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Friday, April 15, 2011

Overall Effective Tax Rate, and Why Public Jobs

I read from Paul Davidson’s 2009 book The Keynes Solution this morning, April 15,2011. It has to be one of the best economics books ever written for a general audience. I am posting two little essays in the spirit of simplicity. The first was inspired by the debate around President Obama’s speech in which he concedes the need to cut spending, but offers very little in terms of solution. And the second deals with my perspective on taxes, and general information everyone should have about our system. B.L.

Why the Economy Must Have Public Jobs
or Suffer a Lengthy Slump

Essentially, since 2007 the economy has lost about 10% of its workers, and it's difficult to re-employ all those people. --- If you look at the employment as a percentage of population (EPOP) rate, which includes the number who have dropped out of the labor market, and combine it with the increased rate of unemployment, about 15 million workers have been lost. I don't like to guess on a blog like this, but it's in that neighborhood. It is unfortunate that this data is not easier to access. But, the exact number is large, and "exact" is not necessary for us to know in this essay. ---- An economy only produces what people will buy, that's an iron law, and now an additional 10% have stopped buying. Private sector employment employs about 5% fewer workers than in 1999, eleven years ago, a drop from 110 million to about 105 million. Total unemployment is down between 15 to 20% depending. Moreover wages for non-supervisory workers (80% of the workforce) are artificially low, they don't reflect the value of their labor input. Their share of the nation's personal income --- income going to the bottom 80% of households due to labor --- is only 28.6%, as I've mentioned before. We have almost one in three working adults either unemployed, under-employed or working full-time and year-round for below poverty level wages. Add it all up, we have very low consumer purchasing power, also called aggregate demand. Wages have to be increased and jobs need to be created. We must look to government to intervene, the private enterprise of the nation's economy is not performing. Nor will it ever adequately perform, that's why we have minimum wage standards and the Earned Income Tax Credit -- all of which I've written about. Re-employment will indicate recovery and that will occur slowly by 2018 or 2028 or perhaps never, let's be realistic. My perennial thesis --- and the subject of Philip Harvey's paper published at Demos, "Back to Work, A Public Jobs Proposal for Economic Recovery" --- is to create public jobs. The proven method to accelerate re-employment is direct government employment. Nothing else will create much change -- not by cutting the government spending (the Republican position), not by defending social programs (the Democratic position) -- neither will work.

The only quick way to afford to pay for all the "level of life-style security", including "social security", "income security", Medicaid and Medicare, and "military defense security" is to employ all those up to 20% who are not working. As I noted, private industry is employing 5% fewer workers than 10 years ago, according to Hughes and Seneca at Rutgers University writing in July 2010. (See hyperlink above) Four years ago people were spending borrowed money. Then the credit collapsed, finance self-destructed literally, and the workers were fired. The credit collapsed because 1. people were gaming the system for phantom profits, and 2. because we do not pay most people properly. Our economy generates $46,000 per year per human being, children and elders included, yet half the workers earn less than $30,000 a year! ($29,755 or $26,261 according to the U.S. Census or Harold Meyerson in the American Prospect, January, 2011.)

Our income distribution is non-functional, 1% of families' incomes is larger than the combined incomes of 60%, the rich take too big a share of the entire personal income pie. The bottom 80% only receive 28.6% of the income pie from their labor (State of Working America, 2006-2007, page 79), therefore they borrow beyond their means to buy the stuff they themselves make. The top one percent take 21% of all income (Sylvia Allegretto, The State of Working America's Wealth, April 2011, Economic Policy Institute) while in 1980 their share was below ९%.

