Why Taxation Policy Matters


The US was built on inequality, and was structured so as to maintain that inequality. It’s so deeply embedded in the fabric of the country that most people don’t see it – they’re indoctrinated to see the flip-side of that inequality as “middle class” and “upward mobility.” When a president talks about “helping the middle class” it’s not saying “We’re going to make things better for people!” it’s saying “We’re going to make things more unequal!” Because, the fact of the matter is that the middle class is smaller.

The Guardian [guard] identifies a problem

The authors cite the legacy of discriminatory housing policies, an “upside down” tax system that helps the wealthiest households get wealthier, and the economic effects of mass incarceration as among the root causes for the discrepancy.

The numbers in the chart above are ridiculous: 6 times? The report cited in The Guardian is focused on the trend-line (which is that it’s getting worse) but the starting point is pretty bad. For one thing, if I make 6 times what you make, I get to take advantage of more opportunities to invest and save – “it takes money to make money”. I covered this dynamic, specifically in relation to the practice of red-lining, with some important quotes from Robert Paul Wolff. If you haven’t read that piece, I urge you to [stderr] – Wolff’s explanation is devastating. His summary:

Michael, on the other hand, even though he has as good a job as Skip, will never be able to buy his own home, for his father has no assets that may be deployed to give him the down payment. The disadvantages of the fathers are visited upon the sons. Thoughtless social commentators will wonder why Skip is doing so much better by the year 2000 than Michael is, and will come up with elaborate cultural and psychological explanations, blaming low self-esteem [if they are liberals] or the lack of a suitable work ethic [if they are conservatives] but all of their fancy explanations will be wrong. The real explanation of the generations-long effects of explicitly discriminatory policies of previous eras , which continue to manifest themselves in dramatic inequalities of wealth, even after inequalities in income have been corrected by the marketplace or even by affirmative action and anti-discrimination laws. [Robert Paul Wolff, Autobiography of an Ex-White Man, amzn]

If you look at American society, there are all sorts of places where things are upside-down: it’s designed to preserve what the “haves” have got, and extract from the “have nots.” For example, why is it that someone who is wealthy enough to own a house, can get a tax deduction on the mortgage interest? Sure, it’s to help make it easier for people to own a house – but only the people who can step across the threshold with the initial payment. There are tax incentives for longer-term investment versus short-term investment, which are billed as “to encourage long-term investment” but – here’s how you can tell that’s a lie: if long-term investment yields better results (as they say it does) then it’s inherently more rewarding and we need no additional incentives. If it doesn’t yield better results then that’s another problem entirely. The long term capital gains tax advantage is set up to favor people who have enough capital that they can afford to have it parked for decades; i.e.: people who already have money.

The Guardian continues:

Recent economic crises have widened this wealth gap, according to the report, as communities of colour took the brunt of the economic hit. Black median wealth has never recovered from the 2001 recession, nor Latino median wealth from the 2008 financial collapse. White median wealth, on the other hand, was left unaffected in 2002, and began rebounding just two years after the speculative housing bubble began to implode.

Right – so there’s a near collapse of the market, and a collapse of a housing bubble. The US Government rushed in to prop up the people who had houses and had investments. All the people who didn’t own their own homes, or have a stock portfolio? The only help they got was in the form of the “bounce” when the economy started to turn around – a “bounce” that was higher and better for the people who had enough assets that they could weather the downturn. Right now, the stock market is at record heights – someone who had the assets to hang on, keep their house, struggle through a period of stress and unemployment – they may have come out better off than they were when the crisis hit. But the people who were on the margins already: they lost their homes and they probably never had enough capital to spare for investment anyway. They’re reset right back to where they started.

