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As pollsters on both sides of the American political divide point out, the standout fact about the presidential election is the small number of undecided voters. As Jeff Zeleny observed in the New York Times August 15, polls show that only 5% of voters remain undecided.
Both the Barack Obama and the Mitt Romney camps, Zeleny adds, are fighting for the enthusiasm of their own supporters rather than the marginal vote from the center: Romney “is now running a campaign more focused on energizing an anti-Obama coalition than on trying to expand the universe of Romney voters with an argument that he is the most qualified economic steward. Mr. Obama has been responding in kind, opening a deeply divisive period in the race in which firing up hard-core partisans is taking priority over trying to pursue relatively small numbers of undecided voters in the middle.”
Polarization of this extreme degree is not ideological, but existential. The great split down the center of America society is not between the rich and the middle class, as the Obama campaign suggests, but within the middle class itself.
This helps explain why Paul Ryan was a smart choice for the second spot on the Republican ticket. There are still more people paying taxes than getting a check from the government, and their patience with tax creep is exhausted.
The home price collapse wiped out nearly half the median family’s wealth during 2007-2010, but the tax burden middle-class homeowners continued to rise.
Exhibit 1: State and Local Property Tax Receipts (12 Month Rolling Sum) vs. Case-Shiller 20-City Home Price Index
Source: Census Bureau, S&P
As I argued in late last year (see The Economics of Polarization, Asia Times Online, November 1, 2011), the cost of supporting bloated payrolls and pension schemes for government unions at the state and local level forced these governments to squeeze more out of floundering homeowners. Homeowners now pay in aggregate almost as much in taxes as in mortgage interest. Taxes used to be a third of mortgage interest. The increased tax burden has kept home prices low.
The distress of the American middle class is unlike anything observed in the post-war period. Home equity rose at least in nominal terms during every five-year interval since World War II, except the most recent.
Exhibit 2: 5-Year Percentage Change in Owners’ Home Equity
Source: Federal Reserve
For the median American family, that translates into a 40% reduction in wealth.
The impact on home equity, moreover, isn’t the worst of it. The home-price bubble brought with it business opportunities for Americans with modest skills: construction, real estate sales, mortgage broking, retail, and a host of other services. With the boom in home prices came a wave of entrepreneurship comparable to the first response to the Ronald Reagan tax reforms of the 1980s.
A simple but robust measure of entrepreneurship is the change in the total number of corporate tax forms filed in the United States each year. That reflects the number of businesses actually operating and making money. During the Reagan years, the number of corporations filing taxes rose by 5% a year, reflecting the great wave of entrepreneurship driven by a happy confluence of economics and demographics.
Reagan cut the top tax rate from 70% to 40%, an enormous spur to individual initiative. The baby boomers were just entering their 30s, starting families, and eager to succeed. And American households were flush with capital. As Exhibit 2 shows, homeowners’ equity had more than doubled during the five years before the 1980 election.
Exhibit 3: Annual Change in the Number of Corporations Filing Taxes
Source: Internal Revenue Service
During the George W Bush years, this index of entrepreneurship rose sharply; corporations paying taxes grew by more than 4% a year in 2005 and 2006 before plunging into negative numbers in 2008 after the financial crisis. Although data are not available for the past four years, anecdotal evidence suggests that the number of corporations in the US has continued to shrink.
Exhibit 4: Net Income Per Corporation
Source: Internal Revenue Service
As Exhibit 4 shows, not only the number of corporations operating, but the net income per corporation, soared during the 2000s. The graph shows “C” corporations (in which income does not flow through directly to the owners) and “S” corporations (where income flows directly to the owners) separately. “S” corporations overwhelmingly reflect small business.
Now the baby boomers are entering their 60s after losing nearly half their wealth, in the least business-friendly environment the country has had since the 1970s. Rising taxes at the state and local level, and unprecedented deficits at the federal level, worry the middle class, with good reason.
Americans are concerned about the lack of opportunity, but they are even more concerned about the risk that they may lose what little they have left. It’s not enough to promote entrepreneurship, as Romney does so enthusiastically. It’s also important to talk about deficits. That is the thrust of the Tea Party, a classic middle-class creditors’ party responding to the well-justified fear of higher taxes and inflation.
The punditeska claims that Ryan’s presence on the Republican ticket opens Romney to the charge that his prospective vice president wants to cut Medicare (Ryan had suggested a private option as an alternative to Medicare for Americans reaching the age of 65 a decade from now, which is quite different).
But Romney is betting that Americans are smart enough to understand that the federal government can’t keep borrowing one out of every three dollars it spends. The Ryan choice highlights the divide between the Democratic Party’s core base among government employees, and the Republicans’ appeal to middle-class taxpayers.
If that’s what the election is about, arithmetic tells us that Romney should win.