The real AIG fraud

There is one thing that I have learned about politics: when the political ruling class is in a big lather about something and screaming loudly for retribution and action, that means the real action is taking place elsewhere, in secret, and that all the fuss is to distract attention from the real scandal. This rule of thumb has never failed me, although sometimes it takes a while to find out what the true story is.

This instinct immediately kicked in when all the ballyhoo began about the $165 million in bonuses being paid to some AIG executives. This is just 0.1% of the money paid out (so far) to AIG and when I saw all the politicians getting into fits of righteous indignation, holding Congressional hearings, calling these executives all kinds of names, demanding the bonus money back, and threatening to use subpoenas and punitive laws to do so, I felt at once that it was all a smokescreen although I did not know what the smoke was covering. But I knew that soon enough, more knowledgeable people would reveal the truth, even though it would not get major coverage in the mainstream media, because the latter is a necessary part of the smoke-generating machine, and dutifully play their role by giving extensive coverage to all the grandstanding, while not investigating the real news.

Some new articles reveal what is actually going on. To understand what they say, you need to know that the term ‘counterparties’ refers to those firms that owned assets of dubious value that AIG had ‘insured’ against loss from their face value. (Note: I have explained before that this was not technically insurance, which is a highly regulated industry, but was essentially an unregulated scheme of private bets.) The taxpayer bailout money to AIG was used to pay off those obligations. But despite using public money and despite the government now owning nearly 80% of its shares, AIG had the nerve to refuse to reveal to the public the names of the companies that it had paid out money to and for what, leading to suspicions that, rather than protecting taxpayer interests, they had deliberately overvalued those assets in order to bail those companies out from their bad decisions. They finally revealed at least the names on Sunday night, a time when companies and governments release bad news hoping the public is not paying attention.

After months of stonewalling, government-controlled American International Group (AIG) finally revealed the names of the counterparties that were funneled $108 billion in taxpayer funds. The largest recipients of AIG bailout funds were European banks, Wall Street firms and, to a lesser degree, municipal governments.
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The fundamental concern is that favored firms may have been overpaid for assets using a large chunk of AIG’s $170 billion bailout package. Though it is now known who the counterparties are, AIG refused to itemize what exactly it is each of them brought to the table. As a result, it’s impossible to know if some firms got better deals than others, or if taxpayers got a raw deal all together.

Eliot Spitzer explains in Slate what is going on:

Everybody is rushing to condemn AIG’s bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already. (my italics)
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The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

Spitzer then goes on to ask some very pertinent questions about all the cozy insider dealing between AIG, Goldman Sachs, Paulson, Geithner (who has replaced Paulson as Treasury Secretary), and Benanke. He says that those questions should be asked under oath.

Economist Michael Hudson sheds more light on the deal:

Here’s the problem with all the hoopla over the $135 million in AIG bonuses: This sum is only less than 0.1 per cent – one thousandth – of the $183 BILLION that the U.S. Treasury gave to AIG as a “pass-through” to its counterparties. This sum, over a thousand times the magnitude of the bonuses on which public attention is conveniently being focused by Wall Street promoters, did not stay with AIG. For over six months, the public media and Congressmen have been trying to find out just where this money DID go. Bloomberg brought a lawsuit to find out. Only to be met with a wall of silence.

Until finally, on Sunday night, March 15, the government finally released the details. They were indeed highly embarrassing. The largest recipient turned out to be just what earlier financial reports had rumored: Paulson’s own firm, Goldman Sachs, headed the list. It was owed $13 billion in counterparty claims. Here’s the picture that’s emerging. Last September, Treasury Secretary Paulson, from Goldman Sachs, drew up a terse 3-page memo outlining his bailout proposal. The plan specified that whatever he and other Treasury officials did (thus including his subordinates, also from Goldman Sachs), could not be challenged legally or undone, much less prosecuted. This condition enraged Congress, which rejected the bailout in its first incarnation.

