The Weiner Component #157 – Taxes & the American Public & the Negative Income Tax

The United States of America is a Federal Republic with separate state and local governments.  In order to function each of these governments tax, in some or various fashions, the general public.  These include income, payroll, property, sales, excise taxes and capital gains, dividends and interest, import tariffs, estate taxes, and gifts, as well as various fees.  In 2010, for example, the amounts collected by federal, state, and municipal governments amounted to 24.8% of the Gross National Product (GDP).

 

In the United States most taxes are regressive; that is, the less one earns the higher a percentage of their income they pay.  This would include those who earn too little to even pay an income tax.  There are a multitude of taxes: local, state, and federal that everyone pays equally regardless of their income level.  This means that most of these taxes are paid by virtually everyone from the homeless person to the multimillionaire or so-called billionaire like Donald Trump.

 

There are excise taxes on such items as gasoline or tobacco, sales taxes on most purchases, property taxes on homes and business buildings, social security and Medicare taxes that are deducted directly from the business and employees’ wages, unemployment insurance which is deducted from one’s income.  In addition license fees are a form of taxation that allows individuals to practice certain occupations.

 

Taxes fall more heavily on labor income than on capital income.  A larger percentage is taken out of every employees income that out of every employers profits or dividends.

 

If we ask ourselves what is the major economic problem in the United States today, besides the current 5% unemployment rate, the answer we get is the distribution of the National Income.  More and more money keeps going to the upper echelon and less and less of the National Income is being acquired by everyone else.

 

We are the richest country in the history of the world but the distribution of the National Income is such that an ever-growing, percentage of the population is having a harder and harder time surviving.

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If we consider the 2015 tax table for a married couple filing jointly:

 

0 – 18,450         10%

18,451 – 74,900         $1,845 plus 15% of amount over 18,450

74,901 – 151,200       $10,312.50 plus 25% of amount over 74,900

151,200 – 230,450       $29,387.50 plus 28% of amount over 151,200

230,451 – 411,500       $51,577.50 plus 33% of amount over 230,450

411,501 – 464,850       $111,324 plus 35% of amount over 411,500

464,851 – Or more       $129,996.50 plus 39.6% of amount over 464,850

For a single individual you can half the above table and for a head of household drop it down about a quarter.

 

There are, of course, numerous deductions for the number of people in the family and numerous other assorted items. The upper two categories, I suspect, will cover most American taxpayers.  Within the decade or less, as money become less valuable, a larger and larger number of people will slip into the third category.

 

The person earning $18,450 with a family of four is not going to pay any income taxes since the 2016 poverty level for that group is $24,300.  But everyone else with pay 10% of the first $18,450 they earn; then from $18,451 up to $74,900 they pay 15%, and from $74,901 to $151,200 they pay 25%.  This process continues until they reach $464,850, paying the amount in each category until that amount is reached.  Up to this point the income tax has been graduated, the more one earns the higher a percentage of their income they pay.

 

After the last category, $464,851 onwards into the multimillions the amount paid is $129,996.50 plus 39.6% of the income.  This is a regressive income tax favoring the upper percentage of the population. These people’s percentage of income decreases as their earnings increase above the $464,851 mark.  These people pay a far lower percentage of their incomes in taxes than the average citizen.

 

It should be noted that CEOs of fairly large to very large corporations and their leading executives do earn anything from one million dollars a year to one million dollars a month to even one million dollars a week.  The CEO of Hewlett Packer earns 15 million dollars a year.  The current                            CEO of Ford earned 50 million dollars in 2015.  The Bank of America has a CEO, who I imagine can be called the emperor and each section of this international organization has a president for that section of the company.  All of these executives and their leader’s salaries are in the millions of dollars.

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In addition to all this there are two forms of income.  One is regular income which is the only one most people have.  It is taxed as shown above, after deductions are taken out of the total.  The other is passive income.  This is monies earned from investments or increases in value of property.  It could be an apartment house, a home, a piece of art; mostly anything that is owned and increases in value when sold.

 

In addition, specific properties that are rented for profit can legally be depreciated in value over a period of time and any money spent on maintenance of these properties can be deducted from passive income.  Donald Trump, in all probability, pays nothing in income taxes; all his maintenance costs for all his buildings would be deducted from his income leaving him legally and theoretically with no income.

