A Philosopher's Blog

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Middle class

Tax Rates

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The Tea Party made a lot of noise about our being Taxed Enough Already. While I am sometimes cast as a liberal, I am actually a fiscal conservative and I agree that many of us are taxed enough-if not too much. However, I also contend that some of us are under-taxed in a way that causes the rest of us to be over-taxed, which is probably one reason I get branded as a liberal.

A typical person, say a teacher, who makes $50,000 a year gets taxed at an effective rate of 17.2%. Mitt Romney gets taxed a bit under 15%, mainly because he and his lobbyist cohorts saw to it that the tax laws benefit his sort of people rather than the folks who earn a paycheck. Of course, even Mitt is paying a modest piece of his income compared to some others.

According to the IRS and Citizens for Tax Justice certain industries have managed to get rather desirable tax rates. Aerospace and defense companies are doing very well, having an average tax rate of 1.6%. The telecommunication folks are worse off at 7.5% and the often vilified folks in petroleum and pipelines are taxed at an effective rate of 13.1%. Above that are the utilities who are hit hardest at 14.4%. Of course, some clever folks at the top companies have worked out the means of paying no taxes (most famously GE).

Tax
Tax (Photo credit: 401K)

A rational, objective look at the numbers shows that the claim that companies are overtaxed seems to be untrue. After all, they are taxed at a rate less than a person who earns $50,000 by working. Of course, it could be contended that everyone is being overtaxed and that the people who work for a living and do not have armies of well paid lobbyists and lawyers are being brutally overtaxed. If so, it would seem that the focus should be shifted from trying to rescue the corporations from the cruelty of their relatively low effective tax rate to rescuing the working people from their much higher tax rates. After all, corporations have been enjoying record profits and CEO compensation is most excellent while the middle class is generally struggling or sinking into the lower class.

Naturally, there has been some talk about helping out the middle class. However, while politicians have bent over backwards after being slathered with cash from the corporate lobbyists, little has been done for the middle class. Given that the middle class lacks the unified cash to hire lobbyists and lawyers, this is hardly a surprise. However, the pain of the middle class can be cleverly exploited. After all, if we feel hurt by our taxes, it is usually easy to get some of us to shed tears for the corporations on the assumption that if we are being cruelly taxed, then so are they. Of course, this is not true-they are doing quite well.

As far as what to do, the usual call from conservatives has been to lower spending to address the problem of deficits. While that is a reasonable idea, there is the obvious question of whether or not these cuts will be best for the country. After all, we could also address the deficit by increasing the taxes paid by the very wealthy to match those paid by the middle class in terms of percentages. That is, if folks like Buffet were taxed at the same rate as their secretaries, then there would be considerably more revenue while the rich would still remain rich.

It might be objected that taxing the rich at this rate would be harmful. However, the obvious reply is that if someone who makes $50,000 a year can manage to survive while being taxed at 17.2%, someone who makes $ 50 million a year can also survive at that tax rate or even higher.

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Warren on Wealth

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Warren Buffett speaking to a group of students...
The man who would pay more taxes...

Money, get back
I’m alright, Jack, keep your hands off my stack
money, it’s a hit
don’t give me that do goody good bullshit
I’m in the hi-fidelity first class travelling set
and I think I need a Lear jet…

People have asked me what I think of Warren E. Buffett’s editorial about taxes, so I thought I do a short post on some aspects of his commentary.

As Buffet notes, our wars are being fought by the poor and middle class. That is usually how war go-you generally do not see billionaires taking a bullet on the field of war. On the plus side, at least there is no longer the open practice of buying one’s way out of service by sending a substitute (a not uncommon practice during the civil war).

Buffet says that he paid $6,938,744 in taxes last year. As he points out, that is a lot of money. However, when considering taxes it is not just a matter of the total dollars-what also matters is the percentage. In Buffet’s case, that was only 17.4% of his taxable income, which is a pretty good deal. As he points out, most people who make much less pay a larger percentage of their income. Naturally, they will pay less in total dollars, but they will be giving up more of their income and thus have less left (both in terms of the percentage of income and, of course, total dollars).

On the face of it, this seems unfair. After all, the less wealthy are contributing a greater percentage of their income than the wealthy. This can, of course, be countered by the claim that the rich pay more taxes in terms of the total money and as such an individual rich person contributes more total dollars than a middle class or poor person. To use an analogy, if Sally is very strong and she is, along with Sherman and Winston, moving their Nordic Track, she might only be using 17% of her strength while Sherman and Winston are using much more as a percentage of their feeble power. Sally is, of course, doing more than her fair share because she is so much stronger than Sherman and Winston. Likewise, the poor and middle class give a greater percentage in taxes, but actually give less overall dollars.

