Friday, January 22, 2010

Plutocracy, Complacency, and Taxes

I am growing ever more fearful of the plutocracy that is ravaging the spirit of my country and the pride of my people. Much like a cancer that has quietly metastasized undetected for so long that even chemotherapy is an unfeasible option (perhaps a lack of health insurance prevented preventative check-ups—God forbid they pay out of pocket in time to learn they cannot afford to pay for treatment!), I believe the governing system of America is so inflicted and full, not so much of corruption (although that is also true), as much as incoherent and therefore unenforceable rules and regulations, that it will inevitably implode and take the country--if not the world--with it. (Please note, as someone who has experienced the horror of watching a loved one succumb to cancer that went undetected until it reached stage-4, I am aware of the implications of this analogy.)

The intensity of economic inequality that has swept America and enslaved the ethos of its people is such that I no longer believe that a gradual structural revamping of the system is possible; the only way out of this mess is to hit the reset button or wait for nature to do it for us. What, exactly, it means to “hit the reset button” is surely a question worthy of significant attention and discussion, but suffice it for the purposes of this blog entry to say that some kind of major and immediate structural change—regulatory or not—resulting in a major redistribution of a significant portion of the wealth of the top 5% of Americans to the remaining 95% is necessary or we are doomed to suffer a civil war, another third world war, or both.

Before I enter into an endless filibuster with those who think they represent (or some day will)—and therefore feel the need to defend—the top 5%, permit me a few more moments of your time. First off, by the laws of probability, you most likely do not and never will represent the top 5%. Truly, one of the greatest illusions propagated by American plutocracy during the past 50 years, is the Reaganomatic three-class system. Apart from the fact that “upper class” sounds oh so much better than “rich” and “lower class” better than poor (albeit still a denigrating term), the fact of the matter is that socially, economically, and thus residentially, American society is divided and subdivided so completely and thoroughly that one can hardly maintain candid awareness of their place within it. I believe many individuals actually prefer it this way; as it is more palatable to trade away our consciousness than to accept that within the context of the actual, far more variegated, stratosphere in which we exist, the majority of us are really pretty damn far from the top, not “2nd best”, as our acceptance of “middle class” status would have us believe or even “upper-middle class.” There is plenty written on this subject so I defer to the Ackerman’s of the world for those that want to isolate discussion to Reaganomics. As for me, I am passed that as I think it is more pertinent to note that the average tax rate of the wealthiest 1% fell to its lowest level in at least 23 years in the year 2000 and has been maintained at such a level for 9 years. The group's share of the tax burden has risen, but only because its share of income has risen faster. This painful fact is only possible because over the past hundred years this group has had their taxes gradually lowered from 70% in the 1920’s to the current rate of 35% (I’m ignoring of course the Eisenhower time period in which they had a 90% tax rate because of the need to fund the war). [More on this topic can be found at: www.heritage.org as well as the IRS's income-statistics website.] The compounding impact of the increased wealth of the top 1% (you can use 5% if you prefer) creates an increasingly unfair playing field as these extremely wealthy individuals are provided with much lower risk opportunities to multiply their free and available money that unlike the “middle class” is not being tied up by liabilities connected to basic necessities. Yet, our regulators have not only accommodated the wealthy (forget for a moment that many of them belong to this privileged group), they have actually made it exponentially easier to compound their wealth.

It is important to note here that the word “wealth” is often confused with “income.” As noted in Wikipedia: “These two terms describe different but related things. Wealth consists of those items of economic value that an individual owns, while income is an inflow of items of economic value. The relation between wealth, income, and expenses is:

change of wealth = income − expenses

A common mistake made by people embarking on a research project to determine the distribution of wealth is to use statistical data of income to describe the distribution of wealth. The distribution of income is substantially different from the distribution of wealth. According to the International Association for Research in Income and Wealth, "the world distribution of wealth is much more unequal than that of income.

Two important points need to be extracted and highlighted here: first, the wealthy do not grow wealth-y by spending their money, they do so by hording it or by having such a disproportionately large income compared to that of the rest of the individuals in society that they cannot spend it all without gratuitous effort; second, the more wealth an individual has sitting in appreciating assets, especially those that pay dividends, the more powerful the compounding effect of such wealth becomes, allowing such an individual to take from the economy without producing an equivalent worth of production.

