Most Interesting Perspective of the Week

Since then, analyses from investment banks and researchers have estimated that 40 to 60 percent of the savings from the tax cut are being plowed into buybacks. One analysis of companies on the Russell 1000 Index—which consists of big firms, much like the Standard & Poor’s 500 does—found that companies directed 10 times as much money to buybacks as to workers. As such, Milani and Tung said they expect the math on corporate spending on shareholders versus workers to become even more exaggerated in the coming years.

In the meantime, corporate boards are poised to spend hundreds of billions more on their own shares, benefiting executives along with the mostly wealthy Americans who own stock. Just this week, Caterpillar, for instance, said it plans to spend $1 billion buying back shares in the latter half of this year, before kicking off a new $10 billion round on buybacks starting in January. It is also in the midst of laying off hundreds of workers.

ANNIE LOWREY is a contributing editor at The Atlantic, covering economic policy.

Once Cut, Corporate Income Taxes Are Hard to Restore NYT Robert Shiller

Tax rates on corporate profits rose sharply during World War II. Here, in 1942, guns used by the United States military are assembled in a Firestone Tire & Rubber plant in Akron, Ohio.Associated Press

The Trump corporate income tax cuts are the latest in a decades-long trend of tax reductions that have been substantially reversed mainly during times of war.

The historical evidence is revealing.

When the federal corporate income tax began in 1909, it was about as low as it could be — a rate of only 1 percent of corporate profits. Over more than 100 years, it has followed a broad hump shape, increasing for about half a century, and then decreasing for about the next 50 years.

The corporate tax rate peaked in 1968 at 52.8 percent. The Tax Cuts and Jobs Act of 2017 brought the 2018 rate down to 21 percent from 35 percent last year.

Wars provided an impetus for tax increases, with major hikes during both world wars and the Korean War. Corporate taxes remained high for more than 30 years, then dropped sharply under President Ronald Reagan and now, again, with President Trump.

At the beginning of the modern era of income taxes in America — in 1909 for corporations and 1913 for individuals — war was not a factor. Instead, in the Progressive era, the main argument for instituting these levies was that “wealth is escaping its due share of taxation,” Edwin Seligman wrote in his 1914 book, “The Income Tax: A Study of the History, Theory and Practice of Income Taxation at Home and Abroad.”

Taxes on land hit farmers unfairly, proponents of the new taxes said, while owners of corporate stocks paid no taxes. Excise and customs duties taxed consumers unfairly and benefited specific domestic industries, so the argument went. Seligman, a professor at Columbia University, said the income taxes were not an “attack on wealth as such.” The aim of the new income taxes “was solely to redress the inequality of taxation.”

That was an intellectual defense of the income tax. But more emotional issues — those of unequal sacrifice in time of war — account for the high levels to which corporate tax rates rose.

During World War I, the federal corporate income tax rose to 12 percent in 1918 from 1 percent in 1915. In addition, in 1917 a new “excess profits tax” — on profits above the payer’s prewar level — was imposed, and it ranged as high as 80 percent. The increase came amid public outcry against wartime “profiteering.” People were angry to see men who stayed at home becoming millionaires from war profits, while the soldiers overseas were fighting and, often, dying.

The excess profits tax was scrapped in 1921, but the corporation income tax remained at nearly the same level.

With World War II, rates rose further, reaching 40 percent in 1942. And once again a wartime excess profits tax was instituted, ranging up to 95 percent.

After that war, the corporate excess profits tax was eliminated, but the corporate income tax rates were not cut back for long.

The Korean War, which scared many people as being the possible beginning of what they called “World War III,” occasioned further increases. The federal corporate income tax rate rose to 52 percent, and yet another temporary excess profits tax was instituted. And again, a familiar pattern was in place: Corporate income tax rates did not decline much after the war was over.

These wartime tax increases left a lasting legacy of relatively high corporate income tax rates. Even with the Trump tax cuts, the United States is far above the rate that prevailed before World War I.

According to a “cognitive theory” of taxation offered by Edward J. McCaffery, a scholar at the University of Southern California, governments use the opportunity of a war to raise tax rates when “citizens are either more patriotic and willing to share with the government, and/or are distracted by the crisis itself.”

What prompted taxes to begin a long decline, starting with the Reagan presidency in the 1980s? Here, we are in the realm of speculation. Decades after the Korean War — arguably the last American war with a high degree of public unanimity — the names and feats of war heroes began to fade in memory. People may simply have returned to more individualistic, self-centered views of society and the economy.

In any case, under Reagan, the top corporate tax rate dropped from 46 percent to 34 percent. In 1993, during the Clinton administration, it increased slightly to 35 percent, where it held until last year.

Similar declines occurred in other countries in recent decades. That didn’t happen because governments needed less tax revenue. To the contrary, Prof. Joel Slemrod of the University of Michigan has shown that “across countries, there is no association of the expenditure-G.D.P. ratio with the corporate statutory rate.”

Effective tax rates — actual corporate taxes paid as a percentage of pretax profits, including the effects of all deductions and accounting tricks — can’t be tracked accurately all the way back to 1909, but estimates have also shown a decline in these rates in recent decades.

