Budget Crisis? Duh, Tax the Rich!

A great tragedy of the United States is that the answer to many of the country’s domestic problems is obvious, even simple, but can’t be done because of a dominating political/media dynamic that rules that solution out.

The solution to these many problems – from the budget deficit to crumbling infrastructure, from mass joblessness to income inequality, from environmental degradation to educational shortfalls -- is to raise taxes on the rich and to use that money to get the United States back on track and advancing toward the future.

And there are clear justifications for doing so, from practicality to fairness. Though many multi-millionaires fancy themselves self-made men (and women), the truth is that they all have profited from investments that American taxpayers have made over the decades, and even centuries.

For instance, President Dwight Eisenhower’s inter-state highway system enabled companies to move their goods more cheaply; President John Kennedy’s space program spurred the growth in computer sciences; the Pentagon created the Internet (yes, with critical support from Al Gore when in Congress), which revolutionized commerce and spread information.

These innovations and many more were achieved by the federal government using taxpayers’ money. Yes, entrepreneurs in their garages and dorm rooms did expand on these breakthroughs and deserve credit and a share of the profits, but they also should pay back at a much higher rate for the taxpayer-funded R&D that made their fortunes possible.

An even-stronger tax justification applies to Wall Street, where the greed and gambling of bankers tipped the economy into a severe recession just three years ago, costing millions of Americans their jobs and homes. To avoid an even worse outcome – a new depression – the federal government and Federal Reserve authorized trillions of dollars in bailouts.

To further calm Wall Street, the authorities essentially gave the bankers a “get out of jail free” card. Not a single prominent player in the sub-prime securities scandal has been prosecuted or forced to surrender much in ill-gotten gains.

Instead, many of the top Wall Street bankers are lining up again for massive paydays in the tens of millions of dollars, essentially skimming off profits that were achieved only because the U.S. government poured vast sums of public money into the financial sector. Yet, many of these same bankers insist that their taxes remain at historically low levels.

Other wealthy Americans have enriched themselves through holdings in multinational corporations that fattened their bottom lines by laying off middle-class Americans and hiring cheaper replacement workers overseas.

Not only did these American workers see their lives damaged by the exporting of their jobs but they face the indignity of helping to foot the bill for the gigantic U.S. military which protects the global interests of these multinationals.

Fair and Logical

So, it would seem both fair and logical for the U.S. government to restore the marginal income tax rates on the wealthiest taxpayers at least to levels that existed prior to Ronald Reagan’s presidency. That way the rich could pay back the country for all it has done for them.

The American rich would even stand to make more money if they helped to rebuild the middle class. It has been an acknowledged rule of business since Henry Ford that companies thrive when people can afford to buy the products that the factories produce.

A socio-economic system that craters its middle class and caters only to the wealthy is not just unjust but unsafe. It is especially vulnerable to stock market speculation, to boom-and-bust cycles, and to political disruptions.

So, to take action to restore the United States to the more stable middle-class structure that reigned from the end of the Second World War until Reagan’s presidency would seem to be a no-brainer.

And, the key to that restoration would be to raise the top marginal tax rates on the highest levels of income for the richest Americans from today’s 35 percent to, say, 50 or 60 percent. Those marginal rates were as high as 90 percent under Eisenhower.

But today’s U.S. political/media dynamic makes any discussion of higher taxes on the rich a non-starter. Instead, the debate is all about handing out more tax breaks to the rich, slashing government spending, canceling transportation projects, abandoning environmental goals, and busting unions that represent teachers and other public workers.

The test of political courage, according to the mainstream U.S. news media, is whether you’re ready to go even further and cut Social Security and Medicare. But the real “third rail” of American politics is whether you’ll consider higher taxes on the rich.

How hard that is was made apparent earlier this month as the nation wallowed in a sentimental remembrance of the late Ronald Reagan, the father of what his own Vice President George H.W. Bush once called “voodoo economics,” the notion that reducing taxes would increase revenues.

Reagan also elevated the worship of private wealth and stoked the demonization of the public sector with his famous line: “Government is not the solution to our problem; government is the problem.”

Yet, as misguided as Reagan's policies have proved to be, a new Gallup poll shows that Americans rate him the greatest president ever, ahead of Abraham Lincoln and George Washington.

