The Power of Money, Not Logic

In an age of exploding inequality, it is shocking that we are ignoring a tax system that deliberately makes the inequality crisis in our society far worse than it needs to be.

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Carol Gay, of Brick, New Jersey, holds a sign saying
Carol Gay, of Brick, New Jersey, holds a sign saying "Tax the Rich," as several groups, including the People's Uprising, October 2011 Coalition, and Occupy D.C., occupy Freedom Plaza in Washington. (AP/Jacquelyn Martin)

When economic historians look back at the current moment, they will likely be shocked first and foremost by the following paradox: During an era when global and technological developments were pushing most nations toward greater economic inequality, the U.S. government did almost everything possible to accelerate these trends and further enrich its wealthiest citizens at the expense of everyone else.

A new report by the Congressional Budget Office, or CBO, on the nature of the U.S. tax code and the special favors it offers specific groups of people sheds considerable light on this process. According to the CBO, we can expect more than half of the $12 trillion being doled out in tax breaks in the coming 10 years to go into the coffers of the top 20 percent of earners, or those families earning more than $162,800 annually. That’s compared with just 8 percent that goes to the bottom 20 percent of earners. And the closer you look, the worse it gets. Seventeen percent of expenditures, for instance, will go to people in the top 1 percent, or those with an annual family income above $654,000.

This was entirely intentional. The Bush tax cuts of 2001 significantly reduced tax rates for the wealthy, especially with regard to capital gains and dividend income; in doing so, the cuts offered extremely large benefits to the wealthiest Americans and thereby increased the budget deficit while simultaneously worsening inequality. Moreover, itemized deductions for state and local taxes, charitable contributions, and mortgage interests and the like largely favor the coffers of the wealthy. Plus, the costs of these breaks are enormous. As Dylan Matthews at The Washington Post points out, “[T]he 10 major expenditures examined in the report cost the government $900 billion this year and will cost almost $12 trillion over the decade to come. That’s more than Medicare, defense or Social Security.”

Not coincidentally, conservatives across America are doing everything they can to worsen the situation. Not only are they attacking in Congress such proven programs as the earned income tax credit or the child tax credit, which benefit those on the bottom of the scale, they are also seeking in states where they control the legislatures to increase the tax burden on the poor to benefit the rich even further. In North Carolina, for instance, they recently succeeded in repealing a tax credit for 900,000 working families in the state. This is in addition to the fact that, according to the North Carolina Justice Center, the wealthiest North Carolinians pay 6.5 percent of their income in combined sales and income taxes to the state, while the bottom 80 percent of earners, on average, fork over between 9 percent and 10 percent combined.

As counterintuitive as it may initially appear to seek to worsen a situation that is already endangering the social stability and economic basis of democracy, it is the natural result of a political system that rewards money power rather than people power. As Thomas B. Edsall demonstrates writing for The New York Times, the power of money—working through lobbyists—has vastly expanded in recent years through what he terms a “quiet upheaval in the lobbying industry,” whereby “the industry is moving below the radar.” He explains, “More than $3 billion is still spent annually, more of which is not being publicly disclosed. Corporate America is relying on new tactics to shape the legislative outcomes it wants.” As Edsall demonstrates:

Lobbyists and their lawyers are capitalizing on arcane gaps in regulatory guidelines. For example, constricted definitions of lobbying contained in Congressional regulations have been construed to exempt from disclosure money spent on grass roots mobilization; on television, digital and social media campaigns; and on public relations efforts to build support among voters and key elites.

So it’s no wonder that a system that runs on the power of money would respond, almost exclusively, with those with the resources to lobby its members to their own benefit.

Conservatives routinely argue that skewing economic benefits to the wealthy helps everyone. It’s become a near-sacrosanct belief on the right that such policies increase the economic pie and hence, trickle down to the lowest earners. Alas, it is nonsense. The 2012 Congressional Research Service study, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945”—withdrawn after publication due to demands by Senate Minority Leader Mitch McConnell (R-KY) but later made available—clearly found “no correlation between top tax rates and economic growth.” Specifically, the evidence demonstrated:

The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007–2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

In his report for the Center for American Progress on the present debate in Washington, Michael Linden begins by observing, “The federal budget has dominated the policy and political debate in Washington over the past three years.” He goes on to argue on behalf of a “reset” that would better represent current conditions and progressive priorities in which “the deficit [would] no longer be the country’s most pressing economic concern.” Indeed, in an age of exploding inequality and an obsessive media focus on the actions of the Internal Revenue Service, it’s altogether shocking that we are ignoring a tax system that deliberately makes the inequality crisis in our society far worse than it needs to be, owing to discredited economic arguments that enjoy the power of money, but not logic, behind them.

Eric Alterman is a Senior Fellow at the Center for American Progress and a CUNY distinguished professor of English and journalism at Brooklyn College. He is also “The Liberal Media” columnist for The Nation. His most recent book is The Cause: The Fight for American Liberalism from Franklin Roosevelt to Barack Obama, recently released in paperback.

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Eric Alterman

Senior Fellow

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