Borrowing, Taxes & Deficits – A Discussion Continued

In my post of November 2, 2011 entitled "Borrowing, Taxes & Deficits – A Discussion," I referred the reader to an article written by Professor Robert Malchman and posted on his blog entitled "Real Interest Rates," and the exchange that followed, which appears as four comments below the post. In my post referred to above, I rebutted the view of Professor Malchman, and to a greater extent those of Bunny42.

(I interrupted that exchange to focus on the controversy regarding "Contraception, Abortion and Komen.")

My rebuttal was reproduced on that blog and provoked two more rebuttals by Bunny42 below the post, which you can find here.

I thought that her rebuttal was so misguided that I feel it incumbent upon me to respond to it, and so here is my rebuttal:

Bunny, you have every right to be taken seriously because you do not run away from opinions that are contrary to yours. I can assure you that most people close their ears when confronted with contrary views, and only want to hear opinion, and indeed facts, that reinforce their views.

Furthermore, you are far more knowledgeable than most people. You are familiar with the Keynesian economic theory. Please watch this video on YouTube. You say that “(Your) impression has been (and still is) that reducing taxes on industry allows for expansion, and that includes new jobs.” It is no wonder that this is your impression, since this has been the message repeated over and over again. It is part of what is known as staying on message. But that doesn’t make it true and it isn’t. Right now corporations are sitting on $2 trillion and are not investing according to a New York Post, [a News Corporation subsidiary (i.e. Rupert Murdoch's)] article that goes on to say: “US consumers are stretched financially. Rosenblatt says there's no incentive for many companies to expand. Why go out and make 110 widgets when I can only sell 100?" he asked. Which sums up the situation.” See here. See also here.

Taxes have nothing to do with it. In fact right now we have one of the lowest tax rates in our history. When Eisenhower (R) was President (1960) the top rate for all those making over $400,000 was 91% and our economy did very nicely, thank you very much. When Ronald Reagan was President and after he sharply reduced taxes (1985) the top tax rate was 50% on incomes over $169,000 (See here) and our economy did very nicely, thank you very much. When Clinton became President he inherited a slow down and increased taxes and the economy boomed. But I said all this in my previous posts, but apparently it didn’t sink in. Impressions are hard to shake.

Consumer spending accounts for 70% of US economic activity. See here. When consumers spend, businesses make products to sell. When consumers don’t have the money to buy, business contracts, and jobs are lost. During inflationary times, when consumers want to buy more than business can produce the emphasis must be on increasing production. During deflationary times or during recessions when business capacity is greater than the demand, emphasis must be on increasing demand, not supply. That is not only economic theory. It is common sense.

It is not a coincidence that in 1929 just before the great depression the income disparity was huge just as it is now, or to quote from the Center on Budget and Policy Priorities, “Taken together with prior research, the new data suggest greater income concentration at the top than at any time since 1929.” See here. Henry Ford, not known as a left wing radical said, “One's own employees ought to be one's own best customers. Paying high wages is behind the prosperity of this country.” See here.

But as I write this, I begin to wonder if I am giving you too much credit, Bunny. It seems like I am going over much of what I covered in my last post, which essentially you ignored, as undoubtedly you will ignore the facts here, because they do not comport with your “impressions.”

You say that, “One of our problems involves not having enough skilled labor available to fill those jobs.” This is not the major problem in our economic malaise, but it illustrates another problem in our society – we are not spending enough money on education, we have fallen way behind the rest of the world in educating our young, and college education, has become far too expensive. When I climbed out of poverty to a prosperous upper middle class existence, my college was free. Without that I could not have moved up. But we no longer have those rungs on the ladder.

Bunny, you are entitled to your opinions, but not if they are based on misconceptions. You talk about a slippery slope. But you ignore that the slippery slope has been in the opposite direction. It’s not a little tax there and a little tax here. It a big tax cut and another big tax cut. I have shown you how much taxes have been reduced over the years, but it makes no impression on you. You refuse to focus on the facts.

