Archive for the ‘Taxes’ Category

The cost of the Republican tax plan

December 4, 2017

Click to enlarge.  Source: Slate Star Codex

LINKS

The Brazen Cynicism of the Republican Tax Plan by Doug Muder for The Weekly Sift.

Republicans are weaponizing the tax code by Mike Konczal for Vox.

The Tax Bill Compared to Other Very Expensive Things by Scott Alexander for Slate Star Codex.

Tax havens are big business

November 7, 2017

Research by the economist Gabriel Zucman shows that tax havens are big business.   He concludes that they substantially increase the after-tax income of the top 0.01 percent of the world’s population and that they enable U.S. and other corporations to evade taxes on nearly half their income from foreign operations.

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Offshore wealth as % of GDP.  Source: Gabriel Zucman. Click to enlarge.

Zucman is a respected economist  I’m not able to evaluate his estimates based on my own knowledge, or to meaningfully compare his figures with those of the Tax Justice Network and other sources.   But there’s no doubt that ultra-rich individuals and powerful corporations are able to keep a lot of their wealth hidden from view.

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A new look at the secret hoards of the ultra-rich

November 6, 2017

Remember the Panama Papers?  That was a massive leak of documents from a Panama-based law firm called Mossack Fonsecka, revealing how the world’s richest and most powerful people hid billions of collars in investments from tax collectors and the public.

Now there is another big leak—called the Paradise Papers—from century-old Bermuda-based law firm called Appleby and its Singapore affiliate.

Like the Panama Papers, the anonymous leaker sent documents to a German newspaper called Süeddeutsche Zeitung, which teamed up with the International Consortium of Investigative Journalists, the Organized Crime and Corruption Reporting Project and some of the world’s other top newspapers, and spent a year going through 13.4 million files.

Some of the highlights of what was found:

  • Queen Elizabeth II’s investment manager, the Duchy of Lancaster, invested millions of pounds in a Cayman Islands fund, whose investments included Bright House, a rent-to-own UK furniture company that charged interest rates of up to 99%
  • Secretary of Commerce Wilbur Ross, who divested himself of ownership in 80 companies to avoid conflicts of interest, kept interests in nine offshore companies.  Four of them invested in a shipping company called Navigator Holdings, which did business with a Russian energy and chemical company called Sibur, whose key owners include Vladimir Putin’s son-in-law and a Russian oligarch under U.S. sanctions.
  • Stephen Bronfman, a key fund-raiser for Canadian Prime Minister Justin Trudeau, teamed up with key Liberal Party figures to evade Canadian, U.S. and Isreali taxes.

Major companies shown to do business through tax havens are Apple, Nike, Uber Barclay’s Bank, Goldman Sachs, BNP Paribas and Glencore, the world’s largest commodity trader.

None of this is, in itself, illegal.  But hidden offshore investments provide a way for criminals to launder money and for individuals, companies and governments to evade economic sanctions by the U.S. and other governments.

As several people have remarked, the worst scandals are not how the law is broken, but what can be done that is perfectly legal.

For what it’s worth, I don’t think any of this is evidence that the Russian government or Russian interests manipulated the 2016 elections in favor of Donald Trump,

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A recent history of U.S. taxes

April 17, 2017


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A larger version of these charts, plus explanations, are available by clicking on Average Federal Taxes on a Family of Four and Federal Revenue and Top Tax Rates on the Visualizing Economics blog.   Also of interest—

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Wealth and income inequality in the USA

September 2, 2016

wealth-share

These two charts, courtesy of Prof. David F. Ruccio, show the changing distribution of wealth and income in the USA.  Please keep in mind that while the chart below refers to the top 1 percent of income earners, the chart above refers to the top 1/100th of 1 percent of wealth holders.

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Vladimir Putin and the Panama Papers

April 8, 2016

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One of the Russian Federation’s big problems is that its millionaires and billionaires are sending their money abroad, adding to Russia’s serious economic problems.

Sergey Roldugin, friend of Vladimir Putin

Sergey Roldugin

The fact that the Panama Papers reveal that one of Vladimir Putin’s oldest friends, a cellist named Sergei Roldugin, is the nominal head of offshore companies controlling billions of dollars in assets, is a big deal – especially since Roldugin does not live the life of a millionaire or billionaire.

Putin said back in 2011 that rich Russians who keep their money offshore are unpatriotic.

