Raise The Floor, And Also Trim The Top

It is well known that excessive inequality is very harmful to both the economy and society at large.  Even before we learned the truth about Monetary Sovereignty (MS) and Modern Monetary Theory (MMT) in 2018, the TSAP has long supported both a Universal Basic Income for all, and has also supported hiking taxes on the rich as well.  And even after learning about MS and MMT, we still support hiking taxes on the ultra-rich, and for good reason.

Some may be scratching their heads.  Why do we even need federal taxes at all, if our Monetarily Sovereign federal government has infinite money?  They clearly don't need taxes to pay their bills.  But taxes also have other useful functions as well:

• Taxes compel the use of the official currency, thereby giving it value in the first place.  
• Taxes automatically "claw back" excess liquidity in the money supply due to the "velocity of money", thus to an extent crudely preventing demand-pull inflation before it happens.
• Taxes can be used for social engineering (think vice taxes and Pigouvian taxes) in ways that are otherwise difficult, impossible, illiberal, illegal, and/or unethical to do by other means.
• And finally, progressive taxes can be used to "trim the top" when levied on the top 0.1%, thus reducing inequality without leading to runaway inflation.  Rodger Malcolm Mitchell compares this to a "trophic cascade", such as when wolves (i.e. the federal government) keep elk populations (i.e. the oligarchs) from getting out of control and devouring everything in sight.

So what sort of federal taxes would be suitable for this purpose, knowing what we know now?

• A rich-only, steeply progressive income tax like the kind that prevailed before WWII.  At least the first $100,000 to $500,000 would be exempt, and the new brackets would include marginal rates of 50% above the first $1 million, 70% above the first $10 million, and perhaps 90% above the first $100 million.  With NO LOOPHOLES this time. 
• Tax dividends and capital gains the exact same as ordinary income, but index the basis to inflation for capital gains.
• For the largest corporations, especially those who are "too big to fail", a top tax rate of at least 50%, with NO LOOPHOLES this time.  Tax only retained earnings.  Smaller corporations should not be taxed at all.
• The Universal Exchange Tax, i.e. a tiny tax of 0.1% or less on all electronic transactions.  It would actually be highly progressive in practice since the rich make a disproportionately high amount and number of transactions compared to the non-rich.  "The more you play, the more you pay."
• Various vice taxes (alcohol, tobacco, cannabis, etc.) and Pigouvian taxes (pollution and resource depletion).
• Land value taxes and severance taxes on natural resources such as oil and gas.
• And, of course, the estate tax needs to be made more progressive as well.

State and local governments, of course, are not Monetarily Sovereign, and thus need to raise revenue to pay their bills.  And they can piggyback on the aforementioned federal taxes and levy their own, especially the Universal Exchange Tax and the land value tax and severance taxes, and thus reduce or eliminate their currently regressive sales and property taxes.  Additionally, federal aid to the states should be increased for precisesly the same reason.

A UBI would indeed abolish absolute poverty, no doubt about that.  And that alone would have numerous individual and social benefits.  But without progressive taxation of the top 1% and 0.1%, it would do nothing to reduce relative poverty, and may paradoxically increase inequality.  And inequality in itself is harmful, over and above the effects of poverty.  Thus, it is not enough to either raise the floor or trim the top, we need to do both.  Yesterday.

Thus, Rep. Alexandria Ocasio-Cortez essentially has the right idea as far as taxes go.  And of course, the oligarchs and their sycophantic lackeys are coming down hard on her, but that just goes to show how effective her ideas are in terms of reducing the Gap between the haves and have-nots, which the oligarchs utterly depend on.  All the more reason to do it.

UPDATE:  Elizabeth Warren recently proposed a wealth tax of 2% on the assets of those with a net worth of $50 million and up (that is, on the top 0.1%), and up to 3% above the first billion.  Only the amount over the first $50 million would be taxed.  Controversial as it is, it actually makes a lot of sense, and the TSAP would certainly not oppose it. 

The Root of All Evil: Unmasking the Wetikonomy

The TSAP has recently discovered a parasite lurking in our midst.  This parasite is not one that you can see, but its evil works are apparent just about everywhere you look.  It is a mind-virus that digs deep into our subconscious and subverts our thinking in a manner that causes us to act against our best interests.  And its name is wetiko--essentially the root of all evil.

The concept of wetiko was discovered a few years back by Paul Levy, author of Dispelling Wetiko:  Breaking the Curse of Evil.  The word itself comes from Native Americans, who apparently coined it to describe the sort of destructive collective psychosis that they had observed and were too often on the receiving end of when the white settlers came and wreaked havoc upon them.  Levy apparently had a spiritual awakening and realized exactly what the root of all evil was, and describes it well in his book.  It explains evil far better than the Western concept of evil ever could.  Basically, this disease hides in the dark recesses and blind spots of our psyches, and causes us to behave in utterly destructive ways without really understanding why.  And just like a vampire, sunlight is the best disinfectant.  So let's expose it and defeat it!

