Essays on Inequality III – Taxing the Rich, A New Start

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More frightening than any particular beliefs or policies is an utter lack of any sense of a need to test those beliefs and policies against hard evidence. Mistakes can be corrected by those who pay attention to facts … dogmatism will not be corrected by those who are wedded to a vision.Thomas Sowell

Less than two weeks ago, the day after President Obama (9/8/11) announced his proposed American Jobs Act, it appeared that the “Emergency Jobs to Restore the American Dream Act,” soon to be introduced in Congress, was the only hint of a possibility of raising more tax revenues for job creation.   That suddenly changed on Monday when the President demanded that the richest Americans pay higher taxes to help cut deficits.  As part of a deficit reduction package of about $3 trillion, he proposed about $1.5 trillion of savings from increasing the taxes on those with an annual income of more than $1 million, and the super-rich earning more than $10 million. He promised to veto any legislation cutting Medicare benefits that does not also raise taxes.

Suddenly, it’s “game on” for the middle class.  The Republican/Tea Party response was immediate:  Obama is engaged in “class warfare” against wealthy people, House Majority Leader John Boehner charged.  Hats off to the editors on my local newspaper, the Albany Times Union, for belittling that characterization:

A strategy that under better political circumstances would be far less controversial is under siege by Republicans inflexibly resolute in their zeal to kill tax hikes.  No one will pay a dime more in income taxes if the likes of House Speaker John Boehner and Senate Minority Leader Mitch McConnell continue to have their way — not even the 400,000 or so taxpayers who are literally millionaires.

That’s wrong, on both practical and moral grounds. How can a $1.3 trillion annual deficit be substantially reduced when people who easily could pay more can’t be taxed further? And how fair is that?   * * *

It’s a sad country that Mr. Obama leads when his insistence that people making more than $1 million a year pay taxes at the same rate as the middle class is so contentious. [1]

The Times Union properly asks how a $1.3 trillion annual deficit can be reduced without more tax revenues.  It cannot: There just isn’t enough wealth and income in the lower 99% anymore to pay the bills, as I will discuss in my next post.  This has been a big year for the supply-side propaganda from the political right, but it’s wrong: Low taxes for the rich do not create jobs, and they never have.

Robert Reich weighed in immediately:

[I]t’s not warfare to demand the rich pay their fair share of taxes to bring down America’s long-term debt.  After all, the richest 1 percent of Americans now takes home more than 20 percent of total income. That’s the highest share going to the top 1 percent in almost 90 years.  And they now pay at the lowest tax rates in half a century — half the rate they paid on ordinary income prior to 1981.

(Unfortunately, the President isn’t proposing to raise the capital-gains tax — which, now at 15 percent, creates a loophole large enough for the super-rich to drive their Ferrari’s through. About 80 percent of the income of America’s richest 400 comes in the form of capital gains. Here’s where billionaire hedge-fund and private-equity fund managers make out like bandits. As I’ve noted, I also wish he aimed higher — for more brackets and higher rates at the very top. But at least he’s drawn a line in the sand. The veto message is clear.)

Anyone who says the American economy suffers when the rich pay more in taxes doesn’t know history. We grew faster the first three decades after World War II than we have since. Trickle-down economics has been a cruel joke. [2]

An especially cruel joke, by the way, given the bind the economy is in.  Bruce Bartlett, who held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul, recently reaffirmed his rejection of “voodoo economics”:

With the debt limit debate temporarily set aside, the Obama administration is talking about finding some way to create jobs and stimulate growth. But the truth is that there really isn’t much it can do and it knows it. There may be some small-bore things it can do without Congressional action that may help a little, but the operative word is “little.” The only policy that will really help is an increase in aggregate demand.

Aggregate demand simply means spending — spending by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment. At the moment, businesses don’t need to invest because their biggest problem is a lack of consumer demand, as a July 21 study by the Federal Reserve Bank of New York documented. 

The federal government could increase aggregate spending by directly employing workers or undertaking public works projects. But there is no possibility of that given the political gridlock in Congress and President Obama’s desire to appear moderate and fiscally responsible going into next year’s election.