It now looks as if Paulson had good reason to put in a fatal legal clause blocking any clawback of funds given by the Treasury to AIG’s counterparties. This is where public outrage should be focused.

Instead, the leading Congressional shepherds of the bailout legislation – along with Obama, who came out in his final, Friday night presidential debate with McCain strongly in favor of the bailout in Paulson’s awful “short” version – have been highlighting the AIG executives receiving bonuses, not the company’s counterparties.
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[What do] Sen. Schumer, Rep. Frank, Pres. Obama and other Wall Street sponsors gain from this public outcry? For starters, it depicts them as hard taskmasters of the banking and financial sector, not its lobbyists scurrying to execute one giveaway after another. So the AIG kerfuffle has muddied the water about where their political loyalties really lie. It enables them to strike a misleading pose – and hence to pose as “honest brokers” next time they dishonestly give away the next few trillion dollars to their major sponsors and campaign contributors.
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The uproar about AIG bonuses has effectively distracted attention from the AIG counterparties who received the $183 billion in Treasury giveaways. The “final” sum to be given to its counterparties has been rumored to be $250 billion, do Sen. Schumer, Rep. Frank and Pres. Obama still have a lot more work to do for Wall Street in the coming year or so.

To succeed in this work – while mitigating the public outrage already rising against the bad bailouts – they need to strike precisely the pose that they’re striking now. It is an exercise in deception.

The moral should be: The larger the crocodile tears shed over giving bonuses to AIG individuals (who seem to be largely on the healthy, bona fide insurance side of AIG’s business, not its hedge-fund Ponzi-scheme racket), the more they will distract public attention from the $180 billion giveaway, and the better they can position themselves to give away yet more government money (Treasury bonds and Federal Reserve deposits) to their favorite financial charities.
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The money can be recovered. And that’s just what Mr. Schumer, Mr. Frank and others don’t want to see the public discussing. That’s why they’ve diverted attention onto this trivia. It’s the time-honored way to get people not to talk about the big picture and what’s really important.

Barack Obama, Barney Frank, Charles Schumer, and other leaders of both parties are busy grandstanding about the bonuses to hide the fact that they are complete shills for the finance industry and that they have colluded in the outrageous giveaway of huge sums of taxpayer money to the big financial firms, using AIG as the conduit. It is basically a money laundering scheme, to hide the real beneficiaries, the big financial interests that both parties serve.

Our pro-business, one-party government at work, serving the needs of the people they really care about.

POST SCRIPT: Monkey business

Researchers find that some monkeys seem to teach their young children how to floss their teeth. This is remarkable because the ability to consciously teach others how to use tools properly is thought to be a capability that only the human species possesses.

In the name of Galt, go!

Yesterday, I wrote about the predictable opposition of the low-tax/no-tax zealots to the implementation of the sunset clause that will at the end of 2010 revert the tax rates to its 2000 values.

The most bizarre feature of this opposition has been those who are threatening to ‘go Galt’. Apparently they are taking their cue from John Galt, the hero of the Ayn Rand 1957 novel Atlas Shrugged, who inspired all the allegedly talented people, the leaders of business and arts and inventors and scientists, to show their disgust with the government burdening them with regulations and ‘taking’ their money in taxes for society’s benefit, by abandoning their prosperous careers and going on strike, even withdrawing to a remote enclave in Colorado called Galt’s Gulch. By withholding their talents from society, they caused society to crumble, teaching it the harsh lesson that the very gifted and talented must be left unfettered and tax-free so that their ambition is not shackled and their genius can flourish and thus society as a whole benefits.
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Phony tax arguments

I do my own taxes. They are not that complicated and the tax forms and instructions provided by the IRS are pretty clear and straightforward.

Basically, the system for most individuals is that you add up all your income to get your gross income, then subtract all the allowable deductions (personal and dependent deductions, state and local taxes, home mortgage interest, IRA and charitable contributions, etc.) and you are left with what is known as your taxable income. At the very least, a single person in 2008 would be able to claim the standard deduction of $5,450 and one personal exemption of $3,500, meaning that their taxable income would be $8,950 less than their gross income. If they put away another $5,000 in an IRA savings account, their taxable income gets further lowered by that amount and they pay even less in taxes.

