The Grand Illusion
On the economic front, the Unites States faces a double problem – a huge continuing federal deficit and a weak economy, not to mention the fact that taxes will jump considerably in less than three weeks, and a number of federal income support payments will be cut off, unless the President and the Congress can work out something.
From what I see, almost no one is looking at the overall problem. They’re all concentrating on the symptoms, and each group is focusing on its particular interests and wants.
One of the questions that’s been raised is how can the economy be so weak when business and corporate profits are so high. Although industrial profit margins vary considerably from year to year, on average, regardless of how profit is calculated (on equity, sales, revenue etc.),the profit margins of the S&P 500 have more than doubled over the past thirty years, rising from around five percent to between eleven and fourteen percent. In 2012, corporate profits as a percentage of sales hit an all-time high, while the percentage of Americans working dropped to the lowest level in 30 years. Wages and salaries are now at the lowest percentage of gross domestic income (GDI) since statistics have been kept, and have dropped from the historic range of around 55% of GDI to just over 44%. That amounts to a massive shift in income away from workers to owners and businesses, roughly $1.5 trillion annually – and that’s money that’s not being taxed or spent at near the rate it would be if it went to workers.
Not only that, but the additional corporate profits aren’t funneling back into the economy, either through increased dividends or increased employment. All this results in significant loss [more accurately, a lack of growth] in federal tax revenue at the time when federal spending is increasing. Those who demand a corresponding decrease in federal spending seem to fail to understand that the vast majority of the increased federal spending has gone to prop up the economy in one way or another, either through increased joblessness benefits, food stamps, or the financial community bailouts. Without that additional federal spending we would be, not in a great recession, but in another great depression.
What the large corporations fail to acknowledge, as noted in the previous blog, is that their cost-cutting and “efficient” personnel management techniques, are contributing significantly to the problem. Since the United States is essentially at best a self-contained economic system, because we are not a net exporter of goods and services, but a net importer, we cannot sell massive amounts of goods abroad to compensate for domestic economic weaknesses. That means that when wages and salaries go down – or stagnate with a growing population – so does domestic demand for goods and services. That means companies strive for greater efficiencies, and those efficiencies come largely from “employee efficiencies.”
One of the fastest rising employee costs is health benefits, and the larger corporations have addressed this through automation, fewer employees per unit of output, and greater use of part-time employees who are not paid benefits. The Affordable Health Care Act attempted to address the growing number of Americans without health benefits, but the way in which it was finally passed appears to impact disproportionately, as many Republicans have noted, smaller businesses. In effect, large corporations, through their management practices, have effectively shifted their past health care costs onto small business and government (i.e., all taxpayers). This, unhappily, isn’t anything new. Business has always attempted to shift costs onto someone else, whether environmental, infrastructure, or social costs, and always trumpets “jobs” and “free enterprise” as a rationale for not paying for the costs it imposes on society.
At the same time, U.S. tax policies, particularly corporate tax policies, have only made the situation worse. Although the United States has the highest “official” statutory tax rate of any OECD/industrialized nation in the world at 35%, the effective corporate tax rate for U.S. corporations averaged 12.1% in 2011 – and that was lower than all but one nation out of the top 34 industrial nations. That 12.1% rate is the lowest effective rate for U.S. corporations in the last 40 years. How does this happen? Tax breaks, subsidies, and a tax structure that does not tax overseas profits until or unless those profits are transferred back to the U.S. – where they’ll likely face the 35% rate [since they’d already have been transferred if the corporations had any way to tax shelter them]. Well… if you can’t or won’t transfer those billions, if not trillions, of dollars in overseas profits back to the good old USA, what can you do with them? Build more facilities overseas, of course. Since business tax breaks and subsidies are largely legislated on a political basis, this also results in economic inefficiencies. All this doesn’t exactly help the U.S. economy… or American taxpayers.
Then there’s the financial sector, whose indiscretions, greed, and mass speculation created the economic crisis, and whose major players are still reaping multi-million and multi-billion dollar bonuses… and a significant portion of whose income is taxed at a lower rate than that of most middle-class wage earners.
So… what can be done?
