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Ruppert Murdoch, Ayn Rand and A Sociopathic Economy

Rupert Murdoch, chairman and CEO of News Corp., and one of the richest men on the planet, recently claimed that free markets are morally superior to more social based ideas of morality and fairness.  “We’ve won the efficiency argument,” he claimed.  Now he hopes to persuade us that free markets are morally superior and that socialism fails because of its “denial of fundamental freedoms.”  In Murdoch’s world the idea that market success is based on greed is a false characterization that creates confusion. He believe that markets succeeds where governments fail, not because of greed, but because people are given “… incentives to put their own wants and needs aside to address the wants and needs of others.”

It sounds great!  But before you buy into this idea you should know he goes on to say, “To succeed, you have to produce something that other people are willing to pay for.”

Therein lies the rub.  To succeed you must “produce.” For Murdoch, distributive justice is the natural outcome of these purely commercial transactions.  He quotes Arthur Brooks at the American Enterprise Institute who defines fairness as, “… the universal opportunity to enjoy earned success”. The key words here being “earned success.” Accordingly, producers are entitled to all they earn because if their product wasn’t successful, consumers are free to not buy their product. This is a cruel argument to make in the face of an elderly person having to choose between buying food or medicine, of course.  Nevertheless, in this view every sale in a free market system automatically results in a fair distribution of wealth. No other social factors should apply.  In fact, to take from producers what they’ve earned to support the lives of less successful or non-producing human beings is immoral, in Murdoch’s view.

“What’s fair about taking money from people who’ve earned it and giving it to people who didn’t,” Murdoch asks.

But Murdoch’s whole notion, which closely mirrors that of Ayn Rand, ignores the whole complex social economy in which commerce and every other human activity actually takes place.  It rejects the wisdom that markets only exist to serve societies needs.  Markets are manmade entities and not a natural phenomenon, but Murdoch’s narrow view treats markets as natural entities that are morally superior to society. It limits the meaning of production to that which has a monetary exchange value.  It assigns social value to the creators of products according to their market success, measured in material gain.  It does not account for the material contributions of the public domain in making commerce and stable markets possible. Even though the monetary value of a product is co-dependent on a consumers’ willingness to pay, it does not assign any social value to the consumer.  Only the source of a buyers money gives them any social status.

This leaves open the question of how, or even whether, to assign social value to those not immediately involved in commercial production. These folks include children, the disabled, the elderly, the unemployed, those who care for children, woman on maternity leave, all government employees, military personal, clergy, law enforcement, etc.  Murdoch’s view begs the question; What is a person worth when their value to society cannot be directly measured by their market place success?

Murdoch’s views are shared by many of today’s corporate elite.  It is the makers vs. takers mentality.  It is a view that can only be described as anti-social at best, sociopathic at its extreme. It opposes all government interventions in the market place and opposes most government regulations.  It is a philosophy designed to restricts the ability of ordinary citizens (i.e. government) to assure that our markets and commerce works for the good of society and not just for the benefit of the economically powerful. It implicitly confers ownership and control of the markets to the most powerful market makers while failing to acknowledge the corrupting effects of power on financially successful human beings.  By denying the humanity of markets it denies the vulnerability of markets to human weaknesses. This puts society at risk and cripples humanity from solving some of the really big challenges we face as a species.  How we chose to define distributive justice is arguably the most important economic question of our time. How we ultimately marshal our economic resources to solve our really big problems depends on how we ultimately organize our economy.

[Ruppert Murdoch’s views as expressed can be found at the following URL: http://nation.foxnews.com/rupert-murdoch/2013/04/22/rupert-murdoch-op-ed-case-market-s-morality?utm_source=feedly&utm_medium=feed&utm_campaign=Feed%3A+FoxNation+(Fox+Nation)]

Corporations Open New Push for Even More Favorable Tax Laws

Beware America! The push is on for yet another round of self-serving corporate tax reform.  A press release from the Business Roundtable announced the release of a new report touting the economic benefits of “revenue neutral” corporate and individual tax reforms.  Below is a summary of the findings from the press release and a link to the report.  But before you read it, consider what the real trend is in corporate tax revenues compared with what individuals contribute.

HERE IS THE TRUTH! Corporate tax rates do not reflect what  corporations actually pay in income taxes, and the effective corporate tax rates, as well as the percentage of tax revenues they contribute have been in decline for decades.

Decline in Corporate Tax Burden Over 40 Years

corp vs ind taxes

The table above (in millions of dollars) is based on statistics from the Office of Management and the Budget in the White House [www.whitehouse.gov/omb/budget/Historicals/].

The shift in the percentage of total taxes paid by individuals has grown substantially over the years.  Individual income taxes raised 41% of the total income tax revenue in 1943 compared to 79% of total revenues today.  And the shift in tax receipts from corporations to individuals cannot be explained by a shift away from C corporations (who pay the corporate income tax) to S corporations (who don’t). An analysis of that shift in corporation type is an insignificant contributor to the overall shift in the tax burden. [http://rdwolff.com/content/massive-shift-tax-burden-corporations-individuals-statistical-mirage ]

Shifting the tax burden from corporations to individuals over the past 40 years is yet another factor contributing to the current decline in domestic consumer spending.  Wage suppression, the shifting of the tax burden from the rich to the middle class, coupled with the decline in the tax burden on corporations are all that is needed to explain the decline of America’s middle class, the rise in poverty and the growth of government spending in social support programs.  The people are going broke, the government is going broke trying to prop us up and the rich are becoming richer and more powerful each year.

