Why Giving Tax Breaks to Rich People is Useless

Is it useful for the economy and useful for the people if the government gives tax breaks to rich people? I was pondering on this question while at work. One is thinking back to multibillionaire Warren Buffett, who revealed his concern that he was paying half the proportion in taxes than his secretaries. Buffett wrote, “Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”1 His capital income is subject to the capital gains tax, which the government thinks should be taxed less than regular income. The rate for the capital gains tax is 15%, compared to the 35% maximum tax rate for the income tax. Toiling for a living is to be rewarded less than investing and speculating for a living. Right now, tax cuts to the richest 5% of Americans cost the Treasury about $11.6 million an hour, which is over $100 billion a year.2 The government’s rationale seems to be that taxing rich people would diminish from the national wealth, because, so the supply-side logic, the rich people would not invest their money in creating jobs and stimulating the economy. Give more to the rich, so they invest more.

Far from reality, giving more in tax breaks to what Thorstein Veblen quite aptly called the ‘leisure class’ (because they don’t work, but conspicuously consume- another term coined by Veblen)3 actually hurts the economy, because we are only benefiting a tiny sliver of the population, who then have more money with which they are not sure what do with it. Why is that? The reason why rich people would make investments in job creation would be because they expect that their products can be sold on the market. But because we have been pursuing a policy of relentlessly beating back and destroying labor unions, outsourcing work to low-wage countries and replacing labor with labor-saving technology, worker’s incomes have declined, and so has their consumption, the ultimate reason for investments.4 In 1968, 53.2% of the national income went to the middle class, when 28% of the workers were unionized. In 2010, the share of income decreased to 46.5% with union membership reduced to less than 12% (less than 7% for the private sector).5

Reduced labor income means reduced consumption. This has only temporarily been halted by the lending spree to workers, which was a device to delay the crisis of inequality (while enriching bankers). Richard Wolff, in his new book “Occupy the Economy” indicates that since 1978, the standard of living for many Americans has not increased, real wages flattened out, and since 2007, have been dropping sharply.6 Americans have lost 7.7% in income between 2007 and 2010.7 Median incomes no longer rise, corporations are freed from having to pay their workers more in wages, even though their productivity has sharply increased. In the two recession years, 2009 and 2010, labor productivity growth doubled twice in a row, whereas 780,000 jobs were shed every month in early 2009, which sent corporate profits through the roof. As Carl Van Horn says, “[In America] [e]verything is tilted in favor of the employers… The employee has no leverage.”8

American workers are producing more for their employers but get paid less. Their reduced income reduces consumption, which hits the very companies that are trying to sell products to those same employees. All the corporate wealth which flows to the executives does almost nothing to spur consumption, because there is only so much that the superrich need. I would like to point this out by way of example. Let us take a middle class person, whose after-tax take home pay is about $45,000 per year. As we know, an average family of four needs about $45,000 per year to afford basic necessities.9 Since in this example this would be the income of that single earner in the household, all of that income goes to consumption, ranging from food, to housing, health care, transportation, education and day care. What this means is that other middle class people such as doctors, retail clerks, bus drivers, car repairmen, teachers and others also can have jobs. If the society is very egalitarian, like in Scandinavia, almost all the money would go to working people, and almost all the money would flow back into the economy in demand. Let us now take a rich person, whose take home pay is $10 million. His consumption is ‘only’ $1.5 million (cautious estimate). This would include a penthouse, a mansion, five cars and other amenities. That leaves $8.5 million in savings and investments, indeed, the original source of wealth for that rich person. If we live in a highly unequal society, the budgets of the vast majority of people who live in poverty or are in the middle class would go toward consumption, but the few rich people who own the majority of the wealth would spend only a fraction of their income in consumption, and invest the rest. The rich have the money, but don’t want to spend it. The poor want to spend the money, but don’t have it. But as I argued, a society in which a lot of investment capital faces a low consumption rate is unbalanced, and will likely see less investment spending and less economic activity.

