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6 Shocking Ways Capitalism Is Failing Working America

Without a dramatic rethink, our "free-enterprise" system may never again provide enough decent jobs for those who need them.

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Nevertheless the middle-class must pay. We are told that the real problem is “entitlements,” including public support for healthcare, education, unemployment benefits and Social Security. Therefore we must cut, cut, cut, to pay for military adventurism and the lifestyles of our financial oligarchs.  

5. Mitt Slithers Through the “Carried Interest” Loophole

Of course, one of the big news items of the week was Mitt’s tax returns, which revealed that he paid only 13.9 percent in federal taxes instead of the 30-plus percent high-income earners are supposed to pay. Like Warren Buffett, Mr. Romney probably pays a lower tax rate than his secretary at Bain Capital. How does he get away with that? 

It’s not just that he has a legion of tax sharpies who know how to hide his money in secret Swiss accounts and in the Grand Cayman Islands. The real culprit is a gigantic tax loophole called “carried interest” that allows private equity moguls and hedge fund honchos to essentially lie about what they do for a living. 

You will hear Mitt wax euphoric about how hard he worked at Bain to obtain his riches. What he doesn’t tell you is that he used the carried interest loophole to hide all that hard work from federal taxes. Instead of paying himself an income for the real work he performed (which would be taxed at 35 percent), he hid his income within a slice of the profits so that he could claim it as capital gains (which is taxed at 15 percent). If he worked at a big bank doing exactly the same kind of work and got big stock options as his bonus, he would have to pay 35 percent. But thanks to the largess of Congress, he and billionaires in the private equity and hedge fund rackets pay only 15 percent. And of course, every effort to remove this loophole has been stalled by both Democrats and Republicans in Congress.  

This loophole is the poster child example of how the super-rich enhance their wealth at the expense of the rest of us. And the rest of us do indeed make up the difference either through increased taxes or decreased services.  

6. How the Gringrich/Freddie Tryst Distorts History

This week also treated us with the release of Newt’s $600,000 a year consulting contract with Freddie Mac. Did he get paid for influence-peddling or for his prescient historical insights? Who cares? As sordid as his deal may have been, the real damage comes from the analysis of the financial crash that accompanies the story. We hear again and again by all, including the media, that Fannie Mae and Freddie Mac, the two troubled government housing agencies, caused the financial meltdown.  

Not true! 

Let’s start with some basic facts about these corporations. They are not government agencies. They are private corporations that have the implicit backing of the government to help provide a massive mortgage market for middle-class Americans (or they were before the crash). The big mistake was allowing these agencies to become for-profit organizations in the first place. But that’s another story. 

The widely repeated erroneous analysis claims that Fannie and Freddie caused the crash by underwriting risky housing mortgages. Ron Paul, in particular, blames the Community Reinvestment Act for pushing Fannie and Freddie to buy up “risky” loans that enable underserved minorities in particular to obtain mortgages.  

But Paul, who should know better, has it dead wrong. CRA mortgages were standard mortgages and not risky ones. Their default rates are just like other standard mortgages given to Anglo home buyers. CRA, in short, had absolutely nothing to do with Wall Street’s reckless gambling as big banks and hedge funds bought up risky mortgages and sold them in even riskier mortgage-related securities. 

 
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