Popular Economics Weekly

The Oracle of Omaha wrote a very profound New York Times’ Op-Ed recently. Warren Buffet said to “Stop Coddling the Super-Rich”; that what we needed was shared sacrifice in such times of plunging confidence in economic growth. But “when they did the asking, they spared me,” he said.

This cuts to the heart of why we even had a Great Recession, and how to dig ourselves out of the huge debt hole that resulted. There has been no shared sacrifice to date, and without it the economy and financial markets cannot recover. Firstly, the deficit cannot be paid down unless the richest individuals and corporations allow their tax breaks to expire.

The non-partisan Center for Budget and Policy Priorities has calculated that making all of the GW Bush tax cuts permanent would cost roughly $3.8 trillion over the next 10 years. And the Joint Committee on Taxation has calculated all the tax loopholes given oil, agriculture and the like will cost the U.S. Treasury roughly $1.3 trillion just in 2011 tax expenditures. That is our tax monies, folks, that is being paid to keep the super rich.

This is part of the redistribution of wealth that has occurred just since 1992. The top 400’s aggregate taxable income has risen from $16.9 billion to $90.0 billion in 2008, said Buffet. And their federal income tax rate fell from 29.2 to 21.5 percent. So the general taxpayer has been paying a multi-billion tax bill for the tax breaks of Big Business and the wealthiest. Reagan Budget Director David Stockman has labeled it the “reverse Robin Hood effect”.

What have the richest done with our tax monies? Certainly some have expanded their businesses, but much of it went overseas. U.S. corporations have some $1 trillion in unrepatriated profits from their overseas’ businesses sitting in foreign accounts, at the moment.

Much of it has also boosted executive incomes and stock buyback plans. USA Today recently reported that median CEO salaries increased 27 percent in 2010. Data from the Bureau of Labor Statistics shows, however, that workers in private industry experienced only a 2.1 percent pay increase last year. As USA Today points out, though, the great increase in CEO pay in 2010 is not really indicative of booming profits, but rather reflects the fact that many companies have been cutting costs and laying off workers.

In fact, the largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim, says USA Today. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories.

And there is even less shared sacrifice in our increasingly unprogressive tax structure. To understand why, Buffet says you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. But for the middle class typically, they fall into the 15 percent and 25 percent income tax brackets, in addition to heavy payroll taxes.

“Back in the 1980s and 1990s,” said Buffet, “tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

“I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000.”

There is much more to Republicans’ disavowal of shared sacrifice, of course. GW Bush thought that by borrowing the monies for his 2 wars, he would prevent widespread anti-war sentiment so soon after Vietnam, our longest war. And it also muted criticism of his tax breaks for the wealthiest. Vice President Cheney’s infamous saying, “Ronald Reagan proved that deficits don’t matter.” was its incredible rationalization that helped to plunge us into the Great Recession.

“Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances,” says Buffet. “…It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.”

But that is clearly the objective of Tea Party Republicans in their budget cutting crusade. With the economy still recovering, unemployment still high, we cannot afford the taxpayer subsidies that are setting record budget deficits. The taxpayer paid tax breaks won’t reduce the debt load, but it will prevent any real economic growth before 2012, as I have said.

So there is even a deeper reason to bring back the idea of shared sacrifice. For as Americans become more hopeless about their economic futures, they become more passive. And passivity means they don’t vote, and so participate in the democratic process, as is evidenced by progressively declining voter roles since the 1970s. The massive redistribution of wealth that has occurred most recently has bred a greater cynicism about the democratic process. Warren Buffet may not know this, but less participation in our democracy means fewer control the levers of power, as happens in Third World countries controlled by oligarchies made up of the wealthiest families. And it was depression-era Germans badly discouraged by the destruction of their economy that elected a Hitler.

Harlan Green © 2011