Supply-Side Economics Sounds Good But It Hasn't Worked

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Supply-Side Economics Sounds Good But It Hasn't Worked 

Posted: 09/13/2012 1:31 pm

When was the last time supply-side economics worked as a systematic public policy?

By supply-side economics, I am referring to lowering income tax, capital gains tax, and reducing regulation as an effective means for economic growth.

It's a great thought that we can pay less in taxes and economic prosperity would abound, trickling down like manna from heaven. But is that realistic?

I'm quite certain my question will prompt some to race to their computers to remind me that President John F. Kennedy cut taxes. Kennedy did indeed cut taxes, which passed in February 1964, three months after his death. Moreover, it helped to spur economic growth.

But Arthur Okun, a Kennedy economic adviser, stated in 2004, "The Revenue Act of 1964 was aimed at the demand, rather than the supply, side of the economy."
A demand side cut is a Keynesian economic theory that public consumption spurs growth. Government temporarily places money in the hands of consumers so that they will spend, thus, spurring the economy.

Conversely, supply-side economics focuses on business investment and wealthy individuals to invest. This investment would, in theory, spur economic growth for all Americans.

What about Ronald Reagan? Surely, the Gipper would be the answer to my question. Reagan eloquently placed supply-side economics into the mainstream of public discourse.

Reagan cut taxes in 1981. But according to New York Times columnist Paul Krugman, "The 1982 tax increase undid about a third of the 1981 cut; as a share of GDP, the increase was substantially larger than Mr. (Bill) Clinton's 1993 tax increase."

Despite the contemporary supply-side deification, Reagan raised taxes several times during his eight years in the Oval Office. He placed governing over his ideology. Though he may have favored supply-side economics, Reagan's mixed bag of cutting and raising revenues make it difficult to classify him as a strict supply-sider, which still leaves us pondering the last time supply-side economics worked.

In 1988, then presidential candidate George H.W. Bush famously stated at the Republican Convention, "Read my lips, no new taxes." But Bush, who in 1980 called supply-side "voodoo economics," raised taxes as a way to reduce the deficit created in the Reagan years.

Clinton raised taxes, and when he left office in 2001, it marked the last time America enjoyed a budget surplus.

President George W. Bush, who cut taxes in 2001 and 2003, may very well be the only true supply-side commander-in-chief in the past 50 years. It was the second round of tax cuts passed in 2003 that then-Treasury Secretary Paul O'Neil vigorously argued against, citing the growing deficit.

Former Vice President Dick Cheney famously responded with, "You know Paul, Reagan proved that deficits don't matter. We won the midterm elections, this is our due."

I've always maintained that Cheney's deficit comment was more political than economic. But deficits matter economically.

The tax cuts enacted by Reagan or Bush did not have corresponding spending cuts -- a recipe for deficits. But no one can deny that when Clinton raised marginal tax rates, despite supply-siders' dissent, the economy boomed.

Well, to quote Yogi Berra, it looks like déjà vu all over again. If Congress allows the Bush-era tax cuts to expire at year's end, supply-siders would argue it would be a job killer. But its record of job creation is outpaced by its contribution to enhancing the deficit.

After more than a decade, any spur to the economy that the Bush-era tax cuts may have offered has long since passed.

Tax cuts as well as raising revenues are tools for governing. An overreliance on either is counterproductive.

So when has supply-side economics worked? The conjecture says it could; the data says it hasn't.

 

Follow Byron Williams on Twitter: www.twitter.com/byronspeaks

The Failure of Supply-Side Economics

The Failure of Supply-Side Economics

Three Decades of Empirical Economic Data Shows That Supply-Side Economics Doesn’t Work

SOURCE: AP/Greg Gibson

When President Bill Clinton, pictured here addressing the nation in 1993, raised taxes that same year did the economy suffer a slowdown, as was predicted by those who believe in supply-side economics? The data says no.

By Michael Ettlinger and Michael Linden | August 1, 2012

See also: Making Our Middle Class Stronger by David Madland; The Middle Class and Economic Growth by Michael Ettlinger; Video: Once Upon a Trickle Down: The Rise and Fall of Supply-Side Economics by the Center for American Progress and Mark Fiore
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Infographic: Seven Graphs That Show Supply-Side Doesn’t Work

Adherents of the economic theory known as supply-side economics conte
nd that by cutting taxes on the rich we will unleash an avalanche of new investment that will spur economic growth, and boost job creation, leading to economic improvements for everyone. For most of the past 30 years this idea has dominated the economic debate, resulting in two sustained eras of tax cuts aimed at the wealthy, separated by a brief respite in the 1990s.

Now, as our economy struggles to emerge from the deepest recession in generations—and as we argue over what to do with the expiring Bush-era tax cuts—it is more important than ever to understand one simple fact: When put to the test in the real world, supply-side policies did not deliver as promised. In fact, by every important measure, our nation’s economic performance after the tax increases of 1993 significantly outpaced that of the periods following the tax cuts of the early 1980s and the early 2000s.

