GOODBYE, MIDDLE CLASS, Part 6: Our National Debt: From Tax Creeps to Tax Cuts
Continued from Part 5: Credit Debt. Or, The Only Way We Get By
“Taxes are the price we pay for living in a civilized society.” –engraved on the IRS Building in Washington, D.C.
Starting in the 1970s, Americans experienced a tax bracket creep.
Washington journalist Thomas Byrne Edsall explains the tax code of the 1960s: “For 90% of the population, there were…three marginal tax rates: 0 for the bottom 1/5 of the population, 20% for nearly half of the population making from $2,700-$7,000, and 22% for the next ¼ of the population making from $7,000-$11,000.”
According to William Kleinknecht, “Only those people whose income placed them in the top 10% were subject to graduated marginal tax rates ranging from 26%-91%. But the escalating inflation of the 1970s changed all that. Rising median incomes in the 1970s pushed many ordinary Americans into the tax brackets with graduated marginal rates, exposing them to the [tax] bracket creep.”
Thomas Byrne Edsall explains, the “progressive rate system… was no longer separating the very rich from the majority of taxpayers but was impinging directly on the well-bring of the working and middle classes, [creating] a strong base of deep, anti-tax sentiments.”
According to Michael Goodwin in Economix: How our Economy Works (and Doesn’t Work):
Because tax brackets didn’t creep up with inflation, incomes kept creeping up into higher and higher tax brackets. This meant that salaries didn’t buy more, as the standard of living increased as well. It only meant that the middle class was soon paying double what it had only two decades prior. This was still less than most of Europe paid, but Europe also got better schools, free healthcare, and cheaper college.
This tax creep into the progressive rate system explains why today a husband and wife who are dentists or doctors pay the same tax rate as Angelina Jolie and Brad Pitt.
Our government didn’t fix the bracket creep because it needed to take more from ordinary people, as it was taking less from rich people and big businesses, whose taxes became more and more complicated, with more and more loopholes.
So how did the U.S. fix this problem? Reagan was elected by promising smaller government, balanced budgets, less regulation, and tax cuts.
When Reagan cut the top tax rate on millionaires and billionaires from 70% to 50%, then to 28.6%, and drastically reduced the taxes of corporations, he only gave regular folks a 1% tax break.
It’s no wonder the wealthiest in this country have propagated the messianic myth of Reagan; they became what our forefathers tried to prohibit – a rising plutocracy and oligarchy. Wall Street owned Reagan – and America.
According to the IRS, in 1955, the 400 richest households with the highest income paid 51.2% of their income in federal taxes. In 2007, the 400 richest Americans paid 16.6% of their income in federal taxes, reports investigative journalists Donald L. Barlett and James B. Steele in The Betrayal of the American Dream.
In 1980, the top tax rate on salary and wages was 50%. In 2015, it’s 39.6%.
In 1980, the tax rate on unearned income dividends and interest was 70%. In 2012, it was 15%.
In 1980, the maximum tax rate on income from capital gains was 28%. In 2012, it was 15%.
This bears repeating: 1980 TODAY
1% salary and wages tax rate 51.2% 39.6%
Unearned dividend/interest tax rate 70% 15%
Capital gains tax rate 28% 15%
The logic used to be that if you didn’t actually work to earn your money, then you pay higher taxes. No one should pay a lower tax rate on money they did nothing to earn, but that’s exactly what happens with income from interest and capital gains, which is why Warren Buffet touts that his secretary pays a higher tax rate than he does.
As Smith explains in Who Stole the American Dream? "Two trends are primarily responsible for today's hyperconcentration of wealth in America - the collective decisions over time by America's corporate power elite to take a far bigger share of business earnings for themselves, and the increasingly pro-rich, pro-business policy tilt in Washington since the late 1970s... the tax code...has been tilted so heavily in favor of the super-rich that many millionaires and billionaires today actually pay lower tax rates than many people in the middle class. The key driver of this lopsided outcome is the sharp cut in the capital gains tax... [that] go primarily to the people at the top of the economic pyramid... The top 0.1% garner half of all capital gains in the United States."
