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Home Publications Blogs Beat the Press When the Big Debate Is Over Taxes, Progressives Have Lost

When the Big Debate Is Over Taxes, Progressives Have Lost

Wednesday, 19 September 2012 04:15

Ever since Governor Romney's comment about writing off the 47 percent of households who don't pay federal income tax became public, news stories and opinion pieces have been dominated by discussions of who does and does not pay taxes. This is great news for the one percent.  

The obsession with taxes means that the one percent are playing a game that they can only win. The vast majority of the upward redistribution of income over the last three decades has been in before tax income. This has been brought about through a variety of changes in laws and institutions that had the effect of restructuring markets in ways that redistribute income upward.

For example, we have a trade policy that is designed to put downward pressure on the wages of manufacturing workers by putting them in direct competition with low-wage workers in the developing world. (Highly paid professionals like doctors and lawyers are still largely protected from such competition.) This downward pressure is amplified by the over-valued dollar, a policy that had its origins in the Clinton administration.

The implicit government insurance provided to too big to fail banks transfers around $60 billion a year to the shareholders and top executives at the big banks. Patent and copyright monopolies redistribute hundreds of billions a year from consumers to drug companies and the tech and entertainment industry.

Anti-union laws weaken the power of workers trying to organize for collective action, thereby reducing their ability to secure wage increases. (Chicago Mayor Rahm Emanuel was going to court to have union leaders thrown in jail if the teachers continued their strike.) And a Federal Reserve Board that throws workers out of work to meet inflation targets protects the wealth of creditors at the cost of undermining the bargaining power of workers.

These and other areas of public policy are the key factors determining the relative well-being of the rich and the rest of us. As long as we are obsessed with a discussion of whether the Bush tax cuts to the wealthy will continue, the policies responsible for the bulk of the upward redistribution over the last three decades will never be discussed. The current debate may be good news for President Obama's re-election prospects, but it is not a positive development for those who don't like to see the perpetuation of government policies that redistribute money upward. (Yes, this is all a plug for my free book, The End of Loser Liberalism: Making Markets Progressive.)


Comments (17)Add Comment
written by JSeydl, September 19, 2012 6:47
Nice. The question then becomes: Did Romney make those remarks on purpose? Of course, by shifting the entire debate to a debate on tax policy -- every single blog is now talking about Romney's remarks -- Romney has effectively gotten all of his buddies off the hot seat.
written by bmz, September 19, 2012 6:57
Don't give up totally on taxes. Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he extensively offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Between 1946 and 1981, income taxes averaged 12%(+/-1%) of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses have remained 12%(+/-1%) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the 1% to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing the 99%'s money. The national debt has been caused primarily by income taxes which were reduced far below their historic 12%(+/-1%), not by on budget expenses, which have remained at their historic 12%(+/-1%) throughout. These taxing games have transferred $ trillions from the 99%'s payroll taxes to subsidize income taxes.
written by JSeydl, September 19, 2012 7:21
Also, I wonder whether tax policy has some effect on the distribution of before-tax incomes. In a recent CRS report (http://tpmdc.talkingpointsmemo...conomy.pdf), Thomas Hungerford seems to imply that it does.
Why So Many Economists Don't Talk About Pre-Tax Income
written by Last Mover, September 19, 2012 7:30
Among many economists there's an unspoken endorsement of how the pre-tax income described by Baker is earned,
couched in the context of creative destruction.

The general idea is that monopoly power and economic rent don't matter because over time "competitive" forces in the form of technology will eventually drive out the status quo and replace it.

Further, the vast effort itself necessary to protect and maintain economic rent, which eliminates practically all consumer surplus, is considered preferable and more efficient than any government intervention whatsoever.

The conclusion therefore is that monopoly power and economic rent, no matter how powerful, are not wasteful but actually contribute to productive activity, no matter how little it may be from the private sector, because anything from the public sector is even worse.
written by skeptonomist, September 19, 2012 8:13
This starts either from the conventional wisdom among economists, that higher tax rates are a disincentive to constructive activity, or from the neutral assumption that tax rates have no effect. Actually the US economy in the 20th century has clearly performed best when marginal rates were highest, but this empirical evidence seems to have little or no influence on economists. We can think of several good theoretical reasons why high tax rates would be beneficial, such as that those who direct capital would have to work for a long time to make a fortune, presumably at more constructive things than rank speculation which pays off in a short time.

Why not form national economic policy on what is indicated by the empirical evidence? The theoretical reasons that higher tax rates could act favorably on incentives may be speculative, but economists advocate national policies on the basis of speculative hypotheses all the time, frequently with no empirical evidence at all. For example, at the moment many are obsessed with the idea that if the Fed sets a high inflation target this will itself cause inflation and/or economic growth. Of course many conservatives still hold to the counter-factual ideas that higher tax rates are harmful and that cutting rates would boost the economy.
To hell with the income tax
written by Matt, September 19, 2012 8:37
The income tax is a loser, as proved by the uselessness of our actually pretty progressive tax structure. Sure, we can argue that marginal rates are lower than they once were, but at the end of the day it's true that high-earners pay a very high portion of the income tax. It doesn't work, because they just offset it with privilege, as Bakers notes.

