The difficulty is to make the economic policies underlying
the system understood. They may not involve
numerical computations, but they do reflect mathematical relationships. Understandably, the subject scares off or
repels most people, who remain ignorant of the subject. Equally understandably, politicians exploit
their ignorance. They not only mislead Americans
about the rigged economic system—nothing new about that—, but also let them mislead
themselves.
Americans now suffer great angst about the lack of
employment opportunities, job displacement by immigrants, competition in the
global economy, and a decline in the standard of middle-class living. Yet they remain resolute in their ambiguity
about the distribution of wealth. Many agree
with Warren and Sanders about the skewed and worsening distribution of
wealth. As the notorious 10 percent, 1
percent, or one-tenth of 1 percent increasingly accelerate their accumulation
wealth and their share of national wealth, the rest have gained little or lost much,
even in an expanding economy. High-income
people do better, low-income people do worse, and in-betweens are squeezed.
Others admire Trump for his wealth and success. They do not resent those like him who have
great wealth so much as they resent that they cannot work, or feel secure in
working, hard and earn a decent living without being rich. For them, the deal is simple: if they can
live respectably, others can live lavishly.
Thus, they reject “tax-the-rich” proposals as contrary to the American
Dream of making it big and amassing a fortune, like the powerful hope but remote
chance of buying the pot-winning lottery ticket.
Americans have to reconcile this ambiguity when they decide
political questions about which economic policies are beneficial to their real
lives in those around-the-kitchen-table-budget discussions. But they cannot do so without understanding
that a “rigged” system means that the whole of the parts, not just this or that
part, is defective or faulty. I explore
the interlocking ideas which underlie the economic policies rigging the system,
not the imaginings which end in a big payout.
* * *
* * *
*
The first sign of a rigged economy is
misrepresentations of it, the main two of which emphasize the bright and upbeat,
and omit or downplay the dark and depressing.
One is the unemployment rate, always lower than the higher real rate of
unemployment because it omits those who have given up looking for work or those
who could not find work in the first place, after graduation. The national figure differs from state and
local figures, and indicates little about the close-at-hand under- and un-employment
distress.
The other is Gross National Product, or GNP, which
represents aggregate productivity. Once
upon a time, when America’s economy was largely independent, international
trade was a small part of economic activity, and inequalities of wealth were
less widespread and less pronounced, this conventional measure might have offered
a reasonable index of the economy. Then,
they lived happily ever after. Or more
happily: even then, major sectors of the economy like agriculture lagged the
rest of the economy.
Today, GNP does not take into account the great
changes and greater diversity in the economy, with the increasingly differences
in the distribution of wealth among groups.
GNP can increase, but wealth increases more at the higher end than at
the lower end of the economy. Although officials
cite a rising GNP to assure the public that the economy is strong, it assures
the haves more than the have-less or have-nots.
Popular discontent reflects the widespread realization that an improving
economy has been good for the minority of wealthy but bad for the majority of
Americans. As inequality persists and expands,
many are reaching the conclusion, beyond contradiction by measures of the
national economy, that the system no longer works fairly. The inadequacies of the GNP are no secret, but
politics prevents its reform. No one wants
the GNP identify those groups or sectors which benefit or suffer in the
economy; such information would likely lead to demands for reform. Although many Americans sense that the GNP is
dishonest, they probably do not realize that it is deliberately so to protect
the status quo.
A better measure of economic condition would more
closely approximate the truth, not about the economy in general, but about
groups or sectors in the economy to which a person or business might belong. It might be called an Economic Unit Index, or
EUI. The aggregate of all EUIs would equal
the GNP but would enable people or businesses to better situate themselves in a
group (or groups, depending on those used), to know which groups were faring
well or poorly, and to help explain why.
The gap between the GNP and afflicted EUIs explains today’s widespread angst
and malaise because those in afflicted EUIs think that a lot of money is going into
others’ stock portfolios or bank accounts but not into their wallets. EUIs could help target economic reforms, but not
if they are not reported.
