Irresponsible and Obscene

Like the Bush administration’s previous tax cuts, the latest cuts will largely benefit those who need it least.
by Robert B. Reich

Here we are six months before a mid-term election, with polls showing only about 20 percent of the American public approving the job Congress is doing. Small wonder. The federal budget deficit is still out of control. We’ve got a war going on that’s not going well, and the military is spending over a half a trillion dollars a year. Meanwhile, public services are being slashed. So what’s Congress about to give us? A $70 billion tax cut.

The tax cut would be politically irresponsible, but not obscene, if it were going to middle-income workers now facing sky-high fuel prices and soaring health-insurance costs, and variable-rate mortgage payments heading through the roof.

But this tax cut is not going to the middle class. Like the Bush administration’s previous tax cuts, most of this one is going to people who are already very comfortable. Hence, it’s both irresponsible and obscene.

The non-partisan Urban Institute-Brookings Institution Tax Policy Center examined its provisions, including a two-year extension of capital gains and dividend tax cuts, and a one-year extension of relief from the Alternative Minimum Tax. It turns out a whopping 87 percent of the benefits of this tax cut will go to the 14 percent of American households earning above $100,000 a year. Twenty-two percent of the benefits will go to the richest two-tenths of one percent of American households earning more than a million dollars a year.

Perhaps I am slow to catch on to something the Bush administration and the Republican Congress understand intuitively. But I’d appreciate it if someone could explain to me why we need another tax cut for high-income Americans. At a time when the gap between the rich and poor, and between every rung on the income ladder, is wider than it’s been in almost a century, it would seem imprudent to add to these disparities unless there was a compelling public need.

What is the public need? Some administration apologists, including the editorial page of the Wall Street Journal, claim repeatedly that the rich are paying a larger-than-ever share of income taxes, so it’s entirely fitting that they get the lion’s share of any tax cut. This logic conveniently leaves out two facts. First, the rich are now paying a smaller percentage of their income in taxes than at any time in the last seventy-five years. That they pay a lot of taxes nonetheless is a by-product of the mind-boggling increase in their income and wealth relative to most other Americans.

Second, if you consider not just income and capital-gains taxes but all the taxes people pay -- including payroll taxes and sales taxes -- you find that middle-income workers are now paying a larger share of their incomes than people at or near the top. We have turned the principle of a graduated, progressive tax on its head.

A second justification given by the White House and the Journal for continuing to cut taxes on the wealthy is that the wealthy invest their extra money in the economy, and that extra investment trickles down to everyone else. The inconvenient missing fact here is the recent real-world impact of such supply-side economic theory. To date, the administration’s capital gains and dividend tax cuts have not reaped what their proponents promised. The rate of new investment during this recovery has trailed the rate of investment during the three previous recoveries.

Meanwhile, almost nothing has trickled down. Productivity is up, but the current annual median wage of around $35,000 is what it was five years ago, adjusted for inflation. While top executives are raking in seven and eight-digit compensation packages, their middle-class workers are stuck in the mud.

Don’t expect much of a fight over this tax bill, however. The so-called "reconciliation" procedure, on which it’s riding, requires only a simple majority in the Senate and does not allow a filibuster. Members of the American public who believe this bill is irresponsible and obscene will get a chance to express their view in the voting booths, next November.