E-Newsletter No. 4
April 2014
If not us, who? ____ If not now, when?

As we noted last month, President Obama, in his State of the Union speech, discussed the need to find a solution to the problem of “income inequality”. One of his proposals is to raise the minimum wage to $10.10 per hour. However, based on the Congressional Budget Office’s analysis of his proposal, it is a much better “sound bite” than an effective policy. Increasing the minimum wage would serve to decrease the country’s poverty rate by less than half a percent, and the $31 billion “extra tax” on businesses would not go to only low-income families, because many low-wage workers are not members of low-income families. Just 19% of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29% would accrue to families earning more than three times the poverty threshold. [The remaining 52% of the $31 billion would also go to families above the government’s poverty threshold]. Our Editorial Board believes that there are more effective ways to address poverty in America.

Some of our readers may be aware that a documentary was released last fall, which was entitled Inequality for All. It features the viewpoints of Robert Reich, who was Secretary of Labor during President Clinton’s first term. Our Editorial Board agrees with a number of Mr. Reich’s observations, but we also take exception to some of his conclusions. Early in the documentary, Mr. Reich acknowledges that within the US economy “some inequality is inevitable” – – it is the essence of capitalism. Capitalism fosters innovation, creativity and enterprise, and it rewards taking personal responsibility for your own economic well-being. We agree with Mr. Reich’s observation that the U.S. economy is not a purely capitalistic / purely “free market” system. We agree that one of the roles of government is to set the rules and regulations by which the market functions, and therefore (rightly or wrongly) the government’s rules help determine who benefits and who is hurt by those policies and programs.

We also agree with Mr. Reich’s observation (and the underlying data) that the inflation-adjusted income of the average US worker began to flatten out during the 1970s, primarily due to the effects of globalization and new technologies. Robotics, self-scanning check-out lines, and other changes in the workplace have eliminated certain jobs. Some people curse the effects of progress and change; our Editorial Board embraces creativity, innovation, progress and change. However, this raises an interesting question – Does this mean that workers today (more so than at any other point in time) need to continue learning after they finish their formal education? Absolutely.

Here are some of Mr. Reich’s other observations about income inequality – – The disparity in annual income/wealth between “the Top 1%” and the average/median for the country as a whole has steadily increased over the past 30-40 years, and peaked in 2007 – – we agree with the data. America’s overall economy has grown tremendously during the past 30-40 years. Therefore “income inequality” is primarily a mathematical result – – when the economy has grown tremendously, and the average/median income has grown only slightly, there is an increase in the mathematical disparity.

One of Mr. Reich’s hypotheses is that this concentration of wealth leads to “speculative investments” (ie, in housing) which contribute to the formation of various “asset bubbles” which inevitably burst, and which led to the great recession of 2008-2009. However, he does not acknowledge that the government’s own loosening of the rules relating to the requirements/qualifications to obtain a mortgage also significantly contributed to this asset bubble. In addition, as Mr. Reich correctly points out, many people did not diligently pay down their mortgage balance (to ensure that they would never lose their home) but instead used their home as an ATM. (Plus, the government allows mortgage interest to be a deductible expense for tax purposes). It is generally accepted that sub-prime mortgages were one of the major triggers that led to the great recession. As we noted above, we agree that the government does have an important role to play in establishing rules and regulations to protect the public (in this case, from ourselves).

We also agree with one of Mr. Reich’s main warnings about income inequality – – the increasing concentration of wealth does create a danger to democracy. With money, comes the possibility to control government. The Inequality for All documentary was fairly even-handed in that it identified several wealthy individuals who have made significant contributions to either liberal causes or conservative causes (according to each contributor’s tendency). Unfortunately, the Supreme Court has ruled that campaign contributions by corporations and wealthy individuals, in effect, cannot be limited, because this represents a restriction on the freedom of speech. There is a reason for the expression “Money talks”, and money does buy influence. As an alternative, our Foundation supports the concept of Term Limits. We need to find different ways (i.e., CHANGE THE RULES) to reduce the possibility that our elected officials become entrenched, and become beholden to special interests, rather than to the interests of the country as a whole. We believe that if our elected officials are elected for a set (limited) period of time, they will have a greater tendency to serve the public good, rather than focus on worrying about their next re-election.

