Education

My last post "Supreme Court on the Health Care Reform Law & the Ryan (Republican) Budget" was posted and distributed on April 6^th. In that post I explained that my discussion entitled “It’s All About Race” would have to be postponed and now I feel I must do so again, but his time indefinitely. However, I will address this complex and difficult subject in due course.

Now to revert to my post as set forth above, Ernest Hauser of the Bronx, NY called my attention to an error. I stated that the Budget Control Act of 2011 was passed in the Senate by a vote of 74 to 26 with 55 Republicans voting for it. Hauser pointed out that this was impossible since there are only 47 Republicans in the Senate. I should have said “with 28 Republicans voting for it.” Sorry for the error.

I also made a misstatement when I said it has not been reviewed by the CBO. This assertion was made after a long and fruitless search for a CBO analysis caused me to conclude that it did not exist. However, in a NewYorker article by James Surowiecki there is a reference to a CBO analysis. Therefore I stand corrected. Mea culpa!

On the other hand Albert Nekimken PhD of Vienna, Virginia and the author of four books complimented me with this:

Well done, as usual. I haven't had time to follow up all of your links included here, but thanks for doing such meticulous work in documenting the ongoing, attempted Republican takeover of our governmental institutions. It's a sad read.

What prompted me to address the subject of education was an insightful article that was posted on the blog of one of my subscribers, Roger Berkley of Woodcliff Lake, NJ, President and CEO of Weave Corporation and past President of the National Textile association. His article is a must read and can be found here.

It was that article that prompted me to respond to it as follows:

You are right that Santorum as an individual is no longer relevant, but as a philosophy, and as one who undoubtedly speaks for millions, he is very relevant.

                       

It is interesting to note that Santorum knocks education for others, while he himself has a BA an MBA and a JD. How hypocritical for a man who has spent so much time, money and effort gaining an education. Talk about elitism. It’s good for him, but not for those adoring followers of his, who in his view, don't need, and shouldn't want the benefits that an education has bestowed on him. Why can't they see what contempt that shows?

                       

Whether it is Santorum or Romney or Ryan - none of them are interested in making education available to the broad population. They want it to be for an elite group like themselves, who will rule over us and tell us that it isn't about achieving equality, that it is about opportunity. But here they are up to their usual tricks. They resort to the old reliable straw man. As though anyone of any consequence wants to impose equality. Opportunity is precisely what it is all about. And that is precisely what they want to deny the bulk of our citizenry.

Many years ago I read Hitler's Mein Kamf. What struck me, and what I will always remember is that Hitler considered the USA a formidable and dangerous foe because he said the educational system of the US comprises all, regardless of class, while Europe was stuck in a class warp. 

                       

To quote from Wikipedia: 

                                   

"By 1900 educators argued that the post-literacy schooling of the masses at the secondary and higher levels, would improve citizenship, develop higher-order traits, and produce the managerial and professional leadership needed for rapid economic modernization. The commitment to expanded education past age 14 set the U.S. apart from Europe for much of the 20th century. From 1910 to 1940, high schools grew in number and size, reaching out to a broader clientele. In 1910, for example, 9% of Americans had a high school diploma; in 1935, the rate was 40%. By 1940, the number had increased to 50%. This phenomenon was uniquely American; no other nation attempted such widespread coverage. The fastest growth came in states with greater wealth, more homogeneity of wealth, and less manufacturing activity than others. The high schools provided necessary skill sets for youth planning to teach school, and essential skills for those planning careers in white collar work and some high-paying blue collar jobs. Economist Claudia Goldin argues this rapid growth was facilitated by public funding, openness, gender neutrality, local (and also state) control, separation of church and state, and an academic curriculum. The wealthiest European nations such as Germany and Britain had far more exclusivity to their education system and few youth attended past age 14. Apart from technical training schools, European secondary schooling was dominated by children of the wealthy and the social elites. The United States chose a type of post-elementary schooling consistent with its particular features — stressing flexible, general and widely applicable skills that were not tied to particular occupations and geographic places had great value in giving students options in their lives. Skills had to survive transport across firms, industries, occupations, and geography in the dynamic American economy."

                       

I am a refugee from Hitler's Holocaust in Vienna, Austria. Even in Vienna my father was a struggling haberdasher. When we came to the US, he took a job as a bottle washer. Eventually, with the help of relatives he advanced to being a technician in quality control, but he never made much money. My brother never overcame these handicaps, became a high-school dropout and eventually a post office mail handler. I was more ambitious. I wanted to go to college. I could not have done so, (and eventually go to law school) if there had not been a free college available close to home. CCNY of CUNY allowed me to live at home, commute by subway for a nickel, and attend college tuition free. This allowed me to save the money I earned working summers, which I could set aside for graduate school. That is over with. There are no free colleges.