Inspired by Reagan

Just this week, when Wisconsin’s Republican Gov. Scott Walker thought he was talking by phone to right-wing billionaire David Koch, a key financial backer, Walker reminisced about his thoughts before he dropped “the bomb,” his bill to strip public employees of collective bargaining rights in Wisconsin.

Walker told a David Koch imposter who was taping the call: “I pulled out a picture of Ronald Reagan, and I said, you know, this may seem a little melodramatic, but 30 years ago, Ronald Reagan, whose 100th birthday we just celebrated the day before, had one of the most defining moments of his political career, not just his presidency, when he fired the air-traffic controllers.”

In other words, Reagan’s legacy is still inspiring a young generation of Republicans and right-wing operatives to press ahead on an approach to the nation’s economic ills that would continue low taxes on the rich, fewer regulations on corporations, structural budget deficits that compel cuts in government spending, and pressure to break unions.

Yet, over those three decades that Walker cited, Reagan’s right-wing policies have savaged the middle class and shoved more people into poverty, creating an income inequality not seen since the Gilded Age of the 1920s, an inequity that contributed to the Stock Market Crash of 1929 and the Great Depression.

Another factor in today’s job crisis has been the dramatic advances in technology, creating a huge surplus of labor in the United States, from factory workers to bookkeepers. And, if technology doesn’t get you directly, it might still put you in the unemployment line because modern communications let your company off-shore your job halfway around the world.

So, even if today's weak recovery isn’t stalled by higher Middle East oil prices or more gridlock in Washington, many Americans who lost their jobs or had to take severe pay cuts are not likely to make up lost ground. Unemployment and under-employment are almost certain to stay high, and those lucky enough to have jobs will have to work harder, faster and longer than before.

Already, most of us scramble to make ends meet, with fewer protections in the work place as unions shrink, with the 40-hour work week disappearing, with cell phone and e-mails putting us on call virtually 24/7, and with retirements postponed sometimes indefinitely.

This era’s great irony may be that an earlier generation thought that technology would create so much wealth and comfort that life would be easier for the human race, giving us more time to play with the kids, to read a book, to travel or to just take it easy.

Instead, because of America's curious political-media dynamic, technology enriches primarily the rich and, for the rest of us, makes our lives more slavish, more hectic and more desperate, especially when job loss is combined with lost health benefits and endless pressure from bill collectors.

Imbalanced Wealth

While the middle- and working-classes have seen the American dream recede for them, the upper stratum of the super rich has watched the benefits of the high-tech global economy flow disproportionately into their stock portfolios and trust funds -- while seeing their tax rates decline.

Prior to Reagan’s presidency, the top marginal tax rate (the percentage that the richest Americans paid on their top tranche of income) was about 70 percent. By the time, George H.W. Bush left office in 1993, the marginal rate was at 31 percent – and the U.S. budget deficit was exploding.

To get the deficit under control, President Bill Clinton and the Democratic-controlled Congress took the politically dangerous step of raising the top marginal rate to 39.6 percent, a move that contributed to the Republican congressional takeover in 1994.

Still, the Clinton tax hike helped get the federal budget back into balance and led to a projected surplus so large that policymakers fretted about the complications that might result from the U.S. debt being completely paid off. However, when George W. Bush took power in 2001, he immediately resumed the Reagan-esque push to reduce taxes, especially on the rich.

Under Bush-43, the top marginal rate was cut to 38.6 percent and then to 35 percent, contributing to another record surge in the federal deficit. Adding in various tax breaks, the rich paid even less than the low nominal rates.

“The average rate paid by the top 1 percent of households shrank from 33 percent in 1986 to about 23 percent in 2006,” the Washington Post reported. “At the same time, the share of adjusted gross income claimed by that highest-earning sliver of American society doubled, from 11 percent to 22 percent.”

By the time Bush left office in January 2009, the Wall Street financial bubble – inflated in part by the rampant greed fed by huge bank bonuses – had burst and the U.S. government was stuck with a $1.2 trillion deficit that included rescuing the bankers from a disaster of their own making.

