Daily Archives: January 5, 2011

The myth of the importance of inequality.

“Over the decades [from 1973 to the present] the percentage of American families with incomes over $75,000 has tripled.”—Thomas Sowell, Economic Facts and Fallacies.
So within the last weeks I have seen a slew of ridiculous articles complaining that the income inequality is getting worse (which is just a fancy way of saying the rich are getting richer). Never underestimate the Democrats to go for that pesky class warfare thing when the chips are down.
Ah, one of the most common and asinine critiques of capitalism. However, the detractors of capitalism can offer little in the way of a legitimate case. Not that they don’t try. In an article to the Financial Times entitled “Why America needs a little less laissez-faire”, Democratic chairman of the House financial services committee Barney Frank had the following to say:
“As we prepare for this autumn’s election, the results are in on America’s 30-year experiment with radical economic deregulation. Income inequality has risen to levels not seen since the 1920s and the collapse of the unregulated portion of the mortgage and secondary markets threatens the health of the overall economy.”
That’s the best that the capitalism’s critics can offer. Rich people are rich and idiots who got adjustable rate mortgages actually had the rates adjusted. The second argument is the more ridiculous of the two, but it ties into the whole poor get poorer myth. The mortgage crisis while bad, was also in great part due to people just for some insane reason walking away from their mortgages and letting banks foreclose even when the banks were willing to work with them. Nor was it something affecting innocent bystanders, it was affecting people who took an adjustable rate mortgage, a move universally recognized to be on par with buying stock on margin and treating the lottery as your sole retirement plan. Although if you are one of those people who got an adjustable rate mortgage, please contact me, because I have some lovely bridges to sell you for rock bottom prices. Furthermore this is not an example of the capitalism market running rampant to destroy average citizens—it’s one of those natural low periods in the cycle. That’s life, no one seems to complain about the unreasonable high moment (although the rational people get out of the market when it is too high) but somehow when it’s unreasonably low they shouldn’t take responsibility. Of course we could have the government come in to try and prevent those little recessions and the occasional minor depression, but then as I said you’ll get one of the Great Depressions again. I’ll take the recession with its “subprime housing crisis” or “internet stock bubble burst” over a rerun of the 1930’s. But given the government’s current plans for “bail outs” I’m betting on having to suffer the latter.
The second argument, that the income gap is too wide, while not as ridiculous, is certainly more egregious and frankly is below the intelligence of anyone we should let serve in Congress (although it does show the intellectual depth of other icons bearing Mr. Frank’s first name). Yes, the rich are getting richer. It tends to always work that way over time. But the poor are getting richer too! But, says Frank, the rich are getting richer faster than the poor. He goes on to complain that while the top 1% has had their after tax incomes double that “average earnings for the vast majority of workers have fallen in real terms.” Wow. Really? Real wages have dropped during the recession. I’m shocked. (And this of course is when, as far as I can find on the Bureau of Labor Statistics says yes 2007 saw a dip in real earnings, however, it’s been a steady average growth over the course of the Republican controlled Congress which is what Frank argues caused the dip in real wages…even though the Democrats controlled Congress at the time of this dip). Will there be a dip in real wages, assuredly, at some point; recessions are inevitable in any capitalist economy. But here’s the thing, the real wage of workers will go up. If you look at history, when you average out the highs, lows, and midpoints of any capitalist economy they have wacky tendency of always going up, up, up. Let us not forget that we live in America, where our poor are the envied of the world. The rich are getting richer, but the nice thing about capitalist economies is that the poor get richer as well. Just consider for a moment that most people in America, poor included, own a car, own a DVD player, get their 2,000 calories a day (America is famous for getting more than their 2,000 calories a meal), have access to free emergency health care (that’s right any ER has to treat you in an emergency case even if you can’t pay), have access to free public education, and the list could go on. Yes, no one in this country would like to be poor, but in the grand view of things, the poor of a capitalist (semi-capitalist in actuality) country are not doing terribly in the grand scheme of things.
Another problem with this argument is that it views a person’s economic class as something static and unmovable. As the economist Thomas Sowell is fond of pointing out when talking about economic class “most people in the bottom 20 percent move ahead over time to rise into higher income brackets.” Your average high school graduate earns next to nothing right out of the gate, but, even without a college degree, they are likely to make it securely into the middle class by their 40’s. Give or take, people tend to double their incomes between their 20’s and 30’s and to make about $8,000 more every ten years (that’s adjusted for inflation) during their prime earning years.
By no stretch of the imagination are the poor getting poorer over time. When you really look at it almost everyone gets richer over time under a capitalist system. Thus in this single respect of fulfilling material needs capitalism lessens suffering for those under it. And while it may have its dips and downs it is a wholly positive trend that in the long term benefits more people, for longer periods of time.

