Forget The Wealthy. How Do We Tax The Lucky?
September 30, 2011, 7:08 pm
Filed under: Corporations, Economics | Tags:

A few weeks ago, the Washington Post ran a lengthy, above-the-fold piece looking into what impact capital gains tax rates were having on wealth inequality in America. “Most of the richest Americans pay lower overall tax rates than middle-class Americans do,” the reporters noted, adding that during the past two decades, “more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.”

The primary reason for this is that wages and capital gains are taxed at different rates. (The other reason, of course, is that many in the middle class simply don’t realize capital gains because they really don’t invest in securities.) In 1986, as part of a compromise tax bill between President Reagan and Democrats, capital gains and wages were taxed at an equal rate: 28 percent. Since that time, lobbyists have doggedly worked to lower the rate to where it is now: 15 percent on capital gains and dividends, which is a full 20 percent lower than the top rate on wages. Members of Congress, many of whom are very wealthy and who own lots of stocks and bonds also were keen to do what was in their economic interest.

Effectively, the disparity means that hedge fund managers and others who derive a disproportionate amount of their income from investments, pay  a lower effective tax rates than firefighters, police officers, and teachers. As the Post article explains, “Anyone making more than $34,500 a year in wages and salary is taxed at a higher rate than a billionaire is taxed on untold millions in capital gains.” This growing inequality has prompted many, including billionaire businessman and philanthropist Warren Buffet, to urge lawmakers to raise the capital gains rate. As Buffet explained in a New York Times op-ed last month, because most of his income is derived from investments and not wages, he ends up paying taxes at a much lower effective rate than his secretary. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” he wrote.

But the candidates vying for the Republican presidential nomination don’t seem to be at all concerned about these startling trends in inequality. Many, in fact, have vowed to lower capital gains rates even more if elected. And they have powerful allies in Congress, including Rep. Paul Ryan (R-WI), the chairman of the House Budget Committee, who has proposed eliminating capital gains taxes altogether. The argument from them is that capital gains taxes are a form of double taxation and more importantly, that they curtail economic growth, which is bad anytime but especially during a recession. Both claims, however, are not supported by the evidence.

The “double taxation” argument is disingenuous for several reasons. In the case of capital gains related to buying and selling securities for instance, the tax only applies to the gain (or profit) an investor sees, not the original amount he or she has invested. What about the tax on dividends that some corporations give to shareholders? Corporations have to pay taxes on their profit and then again on dividends that they issue. That sure seems like we’re taxing the same money twice. Not only is that inefficient and unfair, but it might also discourage firms from issuing dividends. “A double tax is a destructive and unfair way for the government to gain additional revenue,” longshot presidential hopeful Newt Gingrich wrote in 2009.

This too oversimplifies things. As economist Leonard Burman explained to Washington Post readers recently, “lots of corporations manage to avoid much of their corporate tax and many capital gains are on assets other than corporate stock.” More and more, many large corporations are getting away with paying almost nothing in taxes. A recent study by the Institute for Policy Studies shows that some companies pay more to their chief executives than they do to Uncle Sam. And as the Tax Policy Center’s William Gale has explained, “While the emphasis and public discussion has been on the so-called double taxation of corporate income, the non-taxation of corporate income is probably even bigger.” So yeah, it’s double taxation … but only if these companies were paying their fair share in taxes to begin with.

Nevertheless, the idea of double taxation intuitively seems unfair to most people. But it’s central to our tax collection system. All wage-earning Americans pay income and payroll taxes. (Eventually, when we make a purchase, we also pay a sales tax. That’s a lot of different taxes to be paying on the same amount of wages.)

But what about the impact on investment? As another unlikely presidential contender, Herman Cain, has said, “The capital gains tax represents a wall between people with money and people with ideas.” Lowering the rate, or eliminating it entirely as Cain and others would like to do, will spur unparalleled investment and job creation. Or so the argument goes.

The argument makes sense until you consider that everyday trading in the securities market does not have much of an impact on investment or jobs. If Warren Buffet buys, say, 1 million shares of Bank of America stock, and sells the shares when the price is higher, none of that money goes to the Bank of America because such securities transactions almost always occur in the secondary market and therefore have little impact on a company’s ability to grow and hire additional workers.

In fact, the connection between jobs and capital gains taxes seems to go in the opposite direction. Ultimately, any tax cut that is not offset by spending reductions or revenue increases elsewhere has the effect of growing the deficit. “As the government borrows to finance the deficit, it shrinks the pool of saving available for investment,” notes the Center for Budget and Policy Priorities. The more the government borrows, then, the less investment capital available to business looking to expand and hire additional workers. Lowering the rate that millionaires and billionaires pay without having a way to pay for it will actually do more than increase inequality. It will stymie job creation.