“Remove Incentive” worries you. But nothing in the present or the past would remove incentive. Look at the facts!!! “(You) dispute my assertion that most of the wealthy have inherited their money. According to Forbes “The top 0.1% -- about 315,000 individuals out of 315 million -- are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.” What does that mean. It means that the very rich are making their money, not by working, but from the returns on their wealth. Now where did they get their wealth? By working? Not likely! Even the “captains of industry” make only millions. Billions are acquired on a multigenerational basis, i.e. through inheritance. Yes, some like George Soros and Warren Buffett and Bill Gates have made it in one lifetime, but most inherit it and they live off their money. Nothing makes money more easily than money, and because of that more and more wealth concentrates at the top, and when we tax such money at a lower rate than money earned working, it exacerbates it all the more.

What we are getting is something very similar to the inherited monarchies that we rebelled against. A permanent, wealthy aristocracy and their subjects, with elections getting more and more meaningless because money controls that too. Power goes to money, and money goes to power, ad infinitum.

From the Gotham Gazette:

The median personal income of those who do not receive any unearned income is $15,000 while for those that do, it is at least $191,200 (and may be much higher.) Only about one-quarter of those who are receiving such income are working, and about 10 percent are making more than $100,000, so many members of the group choose to spend their time in other ways. Indeed, very few report social security income, business or farm income, retirement income or wages and salaries. In short, their investment income is their main source of income. They are substantially older than all New Yorkers older than 15, but even among the younger ones only a small fraction work.

Unfortunately, we can not put together a picture based on the statistical data of how they spend their time, though we know that only a few are working full-time. Some undoubtedly volunteer their time, spend time at vacation spots, or work at jobs that pay relatively low wages, such as docents in art museums or other rewarding pursuits. There are very few surveys that would have enough information to even begin to depict the idle rich.

Donald Trump pretends that he made his money, but what he shows is how to “make yourself richer when you inherit an established business and have millions of dollars plunked into your waiting hands after your Dad has sent you to Wharton.” See here.

You mention that your mother depended on Medicaid. Do you really want that eliminated? It’s taxes on the rich that make it possible. It isn’t funded by Bill Gates, nor could it be. Nor could our schools, or our libraries, or the agencies that protect our health, and our food and our children’s toys. Yes, you are entitled to whatever philosophy suits you, but you shouldn’t base a philosophy on total misconceptions of facts.

Now let me take your comments on Social Security and Medicare, and how you paid into them all your life. Yes you did, but unless you die early you would get a multiple of what you paid in. The way it works is that each succeeding generation supports a previous generation. You are not being paid out of the money you paid in. That was used to pay another generation. Your payments come out the money accumulated by generations later than yours and that money is there. They have not been “pillaged, misused and depleted.” How can you have sound opinions when your facts are so wrong? That money has been invested in Treasury bonds, the safest investment in the world with the Full Faith and Credit of the US behind it. The same bonds China invests in. The problem Social Security faces is that with people living longer, the baby boomers coming into the age where they draw on Social Security, and our young population not growing fast enough to meet the demands, the disbursements of the trust fund are projected for the first time ever to become larger then the income being generated. This means that the SS payment are coming out of the trust fund, or soon will be, and the trust funds assets will slowly be depleted.

Thus unless we find a way to either decrease the disbursements, e.g. increase the retirement age, or increase its income, i.e. increasing the top income from which taxes must be paid, (it is now capped at $106,800 of gross wages, and capital gains income is exempt) it will not be possible to continue paying the benefits after a certain time. No Bunny, “Government run amok has (not) created this problem.”

Your idea of voluntarism sounds wonderful, but it doesn’t work in the real world. If taxes were voluntary, very few would pay them. Social Security could not exist if all people were not required to pay their FICA taxes. The military could not function, if only volunteers were sent to the front. They obey orders. Our government could not exist with voluntary taxes, and could never get enough revenue without getting it from those who can afford to pay it, without hardship.

