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With all of the news media talking about Alexandria Ocasio-Cortez 70% tax rate on those making more than $10 million a year and Deb Warren saying she was okay with it during one of her Presidential run announcements and talk of Warren Buffet being on board I thought it was time to let loose an essay from my upcoming book “The Phallus of AGILE and Other Ruminations.” I applaud the gumption and shock factor behind the announcements but, they are pulling on the same worn out lever that has been pulled so many times before. While I’m sure the sound bite plays well in polling and media tests, it shouldn’t take a rocket scientist to figure out this will never work. Let’s assume corrupt influence peddling politicians like the Clintons won’t be able to whisper in enough ears to derail it and that all lobbyists fail to buy enough elected officials. Let’s also assume that either the person sitting in the oval office signs it or there is such a ground swell of popular support any veto is overridden. So what?
I hate to be “that guy” but, this is the question you have to ask. So what? Why do you have to ask it? I will answer that with another question: Do you really think the company identified in the Panama Papers is the only such company in the world? You really need to check out NPR’s “Planet Money” and listen to describing in detail how they used a service to set up two off-shore companies completely legal for very little money, located in tax havens. I seem to remember they were even offered the option of having seven dead Lithuanians assigned as board members. Why dead? So they could never exert control or be compelled to testify.
Only ego maniacs, idiots and control freaks allow that kind of money to be routed through their own name. The off-spring of that same group of people are the only ones who ever pay the “Death Tax” as well. An ego so large they have to have everything in their name. Even a hack financial adviser would tell them to create a privately held corporation or LLC. Put all assets in there along with all income. Depending on its value authorize it for 100,000 to 10,000,000 shares. Issue three shares to each of your inheritors and you get issued four shares for each inheritor. Even if all of them vote against you they cannot override you. (You could make it an even match if you were even close to human.) When you die they don’t pay inheritance tax on the business or its assets. Their tax is based on the assessed value of the shares you will to them at the time of your death. Look at it this way. If you own 12 shares of GE and will 4 shares each to your 3 children, do they pay inheritance tax on GE’s current value or just the current value of those 3 shares? (Odds are they would pay no tax because those shares would be well below a taxable amount.) This same concept applies to family run businesses, farms and actors getting paid $20 million per picture. Where you set that corporation up determines just how much income tax (if any) it pays each year. You only pay income tax on the amount of money the business pays you. Keep in mind you don’t really need much because the business, assuming valuations in the millions, can buy just about anything. A really good tax/finance person should be able to set it up so you only pay for some of your groceries/meals and the clothes on your back. Don’t take my word for it, research it.
Now that we know such a tax rate will only snare the really stupid or complete ego maniac because everyone else will have their holdings stashed in off-shore tax havens, let’s take a look at a real solution.
“The Phallus of AGILE and Other Ruminations” will be published some time in 2019. It is going through editing right now.
Trickle Down With a Chainsaw
Income inequality has become a real problem in America and indeed many parts of the civilized world. Various think tanks and elected officials have proposed various bandages be placed on a patient bleeding from the jugular but, when one takes the time to analyze them they do not solve the problem, simply provide more of the same which did not work before.
Before you discount that previous paragraph consider the history of minimum wage in America1. First instituted in 1938 it has since been raised 22 times and now there is a movement to raise it again, this time to $15/hr. We have had some propose a Universal Basic Income and a few countries have experimented with it2. The flaw here is that taxes on the wealthy have to be massively high and they will spend all of that money fighting such a law rather than paying it in taxes. Some countries have experimented with imposing a maximum wage on everyone3. This has met with disastrous results because there no longer is a ladder to climb.
Many people try to focus on one single pain point for those at the bottom rung. For many years Americans have heard about “Affordable Housing” and we even have the government agency known as HUD4. (U.S. Department of Housing and Urban Development) To understand how that turns out one only need read up on Cabrini-Green5.
Reality sets in when one tries to tackle a small piece of the problem. This particular reality is that nobody wants to live in affordable housing, they want to live somewhere nice with amenities, not a high rise box with criminals and drug addicts all around them.
I’m not choosing to pick on Chicago, I’m from Illinois and am more familiar with house this particular part of the problem worked out. You can visit the Wikipedia page6 and search for the word “demolished.” On the whole, humans don’t deal well with being warehoused. Marina City in Chicago was completed 1964-19687 and it hasn’t been demolished, why? The bulk of the people living there have jobs. If they are home on the weekend it is just to relax. They aren’t in the building 24×7 because they have no money to do anything else. When you own a place you take better care of it because one day you might want to sell it.
The solution, which will never be implemented, is what I call “The Ethics in Income Act”. Others will refer to it as “The Hundred Fold Rule”. You might view it as “Trickle Down With a Chainsaw”. Trickle down economics work,but, only if you have a flow control valve at the top forcing the sprinkler effect.
Unlike previous maximum income attempts in other parts of the world, this act doesn’t cap the income of ordinary people. It simply caps the income the highest paid people can earn by tying it to what the lowest paid make. They personally have to raise the bottom run before they can climb a higher rung themselves.
It must be implemented without allowing for any grandfathered exceptions.
- No officer, board member or management consultant of any publicly traded company is allowed to earn more than 100 times the lowest paid employee or contractor working for any division of their corporation.
- The SEC will create a document which each corporation must file annually listing those companies they have contracted with.