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The major problem that exists today in terms of the distribution of the National Income or Gross National Product is that most people still think of money as they did in the 19th and early 20th Centuries.  At that time the worker exchanged his labor for a precious metal, gold or silver coins.  The value of the labor equaled the value of the coins.  The laborer or a member of his family would then exchange the precious metal coins for the goods and services needed to live: housing, food, clothing, medicine when needed, whatever.

 

Today money is paper, printed by each government and coins are copper sandwiches, having token value.  Currency today has no intrinsic value.  It is used as a means of exchanging services for goods and services: housing, food, clothing, medical care when needed, etc.  Money has not been a precious metal since the early 1930s.

 

General thinking and emotions today about currency by most people, particularly the Republicans in Congress, goes back to the 19th and early 20th Centuries.  They still feel that money is basically gold.  Some Congressmen have even, from time to time, mentioned going back on the gold standard.  If this were to be attempted it would cause unbelievable economic disruptions because there isn’t enough gold available to back the amount of business being done either nationally or internationally.  Also gold is currently valued somewhere above $1,200 an ounce.  If the Federal Government were to start buying gold it would quickly shoot up to over $2,000 an ounce.  In 1929 that was a $20 gold one ounce coin.

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How could the distribution of the GDP be done more fairly?  Or can it be done more fairly?

 

About 25 to 30 years ago my wife and I took a vacation in Estes Park, Colorado.  We visited the Rocky Mountain National Park for a week.  While there, I met a gentleman from Holland who was also on vacation.  He and his family were also visiting this site.  Among other things we spoke about unemployment, both in the United States and in Holland, two different political systems, both democracies.  In the U.S. then and today the unemployed person received an inadequate stipend for a matter of 26 full weeks.  It used to be for a slightly shorter period of time.  This is supposed to hold the individual over financially until he/she finds a new job.  In Holland the unemployed person continued to maintain his/her regular standard of living.  The difference being that the unemployed individual could not afford vacations, but otherwise his standard of living would be the same as the other employed individuals.  Both the man I spoke to and his wife worked; it was expensive to come to the U.S. on vacation.

 

There were no negative connotations applied to the unemployed individuals like there often are in the United States.  The entire population of the country took on responsibility for one another.  Anyone, at some time or other, could be unemployed through no fault of their own and everyone was equally responsible for everyone else.

 

They pay heavier taxes than people in similar circumstances in the United States but they get far better coverage.  In addition to far more reasonable unemployment insurance the people of Holland get free medical care, free education through college if they prove capable of going there, plus numerous other services.

 

The difference between the two countries is that the Hollanders take a much more mature attitude than we do in the United States about the welfare of all their citizens.

 

As a footnote it should be noted that today just prior to the 2016 Presidential Election we see large sections in both political parties, demonstrating through their choices of candidates their revulsion at being taken for granted by the powers that be who have been wanting their votes, but have given a goodly percentage of the people very little in return.  This is particularly true of the Republican Party which now seems to be stuck with Donald J. Trump as their presumptive candidate.

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Is there a way to deal with this problem?  The answer is obvious, if Congress and the American people can come to a rational understanding of the function of money and group responsibility.

 

Traditionally the economic formula is:

Demand equals production of goods and services.

There are two factors that determine Demand.  They are the amount of money in the National Income or GDP that is distributed to the general population.  The more money that goes to the top few percent of the population the less there is available for everyone else.  Since most of these excess incomes are invested in old productivity like stocks and bonds they are removed from the general cash flow, decreasing the amount needed for demand, decreasing the level of productivity and consequently, sooner or later, bringing about a recession or even the possibility of a depression.

 

This behavior is a consequence of traditional beliefs and values.  All this, generally speaking, is how the Great Depression came about in 1929 and all the recessions and depressions before and since.  They are based upon the unreal myths about money that most people feel are absolute truths.

 

Is there a way to avoid this continual economic inequality?  A suggestion was first made in England during the 1940s by a British politician named Juliet Rhys-Williams and later also picked up in the U.S. by the free-market economist Milton Friedman.  This was for a negative income tax.

