On the economic front, the Unites States faces a double problem – a huge continuing federal deficit and a weak economy, not to mention the fact that taxes will jump considerably in less than three weeks, and a number of federal income support payments will be cut off, unless the President and the Congress can work out something.
From what I see, almost no one is looking at the overall problem. They’re all concentrating on the symptoms, and each group is focusing on its particular interests and wants.
One of the questions that’s been raised is how can the economy be so weak when business and corporate profits are so high. Although industrial profit margins vary considerably from year to year, on average, regardless of how profit is calculated (on equity, sales, revenue etc.),the profit margins of the S&P 500 have more than doubled over the past thirty years, rising from around five percent to between eleven and fourteen percent. In 2012, corporate profits as a percentage of sales hit an all-time high, while the percentage of Americans working dropped to the lowest level in 30 years. Wages and salaries are now at the lowest percentage of gross domestic income (GDI) since statistics have been kept, and have dropped from the historic range of around 55% of GDI to just over 44%. That amounts to a massive shift in income away from workers to owners and businesses, roughly $1.5 trillion annually – and that’s money that’s not being taxed or spent at near the rate it would be if it went to workers.
Not only that, but the additional corporate profits aren’t funneling back into the economy, either through increased dividends or increased employment. All this results in significant loss [more accurately, a lack of growth] in federal tax revenue at the time when federal spending is increasing. Those who demand a corresponding decrease in federal spending seem to fail to understand that the vast majority of the increased federal spending has gone to prop up the economy in one way or another, either through increased joblessness benefits, food stamps, or the financial community bailouts. Without that additional federal spending we would be, not in a great recession, but in another great depression.
What the large corporations fail to acknowledge, as noted in the previous blog, is that their cost-cutting and “efficient” personnel management techniques, are contributing significantly to the problem. Since the United States is essentially at best a self-contained economic system, because we are not a net exporter of goods and services, but a net importer, we cannot sell massive amounts of goods abroad to compensate for domestic economic weaknesses. That means that when wages and salaries go down – or stagnate with a growing population – so does domestic demand for goods and services. That means companies strive for greater efficiencies, and those efficiencies come largely from “employee efficiencies.”
One of the fastest rising employee costs is health benefits, and the larger corporations have addressed this through automation, fewer employees per unit of output, and greater use of part-time employees who are not paid benefits. The Affordable Health Care Act attempted to address the growing number of Americans without health benefits, but the way in which it was finally passed appears to impact disproportionately, as many Republicans have noted, smaller businesses. In effect, large corporations, through their management practices, have effectively shifted their past health care costs onto small business and government (i.e., all taxpayers). This, unhappily, isn’t anything new. Business has always attempted to shift costs onto someone else, whether environmental, infrastructure, or social costs, and always trumpets “jobs” and “free enterprise” as a rationale for not paying for the costs it imposes on society.
At the same time, U.S. tax policies, particularly corporate tax policies, have only made the situation worse. Although the United States has the highest “official” statutory tax rate of any OECD/industrialized nation in the world at 35%, the effective corporate tax rate for U.S. corporations averaged 12.1% in 2011 – and that was lower than all but one nation out of the top 34 industrial nations. That 12.1% rate is the lowest effective rate for U.S. corporations in the last 40 years. How does this happen? Tax breaks, subsidies, and a tax structure that does not tax overseas profits until or unless those profits are transferred back to the U.S. – where they’ll likely face the 35% rate [since they’d already have been transferred if the corporations had any way to tax shelter them]. Well… if you can’t or won’t transfer those billions, if not trillions, of dollars in overseas profits back to the good old USA, what can you do with them? Build more facilities overseas, of course. Since business tax breaks and subsidies are largely legislated on a political basis, this also results in economic inefficiencies. All this doesn’t exactly help the U.S. economy… or American taxpayers.
Then there’s the financial sector, whose indiscretions, greed, and mass speculation created the economic crisis, and whose major players are still reaping multi-million and multi-billion dollar bonuses… and a significant portion of whose income is taxed at a lower rate than that of most middle-class wage earners.
So… what can be done?
Knowing that no policy-maker will ever have the nerve to suggest anything along the lines of what follows, I’ll still suggest a general framework that I believe would work, not that workability has a damned thing to do with political feasibility… but who knows… someone might actually get desperate enough to try some of these.
First, stop tying tax increases to political rhetoric. Instead of demanding a 4% increase on higher earners, just ask for 1%… and cap their personal deductions in the range of $35,000-$40,000, while eliminating the alternative minimum tax. What no one mentions is that these folks are already going to pay a 4% additional tax on all their investment income beginning in 2013, as required by the Affordable Health Care Act. Second, drop the statutory corporate tax rate to 13-15% — and repeal every single exemption and subsidy. Then allow them to send profits back to the US – but credit them with a dollar for dollar reduction in tax liability for every dollar paid to another country in income/profit taxes. Third, impose a sliding-scale part-time employee surtax on every corporation with more than 100 employees, that surtax being based on the number of part-time employees not receiving health benefits. Couple that with a sliding scale tax credit for small businesses [20 or fewer employees], allowing a credit of some additional percentage of health care insurance costs per employee. Fourth, and this is an idea floated by Eliot Spitzer, impose a transaction tax of between ¼ and ½ of one percent of the value of every financial transaction in the securities and commodities markets. This would raise at least $200 billion annually, and might actually recoup some of the costs that the financial sector dropped on everyone else. It also might reduce the millions of computerized speculative trades made to try to profit on second-to-second price changes. Fifth, tax all dividend, interest, bonuses, and carried interest income [and any other “preferred” income] at the statutory rates, but allow the current lower tax rate for dividend and interest income to remain for the first $50,000-$100,000 [indexed to inflation]. That way, those middle-class individuals who scrimped and saved for retirement wouldn’t be penalized for their thrift, but multi-millionaires wouldn’t be paying absurdly low rates on massive income.
Anyway… those are my suggestions, not, as I said, that anyone in Washington is likely to listen.