Friday, September 24, 2010

Debating the Flat Tax

Matthew Rozsa's Facebook Status Update

"He mocks the people who proposes that the government shall protect the rich and that they in turn will care for the laboring poor."
- Grover Cleveland

At least Cleveland didn't have to deal with the arrant hypocrisy of today's Republicans, who argue that the solution to our economic woes lies in extending tax cuts that (1) only help the rich while (2) adding $3.7 trillion to our national debt over the next decade.

Kevin Brettell
Well, I would make 2 arguments. I read a recent column (can't remember the author, unfortunately) which leaned on the fact that the top 5% of income earners in this country pay something like 60% of the total income taxes collected. On the face of it, that's absurd, and a complete injustice.

Then I read some more. My facts may be off here, so try not to be too harsh on them. The top 5% of earners may pay 60% of the total income taxes, but they also earn 75% of the total income. That's a pretty messed up disparity. It means, to me at least, that my feelings about a flat tax are spot on (or would at least alleviate this). If everyone paid the exact same percentage of their income in taxes, we wouldn't have this issue. I don't agree that directly increasing taxes on the rich is the answer. A flat tax across the board is the only fair solution to the issue, in my opinion.

Matthew Rozsa
‎1) I disagree that having the top 5% of income earners pay a majority of our total income taxes is absurd or unjust. While the percentage deducted from their gross total would be cripplingly high if taken from the income of a minimum wage earner or even an individual in the middle class or upper-middle class, the reason it is fair to tax those in the top five percent at that rate is because doing so will not negatively impacting their standard of living in any meaningful way. Because government is expensive (including not only those much-maligned liberal social welfare programs but also through such conservative staples as subsidizing the military-industrial complex, engaging in new international conflicts, and continuing the war on drugs), it makes sense that the bulk of the government's revenue needs should be shouldered by those most financially capable of affording it. That said, I would still support a progressive income tax rate even if we were to decrease spending (which, incidentally, I think we ought to do).

2) I agree that the wealthy do not pay their fair share in taxes, as evidenced by the fact that they earn 75% of the total national income but only pay 60% of its taxes. That said, a flat tax would not solve this problem, since it would not only fail to maximize government revenue, but would also expect those with lesser incomes to pay more than they can afford while allowing those with higher incomes to pay less than they reasonably could. Instead I suggest a three-pronged solution to this problem:

i) Allow the George W. Bush tax cuts on the wealthy to expire, which would automatically bring in $3.7 trillion over the next decade, and dedicate that money in its entirety to paying off the budget deficit, which would be a long-term investment against higher taxes in the future.

ii) As another long-term investment against higher taxes on future generations, cut as many superfluous government programs as possible. This should include, among other things, all unnecessary military expenditures, from our involvement in nations like Iraq and Afghanistan to the trillions of dollars in waste from various military projects that are believed to be above scrutiny (and before you say that such cuts would gut our military establishment, bear in mind that during World War Two, Senator Harry Truman of Missouri became a national celebrity by saving taxpayers millions of dollars in unnecessary military projects and downright waste, none of which hampered the ability of our armed forces to win their single greatest conflict). It could also incorporate ending "vice" laws that cost us trillions of dollars fighting victimless crimes, such as the war on drugs or measures rendering prostitution illegal (indeed, ending the former would not only save us trillions of dollars but actually billions more in revenue, as the substances could now be taxed).

iii) Increase taxes on the wealthy back to the levels they reached during the days of Eisenhower's presidency, when the top tax rate was 91% on individuals earning more than $400,000 a year (the equivalent of $5,000,000 today). While conservatives will throw their expected temper tantrum about how this is "socialistic," I would refer them both to my blog article on that subject ( as well as to the simple question of whether they are implying that ol' Ike Eisenhower was a pinko.