 

The negative income tax (NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying income taxes to the government; that is, every citizen living within the country is guaranteed a certain minimum standard of living.  Just as today there is a poverty level set for everyone living within the country in both rural and urban areas for individual living alone, married couples, married couples with children, and heads of households.

 

This poverty level or slightly above it would probably be the minimum level these individuals or group or families would be guaranteed as their minimu m standard of living.  It would probably be paid weekly.  Those earning more than this level would be paying income taxes according to their level of compensation.  The tax would be graduated so that the more earned the higher the rate of taxation would be.  There would be no cutoff point where the tax stopped being progressive.

 

It should be noted that the current income tax cutoff point of 39.6% of any amount over $$464,850 where the taxes stop being progressive and become regressive.  This limit was incorporated just a few years ago under President Barack Obama by a staunchly Republican majority in the House of Representatives and by a filibustering Republican minority in the U.S. Senate.

 

During World War II, 1944 – 1951 the cutoff point was set at 91%, from 1952 – 1953 it was 92%, during 1954 – 1963 it was 91% again, in 1964 it became 77%, and from 1965 – 1981 it was 70%.  During the Reagan years: 1981 – 1989, the tax rate dropped to 50%.  But during these same years Reagan raised taxes twelve times and took back 50% of his 1982 tax act.  In 1987, under George H.W. Bush they were 38.5%.  In 1991 – 92 they dropped to 31%.  In 1993 they were raised to 39.6%.  In 2001 under George W. Bush in stages the maximum income taxes were dropped to 35%.  Under President Obama they were raised to 39.6%.

 

It should also be noted that inflation raised most persons into tax brackets formerly reserved for the wealthy.  And that income taxes now applies to 2/3 of the nation.

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In a land of free opportunity for all, the income taxes should be high enough to include former Presidential candidate Bernie Sanders’ current goals of free medical care for all, free education from pre-school through college for anyone capable of achieving a degree, and other social programs including eventually a dignified burial.

 

The effects of a negative income tax would create a single system that would fulfill the social goal of making sure that there is a minimum level of incomes for all.  With a NIT the need for a minimu  m wages, food stamps, welfare, possibly social security programs, Medicare, and other government programs could be eliminated.  This would reduce the administration costs to a fraction of what they are currently.  These costs and administration wages could be directly applied to the people receiving the funding.

 

In the 1972 Presidential Elections the Republican candidate, Richard Milhous Nixon ran for a second term.  His Democratic opponent was George McGovern who proposed a guaranteed minimum income for a family of four of $4,000 a year.  Nixon proposed a guaranteed minimum yearly income of $2,500.  While neither of these level was a significant amount they bought a lot more than they do today.

 

Nixon was reelected and his proposal came up in both the Houses of Congress.  What I remember about the debate in both Houses of Congress was the pain in the voices of the legislators.  It was the level of pain that a boor would make if a sow accidentally stepped on his scrotum.  It was, apparently, in the minds of the national lawmakers as though their own money was about to be forcibly taken from them.  The Negative Income Tax was virtually killed before it could be born.

 

But times have changed since the 1970s.  Money, to the government, is a tool that begets productivity.  It is printed by the Federal Government and can be and has been used by the Federal Government to enhance the economy.

 

If we reexamine the formula we considered earlier:

Demand equals production of goods and services or to restate it more simply:  Amount of money available in the economy equals the level of employment.

We can rewrite the formula to also read: Extent of Production of Goods (employment) equals extent of Demand (money available).

 

The amount of the National Income that goes to the majority of the people determines the amount they can spend on the purchase of goods and services.  The more they can spend fulfilling their basic needs and wants the higher the level of employment in the nation.

 

Currently the nation is geared to allow the rich to get richer and for everyone else to have less and less of the GDP or National Income.  The NIT would not only reverse the current process it should also satisfy all the voters who feel they are left out of the system and are supporters of Bernie Sanders or Donald Trump.  This process could be a way of giving the country back to the general public.

 

There is, after all, just so far a populace can be pushed against its own interests.  Donald Trump has emerged as the floored hero of the exploited blue collar Republicans.  His existence, as the hero or potential candidate of the Republican Party is a national disgrace.  He will not solve the national problems, and were he elected could disrupt the balance of power or safety that now exists in the world by his presumptuous erratic actions and basic beliefs..