Supply-side economics starts from the generally accepted economic insight that tax policy can influence private-sector decisions by changing the incentives to work and invest. But supply-side acolytes take this relatively mundane observation to an extreme conclusion. They argue that lowering taxes for people, especially for those who have a lot of money to invest, will always lead to better economic results, and furthermore, that lower taxes is the single most critical intervention the government can undertake to stimulate growth.
This assertion—that lower taxes for the rich will lead to improved economic results—is testable. Of course, pure natural experiments in economics are few and far between, but over the last 30 years the United States alternated between economic policies that were heavily influenced by supply-side ideas, then were not, then were again. This variation allows us to compare economic performance in the various eras. If proponents of supply-side theory are correct, then the supply-side eras should outperform the non-supply side era. But that’s not what happened.

In 1981, President Ronald Reagan signed a large tax cut package into law, which lowered the top income tax rate by 20 percentage points and cut taxes for the rich and for corporations. The next several years saw numerous additional tax legislations passed, much of which represented retreats from supply-side ideology. Nevertheless, this supply-side era continued into the 1990s. In 1993, President Bill Clinton signed a major tax increase into law. That legislation raised the top marginal income tax rate paid by the wealthy, and also extended Medicare taxes to higher income individuals. And despite the capital gains tax cut of 1997, the 1990s represented an eight-year respite from supply-side policies.

Those policies returned in force in 2001 with the enactment of tax cuts by President George W. Bush. To this day, we are still living, by and large, with the tax code from the Bush era—with the only differences being further tax cuts signed by President Barack Obama.

In order to evaluate whether supply-side policies really delivered on their promise, we looked at the economic performance of the three eras, all beginning at equivalent points in the business cycle. Since the 1993 tax increases were passed 10 quarters into an economic expansion, we compared performance for all three eras starting 10 quarters into their respective expansions, and then going forward five years from that point, or—in the case of the 2000s—until the expansion ended in December of 2007.

We compared performance during these equivalent years along seven key economic measures. Here are the facts.

Investment growth was weaker under supply-side policies

The critical link in supply-side theory’s chain is business investment. Proponents argue that lower taxes on the rich will spur more investment, and since investment is a key ingredient to growth, that will boost the overall economy. But investment growth during both supply-side eras lagged far behind that of the 1990s when taxes were higher. (see Figure 1)

Productivity growth was weaker under supply-side policies

A second key ingredient in the supply-side recipe is increasing worker productivity. The theory says that more business investment will result in innovations that allow each worker to produce more, thus growing the pie for everyone. But as with investment growth, productivity growth under supply-side policies fails to impress when compared to the higher tax era. (see Figure 2)

Overall economic growth was weaker under supply-side policies

With their lackluster investment and productivity growth, it’s not surprising that overall economic growth during the supply-side eras also lagged behind the higher-tax era. The expansion following the Bush tax cuts was especially weak. (see Figure 3)

Employment growth was weaker under supply-side policies

Because the higher-tax period experienced faster growth, it also enjoyed a booming job market. Employment growth after the 1993 tax increases outpaced that of both the 1980s supply-side period and the 2000s supply-side period. Again, the most recent supply-side period was especially bad for employment growth, averaging just 1.5 percent increases a year. (see Figure 4)

Income growth for middle-class households was lackluster under supply-side policies

Supply-side theory posits that when the tax burden on the rich is reduced, it will eventually help everyone. And conversely, if you raise taxes on the rich, then everyone will end up paying the price. Of course, if that were the case, we should have seen robust income growth for middle-class families under supply-side policies and stagnation under the higher-tax regime. But we saw just the opposite. After the tax increases, income for the median household grew at nearly twice the rate as it did under the supply-side tax policies. (see Figure 5)

Hourly earnings were flat or declined under supply-side policies

One of the ways that lower taxes on the rich is supposed to end up helping the middle class is by resulting in higher hourly earnings. Why? Because if investment leads to boosted productivity, then that boosted productivity should be reflected in wages. Is that what happened? No. We didn’t get the investment boost, or the productivity boost, and we certainly didn’t get the wage boost in either supply-side era. In fact, hourly earnings (after accounting for inflation) fell during the 1980s, and were flat during the one in the 2000s. But during the 1990s, after the tax hikes, real hourly wages grew by about 1 percent a year. (see Figure 6)

Our nation’s fiscal health deteriorated under supply-side policies

Some of the more dedicated supply-side devotees go so far as to argue that tax cuts for the rich will result in so much additional economic activity that they will actually increase government revenues, thereby “paying for themselves,” and have no negative impact on the bottom line. This assertion, as with the others, is not supported in the data. Not only did government revenues fall during the supply-side era, but the bottom line deteriorated noticeably, too. Publicly held debt rose during both supply-side eras, and fell substantially during the higher-tax period. (see Figure 7)

Conclusion

Did the supply side policies of Presidents Ronald Reagan and George W. Bush work? Did they boost investment, spur growth, and cause prosperity to trickle down? The data says no. And when President Clinton raised taxes in 1993, did the economy suffer a slowdown, as was predicted by those who believe in supply-side economics? Again, the data says no.

This data does not mean that higher taxes are always better and lower taxes are always worse for the economy. That would be making the same mistake that many supply-siders make, but in reverse. Indeed, there were obviously other forces at work in our economy besides tax policies over this 30-year period. But it does mean that lower taxes aren’t always the answer, aren’t a magical economic cure, and that higher taxes can coexist with, and perhaps even aid, a strong economy.

Michael Ettlinger is Vice President for Economic Policy at the Center for American Progress. Michael Linden is Director of Tax and Budget Policy at the Center. 

