The Corpus Callosum column by Jonathan Schechter is always worth a look in the Jackson Hole News and Guide . His columns in the Jan 11 issue inspired me to make a few comments. To refresh your memory, Jonathan discussed how economic activity and taxable sales related to that activity have changed in the past 5 decades and particularly in the past 10 years. This mirrors changes in the state and national economy in the same period. In the 1950’s and “60’s the US was a balanced dynamic economy producing goods and services not only for its own citizens but worldwide. The industrial expansion following WW 2 fueled a growing middle class who produced “things” from our abundant resources generating real wealth and rising incomes to a growing middle class. Government’s funding model was to tax companies and individuals involved in this post war boom. By making things, companies and individuals could buy things. From a government funding perspective, government could tax the things , and the people and companies making this real wealth. That government funding model has faltered as Schechter pointed out in his beautiful graphs. So what is government to do? If you want government services at the state and local level you have to pay for it somehow. The national level is a growing disaster which will not concern us here.
What has changed is the economy’s anatomy. We went from a balanced manufacturing economy to a FIRE economy(Finance, Insurance & Real Estate). This FIRE economy has escaped paying taxes at the rate being paid by the Primary and Secondary sectors of the economy. This partially explains the enormous growth in this Tertiary economy. They have escaped taxes by accounting tricks, deferring income and a rewrite of the tax code benefitting them at the expense of the sectors of the economy producing real wealth. This can change. This Tertiary economy makes money off of money. This economy makes nothing of value, creates no real wealth. Government has only lightly taxed this segment. It is time to tax the Tertiary economy. How?
1. Tax all income equally. That means capital gains income is taxed at the same rate as ordinary earned income. That would include payroll taxes,medicare taxes, and applicable state taxes. President Ronald Reagan made this change in the Tax Reform Act of 1986. It must be reinstated. My personal preference is to lower tax rates on all earned income for both individuals and corporations. Currently for example Hedge funds, investment funds, and principals in LBO corporations pay at the low capital gains rate of 15%! In recent years individuals have netted over a $BILLION dollars in a single year.
2. Tax financial transactions. This can be a tiny tax on equity, bond, futures, CDS, insurance and real estate transactions, IPOs and derivatives. It can be paid by the purchaser or the issuer of the trade. In the globalized economy there are hundreds of $Trillions in just derivatives. A 0.1% tax would yield hundreds of billions alone. Collecting it will take effort. No one wants to pay taxes and the financialized economy has shown itself to be the world champions of tax evasion.
3. Tax only the users of particular services. Use the dump, the highway, the schools and universities, the airport, Teton Pass Plow trucks………..pay for it.
4. Tax property to discourage speculation. Once a structure is on the property and is put to a use, it is taxed at a higher rate than raw property. States like Wyoming are famous tax havens for the ultra wealthy who buy huge parcels, ranches and the like and pay little in the way of taxes. The obvious challenge is not taxing legitimate farmers and ranchers into oblivion. This can be done. Keep property taxes for your home low. Wyoming has very high property taxes.
5. Maintain the estate tax. Wealthy expatriates flock to states like WY to avoid taxes in their former abodes. Close that loophole and give them nowhere to hide. Make the estate high enough to allow legitimate businesses to pass on their businesses to their heirs.
6. Tax the 1%. Tax all income. Does this mean an income tax for Wyoming? Do the math. WY has finite fossil and mineral wealth. Put all or most of the income in a trust fund for our kids. An income tax is on all income. Romney’s tax rate on $25 million is 13.8%. What is yours?
7. Put a carbon tax on fossil energy to reduce its use and encourage conservation. Our oil, gas and coal will last longer and give us time to develop energy alternatives.
8. Reduce the cost of government. Government employees are the last segment with taxpayer paid pensions and gold plated health care plans. Mind you, pay them well so they can afford to save for retirement…………just like the rest of us. The working taxpayer must pay their salaries, not their perks. Government pensions are bankrupting other states and are a growing share of Wyoming’s budget. In fairness, existing employees were promised a retirement pot. Give them a fair lump sum pot based on what the rest of us could afford to put away. I think 10% of their salary would be a fair number for each year of work. Have them pay their health insurance like the rest of us and it ends when they quit. To pay these exorbitant unfunded retirement pensions, states are imposing austerity on the citizens and their children. This is blatantly unfair to the rest of society.
Summary: The Tertiary economy has become a wealthy oligarchy by avoiding taxes paid by the working wealth producing members of society. They will resist paying their fair share with all means at their disposal. There is simply no other way to fund necessary government than taxing the Tertiary Economy.