“Reaganomics Killed America’s Middle Class”: The Time Is Long Past Due For Us To Roll Back The Reagan Tax Cuts
There’s nothing “normal” about having a middle class. Having a middle class is a choice that a society has to make, and it’s a choice we need to make again in this generation, if we want to stop the destruction of the remnants of the last generation’s middle class.
Despite what you might read in the Wall Street Journal or see on Fox News, capitalism is not an economic system that produces a middle class. In fact, if left to its own devices, capitalism tends towards vast levels of inequality and monopoly. The natural and most stable state of capitalism actually looks a lot like the Victorian England depicted in Charles Dickens’ novels.
At the top there is a very small class of superrich. Below them, there is a slightly larger, but still very small, “middle” class of professionals and mercantilists – doctor, lawyers, shop-owners – who help keep things running for the superrich and supply the working poor with their needs. And at the very bottom there is the great mass of people – typically over 90 percent of the population – who make up the working poor. They have no wealth – in fact they’re typically in debt most of their lives – and can barely survive on what little money they make.
So, for average working people, there is no such thing as a middle class in “normal” capitalism. Wealth accumulates at the very top among the elites, not among everyday working people. Inequality is the default option.
You can see this trend today in America. When we had heavily regulated and taxed capitalism in the post-war era, the largest employer in America was General Motors, and they paid working people what would be, in today’s dollars, about $50 an hour with benefits. Reagan began deregulating and cutting taxes on capitalism in 1981, and today, with more classical “raw capitalism,” what we call “Reaganomics,” or “supply side economics,” our nation’s largest employer is WalMart and they pay around $10 an hour.
This is how quickly capitalism reorients itself when the brakes of regulation and taxes are removed – this huge change was done in less than 35 years.
The only ways a working-class “middle class” can come about in a capitalist society are by massive social upheaval – a middle class emerged after the Black Plague in Europe in the 14th century – or by heavily taxing the rich.
French economist Thomas Piketty has talked about this at great length in his groundbreaking new book, Capital in the Twenty-First Century. He argues that the middle class that came about in Western Europe and the United States during the mid-twentieth was the direct result of a peculiar set of historical events.
According to Piketty, the post-World War II middle class was created by two major things: the destruction of European inherited wealth during the war and higher taxes on the rich, most of which were rationalized by the war. This brought wealth and income at the top down, and raised working people up into a middle class.
Piketty is right, especially about the importance of high marginal tax rates and inheritance taxes being necessary for the creation of a middle class that includes working-class people. Progressive taxation, when done correctly, pushes wages down to working people and reduces the incentives for the very rich to pillage their companies or rip off their workers. After all, why take another billion when 91 percent of it just going to be paid in taxes?
This is the main reason why, when GM was our largest employer and our working class were also in the middle class, CEOs only took home 30 times what working people did. The top tax rate for all the time America’s middle class was created was between 74 and 91 percent. Until, of course, Reagan dropped it to 28 percent and working people moved from the middle class to becoming the working poor.
Other policies, like protective tariffs and strong labor laws also help build a middle class, but progressive taxation is the most important because it is the most direct way to transfer money from the rich to the working poor, and to create a disincentive to theft or monopoly by those at the top.
History shows how important high taxes on the rich are for creating a strong middle class.
If you compare a chart showing the historical top income tax rate over the course of the twentieth century with a chart of income inequality in the United States over roughly the same time period, you’ll see that the period with the highest taxes on the rich – the period between the Roosevelt and Reagan administrations – was also the period with the lowest levels of economic inequality.
You’ll also notice that since marginal tax rates started to plummet during the Reagan years, income inequality has skyrocketed.
Even more striking, during those same 33 years since Reagan took office and started cutting taxes on the rich, income levels for the top 1 percent have ballooned while income levels for everyone else have stayed pretty much flat.
Coincidence? I think not.
Creating a middle class is always a choice, and by embracing Reaganomics and cutting taxes on the rich, we decided back in 1980 not to have a middle class within a generation or two. George H.W. Bush saw this, and correctly called it “Voodoo Economics.” And we’re still in the era of Reaganomics – as President Obama recently pointed out, Reagan was a successful revolutionary.
This, of course, is exactly what conservatives always push for. When wealth is spread more equally among all parts of society, people start to expect more from society and start demanding more rights. That leads to social instability, which is feared and hated by conservatives, even though revolutionaries and liberals like Thomas Jefferson welcome it.
And, as Kirk and Buckley predicted back in the 1950s, this is exactly what happened in the 1960s and ’70s when taxes on the rich were at their highest. The Civil Rights movement, the women’s movement, the consumer movement, the anti-war movement, and the environmental movement – social movements that grew out of the wealth and rising expectations of the post-World War II era’s middle class – these all terrified conservatives. Which is why ever since they took power in 1980, they’ve made gutting working people out of the middle class their number one goal.
