The Republicans have discovered that they can continuously run against Government. Local government, state government, federal government, it matters not.

It is the teflon answer to everything for the party. Incomes not rising? It’s because the government takes too much in taxes from private concerns. If we only reduced their taxes more, incomes would rise, is the answer to all things always.

But we did that already and incomes didn’t rise, a few of us are asking. No matter. We’ll reduce taxes and incomes will rise, is the answer. But that didn’t happen, we point out. No matter, we’ll reduce taxes and incomes will rise, is the answer.

It works. I don’t understand why it continues to work, but I suspect it’s as basic as the used car salesman pitch that his used car, although not new, is still as good as the new one–only it costs less. You know it’s not true, but still, it costs less. And because your income hasn’t increased, it’s all you can afford. The used car, and your illusion, are all you have.

Professor Robert Reich, Secy. of Labor under President Bill Clinton, posts a nice article with a play on the phrase ‘Class Warrior,’ instead describing himself as a ‘Class Worrier.’

From the article:

“But starting in the 1980s — and increasingly since then — the economy has made the rich far richer without doing squat for the vast middle. The median hourly wage has barely grown, if you take inflation into account. Indeed, it dropped in the last so-called “recovery” between 2001 and 2007. And health-care and pension benefits have declined; we’ve gone from defined-benefit pensions to do-it-yourself pensions, while health insurance premiums, deductibles, and co-payments have skyrocketed.

Meanwhile, the rich have been getting a larger and larger portion of total income. From 9 percent in 1980, the top 1 percent’s take has increased to 23.5 percent in 2007. CEOs who in the 1970s took home 40 times the compensation of average workers now rake in 350 times. Financiers who forty years ago made only modest fortunes today, even after the Great Recession they helped bring on, routinely earn seven and eight-figures. In 2009, when most of the nation’s middle class was deep in recession, the 25 best-paid hedge-fund managers took in an average of $1 billion each. (Their marginal income tax, by the way, was barely over 17 percent, while the typical family paid a marginal tax far higher.)

What happened? It wasn’t just greed. It was also the systematic and ever cleverer manipulation of laws and rules by those able to pay lobbyists, legislators, lawyers, accountants to do their bidding. As income and wealth have risen to the top, so has the power to manipulate the system in order to acquire even more money and more influence.”

One can have a reasonable debate on trying to identify the dynamics behind growing inequality of income, but there can be no denying that it’s grown dramatically in recent decades.

Beezer thinks tax rates should be progressive and stay that way.  Meddling with tax tables creates uncertainty and makes planning more difficult and expensive.  At least progressive rates help pay the government’s bills.  But lost in the ideological shuffle about rates is the fact that, as a fairly rough tool, progressive rates push back against the concentration of wealth and power among fewer and fewer elites.

The danger here isn’t just economic.  It’s dangerous politically.  As more and more folks realize they aren’t participating in the economy (other than to lose ground) what they will do politically is not known.  They may bite the hand that feeds them.  They may bite every hand within biting range, including their own.  If history is any guide, anything can and will happen if public anger reaches these kinds of levels.

One can hope that calmer minds will prevail, and that sensible policies aimed an more inclusion prevail over policies that result in more exclusion.

There are many problems we face.  That’s a given.  But our ability to coalesce around a common goal, or goals, seems to have disappeared of late.

And as a result we seem to have become everyone else’s chump.  We allowed our manufacturing base to decline precipitously under pressure from aggressive foreign exporters who manipulated their currencies, thus imposing de facto import tariffs on our goods and subsidies on theirs.

We allowed unscrupulous lenders to laden mortgage and credit card contracts with hidden fees that helped make debt unmanageable, even as they increased their profits.  We allowed wild west style investment banking to infect the more staid commercial banks, thus turning our financial system into a rigged, casino-like free for all.

We stood by as income inequality climbed and climbed, beggering labor and the middle class as the wealthiest among us enjoyed special tax shelters and tax breaks.

Maxinne Udall (girl economist) writes cleanly, and in my opinion, with great insight.  Recently she posted a nice article where she wonders what has happened to America’s sense of being the United States of America. 

Entitled ‘The Road To Serfdom Is Gravel,” professor Udall uses the history of roads, and their impact on economies.  She starts by pointing out that, in order to not raise taxes, several communities in America are allowing some roads to degrade back to their gravel state.

She points out how ‘plank’ roads and bad weather affected Civil War battle outcomes.  And how the Roman road system was integral to the Empire’s health.  She cites the 1950 Interstate highway system in America, begun under the leadership of President Dwight Eisonhower, and how it boosted economic growth.

But the road history is really a way of asking why we don’t do these things anymore?  We’ve lost something along the road, it seems.  Udall doesn’t provide any answers.  But she does ask a  very important question.  Beezer’s often argued that we need to frame the right questions, in order to develop the right answers.  Udall’s small post asks the same question, but in a different, very creative way.

