TAXES, OR HOW OBAMA COULD LOSE.
Warning, abstract, and update Nov. 3, 2008: The text below was written in June 2008. Its gist is that Capital Gains are way overtaxed, especially for the middle class. This has very detrimental effects on national welfare and security, besides being very unfair for the little guys. Thus, we were happy to hear Senator Obama, in October 2008, claim that he would not rise capital gain taxes on people earning less than $250,000 (in other versions Senator Obama apparently suggested to put capital gains to zero for this category, and that is obviously what should be done, especially in light of the catastrophic drops of the markets, which will insure that people will be taxed in the future for gains that they did not make at all: see below for the mechanism at work). Private capitalism cannot work in combination with democracy if investing gets systematically punished for people who do not belong to the plutocracy. (By the way the only alternative to private capitalism is State capitalism, aka Stalinism, and it is unlikely that can work without the Gulag.)
The threat is in one word indeed: TAXES. Or more exactly: tax expectations. Unrealistic tax expectations is how conservatives have been winning.
In recent years, conservatives were elected in Germany, France and Italy (they all had big deficits, like the USA). Each time the conservatives proposed to lower taxes. They were not believed as much as their opponents, who proposed to raise them. People prefer to elect who proposes less punishment. Moreover, it’s easier to raise taxes than to lower them, and so it’s more likely that those who propose to raise them will raise them rather than those who propose to lower them will.
In Italy, the billionaire Berlusconi, in his seventies, and thoroughly despised for his preceding years heading the government, unexpectedly crushed the left, vanquishing in a landslide. In France, the conservative Sarkozy promised a “fiscal shield”, according to which nobody could be taxed a total of more than 50% of their income. He was elected, and considerable checks were sent to some of the “rich” (although France has a wealth tax, so the truly rich can’t escape as easily, see below).
On June 26, Obamawas interviewed on Fox TV, and promised unambiguously to raise taxes on the top 5% of taxpayers. He was also asked to associate one word to “Wall Street” and he said: “money”. With a big smile. Within minutes the stock market collapsed, breaking multiyear lows. More than 50% of US voters hold stocks worth more than US $5,000.
Right now the US voters who hold stocks, fed up by years of neofascist reasonings and facts from the Bushmen, barely favor McCain. That may change when they become aware of the plans Obama has for their (at this point utopian) capital gains. Right now the long term (more than 18 months) capital gains tax rate is low, as it should be. It’s only 15%, much less than the income tax rate. This is justified because people who use their capital for investment are not using it for their immediate enjoyment, but for a more common good, and are not just insecure about their return on capital, but also about the return of the capital itself. So a return on invested capital, when there is any, should be rewarded more to compensate for the considerable deferment and losses investing leads to.
It is true that the present 15% rate on capital gains has been grossly abused: some of the richest US taxpayers have been using it… for their income (a gross violation tolerated by Bushmen and democratic Congress alike).
On the contrary, hyper rich people should be proportionally taxed more than modest taxpayers, because the richer one is, the easier it is to become richer. That later phenomenon, which is purely mathematical, has to do with the defining characteristic definition of the exponential function. It has been known for at least 10,000 years (and is the root of various wealth taxes, or even human sacrifices of most old cultures, from Vikings to Carthage).
Barack Obama has been listening to some of the world’s richest men (such as the world’s richest investor, Warren Buffet), and they told him (now that they have made gigantic fortunes), that a capital gain tax rate of up to 29% would be OK. The problem, though, is that capital gains are NOT indexed on inflation. As an asset is held for years, it has to augment in nominal value, just to stay as valuable. (Now how inflation is measured is another exasperating can of worms entirely; in the US the official inflation rate is tweaked so as to undercount it, by careful selection and so called “hedonistic” adjustments.) The practical result is that one has to add the 15% of taxes to how much inflation has occurred while the asset was held (several years in the average). Thus assets held years are affected by two taxes: the one on capital “gains” and inflation. RIGHT NOW THE EFFECTIVE CAPITAL GAINS TAX RATE IS 35%. It is not 15%! It’s much higher!
