Enriching Elites

The current tax debate is the mutant great-great-grandchild of the right-wing tax politics that overtook the country in the 1970s.

The crisis of stagflation — a combination of slow growth and inflation — was blamed on an out-of-control tax-and-spend federal government. The “lesson” that elites chose to absorb was that the decade’s macroeconomic disaster had vindicated small government, specifically on the grounds that high taxes on high incomes cause the most productive workers to withdraw their labor supply and cause potential savers (i.e., the wealthy) to withdraw their capital.

Economists pitched in by supplying theoretical models of economies permanently hobbled by taxes on capital income. Newly empowered business interests rushed those theories into policy without bothering to check if they were actually true.

That gave us a decades-long downward march in effective tax rates on the rich, both at the individual and corporate levels — often playing the former off against the latter as an excuse for further reductions.

For example, dividend taxes on shareholders were cut in 2003 using the argument that profits are already taxed at the corporate level; and today, major reductions in corporate taxes are being proposed using the (mostly false) claim that shareholders already pay taxes on that income at the individual level.

The focus all along has been on cutting effective tax rates on capital through loopholes allowing companies to circumvent the corporate tax system (most prominently, the use of international tax havens); tax shelters to shield capital gains from tax; and vastly curtailed tax burdens on both dividends and estates.

And it wasn’t just the Right pushing these moves. Though the Clinton Administration raised the top statutory marginal income-tax rates and kept the statutory corporate rate at 35 percent, it quietly allowed the effective rate to diverge further and further from what the law required — for example by streamlining the process for reclassifying “C-Corporations,” which (theoretically) pay the corporate tax on their profits, as “S-Corporations,” which don’t.

It also cut the capital gains tax rate, under the not-unreasonable theory that since the wealthy choose when to realize their gains (i.e., sell their assets at a profit), a high rate just causes them to realize gains less often. But the larger lesson — that the wealthy are able to game the tax system — unfortunately went strategically unlearned.

The Bush Administration’s blockbuster tax cuts of 2001 and 2003 were extremely regressive, paving the way for the current era of not just high income and wealth inequality in general, but specifically high corporate profits and capital income. The dividend tax cut of 2003 tried and failed to incentivize corporate investment — instead, all the money just went to shareholders. The same happened with the “repatriation holiday” for corporate profits that was legislated in 2004. Perhaps no economic theory has been tested and rejected as thoroughly as the proposition that reducing effective tax rates on capital causes higher investment and faster economic growth.

So why, in the current era of high profits and low investment, is the same policy being tried once again? Because the point of conservative tax ideology was never to make the economy work better — it was to provide the pretext for a self-serving agenda that lets corporate shareholders (and the executives they deputize — very often, from among their number) milk the economy dry. And that’s exactly what will happen if Congress passes the current proposal to cut the corporate tax rate, “territorialize” the system to permanently exempt overseas profits, “repatriate” past overseas profits tax-free, and set a maximum rate for pass-through income.

The bill’s prospects now depend on a delicate political balancing act. Some Republicans in Congress have declared their unwillingness to vote for a bill that would increase federal debt. To assuage them, the current proposal includes some tax increases on the nonrich: raising the bottom tax bracket from 10 percent to 12 percent, for example, and eliminating the deduction for state and local taxes. That puts the total price tag within a range deemed acceptable to the deficit hawks. But meanwhile, it’s created its own political problem: the GOP leadership fears blowback against vulnerable members if voters come to believe they’ll be paying higher taxes to finance a giveaway to the rich. Hence, the plan’s immediate fate hinges on balancing these two questions: will it increase the federal debt too much for one set of Republican votes, and will it take too much money away from the middle class for another set?

Two nonsense economic assumptions will play a role in resolving this political dilemma. First, Republican dogma holds that cutting the corporate tax rate will cause so much economic growth that a boom in federal revenue will make up for the tax cut. Second, Republicans claim that the current corporate tax burden is ultimately borne by workers in the form of lower wages, so cutting it will actually increase wages, substantially benefitting those who rely on their labor to make a living. No serious researcher believes either of these claims, but that isn’t the point: the purpose is to give marginal votes in Congress a set of motivated economic analyses to latch onto, or just to kick up enough dust around technical issues of debt and distribution that those members can take refuge in the controversy, throw up their hands, and vote with the party.

It’s tremendously cynical — but then, so is the entirety of right-wing policymaking over the last forty years. That doesn’t mean it won’t work.

A Mighty Weapon

The larger point is that this decades-long assault on progressive taxes has a logic to it: the Right wants to destroy progressive taxation because it works.

It was originally enacted to tame the excesses of wealth and power that dominated the economy in the Gilded Age. The point was not to raise money, nor even, really, to shift the burden of taxation towards those better able to shoulder it (though the latter played a role). Rather, it was to fundamentally alter the distribution of power in society.

When he took office in the depths of the Great Depression, Franklin Roosevelt and his Congressional allies increased the top marginal income tax rate from 25 percent to 63 percent, and a few years later to 79 percent. In 1936, only a single taxpayer earned enough to be subject to that rate: John D. Rockefeller Jr. The point was to make it de facto illegal to be too rich, to better ensure that economic well-being was broadly distributed throughout the economy and society.

When it’s illegal to be too rich, many of the things rich people do — exploit labor, monopolize markets, squeeze supply chains, offshore jobs, asset-strip their companies, commit fraud — aren’t worth doing, since the government takes the lion’s share of the proceeds. When marginal tax rates are high, every other stakeholder has a greater claim on the surplus from participating in a market economy.

The idea that progressive taxation affects the “pre-distribution” of income — the earnings distribution before taxes and spending — by rebalancing market bargaining power was not original to Roosevelt. It was articulated, for example, by the economist Edwin R. A. Seligman in his 1911 book The Income Tax, an erudite and decisive argument in favor of the Sixteenth Amendment, which authorized a federal income levy. And he may have inherited the idea from speeches by Felix Adler, the founder of the Ethical Culture society, of which Seligman and his family were members.

History has vindicated this approach because no other policy has realized the essential social-democratic principles of redistribution of economic power and the liberation of the oppressed by peaceful means as effectively as progressive taxation. It’s neither obsolete, nor an anachronism, nor a minor technocratic fix. It is perhaps the mightiest weapon in our arsenal.

It’s time for the Left to learn from what the Right has to teach us: they go after progressive taxation because they know that it fundamentally reshapes society against their interest, and the half-hearted defense of it on offer from the Democratic Party’s establishment in recent decades has proven inadequate.

Part of the Right’s success was the removal of tax policy to elitist, technocratic grounds, where its capacity to act as a check on the accumulation of private power is entirely ignored. Even now, the broad left largely overlooks tax policy in favor of universal public programs for health and higher education — crucially important economic rights (and the haul brought in by progressive taxation will be instrumental to bringing about their reality); but the tax part of the picture should not be an afterthought. It must be a full and equal partner. We must use it to show the Left’s natural constituency the kind of world it wants to live in — one in which oppressive power is vastly curtailed.

With luck, the current assault on the US corporate tax system will be repulsed, though the political deck is stacked in favor of the attackers. Let this battle herald a return to our roots: tax the rich so much that they aren’t rich anymore — only then can the rest of us live in a decent world.