What does this have to do with our economy?  Apparently just about everything, since the lion's share of it consists of what Levy calls the wetikonomy.  Basically, our economy (especially the bloated financial sector) is one big Ponzi scheme and shell game designed to benefit the very few at the top at the expense of the rest of us.  It is designed to rob from the poor (and what's left of the shrinking middle class) and give to the already ludicrously rich.  And it is based on lies and illusion, essentially wetiko writ very, very large.  The few financial players that run this toxic and corrupt system are known as Big Wetikos, most notably the debt pushers and financiers that are conning the rest of us.  And it perverts the whole economy, as it is dependent on the debt-based funny money created by the Big Wetikos.  As the Verve so eloquently noted in their song Bitter Sweet Symphony, you're a slave to money then you die.  Clearly it doesn't have to be this way.  But there is so much coercion (subtle and not-so-subtle) in the system that most people just go along with it while sleepwalking to their own doom and unwittingly perpetuating the wetikonomy, while the plutocrats laugh all the way to the bank.

We all need to wake up to the truth, and finally defeat this parasite for good before the shadowy elites succeed in scuttling this once-great nation.  And the TSAP will work very hard to wake up as many people as possible in order to achieve this goal.

One Dollar, One Vote

America is now officially a plutocracy, with a government of the rich, by the rich, and for the rich.  That is basically what the Supreme Court effectively ruled today in McCutcheon v. FEC.  The decision completely lifted all limits on individual campaign contributions, building on the travesty that was the Citizen's United ruling from five years ago.  So it's apparently not enough for corporations to be considered people and money to be considered speech--the plutocrats wanted ALL of the speed bumps to domination removed.  Not like those speed bumps were super-effective to begin with, but those two landmark decisions together now make it virtually impossible to rein-in the influence of the elites on what's left of democracy in America.

Hear that?  That's the sound of Thomas Jefferson and many other Founding Fathers rolling over in their graves.  Absolutely disgusting indeed!

So what's a third party to do now?  How can we possibly compete against the elephant/jackass corporate duopoly now that the odds are even more stacked against us than ever before?  That leaves We the People with one and only one option left:  revolution.  "Wait...did he just say what I think he did?  OMG!!!"  You got that damn right, bitches!  But our idea of revolution is NOT like the French variety from 1789, since we all know how well that worked out.  A violent revolution would only lead to more violence in the long run, as any self-respecting history buff will tell you.  So that's out.  What we mean is more what like these folks have in mind.  Non-violence may indeed sound like a sucker's game to the jaded, but remember what Dr. King said.  Our choice is not between violence and non-violence, but rather between non-violence and non-existence.  And the real suckers are the sheeple who would rather just "go with the flow" off the cliff like lemmings while the elites just laugh all the way to the bank.  So what are we waiting for?  As Rage Against the Machine would say:

It has to start somewhere, it has to start sometime.  What better place than here, what better time than now?

And indeed, true words have never been spoken.  So let's roll!

End This Depression NOW--For Real This Time!

The latest news shows that the Dow Jones recently reached a record high, and remains above 16,000.  Corporate profits are at a record high, and even the unemployment rate has FINALLY dropped to a 5-year low of less than 7%.  So by these numbers, some people seem to think that the recession is finally over for good.  Happy days are here again!  So cue the music, Maestro:

HALLLELUJAH!  HALLELUJAH!  HALLELUJAH, HALLELUJAH, HALL.....er, wait a minute.  Seriously?  This is the kind of thing that passes for "recovery" these days?  Please.  The majority of Americans would certainly NOT consider happy days to be here again!  Certainly not with sobering statistics like these:

• A real unemployment rate (U6) that is actually in the double-digits (13%), and not falling nearly quickly enough.  In fact, when long-term discouraged workers are included and added to U6, it reaches nearly 25%, and has actually risen since the phony "recovery" began in 2009.
• A labor force participation rate that has fallen to a 35-year low, reflecting (in part) those discouraged workers who simply gave up looking for a job.
• A poverty rate that remains stubbornly higher than in 2009, as evident in the record number of people on programs like SNAP (food stamps).
• Near-record levels of income and wealth inequality, approaching Gilded Age levels.  The top 1% controls nearly half of the nation's wealth, while the bottom 80% are left to fight over crumbs.
• Falling real wages, with a real minimum wage that is at least 30% lower than in the late 1960s despite a doubling of productivity.
• Cities declaring bankruptcy.  Detroit is the canary in the coal mine.
• Record levels of student loan debt ($1 trillion), combined with considerable unemployment and underemployment of college graduates.
• A national debt of over $17 trillion, and growing despite fairly harsh austerity measures.
• A real inflation rate that is nearly 10% when measured the way it was in 1980 and earlier.  Combined with the real unemployment rate, the real "misery index" would be a whopping 22-33.  Ouch!