EUIs would discredit the stale metaphor about an
improving economy, “a rising tide lifts all boats,” as misleading. All boats rise equally in a rising tide, but
wealth is not water. Because of the factors
which skew wealth distribution, some sectors of the economy do not rise as far
or as fast as others do, if they rise at all.
When politicians proclaim their resolve to improve the economy to
benefit everyone—“to lift all boats”—trust them to intend to uplift some
interests more than others, and ask whose and why.
* * *
* * *
*
Rectifying the system of wealth inequality requires reforming
inequality-enhancing tax policies implicit in the tax code. These policies mandate and augment the unequal
distribution of wealth in several ways.
First, tax policy assumes that not all money is equal,
depending on its source. Some money is
better or worse than other money, and deserves favorable or unfavorable tax
treatment accordingly. Money earned in capital
gains, stock options, estate transfers, commissions on financial deals, etc.,
is taxed less than money earned in wages, salary, and tips. Yet rationales for these tax-rate disparities
reflect the social snobbery or political influence of those who value innovative
over routine labor or smarts over sweat, not societal utility. But, for many, a good plumber beats a good
psychiatrist any day (or night).
Second, tax policy prefers some interests to
others. The tax code allows some people
or some businesses to get legislated tax benefits—deductions, credits,
allowances, subsidies, etc.—which others do not. The most common explanation is that wealthy
people and big companies make good use of “access” (from campaign contributions),
lawyers, and lobbyists to get favorable provisions put into the code. For example, to promote the
construction-related industries, homeowners get mortgage deductions. But the result is not a savings to the buyer,
who, for a modest but seductive deduction, pays for a higher-priced home than
he/she otherwise would and then pays more principal and interest until he/she
pays it off. Other legislation provides non-monetary
benefits favoring some, but not other, interests. For instance, legislation limiting the
liability of nuclear power companies for damages from plant accidents saves the
companies the full costs of doing business by reducing costs for plant safety
and insurance. This cap on liability not
only imposes increased safety and health risks on the public, but also risks its
tax dollars to cover what plant insurance does not. Such preferential legislation lacks a public-good
rationale.
A note on these special benefits for privileged people
and preferred businesses. Their benefits
cut revenues which must be made up by tax increases paid by everyone or by
borrowing. Large tax benefits for the
rich or the big must be matched by small tax increases on all. For example, an annual subsidy of $5 billion
to the energy industry requires on average nearly $37 from each taxpayer to
cover the give-away. The total of many
such tax inequities increases the burden on those who have less and pay at
lower rates more than the burden on those who have more and pay at higher rates—a
paradox discussed below. For years, total
annual tax breaks for the high and mighty have added up to over $1 trillion, a
figure approximating the annual increase in national debt. Its $19 trillion-plus total today amounts to
nearly $139,000 per taxpayer. To avoid
making the burden unacceptable by taxing to pay for these tax breaks, the
government borrows at home and abroad. The
system is rigged by a tax code which makes the debt payable by all Americans,
not by those who have run up the tab. Never
in human economic history have so many owed so much because of so few.
Three, because current tax-rate brackets imperfectly
reflect the value of money, they benefit the richer at the expense of the
poorer. It might seem odd to talk about
the value of money—is not a dollar a dollar?—, but it makes sense if the dollar
is considered in the context of a taxpayer’s income. A person with an annual income of $10,000 likely
values one dollar far more than a person with an annual income of $1,000,000
values it. We speak of rich people as
those having money to burn; in fact, “Diamond” Jim Brady, an America’s baron of
yesteryear, used to light his cigars with $100 bills (or $2875, today).
In recognition of the value of money, tax rates are progressive;
that is, they increase by increments, or brackets, as taxable income
increases. However, especially since the
1980s, politicians increasingly complaining that “taxes are too high” have cut both
tax rates and the number of tax brackets.
These cuts reduce revenues for services and thus increase borrowing to maintain
them; the historical record of post-Second World War administrations proves the
point. Advocates of lower taxes and, in
the name of tax code simplification, fewer tax brackets are the ones who decry
the burgeoning national debt. Simultaneously,
these advocates of tax-code legislation giving benefits to the upper class insist
that the debt results from discretionary funding of programs serving the needy
in the middle and lower classes.
