Wednesday, December 14, 2005

Wealth and Taxes

Recently under the comments of a previous post I was referred to as a "Debbie Downer", so in response I have decided to write a post that does not pertain to homophobia, war or genocide.

I was recently forwarded an article last week entitled Tax Cuts for the Wealthy: Appearances v. Reality. The premise of this article argues that even though taxes on the wealthiest one percent of Americans has steadily dropped since 1980 from 70% to the 23.3% today, the total percentage of the tax burden paid by the wealthiest one percent has risen. The author claims that this is suppose to demonstrate that those who argue against tax cuts for the wealthiest Americans “at some point must decide what really matters to them -- the appearance of soaking the rich by imposing high statutory tax rates that may cause actual tax payments by the wealthy to fall, or lower rates that may bring in more revenue that can pay for government programs to aid the poor?

But the underlying purpose of tax cuts is not to get more money for the government, the purpose is to increase economic growth for all Americans, and that was the reasoning that Bush and other presidents before him have used to explain why tax cuts are necessary. But it is impossible to see whether or not they were successful in their endeavor without looking at the disparity between the richest and the poorest, they are intrinsically connected and to look at one without looking at the other is impossible.

My argument is that the article’s thesis is flawed because it fails to take into consideration the increase wealth disparity that has occurred over the past 25 years. The fact that tax cuts have resulted in more revenue from taxes doesn’t really mean anything except that the tax cuts benefited the wealthiest Americans and had no real effect on the poorest Americans or the average American.

If the goal of tax cuts was simply to increase government revenue then that would be fine, but that has never been the reason for implementing tax cuts, and by looking at the data and increases in wealth historically throughout the past 25 years it is obvious that tax cuts have benefited the wealthiest Americans while doing little for the average American.

While the divide between the wealthiest and the poorest has continued to grow, there has been no real significant change for the average American. Adjusted for inflation the average annual income from 1970-1998 has only increased 9.3% over the past 30 years, from $32,522 to $35,864, compared to an increase of 395% for the wealthiest Americans. (Gutman)

The article’s thesis argues that people who are critical of tax cuts and argue that they only benefit the wealthiest Americans are wrong. When in actuality you can see that over the past 25 years the wealthiest Americans have reaped almost all of the economic gains. Many who support tax cuts argue that when the economy grows that everyone benefits, but this data shows that only the wealthiest people benefit and everyone else basically stays the same. The argument that a rising tide (economic growth) raises all boats does not hold true. The data proves that a rising tide only raises the yachts that are able to take advantage of it and the average American does not benefit. (Click here for more data concerning wealth and income inequality)

Now let me give an example. If you line up the wealthiest 1 percent in a line starting with the richest and working your way down based on wealth, you will see that over the past quarter century the line up has not really changed, what has changed is that the amount of wealth these individuals have gained has increased at an amazing rate. While at the same time the benefits of a growing economy have yet to benefit the average American, therefore demonstrating that although tax revenue from the wealthiest 1% has increased with tax cuts, the actual economic well being of the average American has failed to grow at even close to the same rates, thus the tax cuts are still just a sell out to the wealthiest Americans.

Now I am aware of the counter argument to all of this which was very well stated by a conservative friend of mine, and for reference later in this post I will refer to this as the “conservative argument”. He wrote, “Tax cuts for the wealthy benefit the poor more than they do the wealthy. A rich person will be rich whether you take 90% or 20% of their income. However it is what you do not see at the surface of this scenario that benefits the working class and the government. The rich person has no incentive to build a factory when the income generated from the factory will be taxed at a high rate. What is seen is the high tax rate, what is unseen is the economic activity that is not generated. With a lower tax rate the rich person will have incentive to build a factory. The rich person benefits with a profit, the workers get jobs and income, and the government collects taxes on the factory income and from the workers.”

I understand this argument and I am not arguing that expansion of business does not occur. What I am arguing is that the expansion rate of business is not at all in line with the enormous increases in the concentration of wealth.

Here is how I see the problem. Take for example Wal-Mart, last year their net income increased 8% to $7.64 billion. Now Wal-Mart took some of that additional income and invested it in opening new stores, which under the “conservative argument” creates new jobs and helps the poor. But at the same time they created new jobs that did nothing to decrease the divide between the poor and the rich. Instead it created jobs that still offered full-time wages that were barely enough to live on. So yes according to the “conservative argument” it did create new investment, the problem was that the investment only created new jobs that required people working them to stay at a low economic level.

