The One Answer: Tax the Rich

The One Answer Tax the Rich

Protesters in Madison, Wisconsin, March 12, 2011. (Photo: Sue Peacock)

It is curious that the American Right, which waxes nostalgic for the happier days of the 1950s when the United States was supposedly more moral and more united, ignores one of the central reasons behind that middle-class era: very high taxes on the rich.

Granted, some on the Right may love the Fifties because it was a time of racial segregation and second-class status for women. But what arguably made the era work was the fact that the U.S. tax structure “disincentivized” greed by ensuring that excess wealth was mostly recycled back into the Treasury for use building the nation and supporting research and development.

During Dwight Eisenhower’s presidency the top marginal tax rate – what the richest Americans paid on their top tranche of income – was around 90 percent. In the 1960s, under John F. Kennedy, that was lowered to around 70 percent, but that rate still meant the rich had a limited incentive to be greedy since they wouldn’t get to keep most of their extra money.

All that changed with Ronald Reagan’s presidency and his slashing of the top marginal tax rate by more than half (before it was adjusted upward slightly late in Reagan’s years and then during Bill Clinton’s presidency before being reduced again to 35 percent under George W. Bush).

Various tax loopholes and lower rates for capital gains also have let many of the richest Americans enjoy tax rates about only half of even those lower marginal income tax rates. Billionaire Warren Buffett has famously described paying a lower tax rate than his secretary, meaning that he and others in his category get to keep about 80 percent of what they make.

In other words, the American tax structure has been roughly turned on its head. From the rich paying between 70 and 90 percent on their top income, some now pay 20 percent or less, which means there is a much bigger incentive to be greedy.

Arguably, it was that incentivized greed – more than any of the social movements like civil rights for blacks and equal rights for women – that eradicated the rhapsodized Fifties and the middle-class culture that it represented in the nostalgic view of many Americans.

So, it’s ironic that the defense of lower tax rates for the rich is at the heart of the Right’s current political agenda. Some leading Republicans have even suggested that “tax reform” should impose at least some income tax on the poor and working class so the tax rates on the rich can be lowered even more.

It’s ironic, too, that the core of today’s economic crisis is that American bankers became so excessively greedy – spurred on by the prospects of “earning” bonuses in the tens of millions of dollars and keeping nearly all that money – that they blinded themselves to the risks from exotic financial products built on an unsustainable housing bubble.

If the tax rates had been kept at Eisenhower or Kennedy levels, not only would there have been plenty of money to keep the United States modern and strong but there likely would not have been the kind of financial crisis that, since 2008, has cost millions of jobs and required massive government borrowing to bail out the greedy bankers.

Thus, in a variety of ways, the Right’s orthodoxy of low taxes on the rich (or the “job creators,” as Republican wordsmiths prefer) has been a major driver in creating today’s massive federal debt and in savaging the middle class.

Two Societies

The data is now clear that the last three decades have witnessed a divergence between haves and have-nots unprecedented in the United States, at least since the lead-up to the Great Depression when a similar era of income inequality set the stage for financial disaster.

For instance, the non-partisan Congressional Budget Office – in an analysis of data from 1979 to 2005 – found that the inflation-adjusted income of middle-class Americans rose about 21 percent (only about one-fifth the increase enjoyed by the middle class during the post-World War II era).

Meanwhile, the income for the ultra-rich (the top 100th of one percent) jumped 480 percent from 1979 to 2005, rising from an average of $4.2 million to $24.3 million. And CBO’s analysis ends in 2005, thus missing the decimation of the middle class from the Wall Street bust of 2008.

The other bitter irony about all this is that despite the oil shocks and other problems of the 1970s, the United States was actually poised to reap huge benefits from the government’s investments in the 1950s and 1960s.

Eisenhower had used tax revenues to build the Interstate Highway system and other modern transportation infrastructure. Kennedy had pushed the Space Program which led to microprocessors and other crucial technological breakthroughs. Government funding also was behind major advances in medicine and in the creation of the Internet.

There were benefits emerging, too, from global markets based on an international system promoted and defended by the United States.

The wealth created by these various developments should reasonably have been shared by the American people, with some of the money reinvested to keep the United States at the cutting edge of transportation, science and technology.

Though higher productivity and global trade would mean the inevitable loss of many factory jobs, the higher profits – if recycled through the government to benefit the average American citizen – could have meant new employment opportunities in areas such as construction, teaching, research, health care and the arts.

Instead, because Ronald Reagan became president in 1981 and won over much of the U.S. population to his message that “government is the problem,” the new orthodoxy called for tax cuts to benefit the rich and the rollback of government enterprises.

The Right’s larger strategy was to starve the government of resources and to make sure that the benefits from the era’s economic gains went disproportionately to the investor class. Prosperity was supposed to come from “trickle-down” or “supply-side” economics.