                       

How far we have regressed! And they want us to regress still further!

                       

If we are to remain a great nation it will not be by the strength of our military, though we need that too, but by the strength of our educational system. It is time for every state and every city and county, to have a free college system and that will only happen if it is financed at the federal level. Just as between 1910 and 1040 we moved to make high school within the reach of everyone, so we now need to make college within the reach of all. Only in this way will we make this a land of opportunity again, close the income gap, and assure the greatness of our nation in the 21st century. Those who say we cannot afford this are giving up on the future of America, and dooming, not only an underclass to remain an underclass, but are pushing millions who had achieved middle class status in another age, out of the middle class.

                       

Not only will the middle and lower classes benefit from such an approach, but in the long run, so will those at the top. 

                       

It is true that what we want is a larger pie for all, but that will not be achieved, by lower and lower taxes, particularly on the rich, but by evaluating the needs of our nation and then raising the right amount of money to meet those needs.

                       

We must realize that we cannot go on deciding how little we will tax, and then focus on what we can afford. We need to decide on what this nation's needs are, what it will cost to meet those needs, and then focus on what level of taxation is required, to meet those needs. In 1986, during Reagan's second term, our marginal tax rate was 50%. By the time he left office the rate was 28%. At the end of the prosperous Clinton era it was 39.6%. The Ryan plan would reduce that to 20% and raise additional revenues by unspecified (the rabbit in the hat - now you see it now you don't) elimination of tax expenditures. This is a formula that makes nothing possible. It is a formula for an ever-greater divide between the super rich and the rest, and the decline of our nation.

On another note I must call the readers attention to the stepped up War on Women, at least in Wisconsin. See here.

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

Borrowing, Taxes & Deficits – A Discussion

In my last post "Soaking the Rich” – A discussion" I set forth a discussion with various subscribers to my blog, which was initiated by an article written by Christopher Caldwell, a senior editor at The Weekly Standard the magazine founded by William Kristol, and a response thereto by a professor at the University of Warwick, Coventry UK.

One of my subscribers, Professor Robert Malchman of Brooklyn, NY has now prompted me into another discussion by sending me a post to his own blog I Am Not Bob.

I urge the reader to go that site and read both his post and the comments, which were exchanged between him and a reader who identified herself (I think it was a she) as bunny42. 

After reading those exchanges I found myself in disagreement with both of them, and accordingly wrote:

I find myself in disagreement with both the post by Robert Malchman and the comments posted by “bunny,” whoever she might be.

Professor Malchman posits a beautiful theory under which the US government is better off the more it borrows and “deficits don’t matter.” This is the first time I have heard this theory since VP Cheney declaimed this sentiment. See here.

Of course Cheney had no basis for his claim, since Reagan neither proved this, nor believed it. After a huge cut in taxes, Reagan worried enough about the deficit that resulted, that he instituted the biggest tax increase in history, “the Tax Equity and Fiscal Responsibility Act of 1982. TEFRA — which was designed to raise $214.1 billion over five years, and took back many of the business tax savings enacted the year before.” See here.

But Professor Malchman points out that conditions are now so unusual that the ordinary rules don’t apply. He points out that with interest rates below the rate of inflation, the government actually makes money by borrowing. But what Malchman overlooks is that if the funds obtained by this borrowing are spent, it will not be possible to pay back the T-Notes, except by further borrowing when they fall due. If at that time the present unusual situation no longer holds then the government would be forced into borrowing at a rate not advantageous. The only way new borrowing can be justified is because it is necessary to cover existing debt, or it is to be invested in projects that by the time the notes become due return a larger return than the cost of long range borrowing, not on the basis of temporary conditions. Investing in infrastructure, undoubtedly, meets this test, and other projects might, but this has to be the test, not temporary deviations from the norm.

Now Bunny is even more off base! She misinterprets Professor Malchman’s comments as recommending that people should buy these instruments. Just the opposite is true. Malchman is pointing out that people who buy these instruments are making a bad investment, since rather than making money, they are losing it. She then goes into a rant about the CRA, which I assume refers to the Community Reinvestment Act, passed in 1977, and which provides among other things, that loans “should be undertaken in a safe and sound manner, and does not require institutions to make high-risk loans that may bring losses to the institution. See here.

