Taxes, Bailouts and Class Warfare

Bruce Bartlett

Good politics, bad economics or both?

The controversy over AIG executives' huge bonuses that appear to be coming out of federal bailout money is helping fuel a populist revolt against the wealthy that has been gathering steam for years. It will undoubtedly aid Barack Obama's plans to raise taxes on the upper class. Indeed, yesterday, 87 Republicans joined 243 Democrats to impose a 90% tax on AIG bonuses.

According to Gallup, support for soaking the rich is rising. In 1998, 45% of respondents agreed the government should redistribute income by imposing heavy taxes on the wealthy. This percentage rose to 49% in 2007 and 51% last year.

Harris has found even stronger support for raising taxes on the wealthy. According to a 2008 poll, 62% of Americans believe the government should tax them more heavily. Interestingly, this percentage was higher than that in many European countries, generally thought to be more egalitarian than the U.S. For example, only 51% of respondents in France favored raising taxes on the wealthy.

Even Rasmussen, which produces results that are often favorable to the conservative point of view, found in a February poll that 51% of Americans say Obama's plan to raise taxes on those making more than $250,000 will be good for the economy; 31% disagreed. This month, Newsweek found 49% favoring the Obama plan and 42% opposing it.

Such results are confirmed at the state level. According to a Quinnipiac poll in February, 79% of New Yorkers favor a higher tax rate on those making more than $1 million, with just 18% opposed. When the threshold is dropped to $250,000 per year, 56% of voters continue to support the proposal, with 40% against.

We may be entering a new era of class warfare not seen since the 1930s, when Franklin D. Roosevelt went after the nation's wealthy as a deliberate political strategy. According to historian Arthur Schlesinger Jr., Roosevelt explained his purpose in these words:

I am fighting Communism, Huey Longism, Coughlinism, Townsendism. ... To combat this and similar crackpot ideas, it may be necessary to throw to the wolves the 46 men who are reported to have incomes in excess of $1 million a year. This can be accomplished through taxation.

On June 19, 1935, Roosevelt asked for sharply higher income tax rates and estate taxes on the wealthy. In his message to Congress, he said:

Social unrest and a deepening sense of unfairness are dangers to our national life which we must minimize by rigorous methods. People know that vast personal incomes come not only through the effort or ability or luck of those who receive them, but also because of the opportunities for advantage which government itself contributes. Therefore, the duty rests upon the government to restrict such incomes by very high taxes.

In truth, there was less to Roosevelt's efforts than it appeared. As historian Joseph Thorndike points out, the heavy lifting in terms of raising taxes on the rich was actually done by Republican Herbert Hoover. In 1932, he raised the top rate to 63% from 25%. The threshold for paying the top rate went up to $1 million from $100,000, but the threshold for paying the 25% rate fell to $38,000 from $100,000.

Roosevelt's 1935 tax increase raised the top rate to 79%, but also sharply raised the threshold to which the top rate applied to $5 million ($76 million in today's dollars). According to historian Mark Leff, there was only one person in the United States who paid even a penny of taxes at the new top rate for the next three years: John D. Rockefeller.

It's important to remember that very few people paid any federal income taxes in those days. In 1935, just 2.1 million taxable returns were filed, 1.6% of Americans. It wasn't until World War II that the federal income tax affected a large percentage of the population. By 1943, 29.4% of Americans were filing tax returns, about the same as today.

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Another thing to remember is that the 1935 tax increase was significantly mitigated in 1938, when Congress lowered the maximum capital gains tax rate to 15% on assets held longer than 18 months. Since most of the income of the very wealthy was in the form of capital gains, the actual effect of the higher income tax rate on them was largely symbolic.

Finally, it is important to note that inflation has greatly affected our perceptions. High tax rates in the past that appear to apply to low incomes actually applied to incomes that were much higher in real terms. The following table illustrates this fact by looking at the taxable income to which the 40% or closest bracket applied and converts it to 2009 (inflation-adjusted) dollars. I picked 40% because Obama is planning on allowing the Bush tax cuts to expire next year, which will raise the top income tax rate from 35% to 39.6%.

Threshold at Which the 40% Income Tax Rate Applies

Selected Years	Taxable Income	2009 Dollars
1933	$68,000	$1,104,000
1934	$62,000	$976,930
1936	$56,000	$850,650
1940	$38,000	$573,100
1941	$16,000	$229,815
1942	$10,000	$129,535
1954	$10,000	$78,490
1955	$20,000	$157,570
1960	$20,000	$142,665
1965	$28,000	$187,685
1980	$29,900	$76,615
1985	$47,670	$93,545
1993	$250,000	$365,300
2000	$288,350	$353,560
2011	$383,390

Sources: Tax Foundation, Bureau of Labor Statistics, Office of Management and Budget.

