What’s
Wrong Today:

Now that
corporations are people, they should be taxed like people. Corporate tax policy
is a toxic cesspool of sweetheart deals, lobbying, campaign finance and bad public
policy.

We are about to begin
a debate between the parties over corporate taxes as part of the fiscal cliff
and debt ceiling talks:

MSNBC reports that Democrats
have set forth terms for the next fiscal cliff skirmish: They want to match future
spending cuts with revenue increases by eliminating corporate tax deductions.

President Obama said last Saturday:

Sen. Dick
Durbin, D-Ill. on CNN, went further:

So, are we
talking about new revenue? Maybe not.  

The White
House’s policy
is to take the corporate tax rate down from 35% to 28% while making up the
difference by closing some large loopholes. The Treasury Department has also said
that loophole reform should be revenue
neutral.

Closing loopholes
appeals to everyone, even Republicans. Loopholes are provisions in the tax code
that exempt certain types of profit from regular taxation. For example,
multinational corporations can allocate profits to overseas operations and
reduce their tax liability by doing so.

The New York
Times editorial
 on January 7th made the argument that corporate tax
reform should also deliver higher tax revenue.

Why shouldn’t
tax reform be revenue positive?

In 2011, taxes paid by individuals made up
47.3% of Federal tax receipts while taxes paid by corporations were 7.8% of tax
receipts.
The
National Priorities Project’s chart below shows a long-term decline in
corporate tax receipts to the federal government compared to the steady share
of tax receipts provided by individuals. Another 33% of Federal tax receipts
are paid jointly by individuals and corporations in the form of payroll taxes.

Individual income
taxes make up a much larger share of all federal tax revenues than corporate
taxes do, in part because the total wages
and salaries of all Americans are much larger than the profits of all US
corporations. But, the share of federal tax revenue paid by
corporations has also declined substantially over time.

Looking at
the chart below, the effective tax rate
for corporations has fallen steadily from about 50% in the 1950’s to about 20%
today (chart on the right). The effective rate is the percentage of corporate
taxes paid, of corporate profits. While the stated corporate tax rate is 35%,
the actual rate paid by corporations is 20%.

So, when
Washington or Wall Street demagogue about lowering the stated rate from 35%, let’s
understand that few corporations are paying that today.

The chart
above (on the left) shows how nicely corporate profits have grown in dollar
terms since the 1940’s. Note that since the 1980’s, tax receipts have not kept
pace with the growth in corporate profits.

Corporate tax receipts have fallen from
around 4.5% of GDP in 1950 to about 2% of GDP today (see chart below). Back
in the 1960s federal taxes from corporations accounted for about 25% of all
federal tax revenues. Since the Reagan-era tax cuts in 1981, tax revenue from
corporations has provided less than 12% of federal revenues and are now ±10%.
During this period, corporate tax revenues fell from 4% of GDP to 2% since the
mid-1980s.  On this chart, the left axis is for the blue line that
represents corporate taxes as a % of GDP while the right axis is for the red
line, representing corporate tax receipts as a % of total tax receipts.

Based on the
facts, the tax reform conversation shouldn’t be constrained by revenue
neutrality. In fact, locking in
these historically low revenue levels, either as a share of GDP, total
receipts, or profits, would be yet another self-inflicted wound.

So, let’s
close a few Corporate Welfare loopholes:

·   Energy
companies lease almost 40 million acres of onshore land in the US and more than
40 million offshore. The government temporarily lowered royalties on oil pumped
in the Gulf of Mexico to encourage more drilling at a time of low oil prices. Oil
prices are now high, but royalty relief wasn’t rescinded, giving oil
companies a windfall of billions of dollars

·   The
mining industry leases federal land at $5 per acre and keeps all the gold,
silver, or uranium they find; we, the people, get no royalty payments at all,
even though metal prices have soared in the past 10 years

·   Farmers,
despite food prices at record highs, still get almost $5 billion annually in
direct payments, along with billions more in crop insurance and drought aid

·   US
sugar companies benefit from an import quota that keeps American sugar prices
roughly twice as high as they otherwise would be, handing the industry
guaranteed profits