The Panama Papers are a trove of documents about shell companies registered in tax havens in the files of a Panamanian law firm called Mossack Fonseca.  The documents were leaked about a year ago by an unknown person to a German newspaper, Seuddeutsche Zeitung, which shared them with other publications around the world and with the International Consortium of Investigative Journalists.  They spent a year picking through the material, and published their findings starting last Sunday.

A tax haven is a jurisdiction with low or zero taxes which provides anonymity and protects financial secrecy.  Drew Schwartz of VICE news explained how a tax haven can be used to hide a money trail.

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The selective revelations of the Panama Papers

April 4, 2016

Update 4/10/2016.  In fact some Americans are named in the Panama Papers documents.  And rich Americans and American corporations have ways to hide their wealth without going abroad.  There’s more in the links below.

Trillions of dollars—an enormous fraction of the world’s wealth—is concealed in secret accounts outside the jurisdiction of the nations of which the owners are citizensIt is invisible and inaccessible to criminal investigators, tax collectors, bill collectors and divorcing spouses.

Now the world has a glimpse of some of those secret accounts, thanks to a leak of documents from a Panamanian law firm, Mossack Fonseca, to a German daily newspaper, Sueddeutsche Zeitung.  Mossack Fonseca specializes in registering corporations in tax havens.  The leaked documents had information on more than 214,000 companies and 140 world leaders.

The staff of Sueddeutsche Zeitung and the International Consortium of Investigative Journalists spent a year sifting through the leaked documents, and shared their information with other news organizations.

blog_panama_papers_countries

Interestingly few if any of the leaked documents implicated Americans or American corporations.  Maybe Americans don’t happen to use Mossack Fonseca to register their companies.  Or maybe there is more information yet to be revealed.  Or maybe somebody had a hidden agenda.

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Who would be hit by the candidates’ tax plans?

March 7, 2016

blog_tax_income_gain_rubio_trump_cruz_clinton_sanders

Source: Kevin Drum.

Analysts for the Tax Policy Center, which previously analyzed the Rubio, Cruz, Trump and Clinton tax plans, released its analysis of the Sanders tax plan on Friday.

What it shows is that the Republican candidates would reduce taxes for everybody, but mainly for the rich, and the Democratic candidates – Bernie Sanders much more than Hillary Clinton – would increase taxes for everybody, but mainly for the rich.

Other things being equal, tax cuts are better than tax hikes, and low taxes are better than high taxes.  The issue is how necessary are the things that the taxes go to pay for.

The Republican candidates’ argument is that much government spending is wasteful and unnecessary, and that the important think is to allow wealthy people to accumulate capital.  Economic growth created by private investment will be best for the country in the long run.

Bernie Sanders’ argument is that the country has huge unmet national needs, and that tax increases are necessary to pay for them.  Economic growth created by government investment will be best for the country in the long run.

Also, Sanders claims that average Americans will save more on reduced premiums and co-pays under his Medicare-for-all single-payer health plan than they will pay in increased taxes.

Hillary Clinton is somewhere in between, but closer to Sanders than she is to Trump, Cruz or Rubio.  She is probably more concerned about fiscal responsibility and balanced budges than the other four.

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Trump, Sanders and the 1 percent

March 6, 2016

populist&plutocratmarch-2016-infographic

Hat tip to Too Much.

States that depend the most on federal aid

January 19, 2016

tax_foundation-e1452228385153

I am not surprised that Mississippi and Louisiana are the states that depend on the federal government the most to support their state budges.

I am somewhat surprised that Hawaii and North Dakota at the states that depend on the federal government the least.

Where the living is expensive (and not)

August 11, 2015

$100Map

This Tax Foundation chart indicates that the cost of living is higher in New York state, where I live, than anywhere else in the USA except the District of Columbia and Hawaii.   The lowest cost of living is in Mississippi.

It’s measured by the relative value of goods that $100 can buy in each state.  The lower the figure, the higher the cost of living, and vice versa.

What I infer from the chart is that cost of living is influenced by high taxes, which makes everything more expensive, and by prosperity and by concentrations of rich people, which bid up prices.

I think these things is true of the District of Columbia and of New York City and its suburbs.   The cost of living might not be that high here in Rochester, N.Y., where I live.

What I also infer from this chart is that a low cost of living is correlated with a bad economy.  So I wouldn’t want to live in a place where the cost of living was extremely high or extremely low.

I suppose the reason the cost of living is so high in Hawaii is that everything must be shipped in from the mainland.  But why isn’t the cost of living proportionately high in Alaska?  I suppose the reason is low taxes.  Alaskans tax the oil industry and not each other.

