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“GOP VALUES” — How The GOP Shows Favoritism to Unearned Income over Hard Work

Something else I don’t understand about Republican dogma…

GOP rhetoric seems to idealize the virtues of hard work:  “Pull yourself up by your bootstraps.” “Just get a job.”  “Quit freeloading.” It’s like they actually believe the Horatio Alger myth.

But look at our federal tax structure, and the changes Republicans have forced through since Ronald Reagan.   There is no reward for hard work.  Instead, our current tax system is tilted strongly in favor of those who already have money.  Investment income — unearned income — is now taxed at about half the rate of wage income.

Flashback to the 2011 debt-ceiling crisis: “Even an architect of the Bush tax cuts, economist Glenn Hubbard, tells Rolling Stone that there should have been a ‘revenue contribution’ to the debt-ceiling deal, ‘structured to fall mainly on the well-to-do.’ Instead, the GOP strong-armed America into sacrificing $1 trillion in vital government services – including education, health care and defense – all to safeguard tax breaks for oil companies, yacht owners and hedge-fund managers. The party’s leaders were triumphant: Senate Minority Leader Mitch McConnell even bragged that America’s creditworthiness had been a ‘hostage that’s worth ransoming.’ ”

Now, let’s look at the impact that this VERY ODD tax preference has had on the US economy.

What happens, when our tax system rewards investment income, rather than actual work?

  1. Private equity “investors” use acquired corporations to borrow money – and then use that borrowed money to pay themselves dividends.  “Investment”?  Not hardly.  The acquired corporations go belly-up when they can’t pay pack the debt, leaving hundreds (or thousands) of workers unemployed.  Read “What Mitt Romney Taught Us about America’s Economy.”
  2. CEOs take more compensation as dividends, rather than wages.  Even accounting for inflation, top-tier taxpayers took home six times more dividends in 2009 than in 1992.  “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).”
  3. Some of those CEOs “invest” that money in politics.  And the cycle repeats itself.

“Pull yourself up by your bootstraps”??!? Bootstraps are getting very hard to find, these days.

(But please don’t shop for them at Walmart.  The corporation’s “Lowest Prices” policy has had a devastating effect on the US economy.  “Wal-Mart has the power to squeeze profit-killing concessions from vendors. To survive in the face of its pricing demands, makers of everything from bras to bicycles to blue jeans have had to lay off employees and close U.S. plants in favor of outsourcing products from overseas.”   Meanwhile, Walton family members – who receive about half of all dividends paid by Walmart – are doing just fine.)

America’s “Race to the Bottom”: Boeing is still outsourcing

Boeing DreamlinerYesterday, the Boeing Company announced it would “create engineering centers for future work in South Carolina and possibly in Kiev, Ukraine.”

The perspective from Seattle, Washington:

The engineering union here — the Society of Professional Engineering Employees in Aerospace (SPEEA), which represents nearly 26,400 engineers and technical staff — has long decried Boeing’s outsourcing of engineering work to its design center in Moscow.

Boeing internal documents obtained by The Seattle Times in 2004 after the Moscow center was set up show the company could employ high-quality Russian engineers there at ‘approximately 1/3 to 1/5 of the U.S. cost.’

Remember, this is the Boeing Company – manufacturer of the problem-plagued Dreamliner 787. Read “Boeing Learns the Hard Way that Outsourcing Hurts in the Long Run” here.

Most of us would think that “lessons learned the hard way” would maybe change a corporation’s modus operandi.

Most of us would think that maintaining – or restoring? – a reputation for quality workmanship would be particularly important to an airplane manufacturer.

But right now, the American economy is caught in a race to the bottom. These days, CEOs aren’t interested in long-term corporate reputations. They’re interested in profits. And Boeing’s executives have been producing good profits – despite the Dreamliner mess, and despite lower sales.

How? They’ve been so very, very proficient at “controlling costs” – costs such as engineering and skilled manufacturing labor. Read “Boeing profit beats estimates despite 787 problems” here.

And Boeing has rewarded its executives handsomely for their ability to “control costs”. Last year, “key executive” compensation was up almost 55%. And the guy at the top? CEO Jim McNerney received almost $27.5 million. One person. One year. Almost $27.5 million.

(And that doesn’t even include what McNerney receives in Boeing corporate dividends. According to SEC filings, McNerney owns a few hundred thousand shares of Boeing stock, mostly received as part of his executive compensation. That means McNerney receives almost another quarter-million dollars, every time Boeing issues quarterly dividends. And guess what? Those dividends are taxed at a much lower rate than ordinary wages and salaries.)

