9/26/2012 1:55 PM ET|
Why Romney's 47% matters so much
Presidential contender Mitt Romney's dismissal of 'dependent' Americans who don't pay income taxes actually highlights our most critical need: more jobs that pay enough to make ends meet.
Mitt Romney speaks to the delegation at the 2012 Republican National Convention
Mitt Romney's 47% problem just won't go away. A week after Mother Jones magazine released a spy-cam video of the GOP contender writing off the 47% of the population that doesn't pay federal income tax, the politicos are still buzzing about it.
Romney's comments were incendiary. He lamented that nearly half of Americans are "dependent upon government" and "believe that they are victims" and that "they are entitled to health care, to food, to housing, to you-name-it." He added that there was nothing he could do to "convince them they should take personal responsibility and care for their lives."
Coming from a guy who could moonlight as petrified wood and is routinely criticized for lack of conviction -- and for not releasing much of his own tax data -- it was a rare glimpse of honest opinion. But it also touched raw nerves among members of both ideological extremes.
On the left, it played into their fears that Romney wants to cut benefits and raise taxes on seniors, the poor and the middle class. On the right, it echoed worries that a tyranny of the majority wants to increase government largesse at the expense of a narrowing base of wealthy taxpayers.
Both sides' fears are valid, to some extent. And Romney's comment about the 47% ignores important details, such as the fact that the working families who make up a large portion of those not paying federal income taxes do pay payroll, state and local taxes.
Here's the thing: This election isn't about tax cheats and welfare queens, who are just a tiny part of the 47%.
In fact, Romney's poor choice of words, and the political fallout that followed, highlight the real problems that have so many Americans on aid. A lack of economic growth, increasing inequality, a narrowing tax base and the resulting growth in benefit spending have pitted American against American. Here's a look at what's at stake.
More are receiving aid
Both sides make some valid points.
Research from Sen. Jeff Sessions, R-Ala., ranking member of the Senate Budget Committee, shows that more than 107 million Americans are getting some form of government welfare. Add the seniors on Medicare and the 22 million government employees (at federal, state and local levels), and you suddenly get a very big number: More than 165 million Americans are at least partially dependent upon federal benefits, a clear majority of the 308 million Americans counted in the 2010 Census.
Consider the increase in people who have received federal disability support since the economy tanked in 2007. As of January, 8.5 million individuals (plus 2 million spouses and children) were receiving these payments. As a share of the population aged 25 to 64, the total has increased to 5.3%, from 4.5% when the recession started, at a total cost of around $200 billion a year -- more than the budgets of the departments of Commerce, Energy, Homeland Security, Interior, Justice and State combined.
This is puzzling. More-advanced health care and an increasingly service-based economy should result in fewer debilitating injuries. Moreover, a weaker economy means fewer people are working, which should mean fewer on-the-job injuries. Research by David Autor and Mark Duggan (.pdf file) suggests that disability benefits "appear in practice to function like a nonemployability insurance program . . . rather than (primarily) as an insurance program for medical impairment."
There are other problems on the spending side, too, especially out-of-control inflation of health care costs and underfunding of Medicare and Medicaid. In fact, an official from the People's Bank of China commented recently that if U.S. debt measures included entitlement liabilities -- or the promises that haven't been funded with payroll taxes -- our ratio of debt to gross domestic product would be roughly twice as large as it is now, at around $31 trillion.
Not enough to go around
On the other hand, it's also true that the benefits of our economy are increasingly accruing to the upper crust while the rest struggle with stagnant wages, lower home values and higher costs of living. Many middle-income Americans are also missing out on the rebounding stock market, a rare bright spot in the current economy, since many investors have been pulling money out of equities and putting it into bonds throughout the recovery. The market has recovered, but a lot of nest eggs have not.
You can see the growing wealth disparity in the income distribution numbers shown in the chart below. Since 1979, low- and middle-class incomes have basically stagnated in inflation-adjusted terms.
In 2009 dollars, the middle 20% of households has seen income rise from $53,100 in 1979 to $64,300 in 2009. For the top 20%, it has jumped from $136,200 to $223,500.
