The Great Tax Con Job

Republicans are using the T-word - taxes - to attack the Obama healthcare program. It's a strategy based in a lie.

A very small niche of America's uber-wealthy have pulled off what may well be the biggest con job in the history of our republic, and they did it in a startlingly brief 30 or so years. True, they spent over three billion dollars to make it happen, but the reward to them was in the hundreds of billions - and will continue to be.

As my friend and colleague Cenk Uygur of The Young Turks pointed out in a Daily Kos blog recently, billionaire Rupert Murdoch loses $50 million a year on the NY Post, billionaire Richard Mellon Scaife loses $2 to $3 million a year on the Pittsburgh Tribune-Review, billionaire Philip Anschutz loses around $5 million a year on The Weekly Standard, and billionaire Sun Myung Moon has lost $2 to $3 billion on The Washington Times.

Why are these guys willing to lose so much money funding "conservative" media? Why do they bulk-buy every right-wing book that comes out to throw it to the top of the NY Times Bestseller list and then give away the copies to "subscribers" to their websites and publications? Why do they fund to the tune of hundreds of millions of dollars a year money-hole "think tanks" like Heritage and Cato?

The answer is pretty straightforward. They do it because it buys them respectability, and gets their con job out there. Even though William Kristol's publication is a money-losing joke (with only 85,000 subscribers!), his association with the Standard was enough to get him on TV talk shows whenever he wants, and a column with The New York Times. The Washington Times catapulted Tony Blankley to stardom.

"Fellowships" and other forms of indirect sponsorship of right-wing talk show hosts have made otherwise-marginal shows and their hosts ubiquitous, and such sponsorships of groups like Norquist's anti-tax "Americans for Tax Reform" regularly get people like him front-and-center in any debate on taxation in the United States.

All so they could run a tax con on the American people, thus keeping Moon and Murdoch and Scaife and Anschutz (and others) richer than you or I could ever even imagine.

All of this money was spent - invested, really, since it's been more than saved back in low income tax rates on millionaires and billionaires - to convince Americans that up is down and black is white when it comes to income taxes. Here's how it works:

Rich Person's Tax Effect

If a person earns so much money that he doesn't or can't spend it all each year, then when his taxes go down your income after taxes goes up. This is largely because there's little to no relationship between what he "needs to live on" and what he's "earning."

Somebody living on a million dollars a year but earning five million after taxes, can sock away four million in a Swiss bank. If his taxes go up enough to drop his after-tax income to only three million a year, he's still living on a million a year, and only socks away two million in the Swiss bank. His "disposable" income goes down when his taxes go up, and vice-versa. (Technically, the word is "discretionary" income for after-tax, after-living-expenses income, but "disposable" income has become so widely used as a phrase to describe discretionary income I'll use it here.)

The Rich Person's Tax Effect is the one that virtually all Americans understand - and, oddly, most working class people think applies to them, too (this is the truly amazing part of the con job referred to earlier).

But it doesn't.

Working Person's Tax Effect - version one

Most working people spend pretty much all of what they earn - their "disposable/discretionary" income is close to zero. Savings rates in the US among working people typically are small - one to five percent - and during the last few years of the W. Bush administration actually went negative. So the take-home pay that people have after taxes - regardless of what the taxes may be - is pretty much what they live on.

As economist David Ricardo pointed out in 1817 in the "On Wages" chapter of his book "On the Principles of Political Economy and Taxation," take home pay is also generally "what a person will work for." Employers know this: Ricardo's "Iron Law of Wages" is rooted in the notion that there is a "market" for labor, driven in part by supply and demand. So if a worker is earning, for example, a gross salary of $75,000, his 2008 federal income tax would be about $15,000 ($802.50 on
first $8,025 of income;
$3,687.75 on income from $8,025 to $32,550; $10,612.50 on income from $32,550 to $75,000), leaving him a take-home pay of $60,000.

Both he and his employer know that he'll do the job he's doing for around $60,000 a year in take-home pay.

So what happens if his taxes go up, cutting his take-home pay to $55,000 a year (even though his gross is still $75,000)? Over time (typically one to three years) his wages will rise enough to compensate for the lost income.

Alan Greenspan used to be hysterical about this effect - he called it "wage inflation" - and The Wall Street Journal and other publications would often reference it, although the average working person has no idea that if his taxes go up, his wages will eventually go up. Similarly, when working-class people's taxes go down, their gross wages will, over time, go down so their inflation-adjusted take-home pay remains the same. We've seen both happen over the past eighty years, over and over again.

When I was in Denmark last year doing my radio show from the Danish Radio offices for a week and interviewing many of that nation's leading politicians, economists, energy experts, and newspaper publishers, one of my guests made a comment that dropped the scales from my own eyes.

We'd been discussing taxes on the air, what the Danes get for their average 52% tax rate (free college education, free health care, 4 weeks of vacation, being the world's "happiest" country according to research reported on CBS's "60 Minutes" TV show, etc.). I asked him why people didn't revolt at such high tax rates, and he smiled and just pointed out to me that the average Dane is very well paid with a minimum wage that equals about $18 US (depending on the exchange rate from day to day).

