Wednesday, December 12, 2012

The Wealthy Panic as Fiscal Cliff and Bush Tax Cuts Expiration Date Loom

Creative thinking, don’t you just love it. Americans whose wealth comes largely from investments are selling off the ones that are doing well to avoid paying the increase in capital gains tax that will hit them if there’s no fiscal cliff deal and Bush tax cuts finally expire. Everybody will pay extra taxes, but taxpayers who earn more than $1m will pay about $254,000 more. 

Households earning $40,000 will pay $1,700 more. Their earnings come from wages so they’ll have to cough up. As they have no alternatives, the tax hike will hit them hard and in any case when your earnings are only covering the basics there isn’t much room for manoevering. Which seems simple enough to understand, and is the rationale behind Obama’s desire to relieve them of that burden.

The figure and the percentage is more than double for the wealthier and the truly wealthy, but they’re selling off investments such as homes they don’t really need so their income isn’t so high. That’s a lot of activity, nice for investment brokers. Their other option is to set up tax-shelter gifts or give more to charity. Probably a whole lot of non-profit organizations and new charities are going to spring up all over the US. 

Linked of course in machiavellian ways back to the donors. The problem is, whatever income bracket you’re in, losing income is traumatic. When you have a minimal amount and you slave to earn it, the loss takes you closer to the abyss. You could lose your home, be evicted, not have food for yourself or your children. You have to have that experience to know what it does to you and what reserves it draw on.

When you’ve never been anywhere close to that line, you still experience trauma at the thought, never mind the reality, of losing income. Even though your day to day life doesn’t in the least bit change and isn’t in any real way threatened. Your fear is entirely irrational, but it’s still real to you. You will believe that things are as bad for you as they are for people who actually are affected in a real way.

The problem is heightened by the fact that people at the real coal face of looming poverty are in the majority still honourable. They still want work, they’re willing to do anything to stay alive. Which helps the economy. But people who are only close to the abyss in their very heightened imaginations will destroy an economy rather than face their worst fears.  

They’ll trumpet old and tired rationalisations about how the wealthy need to be able to hold onto their money otherwise they won’t be able to afford to employ anybody or will leave for greener pastures. They’ll studiously ignore that the trickle-down effect has been no effect at all for so long as to be living proof that the truly wealthy hold onto their wealth in whatever way they can, that they don’t share and they don’t care. Warren Buffet excepted.

Are Republican politicians really so obtuse as to not understand all this? It seems so. For the last decade their modus operandum has been to hedge their bets and put off making a final deal on the expiration date of the Bush era tax cuts because they’ve been so certain that soon the voting numbers would change and they’d have a Republican president. Then they could cancel out the nasty expiration date for ever. Along with that of Bush’s estate tax legislation. 

The only problem for them is that it never happened. Living in never-never land is fun while it lasts. But it never lasts. And no amount of money in the bank can change that. For now, they and the beneficiaries of their tax policies have obviously done the math and stand to lose less with investment dumping than paying the capital gains tax. In theory.

The thing is, if you’re dumping investments, how do you stop that from sending a signal about the value of the investment? And in any case, who is going to buy them, I wonder? Everybody else in their income bracket, who can afford the homes or the stock, is doing the same. It would be truly ironic if this triggered off a stock market collapse. Caught by thine owne springe. Of course they’d take everybody down with them.