Outside of fighting international terroism, the biggest single problem facing America today may well lie in the increasing concentration of national wealth in the hands of a fraction of 1% of the population. This has accelerated under the tax cuts of 2001-3, posing profound threats not only for the effective functioning of our economy but also for the future of American democracy itself. Thus, despite the recent election's evidence of widespread popular pressure for tax cuts, reduced taxes for the SuperRich would be a grave disservice to the public. Cashing in on their 2001-3 investment and other tax breaks, the SuperRich are already paying far lower effective rates of taxation than other taxpayers. Taxes for this one segment of the population must therefore be INCREASED if our towering deficits and national debt are to be brought under control. This report deals with the origins of the problem and its impact.
While most of America slept, business interests have been quietly carrying out a radical restructuring of the US economy during the past half-century. The result is a startling jump in the share of national wealth going to upper-income groups. Simply put, the rich are getting richer while virtually everyone else is either standing still or losing ground. The recession has sharply widened this ominous gap.
One revealing statistic underscores this seismic shift: National wealth held by the richest one percent (1%) of the population almost doubled from 1976 to 2007--from 19.9% to 34.6%. That’s right: 1% of the population now owns MORE THAN ONE THIRD of the nation’s wealth.
Equally revealing, in 1960 chief executive officers (CEOs) at leading corporations were making 42 times the average worker’s pay; by 2007 this had multiplied by nearly nine. To 344 times the average worker’s pay!
Translating their rising economic power into political clout, the New Rich simultaneously got Washington to cut the top marginal rate levied by the Internal Revenue Service (IRS) on taxable income from 91% in 1963 to 39.6% in 2003. Under President Bush this was then cut further to the present 35%. The Bush tax cuts also brought the rate on dividends down from 39.6% to 15%, and on capital gains from 20% to 15%. These cuts were made despite steeply rising government spending for the wars in Iraq and, later, Afghanistan, leading to massive budget deficits.
How these tax cuts work in practice is shown in a Tax Foundation study of the 2007 tax returns of 141,000 people (the top one-tenth of one per cent of taxpayers). This shows that the average of these taxpayers had income of $7.4 million ($7,400,000) yet paid $1.6 million, or just 22 %, in Federal income taxes. This left $5.8 million, or 78%, for other purposes (which certainly included state and local taxes).
Why 22% and not 35%? Because the Super-Rich steer much of their money into investments yielding capital gains and dividends, which, as noted above, are now taxed at far lower rates than work-related earnings. Thus, despite the contention that 1% of the population now pays 40% of Federal income taxes, the wealthy can hardly be said to be suffering from over-taxation as compared with others--and certainly not when compared with taxpayers deriving most of their income from work-related earnings.
Indeed, the wide spread between the SuperRich's 22% effective tax rate and the 39.6% existing before the Bush tax cuts underscores the enormous gift that Washington awarded wealthy taxpayers via the 2001-2003 tax cuts -- a tax-saving gift made all the more mysterious because our deficit-ridden government was forced, in effect, to borrow the money to grant it, thereby adding billion$ each year to America's overhanging national debt.
This dismal deficit record also raises questions of the validity of claims put forward by "supply side" and "trickle down" taxation advocates who loudly proclaim the merits of cutting taxes for the wealthy on the basis that economic growth spurred by their new investments will eventually add more tax revenue than is lost. The past 10 years of record-breaking budget deficits, conversely, indicates that the only ones who appear to be gaining from this dubious strategy of cutting taxes for the rich are the rich themselves. Small wonder their lobbies are fighting to hold on to their present tax breaks!
Put another way, the US today finds itself in the peculiar position of a pig farmer whose prize hog has become so big and fat that he’s able to root everyone else away from the national money trough. Meanwhile, politicians who should be helping the farmer control the hog, flee in fear over the hog’s lobbying clout...even while they plead for his lavish contributions to their re-election campaigns.
While the public has come to expect this kind of behavior from politicians, what are we to make of the profound silence from thought leaders and the normally outspoken news media on this grave problem of concentrated wealth? One wonders: Have the wealthy become so dominant over all aspects of national life that no one dares speak up on this issue for fear of somehow incurring their displeasure...and retaliation?