Note: This analysis was based on a earlier report jointly issued by the Center for American Progress and the Economic Policy Institute, entitled, “Take a Walk on the Supply Side,” authored by Michael Ettlinger and John Irons. The numbers in this brief have been updated with the latest data, and thus differ slightly from that original paper. For more information on methodology and a deeper discussion of supply-side theory, please refer to the original publication.
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Infographic: Seven Graphs That Show Supply-Side Doesn’t Work

Infographic: Seven Graphs That Show Supply-Side Doesn’t Work

By Michael Ettlinger and Michael Linden | August 1, 2012

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See also: The Failure of Supply-Side Economics by Michael Ettlinger and Michael Linden

7 Deadly Sins America Commits Against Its Own People

News & Politics  

AlterNet / By Paul Bucheit

7 Deadly Sins America Commits Against Its Own People

The US terrorizes millions all over the planet... here's what it does to its own citizens.

October 1, 2012  |  

 

 

 

 

 

The list doesn't include our most grievous offenses, those of military and economic warfare against the rest of the world. Sinful enough is our behavior at home.

1. Sin against children

Perhaps "sanctity of life" ends at birth. According to Census Bureaufigures, one out of every five American children lives in poverty. For blacks and Hispanics, it's one out of every three.

UNICEF has reported that the U.S. has a higher child poverty rate than every industrialized country except Romania. We are near the bottom in all measures of inequality that affect our children, including material well-being, health, and education.

2. Sin against the poor

The U.S. poverty rate grew from 11.3% to 15.0%, a 33% jump, in just 11 years. The impact was felt primarily by minorities and women. The median wealth for single black and Hispanic women is shockingly low, at just over $100 (compared to $41,500 for single white women).

Another shock. For every dollar of NON-HOME wealth owned by white families, people of color have only one cent.

Despite the continued economic assault on already-poor Americans, the number of TANF (Temporary Assistance for Needy Families) cases has dropped by 60 percent over the last 16 years.

3. Sin against students

Students at all levels have been losing their nation's support. States reduced their education budgets by $12.7 billion in 2012, and in 2013 the majority of states will be spending even less.

At higher educational levels, Americans are paying much more than students in other countries. Only 38% of college expenses come from public funding, compared to 70% across other OECD countries. While other nations continue to offer free tuition, with the recognition that education leads to long-term prosperity, the U.S. system has become morecorporatized, to the point that expensive programs like nursing, engineering, and computer science have been eliminated to cut costs. The profit motive has blocked the path to academic excellence.

4. Sin against the middle class

The middle class is shrinking. In 2011, according to a Pew Research analysis, 51% of the nation's households earned from two-thirds to double the national median income. In the 1970s it was 61%.

One-quarter of America's workers are now making less than $22,000 a year, the poverty line for a family of four.

Thirty million Americans are making between $7.25 (minimum wage) and $10.00 per hour.

With the transition of middle-class workers to low-income status, entrepreneurship is disappearing. Innovation doesn't come from the upper class. A recent study found that less than 1 percent of all entrepreneurs came from very rich or very poor backgrounds. Small business creators come from the hard-working, risk-taking, nothing-to-lose middle of America, but their entrepreneurial numbers are down -- over 50% since 1977.

5. Sin against the common good

A recent Tax Justice Network report placed total hidden offshore assets at somewhere between $21 trillion and $32 trillion. With about 40% of the world's Ultra High Net Worth Individuals in the U.S., up to $12.8 trillion of untaxed revenue sits overseas. Based on a historical 6% rate of return, this is a tax loss of up to $300 billion per year, money that should be paying for the public needs of education and infrastructure.

Tax avoidance is so appealing that 1,700 Americans renounced their citizenships last year. Like Eduardo Saverin, who benefited from America's research and technology and security to take billions from his 4% share in Facebook, and then skipped out on his tax bill.

Inexplicably, some have defended Saverin's actions, apparently failing to recognize one's obligation to pay for societal benefits. A Forbes writer said, "When individuals resist governmental hubris, we should exalt their actions." The American Thinker blog argued that "the U.S. tax code is so oppressive that smart and successful people like Saverin are compelled to renounce citizenship in order to keep more of their own hard-earned wages." Hard-earned, in truth, by the thousands of contributers to his social networking success.

6. Sin against nature

A number of studies show that investment in renewable energy will create many more jobs than the fossil fuel industry. And the investment will likely pay off. A National Renewable Energy Laboratory analysis determined that "renewable electricity generation from technologies that are commercially available today...is more than adequate to supply 80% of total U.S. electricity generation in 2050."

But now the prospect of cheap natural gas is leading us back to a dirty form of energy independence, with a continuing reliance on fossil fuels, and on the fracking technology that despoils our land and pollutes our water. The national commitment and political will needed for the long-term health of our nation is more elusive than ever.

7. Sin against common sense

The deception began, at least in the modern age, with Milton Friedman, who said "The free market system distributes the fruits of economic progress among all people...He moves fastest who moves alone."

This unflagging adherence to free-enterprise individualism is consistent with Social Darwinism, the belief that survival of the fittest (richest) will somehow benefit society, and that the millions of people suffering from financial malfeasance are simply lacking the motivation to help themselves. Social Darwinism is a feel-good delusion for those at the top. Or, as described by John Kenneth Galbraith, a continuing "search for a superior moral justification for selfishness."

