Thursday, December 19, 2013

The World’s Only Popular Tax By Marc Faber, The Daily Reckoning

The November 2013 Investment Outlook published by PIMCO caught my attention with an essay by Bill Gross entitled “Scrooge McDucks”.
Gross wrote remorsefully, “Having benefited enormously via the leveraging of capital since the beginning of my career and having shared a decreasing percentage of my income thanks to Presidents Reagan and Bush 43 via lower government taxes, I now find my intellectual leanings shifting to the plight of labor.”
I suppose that, by “the plight of labor”, Gross is referring both to the decline of median household income in real terms over the last ten years or so, and to the collapse of labour’s share of US national income since 2000. Personally, I am also concerned about the slump in the labour force participation rate.
Addressing his wealthy colleagues directly, Gross writes:
Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make.
In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today. Admit that you, and I and others in the magnificent “1%” grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living. Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not.
A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafitte 1989. But (mostly you guys) acknowledge your good fortune at having been born in the ’40s, ’50s or ’60s, entering the male- dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, “build that,” you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.
You’ll still be able to attend those charity galas and demonstrate your benevolence and philanthropic character to your admiring public. You’ll just have to write a little bit smaller check. Scrooge McDuck would complain but then he’s swimming in it, and can afford to duck paddle to a shallower end for a while. If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing “capital” at lower rates than “labor” should now end.

Having written about rising wealth and income inequality for the last ten years or so, I have a lot of sympathy with Bill Gross’s views. However, I am far from certain that the inequality was caused by lower tax rates on carried interest and capital gains.
As an example, it is not only the “1%” who have increased their share of national income considerably over the last 30 years, but also the top 10% of income recipients. Moreover even if capital gains are excluded, the top decile’s income recipients have increased their share of national income meaningfully. I simply cannot believe that the top decile of income earners would all have benefited from low taxes on carried interest. (This may be different for the “0.01%”.)

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Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.
Marc Faber

Marc Faber

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