The Weiner Component #27 – Subsidies & Taxes: Is There a Difference?

End crop subsidies

In order for any government to function it must have some source of revenue that allows it to pay its expenses.  In addition, for a nation to grow, both during periods of peace and war, it must have a means of encouraging the development of new or fledgling industries.  A major method of doing this is through subsidies, which reduce taxes in specific areas of economic growth.  These are tax subsidies that are supposed to be used only when they are needed.  Once the fledgling industry can compete on a world-trading basis or can supply the needs of its-own country these subsidies are no longer needed and should be done away with.  Unfortunately that is not always the case.

During the early days of the United States the source of government income was mostly tariffs, a small tax on all goods being imported.  As the country grew so did its need for money to fund its operation and other things within the nation were taxed.  Eventually, with wars, beginning with the Civil War, individual gross income was taxed.  The Supreme Court eventually declared this income tax unconstitutional.  Early in 20th Century the Constitution was amended, Article XVI, legalizing the income tax.  It has existed ever since as one the main sources of revenue for the Federal Government and also for most of the state governments.

This tax, from its beginning was supposed to be a graduated tax; the amount people paid was to be based upon their ability to pay, the more one earned the greater the percent the individual paid.  Thus the amounts paid were based upon the individual or household’s ability to pay.

During the later part of the 20th Century taxable income, the income tax, was divided into two major categories, regular income and capital gain or active and passive income.  Active income was money directly earned by some form of employment; passive income was an increase in value of something, stock, property, art or anything increasing in value over a passage of time.  The object of this was to encourage the sale of the property or stock or whatever the item was, since it could only be taxed when it was exchanged for money.

Also with capital gain the increase in value had to be significant if it were to be sold, otherwise the profit would be eaten up by the amount of the tax.  Consequently capital gain was considered a reasonable extension of the income tax laws.  However over the years many accountants have been able to extend it to cover a goodly percentage of the upper echelon’s income and subsequently have considerably reduced the percentage of their earnings paid in taxes.  Someone like Mitt Romney pays fourteen percent or less of his million plus income while the ordinary citizen earning far less than one hundred thousand dollars a year will pay twenty to twenty-five percent of their income in these taxes.  There is now a move to reduce the capital gains tax and/or increase the tax base of anyone earning a million dollars or more a year.

On the other hand the Federal Government is and has been giving subsidies to many people and companies investing in green forms of power, saving or producing devices like those that make electricity or hot water from light.  These devices are usually installed on the roofs of homes or they can be money invested in electricity producing windmills that generate electricity or similar resource creating devices.  The individual’s benefit derived from this type of investment is not to decrease his overall taxable income by the amount spent on the device but a direct deduction from the money owed to the government.  If you owe fifteen thousand dollars in income taxes that year and the power-saving device cost ten thousand dollars to buy and install, then the tax owed is reduced to five thousand dollars.  If the cost of the device is greater than your taxes then you can carry the difference over to the next year.  It is a means of economically encouraging households “to go green” and inexpensively increase the amount of available resources for the country

In the case of businesses or corporations this encouragement is carried out by “subsidies.”  Subsidies according to Webster’s dictionary are “grants of money by a government to a private person or company to assist an enterprise advantageous to the public.”    Usually these grants are supposed to function as long as it is advantageous for the country to fund that entity.  This usually means allowing a fledgling company to grow large enough to become competitive with similar concerns from other nations or to allow forms of exploration that the concern cannot itself afford, such as drilling for oil in the Gulf of Mexico.  The oil subsidies, for example, were begun in the early 1940’s to allow for rapid exploration during World War II.  With some modifications and additions they are still going on today.  If the government were to stop or limit these subsidies in no way is it taxing these companies which today are making profits in the billions of dollars.

For practical reasons over the years many corporations were given innumerable subsidies, generally for very good reasons.  These subsidies are, in most cases, no longer practical, as currently most of these corporations are multi-profitable.  In point of fact many, like the oil interests, tend to use some of their subsidy money to hire lobbyists and for contributions to both political parties.  While this is not legally bribery, it comes awfully close to being both coercion and bribery.