Americans have been conditioned to look at household income as a metric, because it’s an OK metric, but it doesn’t tell anything about a household’s financial resiliency – can they take a downturn and come out on the other side? That’s going to depend on their ability to have a financial cushion for emergencies which takes us back to the long-term capital gains/investment tax difference.  One of my friends experienced a period of unemployment during the 2008 downturn, and got whacked pretty hard because they had to sell stock they had hoped the profits would be long-term capital gains, but they had to pay a higher tax rate because they needed the money right away. Don’t cry: they were complaining that they had to pay more tax on their profits than they expected. Meanwhile, people on the margins – vastly more of them black and hispanic – were getting foreclosure notices. My friend (who is white) had 8% of his profits go up in smoke. Another couple I know (who are white) had enough money set aside that they were able to take advantage of the downturn to buy several houses that were being foreclosed: they got about a 20% discount on the properties and, when the market rebounded, flipped them and made a fortune. If you buy something at a 20% discount and can afford to hold onto it long enough to get that capital gains deduction (8%) and sell at a 5% mark-up, it looks like this: I buy a $100,000 house for $80,000 then flip it a year later for $105,000, pocketing $25,000 and paying 8% less taxes on the $25,000. Someone on the margin of survival can’t do that. Yet, oddly, the American establishment’s entire concern during the downturn was the middle class. <snark>It’s as if the establishment wants to “divide and conquer” the middle class from the lower class, so they can use them as useful idiots to keep the lower class down.</snark> (Some of those useful idiots call themselves “Libertarians”)

“You find first-generation, even second-generation African-American and Latino households that have professional jobs and are making ‘middle-income money’ – but they have the wealth of a white high-school dropout,” Asante-Muhammad said. “They’re not truly part of a middle class – which would mean financial stability, money to weather challenging economic situations, or money to invest in the economic opportunities of their children.”

A friend of mine once said “money can’t buy happiness but it sure does a great job of funding the research and development.”

That’s the issue: can they invest in their children? My parents ran themselves into quite a lot of debt paying for my sister and my education – but they could: they had a valuable home that was appreciating nicely, which they bought at a substantial discount during the real estate downturn in Baltimore following the “white flight” after Dr. Martin Luther King, Jr. was murdered and there were riots in the city.

The solution, he said, is to “invest in a 21st-century American middle class. We need to make sure, for the first time, that we are investing in a middle class that includes communities of colour. This generally hasn’t been done before.”

The US has not only not done that, it’s done the opposite. Red-lining, school re-segregation, the war on drugs, racial profiling by police, and police violence: all of these things have a profound economic impact, and the key point of all of this is that those economic impacts are long-term.

Imagine a footrace where there’s one runner that has substantial advantages to begin with: better training, better gear, more opportunity to train, and a doctor that supplies them with all the hormone therapies they want. The other people in the footrace start off with shoes they borrowed, they can’t train much because they have day jobs so they workout instead of sleeping – and when the gun goes off, a cop’s there to pepper spray them. Meanwhile, the announcers up in the press box are saying “there’s something wrong with ‘those people’ – it’s like they can’t run worth a damn.”

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In the “help the middle class” discussion nobody mentions the rich, because they already got theirs and their social program is to keep it and collect rent on it, allowing them to remain a permanent oligarchic establishment.

The entire taxation system needs to be radically restructured to advantage the poor and, yes, redistribute wealth. As Shiv brilliantly put it: “It’s not taxation, it’s guillotine insurance.”

Comments

  1. cartomancer says

    The tax system is a useful tool for redistributing wealth in an unequal system, but I have become increasingly convinced over the years that a deeper solution is needed – we need to stop the wealth accruing so unequally in the first place. Which is, of course, something that political analysts have been saying since Plato, but which desperately needs more mainstream political force now.

    It seems that pretty much everyone involved in the academic study of wealth inequality in the US has the surname Wolff. I had not come across Edward N Wolff or Robert Paul Wolff before, but I do follow the work of the economist Richard D. Wolff through his internet and radio outreach. His main contention is that the underlying problem is the capitalist way of organising productive enterprises – having an employer class that makes the decisions and running companies in order to make profits for that class (in their role as directors and as shareholders). While the economy is still substantially structured in such a way, there will always be an impetus in state policy towards the interests of the rich, because they will have the economic power to buy and manipulate the political system. Even if you could get a progressive tax policy in place, the rich would work to have it repealed. That’s essentially what happened with the New Deal in America over the 50s, 60s and 70s, not to mention the abuses wrought in the Reagan era and beyond.

    The solution is to give everyone a genuine stake in the economy, such that the wealth created is distributed fairly in the first place. Pay decent wages to all instead of creaming off most of the money for the profits that go to the rich. Yes, we’ll have to take most of the rich people’s money too, via taxes, because it’s needed for more important things than yachts and strings of holiday homes, but the trick is to stop them being much better off than the rest of us in the first place.