So, who is the “Top 1%”? The income level for the Top 1% is an annual income over $380,000. The Top 1% includes some professional people (doctors, lawyers), some entrepreneurs/business owners/venture capitalists/risk takers, some corporate CEOs, certain elected officials at both the national and state levels, professional athletes, entertainers, etc.

One last set of data to be considered (this is IRS tax data for 2011) – – The Top 1% of US taxpayers paid a greater share of all federal income taxes in 2011 (35.1%) than the entire bottom 90% (31.7%). The 1,366,000 taxpayers in the Top 1% (who earned approximately 20% of the country’s total personal income) paid over 35% of the total income taxes paid to the federal government, so it’s not like the Top 1% isn’t already covering a relatively higher share of the total tax load. We agree that they should – – Please re-visit our website and see our Conversation Pieces on Tax Rationalization, Tax Reform, and Tax Simplification issues. Just to clarify… There were approximately 136.6 million personal income tax returns filed for 2011. This is substantially less than the US population of 317 million US citizens, primarily due to “Married Filing Jointly” tax returns (with or without dependent children), along with a number of citizens who do not file an income tax return.

Having said all that…. We also agree with the comments that were made by Warren Buffet and Nick Hanauer in the documentary – – The US tax code is screwed up – – they only paid an effective tax rate of 17.7% / 11% on their incomes, which were in excess of $10 million. As Mr. Reich points out, it is the US government that sets the rules. At the end of the day, this is what the political process is all about. This is why We The People need to Join the Conversation and get more involved in the process, to debate (and find better solutions to) the issues that are being discussed.

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Our Editorial Board also recently reviewed a commentary that was published a few months ago by one of our favorite columnists, Cal Thomas – – Income Inequality is Part of the Entitlement Philosophy. The primary points that Mr. Thomas makes in his commentary are that certain political leaders want us to accept a false premise: that if I earn more money than you, I “owe” you some of my money to make things “fair”….. “Income inequality” is a part of the greed-envy-entitlement philosophy promoted by liberals who want to addict more people to government….. There was a time when Americans would have been ashamed to take, much less ask for, anything from their fellow citizens…. Envy, greed and entitlements are not the things that built America….. The concern should not be how much others make, but how much you can make if you apply yourself and adopt the values embraced by successful people. Thank you, Cal – we couldn’t have said it any better.

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On March 4, President Obama submitted his budget for fiscal 2015. We will address the president’s proposed budget in next month’s newsletter. The unfortunate news is that, for each of the next ten years projected in the president’s budget, there is not a single year that shows anything other than a continuation of annual deficits. Evidently, our country’s game plan is to let the amount of debt per citizen continue to grow each year. Our Editorial Board believes that (contrary to the president’s plan) we CAN get this fixed.

OK, one more set of data – – Even if the US government were to “appropriate” (i.e., steal) the entire net worth (the accumulated wealth) of the country’s Top 100 billionaires (Bill Gates, Warren Buffet, George Soros, Oprah Winfrey, Mark Zuckerberg, etc.) the government would be able to pay-off only a fraction (less than 7.5%) of the $17.5 trillion “on book” US debt (which excludes the future negative cash flows for Social Security and Medicare benefits that have also been promised). Even the very richest people in the country cannot begin to pay off our country’s cumulative debt, so who is going to pay it off? This intergenerational debt obligation (which is being pushed onto our children and grandchildren by our federal government) is immoral. We MUST get this fixed.

US Debt Clock (the “on book” US debt) –
March 1st – $54,729 per citizen / April 1st – $55,228