The Real Class War

Bush's new tax plan is a blatant giveaway
to the very rich

by David Moberg

In These Times magazine, February 2003

In 1978, after the nation's biggest corporations had ganged up to defeat a moderate, pro-union labor law reform bill, then United Auto Workers President Douglas Fraser complained about a "one-sided class war" being waged against workers in the United States. In the past quarter-century, that war has only intensified.

That's what makes President Bush's recent comments particularly galling. Seeking to discredit his opponents as closet Reds from the start, Bush warned that the opposition would wage distasteful "class warfare" against his new tax cut plan for the rich-sorry, that's the "Growth and Jobs Plan to Strengthen the American Economy."

His statements deflected attention from the real class war being waged by the tag team of big business and hard-right conservatives. Despite their minor policy differences, they have been united for decades on a campaign to shift income from poor and working people to the wealthy, under such guises as "competitiveness" or devolution of the federal government.

That may be harder to do this time. Under the banner of boosting the economy and helping the unemployed, the latest Bush initiative especially when combined with other tax cuts waiting in the wings-is a blatant giveaway to the very rich. As long-term public policy, it is fundamentally wrong-headed, ignoring real needs for sustained economic health. It will also be very costly in ways that ultimately will be paid for by cutting useful govemment programs especially those that help the less fortunate.

But to Bush and the people around him, these are meaningless objections. They care only about serving the interests of the rich, whatever the consequences. As an administration that has raised cold cynical deceit to new levels of strategic importance, they seem unconcerned about whether their policies deliver what they promise.

All the policy talk is political packaging to delude middle-class voters and the media. But after years of failing to fight effectively, and often even joining the anti-govemment, pro-rich juggernaut as a junior partner, the Democrats will have a hard time making the class war two-sided, even if they want to do so.

The House Democratic leadership did at least offer a modest, reasonable stimulus plan that would have quickly delivered money to the people who need it most (and who would be most likely to spend it), thus spurring the economy without creating long-term revenue losses and budget deficits. Their plan would have expanded unemployment insurance beyond the needed but narrow extension that passed Congress early in January. It also would have provided $300 to every working person.

The Democratic plan implicitly recognizes that states now face deficits of at least $60 billion in the next fiscal year. Because they must balance their budgets, states have already been cutting spending for public education, universities, Medicaid, corrections and a broad range of social services, while laying off workers. The Democrats would offer financial help for states on programs like Medicaid and Homeland Security.

Although stimulus programs proposed by the AFL-CIO an the Economic Policy Institute would go further (more money for refunds and public spending, higher minimum wage), the Democratic plan at least recognizes that the economy is not out of the woods. Indeed, the specter of double-dip recession an spiraling deflation still looms, despite the administration's happy talk about recovery.

Bush's plan costs $674 billion over 10 years (and more like $900 billion once interest on increased debt is included) and offer nothing to the states. It accelerates the 2001 tax cuts that provided small middle-income taxpayer benefits but were heavily skewed to the rich. Worst, the bulk of the cost-$364 billion comes from eliminating taxes on stock dividends. Politically, many may be bamboozled by the Bush rhetoric; economically, very few will benefit.

Republicans calculate that a new majority "investor class" will rally to their elimination of "double taxation" of dividends (first as corporate profits, then as investor income). But while more than half of Americans own some stock, only a third own more than $5,000 worth. Also, most of these "investors" hold stock indirectly, in pensions or mutual funds, that are already tax-free (except when they're paid out in retirement, when they will still be taxed under Bush's ~... plan). The wealthiest 10 percent of the population owns 85 percent of the taxable stocks and mutual funds (and the top 1 percent owns 49 percent), according to New York University . professor Edward Wolff.

What about that horrible "double taxation"? It's an illusory issue. Consider the average wage-earner whose paycheck has deductions for both income taxes and Social Security/Medicare-. and who then pays sales taxes on nearly every purchase on top of property taxes. Is that "quadruple taxation"?

In any case, as Dean Baker of the Center for Economic and Policy Research argues, corporations are legally distinct entities from shareholders, and there are privileges and economic benefits that justify separate taxation. Furthermore, according to Citizens for Tax Justice, just over half of corporate profits were taxed in t002, as corporate income taxes declined to only 1.5 percent of the gross domestic product, probably the lowest level of all advanced industrial countries.

