Click here http://www.streetsmartreport.com for more Street Smart Commentaries.  

BEING STREET SMART

By Sy Harding  

WHO IS REALLY PAYING FOR THE RESCUE EFFORTS? November 28, 2008.

Newspapers and Internet chat-rooms are full of witty comments regarding the costly government bailout and stimulus efforts.

"Where's my bailout?" "Hey, I've incorporated my piggy bank. Now I'm a failing bank, and I want my share of the bailout money."

But the most seriously intended complaints are that ordinary tax-payers, the little guys, are bailing out the wealthy bankers. So the wealthy and their big financial institutions will survive, while as a result of their greed, the economy will suffer a bad recession and the little guy is not only stuck with paying the bill for the rescue efforts, but may well lose his house or his job, or both.

Well, there's no doubt about it. Taxpayers, not only of this generation, but of the next generation, will be paying off the debt the government is incurring to save the banking system and re-stimulate the economy.

But who are those tax-payers? Are they not the very wealthy, while the main beneficiaries of the rescue efforts will be the middle class and even more so those at the bottom of the economic ladder? Interesting questions.

The U.S. tax code is a so-called progressive system, calling for those who have the highest income to provide most of the taxes the government collects, not only because they have the highest income, but also because they pay a much higher percentage of that income.

As a result, the top 1% of taxpayers by income pay roughly 36% of all income taxes paid. The top 5% of taxpayers pay 57% of all taxes paid. The top 10% pay 68% of all taxes paid.

So the small group of the wealthiest 5% of taxpayers will pay more than half of the taxpayers' cost of the rescue efforts.

Stepping down from the top 5% echelon, taxpayers who rank in the top half of taxpayers by income, pay virtually all individual income taxes collected. Taxpayers in this group pay 97% of all income taxes.

That leaves half of taxpayers paying just 3% of the total, to say nothing of the many workers who pay no income taxes at all.

Even that is only part of the equation. Individual income taxes account for only about 40% of the government's tax revenue. Payroll taxes paid by corporations, corporate income taxes, and estate and gift taxes, account for most of the rest, and that also tends to come mostly from the very wealthy. So half of taxpayers pay what, maybe 1% of the country's total tax revenues?

Yet, which half of taxpayers would suffer the most if the financial system and the economy were not rescued, and the country fell into a repeat of the Great Depression of the 1930's?

Well, it wouldn't be the very wealthy. They might have to cut back from four or five fabulous homes to only three or four. They might drive less ostentatious cars, leaving the Bentley and Ferrari in the garage, if only to appear less extravagant when driving past soup kitchens and unemployment lines. But they wouldn't be eating at those soup kitchens, or suffering from loss of employment income.

Yes, the little guy and the middle class are suffering from the recession, and homes and jobs are being lost. And the hard times were caused by the previous greed and outlandish risk-taking of financial firms, the failure of the regulators to regulate, but as well by the carelessness of consumers in buying homes they couldn't afford, and taking the equity out of homes they did own in order to buy second homes, large screen TVs, and SUV's.

But the dollar cost of the rescue efforts will be paid by the wealthy and corporations, while ordinary consumers and taxpayers will benefit the most, or at least suffer far less damage, if the rescue effort succeeds (which it will).

There are obviously many who would rather see banks, General Motors, and any other employer suffering from current economic problems caused by their previous poor governance, go under. There might be some short-lived satisfaction in that, as in seeing them pay for their sins.

But just maybe they should consider who is paying the major costs of the bailout efforts, and whether they and their families should even be grateful for that, considering who would suffer the most if the bailout efforts fail.

With the unemployment rate still only 6%, many who have not had family members lose jobs, who are feeling confident enough now to not care if major banks and corporations go under, would not be so confident in another Great Depression. The unemployment rate in the 1930's Depression reached 24.9%. Almost one in every four workers was unemployed, with previously well-paid white-collar workers and executives well represented in those ranks.  

Sy Harding is president of Asset Management Research Corp, DeLand, FL, publisher of the website www.StreetSmartReport.com, and the free daily www.SyHardingblog.com. Sy authored the timely 1999 book, Riding the Bear - How to Prosper in the Coming Bear Market! His latest book is Beat the Market the Easy Way - Surprising Seasonal Patterns Double the Market's Performance!

Harding is frequently ranked in Timer-Digest's Top-Ten Market-Timers in the U.S.