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The Truth About “Class War” in America

Congressman Paul Ryan (R-Wisconsin) speaking at the Conservative Political Action Conference 2011 in Washington, DC.  Ryan, among other Republicans, has described Obama's deficit reduction plan as "class warfare." (Photo: Gage Skidmore)

Republicans and conservatives have done us a service by describing federal policies in terms of “class war.” But by applying the term only to Obama's latest proposals to raise taxes on the rich, they have it all backward and upside down. The last 50 years have indeed seen continuous class warfare in and over federal economic policies.

But it was a war waged chiefly by business and conservatives. They won, as we show below, and the mass of middle-income and poor Americans lost. Obama's modest proposal for tax increases on the rich does not begin a class war. On the contrary, it is a small, modest effort to reduce the other side's class war victories.

Big business and conservatives have worked to undo the regulations and taxes imposed on them in the wake of the Great Depression of the 1930s. Then, an upsurge in labor union organization (the Congress of Industrial Organizations sweep across basic US industries) and in membership in both the socialist and communist parties gave Franklin Delano Roosevelt the support and the pressure to tax business and the rich. He took their money to pay for the massive federal hiring program (11 million federal jobs filled between 1934 and 1941) and to start the Social Security Administration etc. He regulated their business activities to try to prevent devastating capitalist depressions from recurring in the nation's future.

Since the end of the Great Depression – and especially since the 1970s – the class warfare waged by business and its allies (most conservatives in both parties) was successful. For example, at the end of World War II, for every dollar Washington raised in taxes on individuals, it raised $1.50 in taxes on business profits. In contrast, today, for every dollar Washington gets in taxes on individuals, it gets 25 cents in taxes on business. Business and its allies successfully shifted most of its federal tax burden onto individuals.

Over the same period, the tax rates on the richest Americans fell from 91 percent in the 1950s and 1960s, and 70 percent in the 1970s to the current low rate of 35 percent. The richest Americans won that spectacular tax cut. Middle- and lower-income Americans won no such cuts, while paying a higher proportion of their income for Social Security that the rich were required to do.

In plain English, the last 50 years saw a massive shift of the burden of federal taxation from business to individuals and from rich individuals to everyone else. Class war policies, yes, but a war that victimized the vast majority of working Americans.

Of course, Republicans and conservatives carefully avoided using “class war” to describe those tax-shifting achievements over the last half-century. They wanted us to believe that all they cared about was economic growth and job creation. But when Obama now proposes modest increases in tax rates on rich individuals (“modest” because they don't begin to return to the tax rates in the 1950s, 1960s and 1970s), the Republicans and conservatives howl “class warfare.” Obama claims that higher taxes on the rich reduce the need for spending cuts that would slow growth and increase unemployment.

Republicans and conservatives argue that raising taxes on corporations and rich individuals punishes those who create jobs and thus will hurt efforts to reduce unemployment. Neither logic nor evidence supports their arguments. Last Friday, the US Federal Reserve reported a record quantity of cash on the books of US businesses (hoarding over $2 trillion). Despite the currently very low taxes on businesses and the rich, that cash is NOT being invested and NOT creating jobs. Nor is it being distributed to anyone else who is spending it either. Washington could tax a portion of that cash and spend it to stimulate the economy. That would be especially effective if the taxed cash were spent to hire the unemployed rather than leaving the cash idle in businesses' hoards.

Billionaire investor Warren Buffett recently upset many of his fellow super rich individuals by a New York Times op-ed that he wrote. It explained that he had never met any serious investor who decided about investments based on tax rates. Rather the prospects of profits and sales made the key difference to investors. Buffett urged higher income taxes on rich Americans like himself partly because those higher taxes would not negatively impact job creation in the future just as it had not done in the past. He implied that it was becoming dangerous for capitalism's survival to keep providing the minority of rich people with lower federal tax rates than the middle and lower income majority paid.

Economists know that a long time – usually years – separates making an investment and reaping the profits from selling the output of that investment. Anyone making an investment today cannot know what tax rates will be in the future. They may be higher or lower or the same as they are today. That's why investors' decisions depend far more on real costs today and estimates about future sales, markets and prices in the future than on speculation about future tax rates. The claim that tax increases today will cut investments now, thinly disguises an effort to lower taxes on business and the rich now.

History reinforces the same point. In the 1950s and 1960s, tax rates on corporations and the rich were much, much higher than today. Yet, those years had lower unemployment and higher rates of investment and growth than today. Low tax rates on businesses and the rich do not create jobs.

Struggles over taxes always pit business and the rich against the middle-income earners and the poor. Each side seeks to shift the tax burden off of itself and on to the other side. “Class war” in that sense is nothing new. Accusing only one side of waging that war is ignorant at best and dishonest at worst. No one should be fooled. Today, business and the rich are waging class war yet again to avoid even a small, modest reverse in the huge tax cuts they won in that war over the last half-century.

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