Bunny, it isn’t a question of your being entitled to have whatever opinion you choose. But your opinions should be based on an understanding of the facts, not on misconceptions. Horatio Alger was an author who wrote fictitious stories of people coming out of poverty into the middle class. These happen occasionally in real life, but the chance I had, was because of a government that gave me my chance with a free education, and cheap public transportation. Sadly, this is long behind us, and Republicans are trying to make it harder and harder to succeed unless you are born into it or, as Rick Santorum did, by being elected to Congress, and after retiring from it, selling your connections. See here.

If you truly want a country where your status in life is determined by who your ancestors are, and where very few overcome the barriers keeping them from rising up in our class structure, then I have no problem with your views. What do you think your chances, or those your children, of making it to the top are?

Comments are welcome and will be distributed with attribution, unless the writer requests that he/she not be identified.

“Soaking the Rich” – A discussion

As my readers surely are aware, I spend a great deal of time researching and writing on the issues of the day. I do this, not so much to convince anyone of the soundness of my views, but rather to lay a foundation for these views, for to hold views without a foundation, in fact and logic, is empty rhetoric. However in addition to writing for my blog, I often get into discussion with various people, which are worth sharing.

So today allow me to share with you a discussion that was based on an article that was written by Christopher Caldwell, a senior editor at The Weekly Standard the magazine founded by William Kristol. In order for you to follow this discussion it will be necessary for you to read the article, which you can find here.

This prompted a letter from Dean Machin, Dept of Philosophy, University of Warwick, Coventry, UK reading as follows:

Sir, Christopher Caldwell’s article was dispiriting and uplifting in equal measure. First was the hackneyed argument that increasing taxes on the rich will not “suffice” to address the US’s (or indeed any state’s) debt problems. Of course this is true, but as there is no single measure that will achieve this end the point is irrelevant. Second, he is right about the disproportionate political influence of the rich. So, here’s a proposal: make the rich choose between increased taxes or no political influence. Let them vote (as if they care about that). But ban lobbying, funding political parties, meeting politicians and controlling media outlets. Good consequences may follow and this proposal would go some way to returning politics to the control of the people who are doomed to be affected by it; and away from those individuals who are footloose and mobile.

Now I find the letter more revealing than the article by Caldwell. 

Mr. Manchin writes:

First was the hackneyed argument that increasing taxes on the rich will not “suffice” to address the US’s (or indeed any state’s) debt problems. Of course this is true…

But it is not true and it reveals one of the major flaws in the rebuttals that liberals make in responding to spurious allegations. They accept their facts as true, without asking themselves whether they are, in fact, true. That is a poor way to effectively rebut an argument.

The American Enterprise Institute, the organization that speaks more than any other for the wealthy, tells us in an article entitled, “Guess Who Really Pays the Taxes”: “The top 5 percent pay well over half the income taxes.” and further down under (2) “The wealthiest 1 percent of the population earn 19 per­cent of the income but pay 37 percent of the income tax.” According to Forbes magazine “The 400 Richest Americans Pay An 18% Tax Rate” and according to the Tax Foundation “the top 1 percent of tax returns paid 36.7 percent of all federal individual income taxes” (see the third full paragraph in the article).


If we look at the tax projections of the Office of Management and Budget for 2013 (click to enlarge) we see that they estimate receipts from the income tax of $1 trillion 344 billion. 

37% of that is $497 billion or almost half of a trillion. Over ten years that comes to $5 trillion. If by making capital gains income and interest income taxable at the same rate as earned income (i.e. income earned by working) and such other adjustments as necessary, we increased their contribution to the common weal by 50% or an effective income tax rate of 27% (and there is no reason why it should not be much higher) we would add to the treasury another 2 1/2 trillion, probably enough to wipe out the deficit without any cutting. I said that there is no reason why it should not be much higher because there is ample precedence for a much higher tax rate. Under the Republican Eisenhower Administration (1953-1961) the top tax bracket was 91% on incomes over $200,000, and it remained there until 1964 when the top rate was changed to 77% on incomes over $400,000 and 66% on all income over $100,000, which adjusted for inflation comes to $2,895,000 and 3/4 of a million respectively. See here. These high rates of taxation did not prevent the US from enjoying prosperity, but they did prevent the incredible skewing of wealth upwards.