The current argument in Washington between the Democratic and Republican Parties defines these subsidies as being taxes.  If they were cancelled, John Boehner has argued, it would be raising taxes on “the job creators.”

As we’ve seen the large corporations that get these subsidies use the money mainly to fund lobbyists and to make financial contributions to both parties in both Houses of Congress.  What they are mining is the American taxpayer who indirectly ends up paying their bills.  Isn’t it time we stopped subsidizing companies that are making many billions of dollars in profits.  Subsidies are not taxes and should not be treated as such.  Let’s have a more reasonable system of taxation!


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The Weiner Component #18 – Myth & Reality

Washington DC - Capitol Hill: United States Ca...

Today, December 31, 2012, the Republicans and the Democrats in the U.S. Senate are currently attempting to negotiate a compromise to prevent the nation from going over the fiscal cliff; that is, to prevent automatic tax increases from throwing the nation into a recession and possible depression.  Will they succeed?  At this point, 12 noon, Washington time, it’s anybodies guess.

The so-called compromise isn’t really a compromise; it’s a process of each side giving in to some of the other side’s demands.  A compromise is where both sides  can accept and live with an agreement that is somewhere between their initial positions.  What is happening here are that the Republicans are being forced, in their opinions, to give in to some of the Democratic positions.  As a result of the 2012 Presidential Election they have to give in to the other side to some extent.  Given another election, probably in 2014, they believe a victory would allow them to totally get their way.  One Republican candidate for the Senate, who lost the race, stated that compromise, to him, was the other side coming to his position.

The arguments, mostly Republican, are based upon faulty reasoning and a total misunderstanding of economics.  I was surprised last night listening to some eminent newscasters discussing the state of the economy.  They sounded like they had never taken a course in economics or read a book about the subject.  They were talking about the National Debt and they were doing so from the prospective of Microeconomics, equating the National Economy with their household budgets.  This was on MSNBC not on Fox news, which is a fountain of misinformation.  The were respected reporters on “Meet The Press.”  It struck me that everyone, with the exception of the Administration, has taken a Microeconomic view of the National Economy.

Some senator stated that he was not going to burden his grandchildren with current deficit spending.  What he missed was the deficit spending in World War I, the Great Depression, World War II, the Marshall Plan, the Korean War, the Viet Nam Police Action, Reagan’s “Star War” military spending, and the three Bush wars.  Have these sunk us into enormous debt?  Are we still economically suffering and paying for all of these events?

In dealing with this issue there are numerous factors to consider.  One is population growth.  According to the Census Bureau official population clock the population of the U.S. increases at the rate of one person every eleven seconds; this includes births, deaths, and immigrations.  That causes the population to grow at approximately 5 ½ people per minute, 330 people per hour, 7,920 a day, 55,440 for a week, 221,760 for a month, and 2,661,120 people per year.  The Bush Economic growth and Tax Relief Reconciliation Bill of 2001 was passed twelve years ago and extended for two more years in 2010 under President Oboma.  The population increase in the last twelve years is about 34,573,440 people.  The prices of most items have doubled during this period.  Going back to the 2001 level, even if it’s for a short period of time, would bring large-scale unnecessary hardship upon the majority of the population of this country.

This increase in the population requires a significant increase in the Gross Domestic Product in order for the economy to just stay even.  For anyone, be he a Senator, member of the House of Representatives, TV Reporter, or anyone else to talk about the future in terms of conditions today is not only nonsense, it is blatant naivety or ignorance.  And to project to when one’s grandchildren will reach adulthood is utter nonsense.  The entire nation, its population, and the value of money will be different at that time.

Another, and perhaps more important factor is the concept of Macroeconomics.  We think of money in terms of our household budgets.  Anything we buy we have to pay for; but is this true for the Federal Government?  What is the purpose of money to it?  In fact, what is or are the purposes of the Federal Government?