So by just about any rational measure, we are still stuck in a pretty deep depression.   In fact, the progressive site Daily Kos coined a new term to describe it:  stagpression (a combination of stagnation and depression).  So why the huge disconnect between corporate profits and the stock market with the reality on the ground?  The answer is pretty simple.  Our government has been giving money, favors, and tax cuts to the rich and mega-corporations for years now, and what have the plutocrats done for us in return?  Sit on their massive cash, pay CEOs more, cannibalize their workforces, and buy back (i.e. manipulate) their own stock to paper over their declining sales.  And historically, what do they do if they get higher marginal tax rates?  Re-invest more in their own businesses and/or hire more workers.  Counterintuitive, yes, but it actually makes sense when you think about it.  As for "quantitative easing", the Feral Reserve has been printing trillions of dollars out of thin air, and nearly all of it goes to the big banks (i.e. the plutocrats) where it certainly does NOT trickle-down in any meaningful way.  To date, both fiscal and monetary policies have consisted of weak and inefficient half-measures, where the benefits accrue to the elites while the consequences (inflation, debt) accrue to the rest of us.  Thus, the rich get richer, the poor get poorer, and the middle class continues to shrink.  And the customers become too broke to buy anything, and the economy continues to stagnate or sink even further in a downward spiral.   No wonder our "recovery" has been so hollow!

So how can we break this vicious cycle for good, before the resulting bubble bursts leading to the next big crash?  The answer is really quite clear:  adopt the TSAP party platform ASAP.   But since it is unrealistic to expect either corporate party in the elephant/jackass duopoly to take up an entire platform that literally threatens their own interests, we have devised a list of the highest-priority measures to take before the inequality-fueled crash of 2016 happens:

1. Raise the top marginal tax rate to at least 50% (if not 70%) for incomes above $1 million, and simplify the tax code by removing loopholes geared towards the wealthy.
2. Reduce the corporate tax rate to 20-25%, remove all loopholes, and tax only retained earnings.
3. Reduce tax rates for the bottom 80% of Americans, and un-tax small businesses with earnings less than $100,000 per year.
4. Raise the minimum wage to at least $10/hour if not higher, and index it to inflation from now on.
5. Remove the "sequester" cuts ASAP, and sharply increase funding for infrastructure, education, green energy, and other crucial goals to put Americans back to work.

Of course, it would even better if the entire TSAP platform were adopted, but doing just these five things alone would probably be enough to, in the words of Paul Krugman, "end this depression now".  Because that's what this "recession" really is.  And ending it is long overdue--five years overdue to be precise.

But if we could do just one thing that could be done to end the stagpression quickly, it would be this:  replace "quantitative easing" (that really only benefits the rich) with direct payments of about $2000 per person or so to ALL Americans, yesterday.  It would take an Act of Congress to enable the Fed to do such a thing, but it would be well worth it.  Of course, followers of the TSAP know that we have long advocated a guaranteed basic income (citizen's dividend) for all Americans period with no strings attached, ideally funded via various kinds of tax revenue such as carbon taxes and financial transactions taxes.  But this alternative means to the same end would be the next best thing, at least temporarily until our other ideas get implemented.  And if it happens, the depression will be over and full employment restored within a year or two--provided it does not end abruptly without some of our other measures to replace it next year.  So what are we waiting for?

The Phony Recovery

A recent study, by the Wall Street Journal of all places, confirms what the bottom 99% of Americans have long suspected for years: the so-called economic "recovery" of the past five years was essentially a joke all along.  In a nutshell, corporate earnings are at a record high, while revenues have been flat for the past five years.  In other words, consumer demand is low because customers are broke, and companies have mainly been "growing" their earnings by cutting cannibalizing their workforce and buying back (i.e. manipulating) their own stock to paper over their flat or declining sales.  All while they sit on trillions of dollars.  It's a zero-sum game, and a vicious cycle.  Thank you, Captain Obvious! 

So how can we break this vicious cycle before the resulting bubble bursts leading to the next big crash?  The answer is really quite clear:  adopt the TSAP party platform ASAP.   But since it is unrealistic to expect either corporate party in Washington to take up an entire platform that threatens their own interests, we have devised a list of the highest-priority measures to take before the inequality-fueled crash of 2016 happens:

1. Raise the top marginal tax rate to at least 50% (if not 70%) for incomes above $1 million, and simplify the tax code by removing loopholes geared towards the wealthy.
2. Reduce the corporate tax rate to 20-25%, remove all loopholes, and tax only retained earnings.
3. Reduce tax rates for the bottom 80% of Americans, and un-tax small businesses with earnings less than $100,000 per year.
4. Raise the minimum wage to at least $10/hour if not higher, and index it to inflation from now on.
5. Remove the "sequester" cuts ASAP, and sharply increase funding for infrastructure, education, green energy, and other crucial goals to put Americans back to work.

