Swans Commentary » swans.com May 9, 2011  



Blips #110
 From The Martian Desk


by Gilles d'Aymery





"All men recognize the right of revolution; that is, the right to refuse allegiance to, and to resist, the government, when its tyranny or its inefficiency are great and unendurable. But almost all say that such is not the case now."

Henry David Thoreau (1817-1862), Civil Disobedience, 1849
"What kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?"

—Andy Grove, Intel's former CEO


(Swans - May 9, 2011)   AN OUTSPOKEN INDIVIDUAL recently commented that "[T]he people who are threatening not to pass the debt ceiling are our version of al Qaeda terrorists. . . . . They're really putting our whole society at risk by threatening to round up 50 percent of the members of the Congress, who are loony, who would put our credit at risk." He added: "I do believe we have a broken political system that is capable of doing irresponsible things. This whole conversation [about not raising the debt ceiling] is irresponsible." (The loonies want more drastic budget cuts to accompany raising the debt ceiling.) And who might this outspoken individual be -- a radical, a revolutionary, or worse yet a socialist? Actually, he is Paul O'Neill, the first secretary of the treasury under the Bush Jr. administration. Recall that he was as outspoken then as he is now. He opposed the Bush tax cuts in 2001, advocating tax increases and spending cuts to balance the budget, and he strongly objected to the march toward the Iraq War. Mr. Bush fired him in December 2002.

WHETHER THE LOONIES ARE IRRESPONSIBLE is, of course, a matter of opinion, one that I do not share. After all, day in and day out we are being bombarded with news about our public debt and spending "problems" -- the crushing burden of debt, Washington's culture of spending, in the inimitable words (PDF) of Paul Ryan, the would-be fiscal conservative who wants you to believe that we need to cut taxes and entitlements to get our house in order. I can easily understand and even forgive people for believing this narrative. Again, we hear it day in and day out -- proclamations made by experts, pundits, and politicians alike. I sometimes wonder whether this is an issue of cognitive dissonance (and for a few who actually know, moral dissonance), or mere ignorance. I've come to the conclusion that the latter applies (but for the very few who know better, some of them being definitely morally dissonant). Evidently, Psychology 101 teaches that the moment you point the finger at someone's ignorance you lose his or her attention pronto and whatever you can say and argue is dismissed out of hand, which in turn leads to his or her cognitive dissonance and the recourse to information that fits one's confirmatory bias -- aka, "my way or the highway." Now, I have no way of probing someone's mind and even less chance to enter it. So, I am at a loss in regard to educating the ignorant mind whose ignorance is ignored, since he or she cannot acknowledge the ignorance because of the ignorance of the ignorance. It's a never-ending loop that ends with my being accused of elitism.

PERCEPTION BASED ON misconceptions and deceptions is the basis of the widespread belief that the government is spending too much and is running high budget deficits, hence the rising public debt. In reality, what we face is a revenue problem -- or lack thereof -- and a huge misallocation of resources. The federal government, for political and ideological reasons, does not raise enough revenue due to a tax code that is entirely tilted toward the moneyed class. I know, I can already hear the clamors: We are overtaxed already. Yes, it's true for about 80 percent of individuals, but the real money is hugely undertaxed or not taxed at all. Let's take a look at corporate and individual taxes. We are continually being told that corporations pay too much income tax, right? If you do a Google search on "US corporate tax" you'll find a lot of literature claiming that the U.S. has "one of the highest corporate tax rates in the world" -- the 35 percent top rate that is stifling small businesses and large corporations -- and that "only Brazil, Uzbekistan, Chad and Argentina have higher corporate tax rates than the U.S." Before debunking that fallacy please note that if it were true then ask yourself how come Brazil has a buoyant economy in spite of its higher corporate tax rates? Interesting question, no? Could it be that the health of an economy is not linked to the level of taxation? Just asking... (My regular readers will undoubtedly know the answer.) Here are a few more questions that can easily be answered.