What we see with a lot of the excess wealth is that it is used to commit to stock buybacks which temporarily increases the value of the stocks of that corporation, but does nothing to create jobs and provide a better environment of ‘business confidence’. Look at Apple, which announced to use $45 billion of its $100 billion in cash for stock buybacks.10 Even worse, this complete lack of business confidence leads the capitalist to funnel his money from productive investments to financial investments, which enlarges the toxic derivative business, which has crashed our economy back in 2007. Now, the bankers move from private debts (which were issued to workers, whose wages weren’t going up, but were able to get huge mortages that were refinanced until the housing bubble burst) to public debts, which means that the government that has pledged billions and trillions in bank bailouts is now itself going into massive debt by borrowing equivalent trillions from the same banks, many of which generate the revenues out of the money that the Federal Reserve created out of nothing.11

Giving more tax breaks to the rich is fiscally unconscionable. We already owe so much money to the wealthy bankers, we can’t afford more tax breaks to the rich. It forces a greater burden on public services, such as Medicaid, Medicare, Social Security, police, fire fighters, teachers and others, which makes further austerity necessary. This can only reduce total demand further, which runs contrary to good Keynesian policy of counter-cyclical spending, by which the government has to stimulate the economy, when businesses don’t want to do it, because governments can think beyond short-term profitability considerations that private corporations are subjected to.12 A society in which only the rich 1% can loot the bounty, whereas the 99% should be pushed by the way side, the same 99% that produces all the wealth, but is kept from sharing in that wealth, because capitalists take the worker’s product and title it ‘private property’, can ultimately not work.

The right solution for the government would be to massively increase taxes on the rich. I suggest that income above $1 million should be taxed at 90%. While this sounds like terrible confiscation, it would merely take us back to the Eisenhower years in the 1950s, when the US economy was booming. As Robert Reich correctly noted, it is better for the rich to take a smaller piece out of a larger pie than a bigger piece in a shrinking pie.13 Why? Because when the rich are getting taxed at a high rate their incentive for removing money from their business via bonuses and astronomical salaries is reduced. Taking too much money out of their business would reduce earnings for the company, and the coercive laws of competition would push out the company with a greedy executive in favor of more restrained executives, who keep the money in the company and invest in plant creations.

In the face of a government that thanks to the Supreme Court case Citizens United v. FEC is now completely owned by the rich those progressive decisions are highly unlikely in the immediate future. We would have to wait until the economic crisis goes out of control, the debt crisis becomes unsustainable, the inflation and unemployment rates spike, and the rich and the politicians, the elites of the country, are driven to the wall against an angry mass of people that is fed up about an economic crisis, which they didn’t cause. Secondly, the ever-growing ability of corporations to steal money from the community, be it via favorable tax policies, cutting worker’s payrolls, transferring jobs into other countries etc., points out the growing importance of advocating for an economic alternative, what Gar Alperovitz described as the worker-owned cooperatives, which means that workers control the company.14 This removes the disconnect between producers and owners, the essential feature of our capitalist system. Ohio, a state ravaged by manufacturing shutdowns and high unemployment rate, is a vital leader in these worker co-ops. The Evergreen Cooperative laundry that is connected to the higher education and hospital system has 50 workers on staff and is expected to grow in the coming years.

To be realistic here, I do not think that worker-owned cooperatives will completely replace capitalism. Rather, cooperatives are vehicles for providing alternative solutions to disillusioned workers, who need to make a living, when corporations are not willing to provide it for them. It can happen on a larger scale than today, but not on an all-encompassing scheme. The fundamental nature of the economic system would have to be changed around. A reinvigoration of the labor movement would have to come about. Currently I only see a capitalism at a crisis, a capitalist without good explanations, and a working class that is angry, shattered and confused. The grapes of wrath are sewn. This is not enough for socialism, but enough for some big changes.

I also want to address one assumption that I have been making throughout the article, but don’t wholeheartedly back in its premise. The assumption was that reduced consumption for workers is always a bad thing, but increased consumption would then always be a good thing, because that drives economic activity. It can not be doubted that when one grows up in a capitalist economic system, in which everybody from the business press to neighbors, co-workers, friends, and family tell one about the greatness of capitalism so that not even its fundamental assumption can ever be challenged, it is assumed to be true and not even needs explicit articulation of approval. It is true by default, by merely making a case for good economic policies. My opinion is that increasing consumption in moderation is acceptable, but that never-endingly growing consumption is a bad thing, because it becomes environmentally destructive, because the earth’s resources are limited, global warming is accelerating and because spirtually we can’t become better off with more amenities. I am all for more technology to make lives more comfortable, but when one filled his stomach, covered his body in clothes, sheltered his body under solid roof, gets treated in times of ailment, received a full education, can much more be asked for to increase happiness, or is that excess a fabricated fetish, which can easily be dispensed with if society so chooses? This major philosophical question can in all earnesty only be satisfactorily answered when humanity can be freed from the shackles of capitalism and the profit motive associated with it. Unless we do that, the answer will always be stipulated for us (more is always better, or in Gordon Gekko’s words, “Greed is good.”).