As one can see, taxpayers in the past were required to pay 40% in taxes on each additional dollar earned at income thresholds that have varied widely. Despite Roosevelt's 1935 tax increase, a taxpayer still needed to make $850,650 in today's dollars before reaching the 40% bracket.

In the postwar era, inflation raised marginal tax rates relentlessly with little relief from Congress. By 1980, even those making just under $77,000 in today's dollars found themselves in the 40% bracket--a rate that had been reserved for someone making more than $1 million, even after Hoover's 1932 tax increase (someone making $77,000 today is in the 25% bracket).

This is why so many taxpayers of modest means were attracted to Ronald Reagan's effort to cut income tax rates across the board. Although liberals continue to decry that his 1981 tax cut as a give-away to the rich, Reagan understood that a large portion of the middle class was being taxed as if it was rich. Interestingly, even after the Reagan tax cut was fully phased in in 1985, the 40% bracket began at an income substantially below what will be the case in 2011 when the Bush tax cuts expire.

Keep in mind that expiration of the Bush tax cuts won't reduce income thresholds to their 2000 levels, because indexing of brackets is a permanent feature of the Tax Code. The IRS has already determined that the threshold for the top rate will be $372,950 for 2009. Since the anticipated higher rates will apply to income earned in 2011, I have multiplied this figure by the estimated inflation rate between now and 2011, as published in Obama's budget, to calculate the threshold for the top rate that year.

Too much commentary on taxation from the conservative side treats changes in the top rate as the be-all and end-all of tax policy. But it's important to know what income the tax rate applies to. This is especially important when comparing tax rates today to those in the past. It is essential to adjust tax thresholds for inflation before drawing any conclusions.

Raising the top rate to 39.6% is a bad idea, but it is not the end of the world and may be a small price to pay to avoid even more punitive taxes on the wealthy that appear to have widespread support. It should be remembered that, as recently as 1986, the top rate was 50% and the 40% bracket applied to those with a real income one-fourth of what Obama proposes.

Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. He writes a weekly column for Forbes.

Obama's search for an enemy

Obama's search for an enemy: The President keep beating the class warfare drum

MICHAEL GOODWIN

He hasn't called anyone an "evildoer" or denounced an "axis of evil." But make no mistake: President Obama is putting together an enemies list.

Strangely, though, those on it are not terrorists or foreign dictators. They are mostly Americans lucky enough to have succeeded through capitalism and democracy.

In the President's words, they are guilty of being "special interests" and "lobbyists." The Bush-era tax cuts were merely "an excuse to transfer wealth to the wealthy" and he will bring fairness by raising taxes on "the wealthiest 2% of Americans."

His barbs flow almost daily, faulting corporate leaders for "greed" and shirking "a sense of responsibility." And sometimes he suggests the problem is criminal, as when he defended his plan for an expanded government push into health insurance as necessary "to keep the private sector honest."

Less than half-way through what should be a 100-day honeymoon, the Obama administration is on a war footing. Make that a class-war footing.

Sometimes the targets are critics, including two TV commentators singled out by press secretary Robert Gibbs for faulting the President's bailout plans.

Sometimes the targets are Republicans, like conservative talker Rush Limbaugh, the focus of a plan led by chief of staff Rahm Emanuel to divide the GOP and score points with the Democratic base.

But the tone of the President's own attacks on industry and his spending and tax policies are increasingly worrying Wall Street and much of the business world. With the stock market reaching lows not seen in more than a decade, including a 20% drop since Inauguration Day, headlines like "Obama's bear market" are suddenly routine.

The President dismisses the growing perception he is adding to the economic pain. Asked about the markets, Obama waved them off as like a "tracking poll in politics" that "bobs up and down day to day."

It was a telling moment, for the markets on his watch have moved almost exclusively down. And the 55 million households that hold mutual funds are watching their savings and retirements vanish in great gobs.

Most are decidedly middle class, making them collateral damage of this war.

Obama himself remains popular, largely because of his charisma and because most people agree he inherited the problem. With staggering job losses and an unemployment rate now at 8.1%, the highest in 25 years, many Americans are hopeful our new President can right the ship and punish those responsible.

But Obama has expressed little interest in prosecuting those who cooked the books to make billions and undermined the financial system. Nor is he interested in rebuking Congress, including leading members of his own party, who fostered destructive lending and borrowing policies. He seems comfortable with his aides, including those who saw nothing amiss in their former roles as Wall Street players and regulators.