A tenet of progressivism is that a strong society will create opportunities for a greater number of people, thereby leading to more instances of individual success. This is the common sense attitude suppressed by conservatives for over 30 years.

5 Obscene Reasons Why Richest Americans grow Richer As Middle-Class Declines

Economy  

AlterNet / By Les Leopold

5 Obscene Reasons Why Richest Americans grow Richer As Middle-Class Declines

The super-rich have learned a new lesson: it is far better to take than to make. 

 

September 28, 2012  |   

 

 

Photo Credit: Shutterstock

 

If you want to see what’s wrong with America take a good look at the nauseating list of the 400 richest Americans – the Forbes 400. While the economy struggled to create jobs, it was another banner year for the super-rich. They increased their collective wealth by a whopping $200 billion, which is more than enough to provide every student in the country with free higher education.
Meanwhile, the median middle-class family – the one smack in the middle of the income distribution -- saw its net worth (assets minus liabilities) drop from $102,844 in 2005 to $66,740 in 2010 according to the U.S. Census Bureau. So while the richest 400 Americans increased their wealth by 54 percent since 2005, the median middle-class family saw its wealth decline by 35 percent. Welcome to the new American math.

It’s not easy to wrap our arms around so much financial fat. The numbers involved are truly mind-boggling. Here’s more new math:

• The richest 400 Americans have as much combined wealth as 25.5 million middle-income Americans. 400 = 25.5 million!

• The average wealthy member of the Forbes 400 is 63,000 times as rich as the average middle-class family. One = 63,000!

• It would take the median middle-class family 82,411 years to earn an amount equal to the wealth of the average person on the rich list. That’s the very definition of financial obscenity.

What do the richest of the rich do?

The rich list gives us insight into how wealth is accumulated today. Are the super-rich “wealth creators” who bring new goods, services and jobs to our economy? Or are they “wealth extractors” who cleverly skim it from the rest of us? Here’s the breakdown of the main industries represented by the 400 richest Americans:

Investment	24.0 percent
Media	8.8 percent
Energy	8.0 percent
Food/beverage	7.5 percent
Fashion/retail	5.8 percent
Manufacturing	3.8 percent
Healthcare	3.3 percent

The very first Forbes 400 list, published in 1982, reflects a different economy. Only 9 percent were in finance while 15.5 percent came from manufacturing. But since then our best and brightest have learned a new lesson: it is far better to take than to make.

Why are the super-rich getting richer while the middle-class implodes?

To break out of the 1970s economic doldrums, the economics and policy establishment, including leaders of both parties, agreed on a new model. We needed to build an investment-led economy, they said, by cutting taxes, deregulating industry and creating more labor “flexibility” (which is French for union-busting). Together, they argued, these policies would dramatically increase capital investment, which in turn would lead to innovation, more jobs and higher incomes for all Americans. Here’s what actually happened.

1. Tax Cuts for the Super-Rich

Step by step, the tax code was altered to appease and aid the super-rich. First, marginal tax rates were dramatically reduced on the top brackets, falling from a post-war high of 91 percent in the 1950s to 35 percent today. But the biggest giveaway was cutting the capital gains rate to 15 percent. Since most of the super-rich receive their income in the form of capital gains, this was like winning the lottery, each and every year. That’s how Mitt Romney could pay only 13 to 14 percent on his enormous income. As this chart shows, the tax bite is fading away for the super-rich.

Click to enlarge.

2. Financial Deregulation

Both parties tripped over themselves to assist Wall Street by dismantling nearly all of the critical New Deal financial curbs. Until deregulation, Wall Street was a boring place to work with incomes nearly identical to those with similar education in other sectors. After deregulation it became a gold mine (see chart below). Anti-trust actions to break up big banks no longer occurred. Glass-Steagall (which separated speculative banking from commercial banking) was gutted. Too-big-to-fail casinos flourished (until they crashed) along with ever rising incomes for financiers.

Click to enlarge.

3. Union-Busting

Say what you will about unions, but the fact remains that when unions are strong, the middle-class prospers and the income gap closes. It’s remarkable how the rise of the super-rich and the decline of the middle-class correspond to the generation-long assault on unions. National Labor Relations Board (NLRB) and court rulings combined with new anti-union tactics by employers to make organizing new members more difficult. Also the decline of domestic manufacturing, aided and abetted by rapacious financial engineers, further eroded labor’s base. Until this turns around, the middle-class, as well as the poor, will suffer.

4. The Wall Street Crash and Bailouts

The financial crash devastated the middle-class, largely because its wealth is largely dependent on housing values. When the financial casinos went under, the housing bubble imploded. As the economy nearly came to a standstill in 2008-'09, 8 million jobs vanished in a matter of months, all destroyed by Wall Street’s reckless adventurism. To prevent another Great Depression, Washington bailed out the big banks and hedge funds, but not homeowners. The idea, successfully marketed by Wall Street’s minions in government, was that by saving Wall Street, the economy as a whole would be resurrected. Again, trickledown failed to aid the middle-class as unemployment grew to depression-era levels. Yes, GM and Chrysler received support as well, which kept employment from crashing even further. But Wall Street received most of the booty. No wonder super-rich financiers are prospering.

