Tuesday, November 29, 2011

Low Wages Kills Jobs, Not High Taxes

U.S. corporations are sitting on a huge and growing pile of cash, and have no idea what to do with it. Without "demand" (money in people's pockets) there's no reason to "supply" -- to expand, produce, and hire (at least, not domestically).

I don't believe that since the Bush tax cuts in 2003, a lower capital gains tax for CEOs (with stock-options) and hedge-fund mangers, does not create jobs, just digital wealth for "shareholders". We need no further proof than to look at the current unemployment rate -- 9% unemployed (those looking for work) and 16% (including those that lost jobless benefits and are reported by the Bureau of Labor Statistics as "no longer looking for work").

Corporations are not in business to create jobs, but profits for shareholders, and their biggest shareholders are the banks, hedge funds, and the corporate executives themselves. They own huge blocks of stocks and the executives often sit on each other's board of directors. When a CEO talks about their noble responsibility of protecting their investors, they aren't referring to little day-trader who has an online account at Charles Schwab or eTrade, they're referring to themselves.

Wal*Mart is just but one example. When it comes to the 1%, Rob Walton and the Walton family are it. The Walton family has amassed more than $93 billion in wealth, making them the richest family in the country. 1,382 institutions and the Walton family own the bulk of outstanding shares, and we all know how well their employees are doing.

Outsourcing jobs for cheaper labor (or depressing domestic wages) and eliminating workers benefits like healthcare, and/or closing factories to bust unions, increases corporate profits. Lobbying congress for lower taxes also increases profits. Removing environmental regulations increases profits. Restricting lawsuits for wrong-doing ("tort reform") increases profits. Increased profits in 2011 (or record CEO salaries) isn't the problem though, it's job creation, a declining middle-class, and a widening disparity between rich and poor.

New York Times: "In the eight decades before the recent recession, there was never a period when as much as 9% of American GDP went to companies in the form of after-tax profits. Now the figure is over 10%. For companies, these are boom times. For workers, the opposite is true."

Robert Reich: "New data from the Commerce Department shows employee pay is now down to the smallest share of the economy since the government began collecting wage and salary data in 1929. Meanwhile, corporate profits now constitute the largest share of the economy since 1929.

In 1914 Henry Ford paid three times what the typical factory employee earned at the time. The higher wage turned Ford's auto workers into customers who could afford to buy Model T's and in two years Ford's profits more than doubled.

Because of the many loopholes in the U.S. tax code, on average, the largest U.S. multi-national corporations and banks already pay a lower effective tax rate in corporate taxes (14% to 18%) than they would in China (25%). It's not over-regulation or taxes that keeps businesses from hiring, they just don't have to.

CEOs only “earn” bonuses when their company “performs.” (such as saving labor-related costs). One measure of that performance: “earnings per share,” or company income divided by outstanding shares of stock.

But execs have figured out they don't have to boost earnings to hit their per-share targets. They simply reduce the number of company shares — by having their companies “buy back” shares of their own stock off the open market. U.S. corporations overall have so far this year authorized $445 billion worth of buybacks.

(For more details on how stock-options work, read Startup Equity For Employees)

So with corporations paying a record low "effective tax rate", they can also pay themselves generous stock options, and then pay a record low capital gains tax. (Read The Laffer Curve & Capital Gains Taxes)

If the Bush tax cuts are allowed to expire, the top tax bracket of 35% would go up to 39.6% (for income over $379,000 a year), and tax on capital gains (like CEO stock options) would go from 15% to 20% - - but this is what needs changed. Capital gains and dividends should be taxed as regular income.

That's how the ultra-wealthy make most their income (instead of paying taxes in the higher income bracket, they pay the lower capital gains rate), and that's how Warren Buffett's secretary pays a higher effective tax rate for income taxes than her boss.

Hedge fund managers are making a killing paying capital gains taxes, rather than paying the higher top marginal income tax rate on their personal income. Read: Tax breaks for billionaires: Loopholes for hedge fund managers by the Economic Policy Institute (a non-profit and non-partisan think tank).

Higher income earners also have the advantage in that Social Security taxes are capped at $106,800.

And because corporations have been paying a low effective corporate tax rate for decades, that didn't keep them from outsourcing jobs overseas for cheap labor, but rather, it did enable them to pay very excessive CEO salaries...who only mostly pay 15% in federal income taxes on their capital gains. And the Republicans want to lower the tax rates for corporations more.

And the Republicans either want to lower capital gains taxes for the rich, or not tax capital gains at all...even though it doesn't create jobs but only make the top 1% richer -- and further widening the income gap. The ultra-wealthy have been enjoying historically low tax rates for years, but it didn't create jobs. In the past 10 years alone we've lost 56,000 factories and 8.2 million jobs.

American corporations might be hiring Chinese workers with engineering degrees, but their level of education isn't why they're being hired. A high school drop out can work on any of Apple's assembly lines with only 8 hours of on-the-job training. It's only for low wages paid to citizens of a country that has a government violating every imaginable labor law that we have here in America (Read America's Race to the Bottom)

Capital gains and dividends should be taxed as regular income (and we should remove corporate loopholes). Rather than over-paying themselves, the CEOs should start paying fair wages to their employees. $10 million year in employee's wages will go right back into the economy. $10 million a year into the pocket of a CEO will only stimulate the yachting industry.

As an aside: When you earn equity in your pension fund that's invested in stocks, when you retire your pension or Roth IRA is taxed as regular income (according to your marginal income bracket), not at the lower rate that CEOs, banks, and hedge-fund mangers pay with capital gains from THEIR stocks.

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