The Lock-’em-up Culture

The United States has developed a lock-’em-up culture through which a pervasive fear of crime has resulted in a massive prison complex, which is straining the budgets of many states. A few years ago it was announced that California, once the nation’s leader in public education, was spending more on prisons than it was on public schools. Texas was similarly engaged in a big expansion of its prisons, priced at some $2 billion. In the past two years, the money that states have spent on prisons has risen six times the rate of spending on higher education. (1) Overall, there are now more people under correctional supervision in America — more than six million – than there were in the Gulag Archipelago under Stalinism. (2) David Fathi, a specialist in the U.S. prison system, cites a six-fold increase in the U.S. prison population in the 30-year period ending in 2005. (3)

Not only has the U.S. prison population been growing rapidly, it is aging, indicated by the ten-fold increase in prisoners over the age of 65. (4) Nationally, as of the date of Fathi’s article, one in every 11 prisoners was serving a life sentence and it was one in six prisoners in some states. (5)

The provocative title of Fathi’s article, “U.S. Wasting Big Money on Nursing Homes With Razor Wire,” is illustrated most concretely by his citation of a 2008 Pew Center on the State Report, which found that keeping someone over age 65 locked up costs about three times the $24,000 annual cost of the average prisoner under age 65. (6) Given the increasing imposition of life sentences without the possibility of parole, the U.S.is setting itself up for a fiscal cost explosion in its prison systems.

Diane Dimond, who has a column in the Saturday Albuquerque Journal, writes that the Ohio prison system spends nearly $223 million a year on medical care for about 51,000 prisoners. About $28 million is spent on inmates’ drug prescriptions. The California prison systrem identified 21 inmates whose annual health care bill came to just over $2 million each. There are another 1,300 California inmates who require medical attention costing $100,000 or more each. (7)

Solitary Confinement

Deprivation of human contact is a growing practice in the U.S. prison sytem. During the continuing controversy over whether or not the U.S. judicial system could handle the detainees destined for trials at Guantanamo Bay, it has been hard to find a critical comment about the treatment of prisoners at U.S. supermax prisons. Enthusiasts of escape-proof prisons even favorably cite the federal supermax prison built 100 feet under ground. Prisoners held there never see the sky nor an airplane flying through it.

A probing analysis of one of the worst of the worst supermaxs, Pelican Bay in California, has found that the isolation practiced there is psychologically devastating to the prisoners. Except for the possible sound of clanging doors, silence was the predominant impression carrried away by an investigative reporter.

In all the fervor about whether or not torture is a good thing, and if the United States continues to practice it, it is clear that the U.S. citizenry tolerates the psychologically damaging isolation in the supermaxes. Yet, isolation is far from exclusive to the supermaxes. In her book, entitled The Gray Box, journalist Susan Greene estimates that 80,000 Americans — “many with no record of violence inside or outside a prison” — are living in seclusion. They stay there for weeks, months, years, even decades. (8) On any given day, there are about 4,500 men, women and children in some form of isolated confinement in New York State prisons. (9) The damaging effects of isolation are evidenced by those subject to it walking endlessly in small circles. The Poughkeepie Journal’s Mary Beth Pfeiffer studied prison suicides in New York State and found that in a three -year period between 2007 and 2010, inmates in what prisoners call “the Box,” killed themselves at a rate five times higher per capita than those in the general population. (10)

Harsh Treatment of Juveniles

Reference was made in the section above to children being subject to solitary confinement. Juvenile courts have become increasingly punitive, and by the late 1990’s, nearly half of convicted juveniles were behind bars, rather than in community supervision or treatment programs. Moreover, a quarter of them were locked up because of misdemeanors or parole violations. (11) Texas and Michigan share a dubious distinction of leading the parade for harsh treatment of young wrongdoers. Texas has 400 teenagers now serving life entences. (12) In Michigan, being tried as an adult for first degree murder carries a mandatory sentence of life imprisonment without the possibility of parole. Also in Michigan, prosecutors can try defendents, as young as 14 years old, without a hearing, a statement of reasons, or even an investigation of the adolescents’ backgrounds. (13) 

Currently, there are some 2,500 American inmates who were given life sentences for killing someone before their 18th birthday, with more than half of them committing their first crime. (14) 

It wasn’t until 2005, in the case of Roper v. Simmons, that the United States became the last Western nation to abolish the death penalty for juveniles. (15)

Texas Is Pecks’ Bad Boy of Punishment for Crimes

If there is a Pecks’ bad boy concerning treatment of those convicted of serious crimes, it is the state of Texas: it leads the nation in executions by a good margin every year; it is the nation’s leader in teenagers sentenced to life imprisonment; and it is the place where sentences of over a thousand years are known to have occurred.