That really leaves just consumers as a potential avenue for increasing spending. But that will be difficult as long as unemployment remains high, thus reducing aggregate income, and households are still saving heavily to rebuild wealth, which was decimated by the collapse in housing prices. [3]

True enough, increased taxes for the rich will not be possible with this Republican Congress.  Now that Obama’s tough stand on taxes has arrived (regardless of how long it took to get here), at least higher taxes and government stimulus spending – fiscal policy! – are “on the table.”  That’s crucial, with the Republicans gearing up to blame Obama for the poor economy. [4]

The wealthy, radical right that has been selling us the trickle-down snake oil for so long doesn’t like this at all, and is loudly voicing its true feelings.  Bill O’Reilly bitterly complains:

If you tax achievement, some of the achievers are going to pack it in. My corporations employ scores of people. They depend on me to do what I do so they can make a nice salary. If Barack Obama begins taxing me more than 50 percent, which is very possible, I don’t know how much longer I’m going to do this. I like my job, but there comes a point when taxation becomes oppressive. Is the country really entitled to half a person’s income? [5]

Well, yes, depending on how large the income is.  O’Reilly’s claim that taxing wealth at a 50% rate is “oppressive” would have been strongly contested by Edward Albert Filene (1869-1937), who said: “Why shouldn’t the American people take half my money from me? I took all of it from them.” [6]

One factor that doesn’t get enough attention is how enormous the income gap has become.  This graphic speaks volumes:

When the bottom 90% of families earn only about $30,000 on average, barely above the poverty level, while the top 1% earns over $1 million and the top .01% averages over $27 million, the word “oppressive” does not leap to mind to describe taxing people high on the income ladder at a higher top tax rate.

O’Reilly is old enough to remember that the top income tax rate was 70% in the 1970s, and as high as 91% back in the 1950s.  Rich people were still very rich, and everyone else had a bigger stake in the game as well, which meant more economic activity and more income for the rich.  So everyone was better off.

And O’Reilly is not solely responsible for the existence or success of his enterprises, or for the success of the people who work for him.  Government created and maintained the environment in which his success became possible.

Facts about economics most likely won’t change O’Reilly’s ideological views (they haven’t so far), and anyway he has no incentive to change them now.  But O’Reilly won’t quit his jobs or his corporations either, despite his bluster.  As Warren Buffet puts it: “People invest to make money, and potential taxes have never scared them off.” [7]

Also in the news was Louisiana Congressman John Fleming’s complaint about having to pay higher taxes on a $600,000 income:

Fleming is the owner of several Subway shops and UPS stores that grossed $6.3 million last year, according to The Wall Street Journal.  However after taxes and paying employees and whatnot, Fleming said he is left with a “mere fraction” of that — just $600,000.  “So by the time I feed my family I have, maybe, $400,000 left over to invest in new locations, upgrade my locations, buy more equipment,” he said. [8]

It’s so tough being rich! This is the same whine, on a smaller scale, that we have heard from Mobil/Exxon – that after making record profits it still needs taxpayer subsidies to make ends meet.  And it’s misleading: Fleming’s left-over $400,000 is increased wealth, not built-up business expense.  It’s profit.

Taxing the rich goes beyond the question of fairness, though, as we discussed in Essays on Inequality II – Jobs and Recovery.  Progressive taxation is necessary for prosperity, and it’s refreshing to see that the many wealthy people  who are now coming forward and requesting higher taxes (like Warren Buffet) understand this.  We will show (in this series of posts) that the American economy will not recover without real Keynesian stimulus, as Bartlett argues.

Progressive Taxation is Necessary for Prosperity

Several months ago, in The 30-Year Growth of income Inequality I discussed in some detail how lower taxes for the rich have related to the growing inequality of incomes and wealth since the Reagan presidency.  Let’s quickly review the basic facts:

Since the Reagan Administration began, the top 1% share of total income has grown from less than 10% to more more than 23% in 2007. [9]

How did this happen?  The wealthiest people by and large are those who accumulate earnings through business sales and corporate returns, not wages or salaries.  Here are some major ways they increase their incomes and wealth:

(1) After anti-trust enforcement was discontinued in the Reagan Administration and business regulation was relaxed, consolidation and profits soared.  With the demise of many small businesses as big companies like Wal-Mart and Exxon/Mobil increased their market shares, earnings and profits were concentrated in the hands of fewer and fewer people;

(2) The financial sector makes a big contribution to growing inequality – in 2010, more than two dozen hedge fund managers “earned” $25 billion in income, with the highest earner pulling in $4 billion [10];

(3) Private banks create and manage the money supply, and continuing collection of interest (effectively a tax on the money supply, including the national debt) provides increasingly more income and wealth for the top 1%;

(4) Lucrative government contracts, particularly in the military/industrial complex, provide billions of dollars of profits taken directly from taxpayers through tax receipts or deficits;

(5) In general, wealth produces more income, through investment returns (capital gains).  As Robert Reich reported above, about 80% of the income of the richest 400 Americans is made up of capital gains.

