There are large income tax incentive programs to Encourage Conservation of Energy, or to Promote Research and Development, or to Induce the Production of Ethanol, and so many other programs
Yet our biggest issue is ignored under our income tax system – the devastation wrecked upon average citizens by the relentless economic cycles that ravage our society. A large effect in creating these cycles is caused by our financial industry.
In these blog postings, I have described how the financial system is engineered, how economic greed causes every good idea to be sold to investors, and then resold again and again, and engineered and re-engineered over and over again. The incentive for the salespeople in the system is that every sale that they make, creates more profit in their personal pocket.
So of course, if they are able to sell something, there is no greater incentive than to try and sell something similar, and this repeats itself over and over. It is an easier sale than trying to convince someone to buy something brand new.
Think back to the latest craze – the sub prime mortgage bubble, the re-packing of simple mortgage debt until is was unrecognizable, and was then regarded as Triple A bonds, when in fact it was junk mortgages.
Remember the money market funds before that, that were frozen and enormous sums lost, because no-one realized that these were not Triple A covenant debt, but only repackaged junk debt.
Think about the crisis before that when proposed internet companies were given valuations 100 x, or 1,000 x their value, then packaged and an increasing frenzy consumed everything offered – until the inevitable bubble burst.
And so it goes, time and time again. How many times does the middle class have to be economically devastated before we open our eyes? Yet, the same thing has re-occurred throughout my economic lifetime, and I do believe that unless we take some steps, it will re-occur over and over again.
Is this really Capitalism? I think not.
I think that democracy, individual rights, personal economic freedom and capitalism are all wound around the same basic principles. It is the basic right of a member of society to live a decent life, a proud life, a life of free choice, and a life of economic stability.
A Simple Way to Moderate Excesses
The financial industry should be registered the same way that any other economic stimulus program is monitored, the same way that Income Tax shelters have a registered tax number.
It really is very simple. If you work in the financial industry, the income tax system recognizes you as working in that industry. Same as an accountant is recognized as working as an accountant.
The principle should be that if your income exceeds the national average of all industries by more than 10 X as much, you fall into a special higher tax bracket. And for every additional 10 x multiple, you again move into a new tax bracket. These higher brackets move up in rate of tax dramatically.
Essentially, if you make a tremendous amount of money, you are selling too much garbage and the cycle is escalating. Higher Income Tax rates remove the incentive to sell more and more garbage without caring what you are selling, and thereby moderate the cycle.
When it becomes obvious to the salespeople and to the packagers that most of their new found excess profits will be lost to taxes, it would be amazing how little incentive there would remain, to create more and more garbage to sell. Salespeople would realize that they made a lot of money and that working hard to make more money was becoming not worth the effort.
Pretty simple isn’t it. What a wonderful simple way to moderate these crazy cycles we go through every few years, never mind that we could pay down some of the enormous debt created by the last cycle.
Use Our Income Tax System Effectively
Excess profits encourage misdeeds and a loss of vision of morality. The income tax system ignores the most important industry of all.
An interesting effect of the US government bailout of the financial industry was the public outrage over bonuses paid to the executives of the financial companies.
These companies were going bankrupt through their own fixation on only making profits, and were then rescued by using public money. The executives then used part of this public money to give themselves enormous bonuses. In effect to reward themselves for losing money. Doesn’t that tell you something about the morality in that industry?
Understand How Important is the Financial Industry
The very essence of our society is based upon the ability to accumulate capital and to use that capital productively. It is essential to the very existence of our society.
We cannot destroy the banks, the financial houses, the brokerages, the insurance industry. They are too important.
What we can do is to allow them to continue to make enormous profits, but apply a different standard of taxation to the people in that industry, in the name of applying moderation to the excesses of that industry.
The Financial Industry Needs Some Moderation
When people see that income over a threshold is taxed at a higher rate, the incentive to act only to make money is reduced. The people running these money machines start to think about other matters and the incentive to seek extra profits without regard to the ill effects on society, is reduced.
I have no objection to these people owning the biggest houses, the fanciest cars, the most expensive jets. They essentially run our society. They are entitled. But they have to face some moderation
And we need those vicious economic cycles moderated.