In any case there is no evidence that the agency required the type of predatory lending that brought about the housing crisis. All the available evidence indicates that banks and credit facilitators made and encouraged stupid loans, because they believed that with housing prices going up ad-infinitum, the real risk was much smaller than the apparent risk, and with the high rates of return, it was a very profitable business. “They made me do it” is a children’s excuse, and not one for adult sophisticated bankers. In any case if they felt they were being made to do something they didn’t want to do, no one ever heard their protests, Congressman Paul’s allegation notwithstanding.

Malchman then makes an unfortunate comment that has nothing to do with lending, i.e. that if the deficit needs to be cut (according to Malchman it need not be cut) it should not be “cut by eliminating spending (but) by raising taxes on millionaires.” My main concern with this is that it does not define millionaires. Is a millionaire one who has net assets over a $1million, or one who has an annual income of over $1 million? That makes all the difference in the world. But Bunny never raises this question. Instead she goes into a rant saying, “Historically, taxing the rich (the numbers I heard started at $250K) has caused them to circle their wagons and save their shekels.” for which she offers no evidence. In fact the evidence is just the opposite.

“… across the board, today's tax rates are low by historical standards--and for the rich they're very low.” See here. 

And yet the rich “are savi(ng) shekels”. Using Bunny’s logic they should have been spending it. Yet they sent us into the worst recession since the ’29 depression. When Clinton became President (1993) he raised the marginal tax rate from 31% to 39.6% for those making over $194,000, and from 31% to 36% for those making over $108.696. See here. The economy boomed, coming out of a recession that led to the slogan “It’s the economy stupid.” Now I don’t believe that the tax increase caused the boom by itself - but the tax increase reduced the deficit, causing the Fed, under Allen Greenspan, to lower interest rates. Now interest rates are at an all time low, so reducing the deficit would not have the same beneficial effects, but neither would it do any harm if we returned to the rates under Ronald Reagan at say the beginning of his second term, in 1985 when they were 50% for those making over $169,000. Ibid.

As even Bunny should be able to see there is no correlation between taxes and economic expansion. After 1985 taxes went down drastically, and yet we had an economic slowdown, which was not addressed adequately until Clinton.

Bunny says: “So, just tax more? Why not just print more money. You'll get the same result.” No Bunny, printing money, frequently, though not always, leads to inflation, increasing taxes never does. But as you say, “whadda (you) know?

Let me see Bunny – in your second post you posit that increasing taxes on the rich would not make your life easier. No it wouldn’t – but cutting spending in many areas would make your life harder. Would you like your food to be unsafe, the water you drink unsafe, or have your children play with unsafe toys. Would you like your elderly parents to have no income, unless they made enough money to have a big 401K, or to be denied health care because they weren’t wealthy enough to afford the incredibly expensive health insurance at market rates? Or if they are younger, and they have health insurance through their employer, would you want them to go bankrupt because they got sick, lost their job and with it their health insurance. I could go on ad infinitum. Yes, our so-called entitlements are out of whack and need reform, and Ronald Reagan made Social Security reforms that saved the program, and we need to do something like that again. But Ryan’s plan would effectively do away with it, and still increases the deficit by $6 trillion over ten years. See here.

Bunny, you talk about “the self-made millionaires, … having worked for their success” - yes some have, but most inherited money, which they invested and made more from, and paid less taxes than people who actually do work. The people who work the hardest are the ones who make low wages and work on two jobs to make ends meet, and don’t have health insurance or pensions from their employers.

Please understand, Bunny, that employers aren’t hiring, not because taxes are too high, or because regulations are onerous, those have been around through good times and bad, they aren’t hiring because there is no demand. If you had a business and you couldn’t sell the goods you made, would you hire people to make more goods? It wouldn’t matter how cheap that labor is, or how much taxes are lowered, you wouldn’t hire until the demand was there. And if the demand was there you would hire regardless of taxes or regulations. If you double your gross, and taxes were 40% you would still be ahead of the game. If taxes were 40% and you made 10% more you would still be ahead of the game. You would simply have less of an increase. If you make $10,000 more and you pay 40% of that to the government you still have $6,000 more. Would you forgo that $6,000? I am all for cutting. God knows there are many places where we spend money foolishly, on our war on drugs, on subsidies for ethanol, etc. etc. etc. But we have to have enough revenue for the country's legitimate needs, and we have to get that money from those who can afford it – not because we hate them, but because they can afford it. Even half of 250,000 isn’t bad, half of a million isn’t bad. And half of a billion, I only wish. But nobody is advocating anything anywhere near an effective tax rate of 50%. Even a marginal tax* rate of 50% doesn’t amount to anywhere near an effective tax rate of 50% and nobody is advocating a marginal tax rate anywhere near 50%, though in 1945 the marginal tax rate was 94% on all incomes over $200,000. See here.