We now have a choice in this country. We can either continue going down the road to oligarchy, the road we’ve been on since the Reagan years, or we can choose to go on the road to a more pluralistic society with working class people able to make it into the middle class. We can’t have both.
And if we want to go down the road to letting working people back into the middle class, it all starts with taxing the rich.
The time is long past due for us to roll back the Reagan tax cuts.
By: Thom Hartmann, AlterNet, April 19, 2014
“Inequality Perpetuates Inequality”: Conservatives Defend Inequality Out Of Self-Interest, Nothing More
Conservatives have justified inequality for decades, arguing that it is an inevitable byproduct of capitalism and broadly beneficial. This intellectual edifice has begun to collapse.
Supply-side economics rest on the assumption that the wealthy drive economic growth, and that by reducing taxes on them, we can unleash latent economic potential. In fact, however, investment is driven by demand, not supply (a point acknowledged by the relatively conservative Martin Feldstein). If there are viable investments, they will be made regardless of tax rates, and if there are no investments, cutting taxes is merely pushing on a string. Thomas Piketty and Emmanuel Saez, two top economists on inequality, find no correlation between marginal tax rates and economic growth.
Recently, two IMF papers confirmed what Keynesians like Joseph Stiglitz have long argued: Inequality reduces the incomes of the middle class, and therefore demand. This stunted demand means fewer opportunities for investment, stunting growth.
Add to this growing body of research the fact that a robust defense of inequality is increasingly difficult to muster when every other OECD country has far lower levels of inequality than the United States. Greg Mankiw’s defense of the 1 percent was widely decried, because a large swath of research shows that the rise of the 1 percent did not come from natural economic forces, but rather rent-seeking.
The evidence is clear: The economic benefits of inequality have been massively oversold. Inequality is, in fact, a detriment to growth. So why has the right not conceded the argument?
The answer is class interest.
“Class interest” does not mean that the wealthy are nefarious schemers. Instead, it means there are various cognitive biases that lead them to justify and perpetuate inequality. For instance, Kris-Stella Trump conducted experiments in which participants were asked to solve anagrams in a high inequality scenario (the winner received $9 and the loser $1) and a low inequality scenario (the winner got $6 and the loser $4). When asked what a fair distribution would look like, the high inequality group preferred an inequality of $5.54 ($7.77-$2.23) while the low inequality group preferred inequality of $2.30 ($6.15-$3.85). She concludes: “Public ideas of what constitutes fair income inequality are influenced by actual inequality.” Inequality perpetuates inequality.
Paul Piff finds that the wealthy feel more entitled to their earnings and are more likely to show personality traits typically associated with narcissism. Recent research by Andrew J. Oswald and Natavudh Powdthavee finds that lottery winners in the UK are more likely to switch their political affiliation to the right, and also more likely to believe that current distributions of wealth are fair. As people get richer, they think that tax policies favoring the rich are fair — not because of the macro-economic benefits, but because of how they benefit me.
These cognitive biases, rooted in class distinctions, have deep implications. As a young economist argued in 1846, “The ruling ideas are nothing more than the ideal expression of the dominant material relationships.” Benjamin I. Page, Larry M. Bartels, and Jason Seawright examined the policy preferences of the very wealthy and found that they generally fall in line with their class interests. The wealthy were far less likely than the general public to believe that “government must see that no one is without food, clothing, or shelter,” or that minimum wage must be “high enough so that no family with a full-time worker falls below official poverty line,” or that “the government in Washington ought to see to it that everyone who wants to work can find a job.”
This is not meant to demean the policy preferences of the wealthy — only to examine the motives. For too long, the wealthy have couched their economic ideas as being broadly good for the country, but in fact, de-unionization, capital market liberalization, and austerity benefit them while leaving the rest of us far worse off. It’s time that we were all honest about why we support the policies we support.
Now of course, not everyone who supports conservative economic policy is wealthy. Indeed, there is a large literature devoted to the question why the working class supports policies against their own interests. Engles calls this phenomenon “false consciousness,” writing to Franz Mehring, “the real motive forces impelling him remain unknown to him; otherwise it simply would not be an ideological process.” Thomas Frank proposes that working-class conservatives are swayed by social issues. Ian Haney Lopez argues that racial animus still plays a role. Rick Perlstein notes the power of identity politics. The American ethos of upward mobility certainly plays a role; truck drivers in Tallahassee vote for tax breaks on Wall Street believing that they may someday posses enough wealth that an estate tax might affect them. John Steinbeck noted the power of aspiration, writing, “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”
But when it comes to wealthy conservatives who favor economic policies that hurt many Americans: Bartels’ previous investigation of economic and political power finds, unsurprisingly, that those with a higher socioeconomic status have more influence on legislative outcomes. Martin Gilens, Dorian Warren, Jacob Hacker, Paul Pierson, and Kay Lehman Schlozman have all recorded similar findings. It seems obvious, but it is important to connect these dots: Not only do the wealthy have interests divorced from the broader interests of society, but they also have the political heft to turn those interests into policy.