Most appeals in Texas wind up in the Court of Criminal Appeals, which consists primarily of former prosecutors elected to the bench. The court seldom reverses a case, even in the face of glaring errors or unfairness — in one case it upheld the conviction of a man cleared by DNA evidence — and its conduct has caused the U.S. Supreme Court to rebuke it several times. (16)

The Texas parole board rarely, if ever, meets face-to-face, as it conduicts most of its business by phone calls, faxes, emails and regular mail. Parole in very violent crimes is very rarely granted, and on aggregated assault cases, the parole board has approved parole in 0.1 percent of the cases. (17)

Texas also stands out for having no legal means for an actual perpetrator of a crime to confess to it when someone else has been convicted of the crime. Timothy Cole was a tragic victim of this failing.* As previously mentioned, Texas has no formal procedure for dealing with a post-conviction confession by someone else.

Katrina Miller, a corrections official turned academic researcher, is owed a debt of gratitude for discovering that a whopping 30 percent of inmates in Texas prisons meet the clinical definition for “hard of hearing.” (18)

The Rehabilitation Act of 1973 mandated that any entity receiving federal money have an effective communications system for the deaf. An illustration of how poorly implemented this act can be is the case of Texas prison inmate Felix Garcia. When Garcia was tried for murder — it is likely he took the rap for another family member — he wasn’t able to hear words at his trial, only noise. He gets no hearing assistance in prison. In theory, Garcia could file a civil rights lawsuit but the Clinton-era Prison Litigation Reform Act makes it extraordinarily difficult for individual prisoners to bring a federal case. (19)

Racism in the U.S. Criminal Justice System

Many Americans would like to believe that racism has been eradicated from U.S. society. One area of U.S. life where racism is alive and well-embedded is in the criminal justice system. In a New Yorker article entitled “The Caging of America,” Adam Gopnik lays out the case about how black men are targeted for prison: 1) more than half of all black men without a high school diploma will go to prison at some point in their lives; 2) there are more black  men in the grip of the criminal justice system — in prison, on probation, or on parole — than were in slavery in 1850; and 3) blacks are now incarcerated seven times as often as whites. (20)

The nation’s death rows are occupied by black men at a highly disproportionate rate compared to their percentage of the U.S. population and one of the surest ways for a black man to get the death penalty is to kill  a white woman.

The next blog will focus primarily on the conviction of the innocent.

*Timothy Cole, convicted of a rape to which another man confessed, died in prison before any action could be taken on the confession. 

                                       Footnotes

(1) Adam Gopnik, “The Caging of America,” The New Yorker, January 30, 2012.

(2) Ibid.

(3) David Fathi, “U.S. Wasting Big Money on Nursing Homes With Razor Wire,” The Albuquerque Journal, February 20, 2010.

(4) Ibid.

(5) Ibid.

(6) Ibid.

(7) Diane Dimond, “Need Health Care? Try Going to Prison,” The Albuquerque Journal, September 3, 2011.

(8) Diane Dimond, “Solitary Confinement a Stain on U.S. Prison System,” The Albuquerque Journal, February 25. 2012. 

(9) Jean Casella and James Ridgeway, “New York’s Black Sites,” The Nation, July 30/August 6, 2012.

(10) Ibid.

(11) Rachel Aviv, “No Remorse,” The New Yorker, January 2, 2012.

(12) Beth Schwartzapbel, “No Country for Innocent Here,” Mother Jones, January/February 2012.

(13) Aviv.

(14) Ibid.

(15) Michael O’Donnell, “Crime and Punishment,” The Nation, January 30. 2012.

(16) Ibid.

(17) Ibid.

(18) James Ridgeway, “The Silent Treatment,” Mother Jones, March/April, 2012.

(19) Ibid.

(20) Gopnik.

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Deregulation: Another Failing God

During the Republican presidential primary, all of the candidates saw deregulation as a  primary way to get the economy moving. Herman Cain, for example, pleaded for government to get off the backs of banks, assuming that banks have backs. Deregulation, however, is a god that has failed and will continue to fail.

