Category Archives: Tax policy

Google Viewing Peer-To-Peer

On March 11, 2012, I posted about peer-to-peer financing.  I wrote at the time that I felt this was a way for the people to use the system against itself.  It is not a perfect answer, but it was one tool that can be used.  I still believe this to be the case.  However, I heard something that is only slightly disturbing this week.  It is also reaffirming.

Google is getting involved.  Google directly, mind you.  Not their investing arm, Google Ventures.  Google is investing $125 million dollars and taking a seat on the board at Lending Club.  This indicates a number of things.

From a practical standpoint, neither Google nor Lending Club are speaking out directly about what their plans are specifically.  Speculation is that Google wants to implement their technology and bring Lending Club into the Google Wallet fold.  There is also, of course, their cut.  It’s just a good investment, when they’re going to get a slice of the loan fees generated; $350 million in loans in the last quarter.

It also, indicates that people are catching on more and more to this method of lending.  People are looking beyond banks more every day, and seeing other methods and ways to move beyond them.  Consider:

Chanda Lugere works for a bank, but when she wanted a loan to consolidate her credit card debt, which carried a high interest rate, the bank didn’t have much to offer. She tried other banks, but even with her excellent credit score she got nowhere.

So Lugere, who’s in her 30s, went online seeking alternatives.

People living in a 20th and 21st century capitalist society often find themselves in need of credit.  That is, sadly, a reality.  It was not always so, and it does not always have to be so, but it is the case now.  Do we have to go through the wringer to get it?  Do we have to sell our soul to the company store?  Not necessarily.  Peer-to-peer lending offers a way forward for people to get financing to reduce the interest they’re paying, while still returning a profit to those lending.  As I wrote in my previous piece on this topic, this not only has a solid financial basis, but a much higher social value.  For the borrower though, this saves them significantly and thus allows them to get out of debt much more quickly!  Chanda Lugere, mentioned above, got her loan at 6% which, while still high, is half of what she was paying.

Another issue that Google’s investment indicates though is that bigger businesses are catching on, and this part worries me.  If big business gets into the game, they will find ways to pervert it.  They will find ways to wrest control of the system even further away from the people.  Make no mistake about it, business was already involved.  As I pointed out in my previous piece, both of the big P2P lending facilitators, Lending Club and Prosper, were associated with WebBank.  This, as Robin Chase, founder of Zipcar put it, is not a true peer-to-peer system, but rather a “peer incorporated” system.  The smaller the corporation stays in relation to the overall system though, the more the peers are able to stay in control and to benefit from the system, rather than to become simply grease for the gears.


Check Please

Tax season has officially begun.  W-2s had to be sent out by January 31st.  The IRS began accepting e-filed returns on the 30th.

Let the whining begin.  The weeping and wailing and gnashing of teeth.  The woe is me that always comes when most people are asked to fulfill the responsibilities that correspond to the possession and exercise of rights.  Especially in a society that is all about, “What can you do for me?”

Ask not what your country can do for you.  Ask what you can do for your country.

This is taken from what is typically considered one of the greatest inauguration speeches, and one of the finest speeches ever given, period, and yet, this concept is so foreign to Americans today.  Today this would have so many screaming, “Socialist!  Communist!” even though most of those would have no idea what those words even mean.

When President Kennedy said them at the beginning of his term, he was rallying the country together following a contentious presidential race during the Cold War, and yet it was a time that was less divided that we now find ourselves, in many ways.  It was a time when we still had something that resembled a liberal base in America.  And, it was a time when, while people may not have liked it, they at least didn’t consistently shirk their responsibilities quite so much as they do now.

Can you imagine what FAUX News, Glen Beck or Rush Limbaugh would have to say if the POTUS were to use that line in a speech?  If he were to say that echoing Kennedy, it would be bad enough, but try to imagine the reaction, if Kennedy had never said it, and Obama were the first president to say it.  I can imagine drowning in a sea of the foam coming from their mouths.

One of the defining features of the shift to the right over the last 40 years is a decline in personal responsibility.  We see it in so many ways.  When Kennedy gave the aforementioned speech, the top marginal tax rate was 91%.  It had been since 1946.  Unlike modern conservatives, when the conservatives of the past took us to war, they actually paid for it instead of borrowing “against our children’s future” to borrow a phrase, and then blaming the black guy, oops, I mean the next guy.  You see, when we started to gear up for WWII, the tax rates started to go up.  I’ll spare you the full re-cap of the tax rates, as I’ve written on that previously, and you can read more about that here, if you would like.

The real point is this; it’s time to pay up.  We want the benefits of a society that includes the safety and benefits of a “civilized society” provided by decent roads (we’ll ignore the disintegrating infrastructure, for now), police and fire safety, public water, electricity, food inspections, courts, and the list goes on and on.  But, so many of us are looking to someone else to foot the bill.  Okay, so that’s not entirely unreasonable.  No one wants to pay more than their share, but if we’re going to live in this shared society, then we all have to be willing to pay at least our share.

It is just the same as jury duty.  If we want to have a functioning and reasonable jury system where, again to steal a phrase from the currently raging gun argument (I won’t call it a debate because that would imply more civility than most of it has), one is to be “judged by 12 rather than carried by 6”, then there has to be those 12 to serve.  Yet, the vast majority of people bitch and moan and look for every excuse possible to get out of jury duty if they receive the summons.  “Oh, I can’t do that!”  Really?  So, it’s just not important enough to you?  Granted, that too needs to be revised.