 

Bernie Sanders is the Democratic side of the current voter rebellion.  While most people agree with his goals, his methods of achieving them are totally unrealistic.  He wants to make the rich pay for his program by having taxes placed on Wall Street profits.  The term “Wall Street” is an abstraction.  Taxing Wall Street would be taxing all purchases or sales made on the stock market, plus all profits made on capital gains.  It would be an easy way to cause an instant recession or possible depression that would negatively affect everyone in the nation.

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Another factor affecting the money supply in the country is the population.  Every ten years the population of the United States is counted.  The number of the population in each state is needed to allocate seats in the House of Representatives.  The number of members in the House is fixed at 435, but seats are reallocated to each state on the basis of changes in the states’ population.

 

The last official census was taken in 2010, the next one will occur in 2020.  In 2016 the population was estimated at 322,762,018 people.  The country has added 2.4 million people or .77% to the overall population in this year 2016.  It does so every year.

 

In the introduction of virtually every census that is taken the then head of the Census Bureau apologizes for the people who he estimates were not counted.  In 2010 a goodly percent of the homeless in the U.S. were missed, leaving the estimate of the population low.  The probability is that the overall population then was over 350 million people.  Add 246 million people to that number and you’re probably close to today’s population.

 

According to the Census Bureau’s population clock one person is born every 8 seconds; there is one death every 13 seconds; and one immigrant enters the U.S. every 29 seconds.  This gives the population a net gain of one person every 13 seconds.  It’s from these figures that we get an increase of 2½ million people a year or a .77% increase in the general population.  That, incidentally, is higher than the current population of 27 of the 50 states.

 

The issue or problem here is that the money supply in order to stay even has to keep up with the ever growing population.  The FED is the agency that is supposed to deal with this issue by adding currency to the Nation Cash Flow as needed.  The FED can easily do this by using the National Debt and buying back more bonds than it sells.  After all the Federal Government through the FED owns over 50% of its own debt.

 

But banks can also create currency by their lending policy and the banking houses like J.P Morgan-Chase, Bank of America, Wells Fargo, to name just a few, did this through their purchase and sale of home mortgages from the Reagan Administration on to 2008 when their excesses brought about the Real Estate Crash of 2008.  The FED, under Chairman Alan Greenspan, was either not paying attention or was overly conservative in its actions.  Instead from the Reagan Era on to the crash, everything was left to the Free Market.  The Free Market, by the actions of the banks, made all the decisions at that time.  The FED kept its hands off everything until the Federal Government had to step in to avoid a massive depression greater than that of 1929 during the last year of the George W. Bush administration.

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A solution for many of our current economic problems would be the incorporation of the negative income tax into our system.  It probably will take a while for it to become fully incorporated and functioning but it would solve many of the problems that now exist in the United States.  It is time we all took positive responsibility for one another.

 

[BW1]

[BW2] Wage, food stamps, welfare, social security programs, M

[BW3]

The Weiner Component #94 – Consumption Equals Production

Comparison of real GDP using BEA Deflator vs r...

Comparison of real GDP using BEA Deflator vs real GDP using Money Supply (Photo credit: Wikipedia)

Much has been stated and written during the 20th Century about the production of goods, about how production brings about the consumption of a particular product, there are theories about how a finished good will find its own market.

How valid are these beliefs? If the product or products are highly desired as those produced by a company like Apple then the theory would seem to be valid. Apple, while not a monopoly, produces unique items. But if the product is an automobile like a Ford, Chrysler, Volkswagen, or Honda then the theory is limited. First off there are a number of national and international companies competing for the sale of their product. Automobiles are expensive items. Only a certain number is needed on the market or can be afforded; and these can be new or used. If a seemingly endless amount are produced by the assorted companies then at some point the price will decrease and will continue to do so until the cost of producing the vehicle could be greater than the price for which it can be sold. What we have here is a question of demand and supply, not a theory of production; and even that is an anomaly because supply is engendered by demand.

The term supply and demand is actually the opposite of what it should be: Demand determines Supply. An entrepreneur will produce and market virtually any product from which he can make a profit. He is, after all, in the business of making money; profit is his major goal as an entrepreneur.

It would seem that the ability to purchase, having the funds to pay for goods and services, determines the extent of the production of wealth. After all free access of money determines the production of all goods and services.

