Tuesday, September 20, 2011

Buffet’s Rule or principle: Risk sharing across American households?

Keywords or Terms: Oracle of Omaha; Shared Sacrifice; Inequality in Taxation; Class Wars; Fairness and Unfairness; Middle Class; Millionaires; American Politics and Campaign 

 If you read the January 2010 issue of Review of Economics Dynamics article: “Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006” by Fabrizio, Heathcote and Violante), you will understand why the case is being made by Warren Buffet and President Obama for shared sacrifice in the nation's effort to dig herself out of the huge budget hole. We have had inequality in taxation and accumulation of wealth for years in this nation. And, like Republicans want us to believe, there is nothing wrong in being entrepreneurial and reaping  the fruits of one's labor. This notion is fundamental to a free-market economy; or, characteristic of an enterprising economy that can help create jobs. Mind you, there is nothing wrong in accumulating wealth from wages and investments. However, where the difficulty arises, is when wealth is being taxed at differential ratio, or the percentage of one's income paid seems lopsided for disproportional number of Americans, which in turn makes it seem as if there is no equality in shared sacrifice among all income groups; especially, when there is an urgency to dig the country out of an economic doldrums.

Enters the Oracle of Omaha, Warren Buffet, and his acclaimed contribution to the debate over how we may now get the economy moving.  Mr. Buffet surmise that the rich have to pony out more of their wealth largesse. The mega-rich billionaire wants to be taxed just as well as his secretary and wonders aloud in New York Times, why he pays taxes at a lower rate than his secretary. The chagrin of this unfairness led him to call for more taxation of the rich, including him; a position many Republicans have problems with. To put it in his word, the government should stop hugging the rich. The Republicans probably have problems with Buffet’s position, because to a large extent, about half a million of Americans who fall in the category of the mega-rich, with the assumption of a million-dollar income threshold, are mostly Republicans. In fact, over half of congressional representatives or senators fall in this category. It is not surprising therefore, when the Republicans liken this call to class warfare in their charade over the Sunday’s television talk shows circuits; to which President Obama, simply refers to as a Math problem; or raptly [my emphasis]: a misunderstanding of the ratio of taxation spread!

The persistence of income inequality in America has been a problem since 1979. Income increased for all groups on the economic ladder after the second world war. However, in the decades since 1979, while the income of the poorest Americans declined, the richest had an expansion in income threshold never before seen in the history of this democracy. During the booming Clinton era, the stock market was jumping and the rich were carting billions home. The Bush era tax cut, wiped out probably all the savings to the economy of that era and exploded the federal budget deficits. The gaps between the rich and poor, as well as between the rich and the middle class, have continued to expand since the second Bush's Presidency. While unemployment reached and surpassed ten percent in between the last Bush Administration and Obama's, rich Americans have had their wealth expanded vociferously from worthy stocks and bonds' investment performance.

Some economists claim that Obama was dealt a bad hand when he took up the office of the Presidency; that the economy was not only in a free fall as he ascended the office; but, that the precipitated unemployment problem preceded his Administration; and, made all the remedy in terms of economic stimulus, unnoticeable. As many Americans attempted to find jobs, an equal number were being thrown out of work nearly every quarter of Obama's administration. Further, the housing problem has not made matters better, more homes were being lost to foreclosures as many Americans lost their jobs and the American economy tanked. In addition, the parameters of measurement of wealth was skewed against the middle class and the poor, as many in these groups fell into the category of Americans whose homes were under water or in foreclosures. With a stubborn unemployment problem, government tax revenue fell and much of the economic remedies prescribed by Obama's Administration, seemed belated or ineffectual. Worse more, the issue of income inequality began to enter into political lexicon once again; and, many Americans in the middle class and poor groups saw themselves at the receiving end of a slumping economy. 

Inequality in human rights in America led to the equal rights amendment of 1972; the question today, is it time for amendments to the constitution to empower congress to enforce legislative provisions that ensure that the taxation codes are not too lopsided against a class, to an extent that the class feels cheated or annihilated when it comes to sacrificing for the nation in times of economic recessions. Empirical analysis of data on income inequality indicate the inequality across American households; and the inequality in risk borne when taxation is chosen as a measure of forbearance to the nation’s financial woes. For purpose of recalibrating the economy, could the secret lie in the taxation code as is now lauded, or are there other issues that we must be looking at to overcome the close to a grinding economy which has led to scarcity of jobs for a huge population of Americans? The rich in America are not finding President Obama's proposal to tax them at close to fifty percent of their wealth, very funny or welcoming. The middle class and poor income groups see this call as necessary or probably, too late, considering how long it has taken and the pain they have suffered during these trying times. 

The politics of the current call for the rich to pay  more in taxes probably emanated by the call from the left for a more proactive attitude from this White house to stand up against the Republicans, to shift away from conciliatory negotiations on issues of budget and more.  President Obama has been inundated by complaints from the left, that there is need to change tone in leadership. Many Democrats had called for bold and confrontational stance, challenging the Republicans to stand back and see that they are being obstructionists in negotiations regarding common ground on the deficits issues. The President has done just that in the last two days and he has even gone as far as drawing a line on the ground, indicating that he will veto any bill that does not carry the shared sacrifice doctrine with respect to raising revenue along social welfare budget cuts. There are those who perceive this new face of the Presidency as one that is long overdue; however, many Republicans perceive this new stance as apolitical rather than result-oriented.  Who is right in this assessment is better left for time to tell.

The Super Committee on Budget negotiations are probably listening; however, the Republican members of the committee are already saying there is no deal, if the proposal is to raise taxes against the super rich. These are delicate times and the fundamental underlying success of a call from a Presidency are hardly assessed by its pronouncement, but by his ability to effectively ensure that his pronouncement(s) come to pass rather than his adversaries'. The current speech from the President may not have broken the resolve of the majority of the House members, but Capitol Hill has very little options now, as they cannot just dismiss the current call from the President. The rhetoric of class warfare coming from Republicans probably will not make much of a difference, however, Democrats want their leader to return and stand on the basic principle  of their party; shoulder high above everyone. Those are the state of things now!