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Thursday, July 14, 2011

Why soaking the rich will not work

It's tempting to say "soak the rich" and thereby fix all our economic and fiscal problems. Former Secretary of the Treasury Robert Reich said essentially that on a recent video. It will not work.

Disintegration of the American middle class and the concentration of American wealth is real. It is not merely troubling; it is at the very heart of our fiscal problem. I do agree that a small increase in the marginal income tax rates for the wealthy is warranted. I also agree that inheritance taxes should be increased substantially and that some deductions for wealthy taxpayers should be eliminated.

But that's as far as it should go. Much of the excessive CEO compensation that one hears of these days is derived from stock incentives, not outright salary. When CEOs get wealthy through stock incentives, other people and organizations are getting wealthy with them -- including private pension plans that depend on rising stock prices to provide future benefits and private foundations that depend on increasing endowments to fund good works. That's capitalism, my friends. Although unrestrained capitalism is barbaric, rigid socialism is worse. Should there be limits on stock compensation? Probably, but not because it puts too much wealth in the pockets of a few individuals. Rather, my objection to excessive stock incentives is that they lead to accounting fraud.

The problem is not that rich people make too much money or that they do not pay enough in taxes. That is a myth, intentionally spread by some politicians, that deceives. Instead, the problem is two-fold. One, as the middle class of America has thinned out and declined, it cannot pay for most of the country like it once did. Two, government spending is way out of whack. Neither President Obama nor Speaker of the House Boehner wants to frame the problem in those terms, however, because it would depress the electorate.

The middle class is going down the tubes because the manufacturing base in this country has largely collapsed. And don't give me any weepy stuff about unfair competition from China! Germany is the third largest exporter in the world. They have very high labor rates and strong unions and elaborate social protections, and yet they compete with the Chinese all over the world. Likewise Japan. Those nations have succeeded where America has failed; it's that simple. Restoring earnings power to the middle class in America, so that they can pay taxes and simultaneously save for retirement without struggling to make ends meet, is centric to the economic future of this nation. It should be a major priority of government.

Because the middle class cannot save for retirement -- and partly because Madison Avenue has trained us for 50 years that conspicuous consumption is a good thing -- we hear demands for Social Security benefits, Medicare benefits, etc from a generation that wasn't supposed to need either program. Think about it. Redistributing the reduced wealth of the middle class across the middle class, as our current tax systems do, will accomplish nothing but will employ a set of bureaucrats to count the money coming and going.

I am convinced that the US cannot afford both a European social fabric and the world's largest military. We must choose: either one or the other, or less of both. The US military is the world's single largest consumer of fossil fuels, by the way. Our incursions into places like Iraq and Afghanistan will get more expensive as the price of oil inevitably climbs in future years. Who pays? Taxpayers. The rest of the world is no longer interested (e.g. China) or capable (e.g. France) of lending us money to continue the rate of government spending that we have become accustomed to.

Suppose the US confiscated 100% of the wealth of Bill Gates, Steve Jobs, Warren Buffett, and Ted Turner at the peak of their fortunes. The kitty wouldn't even cover one month of the combined outlays of Social Security and Medicare. The entire market value of Exxon ($405 billion, as of today) would operate the Department of Defense for only four months. In short, take all the money of the wealthy and the corporations, and we'll be in the same mess five years hence.

As for corporate tax rates, America already has one of the highest corporate tax rates on the planet. Companies routinely incorporate outside of America in order to avoid taxation here. It's a global marketplace for corporate domiciles, and other countries are more than willing to let Exxon (for example) move its headquarters there. Do you really want to propel multinational corporations -- that provide many of the middle-class, private sector, blue collar jobs that America still has -- entirely overseas? Many of them have left already.

We have been trained since elementary school to conceive of American resources as limitless. I don't know if that was ever true, but it's certainly not now. Until such time as the American middle class has money in their pockets again, spending must be reduced. In that respect this blogging Democrat must admit that the Republicans are right, although I despise their social agenda. And although it may disturb Rep. Nancy Pelosi and her wing of the Party, I think President Obama's willingness to move to the political center indicates that he understands it too. Obama was correct that a certain amount of deficit spending was needed in 2009 and 2010 to prevent the economy from getting worse, but the time has come to adjust to the economic reality of 2011-2020.