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Laws the GOP should pass #7: Tax Reform Part I

Income taxes, gas taxes, capital gains, corporate taxes, death taxes, luxury taxes, import taxes, sales tax, taxes on phones, electricity, cigarettes, car registration, social security and Medicare withholding, excise taxes, fees for every public document you need to file…you get the idea. In the end we pay a lot of our income in taxes. And it gets worse when you consider that (1) if you’re reading a blog on the internet about politics you’re probably in the upper half of population in terms of intelligence, (2) it means that you are or are going to be in the upper half of wage earners in the country. The top 50% of households in the country (in terms of income) pay about 95% of all income taxes. (Income tax accounts for about half of federal revenue, corporate taxes about 15% and Social Security withholdings makes up about 32%, the rest is various other sources). But in final result, we the educated, working people of the country are being really overtaxed.
Now clearly one of the things we need to do is slash and burn government spending. When the government is spending about 40% of its current yearly budget maybe, just maybe, we can slow down in cutting the fat (slow down, not stop). This comes before anything else. And to try and critique what’s coming because we spend too much is a foolish argument because what I’m about to say about taxes can and must only occur in conjunction with massive spending cuts at the federal, state, and local levels of government. But it’s not only spending that’s the problem. Part of the reason we have a spending problem is that deep down those idiots in Washington know that if they need more money they can just invent a new tax. Is it a season when tax increases aren’t popular? Just create a tax on something that most of public doesn’t know enough about or care enough about to complain, i.e., Capital gains or corporate taxes for instance. The general public isn’t always eager to come out and defend the tax rates of big corporations…why? Because the general public has an amazing inability to see more than two steps into the future. They don’t see that a higher tax on corporations comes back to them in the form of lower wages, higher prices and a slower economy.
Now I acknowledge that a tax rate cannot be perfectly static. If we were ever actually to declare a war again (something we haven’t done since WWII) I would acknowledge the need to raise taxes for that. But at the same time giving Congress twenty million different ways to pick the public’s pocket isn’t only unethical and illogical as it makes them less accountable for their actions; it’s incredibly bad economics as any tax is always a tax on the general public and always a depressant on the economy.
The solution to this is to reduce Congress’ avenues of revenue without hurting their ability to fund the running of the government. To make all taxes transparent, obvious and very in your face so that the average member of the public can easily say that this public benefit is worth the cost of the taxes.
This comes into two different parts. The first part is to get simply the change and get everyone ready for the very simple very easy to see and adjust tax rate.
Step 1:
We change all current income based taxes (and any tax rate above 15%) to a flat rate of 15%. (Any federal tax under 15% will remain at its current level). What do I mean by a flat rate?
15% on all income for both individuals and corporate income. No exceptions. No deductions No exemptions. If you only made $2, come April 15th of the next year 30 cents of the $2 belongs to Uncle Sam.
The advantage of this is that first most of the complaints about the rich avoiding taxes come from the creative way they move money around. This simplifies that. The other problem is that the people who get the most per dollar out of the government (i.e. the lower tax brackets) would finally be paying their fair share (15%) and the rich would be paying their fair share (15%) and everyone would be paying their fair share (15%). To those screaming that the rich need to pay more, you need to go back to math class. If it’s a percentage then the more you make the more you pay in taxes.
Same with corporations, no deductions or exemptions based on whatever Congressman you paid off to give your industry a break, no shifting funds between different subsidiaries for tax purposes. Just straight 15%.
Now anyone who actually knows anything about economics will tell you that in the long run, just this step of simple flat taxes will reduce overhead, speed efficiency and improve the economy (and the revenue take for the government). And to as I prefer to phase things in over time it should probably be phased in over a period of three to four years to give people and companies time to adjust.
Next week in step 2 we get rid of even more taxes.

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