 A slightly higher marginal tax rate than we have now, would not hurt those who have so very much, and the point is not to hurt anyone.

*Marginal Tax rate is the tax owed on income above a certain amount. Thus taking the Clinton tax rates as of 1993 on someone making $300,000, we find that the marginal tax rate is 39.6%, which according to the table comes to 39.6% on all incomes over $250,000. With an income of $300,000 that comes to $50,000, or a tax of $18,800; 36.0% on all income over $140,000 but below $250,000 which comes to $110,000 at 36% and a tax of $39,600; 31% on all income over $89,150 but below $140,000; 28% but on all income over $36,900 but below $89,150 and 15% on the remaining income. If my arithmetic is correct, the marginal tax rate is 36.9%, but the effective tax is 31.86%.

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.

In Defense of Romney – Discussion

On January 19^th I posted my commentary "In Defense of Romney."

In response thereto Pam Tisza of Branchburg, NJ wrote:

You did not comment on Senator Bernie Sanders bill to counteract the big money in the elections---or did I miss it ????

To which I replied:

No, I didn't and I am not sure what bill you are referring to. Do you mean his introduction of a Constitutional amendment to overrule Citizen United? If so, I am glad he did that, but it is not very newsworthy, since it is not likely to go anywhere. I expect it will not even get out of committee and if it does it will not get a majority, at least at this time around, and it need 2/3 of both houses in order to go to the states for ratification, where it needs 3/4 of the state legislatures (both houses) to become part of the Constitution, given that Democrats now control 35 total chambers while Republicans are the majority in 60 chambers. See here. There are three tied chambers with the addition of the Virginia State Senate.

Article. V. of the Constitution provides:

"The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress;…”

If you were referring to something other than the above, please advise. In fact please let me have your further comments in any case.

Her rejoinder was:

Thanks for correcting me. I went back and read the original e-mail I got on this and they mention "constitutional amendment”; but then go on as if it is a bill. Poor reading on my part. I agree with you. Nice idea--no hope.

I must add that despite the fact that at present there is no hope of enacting such an amendment, many liberal organizations are organizing petition drives in support of such an amendment, which is a good idea. It must be kept in front of the public.

Albert Nekimken of Vienna, Virginia challenged me on my views with respect to the activities of Bain Capital, writing:

I don't share all of your enthusiasm about Romney's version of private equity capitalism, but I agree with your view that all income from all sources should be taxed at the same rate. As for the corrosive effect of money on politics, the Harvard professor, Lessig, who (in his new book) proposes that ALL political campaigns be publicly financed through a $1 per taxpayer, voluntary contribution on his tax return, which seems like the most promising solution. 

You were correct to emphasize the dire issue of the high cost of education today--and rising. This is killing social mobility. Student debt (now inextinguishable even in bankruptcy) is the next huge bubble ready to burst. Indebted and unemployed students cannot repay these debts. So long as educational institutions are able to coerce/convince students to incur debt as a condition of enrollment, there are/will be no brakes on the rise in cost. When the bubble bursts, many schools will go with it.

To which I posed the following question:

I am interested in your views on "Romney's version of private equity capitalism.” Do you think it is destructive? Do you think parts of it should be illegal? If so what parts? If you can, please be as specific as possible.

And added:

As for Lessig's proposal, we already have a provision in the tax code for deducting, not $1 but $3 for Presidential campaigns. The tax code provides, for a Presidential Election Campaign Fund which helps pay for Presidential election campaigns. The fund seeks to reduce candidates' dependence on large contributions from individuals and groups and seeks to place candidates on an equal financial footing in the general election. Tax Return 1040 provides: “If you want $3 to go to this fund, check the box. If you are filing a joint return, your spouse can also have $3 go to the fund. If you check a box, your tax or refund will not change."

However this check off has come out of favor. "...participation in the tax checkoff program has declined each year, from a high of 28.7% for 1980 returns, to 7.3% for returns filed with the Internal Revenue Service (IRS) in 2010." See here.

There is a limit in how much one is allowed to spend to get matching funds. In 2008, presidential primary candidates who accepted public funding had a maximum entitlement of $21,025,000 (50 percent of $42,050,000). (Ibid) It was because of this limit that Obama waived the public funding in 2008 to much criticism. He felt he could raise and spend much more than the limit.

As I understand Lessig, all he is advocating is essentially to extend this system to Congress. I would favor this, but unless there is a limit on contribution and spending, it would end up the same as the Presidential fund. As long as Citizen United stands, and I am not hopeful of an overrule in less than two decades, we are stuck, money will rule.