Of course, it would even better if the entire TSAP platform were adopted, but doing just these five things alone would probably be enough to, in the words of Paul Krugman, "end this depression now".  Because that's what this "recession" really is.  And ending it is long overdue--five years overdue to be precise.

Fiscal Cliff Averted--For Now

It's now official.  The so-called fiscal cliff that had nearly everyone (especially Republicans) nervous has been averted due to a bipartisan deal in Congress.  The deal contains the following provisions in a nutshell:  no income tax rate hikes for those making less than $400,000 per year (but the top marginal rate is hiked back to Clinton levels on those making above that threshold), various tax deductions are capped at $250,000, the so-called "Obamacare taxes" are left untouched (and thus go into effect), unemployment benefits are extended, spending cuts are postponed by two months, and the payroll tax (i.e. FICA) rates are raised back to pre-stimulus 2009 levels.  So although most Americans will see slightly smaller paychecks in 2013 (due to the 2% payroll tax hike), thanks to the deal there will not be a massive amount of aggregate demand sucked out of the economy, and there will most likely not be another recession as a result--at least for now.

However, the deal only addresses one side of the ledger--revenue and taxes.  The other, bigger side--government spending--will not even be touched until February at the earliest.  Just in time for when the debt ceiling needs to be raised again, most likely in March.  So we can expect another "cliffhanger" around that time, albeit a somewhat smaller one.  But I guess that's the price we pay for kicking the can even further down the road.

To the President and everyone in Congress:  Please listen to what the True Spirit of America Party has to say, at least about economic policy and the national debt.   Our nation's future depends on it.

Now, Back to that "Fiscal Cliff"

Deal or no deal?  That is the question that still hasn't been answered.

But remember, no deal is better than a bad deal.   Obama is still holding firm thus far in the face of the Repugnicans who want to slash our social safety net to give millionaires and billionaires more undeserved and unnecessary tax breaks.  And Boehner seems to be sweating bullets.  If no deal is reached, it will not lead to financial Armageddon like the right-wing plutocrats claim.  The so-called "fiscal cliff" is really not a cliff at all--it's more like a staircase.  The full effect of the tax hikes (which occur on next year's income) and automatic spending cuts (which are phased in over a period of a few months) will not be felt right away, which clearly gives Obama the upper hand especially after January 1, 2013.   No wonder Boehner and his ilk are so nervous.

Even more importantly, the budget deficit is actually NOT the biggest economic problem our nation is facing.  The more pressing issue, of course, is the jobs deficit--the whopping 9 million Americans that are still out of work at the end of 2012, five years after the recession officially began (December 2007) and over three years after the recession officially ended (June 2009).  We are clearly stuck in a vicious cycle of persistently high unemployment and inadequate consumer and aggregate demand (remember that one person's spending is another person's income and vice-versa).  Remember that 70% of our entire GDP is consumer spending, and 20% is government spending.  And cutting the budget deficit too much too soon (at least by traditional means) would only make the jobs deficit worse, and the relative lack of revenue from the still-struggling economy is one of the biggest drivers of the budget deficit.   Basically, any significant tax hikes on the bottom 90% of Americans and/or any significant cuts in non-defense spending would only hurt our economy and make our future deficits (and national debt) that much worse in the long run.  If it turns out that these hikes and cuts must be done, and that is a very big "if", then they must be postponed until our economy is back to normal (i.e. two consecutive quarters of 3% GDP growth or higher and less than 6% unemployment).  Congress, you have been warned, so don't drink the Repugnican Austerity Kool-Aid.

Now, About that "Fiscal Cliff".....

With President Obama's re-election already won, the next hurdle to face is the so-called "fiscal cliff", which is a set of tax hikes and spending cuts that will automatically occur on January 1, 2013 if no action is taken.  While such a thing would clearly reduce the deficit, the Congressional Budget Office predicts that it would also likely trigger another recession given the already weak economy.  Specifically, it would be the middle-class tax hikes and some of the spending cuts that would be the real problem, not the tax hikes on the rich.  However, if we don't address the deficit at all, then we're in financial trouble as well, at least in the long run.   And to top it off, the debt ceiling will have to be raised yet again in late January or early February.  Seems like we're stuck between the proverbial rock and a hard place, between the devil and the deep blue sea.

Not really, though.  As UC Berkeley professor Robert Reich so cleverly points out, the real problem is House Speaker John Boehner and the rest of the Repugnicans in Congress who are willing to play chicken with the economy.   They will apparently do anything to avoid even a modest tax hike on the top 1% of Americans, even if it means ruining our country's credit rating and/or crashing the economy.   Basically, everyone's ox would get gored except the ultra-rich if the Repugnicans had their way.

