Let's Talk Taxes

Since it’s income tax day, let’s talk taxes. Of course nobody likes to pay taxes, but for Republicans, taxes are one of the great evils of the world (in spite of all the stuff they want to spend money on). And since they are in control in Washington, they are threatening tax reform once again, and if they can get the Freedom Caucus to fall in line, maybe they’ll be able to inflict some damage. And I mean damage.

You might remember last time the Republicans were in charge, we paid for two wars and Medicare Part D with tax cuts. I think that’s what they call “fiscal conservatism.” The arithmetic doesn’t work out very well, but if you get the ideology right, who cares about the math? There are always Paul Ryan’s magic asterisks to make all the numbers add up, sort of.

Then we had the Great Recession, which pumped up the debt to truly impressive levels. Of course, Obama came into office in the middle of this mess, so of course the Republicans tried to pin all the debt on him. The truth, of course, is that in a recession, you need government to step in and keep the ship afloat, and with so many people unemployed, tax revenues also drop precipitously, all of which creates more debt. Nevertheless, the “deficit scolds,” as Paul Krugman calls them, were out in force. The big issue for Republicans all during Obama’s first term and half of the second was the massive debt that was drowning America. What they never would admit is that if we hadn’t added a good deal of stimulus when things were awful, it would have gotten a lot worse. Obama generally gets very high marks for his handling of the economy during the late Great Recession. But accumulating debt under those circumstances is pretty much unavoidable.

Now that the economy is humming along, though, we should be trying to build up a surplus. You’d think that would be a high priority for so-called fiscal conservatives. Instead, what do we hear from the Republicans? Well, Trump wants a $1 trillion investment in infrastructure. This would actually be a good idea. Our infrastructure is crumbling. But how do the Republicans propose to pay for this (and other conservative priorities, such as building up an already bloated military and constructing a totally unnecessary wall on half of our southern border)? You guessed it. With tax cuts that primarily benefit the wealthy. Is anyone surprised by this? Of course not. It’s how Republicans operate. They accuse the Democrats of “tax and spend.” All I can say is that “tax and spend” makes a whole lot more sense than “cut taxes and spend.” For some reason, when the Republicans are in power, the debt doesn’t seem to matter at all. Oh, Trump wants to slash spending in important but relatively inexpensive departments and agencies, but all those savings would go to the military, so the net effect is zero. And this week he has actually admitted that repealing Obamacare is really about setting the stage for “tax reform.” It’s not about providing health care for Americans. It’s about tax cuts. At least he’s honest about one thing.

I do agree with the deficit scolds in principle, if not in either timing or methodology. Our debt is too high and can and should be reduced. But it cannot be reduced through tax cuts. That is just obstinacy and absurd ideology and arithmetic deficiency. To put this in some sort of historical perspective, let’s look at top marginal tax rates over time. To save space, I will list only the years when the rate changed.

1940	81.0%
1942	88.0%
1944	94.0%
1946	86.45%
1948	82.13%
1950	84.36%
1951	91.0%
1952	92.0%
1954	91.0%
1964	77.0%
1965	70.0%
1968	75.25%
1969	77.0%
1970	71.75%
1971	70.0%
1981	69.13%
1982	50.0%
1987	38.5%
1988	28.0%
1991	31.0%
1993	39.6%
2001	39.1%
2002	38.6%
2003	35.0%
2013	39.6%

A couple of things are obvious. First, when we needed to pay off our World War II debt, we weren’t afraid to require more of the wealthy. Second, if you look at the national debt, it predictably began to rise with the Reagan tax cuts of the 1980s that took our top marginal rate from almost 70 percent to 28 percent. And once you cut taxes, it is extremely difficult to increase them. In spite of the massive debt, we’ve managed only a measly 4.6 percent increase in the past 14 years.

Hidden in this simplified chart are the myriad tax loopholes that combine with these nominal rates to produce effective tax rates for the wealthy that are quite a bit lower than these figures. Additionally, the capital gains tax rate is 15 percent, which applies to a large share of the income earned by the wealthy. This is why Warren Buffett complained about paying a lower tax rate than his secretary.

So, if we were really serious about reining in our massive national debt, we would enact laws to affect three different elements of the tax code. We would (1) increase top marginal rates to at least pre-Reagan levels, (2) get rid of loopholes that skew the system in favor of the wealthy, and (3) increase the capital gains rate to at least 35 percent, preferably higher. If you think this is drastic, well, just look at the debt we’ve accumulated by playing the silly supply-side game. We’ve been at it for 35 years now, and it doesn’t work. Time to deep-six this awful legacy of Ronald Reagan.

Now, another point about taxes. One piece of misinformation we hear quite often is that Americans are overtaxed compared to other countries. This is simply not true. The OECD (Organization for Economic Co-operation and Development) keeps track of total tax revenue in participating countries as a percentage of GDP. Here are the figures for 2015 (except for Australia, Japan, and Poland, which were unavailable, so I inserted 2014 figures).