Instead, Obama's class-war language, most of it written into prepared speeches, looks like selective anger, calculated to stoke public emotion to build support for his expansive agenda. That agenda, which revolves around a dramatic increase in Washington power, relies on tax hikes on the same successful businesses and individuals he denounces.

First he demonizes them, then he taxes them.

And always, he makes liberal use of bogeymen. On Friday, as he stood before a class of 25 police cadets in Columbus, Ohio, hired with federal stimulus money, the President delivered a standard attack line against unnamed dissenters. "They opposed the very notion that government has a role in ending the cycle of job loss at the heart of this recession," he said.

Actually, few if any critics advocated doing nothing. But never mind. Being President means you don't have to let the facts get in the way of a plan to divide and conquer.

Class warfare returns to D.C.

Class warfare returns to D.C.
By: Jeanne Cummings

President Barack Obama has spent months recasting Democratic goals on climate change and health care reform from liberal-leaning moral imperatives to hard-core economic necessities.

But when it comes to paying for them, Obama’s creative juices seemed to run dry as he turned Thursday to his party’s most predictable revenue enhancer: taxing the wealthy.

The result: an instant revival of an old and predictable Washington debate.

“This budget makes clear that the era of Big Government is back, and Democrats want you to pay for it,” said House Republican leader John A. Boehner.

And right on cue, Obama defended his $1.3 trillion in tax hikes over 10 years with a little class warfare.

“I know that this will not always sit well with the special interests and their lobbyists here in Washington, who think our budget and tax system is just fine as it is. No wonder — it works for them,” the president said. “I work for the American people, and I’m determined to bring the change that the people voted for last November.”

The exchanges beamed from microphones at either end of Pennsylvania Avenue offered reminders of how fresh Obama’s gains are and how fleeting they could become if he loses the aura of bringing a new style of leadership to the White House.

Thus far, the president has managed fairly successfully to use fresh rhetoric to produce a makeover of what is essentially an old Democratic agenda.

In his Tuesday night address to the nation, the president didn’t pitch expanding health coverage to all Americans as the duty of a great and wealthy society, as most Democrats have done for more than a decade.

Rather, he argued that containing health care costs is essential to economic recovery, observed Rebecca Blank, a domestic policy expert at the Brookings Institution. Expanding health coverage to everyone is simply an integral part of that goal, the president suggested.

On energy, Blank noted, the president touted investment in alternative fuels and energy technology as the next, best chance to spur a big wave of new job creation.

The well-worn Democratic mantra of reducing global warming was offered as a positive byproduct of that more tangible and urgent objective.

Those shifts in emphasis make the case for both programs that have long been on the party’s wish lists more compelling and relevant.

But no amount of spin or recalibration could fuzz up the flashback to previous Democratic administration’s fiscal policy when Obama unveiled his spending plan.

What is different this time, however, are the stakes.

Most economists now say the nation’s economy is in the worst shape since the Great Depression. Striking the right balance on tax policy could help a recovery along. A miss could thwart it by driving money out of the market.

The precariousness of the situation wasn’t lost on the White House’s new economic team.

Obama ran on a promise to repeal of President Bush’s income tax cut for wealthy earners to 36 percent from 39.6 percent before it expires in 2010.

But as the financial system collapsed last fall, he hedged on the pledge, saying tax hikes during a recession may not be a wise idea since it could affect job growth.

Congressional Democrats, including House Speaker Nancy Pelosi, leaned on the White House to move quickly and repeal the Bush tax cuts.

But, as it turns out, Obama’s budget keeps those tax cuts in place through 2010, a period in which many economists and the president hope a recovery will arrive.

Some economists argue that the anticipation of a return to higher tax rates may be enough to thwart critical investments and purchases.

For instance, the White House has been working for months to get the nation’s banks to begin lending again and Treasury Secretary Timothy Geithner recently announced a new government program aimed at getting loans to small business and to car and house buyers.

And who are the people out there today with the cash — and confidence — to spend? Most often they are people and families with earnings ranked in the top echelons and who will be subject to the Obama tax hike.

In addition, the spending plan includes other tax hikes that will take effect sooner and could also retard the impact of recovery programs.

One proposal calls for new taxes on hedge fund operators. But those are the very people that Treasury Department is likely to try recruit to buy up some of the “toxic assets” on bank balances.

Finally, the redistribution of wealth featured in Obama’s budget — it imposes higher taxes on wealthy households to offset tax breaks for working class families — could undercut the president’s attempts to rally a broad range of interest groups to back his policy reforms.