The best thing for Obama to do is to start out bold and aim high, rather than start out with a compromised position.  According to Robert Reich, this means the following:

1)  Raise taxes on the rich--by a LOT.  Enough so the average millionaire would pay an effective rate of about 55% after all deductions and credits, as it was 60 years ago.  (The top marginal rate would have to be at least 70%, and every dollar above the first million would have to be taxed at 50% or more)

2)  Create a 2% wealth tax on the net worth of the top 0.5% of Americans.

3)  Create a 0.5% financial transactions tax.

4)  Raise the capital gains tax to match the rate on ordinary income, and cap the mortgage interest deduction at $12,000 per year.

5)  Eliminate special tax preferences and subsidies for Big Oil, Big Pharma, Big Agro, Wall Street, and so-called "defense contractors."

6)  Last but not least, let the Bush tax cuts expire for incomes between $250,000 and $1 million.

Doing all of these things would reduce the deficit by $4 trillion over the next ten years (the same as what Simspon-Bowles proposed), but without cutting any vital programs or raising taxes on the middle class.  This is the crucial difference between what Professor Reich proposes and what the Repugnicans propose.  And it wouldn't crash the economy, as the best studies have shown.

While Professor Reich acknowledges that some sort of compromise is inevitable, he also notes that any such "grand bargain" to avoid the cliff must contain the following stipulation:  any sort of tax hike on the middle class and any sort of spending cut must only be permitted with a triggering mechanism of two consecutive quarters of 6% unemployment or lower and 3% GDP growth or higher.  This caveat would ensure that we really are out of the woods before sucking any significant amount of aggregate demand out of the economy, echoing Keynesian economic theory.  It is also very important to note that, unlike last time, progressives actually have the upper hand right now--so let's not squander it.  No deal is still better than a bad deal.

Of course, there are other ways of accomplishing a similar or even greater deficit reduction, as the TSAP has repeatedly proposed.   In fact our own proposals would eliminate not just the deficit, but the entire national debt as well.  But much of what we have proposed dovetails rather nicely with what Professor Reich suggests, and that is an excellent start.   What better time than now?

New Study: Taxing the Rich Won't Tank Economy

We've been saying this before, and we'll say it again.  Contrary to what the top 1% and their lackeys like to claim, tax cuts on the rich do NOT create jobs or boost economic growth, and tax hikes on the rich do NOT destroy the economy.  And now a new study proves it yet again.  

In a nutshell, a 1%-of-GDP (i.e. $150 billion) tax cut on the bottom 90% of Americans boosts GDP by 2.7 percentage points over a two-year period, while a tax cut of the same size on the wealthiest 10% of Americans gives a statistically and practically insignificant boost of merely 0.13 percentage points (while significantly increasing economic inequality). So, if we really want to boost economic growth, we would cut (or perhaps even eliminate) the income tax on the bottom 90%, while raising rates on the top 10% and especially the top 1%.  That makes sense since 70% of our GDP is consumer spending, and the middle class are the ones who drive such spending.  The less money they have, the less they will spend.  And businesses will avoid hiring and making new investments and instead choose to sit on their excess cash (like they are doing now) when the consumer demand is simply not there.  It's not "class warfare," it's simple mathematics. 

But plutocratic Republicans never let mere facts get in the way of their greedy goals.

The Laffer Curve Revisited (Part Deux)

In our previous post, we essentially debunked the right-wing talking points about the Laffer Curve.  We showed that, generally speaking, the peak of the curve for the top marginal tax rate is most likely 70% or perhaps even a bit higher.  That is, tax cuts (particularly at the top) can nearly always reasonably be expected to decrease revenue rather than increase it, and vice-versa. We also showed that there is another curve called the Kimel Curve, which illustrates that a top marginal rate of 60-70% maximizes economic growth based on empirical data.

But what about Hauser's Law?  For those who don't know, Hauser's Law (a supposed corollary to the Laffer Curve) postulates that federal tax revenue cannot exceed 19.5% of GDP for long regardless of what the marginal tax rates are.  Indeed, at first glance the empirical data from 1945 to the present do appear to agree, but it really doesn't stand up to closer scrutiny.  Part of it comes from lying with statistics to obscure significant swings in revenues, and part of it comes from omitting key facts about less obvious changes in the tax code over the years that confound the apparent (non)correlation.  Thus anyone who cites Hauser's Law (which it turns out is not really a law at all) is either ignorant or disingenuous at best.  Consider it debunked.

