Wednesday, October 26, 2011

When plutocrats dream

Ever since the modern income tax came into being in America in 1913, plutocrats have dreamed of shifting the tax burden back to the unwashed masses, where they were always convinced it belonged.
In 1914, the first year of the new tax, only 357,000 Americans—those with incomes of over $3,000 a year—were subject to federal income tax. That was about a third of one percent of the nation's population of 99 million; it included 20 percent of stockbrokers and lawyers, 10 percent of manufacturers, 1 percent of merchants, and a quarter of 1 percent of farmers. The top tax rate was 7 percent, not exactly a crippling burden on incomes of $1 million a year.

But to Herbert Hoover's treasury secretary Andrew Mellon, even that was an outrage against the laws of nature. He and most American industrialists and captains of Wall Street thought it was obvious that the burden of taxation should be born by the working class, not the "productive" classes. Industrialists John J. Raskob and Pierre S. du Pont hit on "the brilliant scheme," in historian Robert McElvaine's words, of taking over the Democratic Party in 1928, getting Al Smith the nomination, and committing the party to repeal of Prohibition—and then taxing beer. That, they figured, would allow a 50 percent cut in the income tax while making those slacker workingmen pay their fair share.

The other fond hope of the plutocrats in the 1920s — which they clung to even in the early 1930s, at the height of the Depression — was to institute a national sales tax as a way to provide tax relief for the non-neediest. The sales tax was the "proper" way to raise revenue, explained the chairman of the board of Hudson Motors, Roy Chapin, "since the lower income brackets pay nothing to the maintenance of the National Government."

It used to be merely a figure of speech to say that conservatives wanted to turn back the clock by a century or two. Now it's the literal truth.

In particular, all of the Republican candidates have been doing an astonishingly realistic imitation of a 1920s fat cat with the tax proposals they have offered up. Rick Perry recently complained that it was very disturbing that half of Americans pay no federal income tax at all. His solution, unveiled yesterday, is to replace the current progressive income tax system with a flat tax paid across the board by all income earners — and with no tax at all on capital gains, a change that in itself would mean a cut of $100 billion or so in taxes on the highest incomes.* Herman Cain has been touting an even more sweeping plan to soak the poor with a 9 percent national sales tax.

About the only difference between 1926 and 2011, when it comes to the Republican proponents of such a massive redistribution of taxation to the poor, is that instead of referring to the top income brackets as "the productive classes," they now call them "job creators."

The new window-dressing applied to these old ideas is part and parcel of the big lies that have appallingly become routine these days. (Let me deal with a little lie first: Perry's remark that he's "dismayed" that half of Americans pay no income tax is of course ridiculous. The latest IRS data, from 2008, show 142 million individual returns were filed; 34 million of those had no taxable income at all, and the remaining 17 million filers who paid no tax almost all had incomes of less than $20,000 a year. Perry's idea that those who earn under the poverty line are not doing their fair share would be laughable were it not merely obscene. Those earning under $20,000 by the way claim a grand total of a few percent of the nation's total income. Those with incomes in the top 1 percent claim 60 percent of total income. Finally, and much more important, the fact that the poorest wage earners do not pay income tax does not mean they are not contributing substantially to total federal tax receipts. Even the poorest wage earners pay 8 percent of their income in federal payroll tax, a regressive tax that imposes a disproportionate burden on them; payroll taxes by contrast amount to less than 2 percent of the income of the top 1 percent of wage earners, who derive substantial earnings from unearned income.)

But the big lie is the mantra repeated ad nauseam by the GOPS about tax policy and the "job creators." The idea that taxing corporate profits and the unearned income of capitalists is all that is standing in the way of the economy expanding is one of those Flat Earth beliefs that it is astonishing has gained currency at all. But such apparently is the power of repetition, something that all good propagandists understand.

Perry's version of this is that he wants to eliminate capital gains taxes altogether "to really give incentives to those that are going to risk their capital to create the jobs." The idea that capitalists need tax incentives to invest in a money-making enterprise makes about as much sense as the idea that workers need a tax incentive to take a paying job. (By this logic, we are discouraging job takers by taxing their income.)

One extra twist on this fairy tale advanced by the GOPs recently is that merely by asking for an increase in the top marginal tax rate on millionaires, President Obama has created "uncertainty" that is making capitalists afraid to invest their money; not knowing how much of their profits they will eventually have to fork over to Uncle Sam, they have I guess decided there is no point in even taking it out from under the mattress.

Now, last time I checked, taxes are paid on net profits. If an enterprise is likely to generate a net profit, it will be a good investment regardless of what the tax rate is (assuming it is less than 100 percent, a safe assumption). Consider these two scenarios:

(a) A company is turning away customers because it cannot produce enough of its product to meet demand. The owner calculates if he invests $1 million, he can expand, hire new workers, and sell more products, earning him a net income of an additional $100,000. He has to pay 30 percent tax on that $100,000 profit.

(b) everything as in (a), except that he has to pay a 33 percent tax on his $100,000 profit.

Is there anyone in the universe who believes that in case (a) the owner will make the investment, but that in case (b) he will not, having concluded there is no point because he "lacks the incentive"?

Conversely, is there anyone (let me rephrase that, anyone who inhabits the reality-based universe) who believes that if the owner does not have a demand for his product he will make that investment (and "create jobs") regardless of how low his tax rate is — even if it is zero?

Currently interest rates are at historic lows and companies and banks are sitting on piles of cash. The reason they are not investing it in productive enterprises is not because they are waiting for another $100 billion to fall into their hands: the reason they are not investing it is because nobody out there is buying their stuff.

One other favorite rhetorical gambit of the GOPs is to throw around the fighting words, "class warfare." To understand the logic of this, just follow this simple rule: Proposing a massive transfer of the tax burden from the wealthy to the poor and middle class is not class warfare. Pointing out that it is a massive transfer of the tax burden from the wealthy to the poor and middle class is class warfare.

I wish more Democrats would follow the lead of a Republican named Theodore Roosevelt, who knew how to handle that red herring argument — and its corollary, which Perry offered up a fine specimen of the other day, as to why we should Be Nice to the Rich: "Americans, I hope, aspire to be wealthy,"  Perry explained.

TR answered that wealth is in itself a social responsibility, and that there is all the world of difference between wealth that is productively earned and wealth that is simply begotten of itself:
We grudge no man a fortune which represents his own power and sagacity, when exercised with entire regard to the welfare of his fellows. . . . 
But, he continued:
No man should receive a dollar unless that dollar has been fairly earned. Every dollar received should represent a dollar’s worth of service rendered — not gambling in stocks, but service rendered. 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. 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.

One other small but irritating point: Part of the know-nothingness of the antitax crusaders is to cite scary numbers about how many pages the tax code is; a selling point of the flat taxers is that "you can put it on a postcard," in the words of Governor Perry.

You could also put a fair and highly progressive tax plan on a postcard. The reason the tax code is 66,000 pages or 128,000 pages long or a gazillion pages long is almost entirely due to the complex special interest loopholes passed at the behest of corporate lobbyists year after year. In 1915, a year after the first income tax went into effect, one congressman described how the process worked: "I write a law. You drill a hole in it. I plug the whole. You drill a hole in my plug." It's been going on ever since.


A study out today from the Congressional Budget Office documents the rising income inequality in the U.S. and the role that cuts in capital gains taxes and top marginal rates have played in this.


*Table 4-3 of this CBO report has data on capital gains tax receipts.