|
TAX REFORM AND CLASS WARFARE
by Dr. Robert M. Bowman, Lt. Col., USAF, retired
Advocates of social justice are often accused of engaging in class warfare. The truth is that class warfare is indeed being waged, but not by us. It is being waged against us, indeed against 90% of the people in this country, by the wealthy few, the corporate owners, the bondholders, the oligarchy.
The Reagan revolution was a major battle in that war, and we lost. The war on poverty became the war on the poor, then on even the middle class. The worst of it is that the working people don’t even understand that they’ve been attacked, plundered, chewed up and spit out by the oligarchs. Let’s look at some facts.
At the beginning of the Reagan era, the richest one percent of Americans owned a little under 20% of the country’s assets. Now, they own well over 40%. We are always told that there are so few rich people that if you spread their wealth around it wouldn’t make any difference (except to them). What a colossal lie! If the wealth of this country was divided equally among us, every American family would get over a quarter of a million dollars!
The rich are getting richer. During the 80s, the total wages of those earning a million dollars or more a year shot up an average of 243% — per year! The average corporate CEO now rakes in about four million a year, about three-fourths of which is in stock options and other tax-sheltered compensation.
Meanwhile, the poor and middle class are getting poorer. Incomes have declined since the 1960s, and the trend is accelerating. Until 1980 the war on poverty was slowly being won. The number of families in poverty was going down. But the Reagan revolution changed that, and the fraction of our people who live in poverty is increasing rapidly, especially for children and minorities. This in spite of the fact that productivity has shot up dramatically. Based on productivity gains, we all ought to be working ten hours a week yet enjoying the same standard of living we had in the 1950s. Obviously, that’s not happening. In 1952, the average factory worker had to work one day to earn the closing costs for a brand new home in Levittown, PA. In 1991, it took the average factory worker (if he was lucky enough to have a job) 126 days to earn the closing costs on the same (now 40-year old) house. What’s worse, the average factory worker (never mind service and retail workers) doesn’t earn enough to qualify for a mortgage on that 40-year old tract house. Home ownership is declining as the American dream is rapidly becoming a nightmare for the younger generation. The net worth of the median non-home owner American family is about three thousand dollars. That’s middle class?
How did all this happen? How did the gap between the rich and poor in this country become the worst in the world — even worse than Mexico and Brazil? The ultimate answer, of course, is power. The big multinational corporations have become more powerful than any government, and indeed dictate the policies of many governments. They dominate most political parties (including both major parties in this country), and own the major media, allowing them to mold public opinion and manipulate the people. But in this article, I am not addressing ultimate answers. I am dealing with the specific mechanisms they use to pump money from all levels of society up to their own. There are three of these mechanisms: wages, debt, and taxes.
MECHANISMS OF
WEALTH APPROPRIATION
Wages:
When wages started falling in the 1960s, many families made up for it by having the wife go to work. But even this is no longer filling the gap. Even with two wage earners, family income fell 7% in the 1980s and another 7% in the first four years of the 90s. Why have wages been falling at the same time that productivity has been rising and the stock market soaring? One answer is that they can get away with it. Artificially high unemployment has created a permanent pool of talented workers ready to take the job of anyone who complains about a cut in wages. And, of course, Reagan’s destruction of the Air Traffic Controllers’ union in the PATCO strike essentially killed solidarity in the United States. With government weighing in on the side of big business, labor has lost its bargaining power.
The second answer to why wages have been falling has to do with taxes. Businesses are taxed on the wages they pay and are even taxed on the full-time jobs they provide. So, naturally, there are lower wages and fewer full-time jobs. If you want to discourage, minimize, or get rid of something, tax it. In France, a few centuries ago, they instituted a tax on windows. As you drive through the French countryside, you can still see windowless homes built during that period. So why do we have payroll taxes? If we want to use taxes to discourage something, let’s tax pollution produced or energy consumed.
The Minimum Wage is far too low. Yet in the present environment, increasing it by legislation is not much of a solution. That would help a few, and cause a few others to be fired. Perhaps a better approach would be to use the tax system to give business an incentive to pay better wages. Only a few decades ago, the ratio between CEO pay and that of the workers was about 20 to 1. Today, the ratio is about 500 to 1. We constantly hear of chief executives firing thousands of workers in a "downsizing" maneuver, and then rewarding themselves with a doubling or tripling of their multimillion dollar salary.
