Gambling with Monopoly money

In TaxVox, Eugene Steuerle has an essay today on Multi-Trillion Dollar Fiscal and Monetary Gambles.

Read Collusion by Nomi Prins to understand the monetary gamble. Current monetary easing on a global scale is creating money for the wealthy to play with. It has not been injected to Main Street. That was only financial stimulus, not economic stimulus. It did nothing after the Great Recession but protect wealth so that the bankers rewarded themselves, like the rich always do . The only injection is for their servants and toys.

I call this rent seeking, monetary style. The new scam to play with all that monopoly money is Bitcoin. If the monopoly players keep it to themselves, it does not affect the economy. Call it MMT for the wealthy.

This build up is only a problem when it becomes a pyramid scheme. When the rich get out, we all figure out that the new asset is worth nothing. Those at the bottom of the pyramid are holding the bag.

Why does this happen? Capital gains are taxed at 20%. Whenever they are that low bubles happen. The way out is to tax them at a higher rate.

To make more monopoly money, Mulvaney wants to make those rates lower by creating by unilaterally indexing capital gains taxes.

Asset price growth is all inflation. More money chases the same assets their price goes up. In finance, this creates a need for more junk. It can be spent down in luxury goods or sold to the masses. Because the money is fake, the Fed creates money for the middle class to buy the junk assets. When the assets crash, the Feds bail out the big banks and the middle class is holding the bag.

If the middle class borrowed to get real stuff, their debt outpaces their income and it all crashes. Then liquidity becomes an issue and the working class cannot get their real money. Panic ensues and real people get hurt. More fake money is created and the poor are holding the bag.

On the fiscal side, if we have increased spending, bond sales take away some or all of the injection into asset inflation caused by tax cuts.

Deficit hawks eventually swoop in and demand cuts in spending and taxes to keep people working harder and longer and increase make asset inflation possible again, this time with real money. They assure us that raisins taxes during a recession hurts the economy. Bosch.

Panic soon leads to regime change, but not too much change because the wealthy control both sides. The rich used some of that money to buy Congress. Even if Sanders or Warren get elected with small dollar support, until we have public financing, Congress will never do enough.

Enough what? Raising transfer payments and taxes on the wealthy to increase the real economy. This gives beneficiaries money to buy real stuff and results in growth. This could happen in the old regime, but that would mean more equality and less cheap labor. For reactionaries, that would be wrong.

To keep the poor in check, there must be an enemy to divide the lower classes against each other and not against them. Immigrants are the latest target. Trump may be more craven then stupid after all.

The answer is to end rent seeking before the crash. Increasing marginal taxs on CEOs and capital gains taxes on capital gains and dividends both end rent seeking. To really slow speculation down, scrap capital gains taxes and put in an asset tax. Set the rate at 22.5%, between the Democratic rate of 25% and the GOP rate of 20%. Cancel previous credit on taxes paid when the asset is gifted or inherited while waiving it when transferred To a qualified, broad based ESOP.

It turns out that there are really good tools to use in a recession. All we have to focus use them. If we use them now, we can prevent the crash in the first place, slowly and without disruption. If this is class war, make the most of it!

Counting the Debt

This still holds up:

A common theme in discussions of the national debt is the liability of individuals or families for its repayment, usually based on per capita figures, although none of these calculations are “official.” There is no place in the budget where individual liability for the debt is assigned. It is an obligation collectively held. This allows individual policy advocates to generate their own numbers, based on dividing either the total debt or the debt held by the public by the size of the population. While the amount of the national debt is fixed between auctions, debt clocks are in vogue which calculate the buildup of the debt on a constant rate based on the deficit. While this provides great dramatic effect, it is still incorrect. Population figures are also derived from estimated values based on the birth and death rates. Big brother is not watching that closely in real life.