IRS budget cuts are bad for honest taxpayers

April 15, 2015

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The Internal Revenue Service is less and less able to serve the public well because of budget and staff cuts imposed by a Republican-dominated Congress.

Nobody likes to pay taxes—I certainly don’t—but IRS employees don’t write the tax laws.  Their responsibility is to collect the taxes, without which the government couldn’t function.

When Congress cuts the IRS budget, it means that the IRS is less able to serve honest taxpayers and to audit and collect from dishonest taxpayers.

If the process of filling out income tax forms is overly complicated, only Congress has the authority to simplify the tax code.

Some of the recent IRS scandals have been bogus, some real, but the way to deal with a real scandal is to fire the people responsible, not to hamstring the agency as a whole.

This starts a cycle, which may be intentional, in which Congress supposedly punishes an agency for bad performance by cutting its budget, which results in worse performance, which generates more punishment, and so on.

LINKS

An Emotional Audit: IRS Workers Are Miserable and Overwhelmed by Devin Leonard and Richard Rubin for Bloomberg Business.  (Hat tip to Mike the Mad Biologist)   This is the source of the charts.

The IRS sucks because Republicans made it suck by Joan McCarter for Daily Kos.  (Hat tip to Mike the Mad Biologist)

The truth about President Obama’s budget

February 5, 2015

I like to write good things to write about President Obama.  It helps me to convince myself that I am a fair-minded person, and also convince my friends, most of whom are supporters of the President.

But usually when I do, it turns out there is a catch.  I feel as if I were Charlie Brown in the comic strip once again trusting Lucy to hold the football so he can kick it.

I wrote a post the other day praising the President for budget proposals, which contained some modest tax increases on the upper income brackets and some modest benefits from working people.

But now I realize I missed important parts—more spending for the military, tax reductions for the rich and cuts to Medicare.

Andre Demon, writing for the World Socialist Web Site, pointed out:

Obama’s budget proposal would increase Pentagon spending by 7 percent, adding an additional $38 billion to bring the total defense budget to $534 billion. 

Obama is separately proposing $51 billion in additional funding for the wars in Iraq and Syria, including money to back the so-called “moderate” opposition in Syria, as well for as the ongoing US troop presence in Afghanistan.

Newsweek - Obama - The Democrats ReaganThe budget calls for the corporate tax rate to be cut to 25 percent for manufacturers and 28 percent for other corporations, down from the current rate of 35 percent.

The proposal would also allow US corporations to repatriate past profits generated overseas at a tax rate of only 14 percent.  Foreign profits would be taxed at 19 percent in the future. 

Currently, US corporations pay a rate of 35 percent on foreign profits, which many corporations avoid by keeping their foreign earnings abroad.

These tax cuts are accompanied by $400 billion in cuts to Medicare, Medicaid and the Department of Health and Human Services. 

The budget proposes to raise $66 billion over ten years by charging higher Medicare premiums to upper-income patients, a move that would undermine Medicare’s status as a universal entitlement and open the door to means testing and the transformation of the government health insurance program for seniors into a poverty program.

The plan would cut another “$116 billion in Medicare payments to drug companies for medicines prescribed for low-income patients,” according to the New York Times. 

It would also slash $100 billion for the treatment of Medicare patients following their discharge from the hospital, affecting primarily the elderly.

via World Socialist Web Site.

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Obama’s tax plan: Better now than never

January 19, 2015

When Barack Obama ran for President, he promised lower taxes on the American middle class and higher taxes on the super-rich.  Public opinion polls show most Americans favor this.

Barack_Obama_Hope_posterNow, in the seventh year of his Presidency, Obama has a new tax plan that will do just that—reduce taxes by $175 billion on working people and increase taxes by $320 billion mainly on holders of financial assets.

It’s not a radical plan, but it’s almost certain to be opposed by Republicans in Congress, and that will make a good campaign issue for Democrats in 2016.

The cynic in me wonders why the President didn’t introduce this in 2009 when Democrats had majorities in both houses of Congress, and there was some possibility it would be enacted.

But the pragmatist in me thinks it is a good thing to get politicians and the public talking about tax justice even if it doesn’t result in legislation on the first try.

∞∞∞

President Obama finally has his Piketty moment by Matt O’Brien for the Washington Post.  Hat tip to Cannonfire.