PRESS RELEASE

BUSINESS ROUNDTABLE RELEASES ECONOMIC CASE FOR CORPORATE TAX REFORM

Comprehensive Data Analysis Shows Tax Reform Would Ensure U.S. Competitiveness and Lead to U.S. Economic Growth

Corporate Tax Reform – The Time Is Now

http://usahomecourt.org/resources/business-roundtable-releases-economic-case-corporate-tax-reform

Key components of the Roundtable’s analysis include: [also known as “talking points”]

  • U.S. Companies’ Fiercest Competitors Enjoy Lower Home-Country Tax Rates: It is well known that the U.S. combined (federal and state) statutory tax rate is the highest of any developed nation, averaging 39.1 percent. As the analysis points out in detail, American companies now find that their closest foreign competitors are based in countries with lower corporate tax rates and international tax systems more favorable to their global operations than the U.S. rules. Since 2000, 30 of the 34 Organisation for Economic Co-operation and Development (OECD) countries have reduced their corporate tax rate.
  • High Rates are a Drag on the U.S. Economy: Researchers at Cornell and the University of London report that a one-percentage-point decrease in the average corporate tax rate would result in an increase in real U.S. GDP of between 0.4 to 0.6 percent within one year of the tax cut.
  • Double Tax on Foreign Earned Income Hurts American Companies and U.S. Competitiveness: Within the OECD, of companies headquartered outside the United States, 93 percent of the world’s top 500 companies (based on Fortune’s 2012 list) are headquartered in countries that use “territorial” tax systems, where income earned abroad is not taxed again when earnings are repatriated, unlike under the current U.S. system. This is up from only 27 percent of the same countries utilizing territorial systems in 1995 – signaling a significant trend towards the more competitive method of taxation.
  • Under current law, foreign earnings are effectively “locked out” of the United States: An estimated $1.7 trillion in accumulated foreign earnings was held by the foreign subsidiaries of American companies in 2011. If only half of that amount came back to the United States in response to enactment of a market-based territorial tax system, the funds freed up for use at home would exceed the increased government spending and tax relief provided under the 2009 American Recovery and Reinvestment Act.
  • Effective U.S. Corporate Tax Rate 12+ Percentage Points Higher than OECD Countries: Data in the new document disproves claims of low “effective” rates (amount of tax paid after deductions) paid by U.S. corporations, citing a new World Bank study of corporate income taxes in 185 countries for 2013 that finds that tax payments are higher for companies operating in the United States as a percentage of income than the average of other OECD and non-OECD countries. In fact, the U.S. effective tax rate (ETR) of 27.6 percent is more than 12 percentage points higher than the average of other OECD countries and 11 percentage points higher than the average of non-OECD countries. The analysis also explains why using the ratio of corporate income tax to GDP is an improper measure of effective rates.
  • U.S. Workers Bear the Burden of the Outdated U.S. Corporate Tax System:  Corporate Tax Reform – The Time Is Now also analyzes a number of recent studies that find that workers bear between half and three-quarters of the burden of the corporate income tax. These findings suggest reducing the corporate income tax rate would provide benefits to workers through higher wages.

Some Minor Edits to The Declaration of Independence

[Please note, paragraphs one and two of the Declaration of Independence have been modified to read as follows]:

When in the Course of human Commerce, it becomes necessary for Businesses to dissolve the political bands which have connected Owners with national geography, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and a Free Market economy entitle them, a decent respect to the opinions of international Competitors requires that we declare the causes which impel us to the separation.

We hold these truths to be self-evident, That all men are created for Commerce, that Corporations are endowed by their Creators with certain unalienable rights, that among these are Perpetuity, Market Liberty and the pursuit of Profits.–That to secure these rights, Governments are instituted, deriving their just powers from the consent of Corporations, –That whenever any form of Government becomes destructive of Commercial Interests, it is the right of business Owners to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to preserve and expand Market Shares. Etc, etc…

Thank you for your gracious consent to these changes.

Capital Investment Income Drives Income Inequality

A recently published analysis by Thomas L. Hungerford (see highlights below) looks at factors driving the growth of income inequality for the period between 1991 to 2006.  Hungerford looked at the contributing impact of three factors, tax policy, labor wages and capital income. During the studied period he found that capital income (capital gains, interest income, business income and dividends) was by far the largest factor contributing to rising income inequality. Wages and salaries alone were not a factor and tax policies were only a minor contributor during this period, largely due to the more favorable tax treatment of capital gains.

This report doesn’t trace the history of income inequality prior to 1991 where changes in wage growth in the late 1970’s and the collapsing of upper income tax brackets in 1980 and 1985 were more dramatic.

