Supertanker E-Z Pass

I was talking to friend today about the topic Albert Einstein is said to have found too difficult to understand – the US Tax Code.

Through most of the first 120 years of the Republic, the Federal government was funded by tariffs, customs duties and taxes on commercial interests.  Some borrowing and taxes were imposed in times of war, but usually those special revenue generators expired after the war was paid for.

Makes sense, since most activities of the government support or protect or enable commercial activities.  The reason the Marines were on the shores of Tripoli, after all, was to protect American merchants from Barbary Pirates.

Even today, it makes perfect sense to fund the Highway Trust Fund from the Federal gasoline tax.  That way users of the highways pay for the roads roughly proportional to how much they use it.

Localities use property tax and sales tax, again essentially charging citizens for the commercial interests they use in the community, with larger (more valuable) properties likely to use proportionally more local services, and those who spend more in the community, the same.  Some of us don’t even mind paying half our local taxes to support schools, even when we don’t have children, under the assumption that a more educated citizenry is good for all of us.

Another significant source of Federal revenue through the 19th century was also provided by “good for all of us” taxes on sin — liquor and tobacco.  That continues today, with smokers being the only group in the country that consistently pays for more health care costs than they receive.  Still, even the sin taxes are levied on commercial activities, albeit individual rather than corporate.

That all changed when the income tax came into being.  It became more of a game of winners and losers, and that shift in the source of revenue was event that made the Tax Code so difficult to manage.

I’ve often thought one purpose of the code was to ensure full employment for CPA’s.  The other is to shift the wealth of the nation to the activities and people the code writers prefer.  What most don’t seem to understand is that the purpose for the past thirty years or so has been to punish work and investment, and reward speculation and liquidation.

If you don’t believe me, just look at the rates being paid and the results in distribution of wealth.

When personal income tax rates were much higher (as high as 92% for income tax under Eisenhower), the nation was investing, saving and working, and the tax code encouraged that. Fueled by the blatant “socialism” of the GI Bill and “big government” projects like the Interstate highway system, America embarked on the boom of the 50’s and 60’s.

The entire post World War II generation was able to build wealth in their homes, support the proverbial two-car family and send their kids to college, all the while providing for secure retirement based on company pension funds and the Social Security backstop.  The Federal Government took about 18% of GDP, and budgets were nearly balanced.

Since 1980, while tax rates are generally lower, the most advantageous rates have been given to taking gains from investments, which led to the wholesale stripping of assets like pension funds and factories from companies and refinancing houses on a family level

Trading became a way of life, and and an ever-greater share of the burden of government was borne by those who get paid in salaries, wages or by running a small business.  In 2000, the Federal Government took about 18% of GDP, and the budget was balanced.

Over those two decades the mix had changed substantially, and payroll tax was paying an ever-larger part of the burden, while corporate tax and taxes on investment income paid an ever-smaller part.

Today a bad situation is made worse by the outright dishonesty of so many who comment on our taxes as part of their political agenda. We will not be able to address our problems if nearly half the population is tricked into believing the problem is the attempt to recover, rather than the destructive policies we pursued these past thirty years.

For example, a significant percentage of Americans think their taxes are higher now than they were a few years ago, even though the rates are demonstrably lower in 2009 than they were in 2006.  This can only be because they (want to) believe the politicians that see an advantage in selling them that lie.

It’s been nearly 60 years since the tax load was this low (around 14% of GDP), and even longer since the individual income tax was such a low percentage of the total tax take by the Federal government.

This will also be the first year ever that FICA and Medicare taxes exceed personal income taxes.  That makes the popular refrain “nearly half the population pays no taxes” especially disingenuous, since the very first dollar of a part time burger flipper’s pay is subject to an immediate 15.3% in taxes, a higher rate than most hedge fund managers pay on their fees, if and when they ever pay taxes.

Not only that, most hedge fund managers don’t pay the 15% capital gains rate on their management fees until the time they decide to take the money out of their funds, and they can enjoy earnings on that compensation as long as they want before paying.  (Billion dollar IRA, anyone?)

Those billions that hedge fund managers get as their management fees don’t get taxed at all unless they bring the dollars back to the US, and then only at the capital gains rate.  Why, pray tell, is the money other people pay you to manage their capital taxed at the preferred lower rate, and your tax payments delayed for years if you decide to wait to cash the check?

It should be no surprise that people who make up their own facts on this topic would have even more problems getting their history right.  It was a discussion of taxes with a youngest Boomer “conservative” (born ca. 1960) that left me firmly convinced that when it comes to taxes and politics, the myth far outweighs the man.

He started on about deficits and taxes (both too high), and his proposed solution was to lower capital gains taxes to zero and cut corporate taxes to 15%.  He then cited Ronald Reagan as his justification for the economic soundness of such a plan, saying Reagan had cut taxes and made government smaller.  According to him that’s why we had our longest post-war period of economic growth beginning about five years after Reagan left office.

Maybe he spent too much time taking Jello shots at the Disco to remember the 80’s, but I was working 100-hour weeks on Wall Street by then, and paying tons of taxes.

I had to draw the line somewhere, and that was the spot.