What data we do have shows an unmistakable trend. Consider, for example, the United States National Income and Product Accounts, published by the Commerce Department’s Bureau of Economic Analysis. Data from that source indicates that the fraction of profits on corporate income taken by federal, state, local and foreign taxes peaked during World War II and has shown a fairly linear, steady and steep downtrend ever since.

This history provides an important perspective.

While it may be tempting to view the Reagan and Trump tax policies as anomalies, they may be seen as part of a long-term trend. It is important to recognize that Reagan’s tax decreases were not substantially reversed under subsequent administrations. And it is quite possible that President Trump’s corporate tax cuts may remain in place, even if Trump political power ebbs.

Given this history, I have to wonder: Will it take a major war — one that galvanizes the public, involves vast sacrifice and seems to truly threaten domestic survival — to raise the corporation income tax significantly?

Robert J. Shiller is Sterling Professor of Economics at Yale.

Saving Capitalism: For The Many, Not Just The Few by Robert Reich (Notes)

As income and wealth have concentrated at the top, political power has moved there as well. Money and power are inextricably linked. And with power has come influence over the market mechanism. The invisible hand of the marketplace is connected to a wealthy and muscular arm.

 In 2010, the majority of the Supreme Court of the United States decided in Citizens United versus Federal Election Commission that corporations are people under the First Amendment, entitled to free speech. Therefore, said the court, the McCain-Feingold act, which had limited spending by corporations on political advertisements, violated the Constitution and was no longer the law of land.

Higher share prices have added substantially to the incomes and well at those at the top. In the bull market that sent stocks soaring from 1994 to 2014, America's rich hit the jackpot. By 2010, the richest 1% of Americans own 35% of the value of American owned shares, both directly and indirectly through their pension plans. The richest 10% owned more than 80%.

The compensation of CEOs in America's largest corporations over the last three decades, relative to the pay of average workers went– – from a ratio of 20 to 1 in 1965, 230 to 1 in 1978, hundred 23 to 1 in 1995, 296 to 1 in 2013, and over 300 to one today.

 Professor William Lazonick  of the University of Massachusetts has documented that a major means by which corporations accomplish such pumping is to use their earnings, or to borrow additional money, to buy back shares of stock. This maneuver pumps up share prices by reducing the number of shares owned by the public. A smaller supply effortly increases the price of each remaining share. In recent years, such buybacks have become a major corporate expenditure.  Not only do stock buybacks enrich CEOs and other top executives at the expense of smaller investors who do not know about the timing or amounts of buybacks, they also drain away money the corporation might otherwise spend on research and development, long-term expansion, worker retraining, and higher wages.

 Corporations deduct CEO pay from their income taxes.

The reason Wall Street bankers got $26.7 billion in bonuses in 2013 was not because they work so much harder or were so much more clever or insightful than most Americans. They received those bonuses because they happen to work in institutions that hold a privileged place in the American political economy. The subsidy going to the big banks comes from you and me and other taxpayers because we paid for the last bailout and it is assumed we will pay for the next one.

 In 2013, an American household smack in the middle of the earning scale received less than the equivalent household did 15 years before, in 1998, when pay is adjusted for inflation. Median household earnings were 8% below what they were in 2007.

 Between 2020 13, the real average hourly wages of young college graduates declined. By 2014, according to the Federal Reserve Bank of New York, the share of recent college graduates working in jobs that typically do not require a college degree was 46%, versus 35% for college graduates overall.

The so-called recovery from the great recession has been among the most anemic recoveries in American economic history, especially given how far the economy fell into thousand eight in 2009.  The ongoing problem is inadequate overall demand, the same impediment that had delivered the economy into the great recession in the first place. After the crash of 2008, most Americans did not have the resources to buy enough goods and services to convince businesses to invest, expand and hire.

 The third job category I named  "symbolic – analytic services." Here I included all the problem-solving, problem identifying, and strategic thinking that go into the manipulation of symbols – – data, words, oral and visual representations. The essence of this work is to rearrange abstract symbols using a variety of analytic and creative tools – – mathematical algorithms, legal arguments, financial gimmicks, scientific principles, powerful words and phrases, visual patterns, psychological insights, and other techniques for solving conceptual puzzles.

 We are faced not just with labor reducing technologies but with knowledge replacing technologies. The combination of advanced sensors, voice recognition, artificial intelligence, big data, text mining, and pattern recognition algorithms is generating smart robots capable of quickly learning human actions, and even learning from one another.

 The demand for well-educated workers and United States seems to a peak around 2000 and then fallen, even as the supply of well-educated workers has continued to grow.  Since 2000 the vast majority of college graduates have experienced little or no income gains at all. Even those in the top 90th percentile of college graduates increased her cumulative income by only 4.4% between 2020 and 2013. Over the same years, the entry level wages of college graduates actually dropped, a decline of 8.1% for women graduates and 6.7% for men. To state it another way, while a college education has become a prerequisite for joining the middle class, it is no longer a sure means of gaining ground once admitted to it.