IN REGARD TO THE TOP 35 percent corporate income tax rate that is supposed to destroy small businesses, how many small businesses do you know that have a taxable income equal to, or larger than $18,333,333 -- the threshold for the top rate? How many? Small businesses are not touched by this rate. Still, the narrative remains that corporate America is overtaxed. But if that is so, please explain how come the average federal corporate tax revenue was 4.7 percent of GDP in the 1950s and only 1.9 percent in the last decade? Please, further explain why "between 2000 and 2009, 10.7 percent of federal revenues were collected through the corporate tax, down from 29.8 percent of revenues in the 1950s"? In other words, according to the Center on Budget and Policy Priorities (CBPP), "the corporate tax now contributes considerably less to federal revenues." Contrary to the propaganda the effective average US corporate tax rates are much lower than most countries in the OECD. Even worse, last year, according to Fortune magazine's just published Fortune 500 list, America's 500 largest corporations "posted the third-largest combined profit gain in the list's history." Yet, the share of corporate taxes contributed just 9 percent to federal revenue in 2010.

HERE, I MUST TAKE ONE OF my famous detours to address an issue that is long overdue. The editors of Fortune Magazine noted that those incredibly high profits were achieved thanks to increased productivity and job cuts. What it means is that the federal government directly contributed to the increased profits of corporations, the same corporations that contribute so little to the federal revenue. Let me explain with the help of a July 25, 2010, New York Times article written by Nelson D. Schwartz, "Industries Find Surging Profits in Deeper Cuts." Schwartz takes as an example the motorcycle manufacturer Harley-Davidson, which in spite of falling motorcycle sales for the last three years saw its profits rise ("soaring, in fact"). Falling sales and soaring profits? Schwartz explains:

Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year -- more than a fifth of its work force.


Harley has warned union employees at its Milwaukee factory that it would move production elsewhere in the United States if they did not agree to more flexible work rules and tens of millions in cost-saving measures.

SCHWARTZ ADDS THAT "the trend is hardly limited to Harley." He mentions corporations like Alcoa, Ford, General Electric, and JPMorgan Chase, etc. all squeezing labor to increase profits. Now, you may wonder, how did the federal government (the taxpayers) contribute to these profits? Well, when I read the article last summer, I also found a report that indicated that the Fed had spent $139 billion in unemployment insurance in 2009, an increase of 320 percent over the withdrawals that took place in 2007. During that period the deposits declined by 6.6 percent, creating a deficit of almost $107 billion, which was most probably covered by the printing press and borrowing. In sum, the government indirectly subsidized the profits of the corporate world, piles of cash that either sit in the corporate coffers or are distributed to the shareholders in the form of dividends, which, keep in mind, are only taxed at the outrageously low rate of 15 percent. Talk about moral dissonance!

SOMETHING ELSE in the Fortune 500 list attracted my attention. The editors noted that the profits "grew faster overseas than in the U.S." This is significant because profits located abroad are taxable only when they are repatriated to the U.S. That loophole provides a strong incentive for US transnational corporations to shift their investments overseas and seek tax shelters. (You have heard of Ugland House in George Town, the capital of the Cayman Islands, haven't you?) That gimmick, aside from other perfectly legal shenanigans (tax breaks) inserted in the tax code, allows major corporations to pay no taxes -- e.g., General Electric or Honeywell -- or very low taxes. (Honeywell did not pay any income tax in 2009 and 2010, expects a tax benefit of $471 million, and in the last five years has only paid 4.1 percent in income taxes.) Since the US government does not force these multinational corporations to repatriate their overseas profits, they simply are not repatriated -- or they are under very lenient conditions, as occurred in 2004. Congress passed a measure known as a "repatriation tax holiday." The repatriated profits were to be taxed at a rate of 5 percent (the effective tax rate was only 3.7 percent). In exchange, the corporations were supposed to reinvest this income and to create jobs. What do you expect happened? Take a look at this April 8, 2011, report by Chuck Marr and Brian Highsmith of the CBPP. Money being "fungible," the corporations played a dance of musical accounting chairs. No investments were made, no jobs created. Instead, drastic layoffs took place and it was found that for each repatriated dollar almost one dollar was paid in dividends to shareholders. To add insult to serious injury, there is a new lobbying effort to proceed with a second repatriation tax holiday, this time for one trillion dollars. I think -- but don't hold me to this one, as I can't find the source any longer -- that it is the chairman of Cisco who recently waxed romantic about the beneficial effects on investments and jobs creation of the injection of $1 trillion in the US economy. There is even a congressman, Representative Brian Bilbray (R-CA), who advocates a zero tax rate on this repatriated income. Again, please read the report.