Except for the hyper rich who have devices to roll continually their money. Indeed, the capital gain tax rate the rich profit from is closer to a true 15%, because hedge fund managers, for example, have only to hold their income 18 months (at the present 4% inflation rate, that means they are taxed 21%). Assuming today’s inflation, and the average holding period of assets, Obama proposes to tax capital gains of the small, average, not to say ridiculous, stock holder at 50%. Assuming the present inflation rate; with an inflation of 6% (which is entirely possible, considering the stratospheric rise of oil), Obama’s tax would be well ABOVE 60%.
This was tried before, in the sixties and seventies: high tax rates on capital gains, and high taxes on income. Investments stopped, stagflation reigned, Reagan got elected (ultimate catastrophe). To this Obamareplies that this time will be different, because he will not tax venture capital (!). Venture capitalists are typically extremely rich people who finance a few ideas on the side to get even richer. It is dubious that they will bring more serious innovations if they are taxed zero. So now the very richest, instead of having a loophole at 15% will have one at 0%! That change was proposed by Obama! Change you can believe in: the plutocracy will always have a new tax loophole at the ready, if the regime changes.
All McCain has to do is to point out the enormous capital gain tax augmentation Obama proposes for the little guy. This is added to the augmentation of social security tax of 6.2% (starting at $250,000), Whatever the reasons for that augmentation, it will bring US taxes well above 60% in many places. That would be 20% more than the maximum taxation rate in “socialist, welfare state” France!
Right now, because of the housing bubble (still not shrunk), one can earn $300,000 in one of the expensive places (New York, San Francisco), and being unable to afford (decent) housing. The political risk for Obama is clear: people will wonder why he would stop at $250,000 (and anyway that number is not indexed by inflation, either; within a year, it will be already below $240,000 in constant dollars (at 4% inflation, soon to be 6%… in which case it would be only $235,000…)).
WHICH TAXES SHOULD OBAMA PROPOSE?
Obama should propose to leave intact the “Bush tax cuts” for the little guys. The 15% capital gain tax rate should be kept as is (and, better, be indexed on the CPI). For the little guy. So Obama will have to define what “RICH” means. One MILLION DOLLAR in interest and dividends, and/or TWO million dollar in income should define “RICH”.
The question arises of how the government would compensate for the loss of income that not increasing direct taxes on the non rich will bring. Of course, INDIRECT taxes (energy taxes in particular) could be introduced (they would bring huge income, and decrease the US splurge of consumer spending and energy waste; besides, they would bring down the price of crude oil). More simply, the hyper rich (such as some of Obama’s advisers) should be hyper taxed. First a higher tax bracket for the rich should be introduced; if Obama wanted to tax the little guy’s capital gains 50%, he should be even more open to tax the rich 50% on their income (remember the richer one is, the easier it is to get richer, the exponentiation argument).
There is a recent precedent of the crack down by conservatives on the rich, and not just in France. Obama should do as Merkel, the conservative German Chancellor, did: IMITATE FRANCE, AND INTRODUCE A WEALTH TAX. That’s a special tax on the rich that looks at total assets (another tweak on defining the rich).
EUROPEAN CONSERVATIVES RULE BY TAXING MASSIVELY WASTE AND THE RICH (the left, when in power, does the same, overall). That recipe, TAX WASTE, TAX RICH, has proven highly successful for the European economy. The Obama tax program, at this point, does not do either. It punishes the upper middle class, though. Since the later is highly influential, McCain is in better position than he looks.
“Wonkish”, technical addenda:
0) Ever since there has been trade, there has been capital (archeological studies in Australia have uncovered proofs of currency usage and trade on distances in excess of 1,000 kilometers, more than 40,000 years ago already). Systems where the little guy could not invest were tried before: plutocratic imperial Rome on one side, Stalinist imperial Russia on the other. Capital from the little guy is crucial not just to the economy, but to democracy. It’s not just about “money”. “Money” is about power; give no “money’ to the little guy is equivalent to leaving him powerless. But the “cracy” (from Kratos) in democracy means power.
1) Italy, France and Germany together have more voters than the USA. Polls show Great Britain could go “conservative” too (the just elected mayor of London is a maverick conservative). All these European conservatives clamor for change, to the point of making the left look … conservative. But European conservatives all claim to want to alleviate direct taxes on the little guy, and the definition of the little guy includes the upper middle class income earner (who often cannot afford decent housing in cities such as Paris and London, since the truly rich global worldwide plutocracy has driven the prices up).
