The United States has always sought to balance the opportunity of the individual to achieve unbelievable success while promising a minimum safety net for us all. This leads to a society with billionaire twenty-somethings and millions scrambling to get by. I am not a politician but, if I were, I’d do everything I could to capture the vote of the millions scrambling to get by rather than the few who have risen to the top. After all, time and votes are the only things we all share equally.
This election is turning into an argument about Warren Buffet having a higher effective tax rate than his secretary. This election should be focused on the empowerment of the people in the gap between middle income and the poverty level. Every time the tax rate argument is brought up, it’s in the context of, “How can we make Mr. Buffet pay more.” I’ve yet to hear, “How can we incentivize Mr. Buffet’s secretary to create more personal wealth for herself.” Warren Buffet has created his wealth through the ownership of a company he started. He’s very good at what he does. Our country embraces excellent performance of any kind.
The fact that President Obama has called out Mitt Romney’s creation of personal wealth is a bit hypocritical considering his American Recovery and Reinvestment Act (Jobs Act), contained a provision for a one year amnesty on 100% of capital gains based on businesses started or, acquired from September of 2010 through January of 2012. According to the IRS the top 400 reported incomes earned at least $77 million dollars and nearly 46% of their incomes came through capital gains (ownership). The downside to this is that working for wages, investing in bonds or buying dividend stocks leaves you little chance of cracking that top 1%.
Cracking the top 1% isn’t something that many of us aspire to. Our, “Pie in the sky” turns to, “Food on the table. “ The truth is many people are having an awfully tough time just putting food on the table. This year’s drought is sure to raise staple food prices by at least 15% over the next year. In fact, food inflation may be the only thing holding our economy above deflation. Meanwhile, the Associated Press recently compared the current level of poverty to where we were in 1965. Low to middle earners are getting squeezed by having to support more in government assistance programs as we reach unprecedented levels of government spending while hitting the proverbial earnings glass ceiling due to the tidal shift in American employment opportunities.
We, as a country are shifting to a new model of employment and compensation whether we like it or not. We will be increasingly compensated for our individual performance rather than as a group of employees. Union membership has declined by approximately 35% over the last thirty years to less than 8% of the workforce. Here is where the argument for the Oval Office needs to focus. The balance of power always swings from one extreme to the next.
The Industrial Revolution through WWII created too much wealth for too few at the human expense of too many. The Civil Rights movement and Lyndon Johnson’s War on Poverty provided the inflection point to get the pendulum started back towards the working public’s favor. We are now paying the Piper for the excessive swing of the pendulum due to the hubris of our entire nation. The promises made 20 years ago by domestic manufacturers to union members simply can’t be kept if the businesses are to remain solvent. This is what Greece, Spain, Italy and France are coping with on a national level now. This is also what burst the auto industry in 2008 and most likely, the European Union in 2013. At what point can the employer and the employee agree on compensation?
There are two primary points to look at going forward. The first is ideological. Can we quantify how much individual top end we’re willing to give up to shore up the bottom end of many? Currently, we arbitrarily institute a tax rate based on income, which will always create loopholes and cheats. The higher the tax, the more it will decrease the incentive for business owners and corporations. One caveat; remember that 40% of all new jobs come from startups. Therefore, maximum reward for taking the financial risk of starting a new firm must be sufficiently rewarding. After all, no one wants to give up his or her hard earned dollars for something they’ve created from nothing.
We could also institute a Value Added Tax (VAT). This tax is based on consumption and applied to an individual’s spending. It would be applied at the Federal level and paid on everything from soft drinks to legal counseling. High-income people would face the brunt of this tax as their incomes get spent on more high dollar items. Think in terms of imported automobiles, country club dues and professional services. This would work out to a percentage-based tax paid by those who have more, spending more. Those who spend more, pay more.
The second point is one of personal accountability. The manufacturing jobs are not coming back to the U.S. in their previous form. There are simply too many expenses associated with hiring American workers relative to the added value they bring to mundane tasks. There are however, great opportunities to sell our skilled workforce at attractive rates to European Union manufacturers dealing with 30 hour work weeks, socialized health care and full retirement packages at 60 years old, regardless of profession. However, Generation Y and the Millennials must be able to demonstrate their intellectual proficiency. This must also be supported by government stimulus spent rebuilding our infrastructure to move goods to market. This would also create domestic, value added jobs as the economy heals.
The housing bubble, the economic collapse and the Federal deficit can all be traced back to wanting more than we can afford. The U.S. may have the lowest personal savings rate of any developed economy. Unfortunately, not everyone can own a house, an iPhone and a big screen TV. Somewhere along the lines we as the general public began buying what the ad agencies were selling. Whether it was a new phone, a new car or, a new President we all bought into the pitch and that pitch has always been, “Buy now. Pay later.” Our personal savings rate peaked at 8.3% in May of 2008, its highest level since January of 1987, as the stock market took a swan dive. It’s time to square the ledger. Invest more. Spend less. Instead of arguing at the extremes of all or nothing, let’s take an honest look at the middle and try and budge that needle back into the black, for our families, our country and us as individuals.
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