TO UNDERSTAND THE EXTENT of the corporate taxes boondoggle that is sold to the American people day in and day out, I urge my readers -- friends and foes -- to read another very thorough report by Chuck Marr and Brian Highsmith, "Six Tests for Corporate Tax Reform: Reform Should Help Shrink Long-Term Deficits, Reduce Biases and Preferences in the Tax Code, and Discourage Tax Sheltering" (February 28, 2011). You can download the 10-page report in PDF format at http://www.cbpp.org/files/2-28-11tax.pdf. You will learn a lot about our current tax system in relation to corporations. You will also learn how the very-high-wealth individuals are increasingly using the system to become unincorporated "corporations" to use the foreign-income loophole in order to avoid paying taxes. Claiming ignorance ought not to be an excuse when the facts are right out there for those who care to or take the time to look...

THERE ARE MANY OTHER GIMMICKS within the tax code that explain the lack of government revenue versus the "debt problem." One of my favorites is the deductibility of "charitable" gifts to not-for-profit organizations. I'm not referring to the $25 or $100, or even $500 you give to whatever causes you support -- even Swans can be considered a "good" cause (though, since we are not set up as a nonprofit, your donations are not deductible...sorry). No, I'm referring to the huge financial donations that wealthy patrons give to their chosen causes or to their own personal foundations. The Bill and Melissa Gates Foundation may be a good cause but its $33.5 billion endowment was subsidized by the taxpayers by at the very least 15 percent -- or just over $5 billion. Mr. and Mrs. Gates may judge their causes worthy and whether they are is a matter of opinion, but did they ask any of us, taxpayers, whether we agreed to subsidize their choices at the price of running a deeper budget deficit? Warren Buffett, the "oracle of Omaha," may have decided to eventually give most of his wealth to the Gates Foundation -- some $40 billion. Fine, but why should we, taxpayers, give away $6 billion (conservative estimate) to subsidize his choice? And don't forget that this charity charade allows the avoidance of the estate tax, another tax that the free-market fundamentalists want to eliminate.

LET'S LOOK AT INDIVIDUAL TAXES. The narrative here tends to focus the attention of the public on the federal income tax. The argument advanced and repetitively rehashed by politicians like Paul Ryan, commentators like Charles Krauthammer, and countless think tanks like the Cato Institute, the Heritage Foundation, etc., is that the rich already pay the largest proportion of the (inferred very progressive) federal income tax, that they are already overtaxed and the rates should be substantially lowered. Note in passing that these are the same folks who want to dismantle the public school system by privatizing education, who want to privatize Social Security and Medicare, get rid of all regulations, and on, and on. In a sense, a sadistic sense, their logic is implacable: eliminate all social programs and the government won't need the revenue to fund them. Welcome to the world of Ayn Rand! However, in the real world things are a little more complicated. Individual taxation is not reduced to the federal income tax. There are many other types of taxes like sale taxes, state and local taxes, and of course the elephant in the room, the payroll taxes, which contribute about 40 percent of federal revenue.

WHEN TAKING ALL TAXES into consideration, the American tax system is far from progressive. The Citizens for Tax Justice, an organization that has been promoting "fair taxes for middle and low-income families, requiring the wealthy to pay their fair share, and closing corporate tax loopholes," since 1979, (they have not been very successful apparently!) issued a report on April 15, 2011, entitled "America's Tax System is Not as Progressive as You Think" (PDF). The concise 2-page report clearly shows the tax system is, as they put it, "barely progressive." The top 1 percent averaging a cash income of $1,254,000 pays 30 percent of their income in total taxes. The fourth quintile, averaging a cash income of $66,300 pays 28.5 percent in total taxes. Actually, those averaging a cash income of $140,000 pay more in percentage of their income (31.1 percent) than the top 1 percent.

HOW CAN IT BE POSSIBLE? Billionaire Warren Buffett once quipped that his secretary paid a far larger percentage of her income in taxes than he did. On ABC's "This Week," November 28, 2010, Buffett told Christiane Amanpour...