- The IRS will simply issue the person who was overpaid a bill for the overpaid amount. If they pay it, nothing happens. If they fight it and lose they serve a minimum of 5 months in federal prison. For a second offense not only does the person pay it but, each member of the board of directors. For a third offense it is a mandatory 3 years and they all have to pay.
- All fines collected go directly to paying down America’s debt. Congress cannot touch, redirect, or in any other way divert the funds.
Sounds crass, sounds harsh but, it actually does solve all of the problems. You know people are going to try and cash stock options without reporting them and get caught. After the IRS starts collecting $20mill here and $80mill there, the deficit will start coming down. This law is fair and just. It only affects those corporations who wish to stick their hands into that never ending piggy bank known as the stock market.
In the wake of Enron, MCI, Tyco, Health South and far too many others to list here, it is apparent that corporations cannot self regulate. The mantra handed down from upon high whenever increases in minimum wage or health insurance come about is that they are “trying to run a business”. This law ensures you actually run the business rather than continue to rape it.
Corporations off-shoring jobs to countries where people make $10/day is no longer a problem. Why? Because it total compensation to $1,000/day and you know they aren’t going to take that. Want to be a major retailer that contracts with cleaning firms using illegal aliens who get paid less than minimum wage? That’s fine. You get paid no more than 100 times what they do and that total includes all of your stock options as well as other benefits like golf club memberships and rides on corporate jets.
So, what happens with this law? Well, for starters, that box of corn flakes you pay $5.25 for which has about $0.04 of corn in it will probably start selling for $3.25. Nice but, if you don’t eat corn flakes it doesn’t do you much good.
You have to remember the immortal phrase “greed is good”. In this case “greed is a tool”. Almost all of those shady dealings and accounting problems got started because of people wanting to manipulate the stock price and thus, the amount of money they made from stocks and stock options. When your income is capped, there isn’t much incentive to do that.
At most large corporations, the people who are paid the least tend to empty the trash and clean the bathrooms. Sometimes they work in the cafeteria. They usually make less than $20K. I don’t know where the Earned Income Credit kicks in but, I assume it is somewhere between the federally declared poverty line and that number. As employees for publicly traded companies they will suddenly find themselves making $50K. Not because anything changed about their job but, upper management will want to pay itself at least $5M and the only way they can do that is if the lowest paid person anywhere on the planet working for the company is making $50K.
Remember that deficit problem? The person who is now making $50K instead of pulling down enough money to qualify for Earned Income Credit and other government benefits will suddenly start paying taxes instead of getting a check at the end of the year.
What about that minimum wage thing you ask? Well, I have lived in areas where I got to watch this minimum wage thing happen. When I was young the minimum wage was around $3.50/hr. I know, because I earned it at one point. When I went away to college the minimum wage was still that but, the area I was in had gas stations and fast food restaurants paying between $6.50 and $7.00/hr. Why? Because the corporate jobs in the area all paid at least $6.00/hr. Since they couldn’t give prestige they had to give cash.
By invoking this rule, the same thing will happen without raising minimum wage. After a couple of years, minimum wage will just simply be raised to whatever is currently being paid as an afterthought to help those areas where no business is part of a publicly traded corporation.
Remember, total cash + non-cash compensation is limited to 100 times the lowest paid person working for any division or contracting firm. This means the wages will increase even out at that little grain elevator in Po-Dunk USA because it happens to be owned by some division of a multi-national publicly traded Ag-based company.
So, here we are. With total compensation capped for the haloed few, there is suddenly a lot of cash laying around. Greed won’t let them keep their hands off it. Some of it will go out to shareholders as dividends. Some of it will be eaten because it is cash on hand which can’t be called anything other than profit, say hello to the tax collector.
Ah, the rest of it. That cash will burn in their hands. They control the cap because they control what the lowest paid person makes. That means the wealth will be distributed more equitably across the employees, shareholders and the business itself. The bottom end will pay more in taxes because they moved up in tax brackets or entered them for the first time.
Accounting fraud will now only happen to bankers when a failing company is trying to secure more credit. Since the bankers are professionals, they should know how to look for that problem.
This whole visa worker/off-shoring thing will suddenly have a very nasty taste indeed. If that developer is only pulling down $12K/yr, the haloed few have capped themselves at $1.2M. As an analyst, I have to believe the haloed few aren’t going to tolerate that for very long. High paying jobs will start moving back to America and they won’t get filled by $60K/yr H1-B workers. In 2018 Jamie Dimon got a raise to $31 million8 so how long do you think he can make ends meet on a pathetic $6 million/yr?
Notice that the haloed few aren’t arbitrarily capped. They can still pull down $30M per year. They just have to ensure the lowest paid person working anywhere for the company is pulling down $300K.
Before you write this entire journey off as a mad ramble brought on by too much caffeine and too little sleep, take a good look at a company known as Lincoln Electric. Some years ago “60 Minutes” did a report on that company. The head of the company made less than some of the people working on the assembly line making the welders and other products. The employees actually knew what his salary was and some of them had a contest about who could put in enough hours to beat it. Not to mention, the quality of their products has been phenomenal for years.
As I have said, developing the skill to solve the whole problem changes your way of life. You start seeing things like this and the connection between them when it comes to solving them. Your friends will call you crazy . . . until they’ve had a year or two to digest what you said.
The maximum income philosophy isn’t a horrible idea, it has just been horribly applied. Generally this had to do with big corporations wanting to exploit workers. If you simply apply the maximum income idea to the top of publicly traded corporations without a fixed cap, it works. What you cap is the distance between them and the bottom so most everyone wins.