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 #116 – The U.S. & the Federal Reserve

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

English: Janet Yellen being sworn in by Fed Ch...

English: Janet Yellen being sworn in by Fed Chair Ben Bernanke (Photo credit: Wikipedia)

By Friday January 9, 1915, the Federal Reserve had turned over $98.7 billion to the Treasury for the year 2014. In 2013 it was $79.6 billion and in 2012 it was $88.4 billion. All of this was the interest on the National Debt bonds, much of which the Federal Reserve had purchased since 2009.

In 2008, the last year of the Bush Administration, the country faced the explosion of the Real Estate Bubble that had been gradually building over the prior thirty years. The big banks had been going crazy with denial in 2007 with their abuses when the oncoming failure became obvious. In essence every dollar in circulation suddenly dropped in value to about a dime. The Obama Administration did two major things in 2009 and 2010. They were able to avoid through rapid action an economic crash potentially larger than the Great Depression of 1929 and they passed Affordable Health Care (Obamacare). In 2010 the country elected a Republican majority in the House of Representatives and thereafter nothing was done by the House to alleviate conditions caused by the Real Estate Bust. In fact Congress passed laws to exacerbate the negative conditions.

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It should be noted that the Federal Government has two major tools to deal with downturns in the economy. One, used by the Federal Reserve, is Monetary Policy and the other, used by Congress and the President, is Fiscal Policy. This is Macroeconomics.

Fiscal Policy has to do with Congress passing bills that add money to the economy. Keep in mind that all currency has nothing behind it other than the word of the National Government. All money is now a means of exchanging something of value for something else of value, goods and services for goods and services.

In 2011 or 2012 President Obama proposed a bill that would create jobs by updating the infrastructure of the United States. The electric grid across the U.S. is well over fifty years old, much of it predating World War II, and parts of it are in constant danger of breaking down. It has not dealt with the changes in demography or increases in population that have occurred over that period. The country has come close to power outages because of cold weather conditions or for other reasons. Many of the bridges throughout the nation are also well over fifty years old. A number have collapsed; many are still waiting to be refurbished.  Also many schools, some of which were built over one hundred years ago, also need refurbishing or replacement throughout the country. Many of the sewers in cities are well over one hundred years old; a few have collapsed in parts.

All of these and many other projects will have to be done at some point in the future. Maintenance is required to keep all aspects of society properly functioning. From 2011 on the House of Representatives with its Republican majority has tended to squeeze the society, downsizing government and adding to unemployment, in fact at one point it closed down the Federal Government by refusing to fund it. The present is an ideal time to do a lot of these fiscal projects as interest rates are at just barely above 0.

Monetary Policy is a tool of the Federal Reserve. It can be used to increase or decrease the amount of money in circulation. Ordinarily the Fed adjusts the money flow in the economy by increasing or decreasing the amount of money it borrows through the sale of bonds. What happens is decided by the rate or non-rate of inflation. The Fed is always cashing out and selling bonds. There are short term, medium term, and long term bonds, lasting from a few months to a number of years. The rate of sale is determined by the level in interest paid on these bonds. The higher the interest the greater the sale and the lower the interest the less the sale. These interest rates are determined by the level of inflation in the country. The higher the inflation the higher the interest. Here money is taken out of the national cash flow so that there is less available to be spent, thus gradually forcing down the rate of inflation. If the opposite is true then the Fed will sell less bonds than it cashes out and continually add currency to the national cash flow.

With no help from Congress during a period of recession or depression the Fed under the chairmanship of Ben Bernanke had to be quite innovative to pull the nation out of the Real Estate Debacle. This was done by the Fed buying $85 billion worth of bonds each month for well over two years: $45 billion in mortgage paper and $40 billion in government bonds. The effect of these two actions was to add well over a trillion dollars to the national cash flow per year; and also to essentially resolve the big banks activity in splitting up individual mortgages into well over one hundred parts. By my estimate it would have taken well over twenty years to straighten out the housing mess if the Fed had left it alone. The Fed did it in a relatively short time by buying most of the pieces. We again have new construction and older houses are being resold.

