I had a conversation about this Friday with Robert S. McIntyre, the economist who heads up Citizens for Tax Justice and writes the “Taxonomist” column for The American Prospect.
McIntyre probably explained all this best in a recent TAP column:
President George W. McKinley?
- Prior to the 20th century, except under Abraham Lincoln, the federal government relied almost entirely on regressive consumption taxes to pay its bills. This system of high taxes on the poor and middle class and hardly any tax burden on the rich and powerful reached its apotheosis under Republican President William McKinley, who worked with GOP political boss (and Karl Rove hero) Mark Hanna to raise consumption taxes to almost 50 percent on many ordinary commodities in the 1897 tariff bill.
Thanks to such progressive leaders as William Jennings Bryan and Theodore Roosevelt, that cruelly unfair approach to taxation was eventually abandoned. But as CBS' Dan Rather brashly put it this past election night, conservative Republicans now control "the White House, the House of Representatives, the Senate and the Supreme Court." This ominous development may embolden Bush to try to turn back the clock a century or so on taxes.
McIntyre, as it happens, explored this point in even greater detail in his review in The Washington Monthly of Stephen R. Weisman’s The Great Tax Wars:
Tax and Fend
As he explains, this situation was made possible by a government that was wholly in the control of large corporate interests -- the president, the Congress and the Supreme Court were all defenders of Big Business. Sound familiar? Well, the arguments presented in defense of this travesty have an even more familiar ring:
- In 1895, the court considered the newly passed income tax law, which was being challenged by corporate interests. By a 5-4 vote, the court declared it to be unconstitutional. There was no single majority opinion in Pollack v. Farmers' Loan and Trust Co., but rather several opinions, offering conflicting and wholly unpersuasive legal arguments for the decision. But the underlying rationale was clear: The income tax, wrote one justice, is "an assault on capital," a path to "sure decadence," and a "stepping-stone to ... a war of the poor against the rich." (The contemporary conservative tactic of attacking those who favor progressive taxes as indulging in "class warfare" is apparently nothing new.) It would take two decades and a constitutional amendment to undo the decision.
…
Entrenched business interests fought bitterly in places like New York, where a Republican newspaper argued that the tax would "divide the population into two classes, the class which contributes to the support of the Government, and the class which does not contribute." Again, one hears almost exactly this argument from conservatives today. One GOP lawmaker told The New Yorker's Nicholas Lemann in 2001 that unless Congress passed Bush's tax cuts for the wealthy, "[t]he tax code will destroy democracy, by putting us in a position where most voters don't pay for government." The truth, of course, is that ordinary citizens pay dearly for government, not just through their share of the income tax but also through payroll taxes, state, and local taxes, and other levies that fall much harder on them than on the rich. The idea that the wealthy alone carry the burden of paying for government is as wrong today as it was a century ago.
There is in some ways an appealing aspect to “turning back the clock.” Indeed, many Americans are positively nostalgic for “the good old days.” But the reality of everyday life for Americans in 1900 was not quite so golden. In fact, most Americans were by today’s standards dirt poor, and the phrase “wage slave” was not merely a euphemism.
There were no limits on the length of the work week, and in fact the average laborer was often expected to put in between 60 and 80 hours of work per week. There was no such thing as overtime pay. Retirement plans were a distant fantasy. Child labor was very common. People of all sexes and all walks of life were so overworked, and their health care so marginal, that the average lifespan was 47 years (it’s now 75). Life, in Hobbes’ famous phrase, was “short, nasty and brutish.”
That’s the kind of world to which the Bush regime wishes us to return -- all for the sake of further enriching his fellow members of the wealthiest class of Americans.
When I talked with McIntyre, I wanted to explore the practical ramifications of the Bush tax-reform push not merely in terms of what history tells us about such systems, but what it will mean for us in the 21st century.
This recent push, he points out, is of course nothing new: “This has been a goal of the ultraconservatives, even before they put it in [the Council of Economic Advisers’ report].”
And it’s become quite clearly a major focus of the Bush regime’s rhetorical base: “You know: If only rich people had more money, we'd have a better country.”
But just as Angry Bear has been arguing at his blog, this plan will drive the economy into the toilet, perhaps permanently, because the resulting tax rate on goods will become insanely high (I offered some of the details of this point previously). And taxes do not stimulate the activity that they tax; they suppress it. A consumption tax will suppress consumption. An extreme consumption tax will drive it to minimalist levels.
Thus the great consumer society that Americans have known since the 1940s -- and which we obviously have come to take for granted -- will finally come to an end.
Nearly every economist with whom I’ve spoken confirms that, in order to replace the revenues provided by the current tax structure, a national sales tax would have to be in the vicinity of 50 percent. And that means other problems too -- the rise of a huge black market for all kinds of goods; increasingly lax controls over the public-health aspects of these goods; and ultimately, the near-impossibility of actually administering such a tax. Not to mention, of course, what effect the extreme pressure to reduce these taxes will have on the ability of government to provide services and, ultimately, the concomitant effect on the nation's infrastructure.
As McIntyre told me: “It becomes pretty hard to run when you get up to a rate big enough to replace the income tax, because you're going to have to have a 40 or 50 percent rate. That's what scared Bill Archer [the chairman of the House Ways and Means Committee, a fierce advocate of a consumption-tax approach] from ever putting a bill in. He was for it, but he didn't want anybody to know how high the rate would be. He asked his staff to analyze it, and they came back and they said, 'Well, if you taxed everything, you could do it at 42 percent.' He says, '42? Come on, I was hoping for 10.' And they said, 'Well, you've gotta tax everything, you understand.' And he said, 'Like what?' And they started going through this, you know, rents and everything. 'Oh shit!'
“We had exactly the same talk 20 years ago when the supply-siders in the Reagan administration wanted to do the same thing. And when they couldn't go that far, they would say, 'Well, we're going to make income-tax changes based on consumption-tax principles, i.e., tax breaks for investment.’ And that gives you the worst of all worlds.
“Because an income tax that doesn't tax investment income doesn't even end up being a consumption tax, it ends up being a consumption tax full of loopholes, all of them at the high end. You can make the borrowing tax shelters to make the thing not even tax your consumption.”
McIntyre explained this in more detail in the TAP column:
- Without a tax on corporate profits, people could easily avoid taxes on their investment income simply by incorporating their portfolios. And as economists are fond of telling us, an income tax that doesn't tax investment income isn't an income tax anymore; it's a consumption tax. Indeed, it may well be even worse than that. Tax lawyers and accountants will inevitably come up with hard-to-stop schemes to let their wealthy clients go beyond indefinite tax deferral on investment earnings and actually spend the money tax-free -- say, by borrowing against their incorporated portfolios.
Of course, under a regressive system like this, the major tax burden will shift almost wholly off the backs of the wealthy, whose disposable income likely would at least double, to the backs of the middle class and poor, whose own disposable incomes would certainly shrink accordingly.
And in short order, we will indeed return to those halcyon days when Americans workers were caught in the death grip of the wealthy.
As McIntyre puts it: “It's pretty evil. But that's what they are.”
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