That does not mean that we should arbitrarily raise rates on capital gains. We have to encourage investment and so, perhaps, we should treat different sorts of investment differently. A person who invests in a plant should have his or her gains taxed differently than someone who runs a hedge fund. But something should be done to address to issue in a way that will have the greatest impact on the middle class and not just benefit those fortunate few who owe some of their wealth and success to, as Burman argues, luck.

Wealthy Far More Likely To Default On Mortgages
July 9, 2010, 12:24 pm
Filed under: Economics, Poverty | Tags: , , ,

crossposted at Political Correction

For much of the past two years, Congressional Republicans have wasted few opportunities to blame poor and working class Americans for the financial meltdown and the subsequent recession. They’ve argued that through well-intentioned government initiatives, including the Community Reinvestment Act, the government and those in traditionally underserved communities created much of the foreclosure crisis.

As Rep. Steve King (R-IA) often puts it, by promoting “bad loans in bad neighborhoods,” the government laid the groundwork for a catastrophic meltdown in the financial services sector.  Sen. Jim DeMint (R-SC) has also blamed CRA for decreasing underwriting standards and increasing the number of loans to people who “could not afford to pay them back.”  Often, the sentiment, such as King’s reference to so-called bad neighborhoods, comes tinged with a kind of subtle racism.

It’s all ridiculous.  As Aaron Pressman pointed out back in 2008, “Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA.”  Additionally, as Paul Krugman notes, “Commercial real estate lending, which was mainly lending to rich white developers, not you-know-who, is in much worse shape than subprime home lending.”

Undeterred by such facts, conservatives — who have made their war on workers and the poor central to their platform — continue to blame rising delinquencies on the poor.  In their efforts, they’ve even managed to drag immigrants in the conversation in an effort to tie the worst economic crisis since the Great Depression to their hateful nativist agenda.

But there is more to the story.  The wealthy, the Republican Party’s core constituency, have played a much larger role in the foreclosure crisis then most had assumed.  The New York Times reports today:

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Firms Make Money By Disputing Unemployment Claims
April 4, 2010, 10:01 pm
Filed under: Economics, Poverty | Tags: , ,

With unemployment still hovering around 10% and the prospects for recovery still uncertain, millions of Americans are really struggling and most of us who do have jobs still face some sort of economic uncertainty.

The economy is slowly finding its footing, but just barely.  Most economists predict that a so-called double-dip recession is not likely to occur.  The stimulus has had a positive impact.  However, despite the good news that’s slowly starting to come out, rampant unemployment is and will continue to be part of the equation for many more years to come.

The middle-class safety net – unemployment benefits, COBRA and the like – was designed specifically to work best in conditions like these.  Compared to many other industrialized nations, our programs are relatively ungenerous.  COBRA, which allows someone to keep their health insurance coverage after they leave their job, is important but also very expensive.  Health care reform legislation will fix some of these problems, but that will take some time.

Despite their shortcomings, we’d be in a much worse place without such programs.  However, keeping the net in place, expanding it during a recession and guaranteeing that the middle-class has enough to get by on has not come easily.  In the Senate, Republicans are delaying the extension of benefits, and in the private sector, the New York Times reports, companies are hiring firms that specialize in fighting to delay unemployment claims.

Claims can be denied if a worker is fired for some offense, say for example, sexual harassment or stealing.  That’s fair.  But these firms are not trying to keep the system fair.  They are exploiting the rules and disputing claims so as to compel workers who would otherwise qualify to not apply for benefits in the first place.  The fewer people who apply, the lower the tax on the company.  It’s the invisible hand and it’s ruthless.

With a client list that reads like a roster of Fortune 500 firms, a little-known company with an odd name, the Talx Corporation, has come to dominate a thriving industry: helping employers process — and fight — unemployment claims.

Talx, which emerged from obscurity over the last eight years, says it handles more than 30 percent of the nation’s requests for jobless benefits. Pledging to save employers money in part by contesting claims, Talx helps them decide which applications to resist and how to mount effective appeals.

The work has made Talx a boom business in a bust economy, but critics say the company has undermined a crucial safety net. Officials in a number of states have called Talx a chronic source of error and delay. Advocates for the unemployed say the company seeks to keep jobless workers from collecting benefits.

“Talx often files appeals regardless of merits,” said Jonathan P. Baird, a lawyer at New Hampshire Legal Assistance. “It’s sort of a war of attrition. If you appeal a certain percentage of cases, there are going to be those workers who give up.”