Our economy is incapable of employing everyone because we do not pay the 80% who are employees (non-supervisory workers) the portion they must have -- and therefore the majority of the people cannot afford to buy the services and goods they produce. This is the explanation Marriner Eccles, the Chairman of the Federal Reserve 1934 - 1948, gave to explain the cause of the Great Depression. He said that when the losers in a poker game exhaust their credit, the game is over. When the structural shape of income distribution is so bad, government must create the missing purchasing power, it does so by hiring millions. Marshall Auerback claims (and he is seconded by Paul Davidson, author of The Keynes Solution and prolific Keynesian scholar, and by Jeff Madrick in his deficit reduction report for Campaign for America’s Future, January 2011) that between 1933 and 1937 the unemployment rate decreased from 25% to 9.6%. Roosevelt drastically reduced government spending on jobs creation in 1938 and the unemployment shot up to 13%, so he reapplied his previous policy. Again between 1939 to 1946 the federal government spent like a drunken sailor, and unemployment dropped from 13% in 1938 to below 2% for three years during the war, 1943, 1944, and 1945. Afterwards the result was an economic expansion unheard of before. It worked.

Today we need to add about 8 to 18 million more workers at $40,000 to $60,000 per job, and that would cost between $320 billion to $1 trillion spread it over a 5 year period. (I calculated from Philip Harvey's proposal and came up with an astounding figure: it would cost $171 billion a year to re-employ 8 million workers. The bailout for AGI insurance came to $150 billion. But we don't have the money for workers? Harvey cites a paper by two prominent economists who estimate the entire cost of the bailout will cost the public $1.6 trillion. But that still leaves 20% unemployed. Couldn't we spend $171 billion just to employ our own citizens who are in desperate need? I have to write more about this.) Many economists today have detailed plans to accomplish what I've been talking about, see my essay of February 2011 at this blog. We suffer from a failure to analyze and execute. You will not understand all that I've said because it takes more background than I have described, but there you have it. It's time to brush up on my copy of The Keynes Solution.

The Overall Tax Rate

We all pay taxes to the federal, the state and local governments. Did you ever wonder what the actual rate was when you put them all together? To find out the effective overall tax rate for different income levels -- what the top earners pay and everyone else pays when you count up all taxes to all governments -- visit Citizens for Tax Justice and enter "burdensome" in their search window. You'll discover that the top 1% of earners, who make over $450,000 a year and
own about $14 million on average, but can make as much as $1 billion in a year or own as much as $50 billion -- they pay 30.9% in total on their yearly incomes. The bottom 80% of households pays 24.5% on average.

We face budget shortfalls for all governments. It's time to raise the effective rate on the richest The nominal rate in 1950 to 1960 was 91%, while today it's 35%. Congresswoman Jan Schakowsky proposes to raise the highest bracket to 49%. The top one percent own $20 trillion in savings (35% of everything private), and the top 10% own over $38 trillion (70% of everything). When you consider that the top one percent have yearly incomes approximately equal to the combined amount of the bottom 60% of households, and that the ratio between the median income and the top one percent has never been higher, it is 1 to 225 (Sylvia Allegretto writing in State of Working America, Wealth, April 2011, Economic Policy Institute) you sense that they should carry more of the tax burden than they do. (Visit U.C. Berkeley professor Emmanuel Saez' site and look at "Striking It Richer" for details about income distribution.) You also sense that wages and salaries for the bottom 80% of households should be higher. The lower 80% of households only earn 28.2% of all the nation’s income through their labor. (Source: Brookings/Urban Institute report published in State of Working America, 2006-2007, page 79, Income Sources and Distribution)

But more than this, we need to create jobs with our tax dollars, yes, a direct job creation
program just as in the 1930s. The nation needs much work done in infrastructure, building insulation, green energy projects, childcare, and other unfunded projects. Those jobs are very affordable with proper taxation, and we could repair the entire economy so everyone would be working and the need for public jobs would be diminished, perhaps eliminated. This happened after World War II, after public jobs decreased the unemployment rate to below 2% for 1943, 1944, and 1945.

See National Jobs for All Coalition and their program Drive for Decent Jobs; Demos, Campaign for America's Future, the American Prospect, Political Economic Research Institute at Univ. Massacusetts Amherst, the Economic Policy Institute; and various economists such as Dean Baker, Robert Pollin, Robert Kuttner, Philip Harvey, that promote such a federal jobs creation plan. Congresswoman Jan Schakowsky advocates this. See and, and connect with this information campaign: the Institute for Policy Studies, and their program Inequality and the Common Good.
And then you can feel patriotic again.

by Ben Leet,

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