A Tax System That Works!

My last blog was about comments President Eisenhower made when he was leaving office. He handed over the reins of government to John Fitzgerald Kennedy. I was impressed with his comments, but wanted to continue my thoughts on a tax system that works.

I have heard what Eisenhower’s tax rates were, 91%, and the first thing I thought about was what did people actually pay during his Presidency? I was born in 1950, so I really didn’t care, but my parents did. So I did a little research on the issue. First, let’s look at the marginal tax rate, or the percentage tax applied to one’s income. And for the sake of the inequality discussion, let’s focus just on the top income earners.

Under Dwight D. Eisenhower, the Marginal Tax Rate on regular income for wage earners over $400,000 was 92% at the beginning and 91% at the end of his Presidency. The highest rate was 94% during FDR’s Presidency. Nothing changed under JFK, While during Lyndon B. Johnson’s Presidency over $400,000 was taxed at a rate of 91%, while over $200,000 was taxed at 72.25%.

During Richard Nixon’s Presidency the tax for anyone making over $200,000 was 77% initially but reduced to 70%. Following Nixon was Gerald Ford, who did not change anything, however, it is interesting to note the Long-term capital gains tax rose to 39.875% during this time. It has not been that high since. During Jimmy Carter’s Presidency the amount taxed at the top rate was $215,400 and the rate was 70%. When Ronald Reagan took over he restructured the top tax rate from 69.125% on income over $215,400, to 28% on all income over $29,750. Now that is a significant tax cut. I think this is problematic, and I do not think it is fair to tax someone who makes a multimillion-dollar income the same amount I pay.

What did George H.W. Bush do in response to his “read my lips, no new taxes?” He raised taxes, at least on those who made more that $86,500. They paid a 31% marginal tax rate. When Bill Clinton took over The tax rate for those making $288,500 rose to 39.6%, and George W. Bush lowered that tax rate for those who make over $357,000 to 35%. During President Obama’s time in office there has been no real change to the tax rate, which stays close to the 35%.

Obviously over the 50 years since the time of Eisenhower the marginal tax rates on the wealthy have changed quite a bit. But it got me thinking about what the wealthy actually paid? This is called the effective tax rate. In other words after deductions how much do the wealthy pay?

In 1953 the effective tax rate for those who made $200,000 to $500,000 was 45.9%. If you made $500,001 – $1,000,000 your effective tax rate was 46.3%. If your made $1,000,001 and above your rate was 49.3%. In 1961, we are looking at 27.2%, 29.1%, and 31.5%. However, what the wealthy are effectively paying today is significantly less than the marginal rates. Especially when long-term capital gains taxes are at 15%. According to Joseph Thorndike and Martin Sullivan that those who made more than $100,000 paid less than 5% of the taxes collected in the United States during the 50’s. “A far smaller share of what the wealthiest shoulder today.”

However, we also need to understand what was going on in the world during Eisenhower’s time. American primacy was at an all time high. There was not a lot of opportunity outside of the U.S. There was competition from Europe, but it was still recovering from WWII. Japan had not recovered yet, thus U.S. manufacturing was leading the world, thus creating wealth for many people who owned the means of production.

Today we have an integrated global economy. Now the wealthiest can follow John Galt wherever he leads. Thus there is more of a push for lower tax rates, and when corporations buy companies in other countries and move headquarters to tax shelters we hear cries and accusations of being unpatriotic.

I am a firm believer that we need as little government intervention in our lives as possible. I also believe that government will take more no matter how much we give. But I also believe that in order to hold someone accountable to actions taken, or not taken, one needs something to be kept simple that one can understand it. This is where I think our tax system needs to change.

Why do we need marginal tax rates and effective tax rates? Why not have a simple flat tax. Why don’t we try establishing rates like these:
$400,001 and above: 45%
$200,001 to $400,000: 40%
$100,000 to $200,000: 20%
$50,000 to $99,999: 15%
$25,000 to $49,999: 5%
0 to $24,999: 0

We then charge a 20% on all long-term capital gains, and a corporate tax rate of 18% on all income generated by the company anywhere in the world. The question in my mind can we guess how much government revenue would this generate? In 2012 the top 1% had an income of $1,976,738,000,000. If we tax that at 45%, the revenue would be $889,532,100,000. The top 1-5% earn $1,354,206,000,000. This will result in $541,682,400,000. The top 6 -10% earn $996,955,000,000 if taxed at 20% will result in $1,993,910 in revenue. The top 10% to 25% earn $1,933,778,000,000 and if we tax those at a flat rate of 15% there will be a revenue of $290,066,700,000. Just in the top 25% the total tax revenue would be a total of $1.7 Trillion. This would be a 70% increase in revenue, and remember these are 2012 numbers. Add on to this corporate and capital gains taxes, and we have a system that will more than pay for it’s self and pay off our debt.

