Trickle ‘’Out’’ Economics

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 1/10^th 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.