Then compare that to Costco. Last year Costco increased their net income by 13%. With this increase they plan to open 30 new stores in 2006 creating numerous new jobs. Thus they are following the “conservative argument”. The interesting thing about this is that Costco pays wages that are 40% higher then Wal-Mart and they provide affordable healthcare coverage to 90% of their full and part-time workers. Add onto this that Costco has a turnover rate that is five times lower then Wal-Mart and that they promote almost 100% from within. Therefore a company that offers good wages keeps their workers and then promotes their workers up, therefore giving every worker the ability to move up income brackets and live a more prosperous life. This sounds great.

The problem with this, according to many Wall Street analysts, is that by having Costco offer such high wages and benefits they are taking away from money that should be going back to shareholders in the form of increased investment in expansion projects or dividends. However, if Costco would follow the advice of analysts they would be perpetuating the problems of an increasing divide between the wealthy and the poor since most of those who are investors and shareholders are already in the upper percentage of wealth. But by continuing their current strategy they are actually helping to fill the gap between the poor and the rich, while at the same time operating a profitable and competitive business.

That is how I think this issue needs to be addressed. I am not necessarily arguing that we should hike the hell out of taxes on the wealthiest Americans, I would actually be in favor of cutting taxes if that was coupled with legislation that also forced companies to adopt wage and promotion policies like Costco is currently using. The problem is that most companies are not following this policy at all and instead strictly adopt a policy that makes increasing shareholder wealth the main priority and ignoring the stakeholders and society in general who are not shareholders. And when the priority is increasing shareholder wealth at the cost of workers and the general public then the policy only perpetuates the disparity of wealth between the poor and the rich.

I am too cynical to think that companies would be willing to adopt these policies strictly because of market pressure, so that is why I think that there needs to be legislation that forces companies to do so. I would argue that something has to be done or else in 30-50 years the distribution of wealth in this country will be similar to current distribution in Latin American countries, and I don’t know anyone who thinks that would be a positive thing.

So those are my arguments, but I am by no means an expert on anything I just spoke about so please chime in all of you loyal PePers and let me know what you think.


xtrachromosomeconservative said...

Good post. This is an interesting concept you promote, standards of living are inversely proportionate to income inequality. You forward the example of Latin American countries. I counter with the former Soviet Bloc where income equality was far greater than the U.S.'s but standards of living were on a downward spiral. But ultimately, the question of standards of living, and progress thereof, is best measured in other areas, income for one as you point out, also after tax income. But further, things like educational access and obtainment, home ownership and ownership of securities, other measures of material wealth that often indicate a higher standard of living, health care, things of that nature.

Anti-Everything said...

The example of the Soviet Bloc is an interesting one. Yes it is true that there was not a great amount of income inequality, but then again it is not difficult to see why the standard of living was going down. When the government basically spends all of the countries money on military spending and neglects basic needs such as education and access to healthcare it is easy to see why their standard of living was on the decline.

I agree with you that there are also other indicators of standard of living, but I believe that they all ultimately tie back to the underlying theme of income inequality.

Take for example education access and obtainment. Currently most of the funding for education still comes from the local level through property taxes. And as you probably know people with large incomes do not tend to build their million dollar homes next to trailer parks and low income rental properties, which may explain a friend of mines experience when she spent two semesters student teaching. Her first semester was spent at an elementary school in a poor neighborhood in North East Minneapolis. She found that the funding in this school was so bad that she had to purchase pencils out of her own pocket to give to her students to use. And then compare this to her second semester that she spent teaching in an Edina elementary school. The budget problem that was facing this school was what they should do with all of the excess funding they had and decided purchase a digital camera for every student to use for art projects. So as you can see the income of a community has a great effect on the education children in the community receive, and all of this relates back to income inequality.

Access to healthcare is very much the same way. If one’s income is large then most likely their employer provides healthcare and also they can afford access to the best care. But compare this to someone who is working for Wal-Mart and receives no healthcare benefits and you will see that once again the standard of living in regards to healthcare access is directly related back to income.

Mandingo said...

Anti, nice job of keepin' it real when the rest of us slackers are slacking off to an early 90's J. Jameson film. Huzzah!

xtrachromosomeconservative said...

Anti, I don't think you really mean income, but rather distribution.

Anti-Everything said...

Thats a good point I do more so mean distribution of wealth, which connects up with income because it is through income that most people achieve wealth and a persons income is a good indicator of how wealth will be distributed. Unless of course your parents are billionaires, then it is sex and pro-creatation that achieved wealth for you.

xtrachromosomeconservative said...

Which, I think then goes back to your original point of the income taxes. If the question of enhancing the commonweal is one of distribution of wealth, then the creation of wealth is paramount. Then, the central question is whether said creation is best achieved through a lower marginal tax rate or a higher tax rate.