After taking over, President Barack Obama and the congressional Democrats said they wanted to “claw back” some of those inflated bonuses and collect higher taxes on new bonuses once the bailout stabilized the banks. But Obama and the Democrats also feared a replay of Election 1994, so they passed a $787 billion stimulus package and maintained high spending for Bush’s two unfinished wars without seeking any immediate marginal tax increase.

The result was a further worsening of the federal deficit – creating another Republican campaign issue: Democratic fiscal irresponsibility.

Those accusations – and lavish funding from the likes of oilman David Koch – fueled the rise of the Tea Party movement, a surge that boosted the Republicans to major victories in Election 2010, including seizure of the U.S. House of Representatives and control of many statehouses.

Following those victories, Republicans insisted that Bush’s tax cuts for the rich stay in place for at least two more years, a concession Obama and the Democrats granted in exchange for some additional spending on the unemployed. But the Bush tax cuts guaranteed that the deficit would stay high, opening the door for new GOP demands for more spending cuts.

The U.S. government is now hurtling toward a showdown in March when some Republicans say they will shut down the government if the Democrats don’t accede to more spending cuts, which, in turn, will assure further layoffs from public-sector jobs.

Joe the Plumbers

What is perhaps most puzzling about this political-media dynamic is how many average Americans still support Reagan-esque tax cuts even when those policies have amounted to the wealthy waging “class warfare” against the middle- and working-classes as well as against future generations who are getting stuck with the bills.

During Campaign 2008, this curious anomaly was personified by “Joe the Plumber,” a mid-30-ish Ohio man named Joe Wurzelbacher. Though Wurzelbacher wasn’t even a licensed plumber at the time, he became Sen. John McCain’s symbol of an American everyman, someone whom the 72-year-old Republican presidential nominee called “my role model.”

In the closing days of Campaign 2008, Wurzelbacher launched his strange rise to national stardom by chatting along a rope line with Obama about the Democrat’s tax proposals, specifically Obama’s plan to lower taxes on middle-class Americans and raise them on people earning more than $250,000.

Wurzelbacher said he was considering buying his boss’ company, which he thought might make slightly more than $250,000 and thus might see a rise in taxes under Obama’s plan.

Obama responded by noting that any tax increase in that case would be slight and arguing that his tax plan would help America’s embattled middle class because it would “spread the wealth.” (Later, Obama noted that the vast majority of small businesses don’t clear $250,000 and almost no plumbers do.)

Nothing in the Obama-Wurzelbacher exchange was very remarkable. In effect, Obama was reiterating the century-old case for a progressive income tax that assesses higher rates on the well-to-do than on those with modest incomes.

It was a concept famously advocated by McCain’s earlier Republican role model, President Theodore Roosevelt, who in his New Nationalism speech of 1910 sounded far more radical than Barack Obama did in 2008.

“The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means,” Roosevelt said.

“Therefore, I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective, a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.”

However, McCain accused Obama of “socialism” because of Obama’s support for rolling back tax cuts for the rich. McCain’s campaign began labeling Obama the “redistributionist-in-chief,” a charge that the Democrats finessed during the final days of the campaign but appear to still fear.

In the first two years of the Obama administration, the “socialism” charge has been repeated over and over, even though Obama undertook extraordinary steps to protect American bankers.

Obama’s practical political decision during Campaign 2008 not to aggressively defend his “spread the wealth” idea and his reluctance to tackle the issue of tax increases since then meant that the argument about the need for a greater government role in diverting some wealth from the top downward was deferred. After Election 2010, it is effectively off the table.

However, it may be the most important debate for the future of the United States and the health of the American Republic. If the government doesn’t intervene through its taxing authority to redistribute some wealth that now is concentrating among the ultra-rich, the middle class is likely to continue shrinking and the ranks of the poor swelling.

As the rich increasingly dominate the political process through unlimited campaign spending and the financing of sophisticated propaganda – like Fox News and right-wing talk radio – the policy battles will continue to be fought on ground favorable to the Right: more cuts in public spending, more reductions in retirement and health programs, more union-busting.

No democratic republic can long survive such a distorted political-economic-media system.

As Justice Louis D. Brandeis noted more than 60 years ago, "we can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both.

By Robert Parry
February 24, 2011