I don’t know if everyone would like this, but it could be a start. And with a simple flat tax we can pay for the programs we need to have in place. Will we be more like Sweden? I don’t know! But we do need to do something different. The current system is not working well enough and we are mortgaging the future of our grand children in the process.

And that is my thought for the day!

Lessons From Eisenhower

I have heard so many people say Eisenhower was this, or he was that. It is usually in the context of discussing how the tax rate for the wealthy was at 91% (However, I wonder how much they actually paid?). First of all, I think if they actually paid .91 for every dollar they make they are being cheated. I think all of us should hold our government accountable for the amount of money they spend. A great example is the state of Washington. We have incurred increased fuel taxes, property taxes, among others, and in the paper the other day it was reported that in 2017 there will be another budget shortfall. We have given the government more, but it still wants even more from us. Don’t get me wrong we do need to pay for government, but we also need to make sure the money is being spent wisely. Now let’s get back to the discussion I wanted to write about.

Eisenhower was out President from 1953 through 1961. He was a very popular President His top five accomplishments were, keeping America at peace, ending the Korean war, balancing the budget (not once, but three times), sponsoring and signing into law the Federal Aid Highway Act, and sponsoring and signing the Civil Rights Bill of 1957. However, I found his final speech before handing the Presidency over the John F. Kennedy very interesting. Following are some important elements I gleaned while reading his speech.

First, his relationship with congress started out bad, but ended up being one of cooperation working together for the national good. To me that seems critical for a good leader. Having the ability to create a shared vision that people can come to consensus. This doesn’t mean there is no debate, but there is recognition of a common good that all are working towards.

He described the United States as the “strongest, most influential, and most productive country in the world.” Remember, World War II had ended, the Asian and European supply chains were devastated, and we had emerged as a technological behemoth. This was the time of Eisenhower’s Presidency. An integrated global economy had not developed at this time, although there was trade, but it was nothing like today, nor did India and China have the technology and manufacturing capability that it does today. Basically we were the only game in town.

His desire was for the United States to “use its power for the interests of world peace.” This should be our common desire. Last week, Paris had a horrible event, and we were praying for Paris, but this week we have Mali, we should be praying for Mali too. May our political interests never be skewed just to the few!

I think every Republican and Democrat should be reminded of the next comment. In response to the many issues and needed actions he stated, “But each proposal must be weighed in light of the broader consideration: the need to maintain balance in and among national programs.” He identified this necessary balance as being between several elements: public and private economy, national and individual duties, and current and future needs. “Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration.” Come on Congress; let’s find some balance. Let’s figure out how to move forward in a manner where all can find the ability to be better next year than this.

The following comment I found extremely interesting, especially as a child of the 60’s. “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought by the military/industrial complex. The potential for the rise of misplaced power exists and will persist.” This danger is still prevalent today. Whether it is large corporations, large Unions, or some other elite, we must all pay attention. All that is needed is for good people to do nothing.

Eisenhower continued to warn America, “Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields, In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.” It seems to me he is warning of the influence of power associated with the purse strings.

It doesn’t matter who that powerful person is, “Yet, in holding scientific research and discovery in respect, as we should, we must be alert to the equal and opposite danger that public policy could itself become the captive of the scientifictechnological elite.” He seems to be identifying several entities that could destroy Democracy. When an individual or group has access and influence based on relational cronyism, Democracy fails.

And finally, “You and I, and our government – must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grand children without risking the loss also of the political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.” Amen to this. My generation has been the plunderer. It is time to think about the future that we want to pass on. I have eight grandchildren, another on the way, and I want them to have a meaningful life.

All of us must pay attention to the elements that Eisenhower warned us about.

