A Billionaire’s Plea for Higher Taxes
When billionaires start complaining about taxation policies that are too lenient on the rich, you know something is out of whack.
According to billionaire Bill Gross, the U.S. can “challenge more productive economies such as Germany and Canada,” by improving equality of income, an area where the U.S. ranks “barely ahead of Spain and Greece,” Gil Weinreich, PIMCO’s Gross Calls for Tax Hike on Rich, Laments 1% ‘Scrooges’, ThinkAdvisor, Nov. 1, 2013.
Bill Gross is one of Wall Street’s darlings, a living legend of sorts whose pronouncements and “Current Investment Outlooks” are avidly devoured by Wall Street chieftains. In many respects he is to Wall Street what Warren Buffet is to Main Street. As such, people of differing stripes in life understand these two men and listen to their sage advice. Both of them are admired for the stature they have achieved within their respective fields.
Come to think of it, didn’t Warren Buffet also chime in on this issue of unfair taxes, something about his secretary paying a higher tax rate than he does? Yes, he did.
In August 2011, the New York Times published an op-ed by Warren Buffet, who wrote: “Last year my federal tax bill— the income tax I paid, as well as payroll taxes paid by me and on my behalf— was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent. If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine —– most likely by a lot.”
As such, according to Bill Gross, it’s high time that the U.S. ends its upside down tax structure of lower taxes on capital than on labor. Frankly, it is almost impossible to disagree with his position, as it only makes common sense labor should not be penalized by essentially subsidizing the rich, and this is what the U.S. tax code has come to, thanks to Ronald Reagan’s Supply-side economics, which remains the rallying cry of the Republicans and most conservatives, as well as embraced by some Democrats.
It wasn’t so long ago that Mitt Romney demonstrated the lopsidedness of tax policy when he finally, after much prodding, admitted to paying an income tax of only 15%, and that is only on his “reported income.” Who knows what’s up with all of his offshore accounts, similar to many wealthy people and corporations that don’t report portions of their income.
By the way, the federal deficit problem would be solved if those offshore billions/trillions were subject to regular federal income taxes. And, come to think about it, isn’t it illegal to hide assets and income offshore?
According to an extensive study (July 2012) conducted by James Henry, former chief economist of McKinsey & Company, the wealthy elite have up to $32 trillion stashed away in offshore tax havens. This is twice the size of the U.S. economy, and remarkably, Mr. Henry’s analysis excluded ownership of tangibles like RE, yachts, fancy cars, and entire islands (metaphorically speaking, those hidden assets comprise the largest economy in the world… a tax-free economy… a pure libertarian nation-state.) Hmmm.
So, why discuss cuts in social programs, which is trendy these days, when all of the taxable money needed is only a few miles offshore?
According to Bill Gross
Mr. Gross’s November Monthly Investment Outlook, which is typically addressed to Wall Street’s finest, says: “And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.”
Bill Gross manages the world’s largest bond fund, PIMCO, but his commitment to becoming rich seems to stop at his office. It appears that he does not buy into the tax manipulation ruse of enriching the already rich at the expense of everybody else, as he laments his own lower taxes, thanks to Reagan and Bush 43.
By its very nature, Gross sees no reason for capital to be taxed less than labor. He opines that this taxation formula harms the economy more so than helping it. And, come to think about it, since the middle and lower classes barely make enough to get by anyway, how much is left to spend on an ipod or iphone or Ford F-150 or a movie every week?
As Bill Gross ruefully states, “The 99% don’t have money anymore… the rich 1% and corporations do.”
As a result, it’s little wonder economic growth has been an anemic 1% (on average) the past decade, and it remains sluggish to this day. Other than utilizing sky-high interest rate credit cards, taking on more personal debt, or home equity loans (a dinosaur since ‘07) the consumer is tapped out whilst the 1% make out like bandits because of a distorted tax code pointed right at fattening their wallets.
The Brutal Truth About Supply-side Economics
Thanks to President Ronald Reagan’s lesson to the country in “Starving the Beast 101,” we now have documented proof of the horrific economic dislocations associated with supply-side economics, which preaches tax cuts and less regulation to unfetter the economy so it can grow like a weed. Thirty years later, supply-side policies continue to haunt the federal government’s balance sheet.
In point of fact, supply-side economics has never registered well with the American economy. Under President Reagan, the prophet of supply-side, the country experienced its second biggest-ever tax cut, dropping the top marginal tax rate from 70% to 28%. As a consequence, it was on his watch that America became the world’s biggest debtor nation. Reagan took the government’s debt up an unprecedented 189% during his presidency for a whopping average annual increase of 13.8% (in-line with Obama’s first term, who inherited and continued Bush’s supply-side policies.)
On a relative percentage basis, Reagan has the worst record of debt creation by any president since WWII. As a consequence of Reagan’s policies, the wealthy received a huge tax break and were greatly enriched at the expense of the federal treasury.
Reagan’s tax policy is the equivalent of the richest people dining at a NY Five-Star restaurant, paying the tip, but leaving the bill for ordinary taxpayers.
Supply-siders like Reagan, Bush, and almost all conservatives of their ilk, as well as several Democrats, harp on about how lower taxes create investment, which, in turn, creates jobs like crazy. This labored speech is embarrassingly off the mark, time and again, but voters keep falling for it hook line and sinker; otherwise, why are these candidates continually voted into office?