According to the Preamble to the Constitution of the United States:  “We the People, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

Nowhere in the Preamble or the Constitution is Microeconomics or anything about it mentioned.  The Constitution gives Congress the power to “Coin money,” and “regulate the Value thereof.“  If we consider the power given to Congress and the purposes stated in the Preamble, then we can understand the function of the Federal Government in dealing with money. It is to control the money supply to allow for, or insure the greatest prosperity for the people of the United States.  That is the function of Macroeconomics.  Money is the tool that the government uses to achieve the greatest functionality of the economy of the country.

The argument of the National Debt getting so large it will drive this country to bankruptcy is also nonsense.  If we ask the question: Who owns the bulk of the National Debt, 70 to 80 percent of it?  The answer to that is the Federal Government and its agencies.  For example Social Security owns over 2 ½ trillion dollars worth of the debt.  Can an entity owe itself money that it borrowed from itself?  The question points out the irrationality of the concept.  After all, who prints and issues the money?  It is the National Government.  There is nothing behind the dollar but the word of the National Government.

Money is, after all, a tool that the National Government uses to enhance the level of productivity in the nation.  It is supposed to allow for full employment and a certain level of prosperity for all the people in the country.  The National Government’s goal is not to pay off its debts but to allow the nation to function to it highest possible level.

Currently the Federal Reserve, under Chairman Ben Bernanke and his Board of Directors in Washington, D.C., are spending four hundred billion dollars a month on real estate paper and four hundred and fifty billion dollars a month on government bonds.  This is a very creative use of Monetary Policy.  With the multiplier effect, money is spent numerous times before it becomes part of the National Flow through the economy; this adds trillions of additional dollars monthly to the available currency.  Is it working?  The economy is improving new housing is being built throughout the country, employment is increasing and unemployment is gradually shrinking.  As long as there is no inflation, too much cash chasing too few goods, the economy needs the currency to grow.  We are having a healthy development.

It would be nice if we don’t go over the cliff.  It would be even nicer if all the Congressmen understood Macroeconomics and the proper functioning of the Federal Government.  With full employment much more wealth would be produced and much more would be collected in taxes on all levels of government.  We might even be able to pay off some of the “so-called” debt.  In order for this to happen the government has to spend more money than it takes in.

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The Weiner Component #8 – Banks & Capitalism: The Ultimate Rip-off

NEW YORK, NY - OCTOBER 02:  People pass a sign...

The concept of banks and banking was that the people could safely deposit their funds into these institutions and receive a small reward in the form of interest.  The banks could use these funds for the benefit of the community, charging a slightly higher level of interest.  Everyone would benefit from this practice.

Historically as the banking houses grew in Europe initially many looked for better ways to gain more profit, This led to some banking houses growing inordinately large and financing trade between nations and even some European governments at larger rates of interest.  It allowed for economic growth but much of its original purpose became secondary.  Today many large banks have reached a level where their primary purpose is the greatest profits they can achieve.  The Real Estate fiasco, which almost destroyed the economy of the United States and numerous other industrial nations, was caused by the large banks in a frenzied grab for greater and greater bonuses, fees, and profits; knowingly selling, at times, securities they knew were faulty and prone to failure.  This insane greed brought the industrial world to the point of almost total collapse that would have made The Great Depression of 1929, which lasted ten years, look like a friendly weekend break.

One of the many perpetrators, Bear Stearns & Co., which was taken over by JP Morgan Chase & Co. after its bankruptcy, is currently being sued on the basis that the quality of the mortgaged backed securities sold during the sub prime housing boom was “a sham.  New York Attorney General Eric T. Schnaderman in September of 2012 filed the first lawsuit by a task force investigating misconduct by banks in the run-up to the financial crisis.  The securities fraud suit goes to the heart of the misconduct that created the housing bubble and caused the crash of 2008.  The suite against JP Morgan Chase & Co. alleged that Bear Stearns misled investors when the bank said it had carefully evaluated the quality of mortgages it packaged into securities from 2005 to 2007.  “Defendants in fact had no legitimate basis for any of the numerous representations about the quality of loans in their securities because their systems for assaying were a sham,” stated Schneiderman.