The U.S. Chamber of Commerce is leading the antiregulation campaign, designed to block new safeguards against corporate wrongdoing and rolling back environmental, health, financial and other regulatory protections.

Unfortunately, for the Democratic Party cause, President Obama is not well positioned to make the case against his Republican opponent, because he is deeply compliant in watering down or eliminating regulations.

In an op-ed published in the Wall Street Journal in January 2011, Obama warned about “burdens that have stifled innovation and have had a chilling effect on growth and jobs.” He further wrote that, “We are making it our mission to root out regulations that conflict, that are not worth the cost, or are just plain dumb.”

More recently, the Obama White House withdrew a proposed requirement  for a simple and inexpensive way for employers to track repetitive stress injuries. More importantly, Obama over-ruled his environmental science advisors and ordered the withdrawal of smog rules that would have complied with the Clean Air Act.

On the plus side, President Obama has made some good appointments to regulatory positions and he has increased enforcement budgets. Probably his best action for protection of the environment was to secure agreement on a significant increase in fuel efficiency standards, although these new standards don’t go into effect until 2025. Yet Obama’s regulatory record is far too compromised to pose a credible alternative to his Republican opponent, Mitt Romney.

Is excessive regulation the main reason that businesses are not hiring nor growing their business activity? In a survey done by the National Federation of Independent Businesses, small businesses rated “poor sales” as their biggest problem and governmental regulation ranked second.

Is it the cost of complying with governmental regulations that is a major reason businesses aren’t hiring workers? This doesn’t appear to be the case, as businesses are loaded with cash. The 500 companies that comprise the S and P Index have about $800 billion in cash and cash equivalents, the most ever, according to the research firm, Birriyi Associates. The rating firm, Moodys, says that the roughly 1,600 companies it monitors had $1.2 trillion in cash at the end of 2010. That’s 11 percent more than at the end of 2009.

The upshot of the above is that neither reducing regulations nor making major cuts in business taxes pose a solution to the employment problems in the United States. President Obama has bought into the deregulatory craze to a great extent and he is relying on tax cuts to businesses as an important incentive in his current jobs plans. President Obama’s positions on both regulation and tax cuts are not that much different from those of Mitt Romney for that to be a reason for voters to choose him.

Fixing the Responsibility for “Bailout Mania”

A prime factor in the creation of “bailout Mania” in late-2008 is that hedge funds accounted for about half of all stock trades earlier in that decade. Hedge funds played a central role in the creation of credit-default swaps and other financial exotica. A credit-default swap (CDS)  is a form of insurance which protects the CDS in the case of a loan default. If the loan defaults, the buyer of the CDS can exchange or “swap” the defaulted loan for the face value of the loan. By the end of 2007, the outstanding CDS amount was $62.2 trillion, falling to $38.8 trillion by the end of 2008.

Another contributor to the financial crisis starting in 2007 but coming to a boil in late-2008, was what are called mortgage-backed securities. These are a bundle of securities that have been sold by banks to Fannie Mae, who then repackages them and sells them to individual investors. This process allows the banks and mortgage companies to sell off mortgages and then take them off their balance sheets.

Banks and mortgage companies made loans with no money down. Bundling of securities removed an important discipline for good lending practice.

Another major contributor to the financial crisis was the repeal of the Glass-Steagall Act. Although repealed in November 1999, it took almost a full decade for the repeal to be revealed as a very bad action. Glass-Steagall had created a firewall between investment banks, whcih issue securities, and commercial banks, which accept deposits. Experts believe that the repeal allowed Wall Street investment banking firms to gamble with their depositor’s money, that was held in commercial banks owned or operated by the investment firms.

Goldman Sachs represents an example of how financial firms were deceiving their own clients and profiting at their expense. Goldman Sachs’ employees were making side bets against the very risky investments they were selling. In short, Sachs was selling “short” on the mortgage market meltdown. Brokers were recommending securities to clients that they were disparaging in emails — often in very crude language.

The United States has become much more of a  “casino” economy, in which vast sums are wagered on what will happen to various aspects of economic activity in the future. This transition is revealed by the fact that financial companies account for about twice the proportion of the GDP as they did 30 years ago, and up to 40 percent of corporate profits.

The “best and the brightest” of college graduates are being attracted into the financial sector, where they can make big money fast; however, this “churning” of financial assets adds little or nothing to the betterment of society. If manufacturing were a much bigger component of the U.S. economy, many of these graduates could be going into businesses that make useful products for the society.