Five things about Barack Obama’s Robin Hood tax plan by Brian Faler for Politico.

‘Entitlements’ and welfare: the difference

December 2, 2014

There’s a big difference, easy to not notice, between “entitlements”, such as Social Security and Medicare, and “welfare”, such as Temporary Assistance to Needy Families.

Social Security and Medicare are paid for through special earmarked funds, which the people who benefit from these programs pay into.  They are different from welfare programs, which are paid for through general tax revenues, mainly the income tax.

Gary Flamenhaft, a guest poster on the Club Orlov web log, has a good explanation of how this works.

Some people criticized my claim about the Tea Party’s reason for shutting down the government: “They thought that the welfare system is bankrupting the country.  This is a laughable claim, because welfare spending looks negligible when compared to military spending.”

They pointed to the $850 billion Social Security program, the $821 billion Medicaid and Medicare program, and the $521 billion in other mandatory programs, calling them “welfare.”

There is just one problem with this critique: none of these programs are funded using the income tax. They are called entitlements, and the way you entitle yourself to them is by paying into them using a special payroll tax. Same goes for unemployment insurance, by the way.

entitlements720All of these are funded using something that is called a tax, but in essence they are joint savings accounts that you hold in common with many other people, with some rules on how the money is then spent on those who have paid into them.

Clearly, the Tea Party doesn’t like these joint savings accounts either.  We still need to distinguish them from “welfare,” or we won’t even know what we are talking about.

If you are not aware of this, the employer and employee each pay half of the payroll tax to the government, although if you are self-employed—lucky you!—you get to pay both halves.  [snip]

If you look at the US budget, on Table S-4 p. 168, you will see the distinction between mandatory programs paid by payroll tax and “appropriated” programs paid by income tax. There may be some overlap, but this gives you a general idea:

  • Subtotal, mandatory programs: $2,234 billion.
  • Subtotal, appropriated programs: $1,174 billion.

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Thomas Piketty on democracy and capitalism

May 16, 2014


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Does Earth have a trade deficit with Mars?

May 1, 2014
National trade deficits and surpluses.  Source: Wikipedia

Cumulative trade surpluses or deficits, 1980-2008, in billions of dollars. Source: Wikipedia. Double click to enlarge.

Among the world’s rich countries, the United States has a continuing trade deficit, Germany and Japan have continuing trade deficits and the other rich countries move up and down, slightly above and slightly below the break-even point.  But the French economist Thomas Piketty, in his new book, Capital in the Twenty-First Century, pointed out that, if you add them all up, the rich countries as a group have a trade deficit.

Are the rich countries in debt to the poor countries?  No, said Piketty.   If you lump all the poor countries together, they, too, have a combined trade deficit.

Mars-3In other words, the whole Earth has a trade deficit.  But according to basic economic theory, any nation’s deficit is a surplus for some other nation or group of nations.   Could this mean that Earth has an unfavorable trade balance with Mars?

No, Piketty said.  The problem is that not all the world’s trade is accounted for — in particular, the trade that winds up in hidden accounts in the world’s tax havens.  If it was known how much it is, and who owns it, we probably would realize that the world’s super-rich hold an even higher percentage of the world’s wealth than we think.

One of the benefits of a global tax on capital would be to bring this hidden wealth to light, he said.  Even if you don’t accept the idea of a tax on capital, there is a need for international cooperation on financial reporting and prevention of tax evasion.  World trade treaties, instead of protecting international corporations from national governments, should provide for sharing information on wealth, and for boycotting jurisdictions that don’t meet international standards for reporting.

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Protecting wealth vs. promoting growth

April 30, 2014

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There’s no single principle that explains everything, but there is great explanatory power inn the French economist Thomas Piketty’s idea that inequality always increases whenever the rate of return on investment exceeds the rate of growth of the economy, that is, when r > g.

piketty-saez-top10aThis is not something that results from impersonal economic forces.  During the past 30 years, the policy of the U.S. government, and of governments that follow the U.S. lead, has been to prioritize return on investment over economic growth.

The U.S. Congress and many state governments are in the process of cutting back scientific research, education, maintenance of public works and other things that are needed for our nation’s economic future, in order to keep tax rates low for corporations and upper bracket taxpayers.