It is worth remembering that for most of the past 100 years capital gains was treated as ordinary income for tax purposes.  In recent times, capital gains have be treated as a separate class of income with a more favorable tax treatment. Capital ownership has always been more concentrated at the upper end of the income/wealth continuum.  Capital is, of course, an ownership stake in our economy whether through stocks, bonds, property or business ownership. The income generated when these capital investments are bought and sold is currently taxed at 15% (if it is held for more than a year). That is less than half the top tax rate for wages and salaries.  And how is capital ownership distributed in America?

Who Owns What In America?

The distribution of wealth ownership, as opposed to income inequality, is even more skewed towards the wealthy as the pie chart below shows.  The whole pie represents the total wealth in America.  Each of the five slices of the pie represent 20% of the US population according to how much wealth they own.

WealthDistribution

The slice of ownership for the poor and working poor are barely visible. Eighty-percent of all Americans own just 15.6% of America’s wealth. The number of people who slipped into poverty in 2010 was at an all time high of 46.2 million, so the poorest 20% of all Americans, in terms of wealth ownership, includes 15.5 million who are technically above the income poverty line. The poorest 40% of Americans essentially own almost nothing while the top 20% own almost 85% of everything.  As a result, favorable tax policies for capital gains income has a highly disproportional benefit for the wealthiest Americans. Capital income for this wealthy segment is what drives rising income inequality today.

______________________________________________________________________

Changes in Income Inequality Among U.S. Tax Filers Between 1991 and 2006: The Role of Wages, Capital Income, and Taxes

 Thomas L. Hungerford

thunger@starpower.net

January 23, 2013

Electronic copy available at: http://ssrn.com/abstract=2207372

HIGHLIGHTS FROM THIS REPORT:

Research has demonstrated that large income and class disparities adversely affect health and economic well-being (see, for example, Marmot 2004, Wilkinson 1996, Frank 2007, Singh and Siahpush 2006).

Research has shown, however, that income mobility [in the United States] is not very great and the degree of income mobility has either remained unchanged or decreased since the 1970’s (Hungerford 2011, and Bradbury 2011).

Earnings inequality has been increasing since at least the late-1960s (Kopczuk, Saez, and Song 2010). [The] CBO (2011) has documented that income inequality has been increasing in the United States over the past 35 years.

Three potential causes of the increase in after-tax income inequality between 1991 and 2006 are examined in the analysis: changes in labor income (wages and salaries), changes in capital income (interest income, capital gains, dividends, and business income), and changes in taxes.

Increased salaries paid to CEOs, managers, financial professionals, and athletes, is estimated to account for 70 percent of the increase in the share of income going to the richest Americans (Bakija, Cole, and Heim 2010).

A declining real minimum wage could affect lower income tax filers (the inflation-adjusted minimum wage fell from $6.57 per hour in 1996 to $5.57 per hour in 2006).

Income of the richest 0.1 percent of taxpayers is sensitive to changes in asset prices and this may have been especially important in the increase in the income share of those at the top of the income distribution (Bakija, Cole, and Heim 2010).

Frabdorf, Grabker, and Schwarze (2011) also find that capital income’s share in disposable income has increased in recent years in the U.S. and show that capital income made a large contribution to income inequality in relation to its share in income.

While the individual income tax system is progressive and has been since it was introduced in 1913, the trend has been toward lower marginal tax rates and a less progressive tax system (Piketty and Saez 2007, and Alm, Lee, and Wallace 2005). As a result, the tax system may be less able to equalize after-tax incomes.

The major tax changes between 1991 and 2006 were (1) the enactment of the Omnibus Budget and Reconciliation Act of 1993 (OBRA93), which increased the top marginal tax rate from 31 percent to 39.6 percent, and (2) the enactment of the 2001 and 2003 Bush tax cuts, which reduced taxes especially for higher-income tax filers. The Bush tax cuts involved reduced tax rates, the introduction of the 10 percent tax bracket (which reduced taxes for all taxpayers), [it also] reduced the tax rates on long-term capital gains and qualified dividends. In 1991, long-term capital gains were taxed at 28 percent (15 percent for lower-income taxpayers) and all dividends were taxed as ordinary income. The next year, the

long-term capital gains tax rate was reduced to 20 percent. By 2006, long-term capital gains and qualified dividends were taxed at 15 percent (5 percent for lower-income taxpayers). Tax policy changes that affect progressivity will affect after-tax income inequality (Kim and Lambert 2009, and Hungerford 2010).

Hungerford (2010) notes, however, that about 75 percent of families contain just one tax unit (another 17 percent contain two tax units with the second tax unit usually a cohabitating adult or a working child that cannot be claimed asa dependent on another tax return). Consequently, most of the tax units likely represent a family.

Piketty and Saez (2003) argue that capital gains are not an annual flow of income and have large aggregate variations from one year to another; they exclude capital gains from much of their analysis. Blinder (1980) argues that capital gains should not be included in income because what is important is real accrued capital gains [cashed out].  Also, that capital gains represents partial maintenance of in an inflationary world. [in other words, gains shouldn’t be taxed as it serves as an inflation adjustment for capital]

capitals gains have increasingly become an important source of compensation for corporate executives (through stock options), and private equity and hedge fund managers (carried interests). Consequently, income from capital gains is included in the analysis.