AS FOR THE FEDERAL BUDGET DEFICIT, despite all the differing contentions the election produced over how to handle this recurring national nightmare, there IS a practical, workable approach. Employment is the key. Deficit spending may be necessary now to help stimulate economic recovery...BUT once the national unemployment rate falls below 6%, it is IMPERATIVE that the President and Congress pass a balanced budget. THIS MUST INCLUDE AN EXTRA 5% over and above the operating budget to be devoted solely and directly to paying down the horrendous backlog of national debt. This action formula can be expressed in this simplified equation: MINUS 6% = Balance PLUS 5%.
This approach will require spending cuts or increased tax revenues, or, more likely, a combination of both. As for a first step in controlling spending, the new Congress convening in January can show it really intends to meet public demands for more efficient government by making deep cuts in its own inflated salaries and benefits...AND by outlawing EARMARKS -- which can only be described as the ultimate Washington con game. (Tax policy changes are covered in this report's conclusion.)
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How did the New Rich manage to pull off its portentous economic retro-revolution? The answerlies in a classic case of greed-driven demand for CEOs colliding with limited supply. A few corporate boards started the ball rolling by looking for and paying almost any amount to land an executive who could cut a firm’s costs, raise profits and pump up its stock price. Management and compensation consultants and headhunters then merrily joined the bidding. Yes, merrily…since the higher these people pushed CEO salaries, the higher the fees they received. The result: A nationwide CEO feeding frenzy. And thus was born a new generation of “economic royalists,”asPresident Franklin D. Roosevelt could have called them.
Under today’s winner-take-all approach, predatory CEOs simply hog the profits that once were shared more evenly with investors, customers, employees and the broader community the firms are supposed to serve. Remarkably, however, protests from these shortchanged groups are hard to find.
Moral issues clamor to be addressed here. Ordinary people finally woke up to the problem of runaway executive compensation when Washington in 2008 began bailing out failing big banks with taxpayer money, only to discover that the firms (think AIG, etc) blithely continued to pay their leaders and other “experts” millions in pay and bloated bonuses. All the while millions of fellow Americans were (and are) losing their jobs, their homes, their savings, their businesses.
So much for calls for sharing the burdens of recession! One thinks of the exasperated comment made by besieged attorney Joseph Welch during the McCarthy era...that could just as well be directed at today's businesss executives: Have you no sense of decency, sir?
Ordinary people cannot comprehend how ANY business executive or expert of ANY kind can so contribute to the common weal or general public interest as to justify salaries and bonuses of $10 million or $50 million or $100 million a year. People are shocked and howling mad…not only at the public-be-damned businessmen who plunder their firms of these startling sums but also at political leaders who they feel do nothing to curb such outrages.
Unprecedented concentration of wealth also raises grave operating questions for our economy. Mass production with full employment requires mass purchasing power. As more and more of the benefits of production go to fewer and fewer people (and often wind up in secret foreign bank accounts), mass purchasing power now seems to come mainly through massive expansion of consumer debt. When this reaches its inevitable limit, economic collapse follows--like NOW!
Meanwhile, one wonders if the US is drifting into a dangerous rich-poor class structure and the rising social instability this could bring. Political democracy cannot exist for long without what ordinary people feel is economic justice. Is the New Rich unwittingly creating the kind of conditions that could one day end in a demagogic political reaction? Does anyone remember the lessons of the class struggles that led to the bloody French Revolution of the late 1700s or the calamitous Communist Revolution of 1917 in Russia? Or are the New Rich so preoccupied with their luxury life on the top deck of the Ship of State that they’re unaware that, like the Titanic,the ship's hull has sprung massive leaks below the water line?
The longterm decline of labor unions, from one third of the work force in WWII to the present 12% (with half of these in the public service sector), has contributed subtly to the rise of the New Rich. Strong labor unions once served as an indispensable “countervailing” force in curbing management excesses. This is now largely gone. So where in the unions’ place are the counter-forces that should be wielded by big pension funds or by far-sighted business leaders? Or by an outraged news media? Or by popular revolt like that posed by the Tea Parties (whose anger seems aimed not at business excesses but at government)?