What is interesting to note here is that 40 billion was utilized on traditional monetary policy while 45 billion dollars was used to purchase mortgage paper from the assorted hedge funds which each owned fractional pieces of mortgages in each of their funds that had been very sloppily catalogued. For the Fed to collect or foreclose on any of these properties it would have to set up a table of all the homes on which it held mortgages within the 50 states and gradually build up its portfolio to the point where it owned over fifty percent of each particular mortgage. The cost of setting up this information bank would have been prohibitive even for the Federal government. The probability is that the Fed did nothing with this paper and a percentage of the population ended up living in their homes for nothing, in essence the government forgave these loans.

Of course the people living in these houses still had to pay property tax. If they did not the municipality would eventually foreclose on the property and sell it for back taxes. These people would suddenly have a lot of disposable income, which many of them spent freely, and they could not claim any home interest payments on their income taxes. This, in turn, added billions of dollars circulating in the National Cash Flow throughout the country.

The practice of adding money to the economy was ended in October of 2014. Janet Yellen, the new Fed chair left the ending of the policy tentative. It could be started up again if the need arose.

Interest rates had also been dropped to a fraction of one percent, practically giving the banks free money from all the savers and checking accounts which they could lend out at a decent rate of interest. Currently the Fed is considering when to raise interest rates. Meanwhile most of the larger banks have announced large profits for 2014.

What is interesting here is that the Federal Reserve used part of the National Debt as a means of positively controlling the amount within and the flow of national currency. They actually increased over time the flow of money by trillions of dollars and, in this way, diminished the effects of the Real Estate Debacle caused recession.

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What Bernanke did was to use part of the National Debt as a means of getting the country out of a serious recession. Since Congress would not act he used the Debt itself as the tool by which a large percentage of recovery was gradually brought about.

The National Debt is divided into two parts: public debt which the government owns and private debt which is held by private countries and by individuals. For example the two largest holders of U.S. debt are China which as of November 2014 held 1.25 trillion and Japan had 1.24 trillion.

All foreign holdings at that time were 6.11 trillion dollars. It should be noted that the National Debt currently is 18 plus trillion dollars. Who owns the balance? Private individuals and companies within the United States and elsewhere would hold at least another trillion dollars. The balance would then be held by the U.S. government and its agencies. For example Social Security has well over 2 1/2 trillion in government debt. All this means that the Federal Government holds well over 50 percent of its own debt and pays the interest on that debt to the U.S. Treasury.

It should be noted that Treasury securities are seen as one of the world’s safest investments. This has been the situation in the world and will, in all probability, remain so.

The 114 Congress, which recently met for the first time and has a Republican majority in both Houses, shows no indication that it is even slightly interested in fiscal policy. While unemployment is down to 5 plus percent for the first time in the nation since the 2008 Debacle it still could be a lot lower with fiscal policy.

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Another factor of importance here is population; it is always gradually increasing. According to the Census Bureau’s Population Clock: there is one birth every 8 seconds, one death every 12 seconds, and one international migration every 33 seconds. The result of all this is a net gain of one person every 16 seconds.

That is an increase in the population of the United States of 3.75 people per minute, 225 per hour, 5,400 persons per day, and 1,965,600 people per year, if we count each month as 30 days and do not allow for each leap year. The current overall number of people in the country is in excess of 350 million people.

Most of these new settlers will reside along either of the coastal areas. In order for standards of living to not decrease with this additional population the GDP (Gross Domestic Product) has to increase one or two points yearly. If it stays at exactly the same point or decreases slightly then the overall standard of living has dropped for the bulk of Americans.

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What will happen with this new Congress should be interesting and economically uninspiring. From now until July 2016 when the Republicans hold their Presidential Convention there will be a lot of jockeying for the lead position in the Republican Party. The major issues like immigration, fiscal policy, job creation, plus whatever else comes up will be largely ignored. They will try forms of blackmail with the President in order to achieve some of their goals. This will be done by attaching riders that he will not approve of to necessary bills. That means that President Obama will probably have to veto the necessary legislation causing all sorts of economic and other problems. The question there is who will take the blame for causing all these disasters?

The Republicans will certainly not be creating any new jobs. Janet Yellen, the current chair of the Federal Reserve may have to restart the program of buying bonds for economic recovery to continue since the Republicans will be doing their dandiest to constrict the economy and inadvertently increase unemployment. What will probably occur between the present and the next presidential election is two years that the future historians will in all likelihood essentially ignore.

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)