If you aren't clear on how capital gains work, I'll let Arianna Huffington explain: "More than just a way to pay off greedy CEOs, stock options have also proven to be a corporate accountant's wet dream - a versatile form of compensation that is not counted as an expense on company ledgers, and yet is fully deductible when it comes to chiseling the taxman...companies are still not required to treat stock options as an expense. So, while paying your CEO $100 million, paying him with $100 million in stock options reduces your income by $0. Stock options are only accounted for when they are cashed in. By that time, with their value often considerably higher, they are actually treated as a business expense and the company can claim a large tax deduction... WorldCom, for example, used stock option deductions to trim $265 million off its tax bill between 1996 and 1998...modest compared to the $2.7 billion Microsoft saved, the $1.5 billion saved by Cisco, or the $1 billion that G.E. shaved off its tax bill through stock options."
And as we learned above, these 1%-ers aren't paying the Upper Class salary and wage tax rate of 39.6%. They are paying the capital gains tax rate of 15%.
But let's put these in practical terms:
1% salary: think Bill Gates when he ran Microsoft
Unearned dividend/interest rate: think Bill Gates today collecting quarterly profits from Microsoft stock
Capital gains rate: Bill Gates when he sells Microsoft stock and makes a profit, or when he sells an estate to buy a bigger one
In another example, Mitt Romney, worth a quarter of a billion dollars, pays a tax rate of under 15% by classifying his income from investment gains as “carried interest.” This is how oligarchs keep billions in income that would otherwise fund our government.
The Reagan tax cuts were the largest income tax cut in the country’s history (for the wealthy) while simultaneously being the most massive increase in the country’s history (for the working classes).
Even Bush’s tax cuts favored the super-wealthy. The wealthiest 20% got 68% of the money the government gave back to the people.
Translation: Those earning over $200,000 in 2005 came out ahead. Anyone earning less paid the price in government cuts. Someone has to pay for the social programs lost by giving the top 20% more money, which means closing state parks, public schools, or libraries.
While the government lost a considerable amount of income from these tax breaks, Reagan practically doubled the federal government’s budget spending, particularly on the military industrial complex and bailing out Wall Street.
Much of Reagan’s spending simply disappeared, as more than 130 members of his administration were investigated, indicted, or convicted for criminal activity.
This was a new historical record that surpassed Nixon, Harding, and Grant’s administrations.
To put this in perspective, by comparison, the Obama administration has had 1.
How did Reagan pay for everything if the government no longer had enough income from taxes?
It began borrowing money. In essence, Reagan was chief architect of American’s budget deficits – and growing debt, of which we will likely never pay back.
All of the government borrowing made the Fed nervous about inflation, so it kept interest rates artificially high, so the government paid more interest!
Reagan left office with trillions in debt. Because the 1% still pays record low taxes, our debt practically doubled by 2000. Add in the Iraq and Afghanistan wars, and the debt doubled again, now over 10 trillion dollars.
Ultimately, Reagan ended up raising taxes on the middle class, although his publicity generators spread myths that convince the public otherwise. He also doubled the social security tax on people earning less than $30,000 to make up for the wealthy tax breaks.
Reagan was long gone by the time the bills came through. And every president since has been dealing with the repercussions.
Corporations also decided that with so much money being spent on military industrial, an easy profit would be to bilk the government.
Actual prices paid by the Pentagon to defense contractors during the Reagan years include:
$643 for a hammer
$600 for a toilet seat
$2,043 for a bolt/washer
These prices are NOT adjusted for inflation. And it gets even worse.
Conservative think tanks such as Cato Institute, Heritage Foundation, and even the U.S. Chamber of Commerce claim the U.S. is one of the highest taxed nations in the world, but like most propaganda disseminated from their ranks, this is misleading, if not a flat-out lie.
In the 1970s, the corporate tax rate was 53%. Today, the top statutory corporate tax rate is 35%, technically. However, most corporations pay nothing close to that. An April 2016 Government Accountability Office study found that large corporations actually paid just 14% of their profits in federal income taxes from 2008-2012.