Australia	27.8
Austria	43.5
Belgium	44.8
Canada	31.9
Chile	20.7
Czech Republic	33.5
Denmark	46.6
Estonia	33.6
Finland	44.0
France	45.5
Germany	36.9
Greece	36.8
Hungary	39.4
Iceland	37.1
Ireland	23.6
Israel	31.4
Italy	43.3
Japan	32.0
Korea	25.3
Latvia	29.0
Luxembourg	37.0
Mexico	17.4
Netherlands	37.8
New Zealand	32.8
Norway	38.1
Poland	32.1
Portugal	34.5
Slovak Republic	32.3
Slovenia	36.6
Spain	33.8
Sweden	43.3
Switzerland	27.9
Turkey	30.0
United Kingdom	32.5
United States	26.4
OECD Average	34.3

As you can see, of the 35 member countries, only Chile, Ireland, Korea, and Mexico pay lower taxes, on average, than Americans. We pay 7.9 percent less than the OECD average. We want government to do lots of stuff for us. We just don’t want to pay for it. So we’re not really overtaxed. We are 3.4 percent higher than we were in 2009, in the midst of the Great Recession, but that was an anomaly.

Finally, I can’t let income tax day pass without bringing up the fact that Donald Trump has broken his promise to release his tax returns. Of course his statements over time are a moving target. Now he claims that Americans don’t care, but a recent poll says otherwise. Three-quarters of those polled want him to release his returns. And there is probably good reason why he never will. It may have a lot to do with the Russian connection. We’ll really never know unless Congress, which has the power to do so, requests them from the IRS. Of course, this will never happen as long as Trump’s enablers control both houses of Congress. But the way things are going, that could change in 2018. Stay tuned.

Oh, and happy income tax day.

Authoritarianism and Inequality

It seems that every few months new statistics come out showing that wealth inequality in America keeps hitting new highs. This was an issue in the Democratic primary election, mostly because Bernie Sanders kept it constantly before our eyes. And his message struck a chord with many Americans, especially among the young, who sense correctly that the economic playing field is heavily stacked against them. Indeed, this is a condition that we really should not ignore, because it is creating an imbalance in society that will cause severe problems in the future if not corrected. (It is already causing severe problems, but they will grow exponentially worse, if we don’t execute a course correction soon.)

In order to correct this imbalance, however, we must understand its cause, otherwise we risk whacking at its leaves instead of its roots. The cause of our staggering and accelerating inequality, in general terms, is authoritarianism. Let me explain. In pretty much every society, wealth is a function of ownership. As a general rule, the more you own, the more you earn. And the secret of accumulating wealth is not only to own as much as possible, but also to keep others from owning much. Another rule of thumb is that democracy tends to spread ownership around, while authoritarianism concentrates ownership.

The problem here is not directly political. It is economic. And we have a major disconnect in our society between our political system and our economic system. We formed a democratic republic in America that, theoretically, gives one vote to one person and thus spreads power evenly through the republic. Unfortunately, in our current society, my vote doesn’t count nearly as much as, say, David Koch’s or George Soros’s or Robert Mercer’s. Basically, inequality in the economic system undermines the equality of our political system. And the reason we have so much inequality in our economics is that we have adopted an authoritarian economic system that is a perfect mismatch to our political ideals.

Our economy is populated almost exclusively with organizations that we could only describe as authoritarian in nature. The variety is impressive, though. We have businesses that we might describe as monarchies, or oligarchies, or plutocracies, or dictatorships, or totalitarian regimes, or banana republics, or blundering bureaucracies, or theocracies. Unfortunately, we also have fake republics and pseudodemocracies. But very, very few businesses in the United States could be considered economic democratic republics. In essence, at our founding, we enthroned freedom and democracy in our political sphere, but we allowed authoritarian institutions to thrive in our economic sphere. The inevitable result is that the authoritarianism in our economy has now quite effectively undermined the freedom and democracy of our political system.

So, how does this affect wealth inequality? I’ve written about this before, but it bears repeating. Our economic system, which is overwhelmingly a form of corporate capitalism, has a dual pay system. It pays one group of people (those who own or control capital) as much as possible, and it pays another much larger group of people as little as possible. (Somewhere in the middle is a professional class that is paid quite well, but nowhere near what the owners and controllers or capital are paid.)

 I used to teach operations management at BYU’s Marriott School of Management. One of the given rules of pretty much all production planning models is the imperative to minimize costs, one of which is labor. This is why corporations, with the help of Republican politicians, have broken or diluted the power of most unions. This is why they oppose a minimum wage. This is why they shop around for countries with low wages and move production to those locations. This is especially why corporations are constantly replacing human labor with machines.

And we must understand the result of replacing humans with machines, because more and more jobs are being automated. When you replace a recurring labor cost with a one-time investment in technology, or even if you use technology to make your remaining employees more productive, the incremental profit gained does not go to labor. It goes to those who own or control capital—the capitalists and executives. And this accelerates the accumulation of wealth at the top.