On improving mobility, making decent education available to all, regardless of economic status, is the ultimate class leveler and vouchers can never achieve this. Here too we need to reverse the financing curve. The poor need more financing than the rich, not less. Even in school buildings many are antiquated. No corporation would or could operate in such antiquated buildings. But as long as money rules this will not happen. I hate to say this, but I am not optimistic.

Nekimken responded:

You likely saw the article in today's New York Times entitled “Taxes at the Top” and another one entitled "Romney’s Estate Tax Cut Would Save the Koch Brothers Up to $8.7 Billion Each" but I call them to your attention in case you missed them, it because they bears on the question at hand: Romney's wealth. 

To tell the truth, I have mixed feelings about the role of private equity in modern capitalism. On the one hand, I believe it does serve a useful tool of Schumpeter's "creative destruction" by feeding on weak companies like insects on the forest floor, paving the way for new growth. 

On the other hand, much private equity activity appears to be motivated, not by any long-term desire to turn around failing companies by making new investments and providing new management in order to make them successful and grow and, presumably, to create new jobs, but by a desire to create a transaction that results in a quick profit. 

On the contrary, most of this activity seems to be motivated by a short-term desire to strip assets from a failing company, reduce staff, and (often) to loot the company pension fund. Often private equity owners load a newly acquired company with fresh, unsustainable debt that can be made to "disappear" in bankruptcy, or in a future sale at an inflated price to a bigger fool. 

As a result, much of what private equity firms do falls into the category of "financial engineering" that serves no useful purpose except to make a few "engineers" very wealthy. Unfortunately, I can't think of any coherent and effective way to prevent this. 

The situation is so complex that I don't believe there is any way to regulate this area of finance in order to prevent them from plundering weak companies and destroying jobs. Better would be to reform tax policy (i.e., tax all income from all sources at the same rate), reform bankruptcy and pension laws, and protect employees more effectively, perhaps by making company owners pay severance and re-training expenses for employees who lose their jobs--as is the case in Europe. 

I hope this is helpful.

I concluded this discussion with:

I really don't know enough about how a company like Bain operates to agree or disagree with your description of "financial engineering." However, while your description of the European system of "making company owners pay severance and re-training expenses for employees who lose their jobs--as is the case in Europe" has appeal, I fear that it may be counter-productive. It has long been charged that these potential burdens make employers reluctant to hire in the first place, and I fear that there is truth in this.

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

In Defense of Romney

In my last post entitled "Congress and the Public - Kudos to Sarah Palin," which was distributed on Friday the 13^th, I addressed three issues: the huge amount of money influencing, one might say controlling, our public servants; the lies that dominate our public discourse, so as to bring government into greater disrepute; and the insider trading that is prevalent in Congress.

Paul Negri of Clifton, NJ expressed the view that what is behind the money cursing through our political, and indeed our economic system, and is the reason for scandals such as the insider trading in Congress is “greed and opportunism, (and that these) to a greater or lesser degree, are part of human nature, … and develop more in those who have, through circumstance, the best access to ways and means to self-advancement. The question is how do we push the equation to the lesser, rather than the greater, degree?”

I think the answer has to be through effective legislation, which in our present system can only be brought about by the use of money in the cause of fighting the misuse of money, at least until such a time, when money does not dominate our public discourse. One example that illustrates this, is the Gay Marriage issue in NY. Gay Marriage was legalized recently in New York because some courageous Republicans broke party ranks, and supported its legalization. As a result the Conservative Party of New York State threatened to withhold from them their endorsement and the considerable amount of money that goes with it. Now backers of Gay Marriage have countered by promising to offset the withdrawal of money by their own financial contributions. See here. Something similar can be done with respect to insider trading in Congress. Single issue campaigns are always more effective than broad ideological ones, and here it might be possible to draw money from all sides of the political spectrum, demanding of our law makers that they sign a pledge to support a bill drafted by the organization along the lines of the Palin recommendations.

But greed is not always bad. There is little doubt that greed is what drives our capitalist system, and it does not inevitably lead to the destructive greed of a Gordon Gekko in the movie “Wall Street.” But that is why we need laws and regulations. Left unchecked the engine of creation becomes an engine of destruction. The entrepreneur, while lauding competition, hates competition and seeks monopoly, which is why we have anti trust laws that have not been enforced adequately lately. The investor while lauding good research, seeks a leg up, by seeking or selling insider information, which is why we have laws against that, which have not been enforced until lately.