As a share of tax revenues, corporations once contributed 32% in the 1950s, but by 2015, that number had fallen by 2/3 to 10%
According to Missed Information: Better Information for Building a Wealthier, More Sustainable Future, roughly 25-30% of large corporations pay no taxes. Worse, when including smaller companies, this number rises to 66%.
To add insult to injury, in The Betrayal of the American Dream, Barlett and Steele report that 7 out of 10 multinational corporations operating in the U.S. today also pay no taxes.
Consider the Top 10 Corporate Tax Avoiders, and the millions they receive in government tax refunds:
Johnson Controls earned $1 billion in profits in 2015, paid no federal income taxes, and received a $477 million tax refund.
IBM earned nearly $6 billion in profits in 2015, paid no federal income taxes, and received a $321 million tax refund, and another $1.35 billion in government contracts.
Xerox earned $547 million in profits in 2015, and received a tax refund of $23 million. Oh, and it eliminated 5,000 jobs this year.
American Airlines earned $4.6 billion in profits in 2015, and received a tax refund of nearly $3 billion.
P.G.&E. earned a profit of $847 million in 2015, and received a $27 million tax refund.
Boeing earned a profit of $52 billion in less than 15 years, but received federal tax refunds of $757 million, and state tax refunds of $55 million.
G.E. earned $34 billion in profits from 2008-2013, yet received a $16 billion bailout from the Federal Reserve, and $3 billion in tax refunds.
Citigroup earned $6.4 billion in 2013, after needing a $2.5 trillion bailout in 2008, paid nothing in taxes, and received a tax refund of $260 million. A year later it avoided $11.7 billion in taxes by establishing 427 subsidiaries in offshore tax havens.
Pfizer earned $43 billion in worldwide profits from 2010-2012, and received $2.2 billion in tax refunds.
Verizon earned $42.5 billion in profits from 2008-2013, and received a tax rebate of $732 million.
To further illustrate just how multinational corporations take advantage of our tax breaks, remember when Congress and the Bush Administration passed the American Jobs Creation Act of 2004? Lawmakers claimed that if corporations were given a one-time tax break to bring home untaxed offshore profits in the Cayman islands with only a 5% tax rate instead of a 35% rate, it would create 660,000 jobs. This tax cut would give corporations more money, and thus create more jobs.
In The Fine Print, David Cay Johnston proves otherwise: According to the IRS, 843 multinational companies brought home $312 billion in the Caymans and Bermuda from the deal, escaping almost $80 billion of taxes. The biggest beneficiary was Pfizer, who brought home $37 billion of untaxed offshore profits, saving $11 billion in taxes. And Pfizer closed down factories and fired more than a third of its employees, losing 41,000 jobs. Think of all the money they saved from those salaries that could now come into the U.S. practically tax-free.
Hewlett-Packard brought 14.5 billion untaxed overseas dollars back to the U.S. and fired 14,000 employees.
To recap, 660,000 jobs promised. 100,000 jobs lost.
Corporations pocketed all the money. NO jobs were created.
But wait, you may ask, did the companies spend more money on research or investing? Simply put, no. In 2006, Pfizer spent 7.5% less on research than in 2004. By 2009, Pfizer spent 11% less on research.
It didn’t help that the Jobs Creation Act never stated that companies were obligated to spend any money on hiring or expanding. Convenient. The lobbyists must have gotten a nice bonus that year. Meanwhile, the taxpayers pay interest on the $11 billion they borrowed to finance Pfizer’s tax break. At 2012 federal borrowing rates, the interest came to $1 million per day.
But this is de rigueur.
While President George W. Bush was on the board of Harken Energy, and while Dick Cheney was CEO of Halliburton, both companies created shell companies in offshore tax havens to avoid taxes. The Cayman Islands, for instance, are home to only 50,000 people, yet 90,000 tax-evading companies. Enron alone had 881 subsidiaries there, explains Arianna Huffington in Pigs at the Trough.
