The Inscrutable Center Keeps Moving Rightward (Continued III)

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In my last post entitled "The Inscrutable Center Keeps Moving Rightward (Continued II)" as well as in the posts preceding that, namely "The Inscrutable Center Keeps Moving Rightward (Continued)" and "The Inscrutable Center Keeps Moving Rightward," I discussed at length how the Republican Party has drifted further and further Right, with that movement having now accelerated beyond anything that preceded it with the advent of the Tea Party basically taking over the G.O.P.

Most would assume that this rightward trek started with the election of Ronald Reagan in 1980, but it actually began long before. In 1964 while Lyndon Johnson was basking in his Congressional successes and was getting ready to run for re-election in his own right, after succeeding the martyred John F. Kennedy, a battle for the soul of the Republican Party was taking place. Barry Goldwater, representing the extreme Right of the Republican Party, ran for the party’s nomination against Nelson Rockefeller, who even though now identified with the infamous Rockefeller Drug Laws, was considered the liberal wing of the Republican Party. Goldwater won the nomination and even though he went on to a landslide defeat at the hands of Lyndon Johnson, the Right-wing control of the G.O.P. was never seriously in doubt thereafter.

Today, we are shocked as we see moderate and even conservative Republicans lose primary contests to the extreme Right wing of that party, but most have undoubtedly forgotten just how long this has been going on.

Yet it was as early as 1978 (two years before the election of Ronald Reagan) that Republican Senator Clifford P. Case, a liberal Republican from New Jersey, was defeated in the Republican primary, presaging the Rightward march that has since been identified with Ronald Reagan.

The Republican Party has now marched so far Right that Ronald Reagan would undoubtedly be considered a RINO (Republican In Name Only) by today’s standards. After all it was he who was enough of a pragmatist, despite his rhetoric, that when he was faced with a growing deficit introduced TEFRA, which is described by the Right-wing blog The Free Market as “the largest tax increase in American history”

And so we now have a Republican party that is so far Right that the Cato Institute, The Libertarian Think Tank speaking through its spokesperson, Daniel Mitchell, on the Newshour, referred to Nixon and Bush as: “big-government interventionists.” What might he have said of President Eisenhower who warned that “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.” And added.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. 

It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. 

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. 

It is two electric power plants, each serving a town of 60,000 population. 

It is two fine, fully equipped hospitals. It is some 50 miles of concrete highway. 

We pay for a single fighter plane with a half million bushels of wheat. 

We pay for a single destroyer with new homes that could have housed more than 8,000 people. 

This, I repeat, is the best way of life to be found on the road. the world has been taking. 

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

But the party has gone so far Right that its official Ryan “budget” endorsed by its Presidential nominee, Mitt Romney, was denounced by the Conference of Catholic Bishops (USCCB) in these words:

I reiterate our strong opposition to an unfair proposal that would alter the Child Tax Credit to exclude children of hard-working, immigrant families,” wrote Bishop Stephen Blaire of Stockton, chairman of the USCCB’s Committee on Domestic Justice and Human Development. “Denying the credit to children of working poor immigrant families--the large majority of whom are American citizens--would hurt vulnerable kids, increase poverty, and would not advance the common good.   

The Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), provides vital food security to families during tough economic times,” Bishop Blaire added. “It is estimated that cuts proposed in this bill would deny assistance to two million families, and cut the benefit for everyone else. No poor family that receives food assistance would be unaffected, constituting a direct threat to their human dignity.   

The Social Services Block Grant is an important source of funding for programs throughout the country that serve vulnerable members of our communities--the homeless, the elderly, people with disabilities, children living in poverty, and abuse victims,” he continued. “We should prioritize programs that serve “the least of these,” not eliminate them.   

The Catholic bishops of the United States recognize the serious deficits our country faces, and we acknowledge that Congress must make difficult decisions about how to allocate burdens and sacrifices and balance resources and needs,” Bishop Blaire added. “However, deficit reduction and fiscal responsibility efforts must protect and not undermine the needs of poor and vulnerable people. The proposed cuts to programs in the budget reconciliation fail this basic moral test.

And Bishop Stephen Blaire, the chairman of the U.S. bishops’ Committee on Domestic Justice, Peace and Human Development, added:

Just solutions, however, must require shared sacrifice by all, including raising adequate revenues, eliminating unnecessary military and other spending, and fairly addressing the long-term costs of health insurance and retirement programs. The House-passed budget resolution fails to meet these moral criteria.

And on their web site the US Conference of Catholic Bishops set forth these criteria for evaluating a budget.

1.Every budget decision should be assessed by whether it protects or threatens human life and dignity.  