The banks seek to exploit their credit card customers, making them think that they can spend more than they make, and encouraging them to pay back tiny installments, so that they run up their interest debt at outrageously high interest, and then if they overlook one monthly payment hit them with even higher interest rates and penalties, so that their debt often ends up a multiple of their original one, and then using their money clout in Congress to deny them that, which every business has available, i.e. bankruptcy protection and also using its financial clout to prevent the capping of interest rates from becoming usurious. Even the Mafia never charged more. See here and here.

But what Mitt Romney did at Bain Capital is quintessentially good, beneficial capitalism. It is the essence of “Creative Destruction” so ably described by Joseph Schumpeter, the conservative Austrian economist. See here. Its essence is that inefficient entities must be made efficient or be eliminated, and in the long run the economy as whole will benefit, and while some jobs may be lost in the process, in the long run more will be created. It is ironic that the Right, which claims to be the apostle of free enterprise, should attack Romney for practicing the essence of Capitalism. But I guess the saying that “all is fair in love and war” applies! Is it inter-party war?

What has come out of this, however, is that it illustrates just how unfair our tax system is. The Republican Party has long argued that our “graduated tax system is unfair” in that it taxes the rich more than those with small, or at least much smaller incomes. But what we are seeing is that the system is indeed unfair, it taxes the rich at a rate that is barely distinguishable from the rate applied to much smaller incomes. Romney has now admitted that even though his income is in the millions annually, his tax rate is close to 15%. See here.

I wonder how many of my readers have an effective tax rate of 15%! When Warren Buffett caused a sensation by declaring that his secretary paid taxes at a higher rate than he did, the Right Wing blogosphere went wild with denunciations, and they all stayed on message. One even had a headline, “AP fact check: Secretaries don’t pay more taxes than their bosses," except when the article is accessed no reference to an AP fact check can be found. What percentage of their “income” the rich pay in taxes depends on how “income” is defined. Is it “earned income”, is it “taxable income” or is it total income the way most people would define it?

What causes this anomaly is that as people go up the income ladder more and more of their income comes from capital gains income and dividends. Thus the top 1% of earners on average get 43.4 % of their total income from Capital Gains, Interest and Dividends compared to the next highest quintile who only get 21.4% of their income from Capital Gains, Interest and Dividends, and the lowest quintile only get 1.3% of their income from Capital Gains, Interest and Dividends. The result is that the top 1% who make an average annual income of $1,873,000 pay an effective Income and Payroll tax rate of 20.6% (a lot more than Romney pays) as compared to the top 20% who make a fraction of that at $264,700 (which puts them in the upper middle class) pay almost the same tax rate at 20.1%. See here.

This is neither fair nor sensible. No tax reform, no matter how much the tax is graduated, can deal with this unfair anomaly, unless all types of income is taxed the same. In a country that prides itself on its Puritan work ethic, the discrimination against those who earn their income by working, as opposed to those who earn it by investing, is difficult to understand, and even more difficult to justify. This is even more evident when we consider that most of the rich started out in life with a substantial inheritance, which they could then use to generate more capital and it is further aggravated by our tax law, which forgives even capital gains taxes on inherited stock or other appreciated assets. See here, which is well worth reading.

Romney claims that, “What I got from my parents when they passed away I gave away to charity and to my kids. And so what I’ve earned has been earned through my education, my values, living in the greatest country in the world, through some luck and through hard work.”

Even if that is true, and the reader will forgive me if I am skeptical, he at the very least got an education that most people can only dream of. How often can the child of a blue-collar worker possibly obtain such an education? How likely is a child of a blue collar, or even of the average white collar worker, going to afford a pre-school education beginning at the age of two at $20,000 a year, giving that child a jump by the time it starts grade school. Then when public school begins, how likely is it that it can afford private school at more than the $20,000 mentioned? And even if a “Romney” goes to a public school, you can be sure that it will be an excellent one. On the other hand, with our system, where schools are frequently financed by local property taxes, the schools in a well to do neighborhood will be properly financed, while those in a disadvantaged area will never have what they need to support a first class education. And how many, with all these obstacles will get to, and through college, with their even greater financial burden. Some will. I did. But I would not have made it through college and eventually law school if my college had not been tuition free, something that has long since passed from the scene. 

But none of this should disqualify Romney, except that he is an exponent of this system and an exponent of making it even more unfair.

But most of all I object to his inauthenticity. His father must be turning in his grave, for that former Governor of Michigan, and once Presidential aspirant, put the greatest value on authenticity. See here.

Phoniness is not leadership. Opportunism is a serious character flaw. Inauthenticity is, or should be, disqualifying.

