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Next Up: a "Flat Tax" for the Rich

by MICHAEL HUDSON

The danger the United States faces today is that the government debt crisis scheduled to hit Congress next spring (when Republicans are threatening to vote against raising the federal debt limit as the government deficit soars) will provide an opportunity for the wealthy to give a coup de grace on what is left of progressive taxation in this country. A flat tax on wage income and consumer sales would “free” the rentiers from taxes on their property.

All governments have to levy taxes – that is, they have to tax somebody. Naturally,  the super-rich would like this tax to be shifted off their shoulders onto those who have to work for a living. In diametric opposition to Adam Smith and other putative “founding fathers” of “free market” neoliberalism, the super-rich want to shift taxes off “free lunch” economic rent – off interest, dividends, rents and capital gains – onto wage-earners.

This tax shift already has been underway for the past thirty years. It has doubled the proportion of the returns to wealth (interest, dividends, rents and capital gains) enjoyed by the wealthiest 1 per cent, from a reported one-third in 1979 to an estimated two-thirds of the U.S. total today.

This regressive tax shift off wealth onto wage earners has occurred in three ways. The largest and most egregious was the Greenspan Commission’s ploy of moving the cost of Social Security and Medicare out of the general budget (where it would have to be financed by taxpayers in the higher brackets) onto the bottom of the scale in 1982.

Instead of being treated as “entitlements” paid by the highest tax brackets, it is treated as “user fees” by employees with a cut-off (currently about $102,000) for higher-income earners. The pre-saved “Social Security fund” was invested in Treasury bills and then lent to the government – enabling it to cut taxes on the higher brackets. “Social Security and Medicare” became a euphemism for giving the government enough “forced saving” of labor so that the Treasury could cut taxes on the higher income and wealth brackets.

This First Great Republican Tax increase was folded into a reduction in tax rates across the board – above all on the highest tax brackets. This has been ongoing since 1981. The 1981 tax “reform” also gave an accelerated depreciation allowance to absentee property owners, permitting them to pretend that their real estate was losing value even as it was soaring in market price. The effect of this “fictitious property accounting” was to free the real estate industry as a whole from having to pay income tax. (The loophole was not available to homeowners!) The rental income thus “freed” was available to be paid to banks as interest.

Meanwhile, at the state and local level, governments have scaled back property taxes and replaced them with income taxes and sales taxes. These taxes fall mainly on wages and on consumer goods, not financial and property income.

The trick has been for Republicans (and “Blue Dog” Democrats) to pose as “tax cutters” rather than tax shifters. Many wage earners now pay more in FICA paycheck withholding and other taxes cited above than they do in income tax. These changes over the past thirty years have reversed the 20th century’s tendency toward progressive taxation with a regressive tax system.

The 2000 Republican presidential primaries saw Steve Forbes run on a plank that would be the capstone of this tax shift off wealth: a “flat tax,” one that would do away with taxing the wealthy more than blue-collar labor. Mr. Forbes was laughed out of the presidential primaries for proposing this flat tax. It was promoted as being “tax simplification.” The problem was that it is so “simple” that it falls only on employees and their employers as a wage tax.

The details are much more regressive than seem at first glance. The flat tax actually would tax wage earners much more steeply than the wealthy, whose income it would largely exempt! The flat tax is supposed to fall on employment, not returns to wealth. Employees and their employers would pay the tax, as they pay today’s 12.4  per cent  FICA paycheck withholding, but the flat tax would not be levied on financial and property income.

The flat tax is supposed to be accompanied by a European-style regressive value-added tax (VAT). By taxing “value,” it essentially falls on labor – as in “the labor theory of value.” The tax does not fall on “empty” pricing in excess of value – what the classical economists termed “economic rent,” that element of price (and income) that has no counterpart in actual cost of production (ultimately reducible to labor) but is a pure free lunch: land rent, monopoly rent, interest and other financial fees, and insurance premiums. This economic rent is the major return to wealth. It is grounded in the finance, insurance and real estate (FIRE) sector.

The effect of untaxing the FIRE sector is twofold. First, it increases the power of wealth, privilege, monopoly rights and property over living labor – including the power of hereditary wealth over the living. Second, it helps “post-industrialize” the economy, creating a “service” economy. A service economy is mainly a FIRE-sector economy.

Can a regressive flat-tax be pushed through U.S. Congress?

The wealthy want just what bankers want: the entire economic surplus (followed by a foreclosure on property). They want all the disposable income over and above basic subsistence – and then, when this shrinks the economy, they want the government to sell off the public domain in “privatization” giveaways, and they want people to turn over their houses and any other property they have to the creditors. “Your money or your life” is not only what bank robbers demand. It is what banks themselves demand, and the wealthy 10 per cent of the population that owns most of the bank stock.
And of course, the wealthy classes want to free themselves from the share of taxes that they have not already shed. The flat-tax ploy is their godsend.

Here’s how I think the plan is intended to work. Given the fact that voters have already rejected the flat tax in principle, it can only be introduced by fiatunder crisis conditions. Alan Simpson, President Obama’s designated co-chairman of the “Deficit Reduction Commission” (the euphemistic title  given to what is in reality a “Shift Taxes Off Wealth Onto Labor” commission) already has suggested that Republicans close down the government by refusing to increase the federal debt limit this spring. This would create a fiscal crisis and threat of government shutdown. It would be a fiscal 9/11, for the Republicans to trot out their “rescue plan” for the emergency breakdown of government.

The result would cap the tax shift off finance and wealth onto wage earners. Supported by Blue Dog Democrats, President Obama would shed crocodile tears and sign off on the most right-wing, oligarchic, anti-labor, anti-black and anti-minority, anti-industrial tax that anyone has yet been able to think up. The notorious Flat Tax would fall only on wage income (paid by employees and employers alike) and on consumer goods (the value-added tax, VAT), while exempting returns that accrue to the wealthy in the form of interest and dividend income, rent and capital gains.

If you think I’m too cynical, just watch …

MICHAEL HUDSON is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

 

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Michael Hudson is the author of Killing the Host (published in e-format by CounterPunch Books and in print by Islet). His new book is J is For Junk Economics.  He can be reached at mh@michael-hudson.com

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