But the important point here is that the allegations by a senior editor at The Weekly Standard have no basis in fact, and yet were readily accepted by Professor Machin.

But let us go back and look at Mr. Caldwell’s argument further. He says: “The rich pay less because capital gains and carried interest get taxed at a low rate. As Mr. Buffett puts it, “those who make money with money” are treated better than those who “make money from a job.” In saying this, Mr. Buffett subscribes to the religious understanding of money that was universal in the Christian world before the rise of Florentine banking (and of Protestantism) and has been restated in our own time by practitioners of Islamic finance. People are alive but money is not, which makes it wrong – because it is life-denying – to prefer the latter.”

There is only one thing wrong with this – neither Mr. Buffett nor any one else has made this argument, so why is this straw man being rebutted.

Caldwell concedes that there is a problem with the super rich. He sees a problem from “their influence over the political system.” But he dismissed the influence from campaign contributions by asserting that, “even more comes through the deductibility of “charitable” contributions. Yet it is interesting to note when the President recently suggested that the rich should not be able to deduct these contributions, the scream from Mr. Caldwell’s cohorts was deafening.

But most of all they load the question through the constant refrain that those who want all to contribute to the common weal, are advocating a policy of “Soak the Rich”, which isn’t at all what anyone wants to do.

As I said in my contribution to this discussion at the time the discussion went forward:

I have seen a number of Letters to the Editor that show a misunderstanding of what the graduated income tax is all about. It is definitely not about "soaking the rich." It is about raising enough revenue to allow the government to meet its obligations without putting a burden on people that is greater than what they can afford. I have seen one Letter to the Editor that claimed that those making less than 1 million dollars annually are not rich and therefore tax increases should not be applied to those in that income category. This totally misses the point. Who is rich and who is not is irrelevant. We tax those who can better afford it because that is the source where money can be found without imposing a hardship. As people have more income they can afford to pay more and therefore should. 

We are supposed to be a society that follows the Protestant ethic of valuing work, yet we tax income obtained through work at a substantially higher rate than that obtained from return on Capital. I have never seen any justification for this and this is what Buffet is addressing, for it is that distinction which makes our graduated income tax a hoax and allows the rich, and particularly the very rich, to pay less in taxes as a percentage of their total income, than their secretaries.

                       

Milton Friedman, who I assume is the intellectual inspiration for Republican policies, advocates a flat tax, but includes in income both Capital Gains and Dividends without any distinction or favorable treatment.

                       

We will never have a meaningful graduated income tax until all income is treated equally.

                       

Thus it is not a question of soaking the rich. It is a question of obtaining money from those who can afford it in proportion to their ability to pay; thus the graduated income tax with many brackets. Reducing the brackets is not desirable because it gets us away from affordability. Nor does it create meaningful simplification.

                       

Ditto on exemptions. Many are bad. Corporation for example should not be allowed to choose between LIFO and FIFO for income tax purposes. This distorts their true income and allows them to manipulate it. FIFO should be the standard. This alone would increase corporate taxes allowing them to be lowered somewhat. But I have a real problem taking away the charitable deduction, because without it too many worthy causes would suffer.

                       

The oil depletion allowance and the ethanol subsidy should go, but not the deduction on municipal bonds which cities depend on, nor the deduction on mortgages on first homes, but yes on second or more homes. Nor should we allow the deduction on refinancing mortgages, unless it is shown to be for home improvements. What about 401Ks? They favors higher incomes, but have taken the place of standard pensions, so we need to keep them. But we have so many tax deferred accounts now including the education, medical, etc. deferments, that we should be discussing the merits of various deductions, before we wake up to a mass elimination of good ones and the retaining of those that favor higher incomes. It may be that we should keep all of that type, but limit their total exemption to a fixed amount, e.g. $20,000 per annum.