·   State
and local governments give away $70 billion annually in tax breaks and
subsidies in order to lure (or keep) companies

·   The
government requires refiners to blend billions of gallons of ethanol into
gasoline annually, and hands out an ethanol tax credit. As a result, forty per
cent of corn acreage in the U.S. now goes to make ethanol. This jacks up food
prices, since less corn is grown for feed and table, and the environmental
benefit is dubious

·   The
benefit of patent protection is worth $100’s of billions a
year just to the drug industry

·   Pass
throughs of what used to be corporate income to the individual side of the tax
code, which takes advantage of lower capital gains rates, such as carried interest rules for investment companies

We live in an era defined by increasing corporate
influence and authority over the individual. The individual
has been supplanted in the political process by corporate money, legislative
influence, campaign contributions, even free speech rights.

Society
wants (and desperately needs) more tax revenues, but it also needs growth in GDP,
as that in turn grows tax revenues and general wealth.

Taxing corporations isn’t a panacea for our
current economic disaster, but the ideology that says when corporations
maximize shareholder value, society is enriched, is wrong on its face.

Taxing corporations
by ending Corporate Welfare provides some cash to help solve these problems:

We
live in a society in which the income among the bottom 99% of earners grew .5% slower than the economy grew overall,

Where
about 20% of young males are missing
from the labor force,

Where
our educational achievement is sliding down in the international standings, but
our students owe $1 trillion for their
educations,

Where
our health statistics for people under 50 are
the worst among rich countries,

Where
our level of poverty is the worst
among rich countries,

Where
our infrastructure is crumbling
and is poorer than that of our global competitors.

A strong military is indispensable to our
national security and to our leadership position in the world. Since 2001, defense spending has soared from $287
billion to $718 billion in 2011, including the primary costs of the
Iraq and Afghanistan wars.

Now that those wars are ending and
austerity is in vogue, the Pentagon will have to start tightening its belt. But
very few believe that the sequestration cuts will be in place after the next
round of “fiscal responsibility” negotiations in Washington.

The real question is: Is defense truly on the table as a part of the deficit reduction
plan, or are the deficit hawks also chicken hawks when it comes to the
defense department?

The
sequestration may not be the best tool for cutting the defense budget; cuts
should be based on rational planning. But the Pentagon spending debate is driven
by politics, including the legions of lobbyists for the military-industrial
complex. It is also ensnared in the military’s effort to fit the ideology (and tools) of past wars to the
present world.

Our
national security strategy must be based on current and future threats, not
past war doctrines.

Consider this:

The US has
more than 1,000 international
military bases and another 4,000
more in
the 50 states and Washington, DC. This empire of military installations is unprecedented
in history.

A thousand
locations should be enough, yet we continue to add to the string of pearls: We
are building a new base in Vicenza, Italy, near
Venice. It is Dal
Molin,
a base that the US Army is readying for the relocation of 2,000 soldiers from
Germany in 2013.

It will cost
the tax payers $500 million dollars to build. Now, this may be a
well-considered decision, but we rarely think about these bases, let alone how much of our tax money (and
debt) goes to build and maintain them. Dal Molin includes a
natural-gas-powered energy plant, a hospital, two schools, a fitness center,
dining facilities and a mini-mall.

So how
much does the United States Military spend each year on its global
presence?  Estimates vary, but the Tom Dispatch blog says that it pencils out to $170 billion per year, while
the Pentagon’s public estimate is $22.1 billion a year. $22.1 billion is
about as much
as the budgets for the
Departments of Justice and Agriculture and about half the State Department’s
2012 budget.

But the Pentagon’s
figure contrasts sharply with Tom Dispatch’s estimate and that of economist Anita
Dancs, who estimates costs of $140
billion,
almost $120 billion more than the Pentagon suggests.

So,
What’s Wrong?

The US
government spent
about $718 billion on defense and international security assistance in
2011, more than we spent on Medicare. That
includes the price tag for the wars in Iraq and Afghanistan, which came to $159
billion in 2011. It also includes arms transfers to foreign
governments. That $718 billion equaled 20% of the 2011 federal budget.

