Trickle ‘’Out’’ Economics
Now that the elections are
over perhaps we can finally get to the serious work of solving the multitude of
problems that we face as a nation. The most imminent is the so-called ‘’fiscal
cliff’’, which presents a ‘’roadrunner’’ styled image beyond of not just
the chasm between the revenues and expenditures of our federal government, but
between the poles of our political parties.
I voted for Obama, albeit
not as enthusiastically as in ’08. Mitt almost had me after the first debate.
He came across as a passionate moderate and determined problem-solver. He made
the president look like a tax and spend liberal. In the end though, I
wasn’t really sure who he was, and I didn’t think Mitt would be able
to control, nor even tame a Tea (more like “Cool-Aid”) Party intent on
completely dismantling the Federal Government, except to dictate our personal
social mores. Then, Sandy surged and even Gov Christie got religion on the
usefulness of the Federal Government.
So here we are.
I actually think that Mitt
may likely have done a better job moving toward a balanced budget and
taming the federal debt. I also think he was on to something with a focus on
loopholes, and a simpler tax code with lower rates. I am not particularly fond
of Obama’s focus on the $250K hard line between ‘’haves’’ and ‘’have-nots’. My
wife and I have been relatively fortunate in our careers and would be
considered ‘’haves.’’ Last year we paid an effective tax rate of close to 40%,
and let’s just say, a lot of dollars in taxes. Even then, we voted to increase
our taxes another 3% to keep California schools from going bankrupt, the same
schools that did such an excellent job providing me and so many of my friends
with an outstanding education. Go St. Helena Saints. Go Cal Bears. We
need our government to be more frugal and efficient, for sure, but the last
place we should be disinvesting is education. Seriously?!
We are done though. My wife
and I feel like we pay enough taxes. We believe that the folks who are getting
absolutely screwed by our current tax code are some of the hardest working
people in America. Let’s call them the ‘’DIPSHITS’’ (Dual-Income
People, Salaried, HI TaxeS ). We are
successful, typically married, salaried, dual-income earners with white collar
jobs. We are the sons and daughters of lower income, and middle income parents.
We followed all of the rules. We worked hard, studied hard, worked our way thru
college, and went on to grad school. We work 60 hours a week driving economies in
Silicon Valley and around the nation. Our portfolios are modest, and capital
gains are few (nonexistent, really, with the crash in real estate). We do not
own luxury cars or yachts, etc. We have a nice dinner out and a nice vacation
once in awhile. We are comfortable, not rich. 90%+ of our income is on a
W-2. That means we get hammered. And guess what. The rich, and super-rich use
us as stooges. They point to our higher tax rate and cry that taxes need to
come down. Meanwhile, most of them pay an effective tax rate in the mid-teens,
as Mr. Romney’s elusive tax returns so nicely demonstrated. If I paid the
same effective tax rate as Romney did in 2011, let’s just say I could almost
buy two sportscars with the delta. The effective tax rate follows a bell curve.
The effective rate is low for low income earners and low for high net
worth, high ‘’income’’ earners, with rates peaking for DIPSHITS.
I do not disparage those
less fortunate who may earn less, and as such pay less taxes. I don’t subscribe
to Romney’s ‘’47%’’ theory. ( I actually thought that would end his election
bid, but the working class never seems to quite understand how they are being
exploited by the rich and powerful). I also do not disparage, nor am I jealous
of the hyper-wealthy. Many of them have made indelible marks on the US economy.
Thanks Bill G. and Steve J. Thanks Warren. You too Zuck. What I am
outraged with is the inequity of the tax system for the self-proclaimed ‘’job
creators’’ who decry a taxation system that is beautifully (and likely
not coincidentally) tailored to perfectly fit their needs. Low taxes for
capital gains under the guise of trickle down. Check. Carried
Interest taxed as capital gains for hedge fund managers under the guise of lord
knows what. Check. The list goes on. This is a more beautifully tailored
fit than the Savile Row suit so many wear.