When fewer former workers get aid, a company pays lower unemployment taxes.

Creditors Kicking People While They’re Down
April 2, 2010, 1:08 am
Filed under: Economics, Poverty | Tags: ,

In the middle of a severe recession, you’d expect creditors to make their rules a bit more amendable so as not to overburden those who have already lost their homes and quite possible, their livelihoods.

But of course, where the supposed superiority and wisdom of the market is concerned, such an expectation is pure fantasy. In fact, when people are struggling, it seems, the opportunities to profit off of their miseries become even more plentiful.  Creditors and collection agencies are raking in millions.

The New York Times reports that “[o]ne of the worst economic downturns of modern history has produced a big increase in the number of delinquent borrowers, and creditors are suing them by the millions. Concern is mounting in government and among consumer advocates that the debtors are not always getting a fair shake in these cases.”

Bankruptcy can clear away most debts. Yet sweeping changes to federal law in 2005 — pushed by the banking lobby — complicated that process and more than doubled the average cost of filing, to more than $2,000. Many low-income debtors must save for months before they can afford to go broke.

In some states, courts allow creditors to charge high interest rates for years after a lawsuit is decided in their favor. In others, creditors can win lawsuits by default and seize wages and bank accounts without a case ever appearing before a judge.

Lack of participation is the most fundamental problem. Some consumers do not even know they are being sued; the people who are supposed to serve them with formal notice have sometimes been caught skipping that step and doctoring the paperwork.

In far more cases, consumers are served but still do not offer a defense. Few can afford lawyers; others are intimidated or confused. In their absence, judges can offer little relief.

What collection companies do is perfectly legal.  But going after those who have the least ability to pay back their debts and garnishing their wages, when they often have just enough to survive, is ruthless.

The Hijacking of Adam Smith

Advocates of an unregulated global economy like to use Scottish philosopher Adam Smith’s Wealth of Nations to support their bold claims about the invisible hand.  Smith, capitalism’s patron saint, however, was much more nuanced and reflective than unscrupulous market-friendly ideologues portray him.  Here are a few passages from Wealth of Nations that are frequently (and purposefully) overlooked by libertarians.

“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.  It is but equity, besides, that they who feed, clothe and lodge the whole body of the people should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed and lodged.”

“Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.”

“It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

And that’s just from the more market-friendly book.  The Theory of Moral Sentiments, Smith’s treaties on ethics, is even more blasphemous.

“This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.  That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often more unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages.”

Snap, crackle and pop.

Galbraith: 2nd Stimulus Needed
December 3, 2009, 11:10 pm
Filed under: Economics | Tags: , , ,

University of Texas economics professor James Galbraith appeared on Al Jazeera today to discuss his vision for economic recovery.  The first priority, said Galbraith, is to fill state budget gaps.  While the concern over of the growing deficit and the national debt is important, ultimately, “unless they increase the scale of their effort, which means increasing the deficit and the debt in the short-runt, they’re not going to have a significant further effect.”

With unemployment at 10.2% and several states, including California, on the cusp of bankruptcy, swift action is urgently needed.  Today’s White House jobs summit is a clear indication that the administration does not want to sit idly by as the economy deteriorates.

A second stimulus, though politically unpopular, would fill some of the holes not filled by the initial round of spending.  Earlier in the week, Sen. Kent Conrad (D-ND) told The Free Republic’s Noam Scheiber that additional funding to states was on the table.

The Bureau of Labor Statistics will be releasing November unemployment numbers on Friday.

University of Texas economics professor James Galbraith appeared on Al Jazeera today to discuss his vision of economic recovery.  The first priority, notes Galbraith, is fill state budget gaps.  While the issue of the growing deficit and the national debt are important considerations, ultimately, says Galbraith, “unless they increase the scale of their effort, which means increasing the deficit and the debt in the short-runt, they’re not going to have a significant further effect.”

With unemployment at 10.2% and several states, including California, on the cusp of bankruptcy, swift action is urgently needed.  Today’s White House jobs summit is a clear indication that the administration does not want to sit idly by as the economy deteriorates.

A second stimulus, though politically unpopular, would fill some of the wholes not filled up the initial round of spending.  Earlier in the week, Sen. Kent Conrad (D-ND) told The Free Republic’s Noam Scheiber that additional funding to states was on the table.