These are the same “austerity” policies being enforced by the World Trade Organization, International Monetary Fund and European Central Government on vulnerable governments, which are forced to sacrifice the well-being of their citizens in order to satisfy powerful financial institutions.   In both cases, there is a tradeoff to sacrifice economic growth in order to maintain returns on investment.

top1%sharechart-02One part of austerity is to sell off government property at bargain rates and delegate public services to corporations.  Most of the time this amounts to a transfer of wealth from taxpayers to well-connected business owners, who have no financial incentive to maximize service.

Some other ways that government policy fosters investor income at the expense of economic growth are (1) bailing out banks that have failed due to reckless financial speculation, (2) refusal to prosecute financial fraud by the “too big to fail” banks or claw back profits due to fraud, (3) expansion of patent and copyright monopolies, (4) failure to regulate cable and telecommunications laws, (5) failure to enforce antitrust laws, (6) the ban on student loan refinancing or bankruptcy …. The list goes on.

Increasingly corporate management seeks profit not by increasing the size of the economic pie, but by giving investors and executives a larger part of the pie — through financial manipulation and excess fees in the case of banks, through driving down wages and increasing executive compensation in the case of corporations in general.  I don’t say all corporate managers behave in this way.  I say that this has become common and acceptable.

the-top-01-of-americans-get-a-near-record-amount-of-income-at-around-10The result has been a concentration of wealth and income in a tiny minority of the population, and economic stagnation for everybody else.   So the first step in reducing inequality is to stop promoting it.

Piketty’s preferred solution to undue concentration of wealth is a progressive tax on capital, sufficient to prevent the wealth of the economic elite from expanding at a faster rate than the economy as a whole, along with progressive taxes on income and inheritance.  I don’t object to any of these, but higher taxes on the rich do not, in and of themselves, benefit the middle class, wage-earners or the poor.   I think it is more important to  strengthen labor unions, raise the minimum wage, maintain essential public services and invest in the future.

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Social Security backs down on debt collection

April 15, 2014

The U.S. Social Security Administration, criticized for seizing tax refund checks without notice based on debts of the taxpayers’ deceased parents, said it will stop trying to collect debts more than 10 years old.

That’s good first step. How about promising to use due process of law before trying to collect any debts? And how about observing the legal principle that children are not responsible for the debts of their parents?

http://www.washingtonpost.com/politics/social-security-stops-trying-to-collect-on-old-taxpayer-debts/2014/04/14/9355c58e-c40f-11e3-bcec-b71ee10e9bc3_story.html

Piketty’s formula: its scope and limits

April 4, 2014

Source: Emmanuel Saez and Garbriel Zucmanhttp://www.hup.harvard.edu/features/capital-in-the-twenty-first-century-introduction.html

http://www.yjs.fi/wp-content/uploads/2013/12/Thomas-Piketty-pres..pdf  [Thomas Piketty’s Power Point presentation]

http://gabriel-zucman.eu/files/SaezZucman2014Slides.pdf

http://www.slate.com/blogs/moneybox/2014/04/02/wealth_inequality_is_it_worse_than_we_thought.html

The brilliant French economist Thomas Piketty has an economic formula which shows why, most of the time, the wealthy elite captures a larger and larger share of a nation’s income, and also why, some of the time, the rest of the nation catches up.

pikettybookcover00While my previous post about Piketty and his great book was long, I didn’t really explain his formula and how it works.

His formula, which he calls the fundamental law of capitalism, is as follows:

The capital income ratio (a) equals the rate of return on capital (r) times the national wealth (beta*),

That is, if the national wealth – every form of property that can produce an income for its owner, which is what Piketty calls capital – is six times, or 600 percent, of the nation’s annual output, and the average rate of return on capital is 2 percent, then owners of capital will receive 12 percent of the nation’s income in that year.

If a nation’s annual income is static and the owners of capital reinvest some of their income, then capital will be a larger multiple of the national income the following year, and the owners of capital will receive a larger share of national income.  If a nation’s annual income is growing, but the return on investment is a higher percentage than the growth rate, the owners of capital will get a larger share of national income the following year.

Once this is explained, it seems obviously true – at least to me.   And it seems to be a problem – at to me.   The graph above, prepared by Emmanuel Saez of the University of California (Piketty’s long-term collaborator) and Gabriel Zucman of the London School of Economics, shows how unequally wealth is distributed in the USA.  More than 1/5th of U.S. wealth is owned by 1/1000th of the population.  It is easy to see how the normal working of Piketty’s formula could cause them to suck up more and more of the nation’s income.

Thomas Piketty

Thomas Piketty

What do you do about it?   Piketty proposed graduated taxes on income, inheritance and wealth itself, sufficient to bring return on investment down to the rate of economic growth. 

