The tax system is often discussed on this board. We know the tax law consists of some 70,000 pages and is filled with loopholes and complex algorithms. Much debate centers around what is known as refundable tax credits (earned income credit, the “additional” child tax credit, the education credit, and the making work pay credit) which often result in large refunds for people that have little or no taxable income. As an IRS employee, I am very familiar with this.
Many of the returns filed which claim such credits are perfectly legal. Many are fraudulent. I can tell you that taking the American Opportunity Credit (Education Credit) will result in a $1,000 refundable credit, and literally millions of returns claimed this credit illegally (no one paid tuition or even attended class). Well over 25% of the EIC claims are fraudulent, and with two qualifying dependents you can receive over $5,000 if your income is in the 12-15K range. Someone making $15,000 with 2 kids would have no taxable income and would legally receive over $7,000 in refundable credits from EIC and the additional child tax credit. This amounts to a negative income tax of around 50%, if you will. Throw in a bogus American Opportunity Credit and it’s now an $8,000 refund.
But I don’t want to focus on the scams in this post – thought I certainly could – but rather the economic system we now have in America. I want to talk about reality. Wages, or at least its purchasing power, are steadily being destroyed for more and more individuals. Why is that and how does that bear on our tax code? I’ll give at least two reasons.
First, globalization has opened up the labor market to billions of potential workers. Large, multinational corporations have increasingly shut down the doors in this country to exploit those markets. The Chinese Company Foxconn employs something like 1,000,000 people, most of whom are compensated far below the US minimum wage and receive no benefits. Companies like Apple contract work out to Foxconn and companies like them which enable the company to make huge profits. As a result, we’ve seen CEO and Executive pay skyrocket year after year for the past couple of decades. At the same time, jobs have left this country and downward pressure is placed on wages.
Yesterday, I read a story that Caterpillar was closing a plant in Quebec and would be opening a facility in Indiana. This was trumpeted as great news because the move would bring in jobs. The city in Indiana receiving the business had offered various tax breaks and incentives to Caterpillar (ie the citizens would be taxed). The wages would range from $11-$18 dollars per hour. While unemployed people will be happy to take a job, you’re looking at a range of approximately $22-36K annually. If you have a kid, that income will qualify you EIC. In other words, without a tax code that redistributes income, some of these people would be approaching poverty even with full time employment.
Secondly, we have debt at every level. Citizens have much debt, very little equity in their homes, and the government spends 42% more than it brings in. State governments are in the red, and many cities and municipalities are having to make cuts. With debt saturation, there is very little capital available for expansion and thus very little growth. This further depresses wages (income) because as the population grows, the economy does not expand fast enough to meet that growth.
So we have a conundrum. If the tax code were no longer used as a mechanism for redistribution, poverty would skyrocket quickly, theft and violent crime would inevitably escalate, and civil unrest would become common place. On the other hand, the current system results in total dependence on the government, class resentment, and encourages people to try to beat (cheat) the system.
The current system favors the super rich – the top 0.01% of the population – that benefit from lower labor costs and have the political clout (money) to influence Congress and the various agencies. The Monsanto’s are able to put their people in regulatory positions with the FDA for example. The Goldman’s & JPM are able to stack the SEC and the Treasury Department. And so on.
The lower 50% of the population have thus far been able to maintain their standard of living amidst declining income with the combination of redistribution (the tax system) and using credit (going into debt). At some point the game will no longer be able to play on, once the nation’s debt cannot be effectively serviced. It’s hard to say if that will come in 1 year or 10, but the time will come.
The “middle class” (or producers if you like), that pay taxes but are not independently wealthy are being pushed to the wall. As their wages stagnate, many drop down to the the lower economic strata. The 50% relying on the system will become 55% and then 60% in time.
The problem isn’t the “leeches” so much as it is a systemic problem where debt and globalism have forced the issue and created the current paradigm.
Many times I’ve heard the argument that globalization leads to lower prices, thus we all benefit. Walmart offers cheaper products than local competitors can offer, right? I save by shopping there.
I’ll challenge that. The person working at Walmart might have made $15/hour rather than $10/hour without globalization. But although you, the customer, are saving money as a result of buying products made by cheap Chinese labor, you are also paying for the Walmart employees food stamps, and EIC that he would not need if the local business were still around. Your apparent savings are offset by government debt (either paid now or in the future) used to make up the difference in the Walmart employees lower wages. The difference goes into the pocket of The Waltons family.