Another important question is whether the Laffer Curve differs depending on the type of income being taxed.  Conservatives frequently argue that the tax rate on long-term capital gains should be significantly lower than the rate on ordinary income, as is currently the case.  For example, they claim that the Laffer Curve peaks at a much lower rate due to the so-called "lock-in" effect (when investors hold onto their underperforming assets longer to avoid taxation) induced by higher tax rates, an effect that allegedly hurts the economy.  However, this appears to be primarily a short-term phenomenon that occurs when investors either anticipate the change in tax rate in advance and/or believe that the rate hike or cut will only be temporary.  Effects on economic growth do not appear to be large in the short or long term, and may even be perverse in the short term.  In fact, rather than encourage investment, one experimental study finds that taxing capital gains at too low a rate may, at least in some circumstances, encourage too much divestment (consumption) of capital at the expense of further investment.  This might be one reason why overall private investment was actually lower on average in the lower-tax 1980s than it was in the higher-tax 1970s.  Also, a lower rate on capital gains is a key part of many tax shelters, and adds unnecessary complexity to the tax code. Thus, taxing long-term capital gains at a lower rate does not appear to be justified.  And to avoid taxing illusory gains due to inflation, it would make more sense to simply allow taxpayers to index the basis for inflation (which is not currently the case) while taxing all forms of income at the same rate. 

In addition, one should also observe how nearly every single time the capital gains tax was cut, an asset bubble of some sort eventually followed.  These include the notorious 1920s stock market bubble (tax cut was in 1922-1925), the late 1970s commodities bubble (cut in 1978), the late 1990s NASDAQ/tech bubble (cut in 1997), and the 2000s housing bubble (cuts in 1997 and 2003).  The one exception was the 1982 tax cut, which occurred during a deliberately-induced (i.e. by the Feral Reserve) recession and was followed by an equally large hike in the capital gains tax five years later that restored the rate back to its 1981 value before another bubble had a chance to form.  (The relatively small stock market correction in 1987 represented only a minor bubble in the market.)  While correlation does not necessarily equal causation, it is uncannily suggestive to say the least.  Though a low tax rate may appear be investor-friendly on the surface, one should keep in mind all of those hapless investors that lost their shirts when the bubbles inevitably burst, and all the damage the fallout did to the general economy.

How about corporations?  It appears that the Laffer Curve for the corporate income tax peaks somewhere between 20-30%, which is significantly lower than is the case for individuals.  However, the current corporate income tax rate of 35% in the USA (supposedly one of the highest in the world) is largely a fraud--due to loopholes, most companies pay nowhere close to that, and two-thirds of them effectively paid zero (or even negative) rates in 2008-2010.  And most estimates of the Laffer Curve simply don't take that into account.  While cutting the rate to 20-25% may very well make America more competitive in the global economy, the loopholes absolutely must be closed, period.

We recently came across a website called EquityScore, which claims that cutting the corporate income tax to zero would actually increase revenue to the point that all other income taxes could also be eliminated except for the capital gains tax.  That is, they claim that taxing corporate profits suppresses market values, and the massive gain in market values would yield enough capital gains tax revenue (when the stocks are sold) from individual shareholders to more than offset the foregone revenue from eliminating the corporate income tax.  While there may be some truth to that, their calculations ignore the fact that the majority of corporations already pay an effective rate of zero (or close to zero) due to loopholes, and that typical corporations used to pay much more in the not-too-distant past than they do now.  A better idea to maximize revenue (and growth) would be to cut the corporate tax rate to 20-25%, close all of the loopholes, tax only the amount of profit left after dividends are paid out, and tax dividends (and capital gains) as ordinary income for individuals.  Not only would that raise more revenue directly, it would also allow companies to pay bigger dividends and attract more investors, thus increasing market values and indirectly raise even more revenue.  It would also make the "double taxation" argument moot as well.

In summary, we have shown that the supply-siders' conception of the Laffer Curve is largely a canard.  And for those who continue to eschew the notion of shared prosperity and still insist on the richest Americans and mega-corporations paying historically low (if any) taxes, we shall leave the reader with the following inspirational quote from a very wealthy businessman of many decades past.  This was the man who founded the famous Filene's department store and also founded the U.S. Chamber of Commerce.

"Why shouldn't the American people take half my money from me? I took all of it from them."

---Edward Albert Filene (1869-1937)

The Laffer Curve Revisited

Most people (at least those who took Econ 101) have heard of the Laffer Curve.  This idea is often attributed to economist Arthur Laffer in 1974, but similar ideas were put forth much earlier by John Maynard Keynes and Ibn Khaldun.  In a nutshell, it states that both a 0% tax rate and a 100% tax rate would both yield zero revenue, for obvious reasons, and that the level that would produce the maximum amount of revenue thus lies somwhere in between.  To wit:

However, this is a rather crude representation and the curve need not be symmetric or even single-peaked.  So where exactly is the (highest) peak of this curve?  That is the million-dollar question that has been nagging numerous economists ever since Arthur Laffer himself initially proposed it.  Different sources have given very different answers, and the true answer may very well vary from year to year and country to country.  Probably one of the most reliable estimates of the peak is the midpoint of the results of various studies, which according to the New Palgrave Dictionary of Economics is about 70% as of 2008.  Thus, the real curve would probably look something like this:

Of course, one source of variation of estimates has to do with whether or not you are talking about average rates or top marginal rates (i.e. the rate on the last dollar earned by those in the highest tax bracket), as well as where the threshold of the top bracket lies.  Most studies (and politicians) are more concerned with the top marginal rate, and both those rates and the thresholds for the top bracket have varied a great deal throughout history and from place to place.  The most recent study on the matter puts the peak for the federal top marginal rate at a whopping 76%, assuming no loopholes and all else being equal.  Thus, with a top marginal rate of 35% as of 2012, we clearly have plenty of room to raise it (even double it), close the loopholes, and still significantly increase revenue.  Policymakers should take note next time the issue of budget deficits comes up.