When Reagan was president
and first lowered capital gains rates, one could plausibly accept the notion of
trickle-down economics. The US during the Reagan years was a much more insular
and ‘’closed’’ economy than it is today. Over the past 30 years, however, two
incredibly powerful factors have joined together to create a demonstrably
different US and global economy. The natural forces of equilibrium are
now in full play. Just like any other physical, biological, or chemical system,
equilibrium is driven by two primary factors at play: a) a substantive
differential (the driver) between the two systems (think of the salinity salt
water vs. fresh water) and b) a permeable or semi-permeable membrane between
the two systems (think of cheese cloth). Through our American history, we
have enjoyed a substantially higher quality of living than most of the
rest of the world. That is the ‘’differential’’ factor. However, throughout
that history, the ‘’permeability’’ of the membrane between economic systems was
very low. It was not easy for goods and services to flow between
economies.
The internet has changed
everything.
Coupled with improved and
hyper-efficient global logistics, a massively porous membrane has
evolved, Swiss cheese in effect separates our global economies. In the
last thirty years, the natural power of equilibrium has been in full and
powerful display. First, outsourcing, and then offshoring affected mostly
blue-collar jobs. The internet became faster, more efficient,
easier to use, and more useful. Now its white collar jobs are
moving thru the membrane. Legal work, engineering, even medicine can now be
performed from Bangalore or Guangzhou for 25% of what it cost to do
domestically. The net effect is that the quality of life in India and China
improves, while opportunities in the US decline.
Force of equilibrium at
play. The problem is that the ‘’volume’’ on a per-capita basis of our US
economic system versus the rest of the world is small. Someone in the US
now making $60K per year would have to drop their salary by 1/10th
to bring up 10 people in Vietnam to meet somewhere between with comparable
quality of life. While it is not completely zero-sum game, so long as the
quality-of-life differential exists, and the ease of flow of goods and services
continues, the effects of economic equilibrium are bound to impose forces on
the US economy for decades to come. This is what your politicians won’t tell
you. And no one really knows what to do about it. The factors that retain the
barrier element of the membrane, and thus our way of life, are our political
stability, our education system, our entrepreneurial spirit, access to credit,
and our currency and T-bills backed by the full faith and credit of the US
Government. So let’s not mess with those.
Back to Capital Gains
Tax. In the Reagan years, I could buy the notion that low capital gains
fostered investment in the US economy, and stimulated growth. Trickle Down, in
effect. But now, with the porous membrane between economies, I am no longer
sold. Just look at Romney’s portfolio, managed out of the Cayman Islands, with
substantial investments in China, Brazil etc. Does the ‘’double-taxed’’
argument really work there (if ever). How does low taxation on these
gains benefit the US economy? It is ‘’Trickle Out’’ economics. These benefits
are solely for the wealthy where the preponderance of income is from investment
portfolio. If the $250K earner is lucky enough to have a $100k portfolio
earning 10%/year return (…that would be a very nice return these days - after
paying investor fees), and then earns $10K/yr of long-term capital gains on her
sale of these assets, she pays a tax of $1,500. If the tax was 25%, she would
pay another $1000. Even with a moderate portfolio, this is basically chump
change. Better off lowering her income tax rate by 1%. Particularly when
most Americans have the preponderance of their ‘’investment’’ portfolio locked
in depreciating or stabilized home values. Low Capital Gains benefits the rich
and super rich–only, period. When the portfolio gets to be $10M, appreciating
$1M a year, the 10% tax rate difference now turns into $100K. Now, we can start
making a ding in the deficit.
So as we approach the
fiscal cliff, and Obama is keen to put his first second term notch in his belt,
he should take some of Romney’s advice. The tax system needs to be
overhauled. But don't be fooled by the ''trickle-down'' argument. It is
''trickle out'', not down. We need more equity in our tax structure. As Mr.
Buffet says, he should not be paying a lower tax rate than his Secretary.
But please do not confuse
Warren and me. He is no DIPSHIT.