References

1 Buffett, Warren E. “Stop Coddling the Super-Rich.” The New York Times. N.p., 15 Aug. 2011. Web. http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html.
2 Berman, Jillian. “Tax Cuts For Wealthy Americans Cost Treasury $11.6 Million Every Hour: Report.” The Huffington Post. N.p., 14 Oct. 2011. Web. http://www.huffingtonpost.com/2011/10/14/tax-cuts-for-wealthy-americans_n_1011601.html.
3 Veblen, Thorstein, and J. A. Hobson. “The Theory of the Leisure Class”. London: Routledge/Thoemmes, 1994. Print.
4 Irvin, George. “From Profit Squeeze to Wage Squeeze.” Renewal 17.3 (2009): 1-12. Print.
Kohen, Matthew. “Workers, Unions, and the Globalization of Production: Structural and Institutional Challenges for Organized Labor in the United States.” Graduate School Theses and Dissertations. Paper 2589. Scholar Commons, University of South Florida, 2006. Web. http://scholarcommons.usf.edu/etd/2589/.
Lee, Marlene A., and Mark Mather. “U.S. Labor Force Trends.” Population Bulletin 63.2 (2008): 3-15. Web. http://dalmasetto.com/pdfs/US_labour_stats.pdf
5 Madland, David, and Nick Bunker. “As Unions Weaken So Does the Middle Class.” Center for American Progress. N.p., 23 Sept. 2011. Web. http://www.americanprogressaction.org/issues/2011/09/madland_unions.html.
6 Wolff, Richard D., and David Barsamian. Occupy the Economy: Challenging Capitalism. San Francisco, CA: City Lights, 2012. Print.
7 Riley, Charles. “Family Net worth Plummets 40%.” CNN Money. N.p., 12 June 2012. Web. http://money.cnn.com/2012/06/11/news/economy/fed-family-net-worth/index.htm.
8 Wiseman, Paul. “U.S. Productivity Gains Stifle Job Creation.” USA Today. N.p., 4 Apr. 2011. Web. http://www.usatoday.com/money/economy/2011-04-04-us-economy-jobs.htm.
9 Dinan, Kinsey Alden. “Budgeting for Basic Needs.” National Center for Children in Poverty. N.p., Mar. 2009. Web. http://nccp.org/publications/pub_858.html.
10 Cheng, Jacqui. “Apple’s Plans for Its $100 Billion Cash Pile: Dividends and Share Buyback (Updated).” Ars Technica. N.p., 19 May 2012. Web. http://arstechnica.com/apple/2012/03/apples-plans-for-its-100-billion-cash-pile-dividends/.
11 Nasiripour, Shahien. “Largest Banks Likely Profited By Borrowing From Federal Reserve, Lending To Federal Government.” The Huffington Post. N.p., 26 Apr. 2011. Web. http://www.huffingtonpost.com/2011/04/26/fed-lending-helped-wall-street_n_853884.html.
12 Keynes, John Maynard. “The General Theory of Employment, Interest and Money”. New York: Harcourt, Brace, 1936. Print.
Krugman, Paul. “Keynes Was Right.” The New York Times. N.p., 30 Dec. 2011. Web. http://www.nytimes.com/2011/12/30/opinion/keynes-was-right.html?_r=1.
13 Reich, Robert. “Bye Bye American Pie: The Challenge of the Productivity Revolution.” Robert Reich. N.p., 1 Mar. 2012. Web. http://robertreich.org/post/18578781712.
14 Alperovitz, Gar, Ted Howard, and Steve Dubb. “Cleveland’s Worker-Owned Boom.” YES! Magazine. N.p., 5 June 2009. Web. http://www.yesmagazine.org/issues/the-new-economy/clevelands-worker-owned-boom.

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