So yes, America’s economy is still racing toward the bottom. Boeing is hiring engineers at 20 cents on the dollar — and planning even more outsourcing.

How much lower can we go?

————-

More on McNerney’s dividends:

Not that long ago, dividends were taxed as ordinary income. It didn’t matter whether someone’s income came from wages or stock holdings, it was still taxed the same.

One of the many “Bush tax cuts” changed that – and now, stock dividends are taxed at roughly half the rate as CEOs’ salaries.

This morning, I finally added it all up. According to Congress’ Joint Committee on Taxation, over the past decade the “reduced rates of tax on dividends and long-term capital gains” have cost the federal government more than a trillion dollars in revenue ($1,020 billion, since FY2004).

That means almost 6% of the country’s total federal debt is directly attributable to this bizarre tax preference for unearned income.

Now that the stock market is booming, the impact is even greater: expect another $1.3 trillion loss of federal revenue over the next 10 years. And according to the Congressional Budget Office, the top 1% of taxpayers receive almost 70% of the benefit of this tax preference for unearned income.

The rest of us in the 99% get…?

 

Tax Policy: Time to go Back to the Future?

President Dwight EisenhowerRemember what it was like, back in 1952?  The nation’s unemployment rate was 3%.

Remember the days of annual raises? Back in 1952, the average family income was growing by about 5.4% a year.

Remember the days when one job was enough for a family to live on?  Back in 1952, 75% of American families had only one income.

Remember when our country had a solid middle class?  Back in 1952, CEOs were paid only 47 times as much as their average employee.  (These days, CEOs receive about 230 times what their employees earn.)

Back then, lobbying was an $8-million-a-year industry.   In 2010, lobbying reached an all-time high of $3.55 billion (even after adjusting for inflation, that’s about 46 times what corporations spent lobbying 60 years ago).

What else has changed?  Tax rates.  After all that lobbying, Congress has slashed the tax rates that apply to top-income individuals.  (The top tax rate used to be 90% — both for earned income and for dividend income.  Now, the top tax rate for wage income is 35%, while taxes on dividends are capped at 15%.  Back in 1952, corporate dividends were taxed as “income”; now they are considered “capital gains”.)

What else?  The structure of executive compensation has changed significantly, to reflect changes in the tax laws.  Back in the 1950s, most executives received salaries plus perks such as a company car.  Now, executives receive compensation “packages” that can dwarf their base salary — including “non-cash” awards of corporate stock, which takes advantage of the low capital gains tax rate.

What else has changed? As CEOs receive more of their compensation in stock, they have a bigger personal stake in decisions about what to do with corporate profits.  Should the company reinvest profits by expanding operations and hiring new employees? Or pay profits out to shareholders as dividends?   Implement a long-term growth strategy?  Or loot the company for as much immediate payout as possible?  When top executives own millions of shares, they have a huge personal stake in that decision.

Remember how casino mogul Sheldon Adelson pledged to spend $100 million on Mitt Romney’s campaign?  Wonder how he could afford it?  It was only a fraction of the amount Adelson received this year in stock dividends from his company – even though “Dividend payments to shareholders are not standard in the casino industry, as companies generally still prefer to spend cash on new growth opportunities.” (Are you wondering who made the decision to pay dividends rather than grow the business?)

That $100 million was also slightly less than what Adelson could have received – just in lower taxes on dividends – just in one year – if Mitt Romney had been elected President and had been able to implement his proposed tax policies.  (All told, Adelson could have received tax breaks totaling $2.3 billion, if Romney had been elected.)

Lots of things have changed, since 1952.  Sixty years ago, who would have dreamed that one person would try to buy a presidential election?  Or that a presidential candidate would propose tax breaks which would benefit a single campaign contributor to the tune of $2.3 billion?

Maybe it’s time to start asking whether all those tax cuts have actually benefited America’s economy?  Or have they only benefited America’s richest individuals?

Maybe it’s time to consider what effect those tax cuts have had on corporate decisions.

Maybe it’s time to consider what effect they’ve had on America’s middle class.

Maybe it’s time to stop giving CEOs tax incentives to loot their own companies.

Maybe it’s time to go back to the 90% tax on dividend income, at least for dividends paid to executives by the companies they control.

 

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