Several recent studies estimate that most or all (in some cases more than 100 percent) of the burden of the corporate income tax falls on labor through reduced wages [while] other evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital. [So take your pick!]

Federal individual and corporate income taxes had an equalizing effect on inequality regardless of the inequality measure. Federal taxes had a slightly greater equalizing effect in 2006 than in 1991—taxes appear to have been slightly more progressive in 2006 than in 1991. The top marginal tax rate in 1991 was 31 percent compared to 35 percent in 2006; the lowest tax marginal rate was 15 percent in 1991 and 10 percent in 2006. However, the increased equalizing effect of the individual income tax is likely due to bracket creep—more income is taxed at the highest rates—than to tax law changes. Tax policy changes appear to have played a direct role: OBRA93 tended to have an equalizing effect on after-tax income while the 2001 and 2003 Bush tax cuts tended to have a disequalizing effect.

Tax policy may have also have had an indirect effect on rising income inequality, especially between 2001 and 2006. The reduction in the tax rate on long-term capital gains and qualified dividends may have led to the increased importance of this source in after-tax income.

Overall, changes in [wage] labor income does not appear to be a significant source of increased income inequality between 1991 and 2006. Wages had no or a small disequalizing effect when other inequality measures are used.

By far, the largest contributor to increasing income inequality (regardless of income inequality measure) was changes in income from capital gains and dividends. Capital gains and dividends were less equally distributed in 1991 than in 2006, though highly unequally distributed in both years.

 __________________________________________________________

Thomas L. Hungerford currently works at the Congressional Research Service (CRS) which is part of the Library of Congress. The CRS  provides the policy and legal analysis to Congressional committees and Members, regardless of their party affiliation. CRS staffers sometimes do reports on their own. Hungerford says this report, “… [does] not reflect the views of the Congressional Research Service or the Library of Congress.”  Hungerford is well-published in the professional literature.  He has worked for the Social Security Administration, the Office of Management and Budget, and the General Accounting Office in the past.  The excerpts highlighted here are of my own.  You are encouraged to read the full study at the URL address provide above.

 

Raising Wages Would Revive Our Economy

It seems so obvious that consumption is the fire that powers an economy and money is the fuel.  It doesn’t matter from where the spending comes in the short run, but it must come from ordinary people in the long run.  Wages paid are dollars spent and a dollar spent is a dollar earned in a free economy.   Just as you can dampen consumption by raising the cost of borrowing, you can also dampen consumption by suppressing wages, which is exactly what we have been doing for more than 30 years.  Corporations have become cash rich but customer poor.  They could end this sluggish economy tomorrow by raising wages.

Living Wage Should Be Our Minimum Demand

Here are the facts: The federal minimum wage = $7.25 /hr.  President Obama wants to raise it to $9.00 /hr.  The current US Poverty wage = $10.60 /hr.  The current living wage rate averages $16 to $23 /hr depending on where you live. The poverty wage rate and living wage rates are based on a 40 hour work week.

Profitable companies paying workers, or their out sourced or supply chain workers, less than a living wage are financially benefitting from government aid to the working poor.  We need a stable work force to be competitive.  We also can’t have people starving to death in the wealthiest nation on Earth.  Companies take advantage of this and let state or federal governments step in to help care for their workers.  This amounts to a labor discount.  Cheap labor! Corporations are padding their profits at taxpayer expense.

At least 45% of working households require some form of government subsidy to maintain their financial stability.  The cumulative effect of wage suppression over the past 40 years has become a huge taxpayer drain on households making more than the median income.  While almost everyone’s wages are suppressed relative to GDP, the ranks of the working poor have grown to almost half of the work force. Business profits that have not been shared with workers over the years has gone instead to the wealtiest 1% of American’s creating the huge income inequality we have today.

In effect, profitable corporations and companies are making their higher paid employees subsidize  part-time workers and full-time works who make less than a living wage.

So the next time you see that cleaning lady at work, remember your employer is expecting you to subsidize her family though income taxes rather than pay her the living wage she needs just to make ends meet.   Every conservative argument against raising the minimum wage is just a smoke screen for the real culpret behind unemployment and our sluggesh economy, Wage Suppression!!! 

GAO – $450 Billion Gap in Taxes Owed Per Year

The following excerpt is taken directly from a GAO report called  “HIGH-RISK SERIES An Update,” which highlights the difficulties in collecting revenue legally owed to our federal government. You will note from the steps recommended that significant collection efforts are to be focused on corporations and other business practices.  The $450 billion in annual lost revenue does not take into account other shady tax loopholes used by the wealthy hide their income.  It also isn’t clear if this total includes taxes lost in  the underground cash and barter economies, which costs us billions in lost revenue.  Unpaid taxes are an affront to a fair and balanced tax system.  Lost revenue must be made up out of the pockets of law abiding citizens.  Any changes to tax laws to make them fairer must include provisions to make collection more uniform.

