Correspondent Arnold suggested that I address the fiscal cliff, so here goes.
The first step is to set aside ideological blinders and confirmation bias, i.e. only looking for data that supports our current beliefs.
The second step is to look at the foundation of everything: household income.Household
income is the foundation of taxes paid, consumption (spending) and
savings/investment. If household income is declining, that means the pie
of money that can be divided up into taxes paid, consumption and
investment is shrinking.
If taxes go up, there is less pie left for spending or investment. And
since the economy ultimately depends on private-sector spending and
investment, then reducing those to fund government spending means there
will be less private spending and investment.
If the government spent the taxes on investments that yielded a
higher return than private investments, higher taxes would not devastate
the economy. But the problem is that there are no feedbacks on government spending that favor efficiency or high yields.
Government spending decisions are made solely on the basis of constituency pain:the
constituencies that create the most political pain for politicos and
Upper-Caste government bureaucrats get funding. Efficiency and
high-yielding investments are not in the political equation at all;
there is no feedback in monopolies except those that favor expansion of
budgets and constituencies.
Let's look at a chart of household income from Median Household Incomes: The "Real" Story (Doug Short). Household income has been negative since 2000 except for two brief spikes:
Here is another chart depicting the huge gap between nominal income and real income:while nominal income rose a seemingly healthy 25% since 2000, real income has declined almost 10%.
Median income doesn't tell us who is getting most of the income, so let's look at this: All the increases in income since 1970 accrued to the top 10%.
But we have to remember that median income includes all income,
including the wealthy. Real income has declined by 8%-9%. The pie is
smaller, period.
Some of that is due to a declining full-time workforce, which has dropped to 115 million workers:
Now let's look at the size of government spending and taxation. In
terms of the overall economy (GDP), government spending's share of the
economy has been rising for decades. The Internet and housing bubbles
briefly "grew" the economy faster than government spending, but once
these one-off expansions faded, government spending quickly returned to
its trendline (ever higher).
Federal spending rose exponentially until it exceeded the carrying
capacity of the economy. For context, recall that Social Security costs
$817 billion, Medicare and Medicaid costs total about $800 billion
annually, and the Pentagon/National Security budget is around $690
billion. Add in interest on the ballooning national debt, and the vast
majority of the Federal budget goes to these four. You could eliminate
all other Federal spending and these four consume all the tax revenues
and then some.
Tax receipts, meanwhile, topped out at $2.4 trillion, leaving a structural gap of $1.3 trillion.
OK, so now we see why government spending can't keep following an exponential path higher: households are earning less income.
Next up: the welfare/cartel State. Some welfare flows directly to
individuals ("transfer payments") and some flows to cartels: defense,
sickcare, the education cartels, etc.
The problem here is the number of citizens who are dependent on
government transfers and spending now exceeds the number of full-time
workers. Recall (see chart above) there are 115 million full-time workers in the U.S.
Of the roughly 150 million workers in the U.S., 38 million earn less than $10,000 per year, 50 million earn less that $15,000 a year and 61 million earn less than $20,000 annually. All these numbers are drawn directly from Social Security Administration payroll data.
100 million wage earners, or 2/3 the entire workforce, earn less than $40,000 per year.
In practical terms, only the 115 million full-time workers pay
significant taxes, and of those, The top 25% (those earning more than
$66,193) paid 87% of the taxes. The bottom 50% of taxpayers, roughly 70
million people, earned 13% of the income and paid 2% of the income taxes
collected.
(The top 1% of taxpayers reported almost 17% of all taxable income and
paid 37% of all income taxes. The top 5% reported 32% of all income and
paid 59% of the taxes, and the top 10% earned 43% of the income and paid
70% of the taxes. Where Do You Rank as a Taxpayer?)
The Real-World Middle Class Tax Rate: 75% (July 5, 2012)
There are roughly 127 million people dependent on government transfers: 61 million recipients of Social Security and Medicare (That Which is Unsustainable Will Go Away: Medicare May
16, 2012) (or Medicaid for the 11 million people drawing lifetime SSI
Social Security disability) and 66 million people receiving welfare
(SNAP food stamps, housing credits, Medicaid, etc.): When Work Is Punished: The Tragedy Of America's Welfare State(Zero Hedge)
That means there are 1.1 government dependents for every full-time worker in the U.S. Please read the linked stories above if you believe this is sustainable.
In my analysis, there has been a Grand Bargain reached by the 3.5 classes in the U.S. The Three-and-a-Half Class Society (October 22, 2012)
The top 1/2th of 1% owns most of the productive assets of the nation and
most of its machinery of governance (this is the "half class"). Most of
the income not siphoned off by this "we own the important stuff" class
goes to the next 19.5% who pay most of the Federal taxes (class #1).
Class #2 is the dwindling "middle class" (also known as the working
poor) which receives no government transfers and lives off earned
income. This is perhaps 30% of the households.
Class #3 is the lower 50% who depend on transfers, subsidies, etc.
because they are retired, don't make enough at their jobs to support
their families or are disabled (legitimately or otherwise).
The Grand Bargain was this: we at the top will pay significant
taxes as long as we get to control the levers of financial and political
power. We in the top 19% will pay much of the taxes as long as we and
our children can continue to live well and accumulate wealth. We in the
"middle class" will continue to work hard as long as we have hope of
bettering our lifestyle and the lives of our children. We in the bottom
50% and retirees agree not to threaten the top .5%'s power and the
wealth of the top 19% as long as we can get by on our government
transfers.
This Grand Bargain is now fraying as the promises made to everyone cannot possibly be met. Claims
on welfare and disability programs are skyrocketing at the same time
that the demographics of an aging populace are causing 10,000 people a
day to enter Social Security and Medicare, the two costliest government
programs. The triple-whammy is the upper-middle class that pays most of
the taxes has been slammed with lower income and a devastating drop in
their net worth.
That which is unsustainable will be replaced by another more sustainable arrangement. Everyone
who slips off their ideological/self-interest blinders knows the Status
Quo is unsustainable, and so everyone in the 3.5 classes is shifting
nervously: will I get taxed to the point of "uncle" or will my bennies
get slashed?
By heavily taxing earned income, the system extracts the highest
taxes from the most productive citizens, leaving the less-productive
with essentially no income taxes and the super-wealthy with the huge tax
break offered to capital gains and other unearned income.
In essence, this is a vote-buying scheme by the Status Quo: the top .5% control the policies of the State in alliance with the State's own Elites, and together they buy the complicity of the bottom 50% to passively accept their dominance.
In other words, the bottom 50% pay relatively modest taxes or are
recipients of Central State aid and the top .5% who "own" the political
process limit their taxes by favoring unearned income (what they collect
from sales of securities, stock options, rents, etc.). Thus the
productive quintile (top wage earners) pay the highest tax rates and
most of the taxes.
It's a partnership of "Tyranny of the Majority" and "entrenched incumbents Elites."If
the political Status Quo alienates the majority by making them pay more
taxes, they risk losing power in the next election. If they alienate
the top .5% who fund their multi-million-dollar campaigns, then they
will also lose power. So they heap the tax burden on what remains of the
upper-middle class.
When that 20% rebels, falters or opts out, the system collapses for want
of tax revenues. Not coincidentally, that happens to fit the Pareto
Distribution: the 20% "vital few" exert outsized influence on the 80%.
The Grand Bargain is unraveling, and a new arrangement will take the place of the Status Quo--whether we like it or not.
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