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

The Deficit Reduction Committee II

On November 28, 2011 I posted and distributed my commentary entitled "The Deficit Reduction Committee" on the DRC's failure to reach agreement, and pointed out that Republicans on the committee never made a good faith effort to reduce the deficit, since the only proposal that they made would have increased the deficit. (In this connection it should be noted that in pushing for the extension of the Bush tax cuts for the very wealthy, they insisted that no offsets were necessary, when it came to to an extension of the of the payroll tax cut, they insisted that offsets are a sin qua non. Tax Cuts for working Americans, according to them, pose a danger to the economy, but Tax Cuts for the wealthy, who they call “Job Creators” are, according to them, good for the economy and need no set offs, no matter how much they increase the deficit.

I have received two comments to this article, but will postpone sharing them with you until the next post because of space constraints. In the meantime I invite further comments.

At the end of my last post, I promised to analyze point by point a column by Charles Krauthammer that appeared in the November 24 issue of the Washington Post, under the heading "The Grover Norquist tax myth." See here.

I suggest you first read it in full by clicking "here” above and then read my comments thereon, for which purpose I reproduce the article and intersperse my responses in contrasting type.

            Democrats are unanimous in charging that the debt-reduction supercommittee collapsed because Republicans refused to raise taxes. Apparently, Republicans are in the thrall of one Grover Norquist, the anti-tax campaigner, whom Sen. John Kerry called “the 13th member of this committee without being there.” Senate Majority Leader Harry Reid helpfully suggested “maybe they should impeach Grover Norquist.”

            With that, Norquist officially replaces the Koch brothers as the great malevolent manipulator that controls the republic by pulling unseen strings on behalf of the plutocracy.

Nice theory. Except for the following facts:

            ●Sen. Tom Coburn last year signed on to the Simpson-Bowles tax reform that would have increased tax revenue by $1 trillion over a decade  There was no Simpson-Bowles Tax Reform. This refers to a bi-partisan commission appointed by the President, the formation of which Republicans opposed. The President stipulated that its recommendations would only be submitted to Congress if 14 of its members voted for it. That vote was not achieved and the plan died. Sen. Coburn (R) voted for the report, but the Republican leadership in Congress showed no interest in it, and never brought it up for a vote in the House.

            ●During the debt-ceiling talks, House Speaker John Boehner agreed to an $800 billion revenue increase as part of a Grand Bargain. Yes, and then reneged when he found that his caucus would not consider it, despite the fact that cuts would have been three times the size of revenue increases.

            ●Supercommittee member Pat Toomey, a Club for Growth Republican, proposed increasing tax revenue by $300 billion as part of $1.2 trillion in debt reduction. This is precisely, what I was talking about in my last post. The proposal was to increase $300 billion in revenue, provided there was a decrease of $4 trillion in revenue, through a permanent extension of the Bush tax cuts. This means a net cut in revenue $3.7 trillion.

Leading, very conservative Republicans proposing tax increases. So why does the myth of the Norquist-controlled anti-tax monolith persist? You might suggest cynicism and perversity. Let me offer a more benign explanation: thickheadedness — the inability to tell the difference between tax revenue and tax rates.

            In deficit reduction, all that matters is tax revenue. The holders of our national debt care not a whit what tax rates yield the money to pay them back. They care about the sum.The Republican proposals raise revenue, despite lowering rates, by opening a gusher of new income for the Treasury in the form of loophole elimination. For example, the Toomey plan eliminates deductions by $300 billion more than the reduction in tax rates “cost.” Result: $300 billion in new revenue. This is unadulterated nonsense! Democrats don’t care how revenues are raised as long as they are raised. It is not a question of rates. Republicans have made clear they will not agree to anything that brings more revenue to the treasury.

The Simpson-Bowles commission — appointed by President Obama and endorsed by Coburn — used the same formula. Its tax reform would lower tax rates at a “cost” of $1 trillion a year while eliminating loopholes that deprive the Treasury of $1.1 trillion a year. This would leave the Treasury with an excess — i.e., new tax revenue — of $100 billion a year, or $1 trillion over a decade. Not extending the Bush tax cuts nets $4 trillion. As indicated, Republicans do not support the Simpson-Bowles plan. So this is a straw man. What is the significance of one Republican supporting it on the commission, when we don’t even know if he is prepared to support it in Congress? And it is one Senator. One!