Enforcement of Tax Laws

The Internal Revenue Service (IRS) recently estimated that the gross tax gap—the difference between taxes owed and taxes paid on time—was $450 billion for tax year 2006. For a portion of the gap, IRS is able to identify the responsible taxpayers. IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. The tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with U.S. tax laws has changed little over the past three decades. Given that the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will require applying multiple strategies over a sustained period of time.

IRS enforcement of the tax laws is vital for financing the U.S. government. Through enforcement, IRS collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. GAO designated the enforcement of tax laws as a high-risk area in 1990.IRS and Congress have shown a commitment to addressing the tax gap. Importantly, IRS continues to research the extent and causes of taxpayer noncompliance and is using the results to revise its examination programs. While still in the early planning stages, IRS has met with key stakeholders to develop options for expanding compliance checks before issuing refunds to taxpayers. IRS is also extending a program to encourage taxpayers to voluntarily report their previously undisclosed foreign accounts and assets, which has resulted in billions of dollars in collections. IRS, as well as Congress, has taken other innovative actions aimed at further improving tax compliance, often directly based on GAO’s work, including the following:

• Since 2012, brokers have been required to report their clients’ basis for securities sales.

• Since 2011, banks and other third parties have been required to report businesses’ credit card and similar receipts.

• Starting in 2014, U.S. financial institutions and other entities are required to withhold a portion of certain payments made to foreign financial institutions that have not entered into an agreement with IRS to report details on U.S. account holders to IRS

• Starting with tax year 2010, IRS is requiring businesses to report on their tax returns uncertain tax positions—those for which a business reported a reserve amount in its financial statements to account for the possibility that IRS does not sustain the position upon examination or that the position may be litigated.

• IRS is continuing its multiyear effort to replace the systems it uses to process individual tax returns and receive electronically filed tax returns.

The impact of these initiatives on taxpayer compliance and the tax gap may not be known for years and will depend, in part, on how IRS implements them. Using the new information from financial institutions could require IRS to develop new business processes and uses of information technology. Implementation will also be influenced by IRS’s ability to provide quality taxpayer services, such as telephone, correspondence, and online assistance. GAO found that some services

have experienced performance declines in recent years and IRS’s website could offer additional interactivity for taxpayers.

Another initiative IRS undertook in 2010 was to begin implementing new requirements for paid tax return preparers, such as competency testing, with the goals of leveraging relationships with paid preparers and improving the accuracy of the tax returns they prepare. Given that they prepare approximately 60 percent of all tax returns filed, paid preparers have an enormous impact on IRS’s ability to administer tax laws effectively. In January 2013, the U.S. District Court for the District of Columbia enjoined IRS from enforcing the new requirements for paid preparers. IRS has filed a motion to suspend the injunction and intends to appeal the District Court’s decision. 

Further refining of direct revenue return-on-investment measures of its enforcement programs could improve how IRS allocates resources across its programs. Better use of such measures, subject to other considerations of tax administration, such as minimizing compliance costs and ensuring equitable treatment across different groups of taxpayers, could help maximize income tax collections. Resource allocation will become increasingly important as IRS is tasked with broader responsibilities, such as those in the Patient Protection and Affordable Care Act, in a time of tight budgets.

Additionally, targeted legislative action may be needed to address some compliance issues. IRS has statutory authority — called math error authority—to correct certain errors, such as calculation mistakes or omitted or inconsistent entries, during tax return processing. Expanding such math error authority could help IRS correct additional errors before interest is owed by taxpayers and avoid burdensome audits. Additional types of information reporting could also help improve compliance.

Taxpayers are much more likely to report their income accurately when the income is also reported to IRS by a third party. By matching information received from third-party payers with what payees report on their tax returns, IRS can detect income underreporting, including the failure to file a tax return. Currently, businesses must report to IRS payments for services they make to unincorporated persons or businesses, but payments to corporations generally do not have to be reported.

Taxpayers who rent out real estate are required to report to IRS expense payments for certain services, such as payments for property repairs, only if their rental activity is considered a trade or business. Expanding information reporting in these areas could increase payee reporting compliance. In 2010, the Joint Committee on Taxation estimated revenue increases for a 10-year period from third-party reporting of (1) rental real estate service payments to be $2.5 billion and (2) service payments to corporations to be $3.4 billion.

A broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can cause taxpayer confusion and provide opportunities to hide willful noncompliance. Fundamental tax reform could result in a smaller tax gap if the new system has fewer tax preferences or complex tax code provisions, reducing IRS’s enforcement challenges and increasing public confidence in the fairness of the tax system. Short of fundamental reform, targeted implification opportunities exist. For example, changing tax laws to include more consistent definitions across tax provisions, such as which higher education expenses qualify for some of the savings and tax credit provisions in the tax code, could help taxpayers more easily understand and comply with their obligations.  For IRS to improve its enforcement of tax laws it must continue to:

• perform compliance research on a regular basis and use the results to identify areas of noncompliance;

• seek ways to leverage paid preparers to improve tax compliance;

• implement new (1) requirements for sources of taxpayer information and (2) technologies to enhance the effectiveness and timeliness of service and enforcement corrective measures; and

• develop return on investment measures to better allocate resources and maximize income tax collection.