Contrary to Adam Smith's contention that the entire society benefits when each person is free to pursue his own self-interest without hindrance, it now appears that our capitalist/free enterprise system has worked well only so long as those in decisive positions exercised self-restraint in their own demands for rewards. But what happens when the winners persist in taking all? What can America do to stop the plundering? Obviously, one cannot legislate away larcenous conduct...but the nation CAN turn to its tax system as a way to provide for the public's sharing in at least part of the plunderers' loot.
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America’s one hope of correcting the concentrated wealth propblem may well lie in the hands of the President, Barack Obama. Will he have the insight and courage--the statesmanship—to push basic changes in tax policy through a Congress notoriously reluctant to act in this area? After his party's recent election losses and the bruising battles fought over health-care and financial reform?
The Bush tax cuts of 2001-3 are to end late this year, setting the stage for a Washington showdown on this issue. As shown earlier, these cuts were weighted heavily in favor of wealthy taxpayers, who appear to be gearing up to lobby fiercely for their continuation. This overview, however, shows this would be a grave disservice to the public, especially in this dangerous new era of unprecedented Federal spending and towering budget deficits. Another raw disservice would be any attempt to pass a national sales or Value Added Tax (VAT), which would be highly regressive, hitting low-income groups the hardest.
Indeed, if the New Rich are able to prevent an increase in high-end income taxes, many will take this as proof that America has finally passed the point of no return on the road to government of the wealthy, by the wealthy and for the wealthy.
This overview also shows what should be done to return to a national policy of levying taxes on those most able to pay:
1. Allow the IRS rate on that portion of taxable income exceeding, say, $250,000 annually, to return from the present 35% to the pre-Bush level of 39.6%. The same with the tax rate on dividends.
2. Retain the current capital-gains tax rate at 15% as a needed spur to investment in modernized plant and equipment, economic expansion and new jobs
3. Enact a new top marginal tax on that portion of a person’s taxable income exceeding $1 million a year. This should be set as high as politically possible--and as high as "yield efficiency" permits. (Remember, the top marginal tax rate of the Truman-Eisenhower-Kennedy years, 1950-1963, was 91%.) ALL of the additional money thus raised should be devoted directly to CUTTING tax rates for those making less than $100,000 per year.
This approach would not only correct today’s badly unbalanced distribution of tax burdens but it would also singularly stimulate consumer spending and economic recovery AND the general tax receipts needed to start bringing down the government’s huge budget deficits. It would also help rein in on the runaway pay and bloated bonuses of Wall Street financiers, bankers and corporate CEOs, returning some of the vast sums they are now taking from their firms to use by the general public.
The Tea Party movement, along with everyone else except the New Rich, should rejoice at this third proposal. However, Tea Partiers seem obsessed with demanding across-the-board tax cuts…which would only perpetuate present inequalities and leave the New Rich laughing all the way to the bank. One can sympathize with Tea Partiers’ opposition to big government, which has indeed become too unmanageable, too bureaucratic, too intrusive into our lives and too subject to waste, graft and corruption (as this one-time Federal appointee can personally attest to).
Yet, Tea Partiers appear painfully unaware of the past half-century’s radical restructuring of our economy and its dangerous concentration of wealth at the top...AND of the need this poses for parallel tax policy changes. Or that taxes can and should be raised on a few so that taxes can be cut for the many. Perhaps they should read this article!
Good luck, Mr. Obama! In the coming showdown on this issue, you will have tremendous support from a deeply concerned American people…IF you inform them of the facts and mobilize them. In the process, you may well save not only the remaining remnants of our competitive enterprise system but also American democracy itself.
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PS, January 2011: As the record shows, President Obama did nothing of the above, even though he said repeatedly he wanted to see the Bush tax cuts rescinded for upper-income groups. What he did, in fact, was to cave in to GOP demands to extend ALL the Bush tax cuts for another two years, thereby piling up huge new Federal budget deficits and contributing new billion$ to the national debt. So what will the new Congress, with its many new Tea Party and other conservative members, do? YOU can help them decide....
POST-NOTE: Those interested in the crucial parallel subject of Federal budget deficits may want to note another jolting analysis. Stay on this blogsite and click on to TAMING THE DEFICIT MONSTER (my report of July 4).