Immoral U.S. Economy??

"We’ve witnessed over the last two decades in the United States a steady decline in the willingness of people in leading positions in the private sector – on Wall Street and in large corporations especially – to maintain minimum standards of public morality. They seek the highest profits and highest compensation for themselves regardless of social consequences.

CEOs of large corporations now earn 300 times the wages of average workers. Wall Street moguls take home hundreds of millions, or more. Both groups have rigged the economic game to their benefit while pushing downward the wages of average working people."

Robert Reich  America's Economy is Immoral

End This Depression Now by Paul Krugman *****

I don't usually read economic books because I have a hard time understanding charts and statistics that get thrown in. However this book is presented simply and is an easy read. Krugman explains the causes of our financial distress and offers ideas on how to get out of it.

Some Krugman takeaways below:

• In April 2011, as it happens, McDonald's announced 50,000 new job openings. Roughly a million people applied.

• There are now four job seekers for every job opening, which means that workers who lose one job find it very hard to get another.

• The causes of long-term unemployment clearly lie with macroeconomic events and policy failures that are beyond any individual's control, yet it does not save the victims from bearing a stigma. Does being unemployed for a long time really erode work skills, and make you a poor hire?

• The Obama stimulus didn't fail, it simply fell short of what was required ago offset the huge private sector pullback that was already under way before the stimulus kicked in.

• For the past several years, we have been subjected to a series of dire warnings about the dangers of inflation. Yet it was clear, to those who understood the nature of the depression were in, that these warnings were all wrong and sure enough, the great inflation surge keeps not happening.

• It's not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers are committed Republicans but also quite Keynesian in their views about macroeconomics.

• All that is blocking recovery is a lack of intellectual clarity and political will. And it's the job of everyone who can make a difference, from professional economists, to politicians, to concerned citizens, to do whatever he or she can to remedy that lack.

• The evidence is stronger than it as ever been that fiscal policies matter ----that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process. That's what we need to change.

Smartest Things I've Read Today.

The United States needs a reality check and ideas on how to resolve the economic mess we face, particularly as it concerns our massive unemployment and underemployment.

If you want to read about solutions, check out Seth Godin's blog entry on The Forever Recession (and The Coming Revolution.)

For a much more detailed analysis and study of our economic peril and prospects, check out That Used To Be Us: How America Fell Behind in the World It Invented and How We Can Come Back by Tom Friedman and Michael Mandelbaum. Hopefully the sad sack of candidates running for President may read and incorporate the ideas of these authors.

Blame for Everyone Offered in Griftopia by Matt Taibbi

I've read so many books about the financial meltdown that I was a bit reluctant to take on Griftopia: Bubble Machines, Vampire Squids and the Long Con That Is Breaking America by Matt Taibbi. However this was a well written, well researched and well reasoned book.

I wish I could encourage most Americans to read it. It's ideological but it criticizes all parties and political leanings as it should. Government, politicians and financial institutions have made a mess of our economy. We may never recover for decades, if then.

Given the current stalemate in the debt ceiling and budget talks, there is no sign that Washington is the answer to our deepening problems.

I've added some notes from the book below...

Too Big to Fail By Andrew Ross Sorkin

I've read about 8-10 books on the events around our "economic 9/11." Sorkin's book is the most readable and the best in terms of depth and breadth of coverage.

If you are a student of one or more of the following disciplines, history, business, management, politics, leadership, banking and economics, you will enjoy this book and learn a lot from it. The fate of our economy was not in the hands of George W. Bush, Dick Cheney, Harry Reid or Nancy Pelosi. Instead you will read the real decision makers and leaders in our economic crisis were Hank Paulsen, Tim Geithner, Jamie Dimon and Ben Bernacke.

This book is truly a behind the scenes look at crisis management. You will read of some CEOs and government people who stepped up at the plate and some who were not up to the challenges and bailed out.

The book is over 500 pages but moves quickly. It reads like a political novel with a fascinating group of characters and personalities.

The Trillion Dollar Meltdown by Charles R. Morris

Read this book if you want to find out why:

• Banks are failing
• Foreclosures were up over 50% last month
• Mortgage companies are closing
• The Dow is barely over 11,000 and dropping quickly
• There are no silver financial or business linings in sight

If you are a poor student of economics like me, you'll appreciate Morris's talent in simplifying the history of the past 40 years to show how we got to the economic mess that we are in now.

Read this and weep....

The Elephant and the Dragon by Robyn Meredith

If you listen to the President and many of those who are running for President, you're told to worry about Iran, North Korea and Syria.

Meredith's book suggests that we have two other countries to consider that while not militarily threatening are threats to our economy, jobs and growth. China and India can knock the United States off the shaky economic pedestal it stands.

This is a very readable book. It is not an economic primer.

There are plenty of great illustrative stories on how both China and India are poised for even more growth.

China and India are starting to clean our clocks with outsourcing. Their workers can handle most manufacturing and back office responsibilities as well as Americans can and for much cheaper!

Learn the policies and strategies that are competing very well against ours!