Deficit Reduction

Deficit Reduction

The current negotiations about tax reform and reducing the deficit by increasing the income tax for the super rich have the air of high drama. Many observers have the feeling that we are witnessing a carefully managed theater piece. They are right.

The United States has been spending a lot more money than it earns. Spending more than you take in sooner or later leads to bankruptcy because you owe so much money that you will never be able to pay your debts. When your creditors see that , they stop lending you money and you go broke.

The United States needs to tighten its belt; we need to reduce our deficit. Current targets are to reduce the deficit by about 2 trillion over the next 10 years.

The high drama about increasing government taxes on the superrich is intended to address increasing government income. But it now appears that this whole theatrical performance has a second purpose, namely to distract attention from some very obvious ways of increasing government income.

All this comes to light in this recent news item: "Google Inc. (GOOG) avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company.” (http://www.bloomberg.com/news/2012-12-10/google-revenues-sheltered-in-no-tax-bermuda-soar-to-10-billion.html)

“At its post-WWI peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. . . . Today, the corporate tax accounts for 8.9% of federal tax revenue . . . The list of corporations keeping profits offshore is a Who's Who of multinational giants. Cisco, G.E., Apple, Google, Pfizer, Qualcomm, Walmart, Ebay, Dell, even Coca-Cola. Apple, for example, has $74 billion in profits parked offshore.” (http://www.economicpopulist.org/content/corporate-tax-dodge-billions-avoided-taxes-while-america-goes-broke)

“Under US tax law, foreign profits are subject to 35% U.S. tax when they are "repatriated," or brought into the United States, usually in the form of a dividend.

One internal document released by the [Congressional Investigative] panel suggested that HP [Hewlett-Packkard] routinely brought money into the U.S. without paying U.S. tax. An HP presentation noted that 'without planning, repatriation of foreign earnings could lead to tax payments.'

Loans by the foreign units to a related U.S. entity are considered a dividend for tax purposes but there is an exception for loans that are repaid within 30 days, according to the committee's tax experts.

HP set up a complicated series of short-term loans starting in 2008 to these businesses that were continuous without gaps, to get around that provision, the panel found.” (http://www.reuters.com/article/2012/09/20/us-usa-taxes-offshore-idUSBRE88J0VY20120920)

“Tax losses to the United States amount to $1 trillion over a decade, according to the Congressional Research Service. “ (http://triblive.com/news/2126360-74/tax-money-accounts-taxes-countries-financial-hide-billion-china-global)

I spent ten minutes on the Internet and found half of the 2 trillion the US government needs to say over the next 10 years without touching the income of the super-rich.

The tax manipulations by the large corporations are, on the whole, legal. In order to find half the amount of money needed to reduce the federal deficit, the US tax code would have to be changed to make it impossible for large corporations to save $1 trillion over 10 years in income taxes. Congress would have to take on all the large US corporations to make them pay their fair share of the cost of the US government.

Congress clearly does not have the stomach for that fight because they know they would lose and it would become clear to everyone that ours is a government "for, by, and of the large corporations".

Hence all the fighting about taxing the super-rich-- a theater piece carefully produced to confuse the citizens about what is really going on.

Taxes

Ever since the 1980s cutting taxes for the rich has been a popular cure for unemployment. If the rich have more money—so the story goes—they have more money to invest. After all they already have more money than they can possible spend. If we give them even more by cutting their taxes, they will invest more and thereby create jobs.

During his presidential campaign, four years ago, Sen. McCain was asked how many houses he owns. He could not remember whether it was eight or nine. There is little point in him buying more houses. Ann Romney owns a number of cars, among them two Cadillacs. How many more could she use?

So, having all the houses and Cadillacs (not to mention yachts and other necessities) they could possibly use, the rich will invest their money where they think it will bring in the highest return.

Those investments—so goes the popular story—will create more jobs.

If we want to create more jobs, we should cut the taxes on the rich. Simple, no?

Actually, the matter is a bit more complicated. Let's look at Mr. Moneybags and his terrible problem, he has too much money. He goes to his financial adviser, almost in tears: “Please tell me what to do with my money.”

The financial advisor will list the options: Mr. Moneybags can build some new factories to produce food, clothing, electronic gadgets. But with a lot of people in the US out of work, with middle and working class wages pretty flat for the last ten or more years, no one in our country has money to buy stuff. If Mr. Moneybags produces more commodities, he may find himself unable to sell them.

Creating new jobs in US manufacturing does not pay. So Mr. Moneybags will not do that, even if we do cut his taxes.

He could lend his money to our government, but interest rates are extremely low. The return on government bonds is very small. Not a good investment.

He could invest his money in a bank. That is attractive because banks are, once again, making money.

He could also put his money in financial investments, derivatives, bundled mortgages and other esotheric items. (Warren Buffett comments :”I view derivatives as time bombs,”) He might well make money with those.

But he would not be creating a lot of jobs.

China is thriving. There are more rich people there than ever before. An economically comfortable middle class is growing. Some Chinese have money to buy things. Maybe Mr. Moneybags could build a factory over there (or buy one) and make a good profit. That would be good for him but would not create jobs in the US.

Cutting taxes for the rich is unlikely to create a lot of jobs in the US.

There are three ways to create jobs in the US:

Our roads, schools, bridges and other public works have been neglected. There are many potentials jobs in public works. We could raise taxes on the rich and rebuild our roads, schools, bridges. We could clean up parks, support libraries and museums, build bike paths, skate board parks, trails for ATVs, etc.

We can raise wages. One out of every four jobs in the US does not pay enough to support a family of three. One out of four wage earners cannot buy anything except the most essential goods. Paying more generous wages will increase demand and create more jobs to fill increased demand. Demand will increase if poor people have more money to spend.

Many Americans lack important services: education, health care, counseling or mental health support, legal services, home repairs, all kinds of services for the elderly, etc. A lot of new jobs would open up if we tried to provide everyone with even minimal services.

Cutting taxes on the rich will not create many new jobs in the US to pay for any of these projects.

The slogan that cutting taxes on the rich will create more jobs is a barefaced lie, invented by the rich and their supporters in order to line their pockets.