Our policy needs to be to abolish privilege where possible, and tax it elsewhere. Abolish patents. Drastically scale back copyrights. Tax the privilege of money-creation. And most importantly: TAX LAND RENT.

Western society has been chasing its tail with the loser income tax for too long. It will never lead to fairness.
So much for tax policy as the cause of income inequality
written by Bill Heffner, September 19, 2012 8:57
I have tried repeatedly to argue with my fellow "progressives" that, while our tax code should should indeed be more progressive than it currently is, the changes in it are not the cause of income inequality and changing it will do nothing to alleviate income inequality. Making that argument is like beating my head against a brick wall; it accomplishes nothing and only feels good when I stop doing it.
written by skeptonomist, September 19, 2012 9:09
The distraction from regulation and other measures to rein in banks and Wall Street may be the most important in the near term. If there is another major crash it could wipe out all progress since 2009, making all the squabbling about the best ways to boost the economy irrelevant. The best time to do this would have been during or immediately after the crisis, and I think Dean had some of the best recommendations at that time (just take over the banks), but it was politically impossible. There is general popular support for financial reform, to some extent even among Tea Partiers (they profess to hate Wall Street), so it could be a winning political strategy, if politicians did not depend so much on big donations.

Looking on the bright side, reforms will be much more likely in the next crash, at least if bankers and financiers are not bailed out. There will hopefully be more resistance to a bailout next time.
US Patent system decried in the FT
written by David, September 19, 2012 9:54
[url= http://m.ft.com/intl/cms/s/2/e...abdc0.html
A decent critique, though he misses the boat on pharmaceuticals.
Bill Gates Is Dependent On Government
written by AlanInAZ, September 19, 2012 10:13
Mat Yglesias has a post on copyright and its benefit to the super rich (and less so to himself). I wonder how many economics professors who write textbooks would join Dean in advocating copyright elimination.

http://www.slate.com/blogs/moneybox/2012/09/19/ who_s_really_dependent_on_government_everyone_not_just_

FT link
written by David, September 19, 2012 10:32
Sorry, my "smart" phone sometimes outsmarts me (in an open market, that problem would have already been solved!): here is the link mentioned above.
Redistribution and distribution
written by Gerry Flaychy, September 19, 2012 10:55
Beside the upward redistribution, there is also the upward distribution, like the actual upward distribution of $40 000 000 000, each month, of new money.
written by Eric377, September 19, 2012 12:03
bmz is correct about what changes to tax laws during the Reagan administration, but to attribute these changes to Reagan himself is not correct. The Democratic Party was a full partner in shifting the relative burden of revenue generation towards the payroll taxes.
tranfers from the poor to the rich
written by mel in oregon, September 19, 2012 2:27
quantative easing is just one of the ways the transfer is going on. baker's plug is right on, his book describes the upward move of capital because of patents, copyrights, & the shielding of american professions from competition from third world country professionals. we don't shield our hard labor manufacturing jobs from third world countries. the hypocrisy is evident. the main problem in the united states is most people cannot be bothered to educate themselves on the most revelant issues of today. so they go on suffering. it's kind of like 40 is the new 60.
IP should be wholly dismantled, for economic and entrepreneurial reasons
written by David, September 19, 2012 2:44
Sure it sounds extremist. Until you understand how it works in the presence of behemoth corporations. Piecemeal solutions won't work (like Beowulf killing Grendel, but then the angry mother shows up to spoil the victory celebration).

Here's a recent editorial that interviews actual experts on the topic: http://www.stltoday.com/news/o...6993e.html

Some tidbit quotes to encourage reading of this article:
Patents are intended to be protection for a real investment of time, effort, sweat equity and money, Mr. Levine said. When they work correctly, patents encourage and reward innovation. Instead, he noted, patents in the information technology field have become competitive weapons with companies investing in large patent portfolios and teams of attorneys who are tasked solely with developing patent applications and getting them processed.

"The patent system long ago took leave of common sense," he said.

and ...

Apple ... sued Microsoft, accusing it of stealing software to create Windows. Microsoft's Bill Gates' retort to Apple's Steve Jobs has become a classic: "Steve, just because you broke into Xerox's house before I did and took the TV doesn't mean I can't go in later and take the stereo."

Makes it clear that, in the end, patent wars are often about theft.
written by liberal, September 19, 2012 6:43
Last Mover wrote,
The general idea is that monopoly power and economic rent don't matter because over time "competitive" forces in the form of technology will eventually drive out the status quo and replace it.

The biggest problem is that modern neoclassical economists purposefully ignore the role that land plays in an economy. Land rent cannot be competed away, absent magical teleportation devices.
yes, but...
written by Ken Schulz, September 19, 2012 11:17
Agree completely that the problem is that increasing inequality has been structured into the economic system. Not so sure we need to add mechanisms for depressing high incomes; but we certainly need to restore those that brought up the incomes of wage- and salary-earners. A high-wage economy can afford 'luxuries' like clean air and water, safe workplaces and safe products and services, not to mention advanced, green energy sources. Offshoring production to countries with artificially restrained wages, and weak or nonexistent environmental and workplace safety and health regulations, didn't just eliminate direct employment here, it set back the producers of capital goods that would have supplied the cleaner, safer, more efficient factories of the future. We should be very careful of unintended consequences if we start to globalize professional services. (Didn't work out so well with financial services, did it?)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.