Tax the Rich

Tragically the current election cycle has looked much more like a TV reality show than a comparison of ideas.

One side attempts to heat up the masses by creating Robin Hood notions. Rich folks have too much, so we must take from them and give to the poor. In a country where around 50% of the folks get some form of government check; this actually has a chance of making an impression. I have even heard some of my students repeat the sound bite about tax cuts that are only for the rich.

The other side argues that in a free, capitalist society the rich have every right to the wealth that they have accumulated. They cite the founders notions of small government and point out that of course tax reductions mostly impact the rich since around 70% of income tax is paid by the highest 10% of income earners. They point out that these folks invest their wealth creating more opportunity and jobs for those making less.

What troubles me is that both sides and their observers are only practicing sound bite politics and sound bite journalism or perhaps reality show politics and reality show journalism.

What’s Really Up?

It seems to me that the issue is much more complicated and by blathering on the way both sides do they will prevent real problems, if any exist, from being resolved. I have spoken before about root cause analysis. If you don’t get to the root of a problem before engineering your fix, you won’t fix any problems and most likely cause a ton of additional problems.

I won’t presume to suggest that I am going to get to a root cause of this issue in this post but I do want to look at the topic from a few other angles.

History

After the great recession of the thirties, income gains during the, very long, recovery were shared by 90% of the population.

In the current, very long, recovery the opposite is true. The majority are loosing ground.

From 1933 to 1934 average income went up by 8.8% for 90% of the population while the top 0.01% went down by 3.4%.

In contrast, from 2009 to 2010 the 90% group incomes went down by 0.4% and the top 0.01% went up by 21.5%. Just to put a stake in the ground, the 1% percent of income earners salary range started at $380,000 in 2011.

15,600 households pocketed 37% of the income gains and effectively ALL of the gains were concentrated in the top 10%.

Do you want to get really depressed? Average income in 2010 was just a tiny bit more than the, inflation adjusted, $29,448 average of 1966!

What happened over those forty plus years?

Government Policy

As FDR worked to get the country out of the great depression, he paid folks to work through the WPA, Works Progress Administration, and the CCC, Civilian Conservation Corps. He did not just just hand out money as the current and previous administrations were/are so fond of doing. The idea was to have out of work folks go to an employment office not an unemployment office. Along the way many were learning skills that would allow them to continue working after their stint in either the WPA or the CCC was done.

The current administration seems intent on creating constituencies by handing out money rather than helping folks get back to work. Working helps your self esteem and feelings of independence. They don’t want you to feel good. They want you to be dependent and beholden… on them.

Best pals, the unions and the administration, join up to keep you from working on jobs the unions feel are their sole province, like those that were presented by the WPA and the CCC. The unions also want to protect that great income stream that comes to them from Washington.

Corporate Cronyism

Another flavor of government fiddling, involves all that is done to make things smoother for the people and corporations amassing wealth. The tax code if printed, double sided on 20 pound bond paper, is over ten feet high. Buried in there are tons of twisty lawyer language codicils that benefit sometimes only one person, sometimes a class of companies, sometimes a class of investors, i.e. folks who already have amassed wealth.

If these advantages could be applied to all savers, it would not be so bad. As indicated above, there is a lot happening to prevent those “on the average” from making any gains at all.

Bi-partisan? It sure is. During the Clinton era, the top one percent garnered 45 percent of income growth, with Bush it was 65 per- cent, and knocking the ball out of the park is Obama with 93 percent of income growth going to the top one percent.

A Service Economy

For years, I have been hearing about the great movement of our economy from a manufacturing, product based economy to a service economy. One of the largest segments of this service economy is financial services. The jobs in this sector and jobs in general in the service economy are not typically filled with average Joe’s. The folks in the financial sector receive amazing consideration from our government. The bank bailouts and the Fed’s Quantitative Easing  being some of the grossest recent examples.

While the current administration often speaks ill of the “Wall Street fat cats”, even going so far as to endorse the confused and disorderly Occupy Wall Street movement, they have surrounded themselves with financial insiders. The result? The administration has not prosecuted the “Wall Street fat cats who were prime movers in our current economic distress.

A more recent example, Jon Corzine ex CEO of Goldman Sachs, ex Senator of the United States, ex Governor of New Jersey, misplaced over three billion dollars of customer funds in his last job as CEO of MF Global, and still is walking around the East End of Long Island and going to posh parties.

Income vs. Wealth

In the numbers above we are looking at income. Let’s look at wealth for a moment. Someone can make a “decent” income but if they spend it all, they will have no wealth. Now there are lots of reasons for spending it all. One of the major ones is the almost zero growth in income for the average person since 1966 noted above.

All we really need to be wealthy is what a Vermont farmer recently indicated at a conference I attended. She had her land, passed down through the generations for over 100 years, she earned enough through her labors to maintain her family and property, she was healthy and strong; she felt she was wealthy.

