by Ed Schultz
CHAPTER TEN
THE TRUTH ABOUT TAXES
Time for Mandatory Trickling
IT’S TIME TO PAY THE PIPER, BUT THERE WILL NOT BE ANY DANCING to the music. As the federal debt creeps toward $12 trillion, with the 2009 deficit projected to be $1.75 trillion, with one third of our expenditures going to satisfy the interest on the debt, America is in danger of becoming a giant banana republic.
There seems to be this phenomenal case of amnesia sweeping the nation as to how we got here, and if you bring it up, well, they say you’re just playing the blame game. But telling the truth isn’t the same as placing blame.
It was a supposed tax-and-spend Democrat, Bill Clinton, who turned over the U.S. economy to George W. Bush with four consecutive budget surpluses that had the country on track to pay off the debt by now. Bush inherited a $5 trillion debt, but it was on the decline. However, with reckless spending that included the Medicare Drug Bill, a $1.2 trillion expense over a decade, according to the Washington Post, that Bush claimed would cost less than $400 billion, Bush ruined Clinton’s good work. Talk about a royal scam! They knew the bill was a budget buster, but they wanted to secure the vote of the most consistent voters—senior citizens. Then came two tax cuts for the richest Americans—$2.5 trillion from 2001 to 2010, according to Citizens for Tax Justice. Add to the mix the cost of the Iraq War, estimated to be as high as $3 trillion, according to economist James Stiglitz.
We had been moving forward.
Bush and his Republican enablers in Congress (a majority for six years) took us backward into financial disaster, spreading around another $700 billion to his Wall Street cronies on the way out.
Had Bush continued down Clinton’s path, the debt would now be paid and the deficit eliminated. The last time that happened was in 1835 under Andrew Jackson.
So Barack Obama has been forced to do what most economists say has to be done—stimulate the economy when no one else is spending. That means even more debt.
Now that they don’t have their hands on the checkbook, it is so disingenuous as to be laughable the way the Republicans have suddenly discovered fiscal responsibility. These born again Republicans have delayed the progress of government with procedural votes to slow key legislation, like extended unemployment benefits. In September 2009, what could have been passed in a day or two turned into an ordeal before the majority of Republicans voted for the unemployment extension—but only after receiving tax breaks for business in the package. While they stalled, 200,000 Americans that they had put out of work in the first place with their policies ran out of unemployment benefits. What is at stake? Power. By slowing the process, the Republicans want to claim, “See, we told you. Those guys can’t get anything done!”
Apparently, you can’t pass anything in Washington without giving Republican cronies a tax break. The formula is the same: Cut taxes. Well, I’m all for it. But let’s cut taxes for the middle class. However, as Michael Moore pointed out in his movie Capitalism: A Love Story, since the top 1 percent owns 95 percent of the financial wealth (a figure confirmed by PolitiFact.org), they can afford to pay more. For the record, the top 1 percent pays about 40 percent of the federal taxes collected each year—but when you consider that they own 95 percent of the total wealth, that’s hardly extreme.
We are in a system consisting of financial royalty and worker bees. There’s a lot to be admired about worker bees, but who can truly say they are getting their fair share of the honey? Despite all the complaints from the American oligarchy about the transfer of wealth, the wealth has gone their way!
One way to keep government programs from growing is to blow up the national debt. Mission accomplished. The Republicans did just that and, in the process, stole the birthright of health care and education from the American people. They piled so much debt on the heads of our children that, for the first time ever, a generation of Americans will probably have a lower standard of living than the generation that preceded them. Every man, woman, and child’s share of the national debt is in the neighborhood of $40,000.
It’s a crime.
From the end of World War II until we hit the Reagan years, middle-class growth had exceeded that of every class. But by dismantling the rules that had protected the middle class, capitalism became legalized robbery. Credit card rates spiked; 401(k)s plunged. This oligarchy sucked money out of the system like vacuum cleaners. They got into every corner that was unregulated and got every dime they could.