As a percentage of total income, the middle 20%'s share has fallen from 16% to 15%. For the top 20%, it has grown from 45% to 51%. Similar measures of wealth tell the same story.
This helps explain why the rich are bearing a greater and greater share of the federal tax burden, despite policy changes like the Bush tax cuts. According to the Congressional Budget Office, in 2009 the middle 20% paid 9.4% of all federal taxes. The top 20% paid nearly 68%. In 1979, these burdens were 14% and 55%, respectively.
Because of the progressivity of the income tax code, the upper-income household share of taxes exceeds its share of income. And in fact, because of growing inequality and the higher average tax rates paid by wealthy U.S. households, the Organisation for Economic Co-Operation and Development says the United States still has the most progressive tax system in the world.
The real answer
When Bill Clinton embarked on welfare reform and when George W. Bush talked up the "ownership society" and tax cuts, the national psyche was OK with them because the economy was on track. Incomes were growing, and higher home values made everyone feel wealthier.
Now, the pie isn't growing for most, so everyone is bitterly focused on dividing what's left. This year, it's the 47% vs. the 53%; last year, it was the 99% vs. the 1%.
We should be focused on creating more wealth, rather than worrying about how to redistribute it. A big part of the problem is that our economic policies over the past 30 years have been very focused on consumption over investment and borrowing over saving. We were willing to open the borders and let cheap imports and loans flow in from China. Buying power was bolstered by higher asset prices, driven by inflation, cheap loans and a weaker dollar.
Households were happy -- for a time. Yet the big winners have been corporations and shareholders still enjoying record profitability, thanks to the ability to manufacture cheaply overseas while demanding top dollar here at home. Apple's (AAPL) iPhone 5 is a perfect example of this dynamic. Apple may be considered "cool," but it's also a big contributor to our overall trade deficit.
But it can't go on this way. Despite the Federal Reserve's efforts, inflating the price of assets like homes and stocks won't help the economy, because younger generations can no longer keep up.
The OECD also warns that relying on "taxing more and spending more as a response to inequality can only be a temporary measure." So "soak the rich" isn't really an option, since it will further discourage the kind of capital spending and investment we desperately need, as I discussed in "Why CEOs need our love, too."
That's also the reason it makes sense to keep the capital gains tax rate applied to investment income low. In a report for the American Council for Capital Formation, economist Allen Sinai estimates that raising the capital gains rate to 28% from 15% now would cut U.S. employment by up to 602,000 jobs a year, accompanied by slower gross domestic product growth, a weaker stock market and a higher federal deficit.
The only way out, according to the OECD, is to do something about the growing gap between wages, as well as the swiftly rising income from capital, which goes mostly to the wealthiest Americans.
This requires "that people are capable of being in employment and earning wages that keep them and their families out of poverty." We should hope for more than poverty, of course, but the point is right: We need to find a way to make work pay again.
The only way to do that is to increase the demand for U.S. labor and/or reduce its supply. Labor market reforms, stiffer penalties for currency manipulators like China, government investment incentives and similar measures should be the focus, not debating whether the 47% are any less worthy than the 53%.
Is there a fix ahead?
The stakes couldn't be higher.
Unless something is done -- if the current path continues and families grow increasingly reliant upon government benefits funded by a narrowing base of taxpayers -- our union will suffer and innovation will be stifled. Ayn Rand's Atlas would shrug. The bonds of society would fray.
These are not new concerns. Plato warned in ancient Athens, birthplace of democracy, that majority rule risked devolving into a mob mentality if people started voting for leaders who deliver benefits and favors from the public purse and reacted angrily to anyone who jeopardizes the system.
Our founders worried about it, too. President James Madison wrote in Federalist No. 10 that, because of the nature of democracies, "measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority."
He feared that the majority would "have a common motive to invade the rights of other citizens."