... people that talk about how the rich pay their share and all that sort of thing, they totally ignore the payroll tax. You know, I did this little survey in my office a few years ago and there were 16 people who responded. And I had the lowest tax rate of the 16. I didn't have any tax shelters. I didn't have any tax planner. It was all courtesy of the U.S. Congress. I mean, they did my tax planning for me. And, literally, the average for the office, counting payroll taxes was 32 percent and mine was 16 and a fraction percent.

WHETHER AN INDIVIDUAL makes a salary of $20,000 or $500,000 a year, that individual pays the payroll tax, but only up to a maximum wage of $106,800, which makes the payroll tax one of the most regressive taxes of the system. Low-income families and the middle class bear the brunt of the payroll tax. Eliminate the cap, and there is no longer a problem for the funding of Social Security and Medicare. Even worse, since dividends and capital gains are not considered income they are exempted from the payroll tax. Take Mr. Buffett's example: He receives a modest salary (compared to his peers) of $100,000 but his real compensation comes from the value of shares he holds in Berkshire Hathaway, which capital gains have been tremendous over the past 40-some years (and as said supra, a simple donation to a "charity" and bingo, no tax at all!). Capital gains, like dividends, are only taxed at a 15 percent rate and can be deferred at will. Take John Paulson, the hedge fund manager I have often highlighted in my Blips. The bulk of his earning is in capital gains -- no payroll tax, no income tax.

IT CANNOT BE REPEATED ENOUGH, the real wealth (big money) comes from capital gains and dividends. Treat both like income and the budget deficit is history. And since we are at it regarding the tax code, get rid of the deductibility of mortgage interest. It has not helped homeownership (Canada does not have such deductibility, yet has a higher rate of homeownership). It only serves wealthy individuals to buy multiple McMansions while lowering their taxes. Want more? Start means-testing Social Security. When asked by Christiane Amanpour (in the same November 28, 2010, "This Week" interview) about means-testing, billionaire media mogul (and one of the largest landowners in the world) Ted Turner responded: "Well I don't like it. I paid for Social Security. It's my own money I'm getting back. Social Security, we get taxed for Social Security. In my opinion, I think Social Security -- since you paid for it, it's yours and you're entitled to get it." Just thinking about my 90-year-old father-in-law who cannot afford his medicine (he has Parkinson's disease) while the entire family is struggling to help him, so that the wealthy can get their monthly Social Security checks that they do not need but feel entitled to receive because they paid into the program, makes my blood boil with anger. Where is the solidarity among us all? Where?

THERE IS MORE MEANS-TESTING that could be done by the federal government, particularly in the pensions being paid to retired employees. Take our former presidents. Does anyone have any knowledge of the cost born by the taxpayers for benefits paid to these high-valued retirees? The Internet Public Library (IPL2) has some general information on the topic. The Congressional Research Service has a 2008 document detailing the "Federal Pension and Retirement Benefits" of former presidents (PDF). The FY2008 Consolidated Appropriations Act allocated $2,478,000 to the trinity, of which Clinton got $1,162,000, Bush Sr. $786,000, and Carter $518,000. They are all multimillionaires. Does Bill Clinton need an 8,300-square-foot Harlem office? How often does Mr. Bush visit his 4,600-square-foot office in Houston or Carter his 4,200-square-foot one in Atlanta? Do we have to foot the $79,000 telephone bill of Mr. Clinton? They are accorded more perks called "related benefits" -- state funeral, medical expenses, presidential libraries maintenance, and Secret Service protection whose costs "are not publicly disclosed... for reasons of security." At a time when we are ravaging the social programs (public education, Medicare, Social Security) for the vast majority of the American polity, any independently-wealthy retired public employee or those who have secured lucrative positions in the private sector should be fully means-tested.

REMAINS THE HUGE MISALLOCATION OF RESOURCES, but these Blips are already quite long... Just look in the direction of the military budget, the subsidies to the oil and ethanol industries, agribusiness, nuclear energy, etc. Who knows, perhaps the American people will finally judge that the time is indeed now to act upon the words of Henry David Thoreau.

 . . . . .

C'est la vie...

And so it goes...


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Gilles d'Aymery on Swans -- with bio. He is Swans publisher and co-editor.   (back)


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Published May 9, 2011