The Race We Better Not Lose!

The National Post, a Canadian conservative newspaper, published a telling article January 30, 2010, Poverty stalks the middle class. The article was about the United States, not Canada. The article was based on a 43-page report from the U. S. Department of Commerce, issued January 25, 2010. The report concludes:

It is more difficult now than in the past for many people to achieve middle-class status because prices for certain key goods — health care, college and housing — have gone up faster than income, the report says. Extra medical bills or higher family expenses for child care or elder care can easily make a middle class lifestyle unattainable.

Wages are up 20% over the last 20 years, while housing costs are up 56% and healthcare costs are up 155%. Interviewed for the article, Elizabeth Warren, Harvard University, commented: “America today has plenty of rich and super-rich. But it has far more families who did all the right things, but who still have no real security.” Utah’s Community Action Partnership released its annual poverty report August 19, 2009. Its executive director summarized, “The biggest thing we see in the report is the falling of the middle class into poverty.” ABC World News released a poll on March 15, 2010, concluding that 4 out of 10 middle class Americans are struggling.

A big factor: educational attainment. Among middle-class Americans with college degrees, 75 percent say they’re “comfortably” middle class or even moving up; 25 percent are struggling. But among those without a college degree, this poll for ABC World News with Diane Sawyer finds that about twice as many, 49 percent, are fighting to hold their place. (Education relates to income, and it’s less well-off people in the middle class who are more likely to be struggling to stay there.)

Search the web. The middle class struggle reports, the studies, they’re overwhelming: America is loosing its backbone, its middle class.

Where did the middle class go? Certainly, a lot of middle class jobs have been lost to countries overseas, with lower labor costs. Politically, there are demands and promises to bring jobs back to America. But, there are strong underlying factors that are preventing any such thing. And there appear to me to be other, equally serious factors that stuff the middle class down rather than allow it, like cream, to rise to the top. Let me be political for a moment or two. This discussion is not likely to make me popular with my colleagues, but the issues are severe and consideration an absolute necessity for each of us and for our country.

We Americans are experiencing a political revolt against government. Witness the rise of the Tea Party Patriots. Its slogan is simple, “I want my country back.” CNN reports that the Tea Party activists tend to be male, rural, upscale and overwhelming conservative. If we look at the conclusions from the commerce report above, Tea Party Patriots don’t seem to fit the description of the suffering middle class. They fit the rising upper middle class and the wealthy class, at least for the most part.

So, what kind of country do the Tea Party Patriots seem to want back? Polls indicate that the Patriots want taxes cut and they want less government; however, those on Social Security are not inclined to reduce or give up benefits.

Let’s set aside the paradox of the desire to keep benefits and yet minimize taxes; and let’s take a look at income taxes. In 1913, the marginal top income tax rate was 7% on incomes over $500,000. At the peak of World War II, top rates were 94% on incomes over $200,000. Rates started to come down in 1964 (77% over $400,000), dropping to 35% in 2003 on incomes over $311,950. The Wall Street Journal reports that the top 400 individual taxpayers got 1.59% of the nations household income in 2007 and paid 2.05% of all individual income taxes for that year. Their effective tax rate was 16.6%, lower than in any year since the IRS began to make reports, and less than 50% of the top bracket of 35%. To be in the top 400, your income would have to exceed $138 million. The top 5% of income earners ($160,041 and up) paid 60.63% of all personal income taxes. The top 50% paid 97.11% and the bottom 50% paid 2.89%. There’s some indication, with our down economy, that 47% of Americans will pay zero income tax for 2009. It’s not hard to raise an eyebrow and wonder if we haven’t become a nation of a few taking care of the many. Certainly, that sort of thing flies in the face of Ayn Rand’s Objectivist philosophy (the Art of Selfishness), frequently on the lips of some of the Patriots and others on the far right.

As we think this through, let’s look at a couple of important factors. An April 1, 2010 article in Forbes is titled, What the Top U.S. Companies Pay in Taxes. The shocking conclusion is not very much. Take General Electric. GE earned a measly $10.3 billion in pre-tax income last year. GE filed a tax return of some 24,000 pages, but the end result is that it paid no U.S. income taxes at all and actually claimed a U.S. tax benefit of $1.1 billion. Why? Its manufacturing operations are overseas, in low tax, or no tax, countries. Forbes concludes, “But it’s the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us.” Tax economist Martin Sullivan estimates that U.S. companies keep at least $28 billion a year out of the reach of our Treasury. How will our middle class get its jobs back when our tax structure is structured as it is? No way, in my estimate.

There is another factor perhaps even more important. Lee Hindery’s telling Business Week article, Why We Need to Limit Executive Compensation, deserves a careful reading.

Confronted with the daunting array of economic failures confronting the nation, it may seem improbable for me to say that excessive executive compensation is one of the issues needing the early attention of the next President and next Congress. Yes this particular cancer—which has been growing exponentially for almost two decades—is at the core of many of our nation’s economic ills. And it is a cancer that the average worker finally understands. During the worst days of the recent stock-market, bank, and credit-market upheaval, a raw nerve was struck on Main Street when workers generally became aware, many for the first time, of the huge salaries being earned on Wall Street and on other streets far removed from Main Street.

In 1982, CEO’s on the average made 42 times the compensation of the average worker. In 2004, the average CEO compensation was 431 times the compensation of the average worker. It hasn’t dropped since then. In fact, you may recall, a prime reason those banks that took bailout funds in the past couple of years from the Treasury suddenly decided they didn’t need the money was that taking the money would limit executive compensation. Little wonder that in 2007, the top 1% of American households owned 34.6% of all privately held wealth. Warren Buffett, chairman of Berkshire Hathaway, has warned that the ability of corporations to rein in CEO compensation is the “acid test” of necessary corporate governance reform. Lee Harris has written two provocative books, The Next American Civil War and Civilization and Its Enemies. He writes,

We have recently lived through a period that defined liberty in terms of Horace’s maxim, Carpe diem! Freedom meant to seize the day and to do whatever you wanted to do with it. But the carpe diem ethos is the enemy of the tradition of independence. … Today we are sobered to the realization that our embrace of the carpe diem came at a terribly high price – it led to an economic crisis and crash.

We should all be concerned about the extinction of our most important specie, our middle class, long considered the backbone of our nation. We should all be concerned about the deep and growing split in our country between the wealthy and the shrinking middle class and the growing poor. We should all be concerned about a tax structure that encourages our companies to carry on their operations off shore, penalizing our workers, our middle class. We should also all be concerned by the lack of discipline in corporate governance and the great disparity between executive and labor compensation levels. Some advocate a need for socialism; and there is a “red/green” movement alive in America. But, we are a nation that has championed individual rights and have rewarded individual effort. That fundamental idea should not change. But there must be discipline, concern for the rights of everyone involved, careful thought and long-term thinking when it comes to our execution. We will not succeed if we stuff the middle class down and skew the benefits for the few at the top. As Harris concludes,

“But in our era the triumph of the carpe diem ethos has led far too many of us to think into thinking that selfishness really is all the virtue that a materially prosperous society needs. … (S)ociety needs sold moral foundations …”

That’s how we design an income tax system that encourages jobs here at home. That’s how we discipline ourselves to fairly balance compensation among executives and workers, which will also result in an equitable allocation of income tax responsibility. That’s how we keep our middle class from further extinction. But the world’s events move fast. Time is painfully short. Yet, that’s a race we dare not lose.

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