  2. Siobhan says

    At this point, I think we could make some ground just by forcing people through simulated poverty before they collect their inheritance. Imagine a five-stage challenge. Stage one: You have a $15 grocery budget, make it last two weeks. Stage two: Internet, heating, phone, water–live for 3 months without two of them. Stage three: Sleep rough for a month. Stage four: Catch a severe illness while uninsured. Stage five: Work four different service jobs simultaneously for an entire year.

    At least part of the problem is the entire cottage industry of “isolate the wealthy from the consequences of their exploitation.” Gentrification is bad for this. I truly believe at least some wealthy people are just clueless and could be cured of their naivete with a test like that above. Whoever doesn’t donate at least some of their inheritance after experiencing all that are the ones you line up against the wall.

  3. says

    Shiv@#2:
    At this point, I think we could make some ground just by forcing people through simulated poverty before they collect their inheritance. Imagine a five-stage challenge. Stage one: You have a $15 grocery budget, make it last two weeks. Stage two: Internet, heating, phone, water–live for 3 months without two of them. Stage three: Sleep rough for a month. Stage four: Catch a severe illness while uninsured. Stage five: Work four different service jobs simultaneously for an entire year.

    I agree; call it minimum mandatory service, and as long as it’s non-military, it’d be a splendid way for societies to welcome new members and give them a chance to learn where to fit in. I’d further suggest that the system work in a sort of Rawlesian manner: you give 2 years, during which you are fed, clothed, and housed – the first 6 months (while you’re learning to fit in) are a service job, the next year is your main job, and the last 6 months are a supervised supervisory job. There would be a huge number of available positions, and a citizen could pick 10 preferences at each stage (right before switchover) and a computer would randomly select the available slots from all the applicants. Call it “the birthright lottery” – the computer would not look at anything except preference and a random number*; this would illustrate the inherent injustice in birthright systems. All of the citizens’ “earnings” during the 2 year period would be escrowed for them in a retirement account like Social Security. Everyone would get paid the same, but there would be a “teaching moment” during which the topic of ‘equal pay for effort’ would be discussed – citizens would be exposed to the inherent unfairness of randomly being chosen to dig ditches while someone else was an investment banker, etc. – talk about the way things used to be in the bad old days. People would suddenly have a chance to understand the implications of “1 CEO makes 1,000 times what 10,000 employees make” when the odds of getting that job are more clearly 1:10000. It would also be an interesting teaching opportunity to explain “You know, in the bad old days there’d be a 50/50 chance that if you identified as female, you’d get paid less. And based on your skin color…” It would not be hard to do some monte carlo simulation over each class of inductees so they could imagine a randomized outcome based on how things would be in the bad old days: “Unit #7164788623, Frederika? The computer has assigned you simulation status black, transwoman, which would normally assign over you the profile that you have 0% chance of getting these jobs and your income profile looks like this bell curve. You may compare your simulation status with other members of your inductee class and see how the birthright lottery would have worked for them.”

    At least part of the problem is the entire cottage industry of “isolate the wealthy from the consequences of their exploitation.”

    Surprisingly, that’s an industry created by the rich, for the rich!

    (* did not explain this well: let’s say there are 20,000,000 people who want the job “executive director” as their first preference: the computer rolls the dice for you 1/20,000,000 odds! and if you get it, that’s your job. You get 10 rolls on your preferences, otherwise, it randomizes a job where there are zero people who want it: “assistant fecal engineer” – here ya go! Just like Real Life tm. This way, someone who wanted to be a “burger flipper first class” would have a pretty good chance of getting it but the odds of “art snob” coming up are effectively zero)

  4. anat says

    A link that Libby Anne posted this past weekend: IT’S BASICALLY JUST IMMORAL TO BE RICH – the author’s proposal is:

    We can define something like a “maximum moral income” beyond which it’s obviously inexcusable not to give away all of your money. It might be 5o thousand. Call it 100, though. Per person. With an additional 50 allowed per child. This means two parents with a child can still earn $250,000! That’s so much money. And you can keep it. But everyone who earns anything beyond it is obligated to give the excess away in its entirety. The refusal to do so means intentionally allowing others to suffer, a statement which is true regardless of whether you “earned” or “deserved” the income you were originally given. (Personally, I think the maximum moral income is probably much lower, but let’s just set it here so that everyone can agree on it. I do tend to think that moral requirements should be attainable in practice, and a $30k threshold would actually require people experience some deprivation whereas a $100k threshold indisputably still leaves you with an incredibly comfortable lifestyle better than almost any other had by anyone in history.)