Knowing that no policy-maker will ever have the nerve to suggest anything along the lines of what follows, I’ll still suggest a general framework that I believe would work, not that workability has a damned thing to do with political feasibility… but who knows… someone might actually get desperate enough to try some of these.
First, stop tying tax increases to political rhetoric. Instead of demanding a 4% increase on higher earners, just ask for 1%… and cap their personal deductions in the range of $35,000-$40,000, while eliminating the alternative minimum tax. What no one mentions is that these folks are already going to pay a 4% additional tax on all their investment income beginning in 2013, as required by the Affordable Health Care Act. Second, drop the statutory corporate tax rate to 13-15% — and repeal every single exemption and subsidy. Then allow them to send profits back to the US – but credit them with a dollar for dollar reduction in tax liability for every dollar paid to another country in income/profit taxes. Third, impose a sliding-scale part-time employee surtax on every corporation with more than 100 employees, that surtax being based on the number of part-time employees not receiving health benefits. Couple that with a sliding scale tax credit for small businesses [20 or fewer employees], allowing a credit of some additional percentage of health care insurance costs per employee. Fourth, and this is an idea floated by Eliot Spitzer, impose a transaction tax of between ¼ and ½ of one percent of the value of every financial transaction in the securities and commodities markets. This would raise at least $200 billion annually, and might actually recoup some of the costs that the financial sector dropped on everyone else. It also might reduce the millions of computerized speculative trades made to try to profit on second-to-second price changes. Fifth, tax all dividend, interest, bonuses, and carried interest income [and any other “preferred” income] at the statutory rates, but allow the current lower tax rate for dividend and interest income to remain for the first $50,000-$100,000 [indexed to inflation]. That way, those middle-class individuals who scrimped and saved for retirement wouldn’t be penalized for their thrift, but multi-millionaires wouldn’t be paying absurdly low rates on massive income.
Anyway… those are my suggestions, not, as I said, that anyone in Washington is likely to listen.
One of the things that we got right in Canada is the notion of “integration of tax rates”, which has the intention that the same tax burden will apply whether profits are taken out as salary or as dividends.
The recent place where I have seen it pointed out best was in a Newfoundland description of tax policy which comments:
“The dividend tax credit mechanism is intended to provide for this integration, resulting in dividend income from small corporations bearing approximately the same amount of tax as if the corporate income had accrued directly to the shareholder in the form of a salary.”
I actually find it rather surprising that the Republicans aren’t torn over the Fiscal Cliff… While the termination of tax cuts certainly fits into the “bee in their bonnet”, I should think that it otherwise fits in extremely well with their disbelief in Keynesian multiplication.
If I didn’t have some ‘faith’ in Keynesian economics, I’d think the Fiscal Cliff was a downright *wonderfully* conservative policy. Cutting spending? That’s conservative… Increasing taxes, when in deficit position? That’s a conservative sort of thing to do, if we could only keep absent the “starve the beast” dogma.
Nice. Some times your posts makes me feel like I understand things I know I don’t know a thing about. Thanks 🙂
-rehcra
A cogent distillation of the current fiscal crisis and a tenable, coherent, and politically neutral plan (by politically neutral, I mean ‘irritating to both sides’).
The sliding-scale part-time employee surtax is an OUTSTANDING idea (despite my previous posting on a different topic).
It may seem frivolous for one such as myself to speak on this issue concerning taxes in the economy (botany major lol), yet I do believe I posses an understanding on how we can get this Economy moving.
New political philosophies can be seen as an evolution or response to a failing regime. I think Consumerism is the response to our mixed economy which seems to have faucets from many different economic philosophies. Command Economy – Federal Reserve;Socialism – subsidaries, DMV, etc; Capitalism – free market, albeit with restrictions and occasional regulations.
The economy can’t function if people can’t afford to buy miscellaneous goods and we lose jobs there-in. It is the rule of Demand that has our economy at a stand still. We need people to Demand the manufacture of more goods and in order to do that, these people must start being able to afford them.
First of all, their is our imports:
We need to tax all imports to the point that it is cheaper to buy the American equivalent. We should be buying the Chrystler in Detroit instead of the rice rockets from Asia. Keep American money inside of America as much as possible.