Only the Wealthy Have Seen Real Income Growth Over 30 Years

Here is the stunning result of these trends over the last 30 years:  Between 1979 and 2007, average after-tax incomes for the top 1 percent rose by 281 percent after adjusting for inflation — an increase in income of $973,100 per household — compared to increases of 25 percent ($11,200 per household) for the middle fifth of households and 16 percent ($2,400 per household) for the bottom fifth. [11]  If growth of incomes and wealth had been distributed more evenly among the income brackets, there would have been more growth and a vibrant economy.

Income Inequality levels track the top tax rate. 

Here again is the graph showing the top tax rate over time:

As we have noted, the top tax rate reductions from 1921 until 1931, the beginning of the Great Depression, closely resemble the reductions that began 30 years ago, in 1981.  Of course, there are other taxation factors involved, like the treatment of capital gains.  But the connection is clear between the growth of inequality in wealth and incomes and the way we tax large incomes. 

Just before the Great Depression, in 1928, the top 10% earned almost one-half of all income. For 40 years, roughly 1942-1982, the top 10% consistently took in about 33-34% of income (while the top income tax rate was at least 70%). This was the modern period of American prosperity.

Over the last 30 years, the top income tax rate has averaged about 40%.  It’s now at 35%, one-half of the 70% rate in effect throughout the 1970s.  Not surprisingly, the inequality situation today is very similar to the situation in 1928, just before the Great Depression.  In the next post (see also Stable Income Inequality), I will detail how the economy falters today, as well, for the bottom 99%.

With this history, and in today’s circumstances, I am unable to construct even a rudimentary case for allowing multimillion-dollar ordinary incomes to be so lightly taxed, or for allowing the huge capital gains incomes billionaires make to be taxed at the 15% rate that applies to the incomes of people living in poverty.  I can recall seeing only three such arguments:

Argument 1:  We should all be grateful, in effect, to the Bill O’Reilly’s among us for the blessings their talents have enabled them to bestow upon us. 

Answer: That argument displays no gratitude for what government, society, and other people have done for them.

Argument 2:  They’ll lose their incentives, pack their briefcases, and go home, if we don’t give them all the preferential treatment they ask for. 

Answer: Excuse me – that’s just bullying rubbish.

Argument 3: The more money we let them keep, the more jobs they’ll create. 

Answer:  Why are we headed for a depression after 30 years of lowering taxes for them?  Why are they sitting on several  trillion dollars they accumulated and stashed away?  What are they waiting for?

If this is class warfare, it’s been going on for a long time, and the lower 99% has been losing.  Obama’s line in the sand is welcome, and we all need to make sure it holds.

JMH – 9/22/11

_____

[1] Class Warfare? No Fairness, editorial, Albany Times Union, September 20, 2011. (Emphasis added)

[2] A Good Fight, by Robert Reich, Truthout, September 20, 2011.

[3] It’s the Aggregate Demand, Stupid, by Bruce Bartlett, New York Times, Business Day, Economix, August 16, 2011.

[4]  For example, take note of Rick Perry’s new “President Zero” campaign.  We have an expression in music: “Less is more.”  In this case, unfortunately, less really is less.  In this context, “the Party of No” becomes “the Minus Party.”  Less than zero.  Negative.

[5] Fox News’ Bill O’Reilly Threatens to Quit if Obama Hikes Taxes on Rich, International Business Times, September 20, 2011.

[6] “Filene (of Boston’s Filene’s Department Stores) founded the U.S. Chamber of Commerce to encourage businesses to contribute to the welfare of their communities. He eventually quit the organization, disappointed that it had become a bastion of right-wing conservatism and an anti-tax lobby.” The Long FAQ on Liberalism, Myths about taxes.

[7] Stop Coddling the Super Rich, by Warren E. Buffett, The New York Times, Op-ed, August 14, 2011.

[8] Tea Party’s John Fleming Can’t Make Ends Meet on $600K a Year.

[9] Income Gap Is Widening, Data Shows , by David Cay Johnston,  The New York Times, March 25, 2007  This data is more than five years old;  even without the recession effect after 2008 its share, on the existing trend, might have risen to more than 25% today.

[10]  See Pay of Hedge Fund Managers Roared Back Last Year. David Tepper had the highest income ($4 billion). See also Hedge fund manager paycheck: $4 billion.

[11]  Record U.S. Income Gap Widening Again, Perrspectives, July 10, 2010.

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