Here’s the thing most people miss. Specifically, I mean this is the thing Republican voters miss. They get distracted talking about taxes, without ever stopping to think about all the other ways that dollars are being drained from them. Oil companies get you at the pump. Ken Lay jacks up your utility bill. Insurance companies ratchet up the premiums and deny the coverage. Your investments founder on Wall Street. Credit card companies change the rules in midstream. This behavior is enabled by politicians who are bought off by these very same corporations.
When 1 percent enjoys 95 percent of the financial wealth, you don’t have to worry about getting screwed by the taxman on April 15. You’ve been getting screwed all year long. Tell me, in what reasonable system does so much go to so few?
There are a couple of ways to get it back. Reinstate regulations and a level playing field to make capitalism competitive, or tax those greedy fat bastards back into the Stone Age! (Excuse me while I channel Curtis LeMay.) Actually, we need to do both—increase taxes on the wealthy, as well as regulate and break up monopolies.
Why not go to the heart of the problem? Congressman Peter Defazio has an idea I can get behind, and that is to tax stock market trades .25 percent. That would raise $150 billion for a Job Creation Reserve. Naturally, they screamed about this idea on Wall Street like stuck pigs. Billionaire Mark Cuban suggested on his blog in 2008: “Tax every single share of stock that is bought and sold 10 cents per transaction. One dime. If you buy a share of stock, your brokerage pays a 10 cent tax. If you sell a share, your brokerage pays a 10 cent tax. 1 share, 100 million shares. It’s 10 cents per share. Of course, the tax will be paid for by those of us who are buying and selling stocks. So what. Here is the reality. If you are a true investor. Someone who wants to own a share of stock in a company you believe in, then it’s an amount that is not going to impact your investment decision making process.”
THE TAX CUT SHELL GAME
People also get distracted by federal income tax, never stopping to realize that when the feds cut taxes, the burden gets passed on to the state and school district. Property tax and local sales tax go up, and you pay anyway.
Paul Krugman, the New York Times economist, wrote, “There’s no mystery about what’s going on: education is mainly the responsibility of state and local governments, which are in dire fiscal straits. Adequate federal aid could have made a big difference. But while some aid has been provided, it has made up only a fraction of the shortfall. In part, that’s because back in February centrist senators insisted on stripping much of that aid from the American Recovery and Reinvestment Act, a.k.a. the stimulus bill.”
When Bush finally gave a measly $600 tax break to middle-class Americans, they gave it back at the gas pumps anyway, and it all went into the pockets of his oil company buddies. With one hand they put it in your pocket, with another they take it back out, crowing all the while that you got a tax cut! Charlatans!
Keep your eye on the ball, people! Look at the big picture. What matters is what you have left in your pocket at the end of the day when all your bills are paid. In most countries, people are not worrying about health care bills or the cost of college. It’s covered. My point is not that tax reform isn’t important. My point is that what you pay in taxes is only part of a system that is rigged against you and in favor of the super rich.
This fight has been going on for some time. “The absence of effective state, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economi
cally powerful men, whose chief object is to hold and increase their power,” said Teddy Roosevelt one hundred years ago. He helped rein in that imbalance by busting monopolies and championing a progressive tax.
However, the tax code has been burdened by so many deductions and legalized favors, it doesn’t operate as fairly as it should. I wonder if anyone really understands it all. Few people would argue that the federal tax code is in need of an overhaul. When Warren Buffett, one of the richest men in the world, is paying 17.7 percent and his secretary is paying 30 percent, you know something is terribly wrong.
Here’s something that really galls me. After witnessing the extraordinary muscle corporations are able to flex in Washington, in essence trumping the wishes of the voters, it astounds me to discover (Forbes 2004) that corporations account for less than 10 percent of federal taxes paid. According to a CNNMoney report, “Nearly two-thirds of U.S. companies and 68% of foreign corporations do not pay federal income taxes [emphasis mine]…. The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes—despite having a combined $2.5 trillion in revenue.” The Republicans, meanwhile, want to reduce the corporate tax rate from 35 to 25 percent. If corporations actually paid that much, I might support it!
