Thursday, October 13, 2011

Taxes v. Income

I recently read a survey from the IRS which showed the percentage of federal income taxes paid, and adjusted gross income earned, by the top 1%, 5% and 25% of American taxpayers. If correct, the finding were pretty surprising to me.

The top 1% paid 38% of Federal Income Taxes ( "FIT"), but only earned 20% of Adjusted Gross Income("AGI") .

Likewise the top 5% paid 59% of FIT, but earned 35% of AGI .

The top 25% paid 86% of FIT .

Finally almost 50% of tax filers pay no FIT.

While the top 1% do make 20% of all income, they pay 38% of federal income taxes.

So much I guess for the 1% - 99% Occupy Wall St. mantra.

It is now widely recognized (although not well known) that almost half of American taxpayers pay no federal income taxes. While this doesn't cover social security and medicare taxes, those taxes are narrowly focused and people essentially get them paid back when they retire or get sick. They are not the same as federal income taxes which are used for most of our government expenditures.

The retort is that they do pay other taxes and that if they pay no federal income taxes, it is because they are not rich enough, too old or have big families.

By the way, I suspect a good portion of Tea Party folks are among those who pay very little or no federal income taxes.

Nonetheless there has to be concern from a societal point of view, when half of our citizens do not share in the burden of the cost of running our government. For that reason some conservatives are in favor of some kind of consumption tax at the federal level to insure that everyone pays some federal taxes. See Cain's 9-9-9 plan.

However what really surprised me is that while I always knew the "rich" paid most of the federal income taxes, I thought they made an even higher percentage of the income. Apparently they don't.

I'm not against raising taxes if needed to solve our fiscal problems, I just think it's important that people be aware that taxes are more fairly distributed than we are told. The rich, and the kind of rich, do pay their fair share and the less well off pay very little or none.

Perhaps if that were more widely known it would take some of the steam out of the class warfare frenzy and we can get down to solving our problems in a rational productive way.


Friday, October 7, 2011

Their Pay Is Too Damn High

One of my major concerns with the growing gap between rich and poor is not based on the wealth generated by capitalists, but rather with the outsized compensation paid to certain employees of companies, most significantly senior executives. Many are paid salaries and bonuses that are not rationally tied to performance or success. They are not risking their capital, yet get paid like highly successful capitalists; often whether or not their companies prosper.

There needs to be a recognition of sharing appropriately with those who make companies successful. I feel top contributors can only accomplish so much by themselves. They need contributions from many others in the organization to accomplish success for the company. At some point individual rewards should diminish going up the scale.

The opposite seems to be true today.

Superstars aren't all that great. There are many talented CEOs in waiting who could do just a good a job for a lot less than those currently running our public companies. The same is true of athletes, movie stars and other entertainers. There are limitations on what they can accomplish without the contribution of others.

As an aside, strangely enough no one in the Occupy Wall St. movement seems to complain about outsized pay to athletes and entertainers; in fact many march supporters ( i.e. Michael Moore, Sean Penn) are themselves overpaid movie stars and the like.

It is different for investors, but only to the extent they are risking their own money. The old investment banking model of investment bankers putting their own money at risk was fine. The problems arose when the investment banks went public and started risking other peoples money . No one was sufficiently looking out for the shareholders. The executives "feathered their own nests" with extremely high
compensation and non-merited based bonuses, and the shareholders let them.

Wealth needs to be shared more fairly, but not given away either. I'm not talking about redistribution of wealth, but rather an accurate assessment of the real value created. See the example of how pro golfers earn their pay versus how members of other pro sports teams get paid. The golfer has to earn his money every week.

Even in sports, top performers' contributions has its limits. One player on a team can only do so much without the help of others.

The usual left wing solution, taxation, however, is not the way to get there. It doesn't raise the compensation of the middle class to raise taxes on the rich. It may feel good to liberals, but it just gives the government more money and doesn't raise the incomes for those in the middle class on the "have not" side of the wealth gap.

Executives, especially commercial bankers, used to make very good, but not outsized, compensation. When and why did the shift occur?

The market should recognize the real value of employee contributions and the diminishing returns of any one person to the real creation of wealth.

Why doesn't it? Somehow those in control exploit their position of power to retain outsized rewards. The shareholders, the actual capitalists, should not let them get away with it.

We will always have classes of "haves" and "have nots". I've studied just a bit of history and have been struck by the fact that from the Greeks and Romans to the Soviet Union, it always seems that people eventually sort themselves out to create elites and the rest of society.

However it is dangerous to all if the gap becomes too wide. See French and Russian Revolutions. I've always maintained that the union movement actually saved capitalism in this country because it gave the working man his own "piece of the pie" and as a result he ferociously defended our system against the Communists.

Today we have a global economy which puts into play issues like cheap labor, the environment and free trade. It is hard to reconcile these currents on a national basis and there clearly is no appetite to do so on a global basis. Cheap foreign labor may in part be the reason for the loss of jobs on the lower end of the wealth spectrum, but it doesn't explain why the higher earners are getting so much more.

While I know it may be hard to put that "genie back in the bottle", and yes I know if you spread their compensation over their whole work force it may not be that much money, nonetheless it would be the right thing to do.