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Another stalemate?
Or a chance to save the economy?

The days are ticking by, as our federal government heads toward sequestration (March 1st) and a possible shutdown (March 27th).

House Republicans have drawn the same line in the sand that they drew – and tried to maintain – at the end of last year. They have pledged allegiance to Grover Norquist: “No new taxes.” They would rather cut food stamps than cut military spending – but they would also rather cut the military than increase taxes. Read today’s NY Times story here.

Now’s a good time to step away from the right-wing rhetoric and take a closer look at some actual facts.

Each year since 1992, the IRS has published “information from the Top 400 individual tax returns.” The latest “Top 400” publication covers the years 1992 through 2009. (Remember 2009? According to economists, the 2007 recession ended in June 2009. Even though most of us are still dealing with the effects of that “longest and most painful downturn since the Great Depression.”)

Top400 AGIThe “Top 400” statistics clearly show what’s happening at the top of the economic scale. And despite the recession, and after accounting for inflation, those at the top are doing just fine: in 2009, the top 400 had income almost three times higher than in 1992.

(Yes, in 2009, the Top 400 taxpayers had an average income of more than $123 million. Wouldn’t it be nice if everyone’s income was three times higher than it was in 1992?)

Top400 Tax RateThe US has traditionally had a “progressive” income tax structure: those with more income pay taxes at a higher rate. But that’s not what has been happening.

(In 1992, the Top 400 paid taxes at an average rate of 26.4%. By 2009, the Top 400 average tax rate was only 19.9%. What happened over those 17 years? More money, lower tax rate for the Top 400. While the country’s economy came to a screeching halt.)

Top400 Dividend IncomeOne of the most revealing statistics from that IRS report is the amount of income the Top 400 takes as dividends rather than salaries. Since 1992, even accounting for inflation, the amount of dividend income has increased by 600%. In 2009, as the recession was bottoming out, the Top 400 took home an average of $16 million each in dividend income.

What’s the big deal about that? Unfortunately, the IRS doesn’t release statistics about how much dividend income the Top 400 receive from the same companies they control. But…

Remember what Mitt Romney taught us about America’s economy? How – rather than reinvesting corporate profits in new hires or capital improvements – many executives and investors have been wringing dividends out of their companies? (And often, like Sheldon Adelson, spending money on political influence?)

Remember that FedEx paid an estimated $8.5 million in dividends to CEO Fred Smith last year? Wonder how else that $$ could have been spent? (Read “FedEx and the Real Reason Why There’s No Jobs” in Forbes here.)

Yes, the fiscal cliff negotiations increased the tax rate on dividends from 15% to 20% – but that’s still significantly less than the tax rate on salaries. Which means CEOs are still going to prefer taking home compensation through dividends, rather than salaries.

But each dollar paid to the CEO in dividends costs the company (and the economy) a whole lot of money that could have been reinvested. Going back to Fred Smith as an example, his 15 million shares in the company represent only a fraction of the outstanding stock. For Mr. Smith to receive $8.5 million in dividends, personally, the company has to pay out well over $100 million in total dividends – money that could have been invested in new hires, or new planes, or new facilities (or improved employee benefits).

The low tax rate for dividends is a perverse economic incentive. It discourages hiring. It discourages reinvestment and long-term corporate planning. It discourages growth. It encourages concentration of wealth at the top of the economic scale.

Someone once said “don’t ever let a good crisis go to waste.”

As we head toward (and through) sequestration and shutdown threats, maybe we can hope. Maybe these latest Congress-created crises can have a happy ending.

Maybe whatever political “compromise” is eventually reached will include more changes in dividend taxation.

Maybe the country can end this vicious cycle of wringing profits out of the economy. Maybe the country can go back to growing our entire economy, not just the personal incomes of the top 400.

It’s going to be an interesting couple of months. Fasten your seatbelts for another bumpy ride.

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About Liz Iacobucci

Liz Iacobucci is the former Public Information Officer for the State Employees’ Association of New Hampshire, SEIU Local 1984. Over the past three decades, she has served in government at the federal, state and municipal levels; and she has worked for both Democratic and Republican politicians.
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