She concludes with this paragraph:

“What passes for discussion about social choice and taxation in this country has become the sound of one hand clapping. The divisions in discourse have been strategically engineered by interests whose objectives I do not understand, but that I am sure are not the commonweal. The divisions are fueled by oblique appeals to base sentiments about race, class, and sexual preference that all of us harbor to a greater or lesser extent. They drive wedges on issues on which most would otherwise agree and from which most would benefit near equally from the same solution. While sentiments are used to divide us, a nation founded on the idea of a government of, by and for the people lists dangerously toward income inequality and its bedfellow, concentrated economic and political power, while we bequeath to our grandchildren a world in which they travel a network of gravel roads with barely a high school education, they live in cities and towns with failing sewers and water systems, and risk their and our great grandchildren’s lives crossing crumbling bridges and overpasses.

But their taxes will be low. I wonder if they’ll thank us?”

Once again, thanks to economist’s view for highlighting Udall’s post.

From a recent study by three economics students; Sreedhari Desai of Harvard, Arthur Brief of the University of Utah and Jennifer George of Rice University.  The title is “When Executives Rake in Millions:  Meanness in Organizations.”

“The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies – an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem.”

Beezer here.  This basic concern is a long considered one in economics and the related considerations of ethics and morality.  Even the great Adam Smith wrote about this.

From economist Maxine Udall (girl economist) blog, the following.

Adam Smith wrote about the influence of prevailing custom and fashion on moral sentiments in Theory of Moral Sentiments.

The different situations of different ages and countries are apt, in the same manner, to give different characters to the generality of those who live in them, and their sentiments concerning the particular degree of each quality, that is either blamable or praise-worthy, vary, according to that degree which is usual in their own country, and in their own times. 

Nowadays, most of us would object to what appears to be cultural or ethnic stereotyping in some of what Smith wrote. I am unable to say to what extent Smith’s views reflected then existing national and cultural heterogeneity that will have no doubt been rendered by economic development more homogeneous over time. Smith was a sound thinker and critical observer, which causes me to attribute his generalizations about different nationalities somewhat to Scots-Anglo ethnocentrism and somewhat to possible real national differences. Nevertheless, his main point seems valid: that what is “either blamable or praiseworthy” varies “according to that degree which is usual” in our own country and own times, that our moral sentiments and behavior are shaped to some extent by the culture in which we dwell.

Smith goes on to discuss “customary characters” of professions and stages of life, conjecturing that they are shaped by the moral sentiments that accompany and promote the duties of a given profession or of a specific stage in the life cycle. Thus, some professions and life stages are more reticent or staid than others. But, while Smith sees custom in the form of social and professional norms reinforcing good moral sentiments and behavior, he also sees it as something that can erode the same.

It is not therefore in the general style of conduct or behaviour that custom authorises the widest departure from what is the natural propriety of action. With regard to particular usages, its influence is often much more destructive of good morals, and it is capable of establishing, as lawful and blameless, particular actions, which shock the plainest principles of right and wrong.

His point being that just as self-interest can prevent us seeing impropriety and injustice, so too can culture and custom. A slave holder in the antebellum US South had self-interested reasons for believing slavery to be morally acceptable. A poor white worker whose wages were depressed by the availability of slave labor might still find slavery acceptable and worth fighting to preserve because the norms and customs of his culture find no impropriety in slavery.”

Beezer again.  An earlier Beezernotes post  highlighted the work of behavioural scientist Sam Bowles of the Santa Fe Institute.  Bowles has concentrated his study on the causes and effects of inequality in general and income disparity in particular.  From that article:

Former Labor Secretary under President Bill Clinton, Prof. Robert Reich, has written a strong and direct post about America’s underlying, foundational problem:  The growing disparity in incomes.

“We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.

And as long as this trend continues, we can’t get out of the shadow of the Great Recession. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing.

America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class could boost its purchasing power was to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.

Each of America’s two biggest economic downturns over the last century has followed the same pattern. Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total…..

“What we get from widening inequality is not only a more fragile economy but also an angrier politics. When virtually all the gains from growth go to a small minority at the top — and the broad middle class can no longer pretend it’s richer than it is by using homes as collateral for deepening indebtedness — the result is deep-seated anxiety and frustration. This is an open invitation to demagogues who misconnect the dots and direct the anger toward immigrants, the poor, foreign nations, big government, “socialists,” “intellectual elites,” or even big business and Wall Street. The major fault line in American politics is no longer between Democrats and Republicans, liberals and conservatives, but between the “establishment” and an increasingly mad-as-hell populace determined to “take back America” from it.”

