Fear

Fear is a great motivator and those who lived through the Cold War can vouch for that. For 40 years the threat of mutually assured destruction (MAD) had people building bomb shelters, kept students hiding under their desk and cause countries to spend trillions on defense. Adding to this was the fear of a nuclear accident that caused the world to turn against nuclear power. Groups like Green Peace literally ended the ear of nuclear power only to find out that today it is coming back. Next came the existential threat of climate change which forced governments to move away from fossil fuels and toward renewables. Then came lesser groups like Occupy Wall Street and Black Lives Matter (BLM). In the case of BLM, Geroge Floyd was killed by police and this led to riots. He was a man with severe health problems and a long criminal career but was not given his day in court. The result was five months of riots in 2,000 cities in the US and around the world, $2 billion in property damage, 14,000 arrest and 25 deaths. In the end some police departments changed their procedures and cut their budgets while some of the leaders of BLM absconded with funds meant to improve the situation. Changes and reactions based on emotions, like fear, often get side tracked by misinformation and lies. Objectivity gets thrown out the window as news people capitalize on issues to gain viewers. Today some fear that a king will replace our democracy and others fear that socialism will replace capitalism. In a few years these fears will be gone and replaced with new ones.

Capital gains rates

The capital gains tax was started by congress in 1921 and can be eliminated by congress. It was started when the max income tax rate was 73% and was designed to encourage investment by setting the capital gain rate at 12%. Eliminating the federal capital gains tax entirely requires an act of Congress. To fully abolish the tax, both chambers of the U.S. Congress would need to pass legislation, which the President would then have to sign into law. This would require replacing the Internal Revenue Code regarding capital assets. Polls show that 70% favor taxing long term capital gains as ordinary income and this would essentially remove the capital gains tax. Congress only needs to act.

Tax law changes

The long-term capital gains tax rate is 20% max and only requires the owner to hold the asset for one year before selling. For rich people this is one half the 40% federal income tax rate. For this reason, the rich limit their sales of appreciated assets until they die and then there is no tax. These are called unrealized gains and some suggest the law be changed so that the tax must be paid even if the asset is not sold. This would mean they could no longer escape the capital gains tax by holding the asset until they die. This would go a long way toward lowering the wealth gap. This would not be easy. To tax unrealized capital gains, Congress would need to pass new legislation drastically altering the tax code and likely amend the Constitution or win a favorable Supreme Court ruling. Currently, the U.S. taxes capital gains only when an asset is sold or traded

Wealth gap

The wealth and income gap in the US has been widening since 1980. The wealthy live off of capital while the non-wealthy live off wages. The stock market grows at 10% per year while wages increase less than 3%. The wealthy also use tax strategies that are not available to others. Amazon started in 1994 and reinvested all funds in the company for ten years before it showed a profit. Bezos started with an interest free loan from his family and went public in 1997 for $18 per share. A $1,000 investment on that day would be worth $1.8 million today. Amazon to this day pours revenue back into expanding its business and thus avoids taxes. Amazon compensates many employees with stock units and requires the employees to hold the stock and when it is sold, they get a deduction of the appreciated amount. Amazon uses R&D tax credits to reduced taxes dollar for dollar. Amazon uses accelerated depreciation to rapidly deduct the cost of capital investments. These represent tax advantages that are not available to people who work for wages. Bezos owns 925 million shares of Amazon valued at $215 billion. He uses these assets as collateral for low interest loans to start new businesses like Blue Origin. If Bezos holds onto his stock until he dies there will be no capital gains tax and if he puts the assets into a Dynasty Trust there is no estate tax so the entire amount passes tax free to his heirs. He is 62 years old and if he lives another 20 years his estate will be worth $1.45 trillion and this is why the wealth gap keeps getting wider.

Where to live

On a panel show last week the group was asked which country in the Middle East would they move to if they had to make a choice and all said, Israel. The same question could be asked what is the best country around the world to live in and most would say America. Most polls show that 80% of Americans have a positive view of America. How many of the other 20% would leave is unknown but often times people have claimed they would leave but chose not to. Over the last ten years the numbers of people around the world who want to emigrate has increased from 12% to 16% which represents about 850 million people. Of these the most desired new place to live is the US with 150 million wanting to come to America. While most Europeans would rather remain at home because of the strong social nets, regulated work life balance and universal healthcare some highly skilled professionals will move for economic advantages. This is called the brain drain and three times as many Europeans want to move the US as opposed to the number of Americans who want to move to Europe.

New start

As WW 2 came to an end, the US was the single super power but within a year the Soviet Union annexed most of Eastern Europe as Churchill declared that an Iron Curtain had descended across Europe. This was the opening salvo of what became the 45 year long Cold War. It was a battle between communism and free market capitalism, a battle between dictatorships and democracies. In order to win countries over to the side of democracy, the US announced that they would protect the oceans so all countries could conduct free trade. If one country had iron ore but short on food, they could trade with another country that had food but short in iron ore. This opened the door to worldwide trade which became known as globalization. Over the next fifty years this was the dominant economic system and early on it benefited the West but in time it helped the East and it moved one billion people out of poverty, mostly in Asia and in particular China, India and South Korea. These countries grew rapidly using child and sometimes slave labor, having no environmental laws, no worker protection laws and coal as their source of energy. They were a century behind the West but were catching up rapidly. The Cold War ended in 1991 when the Soviet Union collapsed and the European countries gained their freedom. The downside was the loss of millions of manufacturing jobs in the West and in the rust belt of America. Corporations made huge profits while the working people saw their good jobs disappear and replaced by low paying jobs with few benefits. This caused a wide gap in income and wealth distribution which continues today. The world is now in the process of deglobalization and manufacturing jobs are returning. While most of Europe is struggling with deindustrialization the US is in the process of reindustrialization. Countries are flocking to invest in the large consumer market of the US.

DOGE

Part of the recent experiment called DOGE the USAID program was dismantled and part of it transferred to the state department. USAID had grown from $16 billion in 2001 to $44 billion last year. Following the major restructuring of foreign aid, the remaining active USAID awards managed under the State Department hold approximately $8.3 billion in un-obligated funding. Out of roughly 6,200 evaluated project awards, over 5,300 were terminated, leaving about 900 active. Many of these projects were specious in nature with things like a $2 million initiative aimed at sex changes and LGBT activism in Guatemala. Many question just where this money really went. While DOGE ended, it sparked an interest in waste in other areas and now fraud is popping up all over.