Is there a high standard of ethics among our Wall Street professionals? A 2007 poll of 2,500 Wall Street professionals painted a troublesome picture. They were asked if they would use inside information to make $10 million if the chances of getting caught were 50 percent. Seven percent said yes. But if there was a zero chance of getting caught, 58 percent said they would break the law.

Some of the questions that could be asked about big business ethics are: “Is corporate corruption, in general, rampant?” “Is ethical bankruptcy on the rise?” “Are corrupt business models becoming more common?” “Has the market become more of an exclusive gambling club for the rich?”

In the wake of the bailout of large financial firms during the Bush administration, public anger was ignited when it was revealed that upper management types were going to swanky clubs and exotic locations for business meetings. This anger became, if anything, more extreme when top executives began to receive large bonuses, even when their companies had taken a bailout because of bad performance.

According to the Wall Street Journal, the years 2009 and 2010 turned out to be record breakers for Wall Street, as total compensation and benefits at the top New York banks, hedge funds, money management firms and security exchanges hit $128 billion and $135 billion, respectively, for the two years.

Despite this generous compensation and the huge bonuses, the financial industry’s performance has been dismal: countless lenders have gone out of business and many still standing have seen their stock prices decimated after they loaned immense amounts of money to people who couldn’t repay it.

What about President Obama’s culpability in the financial meltdown and the attempt to recover from it? He certainly was not responsible for the TARP bailout program, which was legislated during the end of George W. Bush’s tenure in office — although Obama did rally Democratic lawmakers to vote for the bailout program,

In the effort to put more regulatory restraints on the financial industry, Obama has not been very visible nor vocal. The Dodd-Frank bill passed into law has been widely derided as  being too weak to curtail destructive actions by financial institutions.

In regard to the Consumer Financial Protection Agency, President Obama sided with the banks in keeping it inside the Federal Reserve system, where critics said it would be swallowed up and lose its independence.

Obama has been very proactive in trying to find a solution for those many homeowners who are deeply underwater in their mortgage payments. The media has done a good job in keeping track of how well the rescue programs have worked. They have found the Obama programs have helped a very small percentage of people, largely in part because the programs have not been well promoted.

President Obama has more recently abandoned his “Yes we can!” rhetoric on the housing crisis, as he told a town hall meeting that the housing crisis was too big a problem for a federal program to solve. He added: “Some folks just bought more home than they could afford, and probably they’re going to be better off renting.”

What, Then, Should Be Done?

Economist James K. Galbraith’s solution is to break up the banks, shrink the financial sector, expose and prosecute fraud, and create incentives for profitable investment in energy conservation, infrastructure and other sectors.

A major initiative being proposed to counter the contention that the financial industry is sitting on $2 trillion in cash is to create an infrastructure bank to provide loans for rebuilding the nation. This action would be similar to the bank to rebuild urban areas proposed by Senator Hubert Humphrey.

Another positive action would be to reinstate the Glass-Steagall Act to restore the firewall between investment banks and commercial banks.

Credit-default swaps should either be outlawed — the preferred option — or made more transparent through reporting requirements.

Bundling securities for home mortgages should also be outlawed to force banks to manage and monitor the mortgages they initiate.

Two recent developments make the case that the financial firms cannot be counted on to solve their own problems. The first was the revelation that JP Morgan had lost $2 billion in a risky investment. First, CEO Jamie Dimon tried to blow off the action as of no consequence; then later explained it as a hedge against losing money, not involving any depositor’s money; and then acknowledged it was a serious error on the part of the company. More recently, Dimon has admitted that the loss was at least four and one-half billion dollars and maybe more.

The second development is the recent scandal involving Great Britain’s Barclays Bank. Barclays manages the libor financial structure. Libor is the rate of interest charged by loans made between and among banks. The scandal is that the libor rate was being manipulated in favor of the banks in the many financial transactions in society that are affected by the libor rates.

Public likes Extending All Bush Tax Cuts and Affordable Health Care Provisions

Polling on extending all the Bush tax cuts and the Affordable Care Act have produced some confounding results. A new McClatchy-Marist poll shows strong support for extending all the Bush tax cuts and polls consistently show public hatred of the Affordable Care Act, but delight in several of its provisions.

In the McClatchy-Marist poll, 52 percent of registered voters want all the Bush tax cuts extended. The breakdowns were as follows on full extention: voters aged 18-29 favored it 69 to 29; Latinos by 62 to 34; whites by 50 to 43; blacks by 48 to 47; and those making less than $50,000 by 53 to 41.