Defense spending does not include, however, benefits for veterans, which came
to $127 billion in 2011, or about 3.5% of the federal budget.

U.S.
defense spending is
expected to rise in 2012, to about $729 billion and then to fall in
2013 to $716 billion, as spending caps kick in. 

Here’s a
historical chart of US defense spending since World War II in
inflation-adjusted dollars. There’s a big spike for the Korean and Vietnam
wars. There’s another big ramp-up during the 1980s under President Reagan.
Defense spending was cut significantly during the Clinton years, then soared to
historically unprecedented levels after 9/11:

Source: WonkBlog

Two big
things are about to happen to military spending: The wars in Iraq and Afghanistan
are winding down. And given the 2011 Budget Control Act, the Pentagon is facing
both hard budget caps and the looming sequester that would further cut defense spending
by about $1 trillion over the next decade (compared to what was expected).

Source: WonkBlog

These are
serious cuts. Although, as the graph above from the Center
for Strategic and International Studies shows, even if the sequester
is fully implemented, which no one expects, the draw downs after Korea, Vietnam
and the Cold War were more drastic, even in 2013 inflation-adjusted
dollars. 

In January
2012, the Department of Defense unveiled its proposed budget for fiscal year
2013, giving us a look at how it would begin to deal with new budget constraints. As Danger Room’s Spencer Ackerman reported,
the Pentagon wanted to downsize about 100,000 human soldiers and ramp up
advanced weapons programs, including drones, bombers and missiles. They asked for a budget of $613 billion.

Yet, in
December 2012, Congress passed its own $631
billion defense appropriations bill, more than the Pentagon had asked. Weapons systems that the Obama administration wanted to retire, such as
three Navy cruisers, were kept in.  

The
Wrongologist proposes three places to consider very large cuts:

1. The massive Military
base structure that costs $140-$170 billion/year

 

2. The F-35 Joint
Strike Fighter. The F-35 program is slated to cost $1.5 trillion over its lifetime:
Today, the use of manned aircraft is more and more limited, so few of our future
threats will call for it. Developing this plane has cost more than was spent on
veterans in the last 20 years

3.  Nuclear weapons: Our
policy is based on Cold War conditions that no longer exist. The Pentagon is expected to spend more than $700 billion on
nuclear weapons over the next 10 years, for questionable added security. The
former US Strategic Command Chief Gen. James Cartwright has called for a drastic cut in nuclear
weapons, saying the US has a stockpile that is:

Conclusion:

Congress needs the political resolve to kill unnecessary
and expensive projects. Mr. Obama could use a shot of courage too.

In
2008, a
National Intelligence Estimate declared the economic crisis, not terrorism,
was the greatest threat to national security. Former Chairman of the Joint Chiefs, Adm. Mike Mullin, along
with other senior military leaders, have endorsed that assessment.

As
retired Gens. Robert G. Gard and John Johns told CNN:

In
the last decade, we have fought two expensive wars that Congress never paid for.
That has been a large contributor to our precarious economic position.

As
Congress attempts to clean up its own mess and prevent sequestration, the Pentagon budget must be on the
table.

Instead of buying
new toys that we keep in the garage, let’s spend some of that dough to provide education and job training
to veterans. Recent congressional refusal to approve such a jobs program is a
disgrace.

(Full disclosure: The Wrongologist holds a
significant investment [for him] in a major defense contractor)

For those who may have questioned yesterday’s statement that it will take 5 years to
get to a 6+% unemployment rate, try it yourself with the Federal Reserve Bank
in Atlanta’s handy calculator.

You enter
your target unemployment rate (say, 6.25%) and how many months until you expect
your target unemployment rate to be achieved (60) and the calculator tells you
the average monthly change in payroll employment needed to achieve that target
rate.

You can
also change the Labor force participation rate and average monthly population
growth rate. I used 6.25% target rate achieved in 60 months at a labor force
participation rate of 63.8%. The result was 143.5k jobs/month, very close to
the average of 150k jobs/month we have averaged for the past 24 months.