Of course, this is downright heresy to wealthy Republicans and their Tea Party lackeys, so when they aren't trying to deny it directly (which they often do) they at least try to argue that a higher top marginal rate will hurt economic growth and thus hurt all of us in the long run, even if it does raise more revenue in the short run.  But history doesn't really bear this out.  Recall that the top marginal rate hovered around 90% in the 1950s and early 1960s, and hovered around 70% from 1964 to 1981.  Some of the greatest economic growth we have ever had occured during top marginal rates north of 70%.  Which leads us to another, less well-known curve--the Kimel Curve.  Discovered by economics blogger Mike Kimel, this curve plots historical real GDP growth versus the top marginal tax rate and controls for several potential confounders.  And the peak of that curve turns out to be somewhere between 60-70% depending on how the model is specified.  Thus, a top marginal rate of 60-70% actually appears to maximize economic growth rather than hurt it! 

While this may seem counterintuitive to those who took Econ 101, it is entirely plausible that hoarding of wealth by the ultra-rich as well as excessive executive compensation has an adverse effect on GDP growth.  Inequality beyond a certain point appears to harm the economy--just look at the levels of inequality (and tax rates) immediately before both the first Great Depression and the current one.  And a top marginal rate north of 50% most likely discourages such hoarding and excessive executive salaries and bonuses, and encourages businesses to reinvest their profits in more productive ways.  This is similar to the rationale nicely summarized by Kimel himself:

At 70% tax rates, there is more of an incentive to reinvest in the business, creating more growth in the business in subsequent years, and more economic growth thereafter. 70% tax rates are more likely to generate faster economic growth than 25% tax rates precisely because people are self-interested and the higher tax rates induce people to continue investing in things they do well.

Indeed, another study of the 1920s and 1930s found high top marginal rates (even pushing 80%) did not appear to hurt business investments one iota, but possibly even slightly increased the formation of new businesses.  This was a time period in which the income tax was levied pretty much only on the wealthy (with the top rate applying only to the top 0.1%), the top rate varied a lot from year to year, and the tax code was a lot simpler with fewer opportunities for cheating and tax-sheltering.

In addition, there is always the fact that, contrary to popular opinion, sometimes the government actually spends and invests money in better ways than the ultra-rich and mega-corporations would.  Just think of public infrastructure, which enables the private sector to generate most of its wealth in the first place.  And the money for that comes from--you guessed it--taxes.

Thus, advocates of a more progressive tax system (as well as the more intelligent deficit hawks) should feel vindicated and motivated by the results of these studies.  And we can just hear the greediest members of society whining right now.  But taxes are the price we pay for civilization, and the alternative to civilization is far worse.

230 Million Unnecessary Returns

This tax day, April 17, about 230 million American taxpayers will file a federal income tax return if last year's numbers are any indication.  The federal income tax has been with us for nearly a full century, having been started in 1913.  It started out simple enough.  In the first few years, it was fairly straightforward, and only the wealthy really had to pay a significant amount.  Since then, our nation's tax code has grown into a convoluted 60,000 page mess filled with numerous loopholes and deductions.  Up until 1980, Americans typically believed that the income tax was the fairest of all taxes, but since then, most people now rate it as the least fair tax of all.  Originally intended to be progressive, it remains as such up to a point, but then actually becomes regressive above that point especially when other taxes are taken into account.  Just ask Warren Buffett.  And for corporations, 2/3 of them get away with paying zero federal income taxes (and sometimes even negative rates!) because of all the ridiculous special-interest loopholes and subsidies in our tax code.

Several thinkers believe that our tax code is in need of a major overhaul and thus have tried to come up with alternatives.  Americans for Fair Taxation, for example, believes that all our federal taxes can be replaces with one national sales tax of 30%.  Michael Graetz, on the other hand, believes that we can and should replace all income taxes for households earning below $100,000 and single individuals earning below $50,000 (i.e. 90% of the population) with a 10-15% value-added tax (VAT) and a 25% flat income tax for those earning above $50,000 or $100,000 as well as all corporations.  Others believe in a purely flat tax, and still others (such as the TSAP) believe we can and should retain a steeply graduated income tax with a generous personal exemption and no loopholes.  For the record, the TSAP would also support a plan similar to Graetz's if an additional 50% bracket were added for incomes north of $1 million or so and the VAT did not exceeed 10%.