In 2008, for a single person, the tax is computed as follows (see page 80):

On the amount of your taxable income that is $8,025 or less, you pay 10% of the amount.
On the amount over $8,025 and less than or equal to $32,550, you pay 15%
On the amount over $32,550 and less than or equal to $78,850, you pay 25%
On the amount over $78,850 and less than or equal to $164,550, you pay 28%
On the amount over $164,550 and less than or equal to $357,700, you pay 33%
On the amount over $357,700, you pay 35%

The size of each income tax bracket is adjusted each year for inflation.

This is what is meant by a progressive tax code, that the percentage of income that is taxed goes up the higher the bracket in which your top income level is. Your marginal tax rate is the percentage that is taxed on that portion of your income in the highest bracket. So the marginal rate for someone earning $50,000 is 25% (meaning that the portion of income over $32,550 is taxed at 25%), while for someone earning $250,000 it is 33%.

Because of this progressive structure, the actual percentage of your gross income that goes as taxes is much less than your marginal rate. For example, a single person who earns a gross income of $50,000 pays less than 11% of their gross income in taxes, even though their marginal rate is 25%, while a single person who earns a gross income $100,000 pays only about 18% of their gross income in taxes (assuming they take the standard and personal and IRA deductions) although their marginal rate is 28%. So when people say that they are ‘in the 25% tax bracket’, they are merely talking about their marginal tax rate, not the effective rate at which their entire income is taxed.

This is an important distinction between marginal and effective rates that some anti-tax advocates like to blur, by suggesting that small increases in marginal rates are a disincentive to earning, and that it makes good economic sense to limit your earnings so that you stay at a lower marginal rate. It is never the case that, by raising your taxable income so that you move into the next higher marginal tax rate, you will lower your after-tax income.

If you were earning $78,850 dollars (and thus your marginal rate was 25%), and by doing a little extra work you earned $1 more and that pushed you into the 28% marginal rate, only that last dollar would be taxed at the 28% rate, with all the other income unaffected. Your take home income would still increase by 72 cents. If you earn more, you get to keep more.

So-called ‘flat tax’ proposals, in which all income is taxed at the same rate, is regressive. The so-called ‘payroll taxes’ such as Social Security and Medicare are regressive taxes since they are flat taxes of 6.2% and 1.45% respectively on all income. In fact, the former is extremely regressive since that tax is not levied on income over an upper limit that is adjusted for inflation (and is $102,000 for 2008), which means that the more you earn over that limit, the lower the percentage of your income that you pay as tax.

The reason that a progressive tax structure is fairer is that poorer people pay a far greater proportion of their total income for basic necessities like food, clothing, shelter, and health care while the rich have far more disposable income to spend on luxuries. You do not want to heavily tax that portion of the income that goes to meet basic needs, hence the lower rate on the lower brackets.

When George W. Bush came into office in 2000, there were five income tax brackets:

On the amount of your taxable income that was $26,250 or less, you paid 15% of the amount.
On the amount over $26,250 and less than or equal to $63,550, you paid 28%
On the amount over $63,550 and less than or equal to $132,600, you paid 31%
On the amount over $132,600and less than or equal to $288,350, you paid 36%
On the amount over $288,350, you paid 39.6%

Even though these taxes were much lower than most years since 1933 (In 1945, the top marginal rate reached a peak of 94%), Bush and the Republicans pushed relentlessly for even lower tax rates, especially the top marginal rates that affected the very wealthy. By 2003, there were six income tax brackets (as now) but the rates for each bracket were reduced to 10%, 15%, 27%, 30%, 35%, and 38%.

