32 Years of Wrong Turns and Tax Amnesia



As we endure the ceaseless political rhetoric surrounding our national budget and debt, I have come to the conclusion that we as a nation, have actually chosen to put ourselves in this quasi-bankrupt insolvent position.



There are a number of critical turning points where our political and business leadership chose the wrong path with our support. Here are some of the major wrong turns that occurred over the last 32 years.



In 1980 we adopted “supply side economics”, also known as “trickle down economics” and we adopted the philosophy that budgets never needed to be balanced.



The theory states that increasing the net wealth possessed by the economic elite generates the best stimulator of economic activity.



These wealth-owners will invest any marginal wealth-gain from tax cuts on things that increase “supply”—factories, new businesses, innovative goods and services, thus “Supply Side Economics”.



Belief in this economic heresy continues and many current candidates for public office actually advocate further tax cuts.



Because of this heretic belief, politically driven and popular tax cuts were put into place that were based on expanding our national debt from $907 Billion in 1980 to $3 Trillion in 1990 to $5 Trillion in 2000 to $10 Trillion in 2008 and $16 Trillion in 2012. These tax cuts continue unabated and are expected to drive our national debt to $22 Trillion by 2016 or a 24-fold increase since 1980.



We also entered diabolical free trade agreements with tax incentives that encouraged manufactured product imports and job exports. In 32 years we have managed to export over 60,000 factories and over 23 Million jobs. Our trade policy continues unabated.



We deregulated the financial sector and freed Wall Street to be “creative”. This permitted the destruction of $16 Trillion of our collective wealth and returned us to 1992 wealth levels nationally. Financial deregulation essentially continues unabated along with super-sized banker bonuses with no bankers in jail.



Following the 911 attacks, we committed over $4 Trillion (off-budget) to occupy Iraq and Afghanistan. Taxes were not imposed to finance the occupation. The occupation continues with no end in sight.



We implemented Medicare Drug Plan D at an incremental cost of $180 Billion a year. No taxes for this were imposed and drug companies were not required to negotiate prices with Medicare. This mismanaged program continues and is growing.



Student loans now total over $1 Trillion as our public and private universities and colleges took advantage of the easy money available to students for education. At UW Madison for example, resident undergraduate tuition in 1980 was $769, today it is $8592 or a 11-fold increase. Sadly, it was reported recently that a new retiree was having their Social Security check garnished to repay student loans over 30 years old.



So are we broke? Indeed we are. And we have clearly chosen to be.



Because of these major wrong turns we have also managed to

concentrate wealth in the United States to levels not seen since 1929.



For example, the Walton family of Wal-Mart fame now controls more wealth than the poorest 40% of Americans combined. This was largely driven by the reduction in marginal income tax rates.



In addition, Reuters reported July 22, 2012 that over $32 trillion in wealth is held in offshore tax havens. While this is a global estimate, it would be fair to suggest 50% or $16 Trillion as “American”. When people and corporations do not pay tax on foreign tax haven accounts, the rest of us have to make up for the loss or we simply must expand the National Debt.



American Corporations currently hold over $1.5 Trillion in profits offshore and are demanding to have taxes cut or eliminated on these profits before they are repatriated. “Negotiations” are taking place with our Congressional leaders as you read this.



The reduction in top personal marginal income tax rates has been anything except modest. Rates have been reduced from 70% in 1980 to 35% currently. As late as 1964 they were 91%. The average top marginal rate from 1915 to 2012 is 57.8%. We are operating at 60.6% of the 97-year average.



We did not stop there, our capital gains tax was reduced as well from 39.9% in 1978 to 15% currently. The 100-year average on capital gains is 26.9%. We are operating at 44% of the 100-year average.



In 2003 we also reduced the top marginal dividend tax rate from 35% to 15%. This is 25% of the 91-year average.



And to completely ensure we would never ever have a balanced budget, we reduced corporate income tax from 46% in 1980 to 35% today. The 100-year average on corporations is 46.7% and we are operating at 75% of the 100-year average.



We are attempting to have our $16 Trillion economy operate with top marginal tax rates at essentially 50% of the 100-year average for the Republic!



It should come as no surprise that this entire tax cutting strategy is not working, as we have accumulated $15.9 Trillion in national debt, 23 Million unemployed and underemployed not to mention state and local debt.



We currently enjoy the lowest marginal tax rates since 1929 when the top marginal tax rate was 24%. In 1932 we increased the top marginal tax rate from 25% to 63% and we began to climb out of the Great Depression.



The circumstances in 1928, just prior to the onset of the Great Depression, and today are strikingly similar. This should seriously concern every citizen in our Republic, but we seem blind to every warning sign our economy has provided.



The ceaseless political “job creator” rhetoric suggesting that “if we tax business and high-income individuals, jobs and growth will not be generated”, is simply untrue historically.



In fact, there is a direct correlation between higher taxes, higher employment and higher economic growth. While this may seem counter-intuitive, I will provide an example that may help reveal the subtleties of what is really going on after a historic review of the correlation between taxes, growth and unemployment.



Jobs and economic growth in our Republic are largely driven by small

Businesses, or “S Corporations”. According to the “S Corporation Association”, there are 25 million small businesses in America.