The suit alleged that Bear Stearns knew that many of the loans it was selling to investors were defective.  It quotes an internal email from one Bear Stearns executive referring to a security as “a dog.”

In October of 2012 the U.S. Government also brought suit against Wells Fargo through its U.S. attorney’s office in Manhattan for defrauding a government backed mortgage insurance program of hundreds of millions of dollars over more than a decade by improperly underwriting more than 100,000 home loans.

What existed during the Real Estate Boom was a frenzy of activity that grew wilder and wilder, particularly during the Second Administration of George W. Bush when any semblance of regulation virtually disappeared.  All the major banks seemed to be interested in were their commissions and bonuses that ran into the billions of dollars.

With the Crash of 2008 and the bailouts under both Presidents Bush and Obama, the banks became more cautious about the types of real estate loans and available money tightened in that direction.  The big banks still felt a need for inordinate profits and they came up with a new ploy, the futures market.

Suppliers of goods and services need to be sure of a constant source of raw materials and commodities for their customers.  Guaranteeing this supply eventually became the Futures Market.  Individuals can bid on the future supply of beef, corn, grain, gas, oil, electricity, on almost any item that can be sold and of which there is a continuous need.

For example Goldman Sacks may purchase a barrel of oil (56 gallons) at sixty dollars to be delivered three months in the future.  They, then, sell that barrel of oil at ninety something dollars a barrel three months later.  At one point, and possibly still, Goldman Sacks was/is making 40 to 45 cents on every gallon of gasoline sold.

JP Morgan Chase & Co. had been dealing with electricity, selling it to the California companies and has been found to have lied or made a gross error in its testimony to the government commission looking into these future sales.  They are being threatened with being forced out of the business in California.  Their profit was in excess of 200 percent of their investment.  JP Morgan Chase’s response was that if the government commission were going to be so unreasonable then losing the sale of electricity, which is such a small part of their business, would not be significant to the company.  This is arrogance from a corporation that lost well over two billion dollars in a foreign investment and ultimately has and continues to use its depositor’s money for its investments.

Many, if not most, of the items the consumers use for daily living, beef, pork, chicken, orange juice, assorted crops, many fabrics, lumber, sugar, etc., are controlled by the futures market, and the large banks with a giant footstep have inserted themselves between the producers and the consumers.  A goodly percentage of the cost of living is taken from the householders by the large banking houses.

There is an interesting note of irony here.  People deposit or have their checks deposited in the banks.  The banks, whose business is dealing with money, take these funds and use them to make massive profits for themselves utilizing their depositor’s own money to exploit the very people who are their depositors.  I would estimate that the banks are betting at least a one hundred percent profit over each three-month period.  It’s like being taken advantage of in every direction; the consumer is not only the victim but also pays for the privilege of being abused.

Do the banks still serve their original purpose?  Are they serving the public in their communities?  If the answer to these questions is No, then something is needed to resume these services.

On the one hand the banks and many bankers have been voluminously fined for these abuses; but to my knowledge no one has gone to jail.  If a bank makes a billion dollars and is subsequently fined two hundred million then, where is the penalty?  Why should they stop these practices?  If the fines are no more than a small percentage of what is made by the violation then there is no real reason to stop these types of practices, especially if no one ever goes to jail.  What is needed here are strict laws and heinous penalties for the crimes.

Since it seems that individual and company greed permeate the public sector it is time to find a new solution to public banking.  That something is a new system of banking that will serve the general public and function totally according to their and their communitie’s needs.  The institution, which exists for that purpose, is the Federal Reserve.  Currently, through Monetary Policy, they control the money supply in the country.  The Fed monitors the banks and, as far as they can, also monitor economic conditions in the United States.  They need to have their power and purpose extended.

