Republicans, Real America, and S&M

John McCain’s arguments about Barack Obama’s tax plan rely upon a misunderstanding of how taxes work, in much the same way intelligent design proponents rely on a misunderstanding of how evolution works in order to get people to believe them. The Internet would call this tactic “FUD,” which stands for “Fear, Uncertainty, and Doubt,” and it is largely the way McCain has run his campaign. By planting fear of Barack Obama (he “pals around with terrorists”), uncertainty about Barack Obama (he’s inexperienced) and doubt about Barack Obama (he hasn’t even done anything significant in his time as a senator) in the minds of American voters, McCain can focus more on the qualities Obama lacks than the qualities that he, McCain, possesses.

On Meet the Press Sunday, McCain said that “CEOs” of companies like FedEx pay a 35% marginal tax rate. This is an intentionally misleading statement; CEOs do not personally pay any taxes for their companies. A “corporation” is created for the purpose of doing business without fear of personal liability. If the corporation incurs debts, then it is the corporation that is liable for those debts; the personal assets of the employees of that corporation cannot take the place of the corporation’s assets.

The separated assets of the company and its employees mean that the company doles out salaries to its employees. The corporation has a payroll, and employees – which includes CEOs and other executive officers – are compensated out of that payroll budget.

CEOs pay 35%? No, “CEOs” don’t pay 35%. Their companies pay 35%. They don’t personally pay anything, except their own personal taxes. A company pays 35% on its revenues. A person pays depending on his salary. Now, a business owner may decide how much to pay himself as an employee, but that does not change the fact that what the business makes and what the owner makes are separate things. As Obama has observed, 90% of small businesses make less than $250,000 and are therefore incapable of paying their owners an amount that would cause the owners’ taxes to go up. How many small business owners do you know who pay themselves more than $250,000? And if a small business owner does personally make more than $250,000, then he can certainly afford the tax increase. That’s the point of a graduated, or progressive, tax: the marginal tax rate increases as income increases because people who make a lot of money can afford to pay more than people who don’t.

The argument behind giving tax cuts to people who make a lot of money is that they are in a better position to take that tax cut money and purchase things or reinvest that money in the economy. This is called “supply-side” economics because it works on the side of people who, theoretically, provide the economy with goods and services; i.e., business-owners. Give business owners more money and they will employ more people – that is to say, people on the “demand side” of the economy. This is often referred to as “trickle-down” economics because the benefits of tax cuts given to the people at the top (in terms of income) will eventually trickle down to the people at the bottom (in terms of income).

Whether or not the trickle will ever come is unknowable. In the last eight years, we’ve seen the wealthiest classes increase in size, while the middle class has decreased in size. In 2007, the median household income in the United States was $50,740. 4% of households made $200,000 or more. 18.9% of households made between $50,000 and $75,000. In 2000, 2% of households made $200,000 or more, while 19% of households made between $50,000 and $75,000. On average, American households as a group have become wealthier, but only a small group of people has actually been the beneficiary of that wealth.

Obama’s plan to “spread the wealth around” sounds very much like the system Marx envisioned: “From each according to his abilities, to each according to his needs.” The question is, what’s wrong with that? To criticize a plan as “Marxist” is to deploy an ad hominem attack, an attack that addresses the person arguing but not the argument itself. Calling a particular tax plan “Marxist” does not address the argument: okay, if it’s Marxist, what does that mean? What’s wrong with that? Conservatives use “Marxist” as a proxy for “bad” without ever mentioning what is actually bad about the plan.

S&M

The “S&M” from the title of this article, as you probably guessed, is not that S&M. It’s socialism and Marxism. The word “socialist” has been bandied about of late with regard to tax plans and bailouts of the banks. Either through willful or deceptive ignorance, the people who throw this word around ignore the extant socialist components of our economy. We have a government that collects taxes at all; we have regulatory agencies that limit the things that businesses can do; we even have socialized health care in the form of Medicaid (government health care for impoverished people), Medicare (government health care for the elderly), and the Veterans Administration. Yes, our American veterans, who spent their lives defending our freedoms, are beneficiaries of socialism! Any veteran can walk into any VA hospital anywhere in the country and get treated. And you, the taxpayer, are paying the bill.

Even Alan Greenspan, champion of capitalism, was hypocritically in charge of a government-chartered bank that holds tremendous influence in the free-market economy. And he never once denounced that institution.

There was a time in American history when the economy was more capitalist than it is today. Do you remember having to memorize, in American history class, all of the various “panics” that occurred from 1789 to 1945? Every ten to twenty years, there was a “panic” that crippled the U.S. economy. Each successive panic resulting in either the passage of legislation designed to stop whatever activity caused the panic or an infusion of cash by the government. The Panic of 1907 was notably stopped by J.P. Morgan himself, whose company injected money into the economy to keep it going. The Federal Reserve Act was passed into law six years later, creating the modern-day Federal Reserve system.