Unless the economy starts working for working families again, a very interested and overbearing majority will have the most powerful motive of them all: providing basic food, clothing, housing and medical care for their families. And Romney, with his aloofness and offshore tax shelters, personifies their eventual target.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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Nobody seems to challenge that 47% bit.I have nieces and nephews that make minimum
wage and they all pay taxes.Sure, they get some money back,but those minimum wage
jobs are hard dirty jobs they have in high school.
Anyone who has any sense, if they will admit it to themselves, knows what Romney was saying is that he probably can't convince those 47% to vote for him, not that he doesn't care about them.
The simple truth is that we cannot afford another 4 years of Obama and the progressive agenda.
Nor can we afford 4 more years of gridlock and excessive spending by either party. Time to start doing what is best for the country, not towing the party lines.
Everyone should pay something.
Taxes on wages are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.
The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.
Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.
What a bunch of BS! This country has a serious financial problem. Sixteen trillion of debt is treason! Our current president all but called the national debt of nine trillion dollars as treason. The debt had risen a little over 4 trillion dollars in 8 years with President Bush. This president said he would cut it in half in his first term. I can't figure out any math that explains how increasing the debt to 16 trillion dollars is cutting the debt in half. Now he wants to spend more. Printing money wildly has done nothing but devalued our dollar. A few years ago it cost about sixty ($.60) to buy one dollar of Canadian money. Now it costs over a dollar to buy one Canadian dollar. It is that way all over the world. We import way too much and it all costs more thanks to this president and the fed chairman.
For those who are listening to the liberals propagating the fallacy that everything is "Bush's Fault", think about this:
January 3rd, 2007, the day the Democrats took over the Senate and the Congress:
The DOW Jones closed at 12,621.77
The GDP for the previous quarter was 3.5%
The Unemployment rate was 4.6%
George Bush's Economic policies SET A RECORD of 52 STRAIGHT MONTHS of JOB CREATION!
January 3rd, 2007 was the day that Barney Frank took over the House Financial Services Committee and Chris Dodd took over the Senate Banking Committee.
The economic meltdown that happened 15 months later was in what part of the economy?
BANKING AND FINANCIAL SERVICES!
THANK YOU DEMOCRATS (especially Barney) for taking us from 13,000 DOW, 3.5 GDP and 4.6% Unemployment...to this CRISIS by (among MANY other things) dumping 5-6 TRILLION Dollars of toxic loans on the economy from YOUR Fannie Mae and Freddie Mac FIASCOES!
(BTW: Bush asked Congress 17 TIMES to stop Fannie & Freddie -starting in 2001 because it was financially risky for the US economy). Barney blocked it and called it a "Chicken Little Philosophy" (and the sky did fall!)
And who took the THIRD highest pay-off from Fannie Mae AND Freddie Mac? OBAMA
And who fought against reform of Fannie and Freddie?
OBAMA and the Democrat Congress, especially BARNEY!!!!
REMEMBER JANUARY 3rd, 2007.... THE DAY THE DEMOCRATS TOOK OVER!"
Bush may have been in the car but the Democrats were in charge of the gas pedal and steering wheel they were driving the economy into the ditch.
Budgets do not come from the White House.. They come from Congress and the party that controlled Congress since January 2007 is the Democratic Party.
Furthermore, the Democrats controlled the budget process for 2008 & 2009 as well as 2010 & 2011.
For 2009 though, Nancy Pelosi & Harry Reid bypassed George Bush entirely, passing continuing resolutions to keep government running until Barack Obama could take office. At that time, they passed a massive omnibus spending bill to complete the 2009 budget.
And where was Barack Obama during this time? He was a member of that very Congress that passed all of these massive spending bills, and he signed the omnibus bill as President to complete 2009. Let's remember what the deficits looked like during that period:
If the Democrats inherited any deficit, it was the 2007 deficit, the last of the Republican budgets. That deficit was the lowest in five years, and the fourth straight decline in deficit spending. After that, Democrats in Congress took control of spending, and that includes Barack Obama, who voted for the budgets.
If Obama inherited anything, he inherited it from himself.
In a nutshell, what Obama is saying is "I inherited a deficit that I voted for, and then I voted to expand that deficit four-fold since January 20th."
