Taxes, Assets, Winners and Losers

Taxes have little to do with economic growth or unemployment but what they do have a large impact on is who wins and who loses.  The right wing will say the government should not pick winners or losers but there is no choice, for a flat tax with no tax breaks means all the money goes to the top, labor loses, the environment loses, elderly lose, education loses, safety concerns lose. 

Over time we have set up systems so that the elderly win, education wins, family wins, the poor win, labor wins etc.  We have set up tax breaks and subsidies for desirable economic outcomes and it’s been effective.  Social security, Medicare, health care for all, public education are all core components of government spending.  Getting rid of these institutions does not mean our obligation to the elderly, the young, the sick and the poor go away.  It just means it gets shifted to private means which would be much less organized, likely lesser in degree of help, with greater instability and uneasiness.

Our national budget does not operate like my or your budget, a business budget, a city budget or a state budget.  On a national scale we can tax who and how we want without much competition, we borrow from ourselves to pay ourselves, we can print money and provide money at will.  That is the power of national and global scale politics and our ability to use our voices as citizens to persuade.

No government input means the winners are the rich.   As evidenced by corporate earnings, the stock market, and executive pay, even as the economy grows 2-3% the top of the income ladder grows much quicker because very little growth is shared with labor and large corporations continue to take share from small business. 

Two problems with capitalism are:

  1. Companies don’t share growth with labor even with labor playing a big part in increased productivity and technological advancement.
  2. Capitalism doesn’t inherently have any values and society desires to have values.

The government is the obvious counter to these issues. A progressive tax system is needed with rules for labor such as a 40-hour workweek and safety rules in order to obtain a nice quality of life for labor.  Unions are another counter. 

The government wants to focus on excessive wealth (to the right of the dashed line below) that is labor owed to the wealthy but not limit money to the left of the line (business investment). It is also generally desirable to allow mainstreet a decent return on investment.

Making the wealthy pay their fair share allows for less burden on mainstreet which can manifest itself in lower taxes for workers, higher pay, lower prices, government help on things they would pay for, or investment in values such as education, environment, seniors, goodwill etc.

Let us look at the financial picture of an average Joe at the start of his working career, in the middle, and at the end.  We will also look at the financial picture of a typical wealthy executive (Dan) and one of someone who would inherit a fortune (Eric) and what happens when the government does something.  Similar to meeting a financial advisor we look at how much you will make during the rest of your life, how much you have saved, and how much you will spend.

An important note is you are either making money from your labor (individual tax rates) or your savings make money for you which is affected by corporate tax rates and capital gains tax (tax on gains from an investment).  Most people put savings into a business equity which can be dangerous because its skewed heavily to the top and gives the impression that we need to do anything possible to increase asset values.  We need to put our security in hard work.

Financial Life Pictures, Winners and Losers

Progressive Tax vs Flat Tax – Labor wins and high salaries lose with the progressive tax, investments and retirees unaffected. This helps Joe and hurts Dan.

Corporate Tax – The higher the corporate tax, the less the share of the individual tax.  This greatly benefits Joe starting out as he has a lot of labor to do in his life but actually lessons as he goes through his working career and ends up hurting him during retirement. The rich and their heirs take the biggest hit (Dan and Eric).

Capital Gains Tax – Same winners and losers as the corporate tax.   The difference is a change in the corporate tax will immediately increase or decrease your assets and then not affect your future returns.  A capital gains tax increase decreases the rate of return on investments.

Wealth Tax, Inheritance Tax – Joe wins, Dan and Eric lose.  The less capital from big players in the market means labor has a bigger share and will get a bigger return, plus lower individual taxes.

Limiting Executive Pay – Investors benefit, Dan loses his pay but gains in his money making money. Joe benefits as he acquires savings, Eric benefits.  But if you limit executive pay and tax the would be gains on investments then that money goes to Joe.

Inflation – Savers lose, debtors win.

General Tax Cuts – Taking money from our collective account to increase individual accounts doesn’t actually make us more or less rich.  It just creates bubbles.

Stock market or Real Estate market goes up – Everyone loves when asset prices go up right? No, young Joe loses big as a future investor.  Prices going up also means the return on investment is smaller.  Only hard work and innovation increase economic output. If the average house now costs 5 years of average labor to pay for instead of 4 is that good for everybody? No, future buyers lose and its bubble inducing.

Socialism – if the objective is to help Joe then just get rid of the money going to investments, executives and trust funds?  Going to the extreme will hurt economic growth and the spirit of competing.  We should be careful in dealing with absolutes especially morality ones that create conflict. 

In truth, does working the least for the most really make you a winner?

United States GDP and Unemployment History

The growth of the gross domestic product (GDP) minus inflation or Real GDP is a good indicator of the growth of the economy.  Asset prices are not the economy.  Debt is not the economy. The hard work of producing goods and services is.  The combined efforts of everyone’s physical labor and brains improve the quality of life year after year.  Does that mean it is always desirable to grow the economy at any cost? No, we may desire less work or different work for quality of life or refrain from some production due to environmental impact.

As safety net programs have been implemented, presidents have changed, environmental and safety regulations implemented, and healthcare improved, the economy has not changed drastically.  As long as the incentive to work hard the next day is still there the government has a lot of leverage and say on what our values are.

There is little evidence to say people work harder or less when taxes go up or down.  Tax laws pick winners and losers or we can add leverage to the national debt in exchange for higher individual net worth.

The other big statistic is jobs.  People don’t like threats to their jobs, but that threat is far greater from a dynamic capitalistic system than from government activity.  Most job losses are gained elsewhere as humanity developed better transportation, the electricity grid, more tourism, the computer, the internet and so on.  Unemployment has fluctuated very little with regulations, taxes, and safety net programs.

The .com, housing, and now the coronavirus have all spiked unemployment.  In the cases of .com and housing the economy was positioned around a certain asset and then that asset wasn’t what we thought it was.  In time the economy adapts.

The federal reserve has a lot of power over unemployment based on how it sets interest rates.  Though there is a lag as businesses have access to more money and then decide to hire.  The reason for higher interest rates is to control inflation.  Exceptions are usually asset bubbles like in 2000 and 2008.  The economy repositions naturally in time.

People will continue to want to trade each other for food, health care, housing, things etc…there is nothing to fear on the economy falling off some cliff as long as the government is empowered to save the day if needed.  The economy has transformed itself through many technological innovations, wars, infrastructure initiatives with maintaining consistent growth.  Economic growth mostly comes from productivity growth, improving processes, developing technology etc. Once a new technology is developed or a manufacturing process is improved, we don’t lose that ability, we work on the next one.  This is not to say asset bubbles can’t happen, but asset prices aren’t the economy.  When an asset isn’t worth what we thought it was (.com and housing bubbles) that industry loses jobs but in time the slack is picked up.

The economy is our ability to produce goods and services tomorrow to satisfy our needs.  Assets are things that can be traded in for goods and services.  In truth, if everyone owns a lot of assets, it puts a strain on labor that needs to work to support those trading in assets for labor.  They also have to do more work to buy anything.  There is always the temptation for us to create asset bubbles but it wouldn’t hinder our ability to take care of each other.  The government can always create demand, deficit spend or print money. 

“Competition has been shown to be useful up to a certain point and no further, but cooperation, which is the thing we must strive for today, begins where competition leaves off.”

Franklin D. Roosevelt