Thursday, April 24, 2014

A brief primer on the origins and purpose of the income tax

The economic debate is now clearly abuzz with the publication of Thomas Picketty's book, Capital in the 21st Century. Capital in the 21st Century is now the top selling book on Amazon. What is the draw? Why would anyone want to read a 700-page tome of economic history?

We finally learn, without much doubt, that capital will outperform labor no matter the state of the economy. Picketty shows that capital can reliably produce 5-8% annual returns over long periods of time. In a nutshell, capital will outperform labor every time. We see it now and in the past with 40 years of wage stagnation.

Republicans have been keen to point out that the capitalists are taking all the risks. Really? Which risks are those? The ones where you lose your shirt or the risks where you might lose a few million from your billion? Name a wealthy investor who lost so much money that he was out on the street. Name one.

If you want to talk about risk, talk about people who work for a living and live paycheck to paycheck, risking homelessness, life without access to healthcare or robbery from living outside of a gated community. That's risk.

Paul Krugman has reviewed this book and has very nice things to say about it. It's a long review, so take your time. But there is something very interesting in what Krugman writes. He invokes the term, "patrimonial capitalism". Yes, that is what you think it is. Inherited wealth. We are returning to a time where the captains of industry owe their position due to inheritance not talent.

Consider that more than 30 years have passed between the massive tax cuts of Reagan and the financial collapse of 2008. That's a bit more than a generation, but it was long enough to make the transition from an economy run by talent to an economy run by patrimonial capitalism. That would explain the collapse in 2008 very well to me.

Republicans would have us believe that they want to eliminate the income tax. But they won't tell us that they introduced the first income tax with Abraham Lincoln signing the bill. The first income tax was signed into law to support the Civil War effort. It was a tax laid on interest, rents, royalties and dividends. It was, pure an simple, a tax on capital. The original income tax did not contemplate ordinary income from labor. Perhaps they knew then as we know now, that the real risk is being a laborer, not a capitalist.

Republicans would have us believe that they want to abolish the 16th Amendment, when in fact, they introduced the 16th Amendment in Congress in 1909. The idea was not to get it passed, it was intended as a joke to show that Democrats wanted to soak the rich. Never mind that there were liberals in both parties that wanted to see passage of the amendment. You know, like Teddy Roosevelt.

Republicans will not tell you, however, that abolishing the 16th Amendment would do nothing to change things now. The amendment was intended as a clarification to ensure that the courts knew better the intent of Congress. In Brushaber vs Union Pacific, the Supreme Court determined that the 16th Amendment conferred no new taxing power to Congress, it merely clarified a power it already had. Congress already had the power to tax income before the 16th Amendment. What a surprise. And Republicans call themselves conservative.

It is interesting to note that the court found that "a tax on income derived from property such as interest, dividends, or rents was or should be treated as a direct tax." They were talking about capital. Even the Founding Fathers knew the power of capital and feared it. To them, patrimonial capitalism smelled like royalty - and it still does. The Founders knew that our economy had to be built and maintained by talent, not inheritance.

Look at the wealthy now, not just the millionaires, but the billionaires. They are treated like royalty, not necessarily because they have talent (we know they are royalty because they don't go to jail). If they had talent, we would not have had the financial crisis of 2008. Our economy would be strong and remain strong, like it was in 1955. They have returned us to an economy very much like 1890, with the Robber Barons running the show.

What we have now is an economy built on monopolies, bubbles and trade imbalances that only the wealthy can take advantage of. Believe me, if the wealthy were job creators, we'd have full employment now. But alas, we spent a long time at greater than 6% unemployment and that doesn't count the long-term unemployed who have given up looking for a job.

So you see my dear reader, the entire agenda of the elite, with conservatives in both parties promoting it, is to distract us from the wealth of their benefactors and how it is created and grown. It has nothing to do with creating jobs, but rather, the goal is to create distance between the patrimonial capitalists, the people who want to be treated like royalty, and the rest of us. The income tax was designed at its inception, to prevent anyone from being treated like royalty.

But the capitalists have turned the income tax on its head for their own advantage by creating uncertainty in the laws so that only a legion of lawyers can protect income from taxation. They would prefer instead, that everyone else pay the tax for them with sweat, boredom and time.
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