    Commenters made the point that additional money is needed for any disabled person.

    We could also cap inheritance (again with a caveat that any disabled dependent will need more). But yes, for an abled-body dependent who is an adult, beyond a home to live in and education there really shouldn’t be significant inherited wealth.

  5. says

    cartomancer@#1:
    The tax system is a useful tool for redistributing wealth in an unequal system

    Well, it could be. I don’t think it is – that’s the whole point of this posting. It’s actually being used to preserve inequality.

    We need to stop the wealth accruing so unequally in the first place. Which is, of course, something that political analysts have been saying since Plato, but which desperately needs more mainstream political force now.

    Agreed. Once when a friend of mine and I were in our cups, we designed a political system in which there was 100% redistribution on a citizen’s demise. The premise would be that during one’s life one holds the goods and benefits that one can earn or extract from society, but they revert to society upon one’s death. We did the math and it looks pretty good – everyone would be able to get a substantial social “kick start” stipend, or education through PhD level, before they had to go into the work force, and there’d be plenty of money left over for a safety net. That’s assuming no massive military, naturally – if there’s one thing that an F-35 can destroy, it’s an economy.

    His main contention is that the underlying problem is the capitalist way of organising productive enterprises – having an employer class that makes the decisions and running companies in order to make profits for that class (in their role as directors and as shareholders). While the economy is still substantially structured in such a way, there will always be an impetus in state policy towards the interests of the rich, because they will have the economic power to buy and manipulate the political system. Even if you could get a progressive tax policy in place, the rich would work to have it repealed. That’s essentially what happened with the New Deal in America over the 50s, 60s and 70s, not to mention the abuses wrought in the Reagan era and beyond.

    Yes, that’s pretty much how it works, and it’s why “keep money out of politics!” is a cry from everyone except the rich. Having disproportionate political power is one of the reasons for wanting to be rich in the first place! (the others being lamborghinis, champagne, island resorts, and cocaine. And art collections.)

    Someone once pointed out to me that Wall St oligarchs had gotten tired of government regulation after the New Deal, and responded by buying the government. I don’t believe that, because if it were the case the military would be gone and replaced with some kind of tax incentives for short-term venture capitalists.

    The solution is to give everyone a genuine stake in the economy, such that the wealth created is distributed fairly in the first place. Pay decent wages to all instead of creaming off most of the money for the profits that go to the rich. Yes, we’ll have to take most of the rich people’s money too, via taxes, because it’s needed for more important things than yachts and strings of holiday homes, but the trick is to stop them being much better off than the rest of us in the first place.

    You can only live in one mansion at a time, anyway.

  6. says

    anat@#4:
    But everyone who earns anything beyond it is obligated to give the excess away in its entirety.

    … except that certain people would give all their money to political causes.

  7. Dunc says

    During WWII, the top rate of UK income tax peaked at 99.25%, and it remained over 90% until 1971. Even in the US, the top marginal tax rate was over 90% during the 50s.

  8. says

    Dunc@#7:
    During WWII, the top rate of UK income tax peaked at 99.25%, and it remained over 90% until 1971. Even in the US, the top marginal tax rate was over 90% during the 50s.

    Yup. The oligarchs are still freaked out about it.

  9. says

    During the 2008 crisis there was a push for a progressive income tax. Latvian politicians (all of whom were rich guys) didn’t like the idea, so they got rid of the plan in a spectacular fashion. They proposed a project where everybody with a salary large enough to stay barely above the poverty line would get the larger tax. Their proposal for a progressive income tax was basically “if your salary is large enough to not qualify for food stamps, you get a tax increase”. Of course people didn’t like the proposal, so it was dropped. And politicians got to say: “See, people don’t support progressive income tax, so it cannot be done.”

    In Latvia we also have a similar system where the richer you are, the smaller your income tax. Workers who receive “salary” must pay over 50% income tax. Business owners who receive “profits” from their company must pay a lot smaller income tax. Same goes for speculators who get “capital gains”, they also get a really low income tax rate. Amusingly, as a self employed artist who earns “author’s fees” I also get to pay the smaller tax rate.

    As for housing, my grandfather built two homes during his lifetime. He did some work on his own, but he didn’t do it singlehandedly. He could easily afford to buy materials and pay workers who helped him. It’s amusing that nowadays many people cannot even afford to buy land, let alone start thinking about getting land with a home. So much for progress.

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