The Federal Reserve has the U.S. divided into twelve banking regions with annexes in other cities.  The one located in San Francisco has a branch in Los Angeles.  Currently, among other things, they serve the public banks.  Their power can be extended to where they establish a system of banks throughout the country, which would serve the general public.  One of the purposes of the Constitution is to “promote the common good.”

Each of the twelve Federal Reserve banks has a Board of Directors.  Also the chairman of the Fed has a Board of Directors.  All of these boards contain an inordinately large number of bank presidents.  What they need for reform are less bank presidents and more economists who don’t have a conflict of interest.  This would tend to make the boards more prone to serve the general public.

Bringing this about would allow the Fed to almost totally control the economy for the public good.  They would be able to limit or cease occasional rapid jumps in the economy and they would certainly not allow a situation as developed in 2008.  The Federal Reserve like the rest of the government’s object is to serve the public and not to exist for private profit for the few.

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The Weiner Component #7 – Taxes: Franklin Delano Roosevelt & the Graduated Income Tax

Franklin D. Roosevelt

There are essentially two categories of taxes that a citizen of the United States pays: one group is called progressive and the other is regressive. A progressive tax is one that is “gradually increasing as an individual’s income increases beyond a certain minimum level. The income tax is an example of this type of tax. The more one earns the higher percentage of his/her salary the individual has to pay in taxes. In the case of State and Federal income tax the earnings have to be above a certain minimum for the person to pay any tax and then as the income rises so does the percentage paid to the government(s). Of course there are deductions which lower the income and the amount paid. Mitt Romney, with an income running into the multimillions in 2011 paid 14.1 % of his yearly income. It should be noted that he paid that much because he refused to take a two million deduction on his charitable contributions. In 2010 he paid thirteen something percent. The average earner getting about above fifty something thousand dollars a year, pays somewhere, after deductions, between twenty and thirty percent of their yearly compensation in income taxes.

(Parenthetically Romney has three years to file an amended tax return to claim and get money back for the two million in contributions he did not use in his 2011 income tax. If he loses the 2012 Presidential Election, or, for that matter, even if he wins the election he can still claim that amount and bring his percentage down to eleven or twelve percent of his income for that year.)

Most other taxes: sales, excise, etc. are regressive taxes. Paying this tax has nothing to do with your income. Everyone buys food and the assorted items needed for daily living; and they all, more or less, pay equally for these items. Consequently the more one earns the less a percentage of their income is spent on these items. These taxes are regressive in form because the smaller the income the higher a percentage is paid in taxes. Those people who are earning too little to pay income taxes are spending a large part of their resources on these survival items and paying a goodly percentage of their incomes on these taxes.. Both the poorest and richest people around must have food and shelter to survive. The difference that they would spend on these items is astronomical.

The other tax that seems to fall between these two areas is property tax. In order to pay this tax one has to own property and the appraised value of the property determines the amount of the tax. In the state of California there is an exception to this principle. In 1979 Proposition 13 was passed which lowered everyone’s tax rate and there after only allowed it to increase two or two-and-a-half percent per year. Everyone, who bought property after that point, paid and has continued to pay a higher tax rate than the people or corporations who owned property before the measure was passed. Still the category of this tax is somewhere between progressive and recessive taxes. For example Mitt Romney owns five houses, each valued at well over a million dollars. I own one house valued at well under one million dollars. In addition I have owned this house in California since 1970. I pay far less in property taxes than Mitt Romney. My neighbors, who have purchased similar houses after 1979 pay more than double what I pay. A person, who does not want to purchase or cannot afford property and rents, pays his/her share in their rent.