I pointed out that Reagan raised taxes a lot more times than he lowered them, and that he proposed a near doubling of the payroll tax even though Social Security was still decades away from paying out more than it was currently taking in.

Here’s the history.  Notice the six increases in payroll and self-employment taxes during those eight years.   Talk about hurting small business, that was it, but my Tea Partying colleague plugged up his ears and ran away rather than give up his fairy tale.

The crying shame was the fact that the huge Social Security and Medicare surpluses taken in under the new higher rates was spent, and then some, on what was actually a much bigger government, if you measure size by number of employees or money spent.

I suppose you could say it was “smaller” due to the fact that Executive Orders were used to make sure the government didn’t interfere with business, much the way anti-government zealots and incompetents made sure the Bush 2 administration let companies succeed by not enforcing annoying “anti-business” environmental, safety or risk mitigating capital reserve regulations.

But to get back to the other piece of news this week that spurred my desire to rant, the debate on the latest military budget got started.  Almost immediately, the opposition thought the increases weren’t enough, the very same opposition that calls spending to provide extended unemployment benefits “wasteful.”

What economic planet are they from?  They try to force the Pentagon to take weapons systems it doesn’t want, paid for with money we don’t have, and some of them even promote the “economic stimulation” of buying nearly useless major weapons.

Defense spending is possibly the least stimulative domestic spending there is, while unemployment insurance payment are among the most stimulative, estimated by virtually every econometric study I’ve seen as producing anywhere from $1.70 to $2.15 in increased GDP for every dollar spent.

Mark Zandi, of Moody’s did a substantial study of the second economic stimulus/tax cut package passed under George W. Bush (2003).  It was neatly summarized here:

A study by Mark Zandi, the chief economist at the independent economic research firm, finds the tax cuts were poorly designed for purposes of stimulating the economy.  If designed differently, the stimulus package would have generated significantly more economic and jobs growth for each dollar it cost.

  • Zandi examined the average “bang for the buck” of provisions in the enacted tax cuts.  He finds that the significant majority of these tax cuts consist of policies that return little bang for the buck, yielding less than $1 of short-term economic demand for each $1 of cost.  Altogether, Zandi’s study indicates that the average bang for the buck from the tax cuts has been 74 cents.  (In other words, each dollar of tax cuts has produced only 74 cents of added economic demand the next year.)
  • Zandi also examined an alternative stimulus package and found it would have yielded far more short-term demand — $1.20 for each $1 of cost — and thus have generated significantly more economic and job growth.  The alternative package would have put more money into the hands of those who immediately spend it — low- and middle-income Americans — through tax cuts targeted on this group, greater temporary unemployment benefits, and more federal fiscal relief to states to lessen state budget cuts and tax increases.  As noted, the federal tax cuts that were enacted are heavily skewed toward high-income households, who are much less likely than other households to spend their tax cuts quickly.  (They are more likely to save their tax cuts.)”

We can debate forever about what we might or might not need for our military.  Until six weeks ago, I’m guessing Louisiana’s Governor would have called deep sea manned vehicles with comprehensive tool-handling capabilities a complete waste of taxpayer money.  Now he wants the Federal Government to save his bayous, but they don’t have the technology.

What we do know is that $663 billion in just one year is a lot more of our GDP than the economies we compete with are spending.  Many times more, in fact.

We have 17 aircraft carrier groups!  What do they do?  More or less what two-time Medal of Honor winner Smedley Butler says the Marine Corps did during most of his 33 years of active duty.  They make the world safe for our corporations, not really much difference from the days when Thomas Jefferson sent the Navy and the Marines to stop the piracy off the Barbary Coast.

At least then, when the nation was new, it was tariffs and import duties paid by those same merchants that paid for the Navy.

So how about charging user fees for using our military?  Since oil tankers are notoriously difficult to stop and start again, we could install really big E-Z pass tokens on them, and then put readers on each of our Navy ships.  Whenever they pass within the protective umbrella of our ships, their account could be debited.

While we’re at it, let’s figure out how to pay for the Federal Aviation Administration by charging those who fly, rather than by borrowing from the Social Security Trust or taxing the income of people who don’t use it.

I figure that the $400 billion a year in Social Security and Medicare taxes that were borrowed by the government to pay for other activities are almost exclusively money spent on making life cheaper and sweeter for commercial interests and subsidies that kept tax rates low for those who run and own those commercial interests.

It may be time for them to begin paying back what they’ve already taken, since retirement bill is coming due.  So no, I’m not joining the Tea Party that wants to ignore the benefits they’ve taken which they never paid for.

The pendulum swung way too far in favor of the corporations over the past few decades.  Those who want to”double down” on the policies of that period have lost their ability to see the reality of our economic situation.

Will Obama and his crew likely swing the pendulum too far in favor of people?  They seem to be trying.

Still, our economy needs the medicine that pendulum swing will give us.  It had a near death experience by going too far in favor of the bankers and their corporate brethren.  A dose “socialism” that expects companies and their investors to start paying for what they take in services is way overdue.



2 Responses to Supertanker E-Z Pass

  1. Steve Gelmis says:

    Amen brother.

  2. davidson says:

    Second that amen. Well said.

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