The US Tax System, Rigged in Favor of the Rich

The controversy over the exclusion of 6.5 million low-income families from the increased tax child credit highlights the anti-worker agenda reflected in George W. Bush’s tax cut passed by Congress in late May. Congressional Republicans claimed that increasing child credits to such families would have exceeded the supposed limit of $350 billion in the tax reduction, so they left it out of the final bill.

But the cost of these credits would be just $3.5 billion–just 1 percent of the total cost. Moreover, if congressional Republicans make good on their vow to make the tax cuts permanent, the final price tag will reach nearly $1 trillion–compared to which the cost of the low-income child tax credit is virtually nothing.

Last week, House leaders said they won’t add a low-income child tax credit unless the credits are made permanent–and expanded to include families with incomes up to $189,000. Yet this is only a small example of way the Bush tax cut rewards the wealthy at the expense of workers and the poor.

According to Citizens for Tax Justice, more than two-thirds of the benefits of the tax cut will go to the wealthiest 10 percent. Those who earn $30,000 or less–a little more than half of all taxpayers–will get just 5 percent of the benefits.

Over the next decade, the richest 1 percent will get 27 percent of the benefits of the tax cut–the same share as the bottom 90 percent. But George W. Bush is hoping that workers will gratefully pocket an expected $400 tax refund per child dependent this summer and a few more bucks next April–and won’t notice this colossal ripoff.

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The “stimulus” fraud

THE TAX cut will give the economy a boost by injecting cash into the economy and increasing demand–but not by much. First, the benefits are overwhelmingly skewed to the already wealthy, who will bank or invest virtually all of their gain.

By contrast, the working class and even the middle class have just a tiny fraction of such wealth, and therefore tend to spend a much larger proportion of whatever gains they get from lower taxes. The more taxes are progressive–that is, shift wealth to low and moderate income people at the expense of the wealthy–the greater the immediate impact on the economy.

The Bush tax cut does the opposite. For example, the new low 15 percent tax rate on dividends and capital gains from stocks will lead to new tax shelters for the super-rich–such as creating paper corporations to pay out income as dividends at less than half of the top income tax rate of 35 percent.

Even the accelerated tax write-off for corporate capital investments isn’t likely to spur the economy, given that the lowest interest rates in 40 years haven’t induced business to invest yet. Capital spending won’t pick up as long as a glut of excess capacity in products and factories keep prices flat and profits weak. Finally, the increase in state taxes, compelled by the worst fiscal crisis since the 1940s, will eat up at least half of the stimulus provided by the federal tax cut, according to Mark Zandi of the Web site

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Furthering the right-wing agenda

THE REAL significance of the tax cuts is that they “further Republican conservatives’ long-term goal of radically restructuring the income-tax system,” the Wall Street Journal observed. The Bush program recalls the 1920s, when Republican presidents and congresses slashed the tax rate for the wealthiest from a First World War peak of 77 percent down to 25 percent.

Higher income tax on the wealthy paid for much of the New Deal social programs during the Great Depression of the 1930s, with the top rate reaching 79 percent by the end of the decade. The maximum rate went even higher during the Second World War and again the early years of the Cold War.

After Democratic President John F. Kennedy cut the top rate from 91 percent to 77 percent, it was reduced to 70 percent and remained at or above that level until the election until Republican Ronald Reagan was elected in 1980. Reagan slashed the top income tax rate to just 28 percent.

The resulting budget deficits pressured the first Bush administration to raise taxes, and former President Bill Clinton raised the top rate to 38.6 percent in 1993. Yet the increased tax revenues weren’t used to increase social spending, as they were in the 1930s.

Instead, Clinton embraced the old Republican program of paying down the federal budget deficits through budget cuts, shrinking the federal government to its smallest size since the early 1960s. Moreover, Clinton’s tax increase on the rich didn’t reverse the regressive trends in federal tax policy.

Crucially, the share of federal revenue from social insurance payroll taxes has risen from 19.5 percent in 1966 to 34.9 percent in 2001. Over the same period, federal revenue from corporate taxes has dropped from 23 percent to just 7.6 percent. The result is that Americans have “the lowest corporate taxes in the world–and far fewer social services” than in Europe, according to Robert McIntyre of Citizens for Tax Justice.

Thus while the overall level of taxation has remained stable over the last 40 years, the burden has shifted steadily to the working class. This fueled the Republicans’ anti-tax, anti-government election appeal over the last 25 years.

The result: “Republicans gain control of the national agenda through tax cuts that drain the Treasury,” wrote Paul Starr in the June 1 issue of American Prospect. “Then, trying to prepare the ground for new initiatives, Democrats enact responsible tax increases that hurt their own popularity, leaving them unable to carry out their positive agenda and setting the stage for a fresh round of tax cuts.”

“Ultimately the Republican strategy unravels, as no government can keep cutting taxes and raising military spending indefinitely,” Starr continued. “But by the time the Republicans lose an election, there’s no money to spend, and conservative policies are effectively locked in.” “Locked in,” that is, because the Democrats are tied to the same corporate interests as the Republicans and embrace “fiscal responsibility” and eliminating the budget deficit even as the GOP burns up money on tax cuts and military spending.

“The Republicans make no bones about the fact that they will do whatever they can to get rich people more money,” says Dean Baker, co-director of the Center for Economic and Policy Research. “But the Democrats are not anxious to be seen as advocating policies that would upset corporate lobbyists.” That’s why the Bush administration is getting away with its plan to engineer a fiscal crisis with massive budget deficits that will be used to justify cuts in Social Security, Medicare, Medicaid and more.

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What taxing the rich could achieve

In a recession, federal budget deficits are a given. The question what kind of government spending and tax cuts will take place.

The truth is that increasing social spending–funded through higher taxes on the wealthy–can provide a powerful economic stimulus. By restoring the corporate income taxes to their early 1960s levels, for example, the government revenues could increase by some $260 billion a year–enough not only to fund a Medicare prescription program, but to fund universal health care, according to an estimate by Baker. And if taxes were increased on the wealthy, Social Security benefits could be expanded.

Of course, such changes won’t come through routine lobbying and politics as usual. It will require a mass movement that’s capable of putting real pressure on politicians–and taking the kind of action that can make it happen. That won’t happen overnight. But the furor over the child tax credit scandal–and the bitterness over Washington’s pro-business policies–shows the potential to organize and fight back.

LEE SUSTAR writes for the Socialist Worker. He can be reached at:

LEE SUSTAR is the labor editor of Socialist Worker