5. Corporate Money in Politics

As more and more money gushed to the top, more and more money entered into politics and lobbying. The net result was more government goodies for the super-rich. Corporate America, in every shape and form, took effective control of the legislative process so that both parties continued to shower the wealthy with tax breaks, and their industries with direct subsidies. While conservative political theorists sang praises to the all powerful free market, the largest corporate players raided the treasury again and again. And while some complain about the undo influence of liberal “special interests,” the biggest interest of all is business which outspends labor to the tune of $14 to $1…and that was before Citizens United.

Why the Ryan-Romney Plan has zero chance of resurrecting the middle-class

Ryan and Romney are in love with wealth and the few who amass it. As a result, they are fully committed to precisely the same policies that created the obscene wealth gaps in the first place. They want even more tax cuts for the rich, even more regulatory freedom for Wall Street, and even more attacks on unions. If they reinstitute these failed policies, we certainly will see larger too-big-to-fail banks that will gamble and fail, and again grab bailouts from us. All the while, those juicy tax cuts for the super-rich will float over to the Grand Caymans, while average middle-class incomes decline. Maybe before the 2008 crash we could have had a serious argument about the merits of tax cuts and deregulation. But we just lived through a real-life experiment using precisely those policies, and the results are in: This dog don’t hunt.

What will it take to resurrect the middle-class?

Americans don’t begrudge the accumulation of wealth as long as our own standard of living improves and our children have a good shot at doing better. We do not expect to work hard and then watch our standard of living decline, while the uber-rich live lavishly by skimming away our collective wealth.
There is a way out -- but it won’t come easy. It’s a hard road because it runs counter to nearly everything we hear about the economy. Revitalizing the middle class (and lower-income groups as well) starts with one central observation – the private sector on its own will never create enough jobs for all who need them. And without full-employment we will continue to see our incomes stagnate and decline.

Unfortunately, it’s hard for us to trust government in part because we live in a surround-sound world that incessantly blares out anti-big government ideology. As a result, many believe that a government job is somehow less worthy than a private-sector job. But is a teacher employed at a private school somehow more valuable than a teacher in your public school system? Is a private security guard more worthy than a policeman? You can try this kind of thought experiment up and down the occupational ladder and you’ll find millions of jobs that are done better in the public sector.

But that’s just a start for retooling our minds. The biggest breakthrough comes when we finally realize that after a major financial crash, it’s just not possible for the private-sector economy on its own to produce the jobs needed to put our people to work. We’ll be waiting decades to get back to full-employment if we rely solely on private-sector expansion. It won’t expand until demand increases, and demand won’t increase until we expand, not contract, public employment.
If you want to see a vibrant middle-class, then we should be creating vibrant middle-class jobs in the public sector – more teachers, more social workers, more workers rebuilding our infrastructure and weatherizing our buildings. (And yes we can fund private contractors to help out as well.) Instead, we are doing precisely the opposite: we are gutting public employment –about 650,000 good-paying federal, state and local government jobs were eliminated over the past two years, all in the name of debt reduction.
A simple reform

We don’t need to run up debt to put our people to work.

All we need to do is make those who caused the crash pay to clean it up. Here’s a simple reform program that neither party has the guts to implement:
1. A financial transaction tax on Wall Street on each and every trade, especially on risky derivatives.
2. Eliminate the special tax rate for capital gains.
3. Institute a 3 percent yearly wealth tax on anyone with a net worth of $10 million or more.

Collectively this would produce revenues in access of $300 billion per year which could readily create 6 million new public-sector jobs both directly and through contractors. (And if we do it right every new job could be green and reduce our carbon footprint.) Add in a multiplier, and our economy would soon reach full-employment.

We are at a clear fork in the road: either we create the jobs we need right now by taxing Wall Street and the super-rich, or the rest of us will suffer several decades of stagnation, while the private sector continues to mint a surplus of financial billionaires and a deficit of decent jobs.

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (Chelsea Green, 2009).

Romnesia: The Ability of the Very Rich to Forget the Context in Which They Made Their Money

ECONOMY

Monbiot.com / By George Monbiot

Romnesia: The Ability of the Very Rich to Forget the Context in Which They Made Their Money

A potent myth is being used to justify economic capture by a parasitic class.

September 25, 2012  |  

 

Photo Credit: Shutterstock.com

We could call it Romnesia: the ability of the very rich to forget the context in which they made their money. To forget their education, inheritance, family networks, contacts and introductions. To forget the workers whose labour enriched them. To forget the infrastructure and security, the educated workforce, the contracts, subsidies and bail-outs the government provided.
Every political system requires a justifying myth. The Soviet Union had Alexey Stakhanov, the miner reputed to have extracted 100 tonnes of coal in six hours. The United States had Richard Hunter, the hero of Horatio Alger’s rags-to-riches tales(1).

Both stories contained a germ of truth. Stakhanov worked hard for a cause in which he believed, but his remarkable output was probably faked(2). When Alger wrote his novels, some poor people had become very rich in the United States. But the further from its ideals (productivity in the Soviet Union’s case, opportunity in the US) a system strays, the more fervently its justifying myths are propounded.

As the developed nations succumb to extreme inequality and social immobility, the myth of the self-made man becomes ever more potent. It is used to justify its polar opposite: an unassailable rent-seeking class, deploying its inherited money to finance the seizure of other people’s wealth.

