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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The Weiner Component #5 – Money & the National Debt

In 1935, Cret designed the Seal of the Board o...

Currently the National Debt is in excess of 16 trillion dollars. Is it real? That is an interesting question. If it’s real then the United States would seem to be spending itself into oblivion. If it’s not real, then what’s the great problem?

The answer to that question is both yes and no. How can we have something both ways?

Before we resolve that issue let us consider some other related problems. Can an entity, any entity, owe itself money? The answer is legally, no. No one can legally owe itself money. If it were possible then we could claim bad debt losses on our yearly income taxes.

There are two levels of economics. The first is called Microeconomics (small economics). It is what most people deal with; what they understand economics to be about. The individual states, municipal and local governments function with it; the corporations and all levels of businesses utilize it; all individuals and households see it as the way economics and their lives are.

States and local governments utilize their taxes to pay all their expenses. It is their income, which provides the necessary services to their citizens and everything else the state needs. What the states can spend is limited to the money they collect with all their taxes; and also what the state can borrow. But borrowed money cost interest and has to eventually be paid back.

Businesses and individuals utilize it their incomes to measure their levels of success as functioning entities in the overall economy. Profit for businesses and the level of their “standard of living for individuals. Among other things economics is to them a “score card,” which allows both people and companies to measure their levels of achievement against those of the rest of society.

This, to most people and apparently to most members of Congress, is “common sense” economics; it is what the subject is all about. When they think economics, this is how they think.

The second part of economics is called Macro-economics (big economics). It concerns the Federal Government and allows it to monitor and make adjustments to the economy. There are two parts to Macroeconomics: (1) The Federal Reserve utilizes Monetary Policy and (2) Congress and the President use Fiscal Policy. Both of these are tools, which can slow the economy down during periods of inflation or speed it up during periods of recession or depression.

To understand how Macroeconomics works we have to understand what money is in the 21st Century and how it actually works.

In 1933, when Franklin D. Roosevelt became President of the United States he effectively took the United States off the gold standard. Up to that point money was gold and silver of equal value to the goods and services it was exchanged for. President Roosevelt collected all the gold and exchanged it for Federal Reserve Notes. The gold was melted down and buried in large bars in places like Fort Knox. Roosevelt also changed the value of the gold from $16 an ounce to $32 an ounce, thus doubling the money supply in the United States. Gold certificates were then issued to the Federal Reserve, which presumably stood behind the new Federal Reserve Notes. A fiction was created that gold stood behind the Federal Reserve Notes, but they were stored in 500-pound bars. How someone was supposed to get his 20 or 50 or 100-dollar worth of gold is an interesting if not impossible question. Also the amount of paper money issued never matched the amount of gold stored.

In 1969 Richard M. Nixon legally removed the last symbolic piece of gold and silver from money. It all became tokens with nothing presumably behind it except the word of the Federal Government. Some people have argued that the National Debt is what stands behind the dollar today. Also all coins became copper sandwiches, no longer containing any silver.

The amount of money that can be printed and released by the Federal Government is determined by an act of Congress that is then signed by the President of the United States.

Let us now consider Macroeconomics. The Federal Reserve was created by an act of Congress in December 1913. It can independently act and initial objectives were maximum employment, stable prices, and moderate long-term interest rates. Its duties have expanded over the years and today include conducting the nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system, providing financial services to depository institutions, and the U.S. government. It also conducts research into the economy, which it releases and utilizes as basic information for its decision making process.

The Federal Reserve is headquartered in Washington, D.C., and consists of twelve regional banks distributed throughout the United States, with auxiliary banks attached to the twelve main ones Its current Chairman is Dr. Ben Bernanke, who was appointed by President W. H. Bush with the advice and consent of the U.S. Senate. He replaced Alan Greenspan, the retiring chairman.

In 2010 the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury. The following year, 2011, it transferred $77 billion to the U.S. Treasury.

Today the functions of the Federal Reserve System are:

  • To address the problem of banking panics
  • To serve as the central bank for the United States
  • To strike a balance between private interests of banks and the centralized responsibilities of the government
  • To supervise and regulate banking institutions
  • To protect the credit rights of consumers
  • To manage the nation’s money supply through monetary policy and to achieve the sometimes conflicting goals of maximum employment, stable prices, including prevention of either inflation or deflation, moderate long-term interest rates
  • To maintain the stability of the financial system and contain systemic risk in financial markets
  • To provide financial services to depository institutions, the U.S. government, and foreign official institutions
  • To facilitate the exchange of payments among regions
  • To respond to local liquidity nee4ds
  • To strengthen U.S. standing in the world economy

The Fed has systematically added money to the National Cash flow during the last few years of the Obama Presidency. In addition to calling upon the Congress to pass legislation that would stimulate the economy Dr. Ben Bernanke recently announced that the Fed would attempt to strengthen the economy by buying up mortgages throughout the United States.

The Fed’s use of monetary policy has caused the U.S. economy to grow during the current presidential administration.

Fiscal Policy is the use of taxation and expenditure to influence the economy. Both Congress and the Presidency are responsible for administering it.

During periods of recession and/or depression expansionary fiscal policy, which involves government spending exceeding tax revenue is undertaken such as it was during the tail end of the George W. Bush Administration and the first year of the Obama Administration. These steps avoided a dire depression and virtually saved the country from economic collapse.

The Republican Party, both in the House of Representatives where they are the majority in the second- half of President Oboma’s first term, and in the Senate, where they have enough votes to filibuster any bill or appointment to office, which they do not approve, has taken the position that the U.S. can not afford any excess expenditures because of the size of the National Debt and have not allowed to pass any legislation that would enable the economy to grow and unemployment to substantially decrease.

The key to all of the arguments for and against economic expansion lies in the question of: What is Macroeconomics? The answer would be that it is the tool by which the Federal Government adjusts the society to allow it to reach its greatest potential for both employment and productivity. The greatness of the National Debt is nonsense since the government owns over fifty percent of its own debt.

What is paramount here is that full employment will grow the Gross Domestic Product, he amount of goods and services produced in the United States and allow, after creating full employment and massively increasing productivity, the National Debt to be paid down.

Money, to the National Government, is a tool, whose value is to enhance the growth and welfare of the country. If we allow the government to utilize it in this was we can look forward to at least a century of prosperity for the citizens of this country.

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