[edited 1/30/09 to correct payroll tax description]
The right-leaning think tanks and commentators have long claimed that the long-term solution that will guarantee a viable U.S. economy involves two things--tax cuts and entitlement cuts. Look at the Cato Institute, Heritage Foundation, Claremount Institute, Tax Foundation, Americans for Tax Reform, or any of the many other right-leaning "think tanks" . Some of these claim to be nonpartisan, but are nonetheless clearly right-leaning in the positions espoused. Many of these "think tanks" might better be called "dogma distributors". In my view, these proposals distort the options and misrepresent the likely results.
I. Re Tax Cuts:
Right-leaning proposals for tax cuts argue for two types of reductions of government revenues that are especially beneficial to the affluent: cuts on capital income (low taxation of capital gains, treatment of dividends as capital gains, low taxation on stock options as compensation, treatment of "carried interest" as capital gains even though it is most clearly compensation income, etc.) and cuts on corporate business taxes (across the board lowering of rates, accelerated depreciation and expensing provisions, advantageous treatment of stock option compensation to high-paid executives, allowance of cross-crediting of foreign income that can drastically reduce the US tax rate, allowing repatriation of foreign income with little or no taxation, advantageous transfer-pricing, sourcing, apportionment and treaty rules for highly manipulable types of income like royalties for intangible properties developed in the US but moved to other countries , etc.).
The justifications offered for these tax cuts are usually couched in language about entrepreneurship and the American way. They say that cutting taxes on capital puts money into the hands of entrepreneurs, creating new businesses and jobs; that cutting taxes on corporations lets them compete better in the world markets; and similar "American dream" friendly language. But the justifications don't hold water. The investor class tends to hoard its assets in order to enrich itself, with little concern about broad-based economic growth. The assets may end up in secret Swiss bank accounts, fraudulently hiding from US taxation and doing nothing to create new businesses or jobs. Conversely, the real entrepreneurs (Bill Gates in his garage, not Bill Gates in his multimillion dollar mansion outside Seattle) are struggling with the bits and pieces of savings and loans that they can pull together from friends, family and local banks--they're not benefitting from the capital gains cut for the affluent. Similarly, the justifications for corporate tax cuts espouse greater productivity and jobs creation but support dividends to affluent owners and high bonuses to affluent managers, low paychecks for typical workers and destruction of worker pensions and other benefits. Corporate expensing isn't likely to result in purchase of excess equipment, and funds freed up from corporate tax cuts are about as likely to be invested overseas (in low-tax jurisdictions where tax credits that are cross-credited amount to a further tax break at home) than to be invested in new job creation here at home. Competition may be enhanced, but where and to what purpose? Likely the tax breaks provide even more impetus for the big multinationals to beat out the little businesses here and abroad, a trend that may not be part of a sustainable global economy in the long run.
Of course, another impact of government revenue reductions in the form of tax cuts for the affluent is the reduced monies available to spend in areas of the greatest need--urban mass transit programs, support for medicaid for the poor, etc. So tax cuts for the affluent are likely to end up being simultaneously translated into benefit cuts for the poor and lower middle class. That is especially true when one realizes that most proposals for zero taxation of capital gains and corporate income also propose reduction of "entitlements" that are particularly important for the elderly and poor among us.
2. Re Entitlements
Entitlement changes, cuts or outright elimination is a long-term goal of most of the right-leaning think tanks. Privatization of Social Security and even further privatization of health care benefits are explicit goals, moving the systems to ones that generate profits for insurers and others while cutting benefits for the sick and elderly poor.
Entitlements, when it comes to the poor, is read broadly. Being able to earn any income and not pay any income tax because of the standard deduction and personal exemptions and earned income tax credit amounts to such an entitlement. The claim is that, in order to be invested in America and "responsible", every American, even those at the very low end of the income distribution, should pay at least some percentage of their earned income in taxes (some suggest a minimum of 5% from those at the bottom who struggle for their daily bread.
Of course, the most conspicuous arguments about "entitlements" are directed towards Social Security and Medicare, social safety net programs that are funded through regressive payroll taxes, in the case of Social Security, taxes that are assessed on every dollar earned up to about a $100,000 cap-- an amount that puts the earners into the upper 30% of the income distribution--while dollars above that cap are not assessed anything to support Social Security. Statements abound that Social Security is already insolvent or bankrupt. Of course, those statements are wrong, since Social Security is still running a surplus that has been used to mask the depths of the federal deficit (which handily helps justify tax cuts for the affluent). Health care costs are skyrocketing, though it is not clear that the "entitlements" problem and the "health care costs" problem are inseparable. We might well use government clout to intervene in a poorly performing market where health care profitmakers are permitted to make life-or-death decisions about care available based on their profit taking goals. Or we might well decide that spending a larger proportion of the US gross domestic product on providing accessible and decent health care to every American is an appropriate goal, so that we should make changes in our health care delivery system, such as moving to a single-payer, single-provider system that acknowledges that health care provision is at least a quasi-government utility. But the entitlement naysayers distort both the current situation (claiming inevitable bankruptcy) and the future options (failing to provide clear information about most western democracy's universal health care) in order to push the dogmatic agenda of privatization and cutting of government benefits provided through these "entitlement" programs.
For all these reasons, and more, item 1 plus item 2 does not equal (=/=) a sustainable economy.