Thus, without voluntarily giving back, or being compelled to give back (via taxes for instance) an amount of that money proportional to the amount of energy that created it, the said wealthy person is essentially sucking net value and currency flow from the economy, thus defeating the two purposes of using a currency system in lieu of a bartering system, which was intended to facilitate the transfer of value (and individuals net production to society) over space and time. Does that mean that we should get rid of interest rates and capitalism? Absolutely not! I have a retirement account and I completely agree that those who have the prudence and gumption to endure short-term pain for long-term gain (my definition of “investing”) should be rewarded. What that individual is giving up (and it is not merely the unit value of the money, but the comforts that such money could have provided) allows for multiplied production. At some point, however, an individual’s wealth is so great that he endures no pain whatsoever, and hence could not possibly buy any further reasonable comforts, yet he is rewarded as if he has given up an incredible amount for the good of society.

Apart from forcing the wealthy individual to give back, what else can be done to return balance to the economy? We could cut expenses. Certainly excessive and unnecessary public spending should be avoided as it ultimately causes the same concern as the previously described super wealthy individual, the money controlled by the government is granted to them under the pretense that if combined it will be able to provide a quality of life enhancement that in general is greater than the pain caused by taking it from the individuals for whom it belonged.

I can already hear someone in the back of the room yelling, that’s exactly why the wealthiest 5% should not have to pay their money into the pot since they do not utilize public resources. Such a skewed perspective is how we got to this point to begin with. Lloyd Blankfein may never need to use the Metrorail system, but 95% of the persons that are somehow connected to the success of the company he runs do (think pension funds) and will continue to depend on public investment. Out of sight out of mind, I guess.

We live in a society in which everyone is convinced of two seemingly connected but really very separate things: one can achieve anything in this world if one wants it badly enough; and the wealth that one has is the result of one's hard work--hence, you’ve earned it. One does not magically result in the other, especially when one thinks of, say, Paris Hilton. Such ideologies allow the wealthy to feel like they are entitled to the disproportionately easy living they have and the un-wealthy believe that the energy they are transferring to the wealthy is just part of the due-diligence process at the end of which they will some day enjoy the benefits of a role reversal. The misdirection lies in the fact that very, very, seldom, if ever, will roles actually be reversed. Sure, it is quite likely that our un-wealthy worker will one day meet another hardworking individual with even less wealth than he, but that does not mean that roles have been reversed. The flow of real wealth, the flow of real power and of economic value in America is for the most part unidirectional and exponential. Furthermore, since it is customary to inherit one’s family wealth, it is not at all obligatory for an individual to produce their wealth’s worth of production.

Continued denial of the state of disequilibrium in our country will only bring us to an ever more painful inevitability. What happens when the masses stop believing? Worse, what happens when those who stop believing begin to mobilize? A friend of mine recently told me that he does not believe in recessions, that they are merely the result of people resting on their laurels after a period of time in which things came to easy. He went on to say how he was at Target and was waiting in line for so long (because there weren't enough employees) that he just put his stuff down and left. He said, on the way out he saw a "we're hiring sign" on the door and continued with a smugness that made me question if he was the same person I played t-ball with as a kid 25 years ago. All I could think to say to him was "the other possibility is that the cost of living has increased so quickly relative to wages that in the end it's not worth working at all." He was disgusted with my response, and as someone who has held multiple simultaneous jobs for most of my life, I wasn't sure I believed the words coming out of my own mouth. Then my 23-year old brother called me to tell me he had quit his job because after subtracting the cost of commute (two hours a day), taxes, and other basic job-related expenses he was working for $4.90 an hour. How can anyone believe in the "American Dream" when they work their ass off for $4.90/hr during one of the worst recessions in history while the front page of the newspaper reads: Goldman Sachs’ profit and remuneration soars?




10 comments:

Anonymous said...

so in the end, what are you saying, that because your brother was a fool and quit his job at a moment in time in which 10% are without a job and more than 20% are under-employed, that we should tax those who weren't stupid enough to quit their jobs should have to pay increased taxes to make up the difference?

falcon said...