“It’s increasingly beginning to look like we’ve all been invited to the dinner, but some of us are showing up as the main course and others are the invited guests,” said Martin Regalia, the chief economist for the U.S. Chamber of Commerce, which has supported Obama’s economic recovery programs.

The timing and scale of the tax hikes ultimately could work in Obama’s favor. If the new tax revenue hits the federal coffers at the same time a recovery is underway, it could significantly improve the nation’s economic and budget outlook.

In addition, today’s politics lower the risks that Obama and his Democratic colleagues will take a big hit from a classic “tax-and-spending” tarring by the Republicans.

Bush’s tax cuts were passed at a time when housing values were still rising and ordinary Americans didn’t reject out of hand a proposal to shift their social security benefits to a stock plan.

Today, the excesses of Wall Street are stoking a populist backlash against a gilded class that seems even more remote and unattainable as ever to the working class.

In defending the hikes, the White House has also noted that they are coupled with tax cuts for most Americans and a repeal of the Bush income tax breaks will lead to a tax rate equal to the Clinton era — when the economy seemed to be doing pretty well.

“We are asking those who, for quite some time, have shared in the benefits of previous tax cuts to give a little bit more,” said White House spokesman Robert Gibbs.

Warfare means business

Gavin Mathis

Blackwater Worldwide’s days of roaming Iraqi streets with impunity are over. The State Department decided against renewing the government’s contract with the notoriously trigger-happy mercenary force last month after the Iraqi government announced its revocation of Blackwater’s operating license. Considered the epitome of America’s reckless exploitation efforts in post-war Iraq, Blackwater’s infiltration into the war effort is symbolic of America’s rampant privatization efforts of the past quarter-century.

Before the current economic collapse, nearly every aspect of American life was placed under siege by privatization efforts – schools, social security, health care, prisons and even the military. Tasks inherent to a nation-state were outsourced to private firms that accumulated millions in taxpayer funds and turned Iraq into their own personal sandbox.

Once an obscure paramilitary company based in North Carolina, Blackwater became infamous when a handful of its employees allegedly opened fire on a congested Baghdad traffic intersection without provocation. The incident left the corpses of 17 Iraqi civilians bleeding in the streets and strained U.S. relations with Iraq.

Despite the best efforts of the Pentagon to create a legal loophole for defense contractors, five of the Blackwater employees involved in the bloody shootout were indicted by a U.S. federal grand jury last December. Each indicted member is facing 14 counts of voluntary manslaughter and 20 counts of attempted manslaughter.

Critiquing the recourse of the Blackwater guards will accomplish nothing. Iraq is a “shoot first and ask questions later” place. Instead, Americans should be alarmed by the menacing iron triangle – the policy-making apparatus consisting of the bureaucracy, legislative committees, and interest groups – that turned Blackwater into Bush’s Praetorian Guard.

In the eyes of the Bush administration, Iraq was an incredible success. They turned the American war machine into a profitable industry, and Blackwater was at the forefront of this capitalist nexus. Chronicles of America’s imperial folly in Iraq are as numerous as they are diverse, but Blackwater’s meteoric rise and fall in Iraq is the coup de grace. Like a parasite sucking blood from its host, Blackwater attached itself to America’s morbid fascination with greed and, as journalist Jeremy Scahill put it, made a killing off the killing in Iraq.

Blackwater’s forces are no longer relegated to the conflict-zones of the Middle East. Erik Prince, Blackwater’s founder, sent his armed militia to the hurricane-ruined streets of New Orleans to suppress looters in the wake of Katrina. Coursing up and down the streets of the French Quarter with loaded assault rifles, the scene was described by Scahill as “Baghdad on the Bayou.” The thought of an ultra-right wing executive protecting the wealthy elite of an American city with his personal paramilitary force sounds like a plot line ripped from the pages of Orwell or Kafka.

In the eyes of Prince, Katrina was an opportunity to diversify. Just like the Wall Street banks that continually find new ways to make money, Blackwater found a crisis and exploited it – disaster capitalism at its worst. President Dwight Eisenhower warned about the increased influence of the military-industrial complex in his farewell address, but not even Eisenhower could foresee the ominous encroachment of private military firms on domestic soil.

Many people find Blackwater to be an old story – a relic of Bush’s Iraq fiasco. However, as Blackwater’s final days in Iraq come to a close, the nation’s new president needs to be reminded that he is accountable to the people, not to the war profiteers of the military-industrial complex. The emergence of America’s mercenary army should serve as a cautionary tale of what happens when capitalist might collides with militant ideologues.