All Hail Wall Street

Flickr/Emmanuel Huybrechts

If the debate around the fiscal cliff and, particularly, the still-impending sequester demonstrates anything, it’s that Richard Nixon’s one plunge into economic theory—“We’re all Keynesians now,” the former president once said—still holds. Everyone acknowledges that laying off hundreds of thousands of government employees, including 800,000 civilian Defense Department workers, and stopping payment to government contractors will, by definition, destroy jobs, at least until the payments resume. It’s still Republican orthodoxy, to be sure, to deny that government spending actually creates jobs, but even they acknowledge that the cessation of government spending destroys them. Which illustrates that the problem with contemporary Republicanism isn’t confined to their indifference to empiricism but also their indifference to logic. Reasoning—either deductive or inductive—is either beyond them, beneath them or above them. 

A second Republican talking point called into question by the fiscal-cliff legislation enacted Tuesday is that the 47 percent don’t pay taxes. In fact, every American employee, including the millions who aren’t paid enough to pay income taxes, saw their payroll tax increased Tuesday by the bipartisan failure of Congress to extend the payroll tax cut that had been enacted as part of the Obama administration’s original stimulus legislation back in 2009. Despite Republican protestations, the payroll tax is a tax, of course, and more particularly, it’s a tax on earned income—to coin a phrase, an income tax. The difference is, it’s not progressive—the working poor are not exempted, and pay at the identical rate as the rich up to the point where taxable income hits its ceiling. 

Even more depressing than the complicity of both parties in raising the regressive payroll tax is their complicity in failing to significantly raise the tax rates on dividends and capital gains—the rate was raised just from 15 percent to 20 percent for the wealthiest taxpayers. The Washington Post's Suzy Khimm summarized the new provisions for Wonkblog: “The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.)” Time was when the Democrats were simply opposed to taxing income from investments at a lower rate than income from work. Indeed, in 2003, as the National Journal's invaluable Ron Brownstein has tweeted, only two Democratic senators voted to lower the capital gains and dividend tax rates to the levels they largely declined to raise earlier this week. 

Problem is, the never-very-strong case for taxing investment income at a lower rate than labor income has grown weaker still in the era of globalization. If you invest, say, in General Electric (GE), from which you derive dividend income, you’re investing in a company that has hundreds of facilities and many thousands of workers overseas. The investment income you provide the company by buying its stock is as likely to be spent creating jobs in China or India as it is to create jobs in the United States. A GE employee who works in the U.S., on the other hand, is creating value in the U.S. But she’s taxed at a higher rate than a shareholder only a fraction of whose investment creates value here. Assuming one purpose of the tax code is to bolster the domestic economy more than the economy of other nations, taxing that investment at a lower rate than the employee’s labor is completely backward. 

As well, wages constitute a declining share of both the nation’s total income and corporate expenditures, reflecting the downward drag that globalization, mechanization and de-unionization have had on workers’ incomes. Wages have fallen from 53 percent of GDP in 1970 to 44 percent today—a shift of nearly $1.5 trillion away from wage income. Profits, and with them, dividends and capital gains, have been growing at wages' expense: J.P. Morgan chief investment officer Michael Cembalest has calculated that reductions in wages and benefits were responsible for about 75 percent of the increase in corporate profits between 2000 and 2007. Taxing wage income at a higher rate than investment income, then, only increases the growing economic inequality that characterizes the pre-tax economy.

There’s no mystery behind the lower tax rates for capital income than for labor income: They simply reflect the continued, indeed growing, ascendency of capital over labor—in the Democratic Party, based on this week’s not-so-grand bargain, no less than in the GOP. Democrats will get a second chance to rectify this imbalance when they have to come up with some more revenues to offset the sequester, which has now been rescheduled to take place two months from now. If the logic of the above arguments doesn’t move them, the fact that Wall Street tilted strongly Republican in November’s election while labor saved their bacon in the presidential, senatorial, and congressional elections in a dozen states might move them yet. 


Wait until we have 7 to 10 % inflation per year, and the capital gains tax rate becomes a penalty for saving and investing. For example, invest $10,000 in 2015, earn 10% per year, while inflation is also 10% per year. In 2022, you cash out of the investment at a value of $20K, and owe $1,500 to $2,000 in capital gains tax. After accounting for inflation, there was no real gain in the value of the investment

The fairest and most reasoned approach may be to return the capital gains and dividend tax rates to the income tax rates, however allow for capital gains to be offset be inflation. This may be a bit complicated, and we may need inflation offset values for multiple market sectors to match the investment, but it could be manageable.

So, Thomas, if the cap gains or divvy tax rates goes up, you're going to put your savings in the mattress?

Globalization drives inequality, higher profits, and lower wages. So what? That's the modern Democratic party. That's the world Obama wants. Remember the line about

"The walls between old allies on either side of the Atlantic cannot stand. The walls between the countries with the most and those with the least cannot stand. The walls between races and tribes; natives and immigrants; Christian and Muslim and Jew cannot stand. These now are the walls we must tear down."

What that really means is unlimited imported cheap labor to break unions and keep wages down. Just this week Obama contrived yet another Amnesty for illegals. No wage is too low for Obama as long as every American worker has yet to be replaced.

Remember the line about

"So it's not surprising then that they get bitter, and they cling to guns, or religion, or antipathy toward people who aren't like them, or anti-immigrant sentiment, or anti-trade sentiment as a way to explain their frustrations."

Of course, it's just a myth that immigrants and "free" trade are destroying the lives of millions. It's a myth as long as you are pocketing the proceeds that is. Otherwise, it misery of being on the losing end of elite globalization. Does Obama have a problem with any of it? Clearly he thinks its all an illusion.

"The regressive payroll tax" had to be raised. We like Social Security, and we want to preserve it. Social Security was designed and intended to be funded separately from the federal budget. During the "payroll tax holiday" that separation was destroyed, and the destruction of that separation would have eventually (probably a couple of months from now) been used against Social Security.

Now we have to figure out what to do with Medicare, which we also want. I'd suggest considering expanding it, by lowering the eligibility age to zero, and funding it with a tax that's also properly isolated from the general budget.

Corporate profits are at all-time high as % of GDP, and wage income as a % of GDP at a low. William Lazonick reports that over 10 years 94% of corporate profits went for stock buybacks and dividends. "For 2001-2010, 459 companies in the S&P 500 Index in January 2011 distributed $1.9 trillion in dividends, equivalent to 40 percent of their combined net income, and $2.6 trillion in buybacks, equal to another 54 percent of their net income. After all that, what was left over for investments in innovation, including upgrading the capabilities of their workforces? Not much." Huffington Post, 4.3.12. Then checking at State of Working America, Table 2.4, income separated by source and quintile income group, the top 1% receive 43.4% of their income in dividends, interest, and capital gains, and 64.5%% adding in "proprietors' income and other business. Average income is around $1.5 million. --- Conclusion, most workers receive only wage income and wages are depressed, the employment to population ratio has dropped by 10% since 2000. The very wealthy with 60 to 70% from business, capital gains, interest, dividends, are receiving more income from sources that are more lightly taxed.

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