I don’t see anything wrong in principle with a wealth tax.   I pay a property tax on my house.  Why shouldn’t a billionaire pay taxes on his investment portfolio?    But this is going to take a long time to bring about, even if everybody agrees.  For one thing, it will require the elimination of all the tax havens where the super-rich hide their money, which will require international agreement.  For another, increasing the government’s revenue does not necessarily benefit the public – if taxes are used to finance aggressive war, for example.

There are other possible solutions, because there are other factors in the equation.  If strong economic growth can be restarted, if the economic growth rate exceeds the return on investment rate, that would solve the problem.   Strong labor unions and minimum wage laws would increase the income share of working people and the middle class.   There are many possible approaches.

In theory, the solution could be wider ownership of capital by the public, such as by ESOPs (employee stock ownership plans) or by pension funds.  Back in the 1970s, the management analyst Peter Drucker noticed that pension funds were acquiring a bigger and bigger share on the U.S. stock market.  Eventually, he predicted, this would accomplish the Marxist dream of worker ownership of the means of production!

This didn’t happen because the corporations that controlled the pension funds didn’t allow it to happen.  But if workers controlled their pension funds, it would be a different story.  This would not be a practical reality any time soon, or perhaps ever.  The point is that tax policy is not the only means to deal with hyper-concentration of wealth.

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Why the rich will probably get richer

April 2, 2014

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CAPITAL IN THE TWENTY-FIRST CENTURY by Thomas Piketty (2013) translated by Arthur Goldhammer (2014)

Thomas Piketty of the University of Paris is the world’s foremost authority on income distribution and the super-rich. All the charts you see how income is being redistributed upward to the top 1 percent of income owners are based on work by him and his collaborators. In this new book, based on 20 years’ work, he concluded that it is not an aberration that ever-greater shares of income go to a tiny elite. Piketty said this is the natural working of a market system.

According to Piketty, the higher you go on the income scale, the larger the amount of income comes from investments rather than work. When the economic grows at a higher percentage rate than the average rate of return on investment, income becomes more widely distributed. When the average rate of return on investment is greater than the rate of economic growth, the owners of economic assets gain at the expense of everybody else.

His research is based on 200 years of data on income and wealth distribution in France, the UK, the USA and other countries, which now can be analyzed and processed with computer technology. His book would be a good supplement to David Graeber’s Debt: the First 5,000 Years, whichi is sketchy on precisely the past two centuries.

Piketty concluded that the average rate of economic growth since 1800 is about 1 percent a year for the countries he studied, and the average rate of return on investment is about 4 to 5 percent a year. Unless something happens to change one or the other figures, a wealthy elite will grow richer and richer at the expense of everyone else, until there is nothing left to invest in.

pikettybookcover00Piketty defines “capital” as anything you can own that will generate income. In the late 18th and early 19th centuries, capital (by his definition) consisted mainly of agricultural land and government bonds. Now it consists mainly of housing, industrial machinery and stocks and bonds of private corporations. Few economists would define “capital” in so broad a way, but if all you’re interested in is income distribution, it doesn’t matter what form “capital” takes.

If you read English and French novels set in the early 19th century, the characters consist mainly of members of what Piketty calls the “dominant” class, which are the 1 percent of the population who receive 30 to 60 times the average income, and the “well-to-do”, who consist of the next 9 percent. Characters in Balzac and Jane Austen seek wealth through inheritance, marriage and patronage of wealthier and more powerful people. Nobody in those novels thinks that wealth is acquired through hard work and superior talents. Piketty said there is nothing to prevent a reversion to this kind of world, although the difference between wealth and poverty wouldn’t be quite so extreme.

The reason the history of the 20th century was different, he wrote, is the great destruction of capital during the two world wars and the Great Depression. This cleared the deck for the great surge in prosperity of 1945-1975, which benefited all segments of the population. Since then, according to Piketty, the growth in income has been sucked up by the dominant and well-to-do classes.

Now I don’t think that someone born in 1900 would have thought the prosperity of 1945-1975 justified the catastrophes of 1915-1945. This points to an important limitation of Piketty’s book. It is full of fascinating information, drawn from a wide variety of sources, ranging from centuries of income and property tax records to social history, economic theory, literature and financial

Thomas Piketty

Thomas Piketty

journalism. But when it comes right down to it, he deals with only one subject, the income share of the super-rich. He doesn’t have theories on how to eliminate poverty, promote economic growth, set priorities for public investment or any other important objective. This is not a criticism. It is just a description of what the book is and isn’t about.