2. A central moral measure of any budget proposal is how it affects “the least of these” (Matthew 25). The needs of those who are hungry and homeless, without work or in poverty should come first. 

3. Government and other institutions have a shared responsibility to promote the common good of all, especially ordinary workers and families who struggle to live in dignity in difficult economic times…  

Just solutions, however, must require shared sacrifice by all, including raising adequate revenues, eliminating unnecessary military and other spending, and fairly addressing the long-term costs of health insurance and retirement programs.

In April 16 and April 17 letters to the House Agriculture Committee and the House Ways and Means Committee addressing cuts required by the budget resolution, Bishop Blaire said:

The House-passed budget resolution fails to meet these moral criteria.

Bishop Blaire also wrote that cuts to nutrition programs such as the Supplemental Nutrition Assistance Program (SNAP- food stamps) and the Child Tax Credit (CTC) will hurt hungry children, poor families, low-income workers and other vulnerable people. Additionally, he wrote that if cuts to the federal budget need to be made, savings should first be found in programs that target more affluent and powerful interests.

Altogether three letters were written by the Bishops. The can be found here, here and here.

Other religious leaders' statements can be found here.

But our so-called middle and even many on the so-called Left do not find it in their hearts to express outrage and our media -- – Well, They see no evil, hear no evil and speak no evil.

They are busy analyzing events only from the perspective of a horse race.

But I have gone far afield from where I intended to go. In my last post I concluded with: “But before I close this subject I must examine one more column by [David] Brooks. It is dated April 16, 2012 and is entitled “The White House Argument.” I suggest the reader examine it before my next post. It is one of Brooks’ best jobs yet at sophism. But like all his others, it does far better at obfuscation than at clarification.

Well, I guess that will have to wait till next time.

If you have read this please click here: es628@columbia.edu put "read" in the subject and hit send. A note will be welcome but it is not necessary.

The Capital Gains Tax

In my last commentary entitled, “The Graduated Income Tax," I pointed out that the reason the very rich pay a large percentage of our taxes is because they have most of the income and most of the wealth, and the gap between the haves and the have-nots gets ever greater. I showed that the graduated income tax only closes the gap a miniscule amount since after tax income shows only a slight closing of that gap.

I quoted Warren Buffett as pointing out that in the final analysis despite our theoretical graduated income tax, his marginal tax rate is 17.7 % on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at a marginal tax rate of 30%.

While many provisions of the tax code play a part in this, I have little doubt that a major reason is the favorable treatment given capital gains. It has often been said that America has a Protestant work ethic that places special value on work, and everyone in American society has an obligation to “work.” This, however, is not reflected in our tax system, for here we penalize work with a substantially higher tax rate than passive income, i.e. income earned without work. At the moment earned income is taxed at a marginal tax rate of 35% on incomes over $357,000, (This is extremely low by historical standards. Between 1941 and 1945 taxpayers with incomes over $1 million faced a top marginal rate of 94 percent.) but unearned income or capital gains (if held for more than a year) and dividends are taxed at 15%. I submit that there is no justifiable reason to tax unearned income at a rate below that for income, which is earned by actually working. While people at the lower end of the income scale often make a small percentage of their income from capital gains, those with high incomes, who often have never made a cent in their lives by the sweat of their brow, or even from intellectual effort, having often inherited their wealth, make the bulk of their income from unearned income. Furthermore, they have every opportunity to cheat even from this minimum burden, for while the wage earner has his income reported to the IRS by his employer, the investor is on his honor when reporting the cost of his asset, (stock or other) and can easily inflate his cost (“basis” in tax lingo) and even misrepresent the date of the acquisition to gain long term status (assets held less than a year don’t get this favorable treatment). Under present Internal Revenue law the broker must report the sale of stock to the IRS, but he is not required to report a purchase. Thus the IRS has no way of knowing whether tax evasion is occurring short of an audit, which is rare. I strongly urge, (and I am sorely disappointed that no major columnist or candidate has addressed this issue) that brokers and other sellers of assets, including real estate agents, be required to report the purchase and sale of all assets subject to tax.

I also believe that the present system which taxes capital gains only when the asset is sold (realized capital gain) distorts the capital markets. It is far better for the capital markets to function when the only consideration is to maximize ones gains or minimize ones losses, without tax consideration being a major factor in decision making. This becomes particularly egregious when one considers that the wealthy can postpone selling their assets indefinitely if they want to avoid paying taxes, while those in lesser financial positions must frequently sell to meet expenses, particularly after retirement. I believe that it would be far better if the value of the asset be assessed at the end of the taxable year (easily done with stocks and bonds) and that to the extent that the value of the asset has increased or decreased be used as the taxable gain or loss minus an allowance for inflation. It becomes an outright scandal when we consider that those who can afford to not sell their assets before they pass away, can avoid paying a capital gains tax altogether on their gains, since their heirs get the assets with a basis, not as of acquisition, but as of the death of the legator thus escaping ALL capital gains taxes.