Try it at: http://www.frbatlanta.org/chcs/calculator/

 

What’s
Wrong Today:

Paul
Krugman says
that minting a trillion dollar coin is preferable to negotiating with Mitch
McConnell and John Boehner on increasing the National Debt Limit.

He suggests
putting an image of Mr. Boehner on the coin.

The
Wrongologist does not agree with any of this, but large coins have had success
in the past. Consider Batman and the Giant Penny:

The
Giant Penny was in the background of the Bat Cave in Batman: The Animated Series. It was
once used by the Batman’s enemy, Two-Face. Two-Face and the “Two-Ton
Gang” captured Batman and tied him to the Giant Penny. The Penny rested on
an over-sized coin-flipping machine. Two-Face boasted that was a “heads I win,
tails you lose” situation: If the coin landed on the side Batman was tied to,
then he would be crushed, but if it landed on its clean side, the impact would
break every bone in Batman’s body. Two-Face activated the flipping device and
the Penny sailed through the air. But, the Batman had managed to pilfer
Two-Face’s lucky coin and used its jagged edges to cut through his ropes.

The
Giant Penny landed on two of the villain’s henchmen.

Maybe
THIS is Mr. Obama’s big idea for his 2nd term: Crushing his
opposition!

What’s
Wrong Today:

December’s
BLS
unemployment report showed that we gained 155,000 total nonfarm payroll (NFP)
jobs. October was revised down by 1,000 to 137,000 jobs and November was
revised up by 15,000, from 146,000 to 161,000 jobs.

While some
in the press are saying that this is a good report because it exceeded
economist’s expectations, it represents more of the very weak job growth that
America has experienced for the past two years.

It is time
to bring more perspective to the problem of unemployment in the US: Our ongoing employment crisis just hit its
5 year anniversary:

Since
the start of the Great Recession in
December 2007, we are still down about 4 million
total jobs, of which 3.51 million are private sector jobs (shown above).

In 2012,
the US gained 1.84 million jobs. In 2011, the US also gained 1.84 million jobs.
So, job growth did not change this year. This tells us that we will need 2 more years of the same growth in jobs to
get back to our pre-recession jobs level.

But
even that won’t be enough:

• We
  have about 12.21
  million people currently out of work, of which 4.8 million are the long
  term unemployed. These are Americans who
  really need a job.

•  About
  2.7 million people
  are expected to graduate in 2013 with Associate’s or Bachelor’s degrees. Some
  of them already have jobs, but they all expect to move to a better position
  with more education. This means we
  need to add about 225,000 jobs/month just to employ these graduates.

To
meet these jobs requirements, we need to average a growth of much more than the
150k jobs per month we have seen for the past 24 months. Yet only 3.7 million jobs are available
in America, against the current need of 12.2 million.

So,
December’s 155k just doesn’t cut it as a good monthly jobs number. We need a massive
rethink of jobs creation.

Will
anything change? The status quo suits the Corporatos
just fine. Corporate profits are the highest in history, the Dow Jones average is
within a
few hundred points of the all time high that we hit in 2008.

But it could easily take 5 more years to return to the number of jobs we had in America in 2008.

And
that would probably still leave us with 6+% unemployment rate, since we will
continue adding new entrants to the workforce between here and 2018.

All this means we are
looking at another 5 years of low economic growth. That means lower tax receipts from
individuals, not simply because we made the middle class tax cuts permanent,
but because median income is stagnant and number of our citizens who are
working is also stagnant:

In
fact, the ratio of people working to total population hasn’t been this low
since October of 1983.

So,
low economic growth, high unemployment, stagnant wages and tax receipts, persistent
calls to weaken the social safety net: It seems very shortsighted to be talking about weakening the safety net when we have 12+ million out of work, another 5+ million working part-time who are seeking full-time work and 40+ million people below the poverty line.

Permanent gridlock in Washington brings nothing concrete to the discussion either.

All
this will lead to slower GDP growth than we have seen historically:

This
chart shows that real GDP growth has been less than 2% annually in the past 20+
years. Imagine what society will look like with growth that averages half that level.