But the chutzpah-of-the-year award goes to Bush administration officials floating the idea that the big problem with America is that the poor don't pay enough taxes, and the rich pay too much.

First of all, the United States is a low-tax country-ranking 27th out of 30 in total taxes among the relatively rich countries in the Organization for Economic Cooperation and Development. Second, overall federal taxation, including Social Security, is only moderately progressive and getting less so. By 2010, according to Citizens for Tax Justice, even before the new tax cuts, the top 1 percent will receive 19 percent of all income but pay only 24 percent of federal taxes. Third, the burden of govemment has shifted back on states and localities, whose taxes are very regressive. A recent study by the Institute on Taxation and Economic Policy showed that on average, after accounting for federal offsets, the richest 1 percent pay only 5.2 percent of their income on state and local taxes. A middle-income household pays 9.6 percent, and the poorest-fifth of all families pays 11.4 percent.

Meanwhile, the richest 1 percent-with an average annual income of more than $1 million-already will get a half-trillion dollars over 10 years out of Bush's $1.3 trillion tax cut in 2001, an average of $342,000 each, according to Citizens for Tax Justice. As their breaks fully kick in, that 1 percent will be getting 52 percent of the tax cuts. By accelerating this change in Bush's new plan, the rich will get more sooner.

Despite the grotesquely misleading administration claim that 92 million taxpayers would receive $1,083 "on average" in 2003, here's the real story from Citizens for Tax Justice: The top 1 percent will get more than $30,000 each on average; a family at the median income level will get about $289; and a family in the bottom fifth, making an average income of $9,900 a year, will gain a big fat $6.

The real point of the plan, of course, is to bring about this redistribution. The second aim is to further shrink govemment. Running a deficit now makes economic sense. The deficit would make more sense if tax cuts or refunds were to go to low and middle-income families rather than the wealthy. And since much of the stimulus from consumer spending dribbles away to other countries through the huge trade deficit, it would be smarter to boost immediate govemment spending (in addition to the benefits of forestalling cutbacks at state and local levels).

But the long-term deficit that Bush would create is another matter. While the economics debate is far from settled, there's a good chance that long-term deficits will raise interest rates slightly, increasing costs to govemment and dampening economic growth. Elimination of the taxation of dividends almost certainly will raise interest rates on tax-free state and municipal bonds, costing states more than $4 billion a year, according to the Center on Budget and Policy Priorities.

If the money creating a deficit were spent on research, education, infrastructure and other productivity-enhancing investments rather than giveaways to the rich, longer-term deficits might be less of a problem. But the right learned a valuable lesson from Reagan's deficits. Down the road, they can point to the deficits as a reason to chop away at govemment. Since the most vulnerable targets will be programs that help poor or working people, the Bush tax cuts will then become doubly regressive and unjust.

Apologists often try to defend the Bush plan by claiming it will boost investment in the long term. But the problem with the economy now is overcapacity, and during the recent boom businesses had little problem raising capital. The long-term economic benefits, if any, will be swamped by negative social and economic consequences, and the same amount of money would be better spent-even from a purely economic perspective-on health care, education, environmental protection, increased energy efficiency and a wide range of other govemment policies.

More fundamentally, the debate on taxes and government must be shifted. As legal philosophers Liam Murphy and Thomas Nagel argue in their recent book The Myth of Ownership, the money that any of us earns, whether as factory worker, corporate executive or investor, reflects not just our own work, but a long history of public investment, regulation and even taxation. The public has a claim on part of that money not only because of their contribution to private wealth, but because the public needs the money to create the kind of society we want in the future.

That is also the message of a compelling new book-Wealth and Our Commonwealth-by William H. Gates Sr. (Bill's dad) and Chuck Collins attacking the repeal of the estate tax, which Bush still hopes to make permanent. Rich people owe much of their great fortune to the society in which they live, they argue, and creation of greater inequality and perpetuation of even larger inherited fortunes is a threat to American ideals of democracy.

In the end, Bush isn't just waging war against the working and middle class on behalf of the rich. He's waging war against America. Where's the Homeland Security when we need it?

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