“The Structural Endgame of the Fiscal Cliff”, by Charles Hugh Smith.

Ready to collapse.  An old building in the Wil...

Ready to collapse.  (Photo credit: gbaku)

This article, The Structural Endgame of the fiscal Cliff, at peakprosperity.com, by Charles Hugh Smith, whose site is oftwominds.com, is the sober reality about where we really are economically and politically as a nation. When our political leaders say “the wealthy among us have to pay their fair share” they are trying to get you to think that the primary reason the Government is in so much debt is because these “wealthy” aren’t taxed enough. Like a magician trying to get you to look over here while the exchange is taking place over there, these spend thrift politicians hammer the “wealthy” as greedy because, for some crazy reason, they don’t want to pay more in taxes than what they are legally bound to pay, while these same politicians who greedily spend 1.3 trillion dollars more than they take in taxes, are being ignored, as the primary reason for the debt problem.   Here are some quotes from the article.

“Financially, the Federal government’s spending has outrun the tax revenues being collected.  Structurally, Federal expenditures for entitlements (Medicare, Medicaid, Social Security, Veterans Administration, etc.) will rise as Baby Boomers retire en masse over the next 15 years, while tax revenues will stagnate along with earned income.

There is no way to square these circles.

The political foundation of America is starkly unjust.  An entrenched financial Aristocracy buys the complicity of the bottom 50% and retirees with Federal transfers – a Tyranny of the Majority.  The 24.5% below the Aristocracy who pay most of the Federal taxes are dominated by this alliance. This may be legal, but is it just? Even more critically, is it sustainable?

In order to understand this article you have to know the difference between income and wealth. Income is what is earned as wages from an employer, and what you earn from being self-employed. Wealth is essentially assets, such as stocks, and what you gain from these assets, dividends distributed to share holders. The Government considers income as earned and wealth as unearned income, and taxes them differently.

“…..Roughly 70% of all financial wealth is held by the top 5%; within this top layer of ownership, the top ½ of 1% hold an outsized share”

The top 1/2 to 1% of this top 5% hold roughly 43% of the wealth. Remember this is not income, it is assets.

“… This preponderance of wealth in the hands of a few translates into an equivalent preponderance of political power, as there are no real limits on the purchase of political influence, favors and power.……  Unearned income (rents, dividends, stock options, hedge fund management fees, etc.) is treated much differently than earned income.  Unearned (rentier) income is governed by highly complex tax codes that lend themselves to politically controlled loopholes, subsidies, and exclusions. As a result, some profitable corporations not only pay no tax but actually receive subsidy payments from the government.  In other cases, politically powerful enterprises have tax laws written specifically to limit or erase their tax burden.”

The top 1% of wealth holders are the people he labels the Financial Aristocracy, because they are able to purchase protection from coercive Government through the political process. Remember politics is how you gain control of Government power, which can be used to take what you want, or protect what you have.

“…U.S. income tax is highly progressive; most Federal taxes are paid by a minority of the citizens. The top 1% of taxpayers reported almost 17% of all taxable income and paid 37% of all income taxes.  The top 5% reported 32% of all income and paid 59% of the taxes, and the top 10% earned 43% of the income and paid 70% of the taxes.

The top 25% (those earning more than $66,193) paid 87% of the taxes.  The bottom 50% of taxpayers, roughly 70 million people, earned 13% of the income and paid 2% of the income taxes collected”

When you hear stats like the top 5% pay 59% of the taxes. What is left out is, the top 5% of income earners pay 59% of the income taxes. This top 5% of income earners are not the top 1% of wealth holders, although there are some people in both categories. Many people accumulate great wealth over their lifetime by investing their income in assets. But remember income and wealth are different things and taxed differently by the Government.

 …There are roughly 127 million people who receive Government transfers of benefits. Sixty-one million recipients of Social Security and Medicare and 66 million people receiving welfare (SNAP food stamps, housing credits, Medicaid, etc.)  Since there are about 115 million full-time jobs in the U.S., this means there are 1.1 government dependents for every full-time worker in the U.S……….The top 25% who pay most of the taxes, roughly 30 million people, are a political minority compared to the 127 million people drawing direct payments/benefits from the Federal government and the 65+ million who pay essentially no income taxes (though they do pay the 7.65% Social Security/Medicare payroll tax).

 “What few dare admit, much less state publicly, is that the constitutional limits on the financial Aristocracy and the Tyranny of the Majority have failed. This guarantees a future Constitutional crisis as each political class – the financial Aristocracy, the top 24% who pay most of the taxes, the dwindling middle class and the bottom 50% who depend on Federal transfers – will battle for control as the Status Quo collapses under the weight of its unsustainable promises.”

When Government usurps power over time, powers not granted by the Constitution, it results in different constituencies being created, each trying to receive favors from politicians, whether in the form of monetary payments or regulations, which benefit themselves at the expense of others. This is exactly were we are as a society. Instead of competing and cooperating in the expanding sum game of the free market, and creating a higher standard of living for everyone, politicians and politics have pitted people, and groups, against each other, all competing for political favors and largess in the zero sum game of Government, which means one person or a group benefits at the expense of others.

Those who administer Government handouts, those who receive Government handouts, those who buy protection from Government power, and those who pay no taxes, represent a majority of the population who are pitted against the roughly 30 million people who pay 90% of income taxes. This majority wants Government intervention because it directly helps them, while the smaller minority who fund the Government are like slaves who’s labor is confiscated through taxes.  Nobody will win this game because, when a growing number of people demand more from the shrinking production of fewer and fewer people, it becomes a recipe for collapse.

Click on the article above for an interesting perspective about our economic and political problems.

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One Comment on ““The Structural Endgame of the Fiscal Cliff”, by Charles Hugh Smith.”

  1. Eric Monti Says:

    Exellent write up!


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