The Case Against the Obama Taxes

Yesterday, President Obama proposed a tax plan. George Shultz has replied: “rich people and large companies like General Electric Co. are the beneficiaries of a complicated tax system.”

“It’s wealthy people and the GEs of the world that know how to manipulate these preferences and get their tax rates down,” said George Shultz, an economist and former dean of the University of Chicago’s business school. “The average Joe doesn’t have access to those lawyers.”

George Shultz, also former United States Secretary of the Treasury and Secretary of State, made this statement in an interview with Bloomberg press when arguing for a complete change in the tax code to reflect the realities of the 2010s.

One could also say the same thing when referring to the ability of “wealthy people and the GEs of the world” to handle the inflationary environment created by governments that are aiming to sustain “high levels of employment” as designated by the full employment objectives of the United States and many other western nations.

The wealthy and the large corporations can protect themselves or even benefit from inflation. The “average Joe” cannot do this. In fact, the “average Joe” ultimately “gets screwed” from inflationary policies aimed at keeping him employed. Having under-employment rates in the 20 percent plus range is not what was planned as policies of credit inflation dominated the past 50 years.

Furthermore, credit inflation creates a wonderful stage for financial innovation, shifting jobs from manufacturing and production to financial services and other support industries…like the legal profession. We can only look at the shift in jobs in the United States over the past fifty years to see the consequences of this development.

The financial innovation of the last fifty years points to another change in the world that not only allowed the financial innovation to take place but provides insight into the world of the future. The change I am writing about is the advent of the Age of Information. Financial innovation thrived upon the new technology and the new technology was underwritten by the growth of the financial innovation.

“Wealthy people and the GEs of the world” (along with the JPMorgan’s, Goldman-Sachs, and others) are able to use this technology “to manipulate” things so as to benefit themselves as much as possible. They have the tools. Why did GE come to earn two-thirds of its profits from its finance wing? And, the same can be said for General Motors and many other “manufacturing” companies.

And, people are concerned about the fact that over the past fifty years the income/wealth distribution of the United States became so skewed toward the rich. The credit inflation and social policies of the past fifty years created the conditions for those that could “manipulate” things and get their tax rates down and profit from the inflationary environment that was created by the politicians.

The “average Joe”?

The “average Joe” could do little or nothing. If he “stayed employed”, kept the job at which he was already working, he fell behind. The “average Joe” needed to become educated, needed to become more technologically savvy, needed to find the “lawyers” and financial advisors to “manipulate” the system. But, that was not the way the incentives were aligned!

Unfortunately, the objective of the politician does not mesh with that of “the average Joe.” The objective of the politician is to get elected and then to get re-elected. Consequently, laws and regulations aimed at keeping “Joe” fully employed in his current job have been crucial. Empathy with “Joe” was good politics. The fact that “Joe” was constantly falling behind was not the issue.

The world has changed. Yet, we can’t seem to get away from the same election strategies that have been followed over the past fifty years. In my mind, we are going through a cultural shift that is painful and disturbing. It is a shift that is going to take place, one way or another, and just pursuing the same goals over and over will only exacerbate the pain and the disturbance over time. And, the constant advancements of information technology will just add to this.

Shultz is arguing that the “Tax Reform Act of 1986” needs to be revised and reformed, not extended and made more complex. He argues that “a simplification of the code would allow Congress to lower rates on a ‘revenue-neutral’ basis, while economic expansion would boost tax receipts.

“You’ll get a gusher,” Shultz said. “If you get this kind of stimulative tax policy and other things into effect, there will be a response and revenue will come in.”

It seems as if “wealthy people and the GEs of the world” will play ball with you when they feel that they are not being singled out and picked on. Otherwise, out will come the lawyers and the financial advisors and we get results similar to the ones described above. The problem is that in proposing these changes in the tax codes as Obama has done or creating an environment of inflation, things just don’t stay the same.

The politician is subject to the same fallacy that is faced by the economist conducting his deductive reasoning. It is the problem of “ceteris paribus”, the assumption that “all else stays the same.” When you change the tax code or the inflationary environment, all else does not remain the same. As a result, you often find yourself facing the problem of “unintended consequences.” You get results that you didn’t intend to get. In the case of the economic policy over the past fifty years, you get higher levels of employment and under-employment than you wanted and greater inequality in the distribution of income/wealth.

The current Obama tax plan is a journey into the past.

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