Bush and the Republicans pushed for the even lower rates, which resulted in the current situation. All of these cuts largely benefited the wealthy since it lowered their top rates by more. In other words, they made the tax code more regressive. As a result of these tax cuts, a single person in 2008 earning a gross income of $50,000 saw a drop in their taxes of about $1,300 (compared with the 2000 rates) while someone earning $500,000 saw a drop of about $21,000. The loss in revenue due to the tax cuts that largely benefited the rich, coupled with the huge costs of the war in Iraq and Afghanistan, has resulted in the budget surpluses of 1998-2001 becoming deficits from 2002 onwards.

These tax cuts were sold as a temporary measure, and to help passage a sunset provision was added that was due to go into effect at the end of 2010, causing the rates to revert to their 2000 values. But it was entirely predictable that when the time came for the sunset provision to kick in, the tax cut zealots would start misleadingly squealing that we were getting a tax hike, rather than the truth that we were ending something that was meant to be a temporary measure. And we see this happening now.

While I expected this kind of opposition to reverting to the 2000 rates, what took me by surprise was the sudden channeling by some people of their inner Ayn Rand and their plan to oppose the sunset provisions using a bizarre strategy based on, of all things, the plot of her novel Atlas Shrugged.

Next: Ayn Rand and ‘going Galt’.

POST SCRIPT: Civil liberties and internet censorship

Chris Hansen, senior national staff counsel for the ACLU, will be speaking at the Case Western Reserve University Law School Moot Court Room on Thursday, March 19th from 4:30-5:30 on the topic of “Civil Liberties and Internet Censorship.”
The event is free and open to the public. Call 216-472-2220 or go here for more details.

Spreading the wealth-8: On living simply and with dignity

I knew an old couple that lived in Youngstown, Ohio. They had grown up in the Great Depression but later as teachers led comfortable middle class lives. But they never forgot their hard beginnings. I remember being their weekend house guest about thirty years ago and noticed that the bars of soap in the bathroom and kitchen rested on their narrow faces, not the usual broad one. When I asked them about it, they said that this way there was less waste of soap from seepage due to contact with the counter surface.
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Spreading the wealth-7: More on the opposition

In the previous post, I said that the arguments in favor of having a more progressive tax system are so obvious that it was an interesting exercise to see why even those who would directly benefit from it still oppose it. I suggested some reasons for this behavior and in this post want to explore some more.

Another group consists of those who are still living in the shadow of the Cold War and have been effectively brainwashed to think that any effort to raise the living standards of the less well-off is ‘socialism’. The label socialism has been demonized so much that for such people anything to which that label is attached is automatically a bad thing, even if they do not understand the term and are really poor and would benefit from the proposed plan. Witness how universal, single-payer health insurance is fought by the health insurance-pharmaceutical-physician complex by labeling it as socialism, though the only people who really benefit from not having it are the very wealthy and the health insurance-pharmaceutical-physician complex.

This group of people have completely bought the myth sold to them by the rich that we would all be better off if we let a very few people make and keep as much money as they can by whatever means. It is this group that the McCain-Palin rhetoric is aiming at.

The instinctive siding of such people with the ‘plight’ of someone who makes $250,000 or more even while they make a small fraction of that and have little or no chance of ever joining those ranks reveals the depth and extent of this brainwashing. They may be finding it hard to pay the rent or the mortgage, they may be fearful of losing their jobs, they may have little or no health care, they may be living in decaying neighborhoods that cannot provide basic services, but somehow they think the very rich and the giant corporations and Wall Street are on the same side as them and deserve to have even more money. Such people are simply not thinking things through.

Another possible reason is that many people share the illusion that some day they too will be rich, and when that happens they want to be able to enjoy the unfettered high life, even though they may be quite vague about how this could come to pass. For some the fantasy may be little more than thinking they will win the lottery. For others, it may be that they have some talent they are proud of and think that they may be ‘discovered’ by a talent scout and suddenly become a world famous singer or model or comedian or actor or writer or athlete. They do not want to spoil the imagined enjoyment of that future success by supporting policies now that might even slightly reduce the free-spending habits they hope to have when they strike it rich.

