Friday, June 06, 2014

How the conservative agenda reduces the tax base

The debate over inequality was sparked by the 2008 financial sector meltdown. People woke up on September 30th, 2008, to realize that 30 years of wage stagnation just wasn't working for them. Wages weren't keeping up with inflation, and home prices had been in a bubble rising faster than inflation. So millions of Americans found creative ways to finance their homes, and a truly middle class lifestyle that became increasingly out of reach. I remember how people were getting second mortgages for cars and vacations with the idea that their home prices would keep going up.

But that's not sustainable with stagnating wages now, is it? I mean, who is going to buy the same house at the new, higher price if wages stagnate?

The financial industry bet against the middle class with their credit default swaps, a form of insurance against mortgage backed securities in the event that those same securities lost value due to defaults on home loans. Goldman Sachs was the biggest winner in all of this. Not only did they win their bet, but when the loser couldn't pay for their end of a lost bet, Goldman Sachs got bailed out by the Federal Government. Meanwhile, millions of people were losing their homes.

The network effects of stagnating labor income was taking its toll everywhere and no one among the elite seemed to care enough about it to do anything about it.

It has been said to me by some conservatives I know, that raising taxes on the rich won't yield enough money to finance the government. While that may be true, lowering taxes on the rich has not produced the jobs that the rich said they would create with those tax cuts. Not with the Bush tax cuts, and not even with the temporary corporate tax holidays we saw during the Bush administration. You know, those tax holidays where billions held in offshore accounts were brought home with a 5% tax instead of 35%? Yeah, those tax holidays.

What did they do with the repatriated money? Why, they laid off thousands and paid shareholders a dividend! How prudent!

Some say that if you taxed all of the money of the 1%, you might get $35 billion out of them in a year. That is not the point of the tax. The tax is not to take all of their money. The point is to finance the government. The size of the American economy is estimated to be greater than $16 trillion.  A rough calculation shows that the federal budget is about $3.45 trillion, or roughly 20% of GDP. To put this in perspective, all health care costs account for roughly 18% of GDP.

As wealth accumulated to a small minority, we could see that whatever the wealthy were skimming from the economy just wasn't enough. The wealthy have known for centuries that capital will always outperform labor in the economy, and they were reaping gains just managing capital, without really producing much themselves compared to the people who worked for them. Their efforts are multiplied by employing other people. That's a feature of capitalism, not a bug. Just ask Thomas Piketty, an economist who used 200 years of data to prove it.

Wealthy capitalists claim that if they are taxed further, there will be diminishing returns. Yet the efforts of capitalists to suppress wages over the last 30 years has been the untold success story of the wealthy. The Iron Law of Wages says that wages will always tend towards subsistence. All we have to do is pay them enough to stay alive and we'll be fine, right?

When capitalists play that game, they are only asking for trouble. Then tax rolls go down. People start to notice that the real job creators are the people who buy things. Lots of people are needed to keep the economy going, and they need to spend money to do it. Henry Ford figured this out long ago. He paid his workers enough money to buy the cars he was building. But if you look at Walmart, they are paying subsistence wages. Why? Being a billionaire is just not enough. "When I go on vacation, I want to *feel* like I'm on vacation while everyone else is working!"

So who is really paying the taxes? The middle class, or at least, what is left of it. During the 30 years after the election of President Reagan, you might know him as "Grandpa Reagan", the tax burden slowly shifted from corporations and the wealthy to the middle class, and there is no end in sight to the trend. While tax burdens were increasing for the middle class, their wages were not keeping up with inflation.

All of this has been happening with hardly anyone noticing the benefits that the wealthy receive in The Conservative Nanny State. Not only do they get subsidies and grants galore. They get patents and copyrights to extend monopolies. They get "free trade" deals negotiated in secret to help protect their interests, like protecting doctors from global competition. They even get a central bank to raise interest rates whenever the unemployment rate gets too low. Yes, those neoliberal economists have got it all wrapped up for consumption in American economics courses all over the country.

Between 2009 and 2012, 95% of the growth in the economy went to the 1%. So uh, what did the wealthy do with all that lucre? Tax havens! You know, places like Barbados, Cayman Islands and even Ireland. That is money that won't create jobs in America, won't be spent here, and we'll never see it - even if the federal government gives them a tax holiday. Why not? Because a billion just isn't enough to get by these days.
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