This analogy works nicely in situations that are comparable to bearing a shared burden. However, the analogy seems to break when one considers income rather than strength. To use an analogy for this sort of situation, consider water. To survive, a person needs a certain amount of water and, likewise, needs a certain amount of money. If Sally has 1,000,000 times the water she needs to survive and meet her needs, then giving up 17% or more is not a hardship for her-she still has plenty left. If Sherman has just what he needs to survive, then any water tax would end up putting his life in danger. Likewise for money: people who make less are less able to afford the taxes because they are left with less with which to survive and meet their expenses. As such, taking more from those who have less seems rather problematic.

While Buffet argues for increasing the taxes on the rich, an alternative is, of course, to lower the taxes on the middle class and the poor. If Buffet is taxed at 17%, then perhaps the middle class should be taxed at 5% or 1%.

While this is appealing, there is a major problem: we need to have tax income in order to pay for things like police, defense, infrastructure, education, the CDC, the FDA, the FAA, the FBI, the CIA, and so on. In this case, the situation is something like the Nordic Track situation: we have a burden we must share and people must either contribute enough to carry the load or we must lighten the load. But, as noted above, it is also like the water situation: people need the income for their own well being and survival. So, the challenge is to leave people what they need to survive and thrive while also keeping our civilization going.

I agree with Buffet that it makes sense to have the rich contribute more than they do now, in terms of percentages.

Of course, as Buffet addressees, certain people will cry out that tax increases will destroy jobs. But, as he points out, the tax rates for the rich were much higher in the 1980s and 1990s. However, as history shows, people did not stay away from investing. While Buffet does not make this point, consider whether or not you would stop working just because tax rates had gone up. Obviously you would not-you still need (and want) money and hence will keep doing what you do to make money. People who invest money will not stop investing simply because of higher taxes. After all, they will still make money if they invest wisely.

Buffet also points out the fact that between 1980 and 2000 40 million new jobs were created. After the Bush tax cuts, job creation has slowed and we are experiencing high unemployment. If taxes were the main causal factor regarding hiring, what should have happened is higher unemployment in that time and high employment during this time of low taxes. As such, lowering taxes is not a magic bullet for unemployment.

Buffet also notes that, as always, the rich have gotten richer. In 1992 the top 400 taxable incomes added up to $16.9 billion, with a tax rate of 29.2%. In 2008, the income for the top 400 had increased to $90.9 billion, but the tax rate was 21.5%. Buffet does not note that income for the rest of us has stagnated or declined, which is a point worth considering. Given the massive wealth of the 400, it makes me wonder what basis there can be for crying that they have been taxed enough already.

Buffet concludes by contending that the rich should pay more, while the middle and lower classes should be left as is (that is, with the Bush tax cuts intact). His main argument is a moral one: the rich have much and many Americans are hurting. As such, the rich should pay a bit more for the good of the whole.

One stock reply to Buffet’s view is that rich people can pay more if they like. That is true-and, in fact, some rich folks have done just that. However, there is still the question of what is fair and right. Going back to the Nordic Track analogy, Sally could put in more effort if she wanted to, but there is also the question of how much she should contribute. One view is that those who are strong ought to help those who are weak and not merely please themselves. Another view is that the weak should fend for themselves and the strong should not be compelled or encouraged to aid those less able. There are, of course, other views-but these present the challenge in a clear manner.

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China

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Flag of the People's Republic of China
Image via Wikipedia

Since 2001 the United States has been almost pathologically obsessed with terrorism. Our security and intelligence (such as it is) has been focused on terrorism and we have launched two (or more, depending on how you count) wars in the name of fighting terrorism. Meanwhile, China has been growing in strength and influence.

While China does not seem particularly interested in having a cold-war style confrontation with the United States, they are in a position to become our most serious competitor in the world. While we have been happily buying their exports and accepting their money, we do not seem to have an effective and focused China strategy (unless it is secret). This, I submit, has been an error.

While I do not think that we should create a cold-war with the Chinese, we certainly need to change our focus. Instead of obsessing over a handful of poorly armed and poorly funded terrorists, we should focus on China. After all, China has over a billion people, a real military, nuclear weapons, billions of dollars and global influence. Focusing on terrorists seems a bit like worrying about a rat when there is a dragon nearby.

The Chinese strategy does not seem to be primarily military based (although they have been building their forces and capabilities) but instead primarily economic. Our strategy seems to be that we buy their stuff and accept their money. This hardly seems like a winning game plan. Our companies do, of course, try to sell the Chinese stuff. One thing that we have going for us is that Western goods are still looked at as being prestigious. However, China is changing.