Contrary to the poll above, other polls have shown the public strongly in favor of taxing the rich more to get additional revenue for the national government: a very recent poll showed support by a two to one margin.

Pollsters have suggested that divergent results in polls depend to a great degree in how a question is asked. In the case of the Bush tax cuts, respondents may have seen extending the cuts for some but not for others as a case of unfair treatment, or they may have bought into the class warfare argument. Perhaps many do not understand how sharply skewed the Bush tax cuts are to the very wealthy in society. Permanent extention of the cuts means a huge reduction, over the long-term, in governmental revenues.

In regard to the Affordable Care Act, polling until very recent times, has shown strong opposition to the legislation; yet majorities, some very decisive, like provisions of the law, which will not be fully in effect until 2014. These provisions include: children being covered on their parents’ insurance until age 26; a ban on denying insurance coverage due to pre-existing conditions; and a cap on medical coverage payments.

The kind of contradictory polling results described above are indicative of a very poorly informed public, a very small percentage of whom ever contact their representatives in Congress or in state legislatures on a policy matter not related to an individual or family problem. Many examples could be cited on how skittish and unreliable it is to base major governmental decisions on public opinion polling, but a very good example of it is how public opinion shifted before and after the invasion of Iraq. Before the invasion, polling showed that only a third or a little more supported an invasion without either a United Nations resolution or a strong coalition reminiscent of Gulf War I. Immediately after the invasion, about three-quarters of those polled supported the invasion, even absent a UN resolution or a strong coalition of nations involved in the war effort. 

Part of the problem inherent in the public wanting to continue generous tax breaks to the rich when put in one framework but wanting to have the rich pay more taxes when put into another framework, is that  those who should be educating the public about policy implications often do such an inadequate job of it. I experienced a example of this phenomenon last night in how a substitute host on the Alan Colmes radio show handled a caller, who angerily complained that it was unfair to ask rich people to pay more in taxes, when they already pay 50 to 60 percent of all federal income tax. The host had revealed herself to be quite well-informed about the need for a progressive taxation system; however, I thought she responded very poorly to the caller’s argument. She focused on the fairness issue, contending that it is unfair to have a millionaire or billionaire pay a lower tax rate than the average working man or woman. In my estimation, the better response would have been two-fold or even lthree-fold in nature: 1) those with lesser economic means pay a higher percentage of their income for the necessities of life than do those with greater economic means; 2) the top few percent of taxpayers control most of the wealth and receive most of the income, thus,  they should pay the lion’s share of the income tax; and 3) a progressive income tax counteracts a FICA tax, which is very regressive because everyone pays the same rate and all income over a cap of $109,600 is not taxed. It is also the case that workers who earn less than $100,000 pay more in FICA taxes than they do in federal income taxes. 

I close this blog with a very provocative idea expressed by a talk show caller during the past week. He said the very high top marginal tax rates after World War II were very conducive to job creation. There was a very strong incentive for owners of businesses to grow their businesses because their expenses would reduce their taxable income.

 

Misinformation on Taxing Corporations

This blog is a continuation of the theme that misinformation, intellectual laziness about providing adequate explanations and plain old-fashioned lying is making it a difficult task to sustainably fund our national government. The focus of this blog is on corporate taxation.

Perhaps the most distressing finding about corporate taxation is that the Congressional Budget Office has concluded that two-thirds of U.S.-chartered corporations pay no federal income tax. A study of the top 100 corporations in the Fortune 500 found that 25 paid their CEOs more than they paid in federal income tax. A 2008 study by the Government Accounability Office showed that 83 of the 100 largest corporations operate subsidiaries in nations that are considered to be tax havens.

Horror stories abound about corporations with very large profits paying little or no income tax and a brief look at just one reveals the egregious nature of our corporate tax structure. General Electric earned $14.2 billion in profits in 2010, paid no corporate income tax and actually accumulated $3.2 billion in tax credits.

Those who insist that tax cuts and reduced regulations will lead to major job gains, ignore the surveys that show businesses cite consumer demand as the major factor in expanding their operations — tax inducements and elimination of regulations lag behind.