The media helps maintain this illusion by feeding this obsession about what rich and famous people are really like. Notice how the interviews with these famous people usually emphasize that they are just like you and me, except for being very wealthy. George Clooney eats corn flakes for breakfast, just like me! Scarlett Johannson likes to lounge around in sweat suits at home, just like me!

At the same time these same media features also indulge in what might be called wealthy-lifstyle-porn, talking about the massive houses, many cars, elaborate parties, and jet-setting lifestyles of the celebrities. The popularity of celebrity-lifestyle TV shows and magazines and the existence of a paparazzi industry to bring us snippets of personal information about these people (“Look! We have photos of Branjelina’s babies!”) testify to the dream world these audiences are creating for themselves.

All these reinforce the belief that the only thing that separates the very wealthy from you and me is a single stroke of luck. This might well be true. But to base your political decisions on the chance that lightning will strike, that you will hit the jackpot, is foolish. To think that your interests coincide with those few very wealthy people is to live in a dream world.

Tom Tomorrow wrote about this fantasy world that people inhabit and which is encouraged by the celebrity-obsessed media.

A few years back, I was on a road trip with my wife, and somehow, probably from some junk shop along the way, we ended up with the audiobook version of Valley of the Dolls, the classic trashy novel about the lives of the rich and unhappy. After the third or fourth lengthy description of wealthy people enjoying caviar and champagne, I commented that the book was not intended to be about the lives of the wealthy, but rather, about the lives of the wealthy as imagined by the trailer park set: they spend all their time drinking champagne! And eating caviar! (Which brings to mind something I was once told by a prominent contributor to Vanity Fair — that it’s not a magazine aimed at the upper class, it’s a magazine for the middle class to buy believing they are reading a magazine aimed at the upper class. But I digress.)

All these things are designed to give the middle class and the poor the sense of identification with the wealthy. It is quite an amazing thing to see. The reality is that any person with no inherited wealth and who depends on a regular paycheck to meet life’s needs has far more in common with the financial situation of a janitor than they have with Paris Hilton.

But as long as they fail to realize who their real allies are, they will continue to be exploited.

POST SCRIPT: Undecided voter=idiot?

The Daily Show tries to understand how people could still be undecided at this stage of the election.

Spreading the wealth-6: Understanding the opposition

Recently, Joe Biden said it would be patriotic of rich Americans to pay more taxes and Sarah Palin chided him for it, saying that no one should pay more taxes and that everyone should want to pay less. This is the mantra of the right-wing ideologues. While I disagree with Biden’s choice of the word ‘patriotic’ (a word that has long since ceased to have any operational meaning but instead is just used as a political weapon), I cannot understand the logic of people who think that paying less taxes is always better. Even the ever-conventional New York Times columnist Tom Friedman took issue with Palin on this fetishization of lower taxes for everybody. (Thanks to Norm for the link.)

Recall that what is being proposed is to make the income tax structure more progressive by raising the rates on the highest slabs of income and reducing it for the lower tax slabs. This seems so eminently reasonable, even downright common sense, that we should try to understand the sources of the opposition to it.

One group consists of rich and greedy and callous people. Such people simply do not care about the poor. They have made (or inherited) a lot of money and it gives them a weird sense of entitlement, that this somehow makes them superior to those who have less. They seem to take pleasure in ostentation. Such people enjoy being much richer than others and think that creating a more a more progressive tax scale is somehow unfair to them.

There are also those ideologues that think that the best system is one in which there is no government at all and that all taxation should be abolished and a pure unadulterated free market should reign supreme. Of course these people are nuts. Such a system has never existed except perhaps in small isolated communities back in hunter-gatherer times. Modern societies are far too large and complex to function without significant government involvement and the only meaningful debate is about the proper balance between the private sector and government.

In fact it is the presence of government that has enabled people to be highly productive by specializing in one or two areas of activity and excelling at it, rather than having to take care of all their needs themselves.

Then there are others, who while not rich themselves, subscribe to the economic theory that says that having a few people make enormous amounts of money is good for all of us because this gives them the incentive to work, hard create new inventions, make new discoveries, and use the wealth generated by the fruits of their labors to invest in more businesses that will create more jobs and so we all benefit in the long run. This is the theory of trickle-down economics.

