Tax the Plutocrats!

by Gar Alperovitz

The Nation magazine, January 27, 2003

It's time to confront the central obstacle blocking a new progressive politics: the Democratic Party's abject fear of the truth that new taxes are going to be needed if the party is ever to offer -- and finance -- a dramatic program capable of mobilizing large numbers of working Americans, white, black and brown. The way forward is to go on the offensive by sharply delineating a strategy targeting America's plutocratic top 1-2 percent elite, plus the corporations they largely own. Changes in income and wealth patterns in recent years make it possible to do this without simultaneously alienating middle-income and middle-class suburban voters.

A progressive program worth fighting for would begin with fixing-improving, not reducing-Social Security; it would move on to prescription drugs, major reform of the healthcare system, support for broad-based college tuition assistance, serious daycare provision, an expansion of the earned-income tax credit. Public transportation, environmental and other infrastructure needs are also huge, between $60 billion and $100 billion a year in recent estimates. A serious effort might also add some tax relief for middle- and low-income families.

The first step is to stop compromising at the outset, thus eliminating any hope of offering something powerful that we can mobilize around over the long haul. Progressives must challenge the idea that the United States, the richest nation in the world, must always be the poor sister among the advanced nations- that our nonmilitary public sector, at 29.7 percent of GDP, must always lag behind Britain's (35.8 percent), Germany's (43 percent), France's (44.8 percent) and, of course, that of countries like Sweden, at 50 percent.

Most Democrats have been afraid to demand such a program- and for good reason: They have been unable or unwilling to answer the obvious question of where the money will come from. In the near term, deficit spending is a reasonable, indeed, inevitable option-both to move the economy out of the recession and to solve pressing public problems (beginning with the $67 billion state revenue shortfall. Ultimately, however, progressives must confront the tax issue.

Until recently, the Democratic Party, as a party, has been almost totally silent on taxes-cravenly so: Twenty-eight House Democrats and twelve Democratic senators voted for the Bush tax cuts. For the most part, the party has been on the defensive -- reacting, after the fact, to each new Bush taxcutting initiative. Even as Democrats fussed over how to respond to the last Bush offensive, the Administration has revved up its new campaign for greater elite and corporate tax cuts- and, amazingly, is now arguing that the poor are undertaxed. (Just ignore Social Security taxes, the most regressive part of the system, ignore the huge redistribution of income in favor of the rich in recent years, scrap all thought of capacity to pay as an element in tax policy, etc.)

If Democrats are unable to redefine the long-term politics of taxation, they will always be on the defensive, trying to play catch-up in response to each new right-wing initiative. To be sure, some members of Congress have put together a short-term stimulus package involving tax rebates, and some liberals have urged rescinding the Bush top income and estate reductions. But even if this were done, it would only take us back to where we were when Bush took office-which, in turn, would provide little capacity for Democrats to go on the offensive with a positive, longer-term program capable of exciting the basic Democratic constituencies.

New Democrats are probably right that it is politically impossible to tax the white suburban middle class much further. They are wrong, however, to suggest that this is the end of the story. The place where the money can-and must-be found is where it is concentrated: at the very top and with the corporations. This also defines a sharp and very clear political target-one that ultimately puts the other side on the defensive.

There has been an extraordinary upward redistribution of income in recent decades, especially at the very top: The top 1 percent garnered almost 15 percent of the nation's income for itself in 1998-up from just over 8 percent in 1980. This is more income than was received by the more than 100 million people in the bottom 40 percent of the population taken together! _

Currently, the top marginal tax rate is 38.6 percent, scheduled to drop to 35 percent by 2006. The dramatic capacity of elites to take care of themselves is etched in the changes they have secured over the past half-century. The top marginal rate was 91 percent to and through the Eisenhower years, indeed continuing up to 1964; 70 percent from 1965 to 1981; 50 percent from 1982 through 1986 (for the first Reagan Administration). If those earning $1 million or more in 1999 (a recent year for which data are available) were to face the same effective rate as top elites faced in the mid-1950s, tax revenues could increase by $130 billion (this would involve raising taxes on only slightly more than one-tenth of 1 percent of all households).

In the Eisenhower era, corporations paid an average 25 percent of the federal tax bill; they paid only 10 percent in 2000 and 7 percent in 2001. The effective tax rate on corporate income amounted to 47 percent in 1960; it is only 35 percent today (before tax credits). Closing the most egregious shelters and returning to the 1960 tax rate could increase annual revenues by $110 billion.

A progressive political strategy that sharply defined the difference between the very top of the income and wealth distribution and the vast majority could benefit the bottom 98 percent of society-i.e., those with incomes of less than roughly $200,000.

The conventional wisdom is that you can't tax the rich. However, something profound has happened to America in recent years. The super-elite-the people Kevin Phillips and Paul Krugman now term the new 'plutocracy"-live in a very, very different world from most Americans, and in a radically different culture. It is a world where homes cost $5-10 million and where $5,000 grills, $3,000 alligator-skin shoes, $17,500 Patek Philippe wristwatches, $63,000 Lexus LX470 sport-utility vehicles and $ 14,000 Hermes Kelly handbags are commonplace. At the height of the 1998-99 stock market, Phillips observes, "vanity and consumption moved toward a new post-Veblen fulfillment.... Behind an increasingly Latin American array of gates, guards, walls, and distance, the scarcely visible displays included helicopter delivery of meals from one's favorite Manhattan, Los Angeles, or Florida restaurant...." A tour guide he cites notes: "Some trees now gracing Hamptons estates have been driven down from the Pacific Northwest in refrigerated tractor-trailers, and some have been planted with the aid of military-size Sikorsky helicopters to obviate the necessity of rutting the lawns with wheel tracks."