In spite of that wonderful farmer’s perspective, the reality is that wealth needs to be accumulated. One of the classic ways lower income folks have done this is through home ownership. It often represents almost all of their wealth. The recent bursting real estate bubble, created substantially by government insistence that pretty much everybody should have their own home, without respect for their ability to pay, has reduced that “wealth” for the lower income folks by over forty percent. Those government policies were enabled by the financial services sector in a wild risk ignoring ride.

Real estate is a small component of the very well to do person’s wealth and not the huge percent it is for those in the lower income categories. Thus the wealthy have been less impacted by the current bursting bubble. If 10% of your wealth is in real estate, then you are down 4% vs. the 40% of your poorer cousins.

The Oligopoly Economy

Over the years starting with the Industrial Revolution, we have studied and practiced management techniques and strategic initiatives that have left us with our major industries dominated by just a few companies. Food Production, Energy, Media, Retail, Fast Food Restaurants, and Financial Services are all dominated by the few.

When I was a kid, in my small New England town, businesses like the woolen mill, the toy factory, the precision optical company, the furniture factory, and others were owned by local folks. These folks were the “well to do” folks in the town. In the next tier, there were smaller business folks like the owners of gas stations, car dealerships, restaurants, news stands, and neighborhood groceries. Then there were the folks who worked at all of these places.

Today, if we need groceries, the choices are large chain groceries, restaurants are dominated by the major fast food chains, Cumberland Farms has a place on Main Street in downtown that most likely took out four or five local businesses (see “Air”), the bank at the head of the square? Bank of America, the organic food on the big grocer’s shelves came from companies 85% owned by a half dozen big food companies. It goes on.

The wealth has left our small town and the jobs available here are waitperson, sales clerk, stock and checkout, bank teller, and so on. Small jobs with little opportunity for wealth accumulation.

Where is the wealth? It is in the executive suites of these big, oligopoly companies. As bailout money flowed towards the TBTF (too big to fail) oligopoly banks, executive bonuses came back right away. While the Feds pump up the banks with Quantitative Easing the created money does not get loaned out to small business but it feeds the trading and other schemes that build up the bonus potential for the bank execs while they burden the rest of us with never ending fees and usurious interest rates on money borrowed from the Fed at zero percent.

Retirement Plan Shifts

Many years ago corporations began to realize that defined benefit retirement plans were going to eat them alive over time (an awareness that municipalities are now beginning to appreciate, but school boards, not so much).

Working with their pals in government, they came up with a pretty good plan, the 401k plan. Instead of contributing to your defined benefit plan you put money into the 401k, good companies had generous matching agreements. The fly in the ointment came when you tried to invest the money. First of all, you weren’t an investor so you depended on, yup, you guessed it, the Wall Street hot shots.

Guess what they did for you. In the last two down cycles (a euphemism) you probably lost close to 40%, clawed it back and then lost it again. Now some of my friends will tsk, tsk here because they have investing skills. Not the point, the 401k is for everyman, everyman is NOT an investor. Oh yeah, the Wall Street hot shots did just fine. They make it on the upside and downside because their money comes from action not value production.

The Turning Point

All of this didn’t happen all at once. It has been eating away at us for fifty years or more. No matter the outcome of the election. It won’t get fixed. It will look differently under each of the candidates but it won’t get fixed.

How WILL it get fixed? The only thing I have been able to come up with is it can be fixed by all of us little people, the 99%.

If we take our money out of the Bank of America and move it to a local bank and insist that they invest it only locally not with Wall Street. If we no longer eat the toxic food presented by the fast food chains and insist on buying from local farmers. If we give up our seemingly insatiable desire for junk consumption and buy only quality, needed goods from regional producers. If we pay in cash and not by credit card. If we only use credit cards from a local credit union and then only for convenience not for credit. If we insist that our legislators get our 401k plans out of the clutches of Wall Street ($15 trillion dollars or so).

These are tough and very difficult things. How do you buy local food if there are no local farmers? How can there be local farmers when the regulations that effect them are designed by the oligopoly food companies?

The Buy Local movement in town says to spend 10% of your holiday shopping budget with local providers. Why is the goal so low? Perhaps because the options are so few.

This is tough stuff. It requires a change from feeling like your government should take care of you to a strong sense of taking responsibility for yourself.

It requires more intelligent discourse, not just “Tax the Rich” sound bites.

Start somewhere, but start.

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2 Responses to Tax the Rich

  1. m efremov says:

    good discussion. Too complicated for 90 % of the 99 % to follow.leaving BOA is a great start, CITI and Chase too. Grassroots movement could start soon if the ideas can get around.

  2. Peter Crowell says:

    Thanks. I am out of TBTF except for 401k. TBTF are the only ones who can afford the infrastructure to run these things.

    Hope you are surviving OK in the darkness.

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