It is considered rather gauche to discuss class today, and the inequality debate is therefore situated in a purely theoretical realm. Liberals are constantly confused and aggravated about why the preponderance of evidence that austerity doesn’t work (while stimulus does) and that inequality harms society is lost on a large portion of conservatives.
Well, let’s face it: Those who support austerity and inequality are not really about “trickle-down” economics or “efficiency and equity.” They are protecting the interests of the upper class.
As Jonathan Swift warned, “It is useless to attempt to reason a man out of a thing he was never reasoned into.”
By: Sean McElwee, The Week, March 18, 2014
“The Winds Are Shifting”: How Corporate America Is Losing The Debate On Taxes
If there is one clear loser in President Obama’s budget this year, it’s U.S. multinationals.
With six new ideas designed to plug some major leaks in the tax code, the 2015 budget proposes a total of more than $276 billion in higher taxes on overseas earnings for U.S. multinationals over the next decade, about $120 billion more than last year’s budget. (A sample of the policy just to give you an idea of how deep in the guts the administration is going: “Create a new category of Subpart F income for transactions involving digital goods or services.”)
So much for the White House’s attempts to strike common ground with big company chief executives, who have been howling for years about paying too much in taxes with the federal corporate tax rate at 35 percent. The companies have also poured money into an endless parade of coalitions with names like ACT, RATE, WIN, TIE AND LIFT.
The trouble with the executives’ complaints is that many companies don’t pay nearly the 35 percent rate. GE, for instance, in its most recent annual filing said it paid an effective tax rate of 4.2 percent. (See this graphic we ran last year showing taxes paid by companies in the Dow 30.) These firms insist that the high rate is merely forcing them to find complex ways to lower their tax bills. But with this budget, it’s clear the administration isn’t buying it.
“The problem is not an international tax system that unacceptably handicaps U.S. businesses,” said Ed Kleinbard, a professor at the University of Southern California’s Gould School of Law who has done extensive research on the way companies shuffle their income overseas to lower their tax bills. “Instead the problem is an international tax system both in the United States and other countries that U.S. multinational firms have demonstrated they are highly skilled at gaming.”
The president’s budget is the latest sign for corporate tax lobbyists that the winds are perhaps shifting against them. Last month’s tax reform plan from House Ways and Means Chairman Dave Camp (R-Mich.) also included a number of ideas unpopular with business, including a bank tax. His section on international tax reform was somewhat more generous to big firms, giving them a lower rate on overseas earnings with anti-abuse measures that Kleinbard says don’t go far enough.
Of course, expectations are low that either the president or Camp’s policies will ever make the leap to reality. But after spending hundreds of millions of dollars on lobbyists, corporate America is not exactly seeing its worldview reflected in these blue prints.
By: Jia Lynn Yang, WonkBlog, The Washington Post, March 5, 2014
“Enemies Of The Poor”: Republicans Are Doing All They Can To Hurt The Poor
Suddenly it’s O.K., even mandatory, for politicians with national ambitions to talk about helping the poor. This is easy for Democrats, who can go back to being the party of F.D.R. and L.B.J. It’s much more difficult for Republicans, who are having a hard time shaking their reputation for reverse Robin-Hoodism, for being the party that takes from the poor and gives to the rich.
And the reason that reputation is so hard to shake is that it’s justified. It’s not much of an exaggeration to say that right now Republicans are doing all they can to hurt the poor, and they would have inflicted vast additional harm if they had won the 2012 election. Moreover, G.O.P. harshness toward the less fortunate isn’t just a matter of spite (although that’s part of it); it’s deeply rooted in the party’s ideology, which is why recent speeches by leading Republicans declaring that they do too care about the poor have been almost completely devoid of policy specifics.
Let’s start with the recent Republican track record.
The most important current policy development in America is the rollout of the Affordable Care Act, a k a Obamacare. Most Republican-controlled states are, however, refusing to implement a key part of the act, the expansion of Medicaid, thereby denying health coverage to almost five million low-income Americans. And the amazing thing is that they’re going to great lengths to block aid to the poor even though letting the aid through would cost almost nothing; nearly all the costs of Medicaid expansion would be paid by Washington.
Meanwhile, those Republican-controlled states are slashing unemployment benefits, education financing and more. As I said, it’s not much of an exaggeration to say that the G.O.P. is hurting the poor as much as it can.
What would Republicans have done if they had won the White House in 2012? Much more of the same. Bear in mind that every budget the G.O.P. has offered since it took over the House in 2010 involves savage cuts in Medicaid, food stamps and other antipoverty programs.