His one subject – which is important – is the economic elite and how, short of violent revolution, to prevent from sucking up an undue share of society’s wealth and income. But as the experience of 1915-1945 shows, destroying the power of capital does not, in and of itself, make things better for everyone.

Piketty focuses on data from France and the UK because the United States is, in good and bad ways, exceptional compared to the rest of the world. During the past 200 years, the boundaries of France remained roughly the same and population grew from 30 million to 60 million. During the same period, the United States expanded from a narrow strip along the Atlantic to the Pacific coast, and its population grew from 5 million to 300 million.

Income distribution in the United States historically has been more equal than in Europe, he noted, at least for white men in the Northern states. The chief form of capital in the early United States was agricultural land, and this was very cheap compared to Europe. Early settlers and immigrants brought little wealth with them. What they created was the fruit of their labor. A great deal of the capital for building U.S. factories and railroads came from European investors. The great American hereditary fortunes did not emerge until the dawn of the 20th century.

The South was different from the North because the economic elite possessed enormous capital in the form of enslaved human beings. Piketty estimated that in the 1770-1810 period, the economic value of slaves in the South exceeded the value of all land, housing and other forms of wealth, and also exceeded the total wealth of the North. The result was a high concentration of wealth, and a large gap between rich and poor white people, which persists to this day.

Differences in earned income, while great in all countries, have seldom been as important as differences in income from wealth. The exception is the surge in corporate compensation in the United States and other English-speaking countries in the last generation. Piketty showed, by means of international comparisons, that the current size of executive compensation cannot be justified on the basis of merit or results. It is the result of executives being able to influence their own pay, and the lack of standards as to how much is enough.

The disturbing fact about investment income is that the more you have of it, the higher your rate of return. Piketty compared the returns on endowment funds of American universities, which are a public record, by size categories. The larger the fund category, the higher the percentage return, with Harvard by far outpacing all the rest.

This is because the larger the fund, the more the owner can afford to get expert investment advice, and the better able the owner is to invest small amounts in high risk, high return investments. Also, unlike an individual who has saved for retirement, the super-wealthy person or institution does not have to take out a significant percentage to live on.

The implication is that once you reach a certain level of wealth, your wealth becomes self-sustaining. A Bill Gates or a Steve Jobs can simply coast. He not longer needs the entrepreneurial drive that brought him success in the first place. Piketty’s analysis of the Forbes 400 list indicates that inherited wealth is at least as important as entrepreneurial wealth, and he thinks Forbes vastly underestimates income from passive investments because of lack of access to tax havens.

Piketty’s solution is a tax on capital – which, remember, is by his definition any form of income-producing property – sufficient to bring the average return on investments down to the expected rate of economic growth. He pointed out that some forms of wealth, such as real estate and buildings, already are taxed. In principle, taxing stock portfolios is no different.

Since the average rate of return is greater for greater wealth, his proposed tax would be graduated, with a zero or 0.1 percent rate for fortunes below 1 million euros and perhaps rising as high as 2 percent above 5 million. These don’t seem high, but they are high compared to expected rates of return. He also favors continuation of the graduated income tax and inheritance taxes. His purpose is not to prevent people from getting rich. It is to prevent the rich as a group from getting richer at a faster rate than the economy is growing.

The revenue from the wealth tax should be spent in reducing government debt, which Piketty sees as a transfer of income from taxpayers to wealthy holders of government bonds. It is better to tax the rich than borrow from them, he said.

Piketty’s proposals require much better information about wealth and income than we have now. The first step would be for the international community to require reporting of financial information from places such as Switzerland and the Cayman Islands that act as tax havens.

The 577-page book and the 76 pages of notes are crammed with information of interest even to those who don’t accept his basic argument. It is not written in technical language, which is part of the reason it is so long; Piketty, like the late Isaac Asimov, explains everything from the groun up.  If you don’t have time to read the whole book, his core argument can be found in the Introduction or Conclusion.  Or click on some of the links below.

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Taxes, welfare and Alan Greenspan

January 17, 2014

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Alan Greenspan, the former chair of the Federal Reserve Board, believed that the key to increasing a nation’s wealth is investment.  Every dollar that was collected in taxes on rich people and corporations and spent on unemployment compensation, food stamps and free health care was, in his view, one less dollar available for investment.  So he favored lower taxes on the rich and less spending on the poor.  We now know how this worked out.

