Be INFORMED

Tuesday, January 17, 2012

Where We Are Headed if Republicans Get Their Way with the Tax Code

Originally posted to Tim DeLaney on Mon Jan 16, 2012

The current Republican candidates have all called for the elimination of both capital gains taxes and estate taxes. Presumably, taxes on dividends would also be eliminated, but even if not, there are ways of diverting profits from dividend payments to capital gains--stock buy-backs, for instance.

Below the fold, we will examine the likely consequences of adopting this Republican vision of taxation. Briefly put, it ain't pretty.

Let's imagine you are a CEO or other high-placed executive for a major corporation. Your annual salary--including bonuses--is about $5 million. You are getting more wealthy each year because you don't spend the whole $4 million in after tax dollars. (You have a very good accountant!)

The Republicans gain control of the White House, and of both houses. (Hurray! Let the good times roll!) True to their word, they cut the capital gains tax to zero and eliminate the estate tax. You and your accountants, with an eye toward the 0% tax on capital gains, decide that your salary ought to be structured such that it is classified as capital gains rather than ordinary income.

Somehow, under the magic of creative accounting, and perhaps with an assist from the lawmakers you helped elect with your Super Pac, most of your income is transformed into capital gains. With an effective tax rate near 0%, your net worth skyrockets.

So, what do you do with the money? Even today, the top 1% in wealth own more than half the financial assets in the country. Under the new tax regime, this inexorably increases until--perhaps a few decades from now--they own nearly all the stocks, bonds, and other financial assets. What now?

A natural outlet for all that capital is property. So you start buying up houses on the open market to use as rental properties. The 99% can no longer afford home ownership because you have squeezed the last available dollar out of them. Eventually, most workers are reduced to living from paycheck to paycheck. What do you do when you con no longer get blood from a stone?

You resort to cannibalism, of course. If you are one of the top 0.01%, you start squeezing out the other 0.99%. eventually, and it might take a few generations, all the country's wealth will be concentrated in a few thousand families. (Remember, we abolished estate taxes.) Under the Republican paradigm, the trend is inevitable: the rich will inevitably get richer, and the rest will get poorer.

It may already be too late to reverse the trend. Excess wealth can readily be converted to votes, especially in view of the Citizens United decision. Votes are converted into control of the government, and this in turn is converted to control of the country's wealth. In this circular paradigm, wealth begets wealth. When wealth and politics combine, the non-wealthy are the losers.

For the United States--and all its citizens--to prosper, we need to attain political equilibrium. The politics of the Democratic Party naturally tend towards equilibrium; the politics of the Republicans naturally tend towards runaway wealth concentration.

I don't by any stretch mean to suggest that everything proposed by Democrats is naturally and necessarily optimum policy. We can, and have, made mistakes. But when Democrats make mistakes, those mistakes tend to be self-correcting. When Republicans make mistakes, the results are generally catastrophic.

What does this have to do with the current campaign? First priority, in my opinion, is to overturn the Citizens United decision by means of a constitutional amendment. Demand from every congressional candidate--Democrat or Republican--a firm commitment to the proposed amendment. The alternative is to allow corporations to buy the government. In reality, this amounts to allowing the Boards of directors and the CEO's to buy the government. It is merely a convenient fiction to believe that the shareholders are in control.

There are other reforms needed. In future diaries, perhaps I will try to advocate for some of them.

Also republished by J Town, Dream Menders, and Community Spotlight.

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