The main value of the per capita debt figure is not public policy but public relations. This public relations campaign has sensitized many Americans to activism on this issue, often in ways that go against their individual interests, particularly in the area of entitlement spending. For example, the proposed budget advanced by the House Budget Committee suggests deep Medicare and Medicaid cuts, the former impacting anyone under 55 years of age and the former impacting the poor and state taxpayers – all in the name of reducing the debt without raising taxes – particularly taxes on the wealthy. The remainder of this essay examines whether the per capita debt figure is at all appropriate.

The size of the national debt and the federal budget as a whole began to balloon with the passage of the Sixteenth Amendment authorizing the taxation of income. Prior to this amendment, the direct taxation provisions in the United States Constitution, which apportion direct tax liability between the several states based on population enumeration, were never used because they would fall more heavily on poorer states and give less heavily on richer states. With the exception of the funding for the Civil War, which was funded by an income tax, revenue was raised from excise taxes and tariffs and government remained small.

The ability to incur debt is tied directly to the ability to repay it. As such, the appropriate way to measure individual indebtedness is in terms of individual tax liability. For the fiscal year just ended, individual income tax liability was $898 billion, while the national debt subject to limit was $15 trillion. This means that every dollar of tax liability produced seventeen dollars of liability for the national debt. Individuals owing no income tax liability owe no debt. Individuals with a million dollars in annual income tax liability owe more than seventeen million dollars in debt. Even if progressive income taxes were replaced with flat income taxes, the ration would remain the same, although the distribution would change (although most flat tax schemes still exempt tens of thousands of dollars of income at the low end of the scale).

The alternative to linking debt liability to tax liability is to distribute it among the states based on population enumeration – either on a per capita basis or as a function of the number of legislators apportioned. At the end of 2010, per capita liability was $50,000 per resident, not counting the residents of the District of Columbia, who have no representation and therefore cannot be taxed on a state based levy. The debt liability allocated among the 435 voting House members is $35.5 Billion per district. Table 1 compares the tax liability for citizens in each state based on income tax liability with per capita and House district liability.  Click on the table to see how your state fares.

Column two is the amount of individual tax liability in each state. Column two is the number of people. Column 3 is the number of House seats in the state.  Column 4 is the total liability for the debt as distributed by income tax liability.  Column 5 is per capita debt liability for each state and column 7 is per house member debt liability.  Column 6 hows how much states owe using per capita liability as compared to income tax liability.  Column 7 compares per House member liability to income tax liability.

This allocation illustrates why a direct tax based on census enumeration was never implemented. Richer states tend to owe less, and in the case of Connecticut, quite a bit less, on a per capita basis than on an income tax liability allocation of the debt. Meanwhile, the poorest states, like Alabama, Mississippi and Arkansas, owe much more on a per capita basis than on an allocation based on income tax liability. It is ironic that those states where the populace is most against income taxation benefit the most from an income tax liability basis for allocating the debt, even though such an allocation is clearly in their interests.

Most individuals are also better off when debt liability is a function of income tax liability. Those who pay no taxes have no liability. Filers between $50,000 and $75,000 have an average tax liability of $5,590, yielding a debt liability of $96,151. For a couple or an individual with one child, that is roughly equal to the $100,000 in debt liability calculated on a per capita basis. However a family with the same tax liability and two parents with two children owes twice as much on a per capita basis. Adding children with an income tax based liability actually lowers or eliminates liability as exemptions and credits add up too, however on a per capita basis, liability for the debt increases with more children. While in the long term, more children will mean more liability on an income tax basis that is only realized when the children begin earning money on their own, not in the current year.

In the long run, both the national debt and our obligations for retiree income support and health care are easier to meet with more children now who will become tax payers later, so perhaps the real solution to this crisis is to give families more money while taking tax subsidies from the wealthy, most especially the home mortgage and property tax deductions. Ending these deductions could buy enough tax revenue to fund a $500 per child per month credit, which would inevitably raise the birth rate while increasing the demand for housing, although the mix will be changed somewhat.