                       

None of the columnists have even touched on this. We need to start a conversation because this is definitely on the horizon.

Comments are welcome and will be distributed with attribution, unless the writer requests that he/she not be identified.

The Deficit – One Big Hoax (Part II)

In my recent post “The Deficit – One Big Hoax (Part I)” I pointed out that (1) the urgency of the deficit is a hoax (2) that the Republicans deliberately created it (3) that they created it as an excuse for decimating and even abolishing all the accomplishments of numerous Administrations, both Republican and Democratic and (4) that merely allowing the Bush tax cuts to expire would go a long way toward reducing the deficit.

Allow me to elaborate on this with additional facts.

As the Republican/Bush tax cuts turned the Democratic/Clinton surplus into a large Republican deficit our then Vice-President Dick Cheney said, "Deficits don't matter.”

On August 5, 2009 Forbes, hardly a liberal publication reported:

Still, Cheney was true to his word, as the White House of George W. Bush raised the federal deficit every year it was in office. When Bush started his presidency, the national debt as a percentage of gross domestic product hovered at 60%. By the time he exited, it was closer to 80%.

(The National Debt is the total amount of debt incurred since the founding of the Republic. The Federal Deficit is the amount of debt incurred during a given year.)

Well, I guess Republicans can change their minds, can’t they. Maybe they realized they were wrong and deficits are a threat to the American economy. Well, they came up with the Ryan budget, which abolishes Medicare, and with an almost straight party line vote passed their own budget, because that is necessary to balance the budget. Really!! Guess what?

On April 22, 2011 The Economist, hardly a liberal publication, had this to say:

Mr Ryan's plan adds (by its own claims) $6 trillion to the national debt over the next decade, but promises to balance the budget by sometime in the 2030s by cutting programmes for the poor and the elderly. The Progressive Caucus's plan would (by its own claims) balance the budget by 2021 by cutting defence spending and raising taxes, mainly on rich people. Mr Ryan has been fulsomely praised for his courage. The Progressive Caucus has not.

I'm not really sure what "courage" is supposed to mean here, but this seems precisely backwards. For 30 years, certainly since Walter Mondale got creamed by Ronald Reagan, the most dangerous thing a politician can do has been to call for tax hikes. Politicians who call for higher taxes are punished, which is why they don't do it. I'm curious to see what adjectives people would apply to the Progressive Congressional Caucus's budget proposal. But it's hard for me to imagine the media calling a proposal to raise taxes "courageous" and "honest". And my sense is that the disparate treatment here is a structural bias rooted in class.

Yes, the conservative Economist is more inclined to tell it the way it is than the so-called “liberal” and so called “un-biased press.”

Even Charles Krauthammer, that beacon of the Right, writing in the Washington Post:

You cannot govern this country from one house. Republicans should have learned that from the 1995-96 Gingrich-Clinton fight when the GOP controlled both houses and still lost.

If conservatives really want to get the nation’s spending under control, the only way is to win the presidency. Put the question to the country and let the people decide. To seriously jeopardize the election now in pursuit of a long-term, small-government, Ryan-like reform that is inherently unreachable without control of the White House may be good for the soul. But it could very well wreck the cause.

Please note that he is not worried about wrecking the country, only wrecking, “The Cause”

He then inadvertently exposes his own hypocrisy by advocating:

…tax reform along the lines of the Simpson-Bowles commission that, in one option, strips out annually $1.1 trillion of deductions, credits and loopholes while lowering tax rates across the board to a top rate of 23 percent.

Which is exactly what, among other things, Republicans have been opposing, because it would increase revenues, something they are adamantly opposed to.

In order to keep this post within reasonable length, I will address other aspects in my next post, which will be named “The Deficit – One Big Hoax (Part III)”