Tuesday, April 19, 2011

Tax Cut Addiction

Since the Christmas recess in Congress ended, the debate over the automatic expiration of the Bush era tax cuts has resumed with vitriol and fervor. We see that Paul Ryan has proposed what appears to be a rather extreme prescription for debt reduction with zero discussion of cuts to defense spending and additional tax cuts.

We have heard from Warren Buffet, one of the most successful investors of our time, suggesting that we should let the tax cuts for the wealthiest expire. We also see a new club of philanthropists forming, pledging to give half their money away. Perhaps this is their token offering of appeasement to the middle class for what they did to them to get where they are now. Or they may be waking up from the buzz of an addiction as I'll explain later. In any case, we know that change is coming, we just don't know the form or the time of it for sure.

I bring all of this up because last year, I read this very interesting article which discusses the question of whether or not income inequality creates unhappiness in America. Here is the relevant part of the article where Timothy Noah of Slate Magazine comments on a point made by Arthur C. Brooks, president of the American Enterprise Institute. Brooks has said that income inequality doesn't create unhappiness, and Noah responds:
"Living conditions improve over time. But people do not experience life as an interesting moment in the evolution of human societies. They experience it in the present and weigh their own experience against that of the living. Brooks cites (even though it contradicts his argument) a famous 1998 study by economists Sara Solnick (then at the University of Miami, now at the University of Vermont) and David Hemenway of the Harvard School of Public Health. Subjects were asked which they'd prefer: to earn $50,000 while knowing everyone else earned $25,000, or to earn $100,000 while knowing everyone else earned $200,000. Objectively speaking, $100,000 is twice as much as $50,000. Even so, 56 percent chose $50,000 if it meant that would put them on top rather than at the bottom. We are social creatures and establish our expectations relative to others."
So the majority of people in the study would prefer to know that they make more money than others rather than to know that what they have is a lot and more than enough to cover their expenses, even if others are making far more. That can probably be extrapolated to the general population without much controversy. That extrapolation would make sense since the need for social hierarchy is hardwired into human brains. What this suggests is that what makes the top of the line Mercedes so appealing to a higher ranking human is that other people can't have it, not just that he can have one with everyone else, right?

To put this rat-race in perspective, this article describes what it's like to have everything you could ever want and still be unhappy. According to the author, he has attained his goals and acquired what he wanted: a house, a wife, a few cars, and plenty of money in the bank with good prospects for retirement. Yet, he's unhappy and says he was happier when he had less. How could that be?

To summarize up to this point is this: humans have a natural tendency to establish social order, and those that attain the highest levels of social order expect differentiation and exclusivity. It can also be shown that for many, getting everything they want means they're going to have to have their own initiative if they want to be entertained, even if they can pay for entertainment.

There is one more point to make about upper income status before we move onto taxes. Consider the predicament of someone who has everything he has ever wanted, faces no real challenges from others in order to satisfy his needs (assuming he can identify and articulate them), and has time on his hands. What to do? What to do when making more than $75,000 doesn't necessarily buy happiness

If what we've witnessed in the last 10 years is any indication, the most popular choice of late is to take extraordinary risks regardless of what will happen to other people, using their money. This risk-taking behavior may include acts that, if not illegal, are at least immoral. That would point most likely to investment firms like hedge funds, banks, and corporations. All of them use other people's money as a platform for risk taking, and lately, they've been paid handsomely for doing it. They have been paid their bonuses and salaries, and they have even received money from the government to cover their losses.

This is why the Bush tax cuts for the very wealthy need to expire. My point about higher taxes for the extremely wealthy is that the act of making money for the top 1% has become something more like an addiction rather than a necessity. It's like they have developed a tolerance for money, and the rush they used to get from making money doesn't come anymore, so they need greater and greater rewards to get the same rush. 

To get that same rush, they are willing to endure greater and greater risks, regardless of who else they might hurt. Here, we see that the very wealthy seem to think that insider trading is the norm and that they need to engage in it to get an advantage over everyone else. Competition at any cost appears to be their philosophy. In case you haven't heard already, insider trading is securities trading activity based on "inside" information on stocks that most people aren't privy to. But if you're wealthy, you can entice the right people to give that information to you.

Taxes are imposed on things we don't want, want to discourage, or that require regulation. We don't want the biggest financial institutions taking extraordinary risks with other people's money, especially without adult supervision. These same institutions could take the rest of us with them in their failure. Does anyone remember Enron? Who was playing with fire there? Some were members of the top 1% club, and they were probably psychopaths. Given those conditions, I'm not sure I want "trickle down" economics even if it did work, but it doesn't. Tax cuts don't create jobs, they create tax havens.

Consider that the top marginal rates for income taxes are lower now than they have been in 80 years, which puts the last low point back in 1929 (seems familiar, doesn't it?). Such low taxes have encouraged very wealthy people to take very great risks. And since 2008, we've seen the damage done by the addiction to the euphoria associated with making gigantic sums of money while taking great risk with other people's money. We may not be able to stop all of it, but we can certainly discourage it.

So, from a sociological and psychological perspective, letting the Bush tax cuts expire for at least the top 1% makes perfect sense. It's not like they have the greatest track record for allocating resources in this country despite any notion that they are leaders. These same leaders took great risk, lost their bets and then asked the government for help and got it (that's what I mean by "other people's money"). That's leadership? They proved themselves wrong in 1929 and in 2008. Why should we reward them again with a tax cut extension?

Update 1: One other aspect of the tax cut addiction that I forgot to mention is the property and employment tax enticements offered to large corporations by various states to welcome large employers. This works well when times are good. But when times are bad and austerity measures are introduced, the workers tend to pay for it as seen here in Ireland. The only people who ever seem to benefit from those deals are the executives who run the companies that enter into them. The employees never see the millions of dollars in tax savings, but the employers do. So when the money runs dry as it did in Ireland, the executives are well insulated from the fallout while the employees have to deal with the results with limited resources. Is this what we want?