Bringing the discussion to my personal level, I was a village trustee in Park Forest South, Illinois — the name was later changed to University Park while I was a trustee. As one of President Lyndon Johnson’s planned communities, our village had a very large industrial park. As one of my responsibilities as a village trustee, I studied the effect of tax incentives on corporate location decisions. I found many cases in which corporations which had received tax incentives opted out when relocation would bring them economic advantages exceeding the value of their tax breaks.

I now live in Albuquerque, New Mexico. A major breaking story within the past month was the gradual closing down of a solar energy company which had received some $50 million in tax breaks as part of the effort to bring the company to Albuquerque. At the same time, two other large employers which had received tax incentives, announced major layoffs of workers.

It was, I believe, in the past year that a story broke that the giant Intel Corporation, located in Rio Rancho, an adjoining suburb of Albuquerque, had a spotty record of meeting goals for hiring area residents, as part of a tax break agreement.

As for regulations leading to job losses, the Bureau of Labor Statistics collects data from companies that lay off workers.  Company executives reported that 0.3 percent of those laid off in 2010 lost their jobs due to “government regulations/intervention,” while 25 percent were laid off due to a slowdown in business.

“Based on the available literature, there’s not much evidence that EPA regulations are causing major job losses or major job gains,” Richard Morgenstern, who worked at the EPA starting under the Reagan administration, told the Washington Post.*

A study by Morgenstern and others looked at the effect of regulations on pulp and paper mills, plastic manufacturers, petroleum refiners, and iron and steel mills between 1979 and 1991. The study concluded tha higher spending to comply with environmental rules did not cause “a significant change” in industry employment, and when jobs were lost they were often made up in the same industry.**

An argument for lowering corporate tax rates is that such action would help U.S.-chartered corporations be more competitive internationally. The Organization of Economic Corporation and Development (OECD) found that even though corporate tax rates in the European Union were nominally higher than the corresponding rates in the United States, due to more generous U.S. tax breaks, the EU corporations pay more in taxes, on average. Note here that if the United States were to adopt a single payer health insurance plan, it would relieve U.S. companies and corporations of a very large cost burden.

Finally, it should be noted that prior to the Reagan tax cuts, corporations contributed about three times as much to national government revenue as they do today. So if we could peel away the layers of false information about the corporate tax burden, we would be further along in advancing to the prosperous three and one-half decades after World War II.

*”Gov’t Regulations Don’t Kill Jobs, Labor Bureau Stats Show,” Newsmax. com, November 14, 2011.

**Ibid.

False Assumptions About Capital Gains and Small Business Taxation

I. A Corrective Perspective on Small Business Taxation

While being interviewed on CBS News this week, President Barack Obama said that his biggest mistake as president has not been policy-related but not putting his policies into story-form. Television news has recognized the reality that people like a major news story put in the context of the impact on an individual or family situation: for example, a breaking story on the unemployment rate remaining at 8.2 percent will feature how a family with no one employed is struggling to survive.

Although I believe that much of Barack Obama’s failure in governance has been in his policies, he could use some focused and accurate story-telling in trying to sell his proposal on the Bush tax cuts.

President Obama makes note in his speeches that 97 percent of small business owners will not be affected by his proposal to eliminate the Bush tax cuts for individuals earning over $200,000 and households earning over $250,000. Using numbers instead of percentages might have more impact, because the comparative numbers might be in the range of a couple hundred thousand to over eight million. More importantly, Obama should single out maybe three small business owners who occupy distinctive niches in the small business structure and demonstrate that his taxation proposal would not increase their income taxes.

There is, however, another dimension to how the Obama taxation proposal will affect small business owners, which goes largely unmentioned: many in that affected three percent will receive tax increases too small to affect hiring and firing decisions. It is estimated, for example, that a small business owner with $500,000 in taxable income would have his or her taxes raised by $14,000 — not enough to cover the expense of one full-time employee, either hired or fired.

Opponents of the Obama plan on the Bush tax cuts and the Affordable Care Act (ACA) stress the point that either or would be devastating to small businesses. Besides the Obama tax plan having very limited effect on small businesses, owners with fewer than 50 employees are not affected by the ACA and those with over 50 employees can get subsidies to help in insuring their workers. If a single payer plan financed out of general revenue were enacted, there would be no issue of small business owners buying insurance for their employees.

What would be the relative impacts on an individual having $500,000 in taxable income ( line 38 on Form 1040) — omitting itemized filing? Under 2011 tax provisions the tax owed would be $141,547; under the Obama proposal on the Bush tax cuts, the tax owed would be $155,547 based on current information; and under my 16 – 60 percent tax rate structure, the tax owed would be $172,010. Note that if the taxed individual had a Cadillac health insurance plan costing $20,000 or more a year and was satisfied with the coverage under an enacted single payer plan, he or she could drop the Cadillac plan and have almost as much disposable income, even under the most costly taxation plan above.