The Tax Reform Act of 1986 slashed the statutory corporate tax rate from 46 percent to 34 percent, and in the process closed enough loopholes that, according to the Multinational Monitor, the effective rate for large corporations was 26.5 percent. But, by 2003, enough new loopholes had been uncovered to bring the effective tax rate paid by major corporations down to 17.2 percent.
A middle-class family bringing home $118,000 will pay 25 percent in income tax plus another 8 percent in payroll taxes. Yet the rich can sell millions of dollars in stocks and pay a capital gains tax of only 15 percent! Baby, the rich really do get richer.
With a tax code thousands of pages long and full of loopholes, there are many people who favor a national sales tax. But the poor consume more as a percentage of their income than anyone. Is that fair? A family with an income of $50,000 would pay as much as one with an income of $500,000. It would bury the poor and middle class and be a windfall for the wealthy families.
Then there are flat taxes based on income. But a flat income tax does not address existing wealth. It would take at least 20 percent for a flat tax to work—probably higher. For the bottom fourth of American wage earners paying 15 percent, that would be a real kick in the teeth.
That leaves us with the progressive system, which Robert Shapiro, director of economic studies at the Progressive Foundation and vice president of the Progressive Policy Institute, explains: “A progressive tax system, however, can protect poor and middle class families from bearing the higher tax burdens entailed in a purely flat or proportional system, and in this sense, ameliorate some of the distributional inequalities achieved through our markets but based on factors other than how hard different people work. And the additional burden of progressive taxation is a reasonable price to pay by those who in some respect start with more, for the privilege of prospering relatively more under America’s laws and in her markets. Bill Gates and his investors have a responsibility to not merely bear an equal share of the burden, but a greater share because they enjoy a larger share of the benefits provided by these laws and markets.”
But if the wealthy are still paying less under the enlightened progressive tax, uh, Houston, we have a problem. The problem is loopholes. Man, we all love our deductions, but we sure resent the ones the other guy gets. As much as I like a simple solution, a progressive tax with minimal deductions is the best hope of the middle class.
There is much to admire about a plan from the Progressive Policy Institute that mirrors one devised by White House chief of staff Rahm Emanuel when he was a congressman and Senator Ron Wyden (D-OR). The PPI website says, “It is designed to shore up the very pillars of middle-class aspiration: paying for college, buying a first home, raising children, and saving for retirement.” It eliminates sixty-eight special-interest loopholes and adds some family-friendly deductions like a $3,000-a-year incentive to students for four years of college and two years of graduate school. A second part of the plan is “a home mortgage deduction that would be available to all homeowners, not just those who itemize.” Also included: “A new family tax credit would replace three existing tax incentives—the Earned Income Tax Credit, the Child Credit, and the Dependent Care Credit—and provide more benefits to more families than all of them combined. A universal pension (UP) would replace 16 existing IRA-type accounts with a single portable retirement account for all workers. It would provide a $500 stake and tax-deferred saving to workers, who could roll their 401(k) plans into their UPs when they change jobs.”
And get this—the plan is budget neutral.
It’s a start. But to begin to break down the imbalance of wealth, which is the only way democracy can really function, you have to beat back those who want to eliminate the death tax, something that affects just .06 percent of people. The point of taxing inherited wealth is to preserve a system that rewards hard work and innovation instead of inherited privilege. If you don’t, you end up with financial royalty, and Americans decided long ago that they were done with that sort of thing. Warren Buffett said, “Dynastic wealth, the enemy of a meritocracy, is on the rise. Equality of opportunity has been on the decline. A progressive and meaningful estate tax is needed to curb the movement of a democracy toward a plutocracy.”
