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“Is Vast Inequality Necessary?”: Inequality Is Inevitable; The Vast Inequality Of America Today Isn’t

How rich do we need the rich to be?

That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.

Now, recent experience has not been kind to the conservative position. President Obama pushed through a substantial rise in top tax rates, and his health care reform was the biggest expansion of the welfare state since L.B.J. Conservatives confidently predicted disaster, just as they did when Bill Clinton raised taxes on the top 1 percent. Instead, Mr. Obama has ended up presiding over the best job growth since the 1990s. Is there, however, a longer-term case in favor of vast inequality?

It won’t surprise you to hear that many members of the economic elite believe that there is. It also won’t surprise you to learn that I disagree, that I believe that the economy can flourish with much less concentration of income and wealth at the very top. But why do I believe that?

I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.

First, we could have huge inequality because individuals vary hugely in their productivity: Some people are just capable of making a contribution hundreds or thousands of times greater than average. This is the view expressed in a widely quoted recent essay by the venture capitalist Paul Graham, and it’s popular in Silicon Valley — that is, among people who are paid hundreds or thousands of times as much as ordinary workers.

Second, we could have huge inequality based largely on luck. In the classic old movie “The Treasure of the Sierra Madre,” an old prospector explains that gold is worth so much — and those who find it become rich — thanks to the labor of all the people who went looking for gold but didn’t find it. Similarly, we might have an economy in which those who hit the jackpot aren’t necessarily any smarter or harder working than those who don’t, but just happen to be in the right place at the right time.

Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.

As I said, the real economy contains elements of all three stories. It would be foolish to deny that some people are, in fact, a lot more productive than average. It would be equally foolish, however, to deny that great success in business (or, actually, anything else) has a strong element of luck — not just the luck of being the first to stumble on a highly profitable idea or strategy, but also the luck of being born to the right parents.

And power is surely a big factor, too. Reading someone like Mr. Graham, you might imagine that America’s wealthy are mainly entrepreneurs. In fact, the top 0.1 percent consists mainly of business executives, and while some of these executives may have made their fortunes by being associated with risky start-ups, most probably got where they are by climbing well-established corporate ladders. And the rise in incomes at the top largely reflects the soaring pay of top executives, not the rewards to innovation.

Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.

And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.

In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking: People may be willing to prospect for gold, even if a successful foray won’t make them quite as rich as before, if they know they won’t starve if they come up empty.

So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, January 15, 2016

January 18, 2016 Posted by | Economic Inequality, Tax Revenue, Taxes on the Wealthy | , , , , , , , , | Leave a comment

“Elections Have Consequences”: Don’t Let Anyone Tell You Otherwise

You have to be seriously geeky to get excited when the Internal Revenue Service releases a new batch of statistics. Well, I’m a big geek; like quite a few other people who work on policy issues, I was eagerly awaiting the I.R.S.’s tax tables for 2013, which were released last week.

And what these tables show is that elections really do have consequences.

You might think that this is obvious. But on the left, in particular, there are some people who, disappointed by the limits of what President Obama has accomplished, minimize the differences between the parties. Whoever the next president is, they assert — or at least, whoever it is if it’s not Bernie Sanders — things will remain pretty much the same, with the wealthy continuing to dominate the scene. And it’s true that if you were expecting Mr. Obama to preside over a complete transformation of America’s political and economic scene, what he’s actually achieved can seem like a big letdown.

But the truth is that Mr. Obama’s election in 2008 and re-election in 2012 had some real, quantifiable consequences. Which brings me to those I.R.S. tables.

For one of the important consequences of the 2012 election was that Mr. Obama was able to go through with a significant rise in taxes on high incomes. Partly this was achieved by allowing the upper end of the Bush tax cuts to expire; there were also new taxes on high incomes passed along with the Affordable Care Act, a.k.a. Obamacare.

If Mitt Romney had won, we can be sure that Republicans would have found a way to prevent these tax hikes. And we can now see what happened because he didn’t. According to the new tables, the average income tax rate for 99 percent of Americans barely changed from 2012 to 2013, but the tax rate for the top 1 percent rose by more than four percentage points. The tax rise was even bigger for very high incomes: 6.5 percentage points for the top 0.01 percent.

These numbers aren’t enough to give us a full picture of taxes at the top, which requires taking account of other taxes, especially taxes on corporate profits that indirectly affect the income of stockholders. But the available numbers are consistent with Congressional Budget Office projections of the effects of the 2013 tax increases — projections which said that the effective federal tax rate on the 1 percent would rise roughly back to its pre-Reagan level. No, really: for top incomes, Mr. Obama has effectively rolled back not just the Bush tax cuts but Ronald Reagan’s as well.

The point, of course, was not to punish the rich but to raise money for progressive priorities, and while the 2013 tax hike wasn’t gigantic, it was significant. Those higher rates on the 1 percent correspond to about $70 billion a year in revenue. This happens to be in the same ballpark as both food stamps and budget office estimates of this year’s net outlays on Obamacare. So we’re not talking about something trivial.