The question raised by Franklin Delano Roosevelt in his first Administration, during the low point of the Great Depression was: How much does a person need to live comfortably for a year? Roosevelt felt that beyond a certain point the amount of money being earned was ridiculous; after all, how much could any individual spend, for himself and possibly for his family, in a year. Amassing large amounts of funds for their own sake was ridiculous, particularly in a dire time of need. He felt that the balance should be taxed. To Roosevelt, the progressive or graduated income tax should be a means of serving the entire nation. Both Houses of Congress refused to go along with this idea and it never even came to a vote in either House of Congress.

In his Third Administration, during World War II, Roosevelt brought the same point up again in terms of war profits. Again Congress refused to consider the idea. It was not really an issue then because anyone who could or wanted to work was employed helping the War Effort. The problem then, with the war, was that there were not enough goods for everyone who had money to spend.

The problem seems to deal with the concept of what is really wealth. Is the money spent to acquire the goods and services produced or is it really the goods and services produced? Is it the productivity of the nation or the money, which the government prints?

If it’s the money then some individuals can amass great amounts of currency in their lifetime and they will then be very wealthy. But if the true wealth is the productivity of the nation, then the wealth is determined by both the level of productivity, and the prosperity of everyone in the nation.

The issue is confusing. Obviously the answer is on two levels: one, money determines an individual’s level of success within the economy. Also money has value in that it can be exchanged for goods and services in the present or in the future. Actually the currency is really a means of exchange. In itself, money has no real value except that arbitrarily assigned to it by the state. In a manner of speaking, money is the tail that wages the dog, the economy.

Roosevelt’s point is well taken: there are only so many goods and services that can be used in a year or even in a lifetime. If there is much more money than is needed, then those amounts are superfluous funds and should be taxed and used for the common good. Money ceased to have any real value when it became paper with nothing behind it but the word of the government.

It can and has been further argued that if tax policy stuck to its principles and was truly graduated for the rich then why should anyone create new industries. Take for example Bill Gates, one of the enervators of Microsoft. Gates is today a billionaire, who is currently spending his life giving millions away to assorted charities. And he and his wife are trying to upgrade the human condition, through medical, educational, and assorted other charities.

Another justification for gathering wealth is so that it can be used for inheritance purposes to create a future dynasty. Mitt Romney is a good example of that category; he has set up a trust fund for his five adult sons and their families of one hundred million dollars; and he has kept for himself and his immediate family between one hundred and ninety to two hundred and fifty million dollars, which was mostly “harvested” from his years as CEO of Bain Capital. In addition he has a ten million dollar retirement fund, from which he should start collecting soon, since he is in his sixties. It’s interesting to note that no one in his family even has to get out of bed to live comfortably for countless generations. Parenthetically, I would wonder if he’s really doing them a favor? What is needed there is a stout inheritance tax for a number of generations!

To the individual, monetary success is important; to the Federal Government economic prosperity is necessary. These two forces contradict one another. What we are dealing with, here, is microeconomics vs. macroeconomics. Microeconomics is the individual and his level of success, which, unfortunately, has led to economic winners and losers. In 2012 the estimate is that twenty percent of the population in the U.S., one in five people, are food insecure and go to bed hungry or without proper nutrition every night, while one percent lavish in lush wealth.

Money, itself, as we have seen, has no real intrinsic value: it is all token, fancy printed paper and cheap metal coins that have only the word of their government behind them. As long as everybody, nationally and internationally, agree on the value of the currency, it exists. To the Federal Government money is a tool to enhance productivity. In a manner of speaking the Federal Government owns the printing press and all it takes to issue more dollars is an act of Congress signed by the President. The amount of money in circulation has to be great enough to allow for full possible productivity and just short of the amount that will start a spiral of inflation.

The question then is: What is more important Macroeconomics or Microeconomics? Where should the emphasis be placed? Should it be with the prosperity of the country, or with the prosperity of a small number of the population?

I don’t think there’s any question that the prosperity of the entire population should be primary and Franklin Delano Roosevelt’s point about the graduated income tax is valid. The Federal Government should control the money supply and its continuous goal or mission should be the welfare of the entire population.

We desperately need realistic tax reform!

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