The crudest exponent of Romnesia is the Australian mining magnate Gina Rinehart. “There is no monopoly on becoming a millionaire,” she insists. “If you’re jealous of those with more money, don’t just sit there and complain; do something to make more money yourselves – spend less time drinking, or smoking and socialising and more time working … Remember our roots, and create your own success.”(3)

Remembering her roots is what Rinehart fails to do. She forgot to add that if you want to become a millionaire – in her case a billionaire – it helps to inherit an iron ore mine and a fortune from your father, and to ride a spectacular commodities boom. Had she spent her life lying in bed and throwing darts at the wall, she would still be stupendously rich.

The rich lists are stuffed with people who either inherited their money or who made it through rent-seeking activities: by means other than innovation and productive effort. They’re a catalogue of speculators, property barons, dukes, IT monopolists, loansharks, bank chiefs, oil sheikhs, mining magnates, oligarchs and chief executives paid out of all proportion to any value they generate.
Looters, in short. The richest mining barons are those to whom governments sold natural resources for a song. Russian, Mexican and British oligarchs acquired underpriced public assets through privatisation, and now run a toll-booth economy(4). Bankers use incomprehensible instruments to fleece their clients and the taxpayer. But as rentiers capture the economy, the opposite story must be told.

Scarcely a Republican speech fails to reprise the Richard Hunter narrative, and almost all these rags-to-riches tales turn out to be bunkum. “Everything that Ann and I have,” Mitt Romney claims, “we earned the old-fashioned way”(5). Old-fashioned like Blackbeard perhaps. Two searing exposures in Rolling Stone magazine document the leveraged buyouts which destroyed viable companies, value and jobs(6), and the costly federal bail-out which saved Romney’s political skin(7).

Romney personifies economic parasitism. The financial sector has become a job-destroying, home-breaking, life-crushing machine, which impoverishes other people to enrich itself. The tighter its grip on politics, the more its representatives must tell the opposite story: of life-affirming enterprise, innovation and investment, of brave entrepreneurs making their fortunes out of nothing but grit and wit.

There is an obvious flip-side to this story. “Anyone can make it – I did without help” translates as “I refuse to pay taxes to help other people, as they can help themselves”. Whether or not they inherited an iron ore mine from daddy.
In the article in which she urged the poor to emulate her, Gina Rinehart also proposed that the minimum wage should be reduced. Who needs fair pay if anyone can become a millionaire?

In 2010, the richest 1% in the United States captured an astonishing 93% of that year’s gain in incomes(8). In the same year, corporate chief executives made, on average, 243 times as much as the median worker (in 1965 the ratio was ten times lower, namely 24:1)(9,10). Between 1970 and 2010 the Gini coefficient, which measures inequality, rose in the United States from 0.35 to 0.44: an astonishing leap(11).

As for social mobility, of the rich countries listed by the OECD, the three in which men’s earnings are most likely to resemble their father’s are, in this order, the UK, Italy and the US(12). If you are born poor or born rich in these nations, you are likely to stay that way. It is no coincidence that these three countries all promote themselves as lands of unparalleled opportunity.

Equal opportunity, self-creation, heroic individualism: these are the myths that predatory capitalism requires for its political survival. Romnesia permits the ultra-rich both to deny the role of other people in the creation of their own wealth and to deny help to those less fortunate than themselves. A century ago, entrepreneurs sought to pass themselves off as parasites: they adopted the style and manner of the titled, rentier class. Today the parasites claim to be entrepreneurs.

References:

1. The Ragged Dick series.
2. http://www.nytimes.com/1985/08/31/world/in-soviet-eager-beaver-s-legend-works-overtime.html
3. http://www.ipa.org.au/sectors/northern-australia-project/publication/2081/let%27s-get-back-to-our-roots
4. Mike Lofgren uses this term in this fascinating article:http://www.theamericanconservative.com/articles/revolt-of-the-rich/
5. http://www.motherjones.com/politics/2012/09/full-transcript-mitt-romney-secret-video
6. http://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829
7. http://www.rollingstone.com/politics/news/the-federal-bailout-that-saved-mitt-romney-20120829
8. Emmanuel Saez, 2nd March 2012. Striking it Richer: the Evolution of Top Incomes in the United States (Updated with 2009 and 2010 estimates).http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf
9. Joseph Stiglitz, 2012. The Price of Inequality. Allen Lane, London.
10. Lawrence Mishel, Jared Bernstein and Heidi Shierholz. The State of Working America 2008/2009. Economic Policy Institute, cited by Joseph Stiglitz, as above.
11. http://krugman.blogs.nytimes.com/2012/05/23/was-greed-good/
12. OECD, 2010. Economic Policy Reforms: Going for Growth. Chapter 5, Figure 5.1.http://www.oecd.org/tax/publicfinanceandfiscalpolicy/45002641.pdf

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George Monbiot is the author Heat: How to Stop the Planet from Burning. Read more of his writings at Monbiot.com. This article originally appeared in the Guardian.

Tax-Free Capitalism

Tax-Free Capitalism

by Robert Hunziker / September 19th, 2012

The wealthy capitalist elites are at war against taxes!