Unnecessary Panic over Inflation

Flicrk Photo by fratella

Generally speaking, inflation is the process of increasing prices and a decline in the value of money resulting in an ‘increase in the flow of money relative to the flow of commodities’ (Waage, 1949: 14). The only consensus within economics is that inflation has winners and losers. Winners are debtors and the losers are people on fixed incomes, savers and creditors who lose from the debtor’s fortune.  When I write of inflation here, I am by no means describing the calamitous situation in places like Zimbabwe and around the third world where, because of poor government mismanagement, peoples lives have been destroyed.  Rather, I am focused on the type of inflation that impacts developed economies, where undue panic is created over a problem that is not embedded in the economy.  As Paul Krugman puts it, “inflation becomes a big problem if it becomes “embedded” in the economy, which makes it hard to restore more or less stable prices.”

In regards to the causes, most people lament greedy people, or what Robert Shiller calls the ‘bad-actor-sticky-price model’ (1997:57). Fundamentally, inflation is about economic stability and while macroeconomics is put in charge of creating stability, there is a lively debate surrounding the issue. Keynesians stress the role of fiscal policy while monetarists put the onus on monetary policy, for as Milton Friedman argued, ‘inflation is always and everywhere a phenomenon’ (1963: 17). Yet, what is missing in the debate is whether inflation should be the economic priority that it is. Increasingly, economies have adopted to make inflation public enemy #1, but is the focus warranted?

Keynesians believed that economic growth would come about by increasing government purchases, thereby rising the economy’s planned expenditure, or by cutting taxes, which would promote greater consumption. Freidman and his disciples saw things differently. What was essential was to expand the money supply at a steady rate of growth. Simply put, Friedman believed heavenly in Irving Fisher’s Quantity Theory of Money MV= PY, or that the amount of money * the velocity of money equaled the general price level times the output. The difference between monetarists and Keynesians has never been about whether the money supply matters but rather about the extent to which it matters. Even Keynes was a monetarist in that he believed the supply of money to be important.1 As  put it:

Non-monetarists accept what I regard to be the fundamentally practical message of the General Theory: that a private enterprise economy using an intangible money needs to be stabilized, can be stabilized, and therefore should be stabilized by appropriate monetary policies. Monetarists by contrast take the view that there is no serious need to stabilize the economy; that even if there were a need, it could not be done, for stabilization polices would be more likely to increase than to decrease instability. (1977:1)

To counter Friedman’s observation that inflation was a monetary phenomenon, R.C. Leffingwell reminded us that ‘cheap money does not operate in a vacuum’ (Waage, 1949:3). There are a myriad of factors at play, including unions, wages, the profits of firms, government policy (monetary and fiscal), the handing the public debt. For example, the crop failure in the United States immediately after the Second World War created a shortage of animal feed. The shortage put upward pressure on the prices of grains, meat and poultry.

Supply shocks such as these, that create inflation, highlight the oversimplification inherent in monetarism, an oversimplification to a complex problem. How much of the rise in prices, in say pharmaceuticals, is caused by the desire of corporations to increase profits, specifically when demand is high (perhaps because of an epidemic) and supply is limited. Although inflation is an increase in the general price level, the actions of key sectors of the economy are likely to put considerable pressure on the inflationary process.

Political developments in the 60s and 70 allowed monetarists the chance to put their theories to the test. If economies suffered from high inflation, Freidmanites posited that it was because of misguided government policy that allowed too much money into the system. Since the market was self-regulating, what was needed was to allow the market to operate free of outside interference. The problem of course was that there was little in history to prove Freidman’s utopian economy would operate as he predicted. Since all economies are mixed (with a few command economies) and have always been so, there weren’t any examples to prove Friedman’s laissez-faire assertions.

Friedman employed econometrics to prove quantitatively what could not be proven qualitatively. One of Freidman’s Chicago Boy’s, known as the economic advisors to Chile’s Augusto Pinochet, put it adeptly, ‘to act against nature is counter-productive’ (Klein, 2007: 79) If economies that had adopted free market reform suffered inflation or a myriad of other possible economic ills, the reason was not liberalization but rather that the economy was not free enough and the government could not escape the urge to turn on the presses. Since the prospects of complete free-markets are socially and politically unpalatable, the monetarist, in theory, could never be proven wrong.

In Chile, where monetarism was best tested, unemployment rate went from 3 per cent under Salvador Allende to 20 per cent within the first year under the monetarists. By 1982, the figure had reached 30 per cent. One of the first actions of Pinochet was to free prices, which caused inflation to skyrocket to 605.9 per cent (Fortin, 1984: 312), the highest rate in the world at the time (Edwards, 1986: 535).