However, we have recently discovered an even better way forward for the 21st century.  Enter the Automated Payment Transaction (APT) Tax.  The APT is a novel idea proposed in 2005 by economist Dr. Edgar Feige.   Basically, it would replace all of our current federal and state taxes (and possibly even some local ones) with one tiny little tax (say, 0.3%) on all automated transactions. This would essentially be the lowest possible rate on the broadest possible base, with no loopholes or finagling. It would actually be quite progressive in practice since the rich make a disproportionally large volume of transactions, and it is literally impossible to evade it or game the system. It is based on simple math, not half-baked voodoo economic theories. And the benefits to replacing the current messy, 60,000 page tax code with something so simple and easy are painfully obvious.  Finally, something most liberals, conservatives, and libertarians can actually agree upon!

Unlike Dr. Feige, however, the TSAP supports retaining an income tax on all individual incomes in excess of $1 million. The first million would be tax-free, while the amount over $1 million would be taxed, preferably at a rate of 50% or higher. Thus, 99.9% of Americans would pay any income taxes at all.  The TSAP also supports various luxury and vice taxes as well.  And to pay down our ludicrously high national debt, we support what should be called the Donald Trump Tax--a one-time wealth tax of 15% on individuals and trusts with net worths above $10 million.

However, if the APT does not come to fruition, the TSAP still supports a graduated, progressive income tax with no loopholes.  The TSAP would consider the following graduated scheme of marginal tax rates (loosely adapted from Robert Reich) to be fair:

Under $20,000: no income tax
$20,000 to $50,000: 5%
$50,000 to $90,000: 10%
$90,000 to $150,000: 20%
$150,000 to $250,000, 30%
$250,000 to $1,000,000, 40%
$1,000,000 to $10 million, 50%
over $10 million, 70%

Unlike the current Byzantine tax code, there would be no loopholes or any deductions other than for state and/or local income taxes paid, and a limited amount (up to 10% of income) for charitable donations. Also, all forms of income (wages, interest, dividends, and capital gains) would be taxed equally, unlike the status quo.   And a top marginal rate of 50% or even 70% is actually pretty tame compared to what it was in the 1950s and early 1960s, which hovered around 90%.   For those worried about the Laffer Curve, rest assured that the most recent study on the matter found that revenue peaks at a top rate of about 76%. 

For corporations, a 20% income tax with no loopholes would be infinitely better than the one we have now, with 2/3 or large corporations (including ExxonMobil, GE, B of A, and BP) currently paying zero income taxes while numerous unfortunate small businesses get hit with up to a 35% tax. Even better would be if the first $1,000,000 per year was tax-free, and only the amount of profit left over after dividends are paid out would be taxable if the company is publicly traded.

And as long as we have a FICA tax for Social Security and Medicare, the wage cap needs to be eliminated completely or set at a very high level such as $10 million or so.

At the very least, though, we definitely need something like the Buffett Rule for as long as we retain our 60,000 page mess of a tax code.  Of course, that doesn't go far enough, but at least it makes the tax code non-regressive at the very top.  50% for every dollar above $1 million with no exceptions would clearly be better, but the proposed 30% is a step in the right direction.

Those who oppose this idea can call us pinkos all they want, but they might just want to listen to Adam Smith, the man who is often considered to be the father of capitalism:

The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.  (Emphasis added)

And there you have it.  Even the father of capitalism himself essentially agrees with us, which really says something.

Does Atlas Really Shrug?

One favorite claim by the wealthiest 1% (and their lackeys) is that higher marginal tax rates at the state/local level will cause rich folks to vote with their feet, and take several jobs with them in the process.  During these times of recession and budget crises at all levels of government, when there is clearly a need to raise taxes, the rich love to scare people about this.  But is it true?

At least two recent, carefully controlled studies say no.  There apparently is little to fear about the alleged adverse effects of "soaking" the rich at the state level, or any level for that matter.  The vast majority of millionaires and billionaires will essentially stay put in the face of a tax hike, and for the very few that do leave, good riddance.  Just ask Donald Trump--despite his repeated threats to leave NYC, he never seems to get around to it.  But why do so many people still believe that there will be a mass exodus of the rich?  Part of it is due to the power of anecdotes, even though the plural of "anecdote" is not "data".  Also, superficial observational data that does not control for other variables can indeed produce spurious relationships.

In addition, the corollary idea that the states that have lower or no income taxes do better economically than states with progressive taxes is also a canard.  In fact, a recent study found that the nine states considered to be "high" in terms of income taxes actually had more economic growth per capita than the states with no income tax at all, despite (or perhaps even because of) the fact that the latter group has more income inequality than the former.  Unemployment rates, on average, were roughly equivalent between the two groups of states as well.  So much for Atlas shrugging.

We feel it is very important to debunk this idea now.  The question is, will our elected representatives listen to the truth?