All you fools who believe that 47% of Americans do not pay thier share of taxes really need to do your homework. Quit regurgitating ridiculous Fox news sound bites that only tell part of the story. The real story sounds something like this; Of the 47% that chump Romney callously refers to as freeloaders, most are retirees who have paid thier share of taxes for 40-60 years, but no longer generate enough income to fall into a federal tax bracket. Most of the remaining Americans not paying federal taxes fall below the low end tax brackets due to mortgage interest tax deductions, child care tax credits and other federal tax programs designed to affect the bottom line of middle income Americans. A mere 7 % of those "Freeloaders," are actually on welfare programs or Federal health care programs.Don't forget too, it was the democrat Bill Clinton who ended walfare as we knew it. Furthermore, if we really want to discuss tax inequality, let's talk about Romney. Here's an American who made 22 million dollars and paid a lower percentage of his income than the freeloaders he refers to. Worse yet, most of his income was generated by closing American companies, shipping jobs overseas and taking a profit whether the corporations made money or not.
By the way, I own a multi-million dollar manufacturing company in Oregon and I pay my employees livable wages and benefits. My income places me in the top 3% of earners in the country. I am investing in our economy and I am not buying into the conservative message of fear and bigotry. Let's face it, the Republican party is sinking. They are a bunch of old, biggoted, white dudes trying to hang on to old ideologies. They know the party is almost over. Soon whites wil be a minority in this country and their base will shrink accordingly. I am white, by the way.
If anyone really wants an accurate picture of where we are today and how we got here, listen to Bill Clinton's DNC speech. He was spot on. If he wasn't, the right would have torn him apart. Let's not forget, Clinton was the last President to leave office with a budget surplus, one that Bush quickly erased with a $6 trillion debt, two wars and tax cuts for the wealthy. And if that wasn't enough, he also erased 200 plus years of constitutional rights with the Patriot Act and other fed programs. I thought the right was the party of small government. Oh that's right, only when it comes to programs designed to help ordinary Americans
To bad that all /most of you see these comments as a joke. In my life I have seen/ meet so many people on welfare that it make me sick. The majority of these people can work only its to easy to just receive welfare.
Most of these people that I have met in my life did not vote, because they felt it was useless.
This population will make a difference, in our next Presidential elections if they would place there vote.
Everyone needs to remember the financial disaster of 2008. We are still paying for it, the world is still paying for it, and it will not be paid off for quite some time. One point the author is right about: jobs are the solution here in the U.S., but why would anyone create jobs here when they can simply go to the third world and greatly increase their profitability? The answer is, 'they won't'. Not until we either make it worthwhile for them to create jobs here, or make it onerous for them to do it elsewhere.
Why is it that "Since 1979, low- and middle-class incomes have basically stagnated in inflation-adjusted terms?" Because so-called "American" companies aren't American any more. They have globalized themselves to scour the world in search of the cheapest labor. As a result, thousands of U.S. factories have been closed -- just as Ross Perot said they would in 1992 if NAFTA passed. In fact, "American" companies receive a tax deduction as a "business expense" the cost of shutting down U.S. factories, moving them overseas, and leaving millions of formerly gainfully employed Americans with nothing to do except compete with teenagers for the remaining low wage jobs.
The typical attitude is that expressed by Lee Raymond, CEO of ExxonMobil from 1993 to 2005: “I’m not a U.S. company and I don’t make decisions based on what’s good for the U.S.” He could easily be a poster child for corporate greed, with his retrograde attitude toward climate change and a controversial retirement package valued at $400 million. And decisions based purely on the profit motive often will be different from what the public interest would dictate.
Do any of you remember NAFTA? If not, you should. And you should all search the Internet about it. Ross Perot was correct...all we would see if that "great sucking sound" of USA jobs going overseas.
End of comment.
Romney capital gains is $14 millions a year and taxed at 14% lower than Warren Buffet's secretary. He is arrogant and should pay his fair share. Capital Gains should be taxed at regular tax brackets and not subsidized by hard working americans.
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