Friday, April 14, 2006
FEDERAL TAX INITIATIVES GROW WEALTH
Some attention has been paid recently by media analysts and editorial writers to the diminution of the American middle class. The shrinking of the middle class, and its separation from the upper class in terms of both income and wealth, has been attributed to various trends and events. Some analysts point to globalization and the inherent competition related to that movement. Others point to our own government policies, including tax policy. This will be an examination of the latter. Due apologies are made to the reader for the professorial style of this piece.
During the past five years a number of changes affecting income and wealth have been made in federal tax laws. Most prominent among these has been the lowering of income tax rates, particularly in the higher brackets. Two other significant income tax changes have been made affecting persons with wealth -- the lowering of rates on dividends and on capital gains. The first change makes it easier for persons with higher incomes to accumulate wealth, while the latter two make it easier for wealth to grow.
For some time tax law has left unrealized capital gains untaxed. That is, unless a property or security is sold or traded, value gains remain untaxed. Combine this latter feature with those above, and with the gradual elimination of the inheritance tax, and a fertile environment is created whereby: (1) it is easier to accumulate wealth; (2) gains from traded wealth tend to accumulate; and (3) gains from non-traded wealth are never, ever taxed. Therefore under such favorable tax policies wealth tends to accumulate and multiply with the wealthy, and wealth remains within the family.
Financial strategies of corporate America are influenced by tax policies. While some may give token dividends, most profitable companies have continued the practices of: (1) carrying huge sums of cash; (2) buying other assets; or (3) buying back stock. All three of these practices tend to enhance the value of existing stock, and thus add to the unrealized gains (untaxed wealth) of company shareholders -- particularly owners of large blocks of stock, many of whom are managers, board members, and relatives. This inside group is well situated to influence corporate strategies in the own interest, not necessarily coincident with the interest of small stockholders or investors in mutual and pension funds, who comprise the majority of stockholders. This ruling oligarchy may choose between and among: (1) higher salaries; (2) greater dividends (at reduced tax rates); or (3) letting equity value (wealth) grow untaxed. Most tend to choose the third option as primary.
Then there are those intangibles known as stock options. Stock options given to managers and board officials allow these persons to buy within a time period a stated number of shares at a stated price (below the market value curve). As stock value grows untaxed, in accordance with the strategy above, these stock options may be exercise and purchases made at earlier and lesser values. Option stock is taxable at the difference between stated value and appreciated value, but ONLY if the stock is sold. Otherwise, these gains are untaxed. This is a simplified explanation, minus complexities.
This has been a brief look at effects of tax policy on wealth accumulation. This demonstrates a shifting of the tax burden, as well as a shifting of the benefits derived from the American form of capitalism. The middle class bears more of the burden and reaps fewer of the rewards. The results of these changes are potentially serious, even disruptive, in social and political consequences for the future. All this has been kept quiet within the tent too long. An open and honest public forum is badly needed on these economic and social issues.
The middle class has been impacted negatively from both above and below. The trends outlined demonstrate the basis for upward separation and prosperity of the wealthy. But the middle class is impacted by other circumstances as well. The outsourcing of professional and skilled jobs looms large, as does corporate migration to cheaper labor markets. Importation of good from areas with cheap labor, immigrant labor competition, and the stagnation of swages all play a part in what has been termed as "the war on the middle class." But these are worthy of a separate discussion.
Dr. Edwin E. Vineyard, AKA The Militant Moderate
Some attention has been paid recently by media analysts and editorial writers to the diminution of the American middle class. The shrinking of the middle class, and its separation from the upper class in terms of both income and wealth, has been attributed to various trends and events. Some analysts point to globalization and the inherent competition related to that movement. Others point to our own government policies, including tax policy. This will be an examination of the latter. Due apologies are made to the reader for the professorial style of this piece.
During the past five years a number of changes affecting income and wealth have been made in federal tax laws. Most prominent among these has been the lowering of income tax rates, particularly in the higher brackets. Two other significant income tax changes have been made affecting persons with wealth -- the lowering of rates on dividends and on capital gains. The first change makes it easier for persons with higher incomes to accumulate wealth, while the latter two make it easier for wealth to grow.
For some time tax law has left unrealized capital gains untaxed. That is, unless a property or security is sold or traded, value gains remain untaxed. Combine this latter feature with those above, and with the gradual elimination of the inheritance tax, and a fertile environment is created whereby: (1) it is easier to accumulate wealth; (2) gains from traded wealth tend to accumulate; and (3) gains from non-traded wealth are never, ever taxed. Therefore under such favorable tax policies wealth tends to accumulate and multiply with the wealthy, and wealth remains within the family.
Financial strategies of corporate America are influenced by tax policies. While some may give token dividends, most profitable companies have continued the practices of: (1) carrying huge sums of cash; (2) buying other assets; or (3) buying back stock. All three of these practices tend to enhance the value of existing stock, and thus add to the unrealized gains (untaxed wealth) of company shareholders -- particularly owners of large blocks of stock, many of whom are managers, board members, and relatives. This inside group is well situated to influence corporate strategies in the own interest, not necessarily coincident with the interest of small stockholders or investors in mutual and pension funds, who comprise the majority of stockholders. This ruling oligarchy may choose between and among: (1) higher salaries; (2) greater dividends (at reduced tax rates); or (3) letting equity value (wealth) grow untaxed. Most tend to choose the third option as primary.
Then there are those intangibles known as stock options. Stock options given to managers and board officials allow these persons to buy within a time period a stated number of shares at a stated price (below the market value curve). As stock value grows untaxed, in accordance with the strategy above, these stock options may be exercise and purchases made at earlier and lesser values. Option stock is taxable at the difference between stated value and appreciated value, but ONLY if the stock is sold. Otherwise, these gains are untaxed. This is a simplified explanation, minus complexities.
This has been a brief look at effects of tax policy on wealth accumulation. This demonstrates a shifting of the tax burden, as well as a shifting of the benefits derived from the American form of capitalism. The middle class bears more of the burden and reaps fewer of the rewards. The results of these changes are potentially serious, even disruptive, in social and political consequences for the future. All this has been kept quiet within the tent too long. An open and honest public forum is badly needed on these economic and social issues.
The middle class has been impacted negatively from both above and below. The trends outlined demonstrate the basis for upward separation and prosperity of the wealthy. But the middle class is impacted by other circumstances as well. The outsourcing of professional and skilled jobs looms large, as does corporate migration to cheaper labor markets. Importation of good from areas with cheap labor, immigrant labor competition, and the stagnation of swages all play a part in what has been termed as "the war on the middle class." But these are worthy of a separate discussion.
Dr. Edwin E. Vineyard, AKA The Militant Moderate