Off the air, he made the comment to me that was so enlightening. "You Americans are such suckers," he said, as I recall. "You think that the rules for taxes that apply to rich people also apply to working people. But they don't. When working peoples' taxes go up, their pay goes up. When their taxes go down, their pay goes down. It may take a year or two or three to all even out, but it always works this way - look at any country in Europe. And it's the opposite of how it works for rich people!"

Working Person's Tax Effect - Version Two

The other point about taxes - which Obama leveraged with his "no tax increases on people earning under $250,000 a year" pledge - has to do with the fact that our tax structure in the US is progressive.

Here's how it breaks out for a single person from the 2008 federal tax tables:

10% on income between $0 and $8,025

15% on the income between $8,025 and $32,550;

25% on the income between $32,550 and $78,850;

28% on the income between $78,850 and $164,550;

33% on the income between $164,550 and $357,700;

35% on the income over $357,700.

Note that our $75,000/year worker has two full tax brackets above him, which, if they go up, will not affect him at all. (This is also true, of course, for the median-wage and average-wage American workers who earn in the low to mid-$40,000/year range.)

The top tax rate that a person pays is referred to as their "marginal tax rate" (in our worker's case 28%). So what happens if the top marginal tax rate on people making over $357,700 goes up from its current 35% to, for example, the Eisenhower-era 91%?

For over 120 million American workers who don't earn over $357,700/year, it won't mean a thing. But for the tiny handful of millionaires and billionaires who have promoted The Great Tax Con, it will bite hard. And that's why they spend millions to make average working people freak out about increases in the top tax rates.

Income taxes as the "Great Stabilizer"

Beyond fairness and holding back the Landed Gentry the Founders worried about (America had no billionaires in today's money until after the Civil War, with John D. Rockefeller being our first), there's an important reason to increase to top marginal tax rate, and to do so now.

Novelist Larry Beinhart was the first to bring this to my attention. He looked over the history of tax cuts and economic bubbles, and found a clear relationship between the two. High top marginal tax rates (generally well above 60%) on rich people actually stabilize the economy, prevent economic bubbles from forming, prevent economic crashes, and lead to steady and sustained economic growth (and steady and sustained wage growth for working people).

On the other hand, when top marginal rates drop below 50 percent, the opposite happens. As Beinhart noted in a November 17, 2008 post on the Huffington Post, the massive Republican tax cuts of the 1920s (from 73% to 25%) led directly to the Roaring '20s stock market bubble, temporary boom, and then the crash and Republican Great Depression of 1929.

Rates on the very rich went back up into the 70-90% range from the 1930s to the 1980s. As a result, the economy grew steadily; for the first time in the history of our nation we went 50 years without a crash or major bank failure; and working people's wages increased enough to produce the strongest middle class this nation has ever seen.

Then came Reaganomics.

Reagan cut top marginal rates on millionaires and billionaires from 74% down to 38% and there was an immediate surge in the markets - followed by the worst crash since the Great Depression and the failure of virtually the entire nation's savings and loan banking system.

Bush I cut taxes, and the nation fell into a severe recession while debt soared and wages for working people fell.

Things stabilized somewhat when Clinton slightly raised taxes on the very rich, but W. Bush dropped them again - including taking taxes on unearned income (interest and dividends - the "income" that people like W. born with a trust fund "earn" as they sit around the pool waiting for the dividend check to arrive in the mail) down to a top rate of 15%. (That's right - trust fund babies like Bush and Scaife pay a MAXIMUM 15% federal income tax on their dividend and interest income, thanks to the second Bush tax cut.) The result of this surge in easy money for the wealthy, combined with deregulation in the financial markets, was the "froth" Greenspan worried about and led us straight into the Second Republican Great Depression, ongoing today.

The math is really pretty simple. When the uber-rich are heavily taxed, economies prosper and wages for working people steadily rise. When taxes are cut for the rich, working people suffer and economies turn into casinos.

Roll Back The Reagan Tax Cuts

While there's much discussion about letting the Bush tax cuts expire, if we really want our country to recover its financial footing we must do something altogether different. We need to roll back the Reagan tax cuts that took the top marginal rate from above 70% down into the 30% range.

First, though, we have to help Americans realize that "no new taxes" is a mantra that is meaningful to the very rich, but largely irrelevant to average working people.

Only when the current generation re-learns the economic and tax lessons well known by the generation (now dying off) that came of age in the 30s through the 60s, will this become politically possible. Americans need to learn what Europeans know about taxes - they only matter to the rich.

Thus today the uber-rich are spending hundreds of millions to make sure words like "burden" are always associated with the word "tax," and to convince average working people that they should throw out of office any politicians who are willing to raise taxes on the rich.

We have a lot of education to do...and as long as the Right Wing Machine of the uber-rich continues to "lose" (e.g. "invest") millions of dollars a year in their ongoing disinformation campaign, it's going to require all of us reciting the mantra, "Roll back the Reagan tax cuts!"