‎3) Although you mention the fact that 75% of our total income is received by 5% of our citizens in passing, the reality is that this statistic cuts to the core of our current economic problems. I refer you to the analysis of Marriner Eccles, a Federal Reserve chairman who wrote an astute explanation of what caused the Great Depression:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality under-consumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

How can we solve this problem?

I refer you to an article by economist and former Labor Secretary Robert Reich (see next post):

Matthew Rozsa
Hint: Go back about 50 years, when America's middle class was expanding and the economy was soaring. Paychecks were big enough to allow us to buy all the goods and services we produced. It was a virtuous circle. Good pay meant more, and more purchases meant more jobs.

At the center of this virtuous circle were unions. In 1955, more than a third of working Americans belonged to one. Unions gave them the bargaining leverage they needed to get the paychecks that kept the economy going. So many Americans were unionized that wage agreements spilled over to non-unionized workplaces as well. Employers knew they had to match union wages to compete for workers and to recruit the best ones.

Fast forward to a new century. Now, fewer than 8% of private-sector workers are unionized. Corporate opponents argue that Americans no longer want unions. But public opinion surveys, such as a comprehensive poll that Peter D. Hart Research Associates conducted in 2006, suggest that a majority of workers would like to have a union to bargain for better wages, benefits and working conditions. So there must be some other reason for this dramatic decline. But put that question aside for a moment. One point is clear: Smaller numbers of unionized workers mean less bargaining power, and less bargaining power results in lower wages.

It's no wonder middle-class incomes were dropping even before the recession. As our economy grew between 2001 and the start of 2007, most Americans didn't share in the prosperity. By the time the recession began last year, according to an Economic Policy Institute study, the median income of households headed by those under age 65 was below what it was in 2000.Typical families kept buying only by going into debt. This was possible as long as the housing bubble expanded. Home-equity loans and refinancing made up for declining paychecks.

But that's over. American families no longer have the purchasing power to keep the economy going. Lower paychecks, or no paychecks at all, mean fewer purchases, and fewer purchases mean fewer jobs.

The way to get the economy back on track is to boost the purchasing power of the middle class. One major way to do this is to expand the percentage of working Americans in unions. Tax rebates won't work because they don't permanently raise wages. Most families used the rebate last year to pay off debt -- not a bad thing, but it doesn't keep the virtuous circle running. Bank bailouts won't work either. Businesses won't borrow to expand without consumers to buy their goods and services. And Americans themselves can't borrow when they're losing their jobs and their incomes are dropping.

Tax cuts for working families, as President Obama intends, can do more to help because they extend over time. But only higher wages and benefits for the middle class will have a lasting effect.

Unions matter in this equation. According to the Department of Labor, workers in unions earn 30% higher wages -- taking home $863 a week, compared with $663 for the typical nonunion worker -- and are 59% more likely to have employer-provided health insurance than their nonunion counterparts...

Although America and its economy need unions, it's become nearly impossible for employees to form one. The Hart poll I cited tells us that 57 million workers would want to be in a union if they could have one. But those who try to form a union, according to researchers at MIT, have only about a 1 in 5 chance of successfully doing so.

The reason? Most of the time, employees who want to form a union are threatened and intimidated by their employers. And all too often, if they don't heed the warnings, they're fired, even though that's illegal. I saw this when I was secretary of Labor over a decade ago. We tried to penalize employers that broke the law, but the fines are minuscule. Too many employers consider them a cost of doing business.

This isn't right. The most important feature of the Employee Free Choice Act, which will be considered by the just-seated 111th Congress, toughens penalties against companies that violate their workers' rights. The sooner it's enacted, the better -- for U.S. workers and for the U.S. economy.

I also have more long-lasting proposals, which I outline here:

Kevin Brettell
Just a very quick point: I was saying that at face value, having those high end wage earners pay such a large percentage is absurd, but upon further checking, stops being so, and is actually absurd in the other direction. I'll look into your other points after dinner/tomorrow.

Laura Brown
In a perfect world. A vision to behold.

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