The structural problem began in the late 1970s when a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the ’80s, any job requiring that the same steps be performed repeatedly was disappearing—going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs—the so-called “talent” who reached the pinnacles of power in executive suites and on Wall Street—soared.

The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance—say, a year of wages—to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America’s trading partners could have been pushed to establish minimum wages pegged to half their countries’ median wages—thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets. It halved the top income tax rate from the range of 70–90 percent that prevailed during the 1950s and ’60s to 28–40 percent; it allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax and escape inheritance taxes altogether. At the same time, America boosted sales and payroll taxes, both of which have taken a bigger chunk out of the pay of the middle class and the poor than of the well-off.

Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device. Washington deregulated Wall Street while insuring it against major losses, turning finance—which until recently had been the servant of American industry—into its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. And nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from thirty times during the Great Prosperity of the 1950s and ’60s), while the pay of financial executives and traders rose into the stratosphere.”

Reich blames both Republicans and Democrats.  When it comes to the disheartening spread in wealth towards the wealthy and away from the rest of the country, both parties turned a blind eye to the problem.

And he says a likely result will be angrier politics as the public, not being able to connect the dots accurately, will strike out at anyone in government.

Reich warns that the likely result will be unpleasant for everyone, including the wealthy.  Beezer agrees.  The political backlash will not benefit anyone, except briefly a few political opportunists. 

While the vast majority of Americans go to work and pay their taxes, the wealthiest among us have been hard at work assuring that they can pass on their wealth, at no or low tax rates, in perpetuity.

The basic concept of using trusts is that the assets inside the trust aren’t taxed.  Only income that is released from the trusts to beneficiaries can be taxed.   When the trust’s creator dies, the beneficiaries do pay inheritance taxes (until recently, apparently) but the “cost basis” of the assets inside the trust are inherited at current market value.  For example.  A trust contains 1,000 shares of XYZ Corp., which were bought by the original wealthy person for $10 per share 30 years ago.  The wealthy person dies, and the shares of XYZ are now worth $50 per share.

The trust is dissolved with the beneficiaries receiving the XYZ shares, not at the original cost basis of $10 per share, but at the current market value of $50.  The profit of $40 per share is never taxed, in other words.  Nice work if you can get it.

But wait.  Things are apparently becoming even better for the ultra wealthy.  We now have trusts that can last in perpetuity.

From a New York Times article written by Ray D. Madoff, a professor at Boston College Law School.

“AMERICANS have always assumed that wealth comes and goes. A poor person can work hard, become rich and pass his money on to his children and grandchildren. But then, if those descendants do not manage it wisely, they may lose it. “Shirtsleeves to shirtsleeves in three generations,” the saying goes, and it conforms to our preference for meritocracy over aristocracy.

This assumption is now being undermined, however, through the increasing use of so-called dynasty trusts. These estate-planning instruments enable affluent people to provide their heirs with money and property largely free from taxes and immune to the claims of creditors. And rather than benefit only children and grandchildren, dynasty trusts provide for generations in perpetuity — truly creating an American aristocracy.

Congress is feeling pressure to deal with taxes on inherited wealth, which have fallen to zero this year thanks to lawmakers’ inaction. In the process, it should address the more pernicious problem of dynasty trusts.”

Beezer here.  You will notice a link in that last paragraph about taxes on inherited wealth falling to zero.

From that article:

“A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free.

Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.

Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.

Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.”

Beezer again.  This article is interesting in that it provides some important historical information about the concept of estate taxation.

By all accounts Mr. Duncan was a terrific philanthropist and believed in using some of his wealth for good purpose that helped others.  But America has long been skeptical of passing along in perpetuity great wealth.  This was how the European aristocracy maintained its position for centuries, collecting rents from working people long after the original ancestors put life and liberty on the line in defense of one King or another, and were rewarded with huge land grants — the fruits of which were enjoyed for centuries of generations.  And still are to this day, most noticeably in the form of Royal families.

Beezernotes has written several posts about the growing income or wealth inequality in America.  For the past 30 years the tax system has allowed the wealthiest among us to essentially capture for themselves all the GDP gains.  The vast majority of working Americans, during that same 30 years, have seen little or no income growth.  There’s been no trickle down where the prosperity was shared.  Instead it’s been all one way up the income ladder, particularly when you reach the top 5% of incomes.

This disparity is worrisome to many.  America grew powerful as labor increased its income, and many laborers raised their incomes enough to invest in businesses and formed a powerful ‘middle class’ of entrepreneurs and professionals.

Now the trend is being reversed.  The middle class is under assault and the current severe recession has thrown millions of laborers out of work.

Yet still Congress favors the wealthy and their heirs with tax avoidance schemes not available to most citizens.

If allowed to continue, this will end badly for all concerned.

As almost always, thanks to economist’s view for highlighting the original article.