Speaking of Obamacare, that’s another thing Republicans would surely have killed if 2012 had gone the other way. Instead, the program went into effect at the beginning of 2014. And the effect on health care has been huge: according to estimates from the Centers for Disease Control and Prevention, the number of uninsured Americans fell 17 million between 2012 and the first half of 2015, with further declines most likely ahead.

So the 2012 election had major consequences. America would look very different today if it had gone the other way.

Now, to be fair, some widely predicted consequences of Mr. Obama’s re-election — predicted by his opponents — didn’t happen. Gasoline prices didn’t soar. Stocks didn’t plunge. The economy didn’t collapse — in fact, the U.S. economy has now added more than twice as many private-sector jobs under Mr. Obama as it did over the same period of the George W. Bush administration, and the unemployment rate is a full point lower than the rate Mr. Romney promised to achieve by the end of 2016.

In other words, the 2012 election didn’t just allow progressives to achieve some important goals. It also gave them an opportunity to show that achieving these goals is feasible. No, asking the rich to pay somewhat more in taxes while helping the less fortunate won’t destroy the economy.

So now we’re heading for another presidential election. And once again the stakes are high. Whoever the Republicans nominate will be committed to destroying Obamacare and slashing taxes on the wealthy — in fact, the current G.O.P. tax-cut plans make the Bush cuts look puny. Whoever the Democrats nominate will, first and foremost, be committed to defending the achievements of the past seven years.

The bottom line is that presidential elections matter, a lot, even if the people on the ballot aren’t as fiery as you might like. Don’t let anyone tell you otherwise.

 

By: Paul Krugman, Op-Ed Columnist; Opinion Pages, The Conscience of a Liberal, The New York Times, January 4, 2015

January 5, 2016 Posted by | Economic Policy, IRS Tax Tables, Obamacare, Tax Revenue, Taxes on the Wealthy | , , , , , , , | 1 Comment

“So Far, So Feeble”: GOP Governors Have A Problem; The Ways They Govern

Even as Republicans boast of their chances to take over the United States Senate come November, their party’s governors across the country are facing dimmer prospects. From Georgia to Alaska, right-wing ideological rule imposed by GOP chief executives have left voters disappointed, disillusioned, and angry.

The problem isn’t that these governors failed to implement their promised panaceas of tax-cutting, union-busting, and budget-slashing, all in the name of economic recovery; some did all three. The problem is that those policies have failed to deliver the improving jobs and incomes that were supposed to flow from “conservative” governance. In fact, too often the result wasn’t at all truly conservative, at least in the traditional sense — as excessive and imbalanced tax cuts, skewed to benefit the wealthy, led to ruined budgets and damaged credit ratings.

Consider Gov. Scott Walker, famous for surviving the recall effort that Wisconsin’s outraged citizens mounted in response to his attacks on labor. While seeking to end collective bargaining in 2010, Walker also passed a series of regressive tax cuts that he vowed would bring at least 250,000 jobs. By sharply reducing state aid to schools and local governments, he temporarily closed a structural deficit – but this year, with state tax revenues declining precipitously in the wake of his tax cuts, Walker is facing a $1.8 billion budget deficit. And as for the jobs, most of them never materialized. Wisconsin is near the bottom of Midwestern states in creating new jobs.

In Kansas, Gov. Sam Brownback was equally faithful to right-wing orthodoxy. With the advice of Arthur Laffer, the genius responsible for Ronald Reagan’s exploding deficits in the 1980s, Brownback imposed an historically huge tax cut on the state. Declining revenues meant huge reductions in state services, especially education. And, as furious Kansans have discovered, the Brownback experiment has achieved poor employment growth combined with…yes, a massive budget deficit of nearly $350 million this year.

In Pennsylvania, Gov. Tom Corbett’s first budget in 2011 included major tax cuts for corporations that cost about $600 million annually. By this point, it should be obvious who was required to pay for those favors: the children served by the state’s education system, who saw a billion dollars in cuts to their schools and programs, from kindergarten through college.

This year, the state is facing a budget shortfall of over $1 billion, but Corbett doesn’t seem to have learned much. He has demanded further income tax cuts that will benefit the wealthy – and will cost Pennsylvania another $770 million in annual revenue. And what about his promise that the state would become number one nationally in job creation? As of last summer, it ranked either 47th or 49th, depending on the data measured.

So far, so feeble – and it is scarcely more impressive in the other red states whose governors face reelection this year.

The politician tasked with rescuing his party’s beleaguered governors is none other than their colleague from New Jersey, Chris Christie, who serves as chair of the Republican Governors Association. From that perch, of course, the blustering Christie hopes to run for president – an aspiration that may recede still further from his grasp with each lost governor’s mansion this fall. Emotional as he tends to be, Christie surely empathizes with his fellow governors – because his very similar policies have landed New Jersey in equally precarious condition.

So it is puzzling to hear voters in places far from the Garden State – such as Iowa and New Hampshire – tell reporters that they admire Christie because he “saved New Jersey.” Evidently they don’t know that the state’s finances have been sufficiently terrible to provoke not one but two downgrades in its credit rating this year alone.

