Myths from the Right

The myth that lower taxes and less regulation will create jobs has been proven to just be a myth along with the myth of less government. Obviously, no one wants to pay more taxes or have to deal with more regulations. Since the inauguration of Ronald Regan, the idea that lowering taxes and easing regulations has been the banner of those on the right and, based upon all historical records has resulted in a decline in middle class wealth and a massive increase in the wealth of less than 2% of Americans. History will further indicate that the increased wealth of the 2% failed to trickle down in any appreciable amount. The end results of thirty years of supply-side economic theory has been a loss of jobs and economic decline that parallels the great depression. While the promoters of supply-side economics are also the promoters of less government the economic situation would have been far worse but for government bail-out of the financial industry as well as government loans to prevent the failure of the automobile industry. The main impediment to economic recovery is lack of demand. When half of all wage earners bring in less than $25,000 dollars per year, there will not be sufficient demand for housing, home furnishings, major appliances, cars, and other drivers of economic growth. Regardless of corporate profits, job creation will not take place without demand for products and services unless need for jobs is created by government. By the same token, we have already seen that suspending or reducing taxes on corporate income repatriated from foreign sources will not result in job creation. This was tried before and failed to do anything but increase corporate executive bonuses and stockholder dividends.

This leads to one of the unspoken, main causes of the present economic crisis...executive compensation. Thirty years ago, the top executive pay was forty times the lowest paid employee. Today that ratio is four hundred times the lowest paid employee. There is a finite amount of money available for payroll and since the share given to executives has increased over 400 times, the amount left for other employees has decreased. In addition, the quest for the higher executive pay has resulted in increased interest in low-wage off-shore labor. The last effect of higher executive pay is the lower payroll subject to FICA and Medicare taxes.

One way to fix Social Security would be to eliminate the cap on all wage, salary, and other compensation payments on the part of employers. This would also discourage excessive employee compensation at the executive level. An even better fix would be a reverse cap where all income is subject to FICA on the part of both employer and employee but the first $10,000 of income is excluded. The effect of this is three fold: First it would bring in additional funds needed to strengthen Social Security. Second, it would discourage obscene executive compensation. Third, many companies would find an incentive to hire lower and middle class employees.

Another solution to today’s economic dilemma would be to first define all forms of compensation as wages and reportable as such on form W-2 then eliminate the cap on FICA so executives, like all other salaried and hourly employees are subject to payroll tax on their entire earnings. Owners of S corporations as well as individuals compensated only by investment income and dividends should also have that income redefined as wages thus subject to the same payroll taxes as everyone else. Income is income. There is no historical evidence that granting favorable tax treatment to so-called capital gains has a positive economic effect. In fact, an argument can be made that lower taxes on so-called capital gains encourages speculation and reckless gambling. It encourages creation of financial instruments that only trade dollars from one individual to another and are never invested in any job-creating activity.

Whether we learn from the financial collapse of the thirties or the more recent financial collapse, the lessons of both are obvious. The fact that wealth does not trickle down should be lesson number 1. Lesson number 2 should be the economy is more dependent upon middle class income growth than income growth on the part of the top 2%. Lesson number 3 should be that a country that does not manufacture what it consumes does not grow. Lesson number 4 is the reality that creating exotic financial instruments benefits but a few. Lesson 5 is all income should be treated the same from a tax standpoint.

Another myth that needs dispelled is the myth that lower corporate taxes result in jobs. To begin with, paraphrasing the words of Leona Helmsley, only little corporations actually pay the legislated tax rates on all of their profits. Many of the larger corporations pay no tax at all and, in fact, actually get back money from the government. At a time when corporate profits are at an all time high, tax receipts from corporations are at an all time low. In spite of record profits America is experiencing record unemployment. The Supreme court (and Mitt Romney) said corporations are people. If that is the case, like U.S. Citizens living and working abroad who have to file and declare all earnings regardless of their national origin, U.S. Corporations should also be required to do the same. Again, like citizens abroad, corporations should be able to deduct foreign taxes they paid, but should be liable for U.S. taxes after taking those deductions. In the same vein, any corporation whose stock is traded on a U.S. exchange should be considered to be a U.S. corporation regardless of where incorporated. Off-shore tax haven incorporation need to be stopped. Finally, any corporation doing business with the U.S. government and receiving federal payments for products and/or services should be liable for U.S. tax.

Finally, there’s the myth of “small business”. Most using this term include as a “small business” S corporations. This is a form of incorporation where there are no public stock offerings and usually a small number of owners. In many cases S corporations are actually small businesses. However, not all S corporations are small businesses. One example of the misleading nature of the term small business is Pilot Flying J, a nationwide chain of convenience stores and truck stops ranked as one of the most lucrative private companies in the country. S corporations do not pay corporate taxes on their profits. Instead, the profits are reported as dividends on the tax returns of the owners of the S corporation and taxes are paid at the personal rate of the individual owner. Another “small business” according to Republicans is Koch Industries. Both Pilot and Koch give a totally new meaning to the word, small.