I FAVOR LOWER TAXES THAN THE REAGAN ERA
Up until 2010, the top estate tax rate was 45 percent, with a $3.5 million deduction. However, that law expired in 2010, leaving a one-year gap until 2011, when the old rate of 55 percent will resume, unless the U.S. House and Senate can agree on another rate.
In the meantime, because the Senate was so wrapped up in the health care debate and unable to deal with the estate tax, Republicans got a reprieve—for a year, anyway. So if you are rich and lucky enough to die in 2010, your heirs will not have to pay an estate tax. Can’t beat a deal like that! However, when Congress does close that gap, I say that they should move the rate to 50 percent with periodic adjustments for inflation.
But what about income tax? We need to incrementally, over the course of ten years, move the tax rate to 49 percent (from 35 percent) for those making more than $3 million. (I would also increase the tax rates on income above $1 million.) Why tax the wealthy more? Like Willie Sutton once said when asked why he robbed banks, “Because that’s where the money is.”
According to the Census Bureau, in 2007 the median household income was about $50,000, taxed at 25 percent. When you look at the tax rate, percentage-wise, lower-income families pay a much higher percentage than do millionaires. So asking someone making sixty times the median income to pay twice as much of a percentage in income taxes isn’t punitive. It’s still 1 percent lower than it was under Ronald Reagan!
And let’s bust the myth about Reagan the tax cutter. After the gaping deficits caused by his original tax cuts, Reagan responded with what Time columnist Joe Klein calls “the largest peacetime tax increase in American history: the Tax Equality and Fiscal Responsibility Act, which raised $37.5 billion or 1% of GDP.” Klein notes Reagan also signed a $3.3 billion tax increase and signed “another whopping tax hike designed to save Social Security.”
Still, the mantra from the right is “You can’t tax yourself to prosperity.” Well, we’ve tried tax cutting our way to prosperity and ended up with the worst economic crisis since the Great Depression! I guess them good old rich boys just didn’t trickle down enough. That’s why we need more motivated tricklers. It’s still Reaganomics, it’s just mandatory trickling that I’m suggesting.
We could infuse Social Security with plenty of cash if we did not cap deductions on income over $106,000. In other words, anyone earn
ing up to that amount pays the full deduction. When it comes to Social Security, the working poor pay more as a percentage in taxes than do the wealthy. While a worker making minimum wage pays 6.2 percent into the Social Security trust fund (matched by his employer), an executive making $1 million contributes only about 1 percent.
I know I sound like I don’t like rich people, but I’m not about class warfare. That’s not it at all. But by all measure, the rich have been doing all the getting in recent decades and not enough giving. I have no illusions about it; there will always be rich people and we will always have the poor, but when the imbalance between them becomes so severe, society starts to break down.
TAX THE INTERNET
Now on to the elephant in the room that we are all ignoring: the Internet. Annual sales on the Internet are well over $100 billion, most of it untaxed, and that is starting to impact your local businesses, who must add 5 to 10 percent in local and state taxes to the cost of their products. Plus, the federal government, states, and municipalities are denied revenues that they used to get. As Internet shopping grows, it will affect us in ways even Walmart couldn’t—especially if we allow it to continue as a black market of sorts—a tax-free zone. Quite obviously, you cannot fund a government without tax dollars.
According to U.S. Census data, Internet sales accounted for 3.4 percent of retail sales in 2007, up a half percentage point from 2006. I know we all like the idea of paying no taxes online, but it puts local merchants at a disadvantage. It kills mom-and-pop stores just like Walmart does when it moves into a region. It’s not politically popular, but we need to fairly tax Internet sales now, before more damage is done to brick-and-mortar retailers who have to charge state and local taxes. It’s about fairness. The longer we wait, the more stores we will lose. The smart—if politically unpopular—thing to do is to implement an Internet tax plan now before this thing gets any bigger.