Our
economy is highly dependent upon consumption. More than 70% of what the US GDP
is personal
consumption. Remember the formula for GDP:

C
+ I + G + (X – M) = GDP

C
is personal consumption, I is Private Investment, G is Government Expenditures,
and (X-M) is exports minus imports.

Personal Consumption is more than consumer purchases. It
includes health care expenses, financial services and much more. In 2011, Personal
Consumption was $10.73 trillion of the $15.10 trillion of GDP. Personal
Consumption is divided into goods and services.

Goods contributed
$3.6 trillion in 2011, nearly 25% of total GDP. This includes durable goods, such
as autos and furniture at 7% of GDP. It also includes non-durable goods, such
as food, clothing and fuel. This was 16% of GDP.

Services were $7
trillion of GDP 2011, 46% of GDP. This is much larger than in the 1960s,
when services contributed less than 30% to the economy. A large driver of this
growth has been the dramatic increase of the financial services and health care
industries.

It is starting to look like we have
to expect lower GDP growth and continued high unemployment.

Better
economic conditions are not going to happen spontaneously. Change isn’t going
to be given to us by those who enjoy
the benefits of the status quo. Their
methods have been operating for 40+ years and if measured against the gains made
by the average citizen, have failed. 

And there are consequences to their failure, stupidity and greed.

Can we get past the status quo to create a better world, a world
in which the vast majority are healthier and doing work they care about?

Do we want a society without broad participation
in prosperity? Where economic growth is measured at 1% per year?

 

Next, we will look at what a low
growth, high unemployment future means for America.

For those who fear the number 13: Remember that the 113th Congress convened on 1/3/13…

What could possibly go wrong?

As you know, the Wrongologist has been away from the PC. He was doing the bidding of Ms. Oh So Right, mostly by renovating her home office. This stuff happens when both members of a couple work from home.

Normal posting returns on Monday.

In the meantime, here is why we should be against relying on corporate investment as the sole answer to our economic doldrums:

What’s Wrong Today:

“A house divided against itself cannot stand”-Abraham Lincoln, June 17, 1858

Lincoln didn’t mean it in this context, but we are at a point where the Speaker of the House does not have the ability to bring his caucus along to make any compromises on the budget.

In his Washington Post column last Sunday, E.J. Dionne said:  

This is very similar to what Eric Hoffer wrote in his book, The True Believer, in 1951. Hoffer says:

To assess the lay of the land for the continuing fiscal negotiations in Washington, Ed Kilgore of the Washington Monthly thinks we need to understand what the Tea types really want.

In the summer of 2011, Speaker Boehner quashed efforts by Rep. Jim Jordan (R-OH) to rally support around the Tea Party’s preferred “Cut, Cap and Balance” proposal in the
debt ceiling debate. Instead, Boehner signed onto the deal that led to the present “fiscal cliff” impasse while the Tea Party bore the burden of blame.

What did the “Cut, Cap and Balance” proposal say?

1. Cut – Make discretionary and mandatory spending reductions that would cut the deficit in half next year.

2. Cap – Create statutory, enforceable caps to align federal spending with average revenues at 18% of Gross Domestic Product (GDP), with automatic spending reductions if the caps are breached.

3. Balance – Send the states a Balanced Budget Amendment (BBA) with strong protections against federal tax increases and a Spending Limitation Amendment (SLA) that aligns spending with average revenues as described above.

So, What’s Wrong?

The “Cut, Cap and Balance” Pledge was signed by 12 senators and endorsed by the viable GOP presidential candidates in 2012, including Mitt Romney. It made all three elements a condition precedent to support for any debt limit increase.

By the way, it requires constitutional amendments to pass both houses of Congress. A constitutional amendment isn’t happening unless and until a few more 2010-style GOP landslides occur.

So these guys are not simply for a temporary “hostage-taking” involving the debt limit, but the kind where the hostages are resettled in another country. In the context of hostage taking, consider the impact of another impasse about the debt ceiling increase: It probably leads to another downgrade in our credit rating. If it does, we should be questioning Republicans’ patriotism. This time, they know the damage they are doing to the country, so they could be branded economic terrorists.