And that is my thought for today!

What A Stunner!

There have been several events to occur that last few weeks that could be described by this phrase. However, it was the Rhonda Rousey headline that got my attention. I mean, there is the French tragedy, the issues of free speech on our campuses, and the upcoming Presidential election; all of which is worthy of comment and I am sure I will eventually tackle them. But for now, I want to discuss the Rousey event.

I have to admit I pay little if any attention to UFC. I think it is a barbaric sport, and I find it uncomfortable to watch. However, there are some who enjoy it, and I am not criticizing those folks, just stating my own preference. I exercise my power of choice to turn it off, or not watch it. This is my philosophy about a lot of things. I make my own decisions on what I buy or watch on TV or in the movies.

However, I am always interested when someone is described as dominant, because they are heading for a great fall, especially if they begin to believe what the press writes about them. There is always someone faster and stronger. That may have been what happened with Rousey.

Jason Gay in the WSJ made a comment that I think is very true, “Her aura will be different now –she is no longer indestructible – but this also means we should get to see the good stuff, the fortitude and will you don’t always see when everything’s fun and shiny and the planet seems to spin for you. Now we get to find out what’s really there. Now we learn more about Ronda Rousey and the UFC.”

I agree with Jason Gay’s statement because it is a universal truth. It is not what we are like when things are going well that demonstrates our true character; it is what we do when we fail, or when something bad happens to us that defines us.

In the world of entrepreneurs failure is a reality. Entrepreneurs are like baseball players. In baseball, a batting average of .300 is a good number. Have you ever thought about what that means? That means that 2/3 of the time the batter has failed. However, the batter comes back and tries again. Entrepreneurs are like that they fail but keep on going, at least the entrepreneurs with a sustainable track record.

Therefore, the lesson from Ronda is not that she failed and turned out not to be as dominant as once thought, but coming back and trying harder next time. Maybe! Maybe the lesson is with all of her other endeavors, movies, books, etc., that she has done her job in the UFC arena, and now can go on and raise awareness for something else? I don’t know Ronda Rousey, so I can’t answer that question for her. Only she can!

Now we watch. Obviously if she chooses to pursue a rematch, there will be a lot of money involved. And, other fighters have lost and come back to win, so there is precedence. It is her choice and not ours. Personally, I think she will fight again, and she will be victorious. We’ll see!

Now lets apply this to leadership. Good leaders are like this; they get knocked down, but keep their wits about them, get up and keep moving forward. There may be adjustment, new direction, but they will always move forward. There is a quote from Teddy Roosevelt that I think illustrates this well:

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes up short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself for a worthy cause; who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory not defeat.

So Ronda, I hope you rise up and defeat your foes. This will be a great example to the many young people who look up to you. Your foes may be UFC fighters, or it may be new foes in other arenas, but rise up and be victorious. Quiet those “cold and timid souls who know neither victory or defeat.”

Personally, I want to be one of those folks that tried, failed, tried, but kept on moving forward. Ronda and Teddy thank you for some great lessons. I hope we all get it, and stop the tendency in our society to choose the easy road that is wide and leading to destruction.

And that is my thought for the day!

A Fading Faith In Capitalism

Wow! It has been several months since I have sat down to write something down. The semester has been very busy, and many events have occurred. There have been moments of great stress and moments of wonderful elation. I continue to grow as a person, teacher, and man. The lessons have been many and varied, but I would not trade them for anything.

Today I have renewed my desire to blog. I have realized that I just need to commit to writing. If I don’t, I won’t. You might ask, why now? What did he read to get himself going again? It was a Wall Street Journal article titled “A Fading Faith In Capitalism.” As I read it, I have to agree. The issue of economic inequality is eroding the confidence we once had in our economic system to the point that many are willing to accept something else. To me this is troubling.

The author, Tim Montgomerie, has created a very interesting argument about the reducing faith in economics. He discussed how other countries see Capitalism. He analyzed data collected by the firm YouGov for the “London-based Legatum Institute.” It appears the people in India have a high level of confidence about their future. 50% of the people surveyed felt that the next generation will “probably be richer, safer, and healthier than the last.” Thailand was next at 42%, 39% in Indonesia, 29% in Brazil, 19% in the U.K., and 14% in Germany. What I found most interesting was the data for the United States. Only 14% of the people surveyed in the United States felt like the next generation will be richer, etc.