But don't worry, it's not tax evasion per se, it's "tax competitiveness," justified the Bush administration. They could also justify why Halliburton went from paying $302 million in taxes in 1998 to getting an $85 million tax rebate in 1999, all the while receiving billions more of our hard-earned tax dollars from no-bid contracts from the government, overcharging them all the way, like one charge for $750,000 for $125,000 worth of work.
This is what happens when politicians double as crony capitalists.
If this doesn’t make you irate, it should. Because these multinationals use our roads, bridges, post offices, court systems, fire departments, police departments, water, natural resources, public goods, and countless government agencies, and pay little if not nothing.
In other words, we the taxpayers subsidize these businesses. But don’t just take my word for it. Thomas Hartmann makes a more compelling case in The Crash of 2016: “Corporations are taxed because they use public services; they are therefore expected to help pay for them… Corporations make use of a workforce educated in public schools that are paid for with tax dollars. They use water, sewer, power, and communications rights of way paid for and maintained with taxes. They demand the same protection from fire and police departments as everybody else, and they enjoy the benefits of national sovereignty and the stability provided by the military and institutions like the United Nations and the North Atlantic Treaty Organization (NATO), the same as all residents of democratic nations… Corporations are heavier users of taxpayer-provided services and institutions than are average citizens. Taxes pay for our court systems, which are most heavily used by corporations to enforce contracts. Taxes pay for our Treasury Department and other government institutions that maintain stable currency essential to corporate activity. Taxes pay for our regulation of corporate activity, from ensuring safety in the workplace and a pure food and drug supply to limiting toxic emissions in our air and water… Every year millions of cases of cancer, emphysema, neurological disorders and other conditions caused by corporate pollution are paid for in whole or in part by government-funded programs.” [Medicare, Medicaid, subsidies for hospitals, universities, and research institutions, National Institutes of Health (NIH) and National Institute of Mental Health (NIMH).]
It’s well understood that corporations use our institutions more heavily than our citizens, so they should be taxed at higher rates. Why should the workers in a chemical plant pay higher taxes when the plant’s corporate owner is the one giving its workers cancer?
Granted, no one likes to pay taxes. But no one wants society to fail them either. And the cost of governance should not be left to the working poor, but returned from those who earn the most wealth from our system.
The only people who got richer in the 1980s were the very rich. And we are still paying for this today, from our national debt to our crippling poverty and crumbling infrastructure. From our mentally ill homeless population to our Healthcare costs to the closure of public hospitals and clinics.
In The Price of Civilization, author Jeffrey D. Sachs argues that “at the root of America’s economic crisis lies a moral crisis: the decline of civic virtue among America’s political and economic elite. A society of markets, laws, and elections is not enough if the rich and powerful fail to behave with respect, honesty, and compassion toward the rest of society and toward the world. America has developed the world’s most competitive market society but has squandered its civic virtue along the way. Without restoring an ethos of social responsibility, there can be no meaningful and sustained economic recovery.”
“We need to reconceive the idea of a good society…Most important, we need to be ready to pay the price of civilization through multiple acts of good citizenship: bearing our fair share of taxes, educating ourselves deeply about society’s needs, acting as vigilant stewards for future generations, and remembering that compassion is the glue that holds society together.”
Yet staunch conservatives just dig in their heels, insisting on free market ideology. Their concern isn’t the middle class, or the unemployed. Their only concern is their pockets, and the corporate constituents’ pockets.
As Upton Sinclair once wrote, “It’s difficult to get a man to understand something when his job depends on not understanding it.”
Today, many big corporations’ profits come EXCLUSIVELY from taxpayers. Privatized profits and socialized losses, it’s called. Tax incentives are lucrative business, from luring Hollywood productions to subsidizing sports arenas. But these breaks can’t continue because they are breaking the country.
The lower the taxes the wealthy and the corporations pay, the less money our government has to function. The Lower and Middle Class are already maxed out. The majority of our wealth accumulates at the top.
Therefore, private affluence = public squalor.
But tax cuts are only half our problem. The other half?
And not the kind that helps people, which we'll see in Part 7: Slashed and Spent