Military:
Cut this, and stop being the world police. Keep as much personelle in the military as it is concurrently. What we need to cut is programs such as those in area 51, the patriot act. Anything that is a dumb paranoid waste of money. We should bring the military home and use them as an extra force of justice. They can be used as a federal police force and we can enroll convicts in these programs in attempt to reform them (we used to do this actually).
Taxes:
We must stop taxing the entire lower half of the economic scale. They must have money to buy manufactured goods (televisions, phones, w/e), and upgrades at the highest rate possible. Their will be more jobs when the consumer has the ability to Demand more from the economy with increased funds.
Why is this? Because a rich man is not about to buy his share of iphones or whatnot to fuel the economy and keep jobs. A billionaire for example would have to buy over 10,000 iphones to keep the job rate up which brings me to my next point.
The entire upper half of the economy should pay a progressive tax rate.
Anyone who works in a corporation and makes over 250,000 should pay a steep progressive tax, but the corporation body itself should pay no taxes (I will get to this later). The reality is that their is not enough sink holes for the hyper rich (not to say 250,000 is hyper rich because it definitely is not) to spend money on to keep this economy moving. Instead of expecting them to buy 10,000 high priced gadgets like in my iphone example, we should steeply tax them and create subsidary programs so the poor (working class) will be able to buy these gadgets and their upgrades. Remember, American goods are now cheaper because of the Tax on their foreign equivalent imports.
Now onto small business. The owners should not have to pay taxes until they start accumulating an excess of approximately 800,000$ why? Because owners equity = business stability. They should have a slight progressive tax once they reach the point where they will no longer be considered ‘small’ businesses.
Why wouldn’t I want to tax the corporation body?
Easy, the corporation body actually creates jobs. We need to go after the CEOs of these corporations and their immediate lackys, not the body that creates the jobs. With a decrease in funds will come a decrease in corporate corruption, as private money = power of one voice. Corporate money = pluralism.
Miscellaneous:
Liveable minimum wage (we should tax dependents for not fueling the housing and real estate markets, food, etc)
Sources: Numerous works on philosophy; although, the majority of this ideal was garnered from an interpretation and criticism of Adam Smiths, Wealth of Nations.
Just a friendly opinion from someone who enjoyed The White Order and The Colors of Chaos. Welllll I enjoyed all the other books, but Cerryls journey especially.
PS: are the Wizards of Fairhaven supposed to invoke a visual of looking like slightly off members of the KKK? LOL. I mean when I thought of the white leather jackets they sometimes wore and their lack of pointed hats that threw me off of that idea, but still! I thought of Jeslek and his sun golden eyes and long white hair, also becoming the High Wizard. Maybe I was subconciously overanalyzing the term wizard and the fact they wore all white unless they were apprentices or from the creche.
If we do not ask anything of the “lower half of the economic scale,” they will rarely, if ever, contribute anything except votes for those who weild power to manipulate as they will. And the ‘upper half’ would also be entitled to call the ‘lower half’ freeloaders and they would be right.
So… you did not mention sales tax. And what about the random tariffs the gov’t calls ‘fees’ ?
If we do not tax corporations, many of the “super rich” will not pay anything since they have the means and ability to hide their money where it is perfectly legal to not pay taxes. Look up “S-type Corporations.”
Cutting the military and pulling it back to CONUS and then re-deploying it as a ‘federal police force’ ALONG with enlisting convicts… please think this through first. This would, quite literally, drop many parts of the world into sheer chaos, economically and militarily.
Last comment: ‘livable minimum wage’ What does this really mean? what is a livable minimum wage in Washington DC or Boston would not apply to Pierre, SD or to Longstreet, MS.
One of the biggest reasons that these little problems haven’t been simply solved is 1. they’re not little, 2. they’re not simple, 3. they’re likely not solvable because what one person/group would call an acceptable end point would not be acceptable to a different (or several different) person/group.
I do admire the enthusiasm…. and envy the naivete just a bit.