Thank you for reading and responding. I guess I can see how you could come to such a conclusion, but I have clearly led you astray. First off, I do not agree with my brothers actions, however, I do sympathize with his feeling of disenfranchisement. Whereas you have chosen to focus on the $700.00 or so of tax revenue that my brother will not contribute as a result of not working, I prefer to focus on the tax revenue lost by successively lowering the tax bracket on the wealthiest individuals (a large proportion of whom happen to be reaping over-sized bonuses and remuneration entitlements at the expense of a tremendous tax-payer bailout). In other words, the solution does not have to come from a tax increase for those in the low or even middle income tax brackets who have been forced to deal with stagnating wages and income--equating to a loss of wealth since cost of living has increased during the same time period. At one point it made sense to increase taxes on the "middle class" because this very large and (once upon a time) clearly demarcated group of taxpayers had benefited disproportionately to the amount of taxes they paid into the system while the wealthiest individuals in the country were paying an average of 60% of their incomes back into the pot. However two very important distinctions should be made between now and then, which I attempted to outline in my post: we no longer have a clearly defined lower, middle, and upper class. The idea that anyone making over 370k dollars should all be grouped into one category is ridiculous. Forget the fact that someone making less than half that at 172k/yr is taxed at only 2% less, what about the group of individuals that make 3-10 million/year? Should these "Gods of the universe" really be taxed at the same rate as those making 373k/year? Now, so as not to alienate anyone, let me just put it out there that I fall in the third tax bracket, so anyone making 373k/year is "rich" by my standards. But those making millions? Come on now?

Why can't we just accept that we have more than just three casts and put in three more tax brackets? Put the top two current tax brackets (33% and 35%) back to where they were during Clinton's presidency (35.5% 39.6%), which if I recall was a time of true prosperity in our country. Then, to compensate for the fact that we now have several new classes of "rich" create three more: 650k/yr 1.2mil/yr and 5mil/year and tax them at 43%, 46.2%, and 49.8%? Do you know how much more revenue would find its way back into the system? I would also bring taxes on dividends back to a capital gains rate (those in tax sheltered accounts such as IRA's would obviously be protected-- and in fact the amount permitted per year could be increased as well).

These changes would grease the economic machine so thoroughly that people like my brother, skilled and hard working, but without a college degree, will be able to find a job closer to home so that 3/4ths of his paycheck aren't gone before he gets home.

falcon said...

So much talk about tax brackets and I didn't even provide a link for those interested in learning more about the History of Federal Individual Income Tax Rates in the United states from 1913-2010. It is truly interesting to see how gradual but very profound the change has been over the past 90 years. Take a look for yourself and let me know if my proposal is really all that crazy?

chica526 said...

Wow- I think this conversation is so important. I had no idea what the history of the tax system was like. The current tax brackets really make no sense given the wide range of income levels in our country today. I like your proposal.

VoodooMandate said...

You can clearly write well, but I think your feelings about the welfare state need to be informed. Have you ever read Ayn Rand's Atlas Shrugged? If not you should, and then let me know if you still feel that the hardworking should foot the bill for the lazy people who don't want to work. Economic cycles are a fact of life. Why is it that when shit hits the fan and all the excesses of the "good times" come crashing down on the heads of those who overindulged, those who practiced prudence and lived within their means are expected to pick up the slack?

falcon said...
This comment has been removed by the author.
falcon said...

(sorry, removed previous comment because of a critical type-o that effected the point of the comment [i.e. "fiction" vs. "non-fiction"] --corrected below)
Well, umm, voodoo, there is a reason "Atlas Shrugged" is cataloged "fiction." And I'm really not sure what you are getting at with your point. Are you suggesting that the only way out of this is to create a Mulligan's valley in which only the selected few get access and the rest are left to perish? Are suggesting that the Dagne Taggarts and Hank Rearden's of the world were wrong to hope for humanity? Like "1984" the book you are throwing out there (in order to avoid making a thoughtful comment?) takes things to the extreme so that we as readers can put ourselves into a hypothetical scenario and consider hypothetically what we would do in the shoes of a particular character given the hypothetical setting in the non-fiction plot.

Atlas Shrugged is a critical thinking piece meant to empower thought and discussion based on the ideas of Objectivism, which one could spend a great deal discussing and debating, and IMHO should not be placed on the other side of an equal sign. I do think though, perhaps your comment brings to light a more critical issue than my blog post: Americans (perhaps people in general) have gotten lazy when it comes to dealing with difficult issues, desiring to condense everything down to a mere yes or no when a compromise might please and/or appease everyone. Why is everything an ultimatum with the inherent assumption being that the one issuing the ultimatum "ultimately" knows what is right for the good of all? It just doesn't work that way for me. No matter what appears to be critical here and now is only so because other events and times their own critical biases led us to the current moment. That fundamental realization escapes the plot of Rand's novel.