Still, can’t Republicans change their approach? The answer, I’m sorry to say, is almost surely no.
First of all, they’re deeply committed to the view that efforts to aid the poor are actually perpetuating poverty, by reducing incentives to work. And to be fair, this view isn’t completely wrong.
True, it’s total nonsense when applied to unemployment insurance. The notion that unemployment is high because we’re “paying people not to work” is a fallacy (no matter how desperate you make the unemployed, their desperation does nothing to create more jobs) wrapped in a falsehood (very few people are choosing to remain unemployed and keep collecting benefit checks).
But our patchwork, uncoordinated system of antipoverty programs does have the effect of penalizing efforts by lower-income households to improve their position: the more they earn, the fewer benefits they can collect. In effect, these households face very high marginal tax rates. A large fraction, in some cases 80 cents or more, of each additional dollar they earn is clawed back by the government.
The question is what we could do to reduce these high effective tax rates. We could simply slash benefits; this would reduce the disincentive to work, but only by intensifying the misery of the poor. And the poor would become less productive as well as more miserable; it’s hard to take advantage of a low marginal tax rate when you’re suffering from poor nutrition and inadequate health care.
Alternatively, we could reduce the rate at which benefits phase out. In fact, one of the unheralded virtues of Obamacare is that it does just that. That is, it doesn’t just improve the lot of the poor; it improves their incentives, because the subsidies families receive for health care fade out gradually with higher income, instead of simply disappearing for anyone too affluent to receive Medicaid. But improving incentives this way means spending more, not less, on the safety net, and taxes on the affluent have to rise to pay for that spending. And it’s hard to imagine any leading Republican being willing to go down that road — or surviving the inevitable primary challenge if he did.
The point is that a party committed to small government and low taxes on the rich is, more or less necessarily, a party committed to hurting, not helping, the poor.
Will this ever change? Well, Republicans weren’t always like this. In fact, all of our major antipoverty programs — Medicaid, food stamps, the earned-income tax credit — used to have bipartisan support. And maybe someday moderation will return to the G.O.P.
For now, however, Republicans are in a deep sense enemies of America’s poor. And that will remain true no matter how hard the likes of Paul Ryan and Marco Rubio try to convince us otherwise.
By: Paul Krugman, Op-Ed Columnist, The New York Times, January 12, 2014
“An Undead Policy Idea”: Rand Paul Pulls Out His Dog-Eared Playbook
Sen. Rand Paul decamped in Detroit today to open a new GOP office (good luck with that), and while he was at it, pulled out his thin, dog-eared playbook of conservative urban policy ideas, as reported by Slate‘s Emma Roller:
Paul’s real mission in Detroit is his new plan to stimulate the bankrupt city’s economy. In a call with reporters Thursday, Paul announced a bill that he insists is not a stimulus. The gist: radically lower taxes for areas that have 1.5 times the national unemployment rate, or roughly 11 percent. As of August, unemployment in Wayne County was at 11.1 percent, and 17.7 percent in Detroit proper.
Yes, it’s “enterprise zones,” the crown jewel of 1980s-style Republican expressions of concern for urban areas, associated especially with HUD secretary and conservative warhorse Jack Kemp. As Roller notes, it hasn’t been a particularly successful idea:
Would insanely low corporate taxes convince Jeff Bezos to build Amazon’s next warehouse in some long-abandoned Detroit building? Would they even convince business owners in adjacent Macomb County—which has an only 9.5 percent unemployment rate—to venture into the city? Critics (as they are wont to be) are skeptical:
“Enterprise zones are not especially effective at increasing overall economic activity or raising incomes for the poor,” said Len Burman, director of the Urban-Brookings Tax Policy Center and a former Clinton administration official. “They just seem to move the locus of activity across the zone’s boundary — reducing activity outside the zone and increasing it inside.”
Burman might well know, because probably the most extensive application of the enterprise zone concept was actually as a small element of the Clinton administration’s “empowerment zone” initiative, which packaged federal grants with tax concessions in urban areas agreeing to undertake a comprehensive strategy for self-improvement. This was not one of my favorite Clinton policies (as I expressed once in a magazine op-ed that enraged the initiative’s majordomo, a guy named Andrew Cuomo), but it was a lot better than the original GOP model.
But here it is again, a truly undead policy idea.
Once when I was involved in rural development efforts in Georgia I wrote (for the private amusement of my colleagues at the state agency where I worked) a savage parody of enterprise zones by “proposing” that we offer poor counties the opportunity to legalize every kind of income-producing vice: prostitution, gambling, drugs, you name it. They’d be called “erogenous zones.” A quarter century later, enterprise zones haven’t become any less worthy of ridicule.
By: Ed Kilgore, Contributing Writer, Washington Monthly Political Animal, December 5, 2013
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