The Political Reality of the Teas:

The Teas aren’t simply trying to push the country towards their policy priorities. The whole idea and rationale for the revolutionary trappings and rhetoric is the permanent repeal of much of the domestic policy legacy of the twentieth century.

For the most part, they have little to fear from voters back home. There is no price to be paid for intransigence, though in
most cases there is a big price paid for exhibiting reasonableness.

So that’s who and what we are dealing with. And there are enough of them in the House to keep Boehner from showing much reasonableness either. As Nate Silver at the 538 blog says, the next Congress will not make a fiscal cliff deal easy for Mr. Boehner:

Silver says in a more recent blog:

In this environment, Congressional Republicans have little need to build coalitions with colleagues with different political preferences or values. Twenty years ago, coalitions
mattered. Today, few members of Congress are conservative on fiscal issues but liberal on social issues, or vice versa.

 

Given the policy
of the Republicans to hang tough and refuse cooperation with Democrats or allow
any modification of its core ideology, there is no way out of paralysis in
Washington that doesn’t involve surrender by one party as a sort of
patriotic sacrifice. The alternative is that one side or the other, achieves enough power to make bipartisanship efforts largely unnecessary.

 

What “enough power” means depends heavily
on whether filibuster reform is undertaken and achieved in the Senate and if
the Hastert rule is suspended in the House.

 

Otherwise,
we are an ungovernable country. Only one thing fixes the polarization: A real
governing majority in 2014.

 

A
few final observations:

 

The number of seats
in the US House was increased in nearly every census until 1910 and has not
been increased since. Along the way, the average population per district has grown by
three times.

 

So,
we now have large geographic congressional districts with large populations. Large
districts require expensive campaigns, making Citizens United indispensable to congressional candidates.

 

We should consider making
the districts smaller by adding more seats in The House.

 

There
are no post postmortems of disasters where
the major cause of the disaster is a failure of imagination.

 

This
current crisis in our American democracy ends only if those with the ability to
do something about it (that means you, voters) have the imagination to recognize these Republicans and fellow-traveling
conservatives for what they are:

 

 

A marriage
of dominionist evangelical Christians, John Birch holdovers, Libertarians and Dead
Enders who have wrapped themselves up in a constitution they haven’t read,
mouthing economic theory they do not understand.

The
ultimate Xmas comment on Plan B:

And here is the Wrongologist’s
stocking stuffer of the year, from the knockknockstuff catalog. A WTF stamp for those useless items
that clutter your inbox, like the text of Wayne LaPierre’s
press conference:

We got a dusting of snow last night and it
was snowing lightly as we opened presents this morning. The Wrongologist had ordered
more snow, but was told that everyone wanted some, so it needed to be spread
around and that was all he could get.

Like most people, the Wrongologist is
seeing family and friends over the next few days. More likely than not, there
will be songs sung in the key of off; by a sib, a child or a grandchild.

Most years, he and his brother sing this song:

“Christmas time is here, by golly

Disapproval would be folly
Deck the halls with hunks of holly,
Fill the cup and don’t say “when.”
Kill the turkeys, ducks and chickens
Mix the punch, drag out the Dickens
Even though the prospect sickens,
Brother, here we go again.

On Christmas Day you can’t get sore
Your fellow man you must adore,
There’s time to rob him all the more
The other three hundred and sixty-four.

Relations, sparing no expense’ll

Send some useless old utensil,
Or a matching pen and pencil
“Just the thing I need, how nice.”
It doesn’t matter how sincere it
Is, nor how heartfelt the spirit.
Sentiment will not endear it
What’s important is the price.

Hark, the Herald Tribune sings,

Advertising wondrous things.
God rest ye merry merchants
May you make the Yuletide pay;
Angels we have heard on high,
Tell us to go out and buy.

So let the raucous sleigh bells jingle,
Hail our dear old friend Kris Kringle.
Driving his reindeer across the sky,
Don’t stand underneath when they fly by” 

Title: A Christmas Carol

Artist: Tom Lehrer

Merry
Christmas, Happy Festivus, Happy Chanukah & Happy New Year to All-Let’s
hope the division in our country is somehow healed.

And that peace on
earth, good will to humankind goes viral in 2013.