In the period leading up to the Housing Bubble of 2008 a goodly percentage of homeowners used their homes as bank accounts, freely remortgaging again and again, in order to acquire whatever they wanted. There was essentially full employment and everyone was doing well, that is both consumers and producers. When the bubble exploded, because of the abuse of the banks, and housing values collapsed like lead weights many consumers were suddenly left underwater, owing more on their homes than they were worth. Consumption of both goods and services came to screeching halt and the economy tanked. There was suddenly massive unemployment. Generally outside of absolute necessities the public could not afford to consume and we were headed for a massive depression which the federal government was able to forestall by massive loans to some industries.

What happened here was that consumption of goods and services stopped when the money supply dried-up. It was the massive sudden termination of consumption that brought about the extent of the crash. Limited consumption had engendered what was largely the end of a production boom and unemployment suddenly became massive.

What suddenly happened in the economy was that consumption determined production. The ability of people to freely spend money had suddenly ended and unemployment almost instantly rose to phenomenal heights. The same people who could no longer spend were those who mainly suffered from the lack of spending. An interesting note of irony!

Money, currency was and is a tool issued by the government of the nation. It has no intrinsic value and can be freely issued by the central government. All that is required for an additional release of this paper is for the government to print it and issue it.

The problem is that if too much of this paper is released into the general society, if the people have more currency than the amount of goods and services that can be produced then the cost of the materials that can be produced within the society will be bid up and mad inflation can be the result. If, on the other hand there is too little money in circulation the public will be limited in what they can buy and a recession and large-scale unemployment will result. The government, in issuing currency has to keep a constant balance between these two positions.

The basic problem or problems here is that the government has to keep a balance and distribute this money, the national income, on the widest possible level throughout the society for maximum demand.

The principle here is that Demand Equals Production. And for maximum demand to occur the money, the national income, must be distributed throughout the entire society.

Unfortunately what is currently happening is the opposite of what should be occurring. Since 2009 a greater and greater share of the national income is and has been moving up to the upper twenty percent of the society. They are currently earning far more than they can possibly spend and their surplus funds in the millions are being stored while the bottom twenty percent is getting less and less of the national income, and the middle class is, in most cases, just barely maintaining itself or just about shrinking in size. There has been a redistribution of income continually going on.

In order for the economy to grow and for everyone to reach a level of prosperity the federal government has to take control of the national income and widen its distribution to include the entire economy. One way this can be done is through tax and entitlement policies. Another way would be by fiscal policies, Congress passing legislation to upgrade the infrastructure of the United States and bring it into the 21st Century. Of course a combination of the two would be even more effective.

The 2014 Midterm Election will give the country an opportunity to decide in what direction it wants to go for the next two years: with the Republicans toward continued gridlock or with the Democrats attempting to move toward fiscal policy, possible tax reform, and toward full employment.

The Republican conservatives who represent the well-to-do CEOs and successful entrepreneurs are generally representing congressional gridlock. They don’t want any changes in the economic system. But if they were to look closely at the system they would discover that their economic base is slowly shrinking. As more and more people are slowly being forced from the middle class to the lower class their ability to consume goods and services is slowly also shrinking. As the percentage of the poor goes from 20% to 22% to 25% to 30% their shrinking incomes will be able to buy less of the goods and services this society is capable of producing and the GDP will decrease at a greater rate than these people’s incomes. The profits possible will also shrink and so will the incomes of the upper 20%.

In essence these people are contributing millions of dollars in political elections to support an economic system that in the long run will significantly reduce their profits and shrink the GDP.

If they were to reverse their positions and support the Democratic positions of fiscal spending and reform of the tax system then they would be engendering a phenomenal growth in the GDP which, in turn, would massively increase their profits and incomes. By fairly paying taxes and encouraging the Federal Government to bring the infrastructure up to standards in the 21st Century the upper 20th percent could multitudinously increase their profits and income far beyond what they would be paying in increased taxes.

It’s a wonderful piece of irony, having the upper echelon of our society fighting tooth-and-nail against their own long-term economic interests.

English: Changes in US Money supply based on F...

English: Changes in US Money supply based on Federal Reserve historical data. Source code is in File:Components of US Money supply.svg (Photo credit: Wikipedia)