But bad bond ratings aren’t the only woe confronting the Big Boy, as President Bush called him. Christie is perfectly suited to his leadership role among the GOP governors – if only because his economic record may well be the very worst of any American governor in either party. The question that voters must answer, this November and two years from now, is when these failed fiscal and economic “experiments” – and the suffering they have caused – will at last end.

 

By: Joe Conason, Editor in Chief, The National Memo, October 1, 2014

October 2, 2014 Posted by | Governors, Red States, Tax Revenue | , , , , , , , | Leave a comment

“Me, Pay Taxes?”: How Wall Street Avoids Paying Its Fair Share in Taxes

Like many Americans, you’ve probably just spent a good bit of time figuring out how much you owe in taxes. Most of us fill in the forms and follow the rules. But the rules are a lot more flexible for the largest U.S. corporations, and especially for the major Wall Street financial institutions and their top executives and owners. Banks and financial companies capture more than 30 percent of the nation’s corporate profits, but manage to pay only about 18 percent of corporate taxes while contributing less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.

What’s more, the owners and senior managers of our major financial institutions can exploit the loopholes in our individual income tax on a far greater scale than the rest of us. Below is a short guide to a few of the major ways that Wall Street avoids paying its fair share.

But I earned it in the Cayman Islands!: American corporations have developed a panoply of ways to route income through low-tax foreign subsidiaries. This practice goes well beyond the financial sector. Indeed, the latest publicized example involves a manufacturing firm, Caterpillar. Because of the inherently “placeless” nature of many financial transactions, however, financial institutions and their investors are among those in the best position to move income around in this fashion. The major Wall Street banks have thousands of subsidiaries in dozens of countries, all capable of engaging in transactions that enjoy the full guarantee of the U.S. parent company even as they take advantage of the tax or legal advantages of their foreign incorporation. Transactions in the multi-trillion dollar global derivatives market, for example, can pretty much be relocated anywhere in the world with the touch of a computer keyboard.

A way to crack down on the massive potential for tax avoidance this creates would be to simply rule that financial transactions backed up by a U.S. firm are in effect U.S. transactions and subject to U.S. tax law. Whatever international tax rules are designed to protect real manufacturing activity in other jurisdictions from inappropriate taxation should not apply to the passive income gained from financial activities that can easily be transacted from anywhere in the world. For some years U.S. tax law attempted to follow this principle, but starting in 1997 an “active financing” loophole made it much easier for multinationals to avoid taxation on financial transactions by moving profits to low-tax foreign subsidiaries. Combined with so-called “look through” provisions, these international tax loopholes mean that U.S. multinationals get to look around the world for the cheapest places to locate their earnings.

It’s not work, it’s investment!: The U.S. taxes capital gains on investments much more lightly than it taxes ordinary income. The details get complicated, but in general the profit on investments is only taxed at a maximum 15 to 20 percent rate, as opposed to a rate of almost 40 percent for high levels of ordinary income. Though its stated goal is to encourage investment and saving, a tax differential of this size can be seen as a subsidy to financial speculation, since it penalizes wage work compared to trading profits, and accrues to any investment held longer than a year, whether or not it can be shown to actually create jobs. In addition to the broad impact of the tax differential, the gap in rates creates a windfall for wealthy Wall Street executives in a position to maximize its benefits. Those who work for big hedge and private equity funds are in the very best position to do that, as they take much of their work income from the investment returns of the fund. Since they are legally permitted to classify this “carried interest” income as capital gains, they can cut their tax rates effectively in half – a windfall that costs the federal government billions of dollars a year, and means that some of the wealthiest individuals in America pay a lower tax rate on their earnings than an upper-middle-class family might.

Who, me, sales tax?: It’s easy to forget at this time of year when we’re all working on our income tax, but the sales tax is also one of the major taxes you pay each year. State and local governments take in more than $460 billion a year through sales taxes charged on everything from cars to candy bars. But Wall Street speculation isn’t charged a sales tax at all. Indeed, you’ll pay more sales tax for your next pack of gum than all the traders on Wall Street will pay for the billions of transactions they undertake every year. The non-partisan Joint Tax Committee of the U.S. Congress estimates that a Wall Street speculation tax of just three basis points – three pennies per $100 of financial instruments bought and sold in the financial markets – would raise almost $400 billion over the next decade. What’s more, such a fee would significantly discourage the kind of predatory trading strategies recently highlighted by author Michael Lewis, strategies that depend on trading thousands of times in a second in order to manipulate stock markets and extract tiny profits from each trade.

This only starts the list of ways Wall Street financial institutions and the people who run them manipulate the system and avoid paying their fair share; there are plenty more, including the use of complex financial derivatives to shelter individual income, the variety of techniques used by hedge and private equity fund partners to avoid effective IRS enforcement, and the continuing tax deductibility of corporate pay above $1 million, as long as it is sheltered under a so-called “performance incentive.” Tax time would be a good time for our elected representatives to get to work closing some of these gaps and loopholes, and leveling the playing field.

 

By: Marcus Stanley, Economic Intelligence, U. S.News and World Report, April 16, 2014

April 18, 2014 Posted by | Corporate Welfare, Tax Loopholes, Tax Revenue | , , , , , , | Leave a comment

   

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