In that regard, IRS should implement GAO’s open recommendations, such as those on developing measures of direct revenue return on investment.  To assist IRS in reducing the tax gap, Congress should consider expanding IRS’s math error authority to correct taxpayer calculation mistakes or omitted or inconsistent entries during tax return processing before issuing refunds. Congress should also consider requiring payers to report service payments to corporations and making rental real estate owners subject to the same payment reporting requirements regardless of whether they engaged in a trade or business under current law. In the event that IRS cannot implement its new requirements without additional statutory authority, Congress should consider whether tax compliance could be improved by regulating paid preparers. The ongoing debate about tax reform also provides opportunities to consider the effect of tax simplification on taxpayer compliance and the tax gap.

Minimum Wage Proposal A Small Step

In his State-of-the-Union Address President Obama proposed raising the federal minimum wage to $9.00 per hour and indexing it to inflation. He said a family of four with two children still lives below the poverty line when one parent works full-time at minimum wage. The proposed increase would lift them out of poverty, he said.


by Google Images

What a welcome suprise! Virtually no attention was given to the working poor in the last election. In the past decade real wages rapidly declined for the working poor, driving ever more citizens into the grip of intractable poverty.

When a person works full-time for a profitable company their compensation should enable them to care for their family. When this isn’t the case, they must rely on taxpayer-subsidized housing, food stamps, medical care, daycare, or other supportive services. This takes a toll. It  can erode a person’s dignity and self-worth. It can foster a sense of inadequacy or self-loathing.

On a social level the working poor are often labeled and marginalized. They are deemed to be less worthy. They are less likely to be promoted or rehired after a layoff. Any economic hardship at all can lock them into a cycle of poverty where their hope for a better life evaporates with each passing year. Escaping poverty in America  today is the exception, not the rule.

Many wealthy companies are just as dependent on government subsidies for cheap labor. Without taxpayer assistance for their workers these companies would have to pay a living wage in order to maintain a stable workforce.

And what is wrong with that? Shouldn’t adequate compensation be part of the cost of doing business? Why should business owners be allowed to pad their profits by cutting labor costs at taxpayer expense?

We can expect the pro-business lobby to oppose an increase in low-wage pay while calling for more spending cuts and lower business taxes. Austerity can’t create more jobs and spending cuts will never result in more pay for low-wage earners. Only an increase in the minimum wage or a living-wage law can do that.

Pro-business economists will claim that a higher minimum wage will increase unemployment and hamstring businesses, especially small businesses. Much evidence suggests the opposite. Higher minimum wages have a simulative effect on the economy. The extra $1.75 per hour will be spent immediately, boosting business profits and sparking more demand.

The pro-business lobby will claim the proposed increase is excessive, but here the facts are against them. Even President Obama got this wrong. The poverty wage for a family of four is current $10.60 per hour. If passed, President Obama’s proposal would still means a minimum-wage worker would have to work overtime, take another part-time job, or have their spouse work part-time to reach the poverty line.

And what does it really mean to be at the poverty line? Does this make a family economically self-sufficient?

No, it does not. A living wage to lift a family of four above the need for taxpayer subsidies is considerably higher. In Wyoming, for example, a living wage for this family is $16.93 per hour. In Virginia it is $20.88 per hour, and in California it is $22.15 per hour. These figures are not government artifacts. They are actual costs based on local free-market economies.

While business owners and corporations may squeal at the size of the proposed increase in the minimum wage, they would still benefit greatly from taxpayer subsidies for their low-wage employees. Raising the minimum wage shifts some of the burden of caring for employees to the employers, but not much. It still doesn’t hold wealthy corporations responsible for their low-wage workers or for the harm that poverty wages inflict on their families.

Taxpayer Subsidized Downsizing in America

The business of quick and dirty layoffs has become a familiar feature in our culture. One  recent example involved a journalist who worked at a large news organization.  He was new to the company so he gratefully accepted the friendship of a well respected senior reporter. One Friday morning his mentor emailed him about a story idea and ended it by writing, “I’ll see you at the 10 AM meeting.” This prompted the following email exchange:

“What meeting? I didn’t get the email.”

“I’ll forward it do you.”

Then a short time later: “Forget the email.  This meeting isn’t for you.  Don’t come to this meeting!”

This is how the newsroom learned that day of the layoffs.  Many senior journalists were let go along with a few younger reporters to avoid the appearance of age discrimination.  As these “redundant” employees filed from the meeting they were handed garbage bags for their personal effects and accompanied to their desks by hired chaperones.   It was all over in an hour.

Coolly calculated business decisions and pitiless firings toss employees off company books and onto government unemployment rolls somewhere in this country nearly every week.  No notices, no outplacement services, no severance pay and no extended benefits are required.  In many cases there is no effort to treat employees with the dignity or respect they deserve.

Apart from union contracts or employment agreements, American companies have no legal obligations to citizens being fired.  They need not assume any responsibility for the impact it has on an employee, their family or their community.  The only business costs of any significance are the premiums companies pay for government unemployment insurance.  This easy, low cost ability to fire workers is called “workforce efficiency” and the U.S. is among the most efficient in the world.  We ranks 12th out of 144 nations according to  the study on global business competitiveness .