But does this happen? Do people who make enormous amounts of money use the excess after meeting their living needs to invest in new businesses that create well paying jobs? Or do they largely use it for ostentatious living that results in the creation of mainly low-paying service sector jobs (waiters, valet-parkers, maids) to support that lifestyle?

In other words, is trickle-down economics a good theory? That is a question that one should be able to answer empirically and I will leave it to the economists to provide a definitive answer. But there is clear evidence that the rapid rise in income inequality that started around 1980, with huge gains for the very rich has not produced a commensurate rise in the general well being.

Look at figure 2 in this paper that analyzes the rising inequality in incomes from 1980 (which is the year that the stock market started to rise like a rocket) and 2000. Notice that while the lowest four quintiles of family income have stagnated and even decreased slightly over that period, the share of the national income earned by the top 1% rose steeply, doubling its value. So we know who actually benefited from the so-called boom years of Reagan, Bush I, Clinton, and Bush II.

In fact, as we see from the graph below taken from this paper, the share of the total income of the top 1% of households rose from about 8% in 1980 to 20% in 2006.

incomeinequality.jpg

As Table 1 in the same paper shows, from 2002 to 2006, when George Bush and the Republican congress gave massive tax cuts for the rich, the income of the bottom 90% of households rose by only $1,446 (4.6%) while the incomes of the top 0.1% rose by a whopping $1,809,824 (57.6%).

Note that the only time in the past when the wealthy had this large a share of the national income was in 1928, just before the Great Depression. That is not a good indicator of what lies ahead. The idea that allowing a few to amass great wealth is good for all of us is an argument that is hard sustain.

POST SCRIPT: The people in your neighborhood

Stephen Colbert looks at the new middle class loved by McCain and Palin, which consist of those people who are identified solely by their first names and occupations, like the famous Joe the plumber and Tito the builder.

Spreading the wealth-5: Class warfare against the poor

Why do so many have a reflexive aversion to paying taxes and think that any adjustments in the tax system to shift the burden away from the poorer and towards the richer is somehow unfair? This is because class warfare has been consistently waged against the poor for so long by both parties that we have come to think of it as the norm. But when attempts are made to redress this balance, the rich are quick to shout ‘class warfare!’ to distract attention from the fact that they are the masters of it.
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Spreading the wealth-4: Who is in the middle class?

The problem with discussing the distribution of wealth and income in the US is that politicians of both parties have for years been pandering to the ‘middle class’ and courting their votes by promising to improve their condition.

The rich have exploited this by giving small income tax benefits to the middle class while giving themselves huge tax benefits, and then claiming that the entire middle class has benefited. David Cay Johnson in his book Perfectly Legal: The covert system to rig our tax system to benefit the super rich – and cheat everybody else (2003) describes how this spreading the wealth in favor of the rich is done. The title of his book says it all. Then the rich (and the middle class dupes who have been taken in by this scam) get outraged and scream ‘socialism!’ when someone comes along to try and spread the wealth in the opposite direction.

They have been getting away with this because the phrase ‘middle class’ has been bandied around a lot without being defined by politicians and the media. As a result, we have the curious phenomenon that almost everyone, from the quite poor to the quite rich, thinks of themselves as middle class. Thus someone who is earning $30,000 a year feels they are in the same class as, and feel a sense of class solidarity to, someone earning $250,000 a year. Hence they react with a sense of grievance when someone with much higher income than them doesn’t come out ahead because of any change in fiscal policies.

The word class has become perceived as based not only on income but also as a proxy for family background, the nature of one’s job, the social circle one moves in, and lifestyle practices. This vagueness has enabled almost everyone to think of themselves as middle class because in at least one area of their life they may overlap with those much better off than them. So someone who has a good formal education but now works at minimum wage job may still consider himself middle class because he reads newspapers and books, listens to classical music, and is involved in arts and community activities.