            Raising revenue through tax reform is better than simply raising rates, which Democrats insist upon with near religious fervor. It is more economically efficient because it eliminates credits, carve-outs, and deductions that grossly misallocate capital. And it is fairer because it is the rich who can afford not only the sharp lawyers and accountants who exploit loopholes but the lobbyists who create them in the first place. This is the latest canard. No Republican reform plan proposed would increase revenue, and none of any kind has been proposed. What they mostly talk about is reforming the tax code, so as to do away with mostly middle class deductions, and a flat tax that would further shift the burden of taxation away from the rich and toward the middle class. This is truly class-warfare. It is war on the middle class and the poor.

            Yet the Democrats, who flatter themselves as the party of fairness, are instead obsessed with raising tax rates on the rich as a sign of civic virtue. This is perverse in three ways:

            (1) Raising rates gratuitously slows economic growth, i.e., expansion of the economic pie for everyone, by penalizing work and by retaining inefficiency-inducing loopholes. We should get rid of the loopholes!!! That is a good start. Lets do it now and reduce the deficit. Increasing taxation on those who can best afford it doesn’t slow growth, no matter how often it is repeated. If we wish to encourage work then we should reduce taxes on those who indeed work, and increase taxes on the “coupon clippers.” Or in other words, tax unearned income the same as earned income. Tax Capital Gains and Dividends the same as earnings from work. Tax Inheritance, at the upper end, since the beneficiaries have never worked for it.

            (2) We’re talking pennies on the dollar. Obama’s coveted repeal of the Bush tax cuts would yield the Treasury, at the very most, $80 billion a year — offsetting 2 cents on the dollar of government spending ($3.6 trillion). This is the ultimate in juggling numbers. It sounds like Enron. That is not 80 billion a year. It is $4 trillion over ten years. And no one expects spending to be anywhere near 3.6 trillion going forward. But of course spending has to be reduced, and the President and Congressional Democrats have proposed spending cuts three times as large as revenue enhancements. Their proposals would begin to bring the deficit under control. The answer has been No and No and No. Every Republican proposal, whether the Ryan budget, or the plan put forward by Republicans on the Deficit Reduction Commission, would actually increase the deficit.

            (3) Hiking tax rates ignores the real drivers of debt, which, as Obama himself has acknowledged, are entitlements. Deficits are driven by lack of revenue or spending or both. Most non-partisan economists feel it is both. Entitlements need structural adjustments and Obams’s “Patient Protection and Affordable Care Act” makes a number of changes that make a beginning in reducing these expenses, over Republican opposition. In negotiations, other changes have been proposed as part of a comprehensive debt reduction measure. Republicans have rejected each and every one, because small revenue enhancements were to be included.

            Has the president ever publicly proposed a single significant structural change in any entitlement? Yes, Many! Again and again, as part of a balanced approach, only to be rebuffed each time. After Simpson-Bowles reported? No. In his February budget? No. In his April 13 budget “framework”? No. During the debt-ceiling crisis? No. During or after the supercommittee deliberations? No.

Indeed, Obama was AWOL from the supercommittee — then immediately pounced on its failure by going on TV to repeat his incessantly repeated campaign theme of the do-nothing (Republican) Congress. Obama had actively negotiated with Boehner and they had a deal until the Republican caucus rejected it. After this failure, it was agreed to set up the super-committee, which was to work without interference from Boehner or the President.

A swell slogan that fits nicely with the Norquist myth. Except for another inconvenient fact: It is the Republicans who passed — through the House, the only branch of government they control — a real budget that cut $5.8 trillion of spending over the next 10 years. Yes, it does. It does away with SS, Medicare and Medicaid, and the whole safety net, and still has so many tax cuts that it increases the debt by $6 trillion. Obama’s February budget, which would have increased spending, was laughed out of the Senate, voted down 97 to 0. Dems didn’t want the vote, and turned it into a joke by voting against it. As for the Democratic Senate, it has submitted no budget at all for 2 1 / 2 years. Does the filibuster have anything to do with this?

Who, then, is do-nothing? Republicans should happily take on this absurd, and central, Democratic campaign plank. Bring Simpson-Bowles to the House floor Yes, why not, but all of it, not cherry picking it. and pass the most radical of its three deficit-reduction alternatives.

Dare the Senate Democrats to vote down the grandest of all bargains. Dare Obama to veto his own debt commission. Dare the Democrats to actually do something about debt. They already have, most particularly in the “Patient Protection and Affordable Care Act,” which Republicans want to repeal.

Krauthammer isn’t even consistent. On July 14, 2011 he wrote: 

 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. But they would never put their hostility to the entitlements to a vote. They would lose overwhelmingly. Instead, they will talk about anything else, and hope they can fool the voters, and do all they can to keep the economy from improving.