Socialism is coming to America! Little doubt that tax rates on wealthy in US are going to rise

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Published: February 21, 2019 1:13:09 AM

Clearly, socialism is coming to America even though an extraordinary number of people in the US (and, to be sure, other countries) are extremely touchy about the word

Socialism is coming to America! Little doubt that tax rates on wealthy in US are going to riseSocialism is coming to America! Little doubt that tax rates on wealthy in US are going to rise

An editorial I read in the Financial Times reported that sales of vinyl (records) have been exploding—25% year-on-year in the US and 17% in the UK—as have sales of hardback books (31% y-o-y). “The millennial generation (those born after 1996) is an important contributor to this phenomenon, seeing the vinyl record (as) an example of the “authenticity” they crave in everything from food to politics.”

The current issue of The Economist has a cover story titled ‘Millennial Socialism’—unsurprisingly, they believe it is not the answer to capitalism’s problems.

AOC—Alexandria Ocasio-Cortez, the youngest member of US House of Representatives, and, at 29, a little older than the millennials—has been making waves as a member of the Democratic Socialists of America and advocating a progressive platform that includes Medicare for All, jobs guarantee, guaranteed family leave, establishing a Green New Deal, abolishing US Immigration and Customs Enforcement, free public college and trade school, infrastructure projects for renewable energy, and a 70% marginal tax rate for incomes above $10 million.

Elizabeth Warren, a senior Senator who is running for President, has called Trump a “symptom of a larger problem (that has resulted in) a rigged system that props up the rich and powerful and kicks dirt on everyone else.” She is calling for a high tax on assets in excess of $50 million, which approach, in my view, is superior to that of AOC, since (a) it undercuts the likely (bullshit) criticism that it would reduce the incentive for highly productive people to work harder, and (b) redistribution of assets rather than income can generate far more value for the economy, since most of these assets—second homes, high value luxuries—are underutilised in terms of generating income.

Clearly, socialism is coming to America even though an extraordinary number of people in the US (and, to be sure, other countries) are extremely touchy about the word. It’s almost as if the benefits of successful socialist economies—Germany and most of Northern Europe, for instance—carry some sort of moral disgrace. It may have to slip in under another name—“a kinder, gentler capitalism”, perhaps.

Indeed, it is significant that as far back as the late 1980s, President George HW Bush—never anybody’s image of a socialist—spoke of the need for a “kinder, gentler America” highlighting the fact that things were not going the right way in America. And, indeed, the fact remains that in the 40 years since, inequality has soared to levels where talk of socialism is no longer limited to sophomore classes and Che Guevara stories.

Change is definitively in the air and there is little doubt that tax rates on the wealthy are going to rise. I would hope—and it seems a reasonable bet—that tax avoidance (ha ha) and tax arbitrage will come into focus. What seems like a thousand years ago, I used to work as a legal proofreader at law firms in New York and first came across the term “tax avoidance”—to anyone with half a brain, it was clear that this was just a legal way to “cheat” on your taxes. People like Warren Buffett have highlighted this time and again.

The scale of loss to the economy is impossible to assess, but I would bet that easily 2-3% of US GDP is tax avoidanced away in various tax havens like the Cayman Islands and others. One idea would be for the US government to pay each citizen of each of these havens, say, $40,000 a year (75-80% of US GDP per capita) in return for closing down these facilities. A Google search showed the population of Caymans at 60,000 (in 2016); so the payout to them would be about $2.5 billion; if the total for all tax havens came to 50 times that, the cost would be far less than even 1% of US GDP—the gain would doubtless be many, many times that.

There are much brighter minds than mine that could come up with better solutions—the good news is that many of them will now be working for the people and not just the 1%. Movements like Occupy Wall Street will likely come back to life, perhaps as part of the upcoming Presidential campaign.

Asset prices will fall globally, as the US is still the biggest daddy in the game. This will be no bad thing—most cities have become prohibitively expensive to live in. Indeed, there is already a softening at the top end of real estate; and certain “luxury” purchases remind me of the old adage of buyers having more money than brains, reflecting my earlier point that these assets are certainly monumentally inefficient in terms of generating economic value. Even as interest rates fall faster than currently anticipated, equity markets will remain subdued. There will, of course, be enormous pushback—indeed, there already is. Volatility will rise—buy the Vix.

But the reality is that there are far too many straws in the wind for this to be just another evening breeze.

The author is CEO, Mecklai Financial

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