However, as Angus Deaton argues in his book, the world is getting richer and healthier. So, is the feeling that the next generation will not be better a reality or is it a figment of a populist belief created by the media?

According to the World Bank Data, 100,000 people are being lifted out of poverty each day. Also, “natural disasters are killing fewer people and fewer crops are failing.” Hmm, in the United States our unemployment numbers are being reduced, and the numbers I saw this morning give an indication that the workforce participation rate has slightly improved. As a result the Fed will probably raise interest rates.

Despite all of this improvement, 55% of Americans think the rich get richer and the poor get poorer. 65% of us “think most big businesses have dodged taxes, bought favors, or polluted.” And only 49% of us “think free enterprise is better at lifting people out of poverty than government.” On one hand I need to ask, what would you replace a system of free enterprise with? But on the other, I have to say that these reflect very real events.

I tend to agree with Winston Churchill who once said “that capitalism is the absolute worst economic system – except for all the others that have been tried time to time.” I also share John Mackey’s concern about the “sustainability of the free enterprise system if large numbers of voters come to think of businesses as basically a bunch of psychopaths running around trying to line their own pockets.”

But what can business leaders do to change this misconception about business? First of all, business leaders need to be concerned about this. There is nothing more ubiquitous than business. As much as people want to deny this, we are all involved with the practice of exchange. Something so critical to our society must be done correctly. Business leader’s actions should reflect ethical practices. Business leaders must demonstrate responsibility to all of its stakeholders. I truly believe that if business worked at limiting pollution, we would have EPA regulation than what we have and we would have a more pristine environment. Business is not some inhuman entity it is organizations run by people.

I believe, as John Mackey does, that business should focus on both maximizing purpose and profit. I do realize that one cannot please everyone, but moving towards this type of business model is the right thing to do. Montgomerie states that Southwest Airlines, Google, and Whole Foods are three companies that are living a mission that represents a triple-bottom-line mentality. Doing and portraying a social and economic purpose will do much to repair the bad press that free enterprise has earned.

There are many examples of very large companies, and their lobbyists, that give free enterprise a bad name. And as Montgomerie properly states, “many big businesses see close connections with government as part of their purpose and as a blessing rather than a curse.” I agree with the writer because crony capitalism destroys free enterprise and its benefits. I also agree with Joseph Stiglitz who has coined the phrase “socialism for the rich,” to describe the process of government protecting the market status of certain businesses.

Montgomerie argues that the first thing needed to change the perception people have in this country about free enterprise is to ensure the same rules apply to all. I agree! “For capitalism to enjoy the public’s confidence, we need a system where the rich can get poorer as well as the poor richer.”

As I read this article I thought about Robert Reich’s movie, Inequality for All. There is this great interview with Warren Buffet who states that his paying of a 13% tax rate for his capital gains is a travesty, which I agree. The deck has been stacked for too long and we need to restore a level playing field system to the market. I do think the rich will play a role in this. They, whoever they are, will need to see their responsibility to their neighbor. Many have.

Montgomerie ends his article with the question, “Which capitalists are still popular?” Each year, YouGov attempts to identify the most popular person in the world. The last two years it has been Bill Gates, who is now known as a “transformational philanthropist.” I really like that phrase.

So what is my take away? First of all, dogmatic arguments of how we are to fix our nation, liberals saying we need to create higher taxes and redistribute income and conservatives saying we need to reduce taxes even more, have got to stop. Both of you are stupid and unless you start talking and figuring out how to do this we won’t improve. Attacking a system that has allowed so many in our country and the world to have better lives is counterproductive, but we must redeem the system from the evils that have emerged. And I used the word evil on purpose. I totally agree with Montgomerie’s concluding paragraph, “Those who are determined to restore faith in capitalism won’t just champion figures like Bill Gates and John Mackey. They will be tough on the crony capitalists who cheat emissions regulators or fix financial markets. When capitalism is seen to be both fair and effective, it can be popular again.”

We have a lot of work to do, but you know what, we can do it. I am very hopeful that we can find free market solutions to social problems, and we can have an effective government that operates as a suitable referee to ensure the game of business is played fairly.

And finally, this is my thought for the day!