But there is another type of entitlement that we ought to be talking about, that tends to be completely disregarded when those right-leaning think tanks mention entitlements. It shouldn't be.
3. The other type of entitlement.....
Meanwhile, there is another type of "entitlement" that is completely disregarded by the same proponents of "welfare reform", "entitlement reform" and generally cutting benefits aimed at those in the non-affluent income groups. That can be best understood by looking at the way the TARP funds (troubled asset relief program) were administered by Paulson and the Bush administration.
TARP came about as an idea for dealing with the credit crunch and the huge losses on the books of banks that had issued subprime mortgages without appropriate risk analysis, securitized those mortgages in vehicles that made it more and more difficult to track how defaults affected the financial system, gambled with credit default swaps built on a rickety foundation lacking appropriate assumptions about risk, and packaged it all with a speculative mentality that grabbed for huge profits without exercising appropriate judgment. Bankers and shareholders got rich (or richer) out of the risky speculation. Investment bankers and traders on the floors hauled home million-dollar bonuses annually, considering it their just reward for their high-flying risk-taking abilities. They were gambling and making millions, bragging about it and browbeating lawyers who dared to get in their way on a risky deal that they wanted treated a certain way for tax purposes. (I know from personal experience--I was a Wall Street tax lawyer from late 1995 through the first half of 2001.) Those bankers--all of them, not just the CEOs making multimillion pay packages for taking risks and ultimately running their banks into huge losses--were part of a speculative, get-rich-quick, greed-is-good, we're-the-king-of-the-world culture that dominates Wall Street.
Why do I say "dominates"? Didn't the credit crunch and near collapse of the financial system take the starch out of their collars and teach them proper humility? Haven't they recognized that their profligate ways have had a huge negative impact on their country, their fellow countrymen, and the world in general--especially the poor and lower middle class?
Apparently not. First, Paulson exercised none of the power that he should have and could have exercised in doling out $350 billlion of taxpayer money to these same loser banks. There were almost no strings attached to the bailout. A few limitations on executive compensation for those at the very top was about it. Dividends or multibillion dollar bonuses could still be paid. Banks were not required to use their lending power to support ordinary Americans' ability to stay in their homes and small businesses' ability to keep operating.
And they haven't. Banks have scoffed at any obligation to the public interest. Instead, banks with big handouts from the government have seen those handouts as just another way to carry on their "greed is good" agenda. Several of the bailout recipients are helping Pfizer buy Wyeth--creation of a bigger Big Pharm that will have even more control over pricing of essential pharmaceuticals worldwide. Not likely, in my view, to be a consolidation that promotes the public good. But none of the bailout recipients are doing much to help ordinary Americans avoid foreclosure.And they are paying dividends and huge bonuses, in spite of running up huge losses and receiving huge government handouts. The headline in today's New York Times tells it all: What Red Ink? Wall St. Paid Hefty Bonuses, Ben White, NY Times, Jan. 29, 2009, at A-1.
[Wall Street financial companies paid out] an estimated $18.4 billion in bonuses for the year. That was the sixth-largest haul on record. ...Wall Street workers still took home about as much as they did in 2004, when the Dow Jones Industrial Average was flying above 10,000 on its way to a record high. Some bankers took home millions last year even as their employers lost billions.
Later in the article, White notes that New York's comptroller, Thomas DiNapoli, has calculated that the brokerage units at New York financial companies lost $35 billion in 2008.
The acceptance of taxpayer bailout monies and payout of bonuses--even at less extraordinary amounts than during Wall Street's recent heyday-- is hard to justify-. It is even "disconcerting" says Lucian Bebchuk at Harvard. There is no "performance reward" argument for payouts--in fact, there's a strong argument for clawing back "performance" bonuses based on the phantom gains from earlier years. There is no "need to pay more to retain them" argument for payouts--in fact, there's a buyers market for brokers these days, as layoffs and financial wreckage continue to cause enormous job loss. Why would you pay to retain the guy that took the gamble that got you into the soup in the first place, anyway? As Bebchuk said "This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees."
Whether bailout monies went directly to pay the bonuses or not is irrelevant, in my view. Money is fungible. Bonuses paid by companies that take taxpayer monies are insupportable. Period.
So are those Wall Street bonus recipients embarassed by their awful performance, the need for their companies to recieve bailout monies, and their absurd bonuses and ready to turn it back to the companies in chagrin? Not one whit. Here's the conclusion to the Times article.
On Wall Street, where money is the ulimate measure, some employees apparently feel slighted by their diminished bonuses. A poll of 900 financial industry employees released on Wednesday by eFinancial Careers.com, a job search Web site, found that while nearly eigght out of 10 got bonuses, 45 percent thought they deserved more. Id.
Now, there's an entitlement I would feel very comfortable eliminating. It's not just because of my memory of the bullying culture that predominates on Wall Street, or the hubris of the sense of entitlement that permeated every encounter with the typically arrogant young white males who raked in million-dollar bonuses for thinking up schemes to help taxpayers avoid paying taxes. It's the fact that the culture that pays those bonuses to people who think they deserve them for risk-taking creates a systemic risk for the entire financial system, which ultimately burdens ordinary Americans in their daily lives. It's time to really end that arrogant, speculative culture. Requiring any company that receives TARP funding to forego any payments of bonuses or dividends until the American taxpayers are 100% repaid would be a start.