What if we passed a change to the tax code saying that any salary (or other compensation) in excess of 20 times that of the lowest paid worker in the company was not deductible to the company as a business expense? If stockholders knew that these obscene salaries were coming out of after-tax profits and therefore out of their dividends, would they allow them to continue? Wouldn’t the CEOs have an incentive to raise workers’ salaries if their own compensation was tied to them?
Debt:
Even if we succeed in getting wages raised, we won’t be able to lift people out of poverty unless we get them out of debt. The federal government owes about five trillion dollars. We individuals owe about eight trillion in consumer debt. Companies borrow billions to buy up other companies, using junk bonds to finance their deals. All of it is owed to a relative handful of bondholders. On it they make hundreds of billions each year in interest, at real rates of interest higher than any in history. In the middle ages, this would have been called usury. Today it’s called usual. It’s one more mechanism for pumping wealth from the rest of us to the top.
Before Reagan, inflation increased the value of the things we bought, like houses. And it let us pay back our debts with less valuable dollars. For us debtors, it was a good deal. It was a mechanism for transfering some of the wealth from the wealthy bondholders to us debtors. The affluent middle class was built on inflation. But Reagan and the Federal Reserve did away with that. They killed off inflation with a very deep recession and kept it from coming back with a high level of permanent unemployment and with unusually high real interest rates. This made it more difficult to pay back loans. Millions of small businesses and family farmers went bankrupt. So did some of the small banks that made the loans, and of course, the S&Ls. But bondholders are happy.
Debt has been the mechanism for oligarchs to suck the wealth out of third-world countries. And it has been an important mechanism for turning a once-affluent America into another third-world country.
Taxes:
Probably the most important mechanism for pumping wealth uphill has been tax "reform."
In the 1950s, corporations paid 39% of all income taxes. By 1990, it was just 17%, and it’s still going down. In 1970, an average family paid $1,689 in income and social security taxes. In 1989, they paid $8,491. Meanwhile, in the same time period, the average taxes paid by millionaires went down by $436,389 per year. Then in 1989, the top 1% received another tax cut saving them an average of $82,000 per year. They told us that if we agreed to pump all this money to the top, it would trickle down. But, of course, it didn’t. It wasn’t even invested in job-creating new businesses. It was loaned to increasingly debt-ridden people and their government. Some of it was invested overseas in more profitable sweatshop ventures than can be gotten away with at home. We poor suckers who allowed our wealth to be pumped to the top actually financed the moving of our jobs out of the country.
We also financed foreign oil exploration for Exxon, while their $8.2 Billion profit goes completely untaxed. We paid to build logging roads through national preserves so mills can export our trees (for which they pay a nickel apiece). But we do not tax their profits. We subsidize companies to mine our national parks. We even pay for overseas advertising for McDonald’s and other huge corporations; but we do not tax their profits on overseas sales.
If the Reagan revolution could be characterized by any one thing it would be shifting the burden of taxation from the rich to the rest.
So now that the enormous damage is apparent and the super-rich are coming closer and closer to owning everything in the country, what do they prescribe? More of the same! Last time they called it supply-side economics. This time they are calling it the Flat Tax.
THE FLAT TAX
There are actually four main Flat Tax proposals — by Forbes, Armey, Gramm, and Buchanan. The most modest is Buchanan’s. It is much like the existing system, except that there’s only one rate — 17%. It taxes all forms of income, just like the existing system. And it allows deductions for mortgage interest and charitable donations in addition to the standard deduction. Phil Gramm’s is similar, except that the mortgage interest and charitable contributions deductions are only useful to wealthy folks, since they are only deductible to the extent they exceed $22,000.
The proposals of Dick Armey and Steve Forbes are more extreme. They allow no deductions, and do not tax all kinds of income. Neither taxes interest, dividends, or capital gains. The only difference between the two is that Forbes would tax only wages, while Armey would tax pensions as well. While this difference would be important to pensioners and retirees, to most folks, the two plans are indistinguishable. Both give wealthy folks essentially a free ride. If such a plan were passed, the wealthy would soon arrange to get all their compensation in dividends and other non-taxable forms, and would pay no tax at all. If just those making in excess of $100,000 per year beat the system, then the "flat" tax rate would have to be raised to 81% to make up the shortfall, and all of it would be paid by us wage earners.