Naïveté? That’s not very nice, I’d like you to point out exactly why that little addition was necessary. You seem to be the type of person who would realize why labeling a person or an idea with such a strongly connotated word could not possibly dismiss it (them) or magically render it (them) any less legitiment. I’d hope we wouldn’t degenerate to under the table insults before a debate actually began. 🙁 I often find such word usage as an ‘intellectual way’ of saying “shut up you little :use your imagination:”
Moving on, how could you really expect me to give a flawless concrete agenda and an explanation in a simple few paragraphs? It would take a whole book and more to explain my complete reasoning. Is it really all that wrong to give a simple summary of an ideology to best be interpreted and read by a general audience?
If you watched the debates you would certainly understand why political speakers believe it crucial to condense content and add flair for their intended target demographics. I clearly made the mistake (being a new user) of crafting a miserable appeal intended for a very different type of audience.
Also, you have not recognized my entire point. I don’t blame you though, I did not have the insight to leave an easily recognizable road map. Anyways, this was an ideal intended for the creation of Jobs. In short, I am not advocating for fairness or equality. I am advocating for materialism, manufacturing, and jobs, in the theme of the ending Bush Tax Cuts.
I never really felt like going further into depth about this, but I do believe in a sales tax in a respect. List of items I do not believe should be taxed: food, property less than approx. 4,000 sq ft, gasoline, cars less than approx 20,000$, any basic necessity. (yes cars are necessary in some states. Anyways, we should individual tax all luxories progressively. A millionaires mansion would pay a hefty tax as a monte blanc pen set would pay a small tax fee.
I believe in deregulation, but only so it remains practical.
Your points about the military and s corporations while, certainly valid cannot be addressed in a few sentences or paragraphs for that matter. Know; however, that I do advocate for a variety of new legislations with strict rules and enforcement regarding overseas trade and American Citizens.
I find it amusing that this reminds me of the black council’s attempts at regulating international trade in Recluce in order to keep their businesses safe and thriving
You may also make note that I personally value America over any of the overseas Nations. They should develope their own political movements and craft themselves as they see fit.
Moving on, I believe you may be overstating my interpretation of the denotation of convict, which I personally charge as someone who is in prison. I did not mean we should unleash all of the people on death row. To believe such seems to me to be utterly ridiculous. We should, for example, release those who are in for DUI’s if they volunteer and sign a form to relinquish their rights to non medicinal alcohol. Again, this is all at a most broad and basic level.
-expecting and welcoming your future criticism as it will prove entertaining to say the least
Yours truly
Another poor (and bored) scientist.
I would type more, but I got to stop procrastinating at work
Your convict ideas still promises a great level of chaos even if you only take the low risk criminals. Specially when you place them out in a place with low supervision/oversite. (And yes, every combat zone qualifies. There’s a reason they work so hard to instill instinctive discipline in soldiers before they ever see combat).
Also, you might want to step back on the rest. Naive isn’t an insult, it’s a term for someone with a simplistic view stemming from lack of experience or knowledge on a subject. We’re all naive in one area or another and there’s no insult in suggesting such when a persona’s comments show that they don’t fully understand a situation. I’m sure I’d show an incredible level of naivete if we started talking plants. Even with basic understanding of botany there’d still be huge holes in my knowledge simply because it’s not a passion or focus of mine.
@Jackson, I know that, like I said before I was typing in a most broad sense.
You say Naïve isn’t insulting? It feels insulting to someone who worked very very hard to get a degree and found that, it doesn’t allot much privilege or even a significant increase in available funds.
This fellow, Wine Guy, I don’t know him, but I have acknowledged him as a peer. I felt I did not recieve an equal amount of respect with such a whimsical dismissal. If he had stated some sort of credentials (ex/ I majored in economics with a masters) or what not, I would have felt much more at ease.
Now, he may or may not have thought my opinion as an attack or critique on Modesitts’ idealism. It was not. I felt like opinion trading. A lot of what Modesitt had stated was unintelligable to me as I lack the information or education in that general field to relate with. As a solution, I merely took a closely related category, in this case philosophy, and attempted to relate it to these current economics being discussed. Because I do have a philosophy that relates to the topic I hand.
I will step back though and enjoy what the rest have to say about this.