In most other advanced nations there are laws requiring companies to provide loyal employees with advanced layoff notices, severance pay and other benefits.  These structural costs for downsizing may make businesses a little less competitive, but it brings significant benefits.  It helps maintain a stable workforce and postpones government funded assistance to severed employees while they look for jobs.  Requiring larger companies to provide mandatory severance benefits helps the nations absorb minor bumps in the economy without adding to problems by throwing people out of work at the first sigh of trouble.  It also happens to be a humane way for citizens to treat one another.

Here in this country we treat our labor force as if it were a commodity to be bought and discarded at will.  In the end, big business lets taxpayers foot most of the costs for unemployment benefits and supplemental welfare services for people out of work.   At the same time the pro-business lobby pushes Congress for business tax breaks and budget cuts in the  programs that help the workers they leave behind.  Isn’t it time we stopped bowing to the pro-business lobby and stand up for the American worker?

Do Pro-business Policies Reduce Poverty?

President Calvin Coolidge once said, “… the business of the American people is business”.  He was quoted out of context at the time.  His remarks were aimed at newspaper reporters who were inept at covering business news, but this intentional misquotation seemed to sum up his economic policies.

Today this misquote seems prophetic. Political leaders from both parties speak as if whatever benefits business benefits the people.  State governments offer tax breaks and business friendly regulations to attract companies that might bring in more jobs.  This is especially true in less wealthy states where poverty rates are high.  President Lyndon Johnson’s “War on Poverty” has been transformed into pro-business politics and the promise of work for the worthy.

It is true that the poor need jobs, but the causes of poverty are more complex.  There is little regard for other factors such as the need for quality daycare, health care access, job training or transportation. Journalists rarely asks politicians how they plan to help the poor.  When they do, candidates talk about their plans to grow the economy.  This has some become an acceptable answer.

The insurgent idea that serving business interests is the best way to fight poverty arguably arose in the mid 1970s when corporate interest groups were forming and the business lobby became a powerful influence on Congress.   This was the high water mark of American unions as organized business groups launched campaigns to turn Congress and public opinion against them.

At the same time, these industry lobbying groups began fermenting hysteria over the growing “welfare state.”  The poor were poor, they argued, because anti-poverty programs make people dependent on government handouts while government regulations restrict the ability of companies to create jobs for those willing to work.  According to their narrative, government needed to spend more resources supporting commercial interests and deregulating markets.  President Reagan road these pro-business, anti-union, anti-government sentiments to the White House in 1980.

The success of the pro-business movement is evident.  In this past election Mitt Romney’s entire presidential campaign centered around the idea that business prosperity was key to growing jobs and the economy. The California Republican Party explicitly incorporates this thinking in their core beliefs:

“” each person is responsible for his or her own place in society. The Republican philosophy is based on limiting the intervention of government as a catalyst of individual prosperity” Republicans believe free enterprise has brought economic growth and innovations that have made this country great. Government should help stimulate a business environment where people are free to use their talents. “[California Rep Committee Philosophy http://cagop.org/inner.asp?z=585A]

In other words, it is the role of government to facilitate the business economy but each individual’s responsibility to avail themselves of the opportunities businesses provide.

The sufficiency of robust commerce to lift all boats isn’t just a conservative or partisan idea. It is expressed and pursued often by Democrats as well. In this last election even President Obama avoided talking about the poor by referring to them as “those aspiring to be middle class.”  There was almost no mention by either party of how they would accomplish this beyond trying to grow the economy.

So how well is our pro-business politics working out for the poor? This should be an empirical question that can be tested by examining the data. Are business interests and the interests of the poor perfectly aligned? Are there points of departure where the needs of some folks cannot be met without compromising some business interests?  Most importantly, does the data show that when businesses are doing well there are more jobs and better wages?

Profits, Employment and Wages 

Corporate profits are a measure of how well businesses are doing, so conventional wisdom would say wages and employment should rise and fall commensurate with corporate profits.    The hypothesis is that when companies do well there are more good paying jobs and therefore less poverty.  Is there evidence to the contrary?

In June of 2012, the St. Louis Federal Reserve released data showing a number of economic indicators over the last 71 years.  Using their report, the graph below plots corporate profits (CP) as a percentage of gross domestic product (GDP) from 1940 to 2011. GDP is total value of all the goods and services sold and a good measure our economy. The shaded areas represent periods of recession.  This graph shows that corporate profits rebounded since the 2007 recession and are at the highest level since 1940. The recession is clearly over for corporate America.


Corporate Profits to GDP by St. Louis Federal Reserve

Does it therefore hold true that robust corporate profits mean more jobs?  The next graph plots the number of employed Americans as a percentage of our population. This graph uses an employment per population percentage because the population doesn’t stop growing during recessions.  A fair comparison over time has to incorporate population growth for the same reason dollar comparisons over time have to factor in inflation.


Civilian Employment to Population Ratios by St. Louis Federal Reserve

This above graph shows that there are actually fewer people working today as a percentage of the population than at any time in the past thirty years. Last June, in an article related to this graphs, Business Insider magazine speculated that one reason corporations are so profitable is that they aren’t employing as many Americans.