Most people have not caught up with what Krugman terms "the tectonic shills" that have taken place: "The rich have always been different from you and me, but they are far more different now than they were not long ago-indeed, they are as different now as they were when F. Scott Fitzgerald made his famous remark." In the past, he observes, we were "a middle-class society. But that was another country."

The world of the new plutocracy is also a world of routine corruption and side deals in which millions of dollars are casually shifted into the pockets of the elites as part of "business as usual" corporate practice. The retirement package that GE's Jack Welch negotiated included an $86,000-a-year retainer for consulting services, use of GE corporate aircraft, a Manhattan apartment (including wine, laundry services, newspapers, flowers, condominium fees, cook, wait and housekeeping staff, postage and restaurant charges in the building, plus tickets to sporting and cultural events.

Polls strongly suggest that the plutocracy is vulnerable to challenge. In 1998 Gallup found that 63 percent agreed with the statement that "money and wealth in this country should be more evenly distributed." Roughly seven in ten also complained that "the rich just get richer while the poor get poorer." Even in the period shortly after 9/11, when patriotism obscured many other concerns, the number who held this view fell only one percent, to 69 percent. Recent Harris polls have regularly found that an extraordinary 80-87 percent of the public believe big companies have "too much power and influence in Washington." The Enron and related accounting scandals only added to long-standing and deeply rooted public distrust. As Century Foundation senior fellow Ray Teixeira has shown, we have reached a nadir in public opinion of large corporations: One 2002 poll found that only 15 percent felt a "great deal" or "quite a lot" of confidence in big business- the lowest number since pollsters started asking the question in 1986. Another showed that 38 percent saw big business as the "biggest threat to America's future," up from 22 percent as recently as October 2000 and again the highest level ever recorded for this question (asked since 1965).

Jeffrey Garten, dean of the Yale School of Management and a former Under Secretary of Commerce, follows the data closely. Hardly a populist, Garten believes citizen anger is ultimately likely to produce a backlash "as radical and as prolonged as the backlash against unbridled corporate power that took place during the first forty years of this century."

Two issues need to be sharpened over time: The first is 'public need versus private greed." The second is simple fairness. A comprehensive, long-term tax program focused on the plutocracy and corporations and that aimed to go on the offensive might include:

* Repeal of the Bush tax cuts at the top.

* A return, ultimately, to the 50 percent top marginal tax rates of the first Reagan Administration.

* Corporate taxes equivalent to those in force during the Nixon Administration.

* A wealth tax of at least 1 percent.

Note especially the tax on wealth. Wealth is far, far more concentrated than income. A mere 1 percent of Americans owns just under 50 percent of financial wealth; a mere 5 percent owns almost 70 percent of financial wealth. Americans with incomes of more than $1 million (roughly 0.1 percent of all taxpayers) made more money from stock sales than the rest of the nation combined in recent years.

Most Western European nations tax wealth-in Sweden, the highest annual rate is 3 percent; at the low end of the scale is Switzerland, with a tax of only one third of a percent. The United States, however, for the most part only taxes the kind of wealth most people own-their home. Moreover, we tax the total value of the home even though most people actually own only a part of the house-i.e., their net property value after subtracting the mortgage amount they owe. We simply do not directly tax ownership of the kind of wealth which is concentrated in the hands of the plutocracy: stocks and bonds.

Repealing the Bush tax cuts would return $86.5 billion from the top 5 percent annually when fully phased in-or close to $800 billion over ten years if, as is likely, the tax cut is made permanent. Estimates by Brendan Leary of the University of Maryland suggest that returning to a tax structure similar to that of the first Reagan Administration could potentially capture an additional $90 billion from the top 2 percent. If corporate tax rates were returned to Eisenhower levels, tax revenues could increase by roughly $110 billion. A I percent tax on wealth (with a $1 million exemption) could bring in $90 billion a year. (A 3 percent wealth tax with a $500,000 exemption could generate up to $290 billion.) A long-term progressive strategy would also aim to build new ways to structure the ownership of wealth-for example, by offering Individual Development Accounts, through which the government would directly match the savings of the poor; and by introducing government-funded $5,000 capital grants at birth that, with additional annual federal contributions, could build a capital fund of roughly $50,000 for every individual by age 18. Wealth-holding to benefit "small publics" is also important: For example, federal legislation has helped create 11,000 Employee Stock Ownership Plans and related efforts, many of which are moving toward substantial, indeed, often majority-worker ownership of significant assets in their firms.

The key to winning acceptance of a bold program is to build support-rather than simply react to polls that register "something" about public attitudes before and in the absence of a serious effort to dramatize an alternative. Conservatives have understood this all along: Ten years ago few would have believed privatization of Social Security was an idea that could ever be taken seriously-or, for that matter, more recently Bush's deficit-producing tax cuts for the rich. Conservatives created what support such ideas have by taking a clear stand and then arguing forcefully for it.

A progressive strategy that went on the offensive to mobilize broad support would put those who attempt to protect the plutocracy and the corporations on the defensive. It would also help redefine the political spectrum as a whole: So long as the Democratic Party fails to take a clear economic stand, "faux-populist" conservatives will exploit cultural and racial issues to divide and conquer the majority. The bottom-line question to confront, however, is: Over the long haul is there any other way to achieve the policies most progressives in their hearts know are right?

Gar Alperovitz, Lionel R. Bauman Professor of Political Economy at the University of Maryland, is working on a book on progressive change in the twenty-first century. He is the author of The Decision to Use the Atomic Bomb (Knopf) and, most recently (with Thad Williamson and David Imbroscio). Making a Place for Community (Routledge)

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