American corporations are stuffed with cash, and the Federal Reserve System has pumped trillions more in cash into the big banks through its “quantitative easing” program.  But the U.S. economy, and to some extent the world economy is stalled, because of the lack of buying power of the American middle class.  That buying power was sustained in earlier eras by rising earnings, and then by rising participation in the work force and rising debt.  But all of these have run their course.  No rational business will increase production unless there is a good market for the product.

Click on Alan Greenspan’s ‘The Map and the Territory’ review by Robert Solow for a more in-depth discussion of this issue.

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We Americans are writing off the future

November 11, 2013

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The United States will not have a good future unless we Americans today invest in schools, scientific research and physical infrastructure.  The top chart shows how much less we spend today, as a fraction of our national wealth, than an earlier generation did immediately following World War Two.  The “gross” investment is total spending on the future; the “net” investment is what was spent over and above what was needed for maintenance of what we had.

The bottom chart shows the projections of the various budget plans before Congress.  Only the “Congressional Progressive Caucus” proposes an increase in investment.

I don’t have a target figure of what percentage of GDP we ought to be investing in the future, but I think that the “net” figure on the first chart ought to be greater than 1 percent.  It is perilously close to a minus figure, which means we are not spending enough to keep up with deterioration.

The United States as a nation invests a lot in improving our technology for surveillance and waging war.  We need science, education, transportation and communication, and we ought to be investing in that as well.

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The USA is a low-tax country

October 3, 2013
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Click to enlarge.  “This year” in the captions is 2011.

I don’t advocate taxes for the sake of raising taxes or reducing the incomes of rich people.  But I do think that taxes should be high enough to cover the normal cost of operating the government, and I don’t think Americans should rule out a modest tax increase as a contribution to balancing the budget.

These charts were created by the Center for American Progress two years ago, but the situation they depict hasn’t changed since then.

The tax reductions proposed by President George W. Bush had an expiration date.  That is unusual, and was done for a reason.  Some people in Congress worried about the impact of cutting taxes in the midst of war, and voted for the tax reduction as an experiment, so see how it worked out.

Well, we know the result of the experiment.  It was one of the two main reasons, along with the economic recession, that the government is so much in the red now.   Returning to Clinton-era taxes, eliminating unnecessary government programs and growing the economic are not mutually exclusive.  We should do all three.

Bush, Obama and the federal deficit

October 2, 2013

deficits-since-2000The great economist, John Maynard Keynes, said that governments should set taxes and expenditures so that they run a surplus when times were good and a deficit when times are bad, but balance over the period of the economic cycle.   This is much like the advice that Joseph gave to Pharaoh in the Bible.

The Clinton administration, with maybe some nudging from Republicans in Congress, followed that advice.   Bill Clinton was lucky in his timing.  He came into office at the start of an economic recovery and got out before the next crash.

The boom in itself helped bring the government’s budget into balance.  Tax revenues increased, and it was easier to cut spending.  Clinton made good use of that opportunity.  A commission headed by Vice President Al Gore streamlined the government so that, at the end of his administration, there was less spending (in inflation-adjusted dollars) and fewer civilian employees [1] than at the beginning.

Clinton persuaded Congress to increase taxes [2] by a few percentage points, which also helped.  Taxes still were low compared to what they were prior to the Reagan era.

I don’t think increasing taxes makes it easier to spend money.  On the contrary, the fact that it is necessary to pay for what is spent creates an incentive to avoid unnecessary spending.

President George W. Bush changed this.  He persuaded Congress to cut tax rates while launching an expensive war.  Nevertheless, the economic recovery during his administration brought the federal budget closer to being in balance, until the crash.

Notice that a fiscal year starts on October 1 of the previous year.  Thus fiscal 2001 began on Oct. 1, 2000, and fiscal 2009 began on Oct. 1, 2008.  This means the first Bush budget was in 2002 and the first Obama budget was in 2010.

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In 2010, the first Obama budget, the federal budget deficit began to close.  Maybe the need to appease Republicans in Congress had something to do with this.  Maybe the decrease is not enough since, even though the deficit is being reduced, it still exists and the debt in cumulative.   I won’t argue either point.

What I will argue is that if budget balance is your main priority, the Clinton era shows how to do it.  Cut unnecessary spending, raise enough taxes to cover the rest and hope for economic growth.

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