But if we narrow the definition of class to purely income and leave those other unquantifiable elements out, we can get a better idea what the terms ‘poor’, middle class’ and ‘rich’ might mean.

To see how income is distributed in the US, take a look at this table published by the Bureau of Labor Statistics and the Bureau of the Census. It gives the range of income in 2005 for each quintile of households. Note that this is for households, not individuals, and thus includes the income of all the wage earners in a household.

20% of households earn less than $19,178
20% of households earn between $19,178 and $36,000
20% of households earn between $36,000 and $57,568
20% of households earn between $57,568 and $91,705
20% of households earn over $91,705

Only 5% of households earn over $166,000.

It is reasonable to think of the middle three quintiles as defining the middle class, so it consists of those households with incomes roughly between $20,000 and $90,000, where I have rounded each figure to the nearest $10,000. If one wants to, one can split those three middle quintiles into lower-middle class, the ‘true’ middle class, and upper-middle class.

Those earning below $20,000 can be called poor and those earning over $90,000 can technically be described as rich. But there is something jarring about the notion that those earning around $90,000 are actually rich. That level of income does not really allow for the kind of lifestyle that one associates with really rich people. It may be more accurate to label that group as simply ‘well-to-do’.

But if we split the well-to-do group into finer-grained slices, we can perhaps get a better understanding of who is really rich. Footnote 1 of this paper provides a link that downloads a spreadsheet that breaks down the income ranges for the highest income groups (excluding realized capital gains) in 2006. (See Worksheet Table 0)

It shows that:

10% of households earn between $100,349 and $138.254
5% of households earn between $138,254 and $329,070
1% of households earn between $329,070 and $482,129
0.5% of households earn between $482,129 and $1,401,635
0.1% of households earn between $1,401,635 and $6,473,710
0.01% of households earn over $6,473,710

Using this table, one can subdivide the top quintile of the well-to-do category into the ‘rich’ (the roughly 5% of households earning between $140,000 and $330,000), the ‘very rich’ (the 1% earning between $330,000 and $480,000), and the ‘super rich’ (the 0.6% earning over $480,000), where again I have rounded each figure to the nearest $10,000. These labels agree more with out intuitive notions.

So Joe the Plumber, who says he hopes to earn over $250,000, rather than being the middle class everyman he has been portrayed to be, belongs to a very tiny and select group, definitely rich and approaching the very rich. He is in the top 2-3% of income earners.

So why is he is whining about his marginal income tax rate for the amount over $250,000 being increased from 35% to 39%, which is hardly going to have any impact on his ability to meet the needs of him or his family? And why do so many people, who will never ever get close to earning that kind of money in their entire lives, identify with him and are sympathetic to his complaint?

More on this later.

POST SCRIPT: McCain supports ‘spreading the wealth’

Listen to what John McCain says at the end of this clip at a town hall meeting in 2000:

Transcript of last portion:

Audience member: “Why is it that someone like my father who goes to school for 13 years gets penalized in a huge tax bracket because he’s a doctor.”

McCain: “I think it’s to some degree because we feel obviously that wealthy people can afford more.”

Audience member: “Are we getting closer and closer to, like, socialism?”

McCain: “Here’s what I really believe: That when you reach a certain level of comfort, there’s nothing wrong with paying somewhat more.”

Stewart: “That, of course, is the late socialist leader John McCain. I believe he passed away during the Republican primaries. He will be missed.”

Looks like McCain was for spreading the wealth before he was against it.

Spreading the wealth-3: Meeting a hierarchy of needs

My view is that one should formulate tax policy based on the extent to which one meets a hierarchy of needs.

The first level of needs is to provide food, shelter, clothing, and medical care for oneself and one’s family. That undoubtedly takes priority over everything else. People who are struggling financially just to get by even if they live frugally, would tangibly benefit from paying less taxes and should pay less. In fact, there is no reason why such people should pay any taxes at all. Tax cuts or policies that result in higher incomes meet that level of need very well.