2) The US total tax receipts are less than 30% of total US GDP (or so they were, before the Bush administration brought them higher, when local taxes are included). The OECDaverage was 36% in 2007, and it’s higher in Europe. Europe is clearly doing better economically than the USA at this point, so one could argue that the total US tax receipts should be brought up. The world’s record in taxation is Sweden, witharound 50% of GDP. France is below 44% (with an individual “shield” at 50%). Italy is at 42%. Obama is talking about raising the upper middle class tax rates at levels that are known to have caused, time and time again, total revulsion in Europe (anything above 50%). Europe can generate high tax incomes without taxing wages and salaries and capital gains too much by using consumption and user fees taxes. The Added Value Tax, in particular, and very high energy taxes make tax evasion impossible, and represent MOST of the tax income, and TWEAK THE ENTIRE ECONOMY IN A WISER, MORE EFFICIENT DIRECTION. The income tax system is used in reverse: half of French income earners de facto pay no tax on income. Besides education and health care are free, and public transportation heavily subsidized.
3) The so called “Laffer curve” says that as one increases the percentage of taxed income too much, economic activity goes down (because people are less motivated to work), and so the total tax revenues go down. As Ibn Khaldun, a 14th century Muslim philosopher, puts it: “It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.” This observation was at the heart of the so called “supply side economics” of Ronald Reagan’s era. The “Laffer curve” was drawn and explained by French economists (Bastiat, etc.) in the mid nineteenth century. That is why the modern French economic planners invented the AVT and heavy energy taxes: those taxes turn around taxing income directly, that is too dispiriting. An interesting warning: the upper bracket of US income taxation was brought up from 29% to 62% by the Hoover administration in… 1929, and the Great Depression started within months.
4) The US economy is actually full of subsidies, and will do much better when many of these are transmogrified into taxes instead. One has to distinguish what is in the common good (say, trains) and what is not (subsidized corporate jets serving the rarefied plutocracy; corporate jets are heavily subsidized by common taxpayers, but they don’t know about it).
5) Why are Obama’s advisers seemly unaware of the preceding? Well, maybe some have hidden agendas. Trojan horses were not invented yesterday. Some may want to stake their leftist reputation; others may outright act as double agents (wanting Obama to fail by giving him subtly poisonous advice, like Buffet, or amused Venture Capitalists, or subtly directing taxation away from themselves); others, like those who suggest to tax the innocent middle class hard, and the hyper rich venture capitalists not at all, have no decency whatsoever (but this bold tactic worked well for top Clinton/Obama plutocratic adviser Rubin, so why not?). The University Of Chicago economy department has been known as a friend of the Hyper Rich, and Obama main economy tax adviser is a professor there (just as Obama was). That individual justified the Venture Capital loophole, boldly, and completely, by calling it “The Future”.
And what of the Obamas themselves? What is their relationship to work and money, and investing? Well, as Michelle Obama herself pointed out, they could not make ends meet until Obama’s juicy book contracts (of the sort politicians get: big money in advance, complete with ghost writers). Mrs. Obama herself financially appears to have profited from her nomination on a corporate board (another usual arrangement in the environment of a politician). I do not say she did. But she certainly appears. And appearance is all what can be ascertained in such a case. When money and power has grown out of magic “community organizing”, why not persist with the magic? Well Europeans don’t believe in magic anymore, and, someday, Americans will join them: change we can believe in.
6) Some pundits on the right have been surprised that McCain has been talking about other things rather than the obvious subject above. The reason pertains to the sort of elementary Machiavellism fishermen are familiar with. McCain is waiting, just like the fisherman who feels that the fish is taking the bait waits. The fish should not be hooked too early. If Obama persists with his hare brain tax plan, he will be stuck with it. When he realizes his mistake, it will be too late to pull out without being accused of major flip-flopping. Let’s notice than in Italy the electorate misled the pollsters: their hearts were beating strongly on the left, but their pocketbooks were on the right, and they voted with the later. Indeed, why not?