Sunday, June 5, 2016

SO TELL ME—HOW IS THE SYSTEM RIGGED AND HOW CAN IT BE FIXED?

 Elizabeth Warren declares that the economic system is rigged.  Bernard Sanders agrees.  Yet neither offers an incisive critique, a reformist agenda, and a clear account of how the system is stacked against most Americans.  Controlling credit-card interest and breaking up “too-big-to-fail” banks are not going to reform the economy or greatly affect peoples’ lives.  Hillary Clinton supports doing something—who knows what?—about economic injustice.  Trump has no clue, and Republicans repeat their ad-man slogans—lower taxes, less regulation, more jobs, more opportunity—to cover their support of state capitalism run amok.  Sensible proposals to reform the economy scare politicians; they would reduce their political power by ending transfers of public wealth to private coffers, eliminating the lucrative practice of lawyers and lobbyists of special interests, and drying up campaign contributions from moguls of capitalism who want favors.


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.



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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.



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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.



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What can be done about these inequities?  The reforms are simply stated and tacitly argued in light of earlier discussions:



  1. Supplement GNP with EUIs.



  1. 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.



  1. Eliminate all deductions, credits, allowances, subsidies, etc., because they serve no public good and swell the national debt.



  1. 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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