One key change is that the Chinese “middle class” is emerging an expanding. This has the potential to change things in very significant ways for the United States. On the negative side, if China becomes more “middle class”, then it will be harder for American companies to find cheap labor to make products. This will mean that the companies will need to find a new source of cheap labor to exploit. Fortunately (or unfortunately), the world is not lacking in poverty and we might see Africa becoming a new source of cheap labor. Or, if the American economy continues to flounder, the United States might provide a viable cheap workforce. On the positive side, a  more “middle class” China (a middle class Middle Kingdom) can mean an even more lucrative market for American products (perhaps made in Africa). It could also lead to political changes in China that could improve relations with the United States. Then again, Chinese nationalism might result in a worsening of relationships. What might occur is a competition between the United States and China that recreates the competition between the European powers just prior to World War I (complete with a new round of imperialism in Africa, perhaps).

It is also well worth considering that people have been overestimating China and that political turmoil or some economic disaster will result in her downfall. We should, of course, be ready for that as well.

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The End of Men II

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Former CEO of Hewlett-Packard Carly Fiorina
Image via Wikipedia

This blog continues my discussion of Rosin’s article “The End of Men.”

Rosin’s next step is to consider the nature of the current, “postindustrial” economy. She argues that this economy favors women. The basis for her case is that the male’s advantages in size and strength do not provide an edge in this new economy, rather social skills (such as communication) and the ability to “sit still and focus” are the dominant skills. While women do not have a monopoly on these traits, she does consider that these attributes might be held predominantly by women.

Interestingly enough, her view rests on the classic stereotypes: men are strong and woman are social. Of course, when women were regarded as the weaker sex because of this difference, feminists argued that these were unjust stereotypes. However, now that these traits are advantageous, they are lauded. One might infer that the rule is that stereotyping is acceptable, provided that it stereotypes men as being at a disadvantage and women as being superior. Naturally, the reverse of this is still to be regarded as unacceptable.

Those who are rather against stereotyping might point out that this approach is still stereotyping and be critical of such an approach. Also, those who were concerned about how women fared poorly in the past economies should now be concerned about the situation faced by men. If the plight of women in the past was a bad thing, then the comparable plight of men today should also be a bad thing. However, there seems to be an unfortunate tendency to laud the “fall of men” and there seems to be, at best, modest concern for the plight of men.

In fact, as Rosin points out, there is a tendency to blame men for the current woes. She cites Iceland’s Prime Minister Johanna Sigurdardotti’s expressed desire to put an end to the  “age of testosterone.” While this probably involves the usual political rhetoric, comparable attacks on women would no doubt be seen as sexist and hateful. However, consistency requires that what is hateful for one sex should also be hateful when applied to the other.

Following the standard approach, Rosin notes that although women have made significant advances and dominate higher education, they still fall behind men in wages. However, she is quick to point out that this is changing and that the  “modern economy is becoming a place where women hold the cards.”

While Rosin might be right, it is also possible that her prediction is mistaken. While the male dominated aspects of the economy have slumped badly, it is risky to make predictions from this situation. After all, the economy might very well shift again during the course of the recovery. As such, the plight of men might not be as dire as she predicts. That said, the general trends do seem to favor women over men.

To be specific, the current prediction is that there are 15 jobs that are likely to experience the most growth. As Rosin notes, only two (janitor and computer engineer) are currently male dominated. The other 13 jobs are dominated by women and, ironically, consist of traditional female jobs such as nursing, child care and food preparation. As Rosin notes, while women have expanded into jobs traditionally held by men, the reverse has generally not occurred-at least not yet. Some, such as Jessica Grose, have claimed that men seem to be stuck in their roles and are largely unable to adapt to the changes.

Rosin and Grose seem to be fairly accurate in this point: while women face cultural obstacles when entering fields traditionally dominated by men, men seem to face even greater obstacles. One difference is that the obstacles men face seem to be internal. That is, men are not being excluded by external forces but by their own decisions not to enter such fields. For example, there have been significant attempts to recruit men into the field of nursing, but men seem to be largely reluctant to enter that field.

If this analysis is correct, then men largely have themselves to blame for this aspect of the situation. If men could adapt as women did and enter non-traditional roles, then this would counter (to some degree) the new gender gap. Making such a conceptual switch would require redefining what it is to be a man, much as women went through a conceptual change when they began entering male dominated fields.

Men might be able to do this and, in fact, might be forced to do so by the realities of the new economy. While it might be unmanly to work in childcare, it might be seen as less unmanly than being unemployed.

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