The ultimate in lower tax rates and fewer tax brackets
is the “flat tax,” that is, one tax rate for all and no brackets. Because lower tax rates and fewer brackets
increase the relative burden on lower income taxpayers and decrease it on higher
income taxpayers, the “flat tax” makes the relative burden even less equitable. “Flat tax” advocates recognize the inequity
and try to mitigate its burden by setting a minimum threshold for the lowest
income earners. No matter where the
threshold is set, the relative burden is still greater at lower than at higher taxable
income levels. Nothing is “fair” about a
“flat tax” if fairness is measured, not by the same tax rate applied to every
income, but by the burden of the tax payment in terms of the value of
money. A ten-percent tax on $50,000, or
$5,000, means making do on $45,000; a ten-percent tax on $500,000, or $50,000,
means struggling to make ends meet on $450,000.
Pardon me: I lack sympathy for any flat-tax burden on people at the
upper reaches of the income spectrum.
Further flat-rate cuts—“taxes are [always] too high”
because of the unfair tax burden on the middle and lower classes—make wealth
inequalities even greater. If a
ten-percent tax rate is cut to five percent, the taxes on an income of $50,000
drop from $5,000 to $2,500, for an increase in disposable income of $2,500; and
the taxes on an income of $500,000 drop from $50,000 to $25,000, for an
increase in disposable income of $25,000.
In this case, the gap between the poorer and the richer increases by $22,500. The general principle is that cuts in income
tax rates always benefit the richer more than the poorer and increase the
disparity in wealth.
* * *
* * *
*
What can be done about these inequities? The reforms are simply stated and tacitly
argued in light of earlier discussions:
- Supplement GNP with EUIs.
- Define all money as equal, dollar by dollar, regardless of source. Value all income or profit from whatever sources—wages, salaries, tips, winnings, capital gains, stock options, etc.—the same by taxing them in the aggregate at the same rate.
- Eliminate all deductions, credits, allowances, subsidies, etc., because they serve no public good and swell the national debt.
- Establish a progressive tax structure of six to ten tax rates based on a consensus about the value of money which would likely require adjustments, but not sharp changes, over time. For the stability of the structure, require a two-thirds vote of both chambers of Congress to reduce rates or cut brackets and a three-fifths vote to raise rates and increase brackets.
These reforms would affect wealth distribution by
progressively reducing, though not eliminating, the disparity between richer
and poorer people and businesses. They
would make personal and corporate tax returns far simpler than they are
now. Without credits or deductions, the forms
would require details on all sources and amounts of income, indicate the
bracket and rate for tax payment, and state the tax due.
The next reforms to reduce great disparities of wealth
would consider a small but progressive annual tax on all personal
assets—home(s), car(s), yacht(s), airplane(s), art, jewelry, etc.; the original
acquisition costs as the cost basis of assets transferred to estate
beneficiaries; and a (more) progressive estate tax (assets valued at current market
value).
These radical reforms need not cause sharp
dislocations in the economy. Benefits
can be eliminated by phasing them out over time. For instance, the tax code could allow
existing mortgage deductions to continue until the mortgage is paid off but deny
mortgage deductions on new home sales.
Others, like caps on liabilities, could be phased out over shorter or
longer periods of time, say, 5 or 10 years, respectively.
The only requirement is that all reforms be
implemented concurrently and consistently; any delays or exemptions for some
privileged persons or businesses would unravel the reforms as all others would
return to lobbying for privilege.
One final note.
Advocates of “free markets” will protest most vigorously against these
reforms although they remove the government from the economy through its
historical use of the tax code to help favorites. They will also protest the continuation of
government regulations of businesses as its continued but unbalanced presence
in the market. They will thus try to
obscure the fundamental difference between giving money away to the rich and
the big, and protecting the safety and health of people, and the environment of
their country. Their desire for the
government to give away money to the rich and the big reflects capitalistic
greed; however, the requirement for the government to look out for the general
welfare is Constitutional.
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