Figures 1 and 2 show how these various proposals would affect the after-tax income of a family of four. (Figure 2 is a blowup of the extreme lower left corner of Figure 1, for us folks with modest incomes.) The lines for the Forbes and Armey plans are almost on top of each other, and are the closest to the line for no tax at all (and these assume no one beats the system, but keeps receiving a major portion of their compensation as salary). All four of the Flat Tax proposals lie considerably above the line for the existing system, meaning everyone gets to keep more of their income. Since everyone pays less tax, the government receives less revenue. Figure 3 (on the back cover) shows this dramatically. Tax revenues under Forbes would be about half what they are under the existing system. This is a way to eliminate the deficit? We saw such voodoo economics once before (under Reagan) and it resulted in a quadrupling of the national debt.
These figures also contain data for an "ISSS Proposal" which goes in the opposite direction from the Flat Tax proposals. It is described in the following section.
ISSS PROPOSED INCOME TAX SYSTEM
All forms of income would be taxed, as now, but Capital Gains would be calculated using an Inflation-Indexed Cost Basis. Deductions for Mortgage Interest would be limited to $10,000 per household. The Social Security (FICA), Medicare, and Medicaid taxes would be eliminated. Every American, regardless of income, would get an untaxed Basic Subsistence Allowance of $6,000 for adults 18 through 64, $9,000 for seniors 65 and over, and $1,000 for each child through age 17 (with the first child in a family receiving an extra $2,000), all children’s allowances paid to the parents. The allowance for convicts would go to the appropriate jurisdiction, and that for deadbeat parents would go to the custodial parent. The above allowance amounts would be adjusted annually with a Cost of Living Adjustment (COLA). Every American would get basic health care under a Canadian-style single-payer system. All auto accident claims would be paid by a National No-Fault Insurance Fund paid for out of gasoline taxes. All payroll taxes would be eliminated, saving businesses $400 Billion per year.
The $1.5 Trillion cost of all this would be paid for by elimination of duplicative programs (social security, medicare, medicaid, welfare), by the proposed increase in income taxes, by a corporate profits tax offsetting the eliminated payroll taxes, and by taxing offshore multinational corporations doing business in the U.S. A $1 per gallon increase in gasoline taxes would all go toward deficit reduction.
Think of some of the advantages of this system. The poorest family with even one child would receive $15,000 per year, and would get health care and auto insurance. Any money they made over that would not be taxed until their income had doubled. Going to work would not mean losing basic support or health care. No one would be trapped in poverty any more. Jobs would be easier to find, since businesses would not be taxed for providing them. At the same time, the stigma and indignity of the dole would be gone, because the unemployed would be receiving no more than any other citizen, including the very rich. They, along with everybody else, would have access to the doctor of their choice for preventive treatment, checkups, pre-natal care, well-baby checkups, and the illnesses and injuries that now inundate emergency rooms. Health would be improved, and red tape and health care costs would plummet.
Working class people would have money in their pockets and no fear of losing everything if they lost their job or got sick. Think what this new buying power would do for the economy!
Churches and charities would prosper, because the wealthy would again have an incentive to give. Under a Flat Tax, it costs 83 cents to give a dollar to charity. Under our ISSS Proposal, it would only cost 30 cents.
Of course, this means raising the top tax bracket back to where it was in 1972 (although at much higher income levels). The very wealthy aren’t going to like giving up the gains they made under Reagan. But then we’re not asking them to. They can keep all the billions they salted away in the last two decades. We only want to restore fair tax rates on what they earn in the future.
The oligarchs are playing us for fools with their Flat Tax proposals foisted on us by their hired henchmen. Don’t be fooled. A flat tax is no simpler than a progressive tax. The complication comes in deciding what to tax and what deductions to allow. Neither do these proposals compensate for lower rates on the rich by closing loopholes. Indeed, they open many more new loopholes than they close. And the simpler a tax system looks, the bigger are the loopholes. Closing loopholes is, by nature, complicated. There can be no such thing as a simple, fair income tax. And the tradeoff between simplicity and fairness has absolutely nothing to do with how many tax brackets you have.
The Flat Tax proposals are a slickly-packaged way to pump even more wealth to the top. They are another round of class warfare being conducted against us.
We didn’t start this war. But we sure can’t afford to lose it. We must educate the people.
==============================================
We are sometimes criticized for straying from our space and weapons forte. We are not economists. Yet you don’t have to be a rocket scientist to figure out that a Flat Tax is a sweet deal for the very rich. The fact that Dr. Bowman is a rocket scientist should not disqualify him from saying his piece!
Top of Page
|