Thank you for your response.

Anonymous said...

"Such ideologies allow the wealthy to feel like they are entitled to the disproportionately easy living they have..."

You make it sound like the members of the top five percent of American society are uncharitable, idle millionaires who sleep until ten in the mornings and spend their afternoons sauntering in their formal gardens staffed by professional gardeners. While you may find the occasional "trust fund brat" doing this, you will see that the rest of these members of society are productive, well-educated Americans who work very hard. In my opinion, it is completely fair for someone with a PhD to make a higher salary than someone who screwed around in high school. After all, a PhD requires more than ten years of formal education. It is also natural that someone who takes a risk is able to benefit from his or her risk taking, so long as his or her risk affects no one else negatively.

Before you start alleging that I am an anti-tax teabagger, I'll inform you that I am a supporter of progressive taxation (or bracketed taxation, whichever term you prefer), with the upper middle- and upper classes shouldering most of the tax burden.

However, I do not agree with 60% tax rates. The government should not have the right to rob anyone of 60% of their money.

Also, I am not a wealthy individual. I am a college student from a working class background (yeah, my dad is the one who tunes up your Prius and fixes your environmentally-friendly appliances). I worked my butt off in high school while the other kids partied and drank and took the risk of going to college. I also suffer from severe illness.

falcon said...

I'm psyched to read your post. Before you read this, please first look at the link I refer to in the post: US tax history 1913-2010.

How anyone can view the mere facts of our country's historical tax policy and not think that our taxes shouldn't go up is being foolish. Seriously, just look at it. Start at the bottom in 1913 and scroll up to 2010. Think about what happened in this country during pivot years. We refer to the 1920's as "The Roaring 20's" because of the crazy boom that happened after the top tax bracket was dropped dramatically from 73% in 1921 to 58% in 1922 to 50% in 1921 and finally to a mere 25% in 1925. Taxes stayed this low until 1931 when the highest tax bracket was raised to 63%--think Great Depression. After which point the highest tax bracket moved up to 79% in 1936, 81% in 1941, and eventually to 94% in 1944 at the height of World War II. That's not a type-o 94%! It did not start its slow decline in earnest until the mid 1960's and wasn't below 60% (my recommendation to which you object so vehemently) until 1981. The Reagan years saw the tax rate on the richest drop to 28%. The highest rate is currently at a mere 35%. Think about the parallel between the Roaring 20's which was followed by the Great depression, and then what most would agree was another "roaring" time-period, the 1990's. What has followed? The "Great Recession" which isn't over.

The mid to late 80's, just like the mid to late 20's saw an incredible drop in taxes, which cost a "lotto-effect" for both eras that followed. All of a sudden individuals had all kinds of extra cash lying around, so they spent it it because it was a new state of being for them. Eventually though, that effect subsides and individuals begin saving and preserving because they realize this can't go on forever. At some point a severe crash ensues because the money that greased the wheels of the economy is used up.

All I can do is share the facts. I also know that since you are a college student, you were probably born after 1981 and so for you, the idea of a tax rate at 60% is completely alien. Until I looked at the facts I did as well. Incidentally I am 27 years old, born in 1982. Whether I like it or not, my generation and my kids generation is going to be forced to deal with the bad tax policy experiment of the Reagan years which at first seemed to be amazingly successful. However, we now know that it's not just what the tax rate is, but how it got there. It is going to be much more painful to get the tax rate back to where it should be then it was to bring it down to where it should have been when it dropped from 94% to 50%.

falcon said...

A friend of mine from Switzerland said something interesting to me the other day: "Charity is a word with tremendously positive connotations, and yet it stems from a chronically evil situation. Why would any country need to provide such incredible amounts of charity if distribution of wealth was fair." not that she did not say "equal" she said "if the distribution of wealth was fair." My gut reaction was to refute her claim and I actually got into a fairly emotional debate with her until I realized I wasn't listening. I jumped to defend my country. Her statement is still resonating with me. I don't know what I think of it yet--I really have never once thought about charity as being anything but a positive, Christian thing to do. And in our society it is, i suppose. Nonetheless, it is something to think about. What kind of society would NEED to incorporate charity? These aren't rhetorical questions.