Economics for the 99% After the Fall: from the Cliff to the Ceiling
Tuesday, 08 January 2013 15:42
By John Weeks.
As the saying goes, just one damn thing after another. We fell off the fiscal cliff (albeit only for a few hours), just to discover that in a few months we shall hit the ceiling. What's going on here, what does it matter, and what should we do about it?
First, the good news. Either by design or accident (probably the latter up to the last moment), the president and non-reactionary Democrats found a way around the Republican obstruction. The trick can be played again, because the Republicans have no defense against it. The problem is simple: reactionary Republicans (is that redundant?) enjoy a majority in the House of Representatives, and enjoy it they do, blocking any and all legislation that would not be endorsed by Attila the Hun.
An iron-clad pledge to never-ever raise a tax rate represented a specific plank in their pre-Enlightenment program. This pledge serves to block any attempt to create a more equitable tax system. Since any legislation must be passed by both the House and the Senate, how would any progressive legislation ever reach the president for signing?
By accident the solution to this conundrum presented itself to the current president. Legislation passed in 2011 specified that the reduction in tax rates legislated under Bush-the-Younger would expire at the end of 2012, along with substantial expenditure reductions. The failure to reach an agreement on the details of extending or eliminating that expiration would imply across-the-board tax rate increases for all US households and the automatic expenditure reductions. Prompted by much the same gang that introduced the deadline in the first place, the mainstream media would call the deadline the "fiscal cliff", a term whose creation finds many claimers.
Any wily president, be he Roosevelt or Reagan, would immediately see the solution. Let the deadline pass, then accuse the reactionary Republicans (RR's) of having raised taxes. The RR's would then be hoisted on their own cliché, facing the unhappy necessity to violate their pledge by living up to it. They honor their pledge (if "honor" is the word for such venality) by cancelling the deadline, and violate it because taxes rise for about 1.5 percent of households.
It would be unfair to accuse the current president of working this strategy out, then implementing it. In mid-December the apparently limitless perfidy of the House Republicans save the president from an impressive collapse of principle and backbone. There he was, poised to reach a deal that would have seriously under cut the welfare of the vast majority of Americans. However, the president found the rug pulled from under him when the lunatic Republican majority in the house rebelled against the agreement negotiated by their reactionary leader, Speaker John Boehner (as in "bone-headed"). We all owe the Troglodytes in the House sincere thanks for having saved us from the president's not-so-grand bargain.
Once the deal was undone, the obvious trap into which the Trogs had leaped seems to have dawned on some Democrats in the Senate, notably the vice-president. Suddenly, it was unnecessary for the president to agree to any cuts or any changes in tax rates. If played properly, the tax and expenditure legislation passed so gleefully by Republicans in 2001, 2003, 2010 and 2011 would return to haunt them with the ferocity of the 22nd Amendment. That amendment, passed in a fit of post-Roosevelt pique by a Republican Congress in 1947 to limit presidents to two terms would prevent potential third terms for Eisenhower and Reagan. The creation of the appallingly nick-named fiscal cliff can serve to beat back reactionary fiscal initiatives from the Republicans for the entire 113th Congressional session.
The basic strategy is simple. As each deadline approaches, for example, the need in two months to increase the federal debt limit (aka "debt ceiling"), the president and the Congressional Democrats refuse to accept any reductions in social expenditure. On the contrary, they demand expenditure increases, with natural disaster relief being the more obvious. If the Republicans prove obstructionist, which they will, let the deadline pass. On the Republicans falls the blame for automatic expenditure reduction on programs supported by the vast majority of Americans, social security and Medicare.
Will that happen? In a recent interview with the real News Network, Bill Black answered that question: it will happen if enough people act politically and pressure the president and the Congressional Democrats to do it, and to do it at first opportunity. (http://therealnews.com/t2/index.php?option=com_content&task=view&id=767&Itemid=74&jumival=9452).
The debate and misinformation about erstwhile fiscal cliff raises an extremely important issue, tax rates in the United States. It seems a common view across the political spectrum that higher taxes are always a bad thing. For the Troglodytes the evil of taxes falls upon everyone, rich or poor. For most progressives, taxing the rich is good, but the middle and working classes bad.
I descent from this view of taxes. In a democratic society taxes are a good thing. They are the vehicle by which society funds those collective tasks that households cannot carry out on their own, and which the private sector rejects as legitimate. In a phrase, taxes are the basis of social democracy and the welfare state.
Before the Kennedy tax reforms, proposed in the 1963 State of the Union Address and passed into law under Lyndon Johnson, marginal tax rates on US households varied from 20 to 91 percent. The Johnson legislation reduced the range of marginal rate to 14 to 70 percent ("marginal" means that each household paid the lowest rate on the first specified income range, then higher on subsequent income range).
Today the highest rate is thirty-five percent and the lowest ten percent. The personal income taxes as a share of personal income were 7.3 percent in 2010, and the highest share since 1945 was less than twelve percent (11.7 in 2000). All employees pay payroll taxes that fund unemployment compensation and social security. When we include these, personal taxes rise to about 15.5 percent of personal income for 2010, down from twenty percent in 2000.
Tax rates in the United States are too low. I mean too low for everyone, the rich, the middle class, the working class. Raising tax rates for the rich represents the major mechanism for achieving a more equitable society, as well as contributing to reducing the political power of the wealth. However, taxing the rich would not fund a decent and humane welfare system. That requires that we all pay higher taxes. Most progressives support an effective public health system, good public education for all, adequate infrastructure, and pensions that allow for a dignified old age. To achieve these taxes as a proportion of personal income must rise from the current fifteen percent to well above twenty percent. This would bring the United States into the range of the Scandinavian countries, where poverty is far less, health indicators much higher, and education considerably better.
Left: Franklin Roosevelt signs the Social Security Act on 14 August 1935.
Right: Social Security Board poster c. 1946.
In this context payroll taxes play an extremely important role in support of social, not private, welfare. Several commentators in The Real News correctly pointed out that payroll tax rates are not progressive like income tax rates. In some cases they go on to criticize the president for failing to extend the reduction of these rates into 2013. While few things the president has done on fiscal policy bring my praise, this is one of them. Payroll taxes fund the most important vestige of the US social welfare system, retirement pensions ("social security"). The president's reduction of these rates a year ago was extremely unwise. It made a future deficit in the social security fund much more likely. Deficits in the fund would be greeted with delight by reactionaries as evidence of the urgent need to reduce pension age and level of payments.
The method of funding pensions and unemployment insurance is extremely important practically and ideologically. The ear-marked tax refutes slurs on the unemployed and the retired as burdens on society. We pay those taxes and earned the benefits they fund. When cutting these taxes we court reactionary attacks on social provision.
A healthy, educated population with the ninety-nine percent living above the poverty line requires shifting resources from private to public expenditure. This shift allows for public sector provision of social services rather than private. Reactionaries love to accuse liberals and other progressive of advocating a "tax and spend" budget strategy. Time we lived up to that accusation. Tax and spend, the battle cry of the ninety-nine percent.