The Coming Great Depression: Gaming the System (November 28, 2008)
The Elites who own and operate the nation have always gamed the system most effectively. Why else hire an army of 41,000 lobbyists except to get tax breaks designed for a single corporation? (Here's but one of hundreds or perhaps thousands of examples: Gallo winery's "Cranston" and "Dole" tax breaks.)
And speaking of taxes, not only do the top 1% of citizenry who own some 2/3 of the productive wealth of the nation get tender loving legislative help, they also have access to another army of well-paid gamers: tax attorneys and the investment banks who profit from "sheltering" billions in income from the tax bite we mere debt-serfs pay. More Law Firms Touched by Tax-Shelter Investigation.
Untold billions are "sheltered" in offshore Caribbean banks linked to money-center banks in the U.S., and various arcane and not-quite-illegal-but-not-legal-either loopholes are designed with infinite care to help the poor Elites escape actually contributing to the government of the nation they own.
The 9% just below the top 1% of wealth-owners owns most of the rest of the nation's productive assets (i.e. an owner-occupied house is not a productive asset, a dwelling which is rented out for a net profit and which provides a tax shelter is a productive asset). They benefit from legal loopholes which game the system in favor of capital such as estate trusts, etc.
Try sheltering income earned from labor: you can deduct horrendously costly medical care (at least before the expenses drive you into bankruptcy) and the interest you pay on debt-serf assets (the mortgage you "own"), and precious little else.
But if you're sheltering income earned from capital, a cornucopia of options awaits you, starting with corporate tax breaks, "small business" benefits like SEP IRAs, special depreciation rules for oil production partnerships, and on and on and on.
This is why the tax code is tens of thousands of pages long. There are lots of forms of capital to protect and nurture.
Regular folks have also actively gamed the system, too. Public employees have learned how to manipulate overtime: you call in sick so your pal gets huge overtime pay in his/her last year of service, effectively raising his/her pension payments by hundreds of thousands over the lifetime of retirement payments.
This game is now driving municipalities into bankruptcy. The poster child of egregious overtime/retirement gaming is Vallejo, California, where the public unions are fighting the city's bankrupcty in court, claiming that millions of dollars are hidden somewhere and by golly, the firefighters and police officers who gamed OT to boost their pay to $200K each are not going to be bamboozled.
Vallejo's base pay for firefighters is more than $80,000 a year. Last year, 21 of them topped $200,000 in salary and overtime, according to city payroll records.
(Vallejo's population is 117,000, while San Francisco has about 800,000 residents.)
Hardball in Vallejo (Mish). At the bottom of this post you'll find links to the database of vallejo's employees, revealing how many made $299,000, $250,000, and those who reaped a mere $150,000 or so.
Shall we be honest and confess that the public union employees gamed the system in Vallejo to the breaking point?
Next up, Medicare. The opportunities to game Medicare for fun and profit would fill volumes, but let's start with those gamers who have figured out how to draw a $1,500 monthly stipend for caring for their own mothers. Yes, it can be done and is done--if you know how to game the system.
So what happens in a Depression? The stakes for gaming the system get higher, as the deficit-burdened government is finally roused to squeeze off a few of the most egregious (or publicized) games.
The Elites' games require one thing above all else: privacy. Publicity of Elites' shelters works something like sunshine on vampires--yes, the tax breaks get all sparkly and draw undue attention and perhaps a touch of political Kabuki theater to "close the loopholes" temporarily follows.
That is of course no more than a passing annoyance to the Elites. Their armies of lobbyists and tax attorneys are already at work on the next "game": alternative energy credits? We got 'em right here, boss.
But more plebian gamers might find the well has run dry. Public employees will soon be finding the well they've been tapping so effectively leads to bankruptcy court, where they learn the old adage "you can't get blood from a turnip," in this case the turnip being a property tax base in free-fall, a shrinking sales tax base and a small-business tax base which is shrinking so fast government accountants can't subtract millions from estimated tax revenues fast enough.
One way to keep your job is to nail small-time gamers who step over the acceptable lines of the game. Knowledgeable correspondent K.C. recently filed this first-hand report on how Medicaid seems to be tightening up:
Once again, you are right on with your topic today, the aging babyboomers and evaporating wealth. ( The Baby Boom's Market Order: Sell, Sell, Sell November 20, 2008)Thank you, K.C. for the report and the kind words. We all know that any rules-based system can be gamed, and any bureaucracy can be corrupted/cheated by those who understand the rules and leverage points.
Nonetheless, for society to maintain a basic level of trust in its institutions, the gaming must be limited via enforcement and punishment to a background level which does not make the honest players just give up in disgust.
I would suggest we are either at that point or well beyond it. Playing the game honestly (i.e. not "gaming the system") earns meager rewards: the honest players receive fewer benefits (if any) and pay the lion's share of the taxes.
One of the most pernicious results of the Republicans' recent reign was the decimation of the government's enforcement efforts, at every level other than the GWOT (global war on terror). The IRS (bad guys when they question you, heroes when they shut down phony for-Elites-only tax shelters that robbed us of billions of dollars) has seen its enforcement division gutted, as have other enforcement agencies.
The result is predictable: gaming the system has increased as the ease of gaming and the rewards of gaming have both risen dramatically. Small-fry gamers justify their lying/cheating/theft via the old "everyone's doing it" line, or "I only steal from the government."
Note to liar/cheat/thief: we are the government. Every dollar you cheat means the rest of us either pony up that dollar or it's borrowed and we have to pay interest on it.
Knowing full well gaming cannot be eradicated but only made more difficult and less rewarding, I would suggest that if President-Elect Obama's team is truly interested in positive change, they should start by boosting enforcement of the various games' rules, and by pursuing tax policies and codes which force the Elites to pay a sum more or less equal to the Social Security (labor) taxes paid for by legitimate players (employers and employees).
That sum is about 35% of all tax revenue--a small enough slice of the wealth the top 1% own and the income from capital they reap.
What are the federal government’s sources of revenue? (Tax Policy Center)
Individual income taxes and payroll taxes now account for four out of every five federal revenue dollars. Corporate income taxes contribute another 15 percent. Excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts make up the balance.
The coming Depression will increase the pressure on Elites and debt-serfs alike to game the system. If P.E. Obama wants "real change," he should focus on enforcing the rules to protect the honest players and on ending the Elites' tax holiday.
As noted here recently, ideals don't change political power--the existing political/tax structure which favors the Elites (capital) over debt-serfs (labor) can only be replaced by a new power.
The Elites field a private army of several hundred thousand lobbyists, accountants
and attorneys to protect their gaming of the system; the only force powerful enough
to counter such a vast army of mercenaries is millions of outraged citizens who
have decided to focus their outrage on political goals rather than self-destruction/
two-bit gaming on their own.
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