I haven’t even mentioned the shift in our economy from manufacturing to finance. That’s a topic for another day, but for now let me just point out that this shift also contributes to the exploding wealth inequality. As money changes from a tool to ease the exchange of goods and services into a product in its own right, we see money breeding money without any sort of attachment to a real good or service. When this happens, something in society gets turned on its head. Which means we should be doing the opposite of what the Republicans are seeking to do with their deregulation of Wall Street.

But why should we even be concerned about our ever-increasing inequality? Well, for many reasons. Let me mention just a couple. First, there is a distinct difference between how the wealthy employ their money and how the poor and middle classes do. The poor and middle classes we might term the consumer classes. They spend most of what they earn (often more than what they earn) on the necessities and minor luxuries that keep the economy humming. If the disposable income of the consumer classes drops, this has an effect on the health of the corporations and entrepreneurs who sell stuff. This is also why supply-side economics doesn’t work. Giving more money to the wealthy doesn’t cause them to invest in production capacity and new jobs. Why? Because they only do that when demand increases, when there is sufficient money going to the consumer classes to make them go out and buy more stuff. So, if you starve the consumer classes, the economy shrinks. We call that recession. The wealthy, by comparison, don’t spend proportionally on consumer goods. They want to invest their money. But if there is insufficient demand, they don’t invest productively. Instead, they might chase after speculative financial instruments or just let their money sit idle, as was the case during the Great Recession. So, it is actually better for both the wealthy and the rest of us if wealth is distributed more equitably.

A second reason we should be concerned about wealth inequality is that when too much goes to the top, the number of people on the bottom increases. We are seeing that in the past couple of decades. This increases the demand for government aid in a variety of ways, from food stamps to Medicaid. The Republican answer to this predictable result of their supply-side scheme is to make health care unaffordable for the sick and the poor, cut aid to the disadvantaged, and give more tax breaks to the wealthy. This is where their ideology simply grinds to a halt and why Paul Ryan’s silly health-care plan had only 17 percent of the population who liked it (and that group probably didn’t understand it). There was absolutely nothing in it to like, other than it wasn’t called Obamacare.

So, how do we reverse the trend we’ve created? How do we decrease inequality? Well, the least effective way would be to restore a sensible tax system. In 1994, the top marginal tax rate was actually 94 percent. In 1945, it dropped to 91 percent and stayed there for 19 years, when it dropped first to 77 percent and then to 70 percent. This enabled us to pay down our war debt, build up the middle class, rebuild Europe and Japan, and create an economic juggernaut. And guess what? Even with tax rates that high, the rich still got richer. Since Reagan’s tax cuts, though, we’ve been accumulating debt while the wealthy have accumulated obscene amounts of wealth.

As I said, restoring a more progressive tax code would be the least effective method of restoring a more healthy level of economic equality. Necessary, but not as effective as redistributing wealth at its source. How could we do this? This is what I’ve been harping about for 30 years now. The only way to do this is to spread ownership more equitably. There are many forms of worker ownership, but it is the best way to solve this problem we have.

This isn’t rocket science. But both political parties have been in the pocket of corporate America for a long time now, so it has never been considered as a serious option. Until the last election. Of all the candidates, it was Hillary Clinton who brought up increasing worker ownership. Of course it wouldn’t have been any of the Republican candidates. The Republicans, for all their “freedom” rhetoric and their supposed devotion to democracy, are not really in favor of economic freedom and democracy for the working classes.

I still think Michael Ventura put it best. I find it hard to argue with his logic:

As a worker, I am not an “operating cost.” I am how the job gets done. I am the job. I am the company. . . . I’m willing to take my lumps in a world in which little is certain, but I deserve a say. Not just some cosmetic “input,” but significant power in good times or bad. A place at the table where the decisions are made. Nothing less is fair. So nothing less is moral. . . . It takes more than investment and management to make a company live. It takes the labor, skill, and talent of the people who do the company’s work. Isn’t that an investment? Doesn’t it deserve a fair return, a voice, a share of the power? . . . If the people who do the work don’t own some part of the product, and don’t have any power over what happens to their enterprise—they are being robbed. You are being robbed. And don’t think for a minute that those who are robbing you don’t know they are robbing you. They know how much they get from you and how little they give back. They are thieves. They are stealing your life.¹

Unfortunately, the authoritarians in America don’t want you to understand these ideas. They want to own everything and keep you from having a voice. They do not believe in economic democracy. But Bernie Sanders’s campaign wasn’t a flash in the pan. It was a hint of things to come. Many people were duped by Trump’s faux populism. But after they learn how blind they were, there will be a real uprising in America. As Nick Hanauer warned his fellow “zillionaires,” the pitchforks are coming.²

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1. Michael Ventura, “Someone Is Stealing Your Life,” Utne Reader, July/August 1991, 78, 80, reprinted from L.A. Weekly.

2. Nick Hanauer, “The Pitchforks Are Coming . . . for Us Plutocrats,” Politico Magazine, July/August 2014, http://www.politico.com/magazine/story/2014/06/the-pitchforks-are-coming-for-us-plutocrats-108014.