Picking Up Where Krugman Left Off

Posted by Bob Lord

Paul Krugman's piece on Friday summed up my feelings perfectly about why this election is so critical: 

And here’s the thing: if Mitt Romney wins the election, the G.O.P. will surely consider its economic ideas vindicated. In other words, politically good things may be about to happen to very bad ideas. And if that’s how it plays out, the American people will pay the price.

You can read the entire piece here

Here's what I think is possible if Romney wins and Krugman is correct. We likley will see a right turn immediately after the election, with the Ryan tax plan replacing the Romney tax plan. Why? Because Romney likes the Ryan plan better than his own, he just doesn't have the balls to 100% own it right now. The Ryan plan would exempt all investment income from tax, which is the direction Romney wants to go. HIs own plan takes smaller steps in that same direction. Although Romney has not 100% owned the Ryan plan, he heaped enough praise on it earier on to allow him to claim his election is a mandate for it. And the legislative process works in his favor here, because he can have the Republican House start the process. 

Yes, if the Senate remains Democratic Romney could be thwarted initially, but only for two years. In 2014, all those Democratic seats won in the 2008 wave election will be up for grabs. It's highly likely the Republicans can get to 50 seasts at that time. 

Here's what happens if this comes to pass: Under the Ryan plan, the rate of increase in wealth for those at the very top will accelerate yet further. Everything else being equal, almost all of us would prefer to accumulate wealth rather than dissipate it. Some of us care more about this objective than others, but with few exceptions we'd all like to have more wealth at our disposal. Now think about how wealth accumulates. Most of us generate income, but we have forces that limit our accumulation of wealth. For most of us, those forces are employment taxes, taxes on our compensation, and living expenses. Even if we're in the top 1%, but towards the bottom of it, living expenses consume a large piece of our income. But these factors have virtually no impact on the very wealthy. Their limiting factors are the tax on investment income and the estate tax, both of which the Ryan plan completely eliminates. 

So, if elected, Romney will work to remove all the obstacles the wealthy face in their drive to accumulate ever greater wealth, while keeping the obstacles the rest of us face firmly in place. And that will be an absolute disaster. In the last generation (30 years), the aggregate wealth of all Americans has increased six fold, from 10 Trillion to 60 Trillion, while the wealth of the top 400 individuals (barely more than one one millionth of the population) has increased twenty-four fold, from 70 Billion to 1.7 Trillion. And that occurred during a period when the estate tax mostly stood at 55% and investment income was taxed at no less than 15% and typically more. Think of where we'll be in one more generation if the very wealthy pay no tax at all.

Here's anohter way to look at it. It's been widely reported that 93% of the income gains in 2010 went to the top 1%. What's not so widely reported is that 37% of the income gains in 2010 went to the top point oh one percent. If that 37% of the income (coming mostly in the form of investment income) is exempted from tax, what does that do to the tax burden on the other 63%? Obvously, this will fuel an even greater concentration of wealth at the top. 

If the statistics are too confusing, here's the best analogy I can come up with to simplify things: American life today is a game of Monopoly, where ultimately one player will own everything, but it's not until the very end that the other players give up hope. Under Romney, American life will be that same game of Monopoly, except the player who's winning will receive $2000 instead of $200 each time he passes go, and the rest of the players will pay $200 instead of receiving $200, and hope will die quickly for most of us.