November, 2012


THE AMERICAN DREAM

No Limit on Gain

Some among us who have the most are the loudest in proclaiming dislike for government expenditures that give economic relief to those among us who have the least. These days more and more American citizens appear to be falling into a less fortunate position in our society. The bellow of indignation is about the costs of economic relief and who will pay for it. However, very little time is actually spent in talking about who pays. Instead, the discussion is mostly about limiting or cutting back government payments and services. The banner often waved says, “No new taxes. Cut spending.”

Levels of government expenditure have usually far exceeded government tax collections for most of the twentieth century and have continued to do so throughout the beginning of the current century. The difference has been covered by government borrowing. Until recently this has been a very sweet deal for those who have had money to lend or who have been able to borrow and to purchase government bonds whenever those government bonds paid a higher rate of interest than the interest rate charged on their borrowed funds.

If the government had not borrowed, then tax rates would have remained high to pay for government expenses. Instead, government borrowing soared, tax rates on the wealthy decreased, and many middle-income and low-paid workers ended up paying very low or no income taxes at all. When income taxes are low or not charged, then wages and salaries can be lower while still covering the costs of daily life.

What a deal ! Pay workers less, get higher profits, pay less taxes, and use the surplus to buy government bonds. And the interest on local government bonds can be tax-free. What could be better! For the very-well-to-do who have money to invest there is no limit on gain via government financing and government tax policy.

Housing - the Road to Wealth

Housing mortgages brought us to our most recent national financial crisis and are a good example of how tax policy may create wealth for some while devastating the financial position of others. After World War II in the San Francisco Bay Area a single family dwelling could be bought for less than ten thousand dollars and sold a little more than a generation later for as much as seventy thousand dollars. However, the best was yet to come for those who bought that same house in the 1980s and sold it for seven hundred thousand dollars before the year 2007. For someone so lucky the capital gain was $630,000. For a single person the tax code allowed that$250,000 of that gain was not taxed; for a married couple $500,000 of that gain was not taxed.

$500,000 of untaxed gain ! For doing nothing but living in your own house for twenty-five years. Think about that for a moment. Earning the Federal minimum wage of $7.25 per hour it would take a little more than 33 years to earn $500,000. And you did not have to be a member of the wealthiest 1% of Americans to do this. All you needed was $14,000 and a bank to give you a $56,000 mortgage in 1980.