Before leaving this treatment of small business taxation, President Obama is being deceptive when he talks of a tax cut for 98 percent of taxpayers by enactment of his proposal on the Bush tax cuts. Based on the most complete IRS data, 47 percent of U.S. households don’t pay any federal income tax; therefore, elimination of the Bush tax cuts for the middle-class, would affect only about half of all taxpayers.

Obama’s initial position in the 2008 presidential campaign was that he wanted to end or let expire all of the Bush tax cuts. He later began to emphasize ending them for only about the top two percent of taxpayers. He apparently doesn’t realize the contradiction in the two positions but is now in the camp of those who believe that letting a tax cut expire on its due date is a tax increase.

II. The Fantasy of Capital Gains and the Wealthy as Job Creators

What has been instrumental in driving the concentration of wealth at the top of U.S. society? Economist Joseph Stiglitz identifies capital gains as a major culprit: “Lowering the rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride.” 

A theory has been developed to support the idea of giving tax breaks to the rich and allowing the manipulation of the financial system — Stiglitz cites it as one of the major theoretical props of today’s accumulated wealth and income-earning inequality. The theory is called “marginal productivity,” which associates higher income with higher productivity and a greater contributiuon to society. “Trickle-down” was built on this kind of thinking. 

Today’s GOP insists that any extension of the Bush tax cuts must include the top two percent of taxpayers. The GOP’s contention is that the wealthiest Americans are the  prime job creators in U.S. society, even though we now have a 12-year-long refutation of the contention. The Bush tax cuts are highly skewed to the benefit of the most economically well-off and yet job growth was anemic during the two terms of George W., Bush. The Department of Labor recently calculated that during the Bush presidency, an average of 11,000 jobs were created each month. President Bill Clinton, who increased taxes, mainly by raising the top marginal tax rate, had a job creation record far exceeding that of Bush II.

Shifting our focus back to capital gains, they are now taxed at only 15 percent. If a low capital gains tax rate is conducive to job creation, that should have been evident during the presidency of George W. Bush. There is, however, a study by Bruce Bartlett, a former high official in the Reagan administration and the author of a book lambasting George W. Bush for greatly increasing the size of the federal workforce, which study tracked the historical interaction of the capital gains rate to job creation, and  found no relationship between the two.

Part of the misinformation campaign about capital gains is the contention that the fruits of any reduction in the taxation rate would be shared by a broad segment of the American population. Middle-class people who own stocks or bonds tend to stash them in tax-sheltered retirement accounts where the capital gains tax rate does not apply. Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to five percent of the people and about half has gone to the wealthiest 0.1 percent. 

Overall then, claims of devastating taxation effects on small businesses; the contention that tax cuts to the economically well-off result in major job creation; and claims that reducing the capital gains tax rate or eliminating it would lead to an explosion of new jobs, are either made out of ignorance or constitute a package of massive lies.

The next blog will deal with distorted information on taxation of corporations.

Equitable Taxing to Meet America’s Needs

We have been hearing a lot about the wealthy paying “a little bit more” or paying an undefined “fair share” in federal income tax. Unfortunately, a consensus has been building that the top marginal tax rate should be no more than 39.6 percent, established in the 1990s, although the United States was economically prosperous in the 35 years after World War II, when the top marginal tax rate was never under 70 percent.

It has now become generally accepted among taxation experts that, on the average, those in the 35 percent taxation bracket actually pay about 18 percent on their income in federal income tax. In studying taxation rates, I recently learned that those in the 91 percent bracket in 1961 paid an average of 42 percent in federal income tax. I was struck by this correlation of close to 50 percent between the top rate levied and the percentage of taxable income paid. The correlation between now and about four decades ago brings home the important point that the percentage of taxes paid by high earners is well below their tax bracket percentage.

The contention that the wealthy are not paying their fair share of income tax is usually met with a counter-argument that a major share of the income tax revenue comes from the few percent at the top of the economic pyramid. The deep flaw in this argument is that the nation’s income goes overwhelmingly to the wealthiest households. A previous blog of mine gave the breakdowns on wealth possession in the nation: over 80 percent by the top 20 percent and 40 percent by the top one percent. Senator Bernie Sanders regularly includes in his emails a wealth breakdown of the much poorer Americans: the bottom 60 percent own less than two percent of the nation’s wealth and the bottom 40 percent own 3/10s of one percent of the wealth. Another startling factoid used by Sanders is that in 2010, 93 percent of all new income went to the richest one percent. 