Remember how Romney’s economic plan included cutting the top marginal tax rate so growth would take off, creating jobs galore, and during the Republican presidential debates, Newt Gingrich nearly hyperventilated when talking about the supply-side miracle, but in reality all that miracle (Reaganomics) did was create a huge hole of missing federal tax receipts and a mountain of deficits, starting with Reagan, who made America the world’s largest debtor nation. Why do people keep talking about how great Reagan was? He’s the one who got the federal government hooked on credit cards.
Tax cutter Reagan was the “Great Deficit President,” who never ran a surplus. But, Bill Clinton, the president who cut up the credit cards, rejecting supply-side economics (in part), raised taxes and ran a surplus of over $200 billion. Oh, lest we forget, Clinton, the tax raiser, created 22 million jobs.
Thereafter, it only took supply-sider (tax cutter) George ‘W’ a year to burn through Clinton’s surplus, turning Clinton’s final budget surplus of $128 billion in 2001 into a deficit of $157 billion in the blink of an eye.
And, here’s the hook, we’re all responsible for the nation’s debt, but it’s the rich who directly benefit the most by the tax cuts, of course including numerous tax-related schemes, like “carried interest” a tax loophole allowing private equity firms to have income taxed at a lower capital gains rate of 20%. As a result, the rich are subsidized because all citizens are responsible for the increasing national debt as a result of tax loopholes, and the 1% gets richer.
Oh, yeah, almost forgot, Bush created a grand total of one million new jobs over eight years. Clinton created that many in less than 5 months! That’s pretty glum since Bush’s big supply-side tax cuts were advertised to create new businesses and jobs galore. Here’s guessing a high school Econ 101 student could’ve done a better job.
Well, according to Robert Kaplan, professor at Harvard Business School and former Goldman Sachs Vice-Chairman, speaking on Bloomberg radio following one of the Republican presidential debates, “We’ve tried this twice in the past with Reagan and again in 2001-08, and it didn’t work… History has shown that growth has never been sufficient to offset these tax rate cuts… History has shown this approach actually created a bigger problem rather than solving the problem,” (Source: Bloomberg Radio Interview: Robert Kaplan, 2012.)
Supply-side Economics – A prescription for sovereign debt
There is no better proof of the glaring discrepancy in economic performance between supply-siders (cut government, cut taxes) and big government Keynesians (spread money around to benefit everybody) than President Lyndon B. Johnson’s Keynesian policies in the 1960s as compared to supply-sider presidents.
The LBJ economy grew at a robust 5.0% annualized rate vs. Reagan’s modest 3.5% and W’s measly 1.7%, and the top marginal tax rate under LBJ was 70%, double the tax rate under Reagan and Bush. Interestingly, the economy grew much faster (40% faster than Reagan) under LBJ with a top tax rate of 70%.
Well, then how about debt?
With LBJ, federal debt grew at a very modest 3.18% rate vs. Reagan’s 13.8% and W’s 11.1%. At the end of the day, President Johnson’s ‘anti-supply-side’ record looks pretty darn good and 70% looks better yet.
Unless, that is, you like rapid debt creation, because, you see, Reagan’s debt creation was four times LBJ and Bush clocked in at 3.5 times faster debt creation than LBJ. If you like lots of federal government debt, then supply-siders have a prescription for you. As such, federal government revenues as a percentage of GDP are down 20% since Reagan took office, which is now Obama’s problem. It’s called “Starving the Beast” in supply-sider parlance.
And then, there is this: According to Forbes’ “prosperity” rankings of presidents, which measures key data points of economic performance, including GDP growth, real disposable personal income, employment, unemployment, inflation, and deficit reduction, the top two highest ranking presidents are: First place – Bill Clinton; second place- Lyndon B. Johnson. Supply-siders didn’t earn a medal. The bronze goes to JFK.
And, digging even deeper into historical economic record books, non-supply-sider President (“Ike”) Eisenhower’s economy had a better GDP growth rate (2.5%) than did ‘W’ (1.7%). Ike created more jobs and cut government debt. W’s job creation was painfully bad, and he jacked up the debt a lot. The top marginal tax rate under Ike was 91%. The top marginal tax rate under ‘W’ was one-third that rate.
Even a 91% top marginal tax rate economic scenario handily beat supply-sider George W. Bush.
Supply-side economics stinks for everybody except the wealthy. Look at the historical record. When the rich contribute more to governmental coffers (Clinton, LBJ, and JFK), the economy performs better, more jobs are created, and deficits shrink. Upon further review, it kinda looks like 70% is the optimal top tax rate.
One has to wonder: Are 40 million-plus Americans on food stamps the result of distortions caused by supply-side economics and/or neoliberalism and/or globalization, or all three?
And, is it possible that funneling too much money into too few pockets is counter-productive?
Bill Gross seems to think so, and he became a billionaire by understanding the economy better than anybody else, and now he thinks the economy is broken because of a distorted national tax policy that favors the rich.
But, wait, what about those trillions hiding offshore?
Postscript: “The Republicans in the majority in the House do not believe we ought to raise taxes, and we will not go about raising taxes in exchange for sequester relief,” House Majority leader Eric Cantor (R-Va) by Peter Kasperowicz, Cantor says House GOP won’t trade sequester for tax hikes, The Hill, Oct. 23, 2014.
Robert Hunziker earned an MA in economic history at DePaul University. He lives in Los Angeles. He can be reached at: firstname.lastname@example.org