This undeclared war is so substantive that its consequences have undermined the ability of major governments to provide social services to ordinary citizens, and it is a direct cause of unsustainable, mushrooming governmental deficits. While the wealthy elite have experienced an once-in-a-lifetime boost in income and inordinate wealth creation, major governments have been experiencing once-in-a-lifetime operating deficits and unprecedented debt-to-GDP ratios. These phenomena are a consequence of one another.

Governments cannot collect taxes on money that is vacationing offshore in numbered or imitation/pseudo/sham bank accounts!

The major accounting firms of the world are the prime movers & shakers; i.e., the feeder system, of tax-free capitalism.

The American Institute of CPA’s (“AICPA”) does have a Code of Professional Conduct, Article II Section 53.04 stating: “All who accept membership in the American Institute of Certified Pubic Accountants commit themselves to honor the public trust.” Well, well, well… time, and again, this trust has been tested and broken; e.g., Enron and the entire 2007-08 financial meltdown nightmare, but honestly, one has to wonder who’s left to pay dues to this forlorn organization.
Tax dodging is one of the largest businesses in the world according to a landmark study entitled “The Pin-Stripe Mafia: How Accountancy Firms Destroy Societies,” Austin Mitchell (MP, UK House of Commons) & Prem Sikka (University of Essex), Association for Accountancy & Business Affairs, United Kingdom, 2011:

All over the world tax revenues are under relentless attack from a highly organized tax avoidance industry dominated by four accountancy firms: Deloitte & Touche, PricewaterhouseCoopers, KPMG, and Ernst & Young  (the combined gross global annual revenues of the major accountancies of the world are $95 Billion, making them the 54^th largest economy in the world.) They employ thousands of individuals for the sole purpose of undermining tax laws, which does not create any social value, but enables corporations and wealthy elites to dodge corporate tax, income tax, National Insurance Contributions (NIC), Value Added Tax (VAT) and anything else that might enable governments to improve the quality of life… The loss of tax revenues is a major cause of the current economic crisis that is inflicting misery on millions of people.

Over the past few decades, coincident with the advocacy of Supply-side economics, commenced under President Reagan, it has become increasingly fashionable for capitalists to cheat governments by hiding money offshore.  One would think the Supply-side economic tenets of cutting taxes for the rich would be enough for them, for example, in America the top marginal tax rate has been cut from 70% under LBJ, whose presidency experienced the strongest annual GDP growth rate since WWII, to 35% today, but no, once the elite got the taste of more and more non-taxable income levels (they also achieved cuts in capital gains, dividends, and estates), it turned into an epidemic, and they simply can not get enough! In spite of Supply-side taxation windfalls for the super rich, they have migrated like swarms of locusts to offshore tax havens to avoid taxes altogether. The money fever led them to it!

And the authorities know all about it!

According to a recent extensive study (July 2012) conducted by James Henry, former chief economist of McKinsey & Company, the wealthy elite have up to $32 Trillion stashed away in offshore tax havens. This is twice the size of the U.S. economy, and remarkably, the James Henry Analysis excluded ownership of tangibles like RE, yachts, fancy cars, and entire islands (metaphorically speaking, those hidden assets comprise the largest economy in the world… a tax-free economy… a pure libertarian nation-state.)

The American Sustainable Business Council, Washington, D.C. claims:

Offshore tax havens provide cover for banks, hedge funds, and corporations to shift taxable income from the United States to tax havens for the sole purpose of escaping taxation. Tax haven secrecy allows wealthy Americans to hide assets, helps companies manipulate their finances, and fosters the casino economy.

A U.S. Governmental Accounting Office study found that at least 83 of the top 100 publicly traded corporations use offshore tax havens, as directed by their public accounting firms.

The egregiousness of this massive fraud against governments is almost impossible to comprehend because the numbers involved are beyond the bounds of normal rational thinking. For example, similar to the enormous debt burdens of trillions-upon-trillions carried by many democratic capitalistic countries, the numbers involved in tax avoidance are so large as not to register within one’s consciousness, but to put it into some kind of perspective, consider this: One trillion seconds of ordinary clock time equals 31,546 years, and thirty thousand years ago there was an Ice Age, and it was then that Neanderthals ceased to exist (one school of thought claims Cro-Magnons exterminated the Neanderthals.) Extrapolating the numbers further: 32 Trillion, which is the amount stashed away in offshore accounts, takes us back one million years in clock time. The enormity of the crime of offshore tax avoidance takes us back to when humans first started using fire. Wow!

Isn’t it despicable that this crime of the century isn’t the ‘first order of business’ for governments around the world, but come to think about it, the U.S. Congress is filled with elite multimillionaires… So?

Speaking of which, America had no compunction whatsoever about sending U.S. Marines into Iraq based upon bogus WMDs. How about U.S. Marines raiding offshore banks to collect Wealth Taxes of 20% of total assets from FWMDs (Financial Weapons of Mass Destruction)? But… this time it’s not bogus! What’s more harmful to the integrity and security of American society:  Offshore terrorists or offshore bank accounts?  Maybe it’s deadlocked.