The Federal Reserve System helped put a stop to regular panics, but even more important was the influence of a British economist named John Maynard Keynes. Prior to Keynes, the government was viewed by politicians and policy-makers as just another consumer. The government bought things from private industry, entered into contracts with private industry, and collected taxes. But it was still seen as being on par with a consumer or company. And as such, conventional wisdom dictated that it should act like a private company or citizen. When the Great Depression began in 1929, Herbert Hoover’s response was to cut spending and raise taxes. For an individual, this would seem to make sense: when faced with declining revenue and a worsening economy, cut your spending to save money. Raise your taxes (if you’re the government) to increase the money you can bring in.

But that only made things worse. The government, said Keynes, is far more powerful than any single consumer or corporation. With its essentially unlimited capacity to borrow money, the government can influence the economy in ways that individuals cannot. In a time of crisis, the government should cut taxes and increase spending in order to inject money into the economy. Even though this will cause the government to incur a deficit, it should be done in order to repair the economy. When the economy recovers, the government should decrease spending and raise taxes in order to pay off the debt it incurred during the recession. This process of government intervention is known as Keynesianism, and it has been employed by the U.S. government since World War II. And guess what? No more regular panics. The first economic depression since World War II was the oil crisis of the 1970s, caused by a combination of inflation and recession (something that economists didn’t think was possible, by the way).

These calls of “socialism” fall mostly on ignorant ears. Socialism is already here! If you pay taxes, you’re engaging in socialism. The question is, what degree of socialism are we talking about? Some countries have national monopolies that are endorsed or partly owned by the government. Think of Telefónica in Spain, Petróleos Mexicanos, or Petróleos de Venezuela. The United States would have to go a long way toward purchasing ownership stakes in our industries. Although, at least one industry – the railroads – are partially owned by the government. The U.S. government took control of the railroad system in the late 19^th century in order to cut down on corruption. Today, the government still owns the railroads, but not because of corruption. It’s because the costs of running railroads are so high that railroad companies would go bankrupt without government support.

Socialism is alive and well here, and it’s helping Americans in ways that they may not be aware of.

Citizen Perks: 80% ownership in AIG

The Federal Reserve extended an emergency $85 billion funding line to global Insurance company AIG in return for an 80% equity stake in the company, making for a nice symmetry of otherwise frightening numbers. Faced with the prospect of a probable bankruptcy filing without intervention, the Fed went against precedent in its most recent bailout.  Without the agreement, the failure of AIG, which holds insurance policies in nearly every area, would have sent unthinkable shockwaves through the world economy. Just when you thought the benefits of American citizenship were limited to tax burdens, peacetime security and voting rights, you are now a certified owner of 4/5 of a global insurance comglomerate…

Lehman Brothers Files for Bankruptcy

After failing to find a buyer, Lehman Brothers, the 158-year old Wall Street investment firm appears ready to file for bankruptcy on Monday, according to reports. The Federal Reserve further relaxed wholesale borrowing requirements, drawing strong interest from the banks.  In order to avert a general crisis, the largest remaining investment firms have pooled over $70 billion in capital to help collectively cover their trading positions, and provide a pool of capital.

With the infusion of liquidity, Bank of America appeared close to acquiring investment brokerage Merrill Lynch early Monday. Lynch’s stock had fallen nearly 2/3 for the year, and BoA found the firm an attractive target. Look for consolidation to continue, as a number of remaining firms such as the insurance firm AIG still face uncovered future debt obligations, requiring further capital inflows. Just when it appeared the financial markets were beginning to settle down, an entirely new chapter begins. Black–Scholes be damned…

Lehman Bidders Walk

Reports suggest that the final two bidders, Bank of American and Barclays, to acquire financial firm Lehman Brothers have dropped out of the running after the Federal Reserve declined to put up public money to hedge against acquisition losses. While details are still emerging, traders scrambled to sort out their positions with the bank in advance of the market opening on Monday. If anything should re-focus our election season upon the economy, this may be the catalyst. Economists have been predicting a larger shakeout in the wake of the moral hazard created by the Bear Sterns bailout. At issue here is the credit rating of US Treasury bonds themselves: with all of the guaranteed public money supporting Stearns, and now the Fanny sisters, the Feds may be hitting the wall on their limit to effectively borrow credibly. The silver lining may be that this is the beginning of the end, although it’s important to note that the next administration will have to try to unwind our national debt obligations just as they fight a two-fronted war.