Free-Market Propaganda

To ensure the political success of this project, the Right’s wealthy benefactors poured billions of dollars into building right-wing media and other propaganda outlets. Inundated with anti-government agit-prop, many middle-class Americans, especially white males, got confused about where their interests lay.

These Americans were sold on the notion that the federal government represented “tyranny” and that “freedom” required letting corporations and the rich control almost everything.

Even as the results of this orthodoxy became apparent in recent years, the Right’s well-funded political/media apparatus continued to dominate the national debate. Though polls showed sizeable portions of the American public favoring higher taxes on the rich, the political momentum still rested with the Tea Party and its billionaire patrons.

The Republicans in Congress have made clear they will reject any increased tax revenues at all (although some favor shifting more of the burden away from the rich and onto the poor). President Barack Obama’s modest proposal for a “Buffett rule” to make sure that the rich at least pay as high a tax rate as their workers is denounced as “class warfare.”

The Right also benefits politically from the fact that many key Democrats (and many top news media personalities) have benefited from the lower tax rates on the rich. The likes of Rahm Emanuel and Larry Summers – key members of Obama’s original White House team – raked in millions of dollars from Wall Street work while out of government.

The class orientation of many politicos and journalists match up more with the rich than with the middle-class and the poor. When I was a correspondent at Newsweek, I would sometimes marvel at office talk in which some of my colleagues would refer to themselves as members of the “meritocracy” and think there was nothing wrong with getting compensated accordingly.

It is perhaps human nature for people who make lots of money to convince themselves that they are truly worth it – and that others are not.

This combination of elitism and incentivized greed has devastated the old social compact of the United States that emerged from the Great Depression and World War II – that “we are all in this together.”

A Washington Post article on June 19 captured this division of America into winners and losers (although the Post editors not surprisingly failed to note the role of Reagan’s tax cuts and similar factors in this separation).

The article described the findings of researchers who gained access to economic data from the Internal Revenue Service, revealing which categories of taxpayers made the high incomes. To the surprise of some, the big bucks were not flowing primarily to athletes or actors or even stock market speculators. America’s new super-rich were mostly corporate chieftains.

Cultural Shift

As the Post’s Peter Whoriskey framed the story, U.S. business underwent a cultural transformation from the 1970s when chief executives believed more in sharing the wealth than they do today.

The article cited a U.S. dairy company CEO from the 1970s, Kenneth J. Douglas, who earned the equivalent of about $1 million a year. He lived comfortably but not ostentatiously. Douglas had an office on the second floor of a milk distribution center, and he turned down raises because he felt it would hurt morale at the plant, Whoriskey reported.

However, just a few decades later, Gregg L. Engles, the current CEO of the same company, Dean Foods, averaged about 10 times what Douglas made. Engles worked in a glittering high-rise office building in Dallas; owned a vacation estate in Vail, Colorado; belonged to four golf clubs; and traveled in a $10 million corporate jet.

Unlike Douglas who recognized the corporate value of team work and respect for one another, Engles apparently had little regard for what his workers thought about his compensation.

“The evolution of executive grandeur – from very comfortable to jet-setting – reflects one of the primary reasons that the gap between those with the highest incomes and everyone else is widening,” Whoriskey reported.

“For years, statistics have depicted growing income disparity in the United States, and it has reached levels not seen since the Great Depression. In 2008, the last year for which data are available, for example, the top 0.1 percent of earners took in more than 10 percent of the personal income in the United States, including capital gains, and the top 1 percent took in more than 20 percent.”

The Post article continued: “The largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

“The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms.

“An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories. Other recent research, moreover, indicates that executive compensation at the nation’s largest firms has roughly quadrupled in real terms since the 1970s, even as pay for 90 percent of America has stalled.”

Not Blaming Reagan

While these new statistics were striking – suggesting a broader problem with high-level greed than might have been believed – the Post ducked any political analysis that would have laid blame on Ronald Reagan and various right-wing economic theories.

In a follow-up editorial on June 26, the Post lamented the nation’s growing income inequality but shied away from proposing higher marginal tax rates on the rich or faulting the past several decades of low tax rates.

Instead, the Post suggested perhaps going after deductions on employer-provided health insurance and mortgage interest, tax breaks that also help middle-class families.

The Post’s peculiar reaction to America’s vast economic disparity – that the middle class should be hit once again – is sadly typical of this blending of elitism and greed. Many Post editors presumably enjoy their six-figure salaries – and see no reason why they or their even richer friends should pay higher taxes.

But this income disparity, which was made worse by Ronald Reagan’s tax cuts, has effectively killed off the middle-class ethos of the 1950s, that sense of community and shared sacrifice with the goal of investing in the nation and building a better future for the children.

That has been replaced by a society of the greedy rich (surrounded by fairly well-compensated staff, including media and political propagandists) and then the rest of the country, facing lost employment, lost homes and lost hope.

The simplest answer to this national crisis would seem to be the restoration of the tax rates of the 1950s or the 1960s – as politically difficult as that might be.