But once those needs are met, the next level of needs consist of safe neighborhoods, well-lit and well-maintained streets and sidewalks, parks and recreational areas for children and adults to enjoy, well-stocked libraries, and good schools. Those are very real and tangible needs that I would directly and personally benefit from but it beats me how giving me a tax cut is going to help me attain any of them. This level of needs cannot be met by tax cuts or even higher income, unless the increased income is so large that I can live in a gated communities, send my children to private schools, hire private security services, and otherwise pretty much cut myself off from most of humanity. [Read more…]

Spreading the wealth-2: Why this benefits all

What is interesting about the flap over Obama telling Joe the plumber about the benefits of spreading the wealth around, is that if you listen to the exchange between Joe and Obama, what Obama is saying not only makes absolute sense, its truth should be blindingly obvious to anyone.

What Obama said was that while he was happy for Joe’s success, he also cared about the waitress and the teacher and the store clerk and the policeman and all the others in that community who do not earn anything close to $250,000 per year and were currently struggling and who needed a break. He pointed out that if they were able to do better in life, then they were more likely to be able to afford the services of a plumber like Joe and he would do better too.

That is exactly right. I myself hate plumbing chores. Even though I do not earn anywhere near the $250,000 that Joe is hoping to earn, fortunately I still can afford it so that when something goes wrong in our home I call Nate the handyman and he comes along and promptly takes care of it, while shooting the breeze with me, exchanging information about our families. It is all very pleasant.

As a result, my plumbing problems get solved by an expert professional, Nate gets my business and some income, and this frees up my time and energy to do the things that I enjoy, such as reading and writing. We are both better off.

If I could not afford Nate’s services, I would have to learn to do the plumbing work myself and spend a lot of my spare time on it and would probably end up doing a lousy job if not actually flooding the house. And if that fails, I would have to ask friends who know more about plumbing to help me out. A lot of poor people do exactly that. They sacrifice their own time and energy to do such things, bartering their own skills and services for those of others. That is perfectly fine, but it does not help the neighborhood plumber’s business.

This example can be multiplied over and over. I pay people to work on my car, to repair the roof, to trim the tress in my yard, to plow my driveway in winter, and so on, because I can afford to. And we all benefit from that in different ways.

But if most people are impoverished and barely making ends meet, and the more concentrated wealth becomes, the less likely it is that small businesses will succeed since fewer people will be able to afford their services. It is far better for a plumber to have a hundred middle class people in his neighborhood than one multimillionaire and a hundred poor people, since a single rich person will not have a hundred times the plumbing needs of a hundred homeowners.

Henry Ford discovered this many years ago when he realized that if he and other employers like him did not pay their employees good wages, there would not be a large enough market of consumers who would be able to afford to buy the cars he made. So while higher wages reduced his profits in the short run, it increased the viability of his business in the long run.

But this basic truth has to be obscured in order that the rich can benefit by impoverishing others, The rich have always depended upon duping the poor to support their lifestyles. As Voltaire said, “The comfort of the rich depends upon the abundance of the poor.” But they also have to persuade the less well-off that that this exploitation is good for them. They do this by using their wealth and power to make the political structure serve their needs, then suggest that the resulting structure that redistributes wealth to benefit the rich is ‘natural’ and that reversing that change to benefit the majority is somehow unfair. What is amazing is that so many poor and middle class people actually believe that argument.

This English nursery rhyme (c. 1764) captures the idea of how the laws have always favored the wealthy. (Thanks to blog reader RCarla.)

They hang the man and flog the woman
That steal the goose from off the common.
But let the greater villain loose
That steals the common from the goose.
The law demands that we atone
When we take things we do not own.
But leaves the lords and ladies fine
Who take things that are yours and mine.

‘Spreading the wealth’ means taking the commons back from those who have taken it for their private benefit. It has so many benefits for so many people that one has to wonder why there is so much fierce opposition to the idea from the very people who would benefit.

In the next post, this question will be explored further.

POST SCRIPT: The other Palin for president