Those who generally argue for reducing the tax burden on those who can best carry it maintain that dividends and capital gains are different from other income and not only deserve favored treatment but should be exempt from all taxation. Their arguments are so that numerous that it is difficult to set them all forth even without pointing out their fallacies, but let me attempt to cover at least the most prominent ones within the circumscribed length of this article. See here.

1.) “High effective capital gains rates reduce the capital stock and lower growth and productivity.” I discussed this in my previous article on the income tax. More capital will not be deployed unless there is consumer demand, which according to the Wall Street Journal accounts for 70% of GDP.

2.) “Capital gains taxes encourage a "lock-in" effect that discourages investors from selling their assets.” I think there is merit in this, which is why I advocate taxing all gains at the end of each fiscal year instead of at the time of sale.

3.) “Capital gains are not income -- as the Supreme Court held for many years, and even after the passage of the 16th Amendment.” This is more a reflection on the makeup of the Supreme Court than an argument and the Supreme Court has long since reversed this erroneous holding.

4.) “Capital gains are already taxed more than once through the corporate and personal income tax -- and taxing appreciating stocks or real estate can be a third layer of taxation.” This is the favored argument not only for not taxing capital gains and dividends, but for not taxing estates, but it is nonsensical, because ALL taxation is of a multiple nature. When a worker’s pay is taxed is it double taxation because that money was already taxed when the corporation earned it? Is it double taxation when a worker is taxed and then pays a portion to his grocer, who is taxed, who then pays his doctor, who is taxed, who pays his landlord who is taxed? The whole point of taxes, and the only way it can work, is that money, or any asset, is taxed every time it changes hands. What the corporation earns is taxed and when it passes those earnings to its stockholders it is taxed - it has changed hands. An even better illustration is the real estate tax where the same piece of property is taxed year after year. If it were otherwise the government would get a tax once and never again.

5.) “Lowering capital gains taxes substantially raises tax collections and increases tax payments by the rich” (Source) This is true in the short run but untrue in the long term, or as Professor Richard Serlin of the University of Arizona put it, “When there is a cut in the capital gains tax rate, there is an incentive to sell the stock then, and get the lower tax rate before a new administration raises it again. Thus, when the capital gains tax is cut, there is a rush of investors selling stocks to pay their capital gains taxes now, when the rate is law, rather than later when the rate may be raised back up. Capital gains tax revenue to the government thus may go up now, but it will go down later, and it will go down overall.”

But logic is not the strong point of the advocates of reverse taxation, i.e. placing the greatest tax burden on those who make the least, who are to be grateful for the opportunity to serve those who make the most.

Joe the Plumber or The Graduated Income Tax

Joe the Plumber! What was that about anyway? They never told us in so many words. Joe complained that he might have to pay more taxes if he ended up making more than $250,000. Why would that be wrong? They quoted Obama as saying, “Spread the wealth.” What is wrong with that? McCain said, “I want to grow the wealth, not spread it.” Are the two contradictory? The campaign is over and one might ask why am I focusing on something that happened in the campaign? The answer is that these issues don’t disappear when a campaign ends. They are the stuff that guides policy.

A campaign is conducted with catch words that are believed to have emotional appeal. They usually have a subtext. The basic subtext in this case was that a graduated income tax is wrong. There was also a suggestion that a graduated tax, or at least making the tax slightly more graduated, was socialistic or European.

Why should we penalize people for success? Why should we “soak the rich?” But that misses the point. The purpose is not to penalize people for success or to “soak the rich” but rather to raise the huge amounts of money that the US Treasury needs to pay its bills, and the money can only be gotten from people who have it. A flat tax, as is advocated by many Republicans, led by Steve Forbes, would mean a tax that would be devastating on people with small, or even moderate incomes. For that reason our income tax has always been a graduated one. As for it being socialistic or European, a graduated income tax is as American as apple pie.