I know most of you will disagree with much of my analysis, but at least I hope I’ve given you some things to consider.
Many of the returns filed which claim such credits are perfectly legal. Many are fraudulent. I can tell you that taking the American Opportunity Credit (Education Credit) will result in a $1,000 refundable credit, and literally millions of returns claimed this credit illegally (no one paid tuition or even attended class). Well over 25% of the EIC claims are fraudulent, and with two qualifying dependents you can receive over $5,000 if your income is in the 12-15K range. Someone making $15,000 with 2 kids would have no taxable income and would legally receive over $7,000 in refundable credits from EIC and the additional child tax credit. This amounts to a negative income tax of around 50%, if you will. Throw in a bogus American Opportunity Credit and it’s now an $8,000 refund.
But I don’t want to focus on the scams in this post – thought I certainly could – but rather the economic system we now have in America. I want to talk about reality. Wages, or at least its purchasing power, are steadily being destroyed for more and more individuals. Why is that and how does that bear on our tax code? I’ll give at least two reasons.
First, globalization has opened up the labor market to billions of potential workers. Large, multinational corporations have increasingly shut down the doors in this country to exploit those markets. The Chinese Company Foxconn employs something like 1,000,000 people, most of whom are compensated far below the US minimum wage and receive no benefits. Companies like Apple contract work out to Foxconn and companies like them which enable the company to make huge profits. As a result, we’ve seen CEO and Executive pay skyrocket year after year for the past couple of decades. At the same time, jobs have left this country and downward pressure is placed on wages.
Yesterday, I read a story that Caterpillar was closing a plant in Quebec and would be opening a facility in Indiana. This was trumpeted as great news because the move would bring in jobs. The city in Indiana receiving the business had offered various tax breaks and incentives to Caterpillar (ie the citizens would be taxed). The wages would range from $11-$18 dollars per hour. While unemployed people will be happy to take a job, you’re looking at a range of approximately $22-36K annually. If you have a kid, that income will qualify you EIC. In other words, without a tax code that redistributes income, some of these people would be approaching poverty even with full time employment.
Secondly, we have debt at every level. Citizens have much debt, very little equity in their homes, and the government spends 42% more than it brings in. State governments are in the red, and many cities and municipalities are having to make cuts. With debt saturation, there is very little capital available for expansion and thus very little growth. This further depresses wages (income) because as the population grows, the economy does not expand fast enough to meet that growth.
So we have a conundrum. If the tax code were no longer used as a mechanism for redistribution, poverty would skyrocket quickly, theft and violent crime would inevitably escalate, and civil unrest would become common place. On the other hand, the current system results in total dependence on the government, class resentment, and encourages people to try to beat (cheat) the system.
The current system favors the super rich – the top 0.01% of the population – that benefit from lower labor costs and have the political clout (money) to influence Congress and the various agencies. The Monsanto’s are able to put their people in regulatory positions with the FDA for example. The Goldman’s & JPM are able to stack the SEC and the Treasury Department. And so on.
The lower 50% of the population have thus far been able to maintain their standard of living amidst declining income with the combination of redistribution (the tax system) and using credit (going into debt). At some point the game will no longer be able to play on, once the nation’s debt cannot be effectively serviced. It’s hard to say if that will come in 1 year or 10, but the time will come.
The “middle class” (or producers if you like), that pay taxes but are not independently wealthy are being pushed to the wall. As their wages stagnate, many drop down to the the lower economic strata. The 50% relying on the system will become 55% and then 60% in time.
The problem isn’t the “leeches” so much as it is a systemic problem where debt and globalism have forced the issue and created the current paradigm.
Many times I’ve heard the argument that globalization leads to lower prices, thus we all benefit. Walmart offers cheaper products than local competitors can offer, right? I save by shopping there.
I’ll challenge that. The person working at Walmart might have made $15/hour rather than $10/hour without globalization. But although you, the customer, are saving money as a result of buying products made by cheap Chinese labor, you are also paying for the Walmart employees food stamps, and EIC that he would not need if the local business were still around. Your apparent savings are offset by government debt (either paid now or in the future) used to make up the difference in the Walmart employees lower wages. The difference goes into the pocket of The Waltons family.
I know most of you will disagree with much of my analysis, but at least I hope I’ve given you some things to consider.