For Federal income tax purposes, the income, deductions, and tax credits of an S corporation flow through to shareholders.

Income is then taxed at the shareholder level.



Payments to S shareholders, most often the “owner proprietor”, by the corporation are distributed tax-free. Also, the alternative minimum tax does not apply to an S corporation.



Given these tax rules; if your marginal personal income tax rate were cut from 91% to 38%, which actually happened between 1964 and 2003, would you take larger cash distributions from your business?



Of coarse you would, as it is very efficient to remove money from a business when you are taxed lightly. Higher marginal tax rates make it more difficult to remove money from an S Corporation, as it is less efficient and the alternative of investing in the business is likely more attractive.



When corporations retain and invest money in businesses they tend to grow as they invest in technology, machinery, research and development, marketing, sales, training, and facilities.



When this happens, jobs are created and the corporation grows and more taxes are generated from the business itself and new employees.



Imagine if only half of the 25 million S Corporations hired just one employee, we would have 12.5 million jobs and we would not have an unemployment issue.



Seems somewhat odd that raising taxes on the real “job creators” actually produces jobs, however it has been validated historically. (See Chart II)



Large American corporations on the other hand, have really been the principal serial job killers since 1980.



Companies like Wal-Mart (Currently under criminal investigation for bribery, tax evasion and money laundering. Source: Financial Times, 8/17/2012) in their incessant drive to produce the lowest priced products, have driven larger companies offshore and have advocated for free trade agreements that do nothing more than facilitate moving more jobs and manufacturing to lower labor cost countries.



It is bitterly ironic that Wal-Mart is currently lobbying Congress to have the minimum wage rate raised as they have come to the realization that their customers no longer have enough income to shop at Wal-Mart. A more “enlightened” strategy from Wal-Mart thirty years ago would have been more helpful.



Wal-Mart customers have moved to the “dollar” and “thrift” stores as 23 million of them have lost their jobs and have moved to unemployment, a lesser paying job or a part-time job as the result of the long term effect of off-shoring jobs.



The average annual industrial wage in the USA is $44,600 compared to China at $ 6,200 and Viet Nam’s $2,200 which illustrates just how large the off-shoring labor issue is.



The solution to this low wage labor issue was actually developed in 1789 by Alexander Hamilton as the Treasurer of the United States working in President George Washington’s administration.



Hamilton believed it was necessary to impose tariffs on all imported goods for 2 reasons.



First we needed to fund our new Republic and tariffs on imported goods were an effective and enforceable means to do it.



The second was the strategic decision to develop new domestic industries by giving them a chance to develop with the protection of tariffs, which at the time ranged between 5-10%.



We can do as our founders did before us, and impose tariffs in order to equalize the labor expense imbedded in an imported manufactured product. This would make the large corporations indifferent to where a product is manufactured and would most likely favor the USA, as international transportation would be avoided if they produced domestically.



Most other industrialized nations currently do this through some form of value added tax.



With this policy, jobs would return to America. Unfortunately, we continue down the diabolical path of free trade expansion with 14 agreements in-force and 12 more being negotiated. All of these agreements are driven by special interest and not the interest of American workers or our Republic.



All this deceitful free trade nonsense started in 1985 with the first “Free Trade Agreement” with Israel.



Free trade, without question, is the largest reason for the closing of 60,000 factories and the elimination of millions manufacturing jobs in the United States since 1980.



Free trade is also the reason why the United States moved from being the largest importer of raw materials and the largest exporter of manufactured goods in the world to the largest exporter of raw materials and the largest importer of manufactured goods in the world all in an amazing 32 short years.



We as a people have grown to believe that the economic issues facing our Republic are “complicated”, “global in nature” and almost “impossible” to solve. This is unequivocally untrue.



Special interests have kept us from formulating sound strategic solutions just as they fought Franklin D Roosevelt as he fought to put programs together to move us out of the Great Depression.



For example, there are 3 banking lobbyists working for each of our Congressional Representatives or 1605 Lobbyist to 535 Congressional Representatives. That is only the “Banking Lobby”. In 2011 there were 12,651 registered lobbyists harassing our Congress by spending $3.3 Billion to “get their way” as it were.



On the Eve of Labor Day 2012, it is time to return our country to our original democratic beliefs and behaviors. Clearly, what we have believed and have been practicing since 1980 is economic heresy and is not working for the vast majority of Americans.



We live in a wonderful country that has many significant challenges, none of which, mind you, is insurmountable.



What is needed now is a personal commitment from each and every one of us, to support political and business leadership that can actually recognize right from wrong, truth from untruth, tell the truth and put the general well being of the Republic ahead of special interests including themselves.



These new leaders will be the people that will create and implement the policies and programs that will get all of us out of this wretched economic ditch we have now been in for over 6 years from the seeds that were planted 32 years ago.



As Franklin Delano Roosevelt opined in the depths of the Great Depression,



“True individual freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made.”



While some in our Republic would welcome a dictatorship, they clearly are not in the majority today but may be in the future.



Election day on November 6th will provide us with the distinct opportunity to renew the wisdom expressed by Franklin Delano Roosevelt and Alexander Hamilton.



On November 6th, it is critically important that as many of us as possible express our views at the polls as unlike many elections in the past, this one really counts for you, your children and your grand children.



Choose wisely.