Our first income tax was passed in 1861 to pay for the costs of the Civil War. It was set at a flat 3% but it exempted all incomes under $800. - (Source - The US Treasury for this and all other statements which are not otherwise sourced) - Thus even then there was a recognition that only people making above a certain amount could fairly be taxed. The census data show that the average factory wage in 1860 was about $20/mo. or $240/year compared with a median farm profit of about $150/year in Wayne County. The appropriate inflation factor is 175, as is discussed in the article at an earlier point, the equivalent factory wage today would be $42,000/year. (The 1860 Census Of Manufacuring By Gerald K. Moore)

Thus even then there was a recognition that only people making substantially more than three times the average factory wage should bear this tax burden. The tax was on the rich. In 1862 this was refined. A two-tiered rate structure was enacted, with taxable incomes up to $10,000 (it is presumed that the $800 exemption was retained) taxed at a 3 percent rate and higher incomes taxed at 5 percent. A standard deduction of $600 was enacted and a variety of deductions were permitted for such things as rental housing, repairs, losses, and other taxes paid. In addition, to assure timely collection, taxes were "withheld at the source" by employers. It is remarkable that our first attempt at an income tax so closely resembled the graduated taxes of today and this was enacted long before any European or Socialist entity even conceived of the idea. At the end of the war the income tax was repealed because the need for the revenue was no longer needed, but its constitutionality was never challenged.

In 1894 increasing revenue was again needed, and a new income tax law was passed, but this time it was challenged in the courts, and the Supreme Court ruled it to be unconstitutional because Article I, Section 2 Clause 3 of the Constitution provided that taxes have to be apportioned, “among the several States … according to their respective Numbers… It took until 1913 before the 16th amendment to the Constitution was passed, which removed this obstacle. In October of 1923, Congress passed a new income tax law with rates beginning at 1 percent and rising to 7 percent for taxpayers with income in excess of $500,000. Less than 1 percent of the population paid an income tax at the time. As can be seen, throughout our history it was assumed that the tax burden must be born by those who could afford it, limiting the tax to the richest 1% and using a graduated tax to make sure that the richest paid the largest percent.

With World War I again requiring greater revenue Congress passed the 1916 Revenue Act raised the lowest tax rate from 1 percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on estates (now referred to by its opponents as the death tax) and excess business profits. In 1916, a taxpayer needed $1.5 million in taxable income to face a 15 percent rate. By 1917 a taxpayer with only $40,000 faced a 16 percent rate and the individual with $1.5 million faced a tax rate of 67 percent. Another revenue act was passed in 1918, which hiked tax rates once again, this time raising the bottom rate to 6 percent and the top rate to 77 percent. (It should be noted that those with incomes over 1.5 million had a marginal tax of 77%) Only 55% of the population paid any income tax. The burden was entirely born by those deemed able to afford it. During World War II taxpayers with incomes over $1 million faced a top rate of 94 percent.

Throughout the 1950s tax policy was increasingly seen as a tool stabilizing macroeconomic activity. The economy remained subject to frequent boom and bust cycles and many policymakers readily accepted the new economic policy of raising or lowering taxes and spending to adjust aggregate demand and thereby smooth the business cycle. This is what is generally known as Keynesian economics and during the Presidency of Richard Nixon he famously said, “We are all Keynesians now.” (The Cato Institute)

In any case as can be seen Republican claims that a graduated income tax is either new, or too high for the rich, or that taxes should be cut all the time and never raised, have no historical basis, and their claim that the are somehow un-American, European or Socialist have no basis in fact.

One of the reasons among many that we are now in the serious financial and economic crisis is that we increasingly abandoned Keynesian economics and adopted Supply Side policies. But without, at this point, arguing the merits or demerits of these respective policies, the claims that a graduated income tax is un-American or Socialistic clearly has no basis in American history and the idea that they have a foreign origin is laughable. During the Bush years with an economy not needing stimulus Bush kept tax rates low creating a huge deficit, ignoring the sound policies of the past, and overheating the economy.

As for the claim that Reagan established the principle that taxes should always be lowered and in the words of Vice-President, Cheney"…proved deficits don't matter," (The Washington Post - June 9, 2004) is another distortion of history. In fact Reagan proved just the opposite. Shortly after coming into office, in 1981 he cut taxes with a 25 percent reduction in individual tax brackets, phased in over 3 years, and indexed for inflation thereafter. This brought the top tax bracket down to 50 percent. The result was a huge and growing deficit. But rather than feeling that this didn’t matter, Reagan became concerned and by 1982 agreed to a sharp rollback of corporate tax cuts, and a smaller rollback of individual income tax cuts. Over all, the 1982 tax increase undid about a third of the 1981 cut as a share of G.D.P., and the increase was substantially larger than Bill Clinton's 1993 tax increase. (Paul Krugman - The NY Times – June 8, 2004)

It is appropriate to debate tax and economic policy. It is not appropriate to distort, to dissemble, or to use names like Socialist to obscure the true facts and the true history, but when a Party essentially represents the economic interests of 2% to 5% of their constituents, that is apparently the only way they can hope to win elections. What is amazing is that so many continue to vote for them.