“The simple fact of the matter is this: tax breaks for Big Oil, corporate jets, and companies that send jobs overseas have the practical effect of raising taxes on everyone else. That’s not right. That’s not smart. That’s not fair. And it’s high time we do something about it,” according to Congressman Chris Van Hollen (D. MY) who is co-sponsor of legislation to close offshore tax loopholes: Stop Tax Haven Abuse Act (H.R. 2669), which bill, as of 3/21/2012, has been referred to 12 separate committees for consideration. Also, Senator Carl Levin (D. MI) is the sponsor of Cut Unjustified Tax Loopholes Act (S.2075), which was assigned to one committee February. 7, 2012; however, will the bills ever get out of committees?

“Taxes are not just numbers in spreadsheets,” says Joseph Rotella, owner of Spencer Organ Company in Waltham, Massachusetts, who spoke at a Public Interest Research Group (“PIRG”) forum: “Taxes provide the revenues that pay for roads, bridges, public safety, public schools, public transportation and other infrastructure and services my business and my customers count on. We need to stop the tax haven abuse that lets big corporations avoid paying their fair share and gives them an unfair advantage in the marketplace.”
According to Forbes Magazine:

For people who think that they can still zip off to Panama or Switzerland to avoid paying taxes, think again. Beverly Hills, Calif.-based international tax lawyer Gary S. Wolfe says that while countries such as the Caymans do not impose taxes, that does not apply to U.S. citizens or residents. ‘The mistake that Americans make is that they go offshore and think that they don’t have to pay any taxes,’ he says. ‘The reality is that U.S. citizens are taxable anywhere in the world.’

In fact, taxes follow the passport of U.S. citizens even after expatriation because, assuming one gives up a U.S. passport, it can still take up to ten years before the U.S. no longer has jurisdiction over U.S. taxable income.

Nevertheless, a new breed of wealthy elite, the Transnational Class (reference: Towards A Global Ruling Class? Globalization and the Transnational Capitalist Class, William I. Robinson and Jerry Harris, Science and Society, Vol 64, No 1, Spring 2000.), who look down with disdain upon the masses, are not in the least concerned about the consequences of utilizing tax havens. Their haughtiness is expressed by a disregard for national borders and against the strictures of nation-states. They truly believe the world is their oyster and consider themselves exclusive members of a worldwide community of like-minded wealthy elites, not beholden to any sovereign, and because they express themselves in a worldly manner, their allegiance extends no further than to their rich compatriots. It is probable they do not view tax havens as anything other than a parking place for money or assets whilst they travel the globe, meeting their ilk at fancy restaurants, or sumptuous resorts, or a brunch with Bono at locations where price alone blocks out the rest of the world. Furthermore, assuming they are caught cheating, they’ll pay the fine, instructing their legion of accountants and attorneys to “settle” the issue.  This is reality in today’s world, leaving the middle/working classes to fend for themselves and for their slowly regressing respective governments, which are similar in many respects to the film Blade Runner’s tension between past, present, and future which is high-tech and gleaming (Tokyo) in some scenes but decayed (Detroit) and old  (Buffalo) elsewhere.

The very fact that such a huge amount of money is stashed offshore, and the whole world is fully aware sends a portentous message that the elites behind the offshore accounts control the message; they control who can or cannot do anything about the problem, and furthermore, they do not consider it a problem at all. Rather, it is a logical conclusion to their earned right for achievement in society. Their contempt for the masses of people comes from a belief that personal merit occasioned their rise to wealth and power, and this is true. Most of the new rich did not inherit their wealth. They earned it.  Meritocracy is their creed, not equality and fraternity. They have turned the national motto of the French Revolution liberté, égalité, and fraternité on its head. If you do not ‘achieve’ in life, then you do eat cake, but Queen Marie Antoinette did not say, “let them eat cake.” Radical agitators who were trying to turn the populace against her attributed the phrase to her in 1789, and their plan worked beautifully as she lost her head on the guillotine to the executioner Charles Henri Sanson at Place de la Révolution, where tens of thousands of citizens stood by quietly, until the blade dropped, and then, they cheered and danced.  Meanwhile, and while holding onto their heads, most of the aristocracy of Paris had already fled the city. Their overt pretensions of lifestyle finally did them in, and their families’ homes were looted, losing fortunes. They did not have offshore accounts to hide wealth… like today’s elite.  In this sense, things do change over time.

What may or may not change in November is the presidency of the United States, and millions of middle class Americans will cast votes for Mitt Romney, who is the Poster Boy for Offshore Bank Accounts and for the wealthy elites.  In this arena, Romney has Obama beaten hands down, but frankly, it is difficult to visualize average middle class families with Romney posters staked in the front yard. It seems so incongruous!

During the Republican presidential debates, Newt Gingrich remarked, “I don’t know of any American president who has had a Swiss bank account.” But, Mitt closed his Swiss bank account. However, he does have accounts in the prototypical tax havens of the Caymans, the Bahamas, and Luxemburg. Thus, it should come as no surprise that unlimited funds are readily available to finance his pathway to the White House.  The wealthy elite need somebody in charge who can veto H.R. 2669 and S. 2075 should the bills make it out of committee!

Robert Hunziker, a former hedge fund manager, is a professional independent negotiator for worldwide commodity actual transactions and a freelance writer for progressive publications as well as business journals. Mr. Hunziker earned an MA degree in economic history at DePaul University/Chicago, and he resides in Los Angeles. He can be contacted at: rlhunziker@gmail.com. Read other articles by Robert.

This article was posted on Wednesday, September 19th, 2012 at 8:00am and is filed under Capitalism, Tax.