A restructured income tax system should have two main goals: 1) it should tax income in some rough approximation to the income stratum that receives it; and 2) it should increase the percentage of households that pay federal income tax — this should change the conversation focus from one of just “soaking the rich” to “we’re all in this together.” 

My taxation plan would be presented in conjunction with a single payer health insurance program, financed through general revenue. A major selling point for single payer would be that millions of households would receive substantial annual financial windfalls by being freed of paying health insurance premiums and subject to sizable deductibles.

The main features of the taxation plan would be: 1) tax rates starting at 16 percent and topping out at 60 percent; 2) capital gains taxed at the same rate as regular income; 3) cutting in half the too-generous child  tax credit; and 4) taxing corporations under the same provisions in effect in the 1950s, when corporations paid a much higher share of national government revenue than they do today. A cap on the home mortgage deduction could also be considered.

The first $35,000 in taxable income would be taxed at 16 percent and the next $35,000 would be taxed at a 24 percent rate. Subsequent rates would go up in six percent increments through 42 percent, after which they would go up in three percent increments to 60 percent. The elimination of the current 10 and 15 percent rates and the initial jump from 16 to 24 percent are primarily designed to raise the percentage of households paying federal income tax.

Following are some examples of the impact of my tax plan, compared to the 2011 taxation provisions. The numbers employed correspond to those found on Form 1040, starting with line 38, adjusted gross income and ending with line 44, tax owed before any further adjustments.

Example I: Husband and wife, filing jointly

2011 tax schedule                            16-60 percent tax schedule

38 – $50,000                                    38 – $50,000

40 – $11,600                                   40 – $11,600

41 – $38,000                                   41 – $38,000

42 –  $7,400                                   42 –   $7,400

43 – $31,000                                  43 –  $31,000

44 –  $3,804                                   44 –   $4,960

The couple pays $1,156 in additional taxes; however, with single payer enacted, the couple is freed of a $7,000 health insurance premium and a $3,000 deductible. The financial windfall is $8,844.

Example II: Husband and wife with two minor children, filing jointly

38 – $100,000                               38 – $100,000

40 –  $11,600                                40 –  $11,600

41 –  $88,400                                41 –   $88,400

42 –  $14,800                                42 –  $14,800

43 –  $73,600                                43 –  $73,600

44 –  $10,656                                44 –  $15,080

The $10,656 is reduced by $2,000 child tax credit and the $15,080 is reduced by $1,000 child tax credit. The family of four pays $5,424 in additional tax; however, with the enactment of single payer, the family is freed of a $8,000 health insurance premium and a $4,000 deductible. The annual financial windfall is $6,576. 

Example III: Husband and wife, with two minor children, filing jointly

38 – $75,000                                   38 –  $75,000

40 – $11,600                                   40 – $11,600

41 – $63,400                                   41 – $63,400

42 – $14,800                                   42 – $14,800

43 – $48,600                                   43 – $48,600

44 –  $6,444                                    44 –  $8,864

The $6,444 is reduced by $2,000 child tax credit and the $8,864 is reduced by $1,000 child tax credit. The family of four pays $3,420 in addditional tax; however, with the enactment of single payer, the family is freed of a $6,000 health insurance premium and a $3.000 deductible. The annual financial windfall is $5,580.

Example IV: Husband and wife, filing jointly

38 – $65,000                                    38 – $65,000

40 – $11,600                                    40 – $11,600

41 – $53,400                                    41 – $53,400

42 –  $7,400                                     42 –  $7,400

43 – $46,000                                    43 – $46,000

44 –  $6,054                                     44 –  $8,240

The couple has no health insurance. They will pay an additional $2,186 in taxes, so instead of being free riders on health insurance costs, they will be contributing to pay the costs.

What the examples above show is that with a single payer plan, most families with good coverage health insurance plans and a taxable income into the low six digits will receive a financial  windfall measured in the thousands of dollars. The national government will have the necessary revenue to fund essential services and begin to climb out of a deep deficit situation.

My next blog will deal with communication of deeply misleading information about small businesses, job creators and the capital gains tax.