Robert Reich, the corporate income tax and the middle class

Robert Reich

I enjoy the writings of Robert Reich despite his liberal leanings.  He is intelligent and articulate and, most importantly, not dogmatic.  On his Facebook page last week he voiced his support for President Obama’s one time tax on the overseas profits of American corporations to rebuild America’s infrastructure.  In a 2 minute video he laid out his case that American corporations enjoy the protections of American trade policies without the penalty of being taxed. 

I immediately thought this was at odds with his prescription for corporate taxes in his 2009 book, Supercapitalism and the Transformation of Business, Democracyand Everyday Life.  But is it?

Then he argued that corporations should not be treated as people and that such treatment distorts their effect on government policy.  This is from page 218…

“The result of this anthropomorphic [treatment of corporations] is to give companies duties and rights that properly belong to people instead. This blurs the boundary between capitalism and democracy, and leads to a host of bad public policies. Consider, for example, the corporate income tax. The public has the false impression that corporations pay it, and therefore they should be entitled to participate in the democratic process under the old adage “no taxation without representation.” But only people pay taxes. In reality, the corporate income tax is paid—indirectly—by the company’s consumers, shareholders, and employees. Studies have attempted to determine exactly how the tax is allocated among these three groups, but the distribution remains unclear. What is clear is the corporate income tax is inefficient and inequitable.

“It’s inefficient because interest payments made by corporations on their debt are deductible from their corporate income tax while dividend payments are not. This creates an incentive for companies to over rely on debt financing relative to shareholder equity, and to retain earnings rather than distribute them as dividends. The result, in recent years, has been for many corporations to accumulate large amounts of money that the company then uses to purchase other companies or to buy back its shares of stock. Capital markets would be more efficient if these accumulated profits were redistributed to shareholders as dividends. “Decisions by millions of shareholders about how and when to reinvest these funds are likely to be, as a whole, wiser than decisions made by a relatively small number of corporate executives. Abolishing the corporate income tax would thus help capital markets work better.

“The corporate income tax is inequitable in that retained earnings representing the portion held by lower-income investors are taxed at a corporate rate that’s often higher than the rate they pay on their other income, while earnings representing the holdings of higher income shareholders are taxed at a corporate rate often lower than they pay on the rest of their income. As we have seen, under Supercapitalism, investors have far more power than they did decades ago. Their decisions about where to put their money to maximize their returns are similar to any other decisions they make about how to increase their earnings. Logically, there is no reason why their ‘corporate’ earnings should be taxed differently than their other earnings. Abolishing the corporate income tax and treating all corporate income as the personal income of shareholders would rectify this anomaly.”

To be fair, the two comments are taken out of context and provide Dr. Reich’s answer to two different questions.  In his book, he is advocating a policy that would favor the middle class by lowering the tax burden of owning corporate stock and mutual funds, cause corporations to be smarter about how they invest their capital, reduce corporate lobbying in Congress and create jobs in America rather than overseas.  His Facebook comments are made in the narrower context of the budget proposal submitted by the President to Congress earlier this month. 

His argument that American corporations enjoy the benefits of US trade policies is somewhat suspect, however.  Those policies are more favorable to our trading partners than to American corporations. 

Enacted in 1994, the World Trade Organization (WTO) has enabled emerging economies to participate in free trade with the industrialized world and has helped to alleviate poverty in those countries.  The rapid expansion of the global economy is among its myriad benefits.

However, the WTO puts every nation and every corporation on an equal footing and precludes the US from taking direct action to pressure trading partners to eliminate barriers to US exports and other unfair practices. Under this regime, American corporations do well to invest overseas.

If we want to help the middle class, lets address the underlying causes of their distress.  Overhaul of tax and trade policies is a good place to start.

WHO WILL LEAD?

F.I.C.A., Inflation and the Middle Class Squeeze

“What’s this F.I.C.A.?” said my son.  He was home from college (in 1992) and was deconstructing his first pay stub from his summer work at a local nursery.  F.I.C.A., which everyone knows is the payroll tax that feeds the Social Security and Medicare trust funds, was larger than any deduction on the stub.  Such are the travails of a 19-year-old working for minimum wage.

The tax is very regressive.  It penalizes low wage earners more than high wage earners as it takes 7.5% of every dollar earned up to $117,000 each year.   It’s only one of the ways in which middle class taxpayers are hurt more than those at the top and bottom.

The poor receive government benefits in the form of the Earned Income Tax Credit, Medicaid, Section 8 housing and food stamps to keep them afloat.  By the time your earnings get to around $35,000 annually, most of that is phased out.

At the top, the wealthy can lower their tax bill though a variety of credits and deductions associated with owning assets, like stocks and real estate.  Those factors typically don’t help the middle class as much.

The middle class squeeze is about more than just taxes though.  It’s about inflation.

We keep hearing that inflation is under control.  And, the numbers don’t lie.  Overall inflation has been running well below the Federal Reserve’s target of 2% for years now.  However, as the cost of manufactured goods has been going down, the cost of essential services has gone up a lot!  Here’s a chart from the liberal think tank Center for American Progress (CAP) that illustrates the problem very well:

Which of these services can you forgo?

Meanwhile incomes are dropping in real terms.  This chart compiled by Mother Jones using data from the US Census Bureau shows the trend going back to 1967 and indicates that 2012 median income is about the same as it was in 1989.

Politicians on the left and right are now talking about the middle class and I suppose that’s good. But, what are the solutions they propose?  It may be too soon to tell how the President and his Republican opponents in Congress will define the battleground.  However, it’s easy to predict that it will be more of the same standoff.

CAP proposes a long list of solutions reminiscent of the 1960’s before globalization and automation stripped good paying factory jobs out of the US economy. These include raising the minimum wage, strengthening unions, improving education, reforming healthcare and realigning factors leading to more equitable home ownership.  

Will a return to the policies of the Great Society work in the 21^st Century?

For their part, Republicans haven’t come up with a viable alternative – or any alternative other than lowering taxes and reducing the deficit.  Both are attractive but unlikely to trickle down to the middle class. 

But, if these policies won’ t work, what will?

It’s hard to know for sure.  However, I would favor those that provide opportunity through programs that would likely defy the dogma of both the left and the right. We can encourage the growth of high paying, blue-collar jobs in industries like energy and manufacturing through deregulation and subsidies. We can reform the tax code so that the burden falls less on employers and employees than on those who profit from asset appreciation.  And, rather than imposing huge tuition costs on those who might graduate without needed skills, we could provide support for technical skills demanded by the market. 

Moreover, capitalists – those who believe in a society built on opportunity rather than welfare – must find a way to ensure that the middle class can share in the benefits of our system.

WHO WILL LEAD?