The government attempted to allay the problem with a cut in government spending and the contraction of demand. Within a year, inflation had dropped to the still unbearable level of 369.2 per cent. In the early 80’s, the Chilean economy was in a terrible state, in debt and facing hyperinflation. At this period in time, Pinochet began to reverse course and started the process of renationalization. The Chilean economic boom, which monetarism takes credit for, happened not under the tutelage of Freidman but as a consequence of policies diametrically opposed to those of Freidman.

In 1958, economist A. W. Phillips wrote about the inverse relationship between unemployment and the inflation of wages. His famous Phillips curve showed that there was a negative relationship between the two vital economic indicators. What explained this? Essentially, as unemployment fell, workers attained more bargaining power allowing them to push for higher wages. This invariably caused a rise in the general price level as firms passed the costs onto consumers. The trade-off suggested by the Phillips curve implied that policymakers could target low inflation or low unemployment, but not both simultaneously.

For ideological reasons, Keynesians emphasized unemployment and monetarists emphasized inflation going back to the fiscal vs. monetary argument. If there was a trade off, than it would be true that there could not exist a condition of both high inflation and high unemployment. Unfortunately, the economic downturn of the 1970’s put the curve into question. NAIRU, or the Non-Accelerating Inflation Rate of Unemployment, first put forth by Friedman and Edmund Phelps posited that there was a ‘natural rate’ of unemployment’ for which policy makers should aim for.

NAIRU explained that all economies have a natural rate of unemployment and that trying to go below that level would ostensibly cause inflation. Because the unemployed at the natural rate would only work at a certain wage above the prevailing wage levels, any fiscal or monetary policy aimed at getting raising employment would put upward pressure on the general price levels. Why was this rate ‘non-accelerating’? Because if broken, higher wages would cause higher prices, labor would pressure for more wage increases and this had the potential of going out of control. Institutional economist John Kenneth Galbraith, in his paper Time to Ditch the NAIRU asserted:

The concept of a natural rate of unemployment, or nonaccelerating inflation rate of unemployment (NAIRU), remains controversial after twenty-five years…First, the theoretical case for the natural rate is not compelling. Second, the evidence for a vertical Phillips curve and the associated accelerationist hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak. Third, economists have failed to reach professional consensus on estimating the NAIRU. Fourth, adherence to the concept as a guide to policy has major social costs but negligible benefits.

As Galbraith argued, the evidence for NAIRU was at best flimsy. NAIRI advocates never have presented historical data or studies to back up there postulation.

Inflation is not a monetary problem, rather is the product of social conflict that arises from the distribution of income. More so than money supply, it is the nation’s labor situation that is the impetus for price stability and inflation. Thus, as Robert Solow argued, inflation ‘is endemic to modern mixed capitalist societies’. Government action is not the key cause of inflation, and the idea that printing money is the cause of inflation is questionable. As students learn fairly early on, banks are the greatest source of making new money, primarily by taking liabilities in the form of loans.

The monetarist controversy was an attempt by free-market advocates to bring inflation to the forefront and put the onus on government to ‘keep-out’ as a means of achieving goals that had very little to do with inflation. In countries where stabilization occurred, poor nations with runaway inflation were forced, at the advice of Friedman and later Jeff Sachs, to sell their public companies. Inflation was a convenient excuse for the wealthy to put unemployment in the backseat.

Works Cited

Congdon, Tim. Keynes, the Keynians and Monetarism. Northhampton, MA: Edward Elgar, 2007.
Edwards, Sebastian. “Monetarism in Chile, 1973-1983: Some Economic Puzzles.” Economic Development and Cultural Change, Vol. 34, No. 3, Apr., 1986: 535-559.
Fisher, Irving. The Purchasing Power of Money: Its determination and Relation to Credit Interest. Norwood, MA: Norwood Press, 1911.
Fortin, Carlos. “The Failure of Repressive Monetarism: Chile, 1973-83.” Third World Quarterly, Vol. 6, No. 2., Apr., 1984: 310-326.
Friedman, Milton. Inflation: Caues and Consequences. New York: Asia Publishing House, 1963.
Galbraith, James K. “Time to Ditch the NAIRU.” The Journal of Economic Perspectives, Vol. 11, No. 1, Winter, 1997: 93-108.
Klein, Naomi. The Shock Doctrine: The Rise of Disaster Capitalism. New York: Metropolitan Books, 2007.
Shiller, Robert J. “Why Do People Dislike Inflation.” In Reducing Inflation: Motivation and Strategy, by Christina D. Romer and David H. Romer eds., 13-65. Chicago: University of Chicago Press, 1997.
Waage, Thomas O. Inflation: Causes and Cures. New York: The H.W. Wilson Company, 1949.