Anti-Everything said...

That is true. So as it relates back to my original point lowering taxes alone will do nothing to solve the problem of distributing wealth. I agree that in order for wealth to be distributed it must first be created. If lower taxes does in fact generate more wealth, then it would be important to accompany lower taxes with legislation that also works to distribute wealth more evenly.

Tax cuts without without such legislation would simply add to the problem of the divide between the rich and the poor that I discussed in my post.

xtrachromosomeconservative said...

But this goes back to your point about Costco, and in my view, also applies to Wal Mart. Tax Cuts spur investment, look at countries that have high tax rates and their unemployment rate, and over time increase revenues (though, they do not pay for themselves). One of the misleading aspects of looking at a snapshot of income statistics is that it does not take into account time. One of the great distinctions in income is age. However, if opportunities are not available, even if they happen to be a "McJob" one is less likely to be able to raise their position in society. And likewise, I believe legislation that you endorse, basically making the best in class practices law, would have a stifling effect on the economy and employment levels. Wal Mart could possibly pay their employees more. Though their profits which you sight, is somewhat misleading. Their 8-10 billion annual profits comes from something like 270 billion dollars in operating revenue. While Costco's average customer has a median income of 75k Wal Mart's has a median income of 35k (Target, 50k). I think the question of how to enhance upward mobility speaks to things like how to improve k-12 education(which is arguably not income related, D.C. public schools being a shining example), access to secondary education, and addressing issues like health insurance which at this point has exercised a downward pressure on wages.

mkultra said...

Thank you so much for your excellent insights on the changing world of salary and benefits in corporate America. It makes me think--what could America do if it's people weren't held captive by benefits such as healthcare? Think of the entrepreneurial power we have untapped because of this stranglehold! I just read a blog by Sara Dady, who is running for MN House that is right up this alley, too. Seems like there are more than just a few of us out here who think alike!

xtrachromosomeconservative said...

No the point is not that there should be no health insurance provided (though, obviously this question is pregnant as some propose the status quo-employer provided health care, government provided health care, or that health care is the responsibility of the individual (though subsidized at the lower end). Rather, as health care costs have increased well above inflation, this has exerted a downward influence on wages, or at least caused them to stagnate in some cases. That comment speaks to the need to addess the escalating costs of health care. Thoughtless snarky comment appreciated nonetheless.

confamused said...

I would like to briefly nudge this to a different level if I may. This debate centers on goals such as narrowing the income gap between the rich and the poor; more specifically, creating better access to education, health care, home ownership, etc. It is quite a complex question.

And so is the answer...take for example, home ownership. I think many people would agree that if we could make income distribution more even, more people could afford their own home, and in general, yes, that is a good thing.

But is it? We have some familiar material standards to measure the "health" of an economy, a society, a country, a populace (GDP, literacy rates, etc). But what is the larger goal? If everyone can own their own home, what problems will that solve, and what problems will that create? Look at the suburbs. Plenty of home ownership, income equality (in a loose sense, in that most people in the suburbs are in the same economic strata), health care, cars, education - great education. How many suburban families do you know with children who have not gone to college?

But what kind of answer is that? The suburbs, and in general societies who meet just these material standards for health and success, can disastrously fail in other areas. I'm talking about immaterial concepts that can easily be chalked up to hippie idealism, but in reality, concepts that I believe are just as critical to societies' health. Concepts like community and identity. Many jokes can be made about "it takes a village" but in the end, it does.

The hierarchy of needs is quite relevant - it is difficult to even conceive of something like identity when you can't see a doctor for the flu, you can't buy enough food, and your children can't read because the school system is overflowing and underfunded. But these intangible needs must be integrated into processes from the very start - you can't set everybody up with their material needs, and then consider what it may do their emotional, intellectual, and spiritual health. These things must be taken into account from the start.

There was a NYTimes article this fall (October 6th, "Net National Happiness") about the country (Kingdom?) of Bhutan, and how years ago they added immaterial needs to the list of variables that were measured to indicate the health of the country. It is a difficult subject, not easily quantified or treated, but isn't the point of an advancing society to grapple with more and more complex and worthwhile subjects?

confamused said...

Sorry, this just occurred to me...perhaps some of the Katrina victims provide examples? Provided with food, shelther, clothing, health care, education...yet based on the interviews in the popular press, many are still withering from a lack of identity, a lack of "home," a lack of community. Difficult to tease out the lingering effects of trauma and relocation, but I think it is relevant.

xtrachromosomeconservative said...

I just recall PJ Rourke's take on it takes a Village, The village is washington d.c. and you are the child.