Does it also hold true that robust corporate profits means better wages?  The next graph depicts the total amount of U.S. wages paid as a percentage of the value of all goods and services sold (GDP). It shows that wages are at an all-time low relative to the wealth being generated.  If jobless recoveries are one reason for record corporate profits, the decline in wages pictured in this next graph may be the other.

US Wages as a percentage of GDP by St. Louis Federal Reserve

It turns out that the null hypothesis is true.  Corporate profits are at a record high, employment and wages are at a record lows and the notion that what is good for business is good for people is false. The stock markets have recovered.  Corporate profits have recovered, but the financial well-being of families have declined. Median incomes are shrinking and prospects for the poor are increasingly dismal.

Are Measures of Business Competitiveness Compatible with the Interests of Individuals? 

When considering what factors make businesses more competitive it’s best to take a broad global view. A global survey of business competitiveness was recently conducted and released by the World Economic Forum. The study on global business competitiveness ranks 144 nations according to indicators grouped in 12 general categories.

Overall, the United States is very competitive, ranking 7th out of 144 countries. When you drill down in some of the 12 categories, however, you find indicators favorable for business that are clearly at odds with worker interests.  For example, In the area of “Labor Efficiency” the U.S. labor “redundancy” costs are low, which means it doesn’t cost as much here to fire employees.  This makes us more competitive (12th place) on this measure. This variable includes the estimated costs of providing advance layoff notices, severance payments any penalties that other countries might impose on employers for terminating “redundant” workers. The U.S. may be more competitive in this measure, but is this factor good for individual workers?  Does it reduce poverty?

The U.S. also did well (8th) when it comes to the ease of hiring and firing people. All of this makes for a “flexible” work force, which is good for business, but does it stabilize the workforce or encourage employers to try and weather out minor economic storms?

Are the states with the most competitive business environments doing better at lifting people out of poverty?

Every year for the past five years CNBC has scored all 50 states on 43 measures of business competitiveness.  This survey was developed with input from business groups including the National Association of Manufacturers and the Council on Competitiveness. States receive points based on their rankings in each factor and the factors are organized into broader categories. I was unable to locate a detailed list of factors within each category, but  CNBC has published general descriptions of each category. In the category of “Workforce” for instance, they indicate that the prevalence of unions in a state is a negative factor for business competitiveness, while lower costs of doing business is a positive factor. Among the factors creating low costs for doing business are lower tax rates and tax incentives or tax abatement for business.  The general category findings for each state are published.

The hypothesis, again, is that when companies are doing well there are more good paying jobs and less poverty.  So it follows that the states with the most competitive business environments should also be the states with the lowest rates of poverty.

To test this I used the CNBC business competitive findings to compare ten states with the highest poverty rates and ten states with the lowest poverty rates. The high poverty states, starting with the highest poverty rate, are Mississippi, Arkansas, Kentucky, Louisiana, New Mexico, West Firginia, Oklahoma, Texas, Alabama, and South Carolina. The ten states with the lowest rates of poverty, starting from the top, are New Hampshire, Mariland, Alaska, New Jersey, Hawaii, Connecticut, Wyoming, Utah, Minnesota and Massachusetts.  The results of this analysis are found in the table below.


State poverty levels and business competitiveness by Brian Lynch.  Business Competitiveness Rankings are from CNBC’s Top States for Business Special Report: ttp://www.cnbc.com/id/100000994 

It is striking that states with the highest poverty levels are also states that are more business competitive. The average rank in “Overall Business Competitiveness” for high poverty states is 7 points higher (more business friendly) than the rank for low poverty states.  In the “cost of business” category, high poverty states have an average rank of 18 versus 37 for low poverty states.  In the “workforce” category, which includes the prevalence of unions in a state, the high poverty states have an average rank of 20 versus 32 in low poverty states. 

Despite being “business friendly”, the ten high poverty states have over eight million poor citizens while the ten low poverty states have just over three million poor. There may be some political asymmetry as well since 7 out of 10 states with the high poverty rates have conservative Republican governors, while 6 out of 10 low poverty states have Democratic governors.

Conclusions

It is clear that pro-business politics, which puts commercial interests above the individual’s interests, isn’t working for the poor or for most Americans.  While a healthy economy is necessary for individual prosperity, it is clearly not sufficient.   What is best for business may be good for some, but not for all of our citizens.  There are certain business interests at odds with individual interests. Our political leaders need to acknowledge this when making policy.

The total dominance of pro-business politics has successfully crowded out meaningful debate on how to help the poor, the ranks of whom are swelling every year.  The poor are more marginalized and invisible than ever.  Almost no one speaks for them.  There is no hope for them in the more competitive business policies being proposed.  In fact, business prosperity is no longer well correlated with job growth or adequate pay, so plans to grow the economy ring hollow. The social contact that once pegged wage increases with increased productivity is broken. As a result, big business can flourish while the welfare of workers and the poor decline. This is unacceptable.

The ascendance of pro-business politics has given rise to commerce without conscience and too many ordinary citizens are being left behind.  We need to change the dialogue and strike a better balance.  We need to reclaim the role that government must play in meeting the needs of all our people.