Of course, these things are tied together in another way.  That is, financially.  I really do understand the working stiff who can’t afford to take the day off of work, because his or her job isn’t going to pay them for not being there, and the jury pay is a ridiculous amount.  Typically, it isn’t even enough to pay for the parking, much less enough to make up for the loss of pay for going.  Unless you are fortunate enough to work for a company that does compensate for jury time, then that is a legitimate issue.  It is one that should be made up for by the state.  We can afford to pay our legislators, most of whom are worth millions, hundreds of thousands of dollars each year, but we can’t afford to compensate our jurors at even minimum wage for a job that is at least as important?  No, in part, we can’t because we do not have the money for it.  In part, we do not have the money for it because we do not collect sufficient taxes, and thus, we come back around to what is important.

Abe Lincoln paid $1,296 in income taxes in 1864

Fact: The average top marginal tax rate in the US since the institution of the Federal Income Tax in 1913 through 2011 is 59.4%.

Fact: The average top marginal tax rate from 1913 through 1989 was 66%.

Fact: The average top marginal tax rate from 1990 though 2011 is 36.3%.1

Already we can start to see a problem.  Let’s look closer at these numbers though.  (The income tax did not, as many believe, actually start in 1913 with the passage of the 16th Amendment.  The first personal income tax in the US was in 1861.)

Abraham Lincoln's Income Tax Record 1861

Yeah, President Abraham Lincoln paid $1,296 in income taxes in 1864.  That’s a copy of the record.  5th line down.

I don’t really care to get into a full history of the personal income tax in America though.  The bottom line is that if we want government services, such as roads, protections, Social Security, Medicare, Veterans services, etc then they have to be paid for.  We long ago left the world where those services can be paid for by tariffs.  A sales tax is a regressive tax that disproportionately impacts the lower income side of the economy.  It cannot be used as the sole funding mechanism for the services that we demand from our shared society.  It could be considered as part of a total taxation system, but even that is not a progressive or fair system.

The income tax rate has varied through the years.  As it should.  When the needs have been higher, the rate has gone up.  With one noticeable exception.  The last 30 years or so, beginning with Reagan, though it really kicked into high gear with Bush the Elder.

From 1913 to 1915, the top rate was 7% then it doubled to 15% in 1916, then jumped up to 67% in 1917 and peaked at 77% in 1918-19.  hmmm … Oh, yeah.  World War I.

It started to come down, slowly as we continued to deal with the debt we had over the next few years until it was back down to 25% in 1925.  Wall Street Crashed in 1929 and eventually, in order to rebuild the economy, the Revenue Act of 1932 raised the top rate to 63%.  With the New Deal, it was raised to 79% to fund the recovery.

Along comes World War II, and the top rate peaks at 94% in 1945!  The Korean war during the 1950s kept it hovering around 91-92%.

It was lowered under Johnson to 77% and then to 70% from 1964 on.  In 1982, the top rate was lowered to 50% where it stayed until ’87.  A brief dip down to 28% from 1988 to 1990 back up to 39.6% under Clinton.  Oh, yeah.  That was when we were projected to have budget surpluses, if you’ll recall.

Now, here’s where the real stupidity hits.  9/11, two wars, and the top marginal tax rate drops!!  It drops to 35%.  Which doesn’t seem like much until you consider that no one is actually paying this top rate.  Mitt Romney, for example, made $21.7 million in 2010 and paid just 13.9% in taxes.  Warren Buffet, in 2010, made $62,855,038 and paid just 17.4% in taxes.  This is largely due to two factors that are not available to most of us.  One, the deductions which are available for charitable giving and so forth make a huge impact.  Two, investment income is taxed at a much lower rate than labor income.

Correlation is not causation, of course, but the economy has tended to do the best when taxes on unearned income were high. Economic growth was great during the 1950s, when dividends were taxed at very high levels and capital gains rates were 25 percent, much higher than they are now. Since 2003, tax rates on unearned income have been at their lowest levels ever, and economic growth has been sluggish.

I am not advocating war here.  I abhor war.  I wish I lived in a world with out it.  I don’t live in that world.  The point though is that in the past we paid for the wars that we were in.  When we needed to rebuild the economy, we paid for it.  We raised taxes.  We didn’t build up the massive and devastating debt that we have now.  We didn’t pretend that higher taxes were devastating to the economy.  Clearly they aren’t.  Look at how we grew through these times.  We didn’t shy away from having the wealthy paying their fair share.  Those who benefited the most from our shared society, our shared growth, have the most to return to our shared recovery, and, in return, will get the most from the shared recovery.  That is how the society works.

So, while there is certainly bloat in the system and efficiency to be found, we need to return to a more reasonable tax rate on the upper end of the income spectrum.  Neither the Democrat nor the Republican wing of the One twoo party is truly arguing for this.  Given our current debt and the bail outs for the wealthy that we recently made, that rate is probably in the neighborhood of 75%.  We need to remove most if not all of the loopholes that have been implemented in the system that allow for the avoidance of taxes by the uberwealthy.  It was the existence of these very loopholes which led to the creation of the Alternative Minimum tax, which was a good idea, but fails to achieve its purpose because it, like so many things, was not updated.

We need to also look at the capital gains rates and other unearned income tax rates.  We’ll tackle that soon.  Suffice it to say for now, that the same holds true.  The periods of most solid growth and lowest debt in our country’s history have not been the periods of lowest taxation.  This is a myth that has the veneer of truth only because the conservative marketing machine has been so effective.  The facts speak for themselves.

1 – Calculations made from raw data.  Raw data available from The Tax Foundation.

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