There are likely few characters less loved in America these days than hedge fund managers — widely regarded as among the archvillains of the 2008 Wall Street meltdown.
So, months ago, when Washington embarked on a frenzied search for ways to reduce the massive U.S. deficit, a tax loophole that allowed hedge fund managers to pay tax at the exceptionally low rate of 15 per cent certainly seemed like low-hanging fruit.
Cancelling the loophole would save the treasury $20 billion over 10 years, and the public would surely be unmoved by the pain inflicted on hedge fund managers — the top 25 of whom took home an average pay last year of $880 million each.
But as the stakes rose in the bizarre negotiations over the country’s debt ceiling, the Republicans managed to push reluctant Democrats into taking all tax increases off the table. All deficit reduction was to come exclusively from government spending cuts, hitting the middle and lower classes hard.
Perhaps this seems like evidence of how resistant Americans are to tax increases. In fact, it shows no such thing. Rather, it shows how a band of far-right Republican Tea Party extremists — financed initially by the billionaire Koch brothers — have managed to effectively take control of the U.S. political system and block the will of the American people.
For the past two years, Americans have repeatedly told pollsters that they support higher taxes on the rich as a way to reduce the deficit. A Washington Post poll last month, for instance, found 72 per cent supported raising taxes on those earning more than $250,000.
The battle over whether to cut spending or raise taxes predates the birth of Elvis. But for decades, compromise was found between the Democrats’ support for social spending and the Republican desire to lower taxes, particularly on the rich.
That changed in the mid-1990s, with the rise of a more radical, aggressive Republican flank. Led by Newt Gingrich and backed by big corporate money, these radicals adopted a no-compromise approach, obstructing all Democratic efforts to enhance social spending, while relentlessly pushing for ever lower taxes, regardless of the impact on the deficit.
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Since then, the Republicans have grown ever more extreme, intransigent — and flagrantly indifferent to the public good.
Once the party of Eisenhower-style moderation and fiscal restraint, the Republicans have become the party of big deficits — mostly due to tax giveaways for the rich.
Inheriting a surplus, George W. Bush added $5.07 trillion to the debt, primarily due to his tax cuts and secondarily to his wars, while Obama has added just $1.44 trillion, mostly fighting the recession, according to data from the Washington-based Center on Budget and Policy Priorities.
All this set the stage for the hair-raising drama played out in recent weeks over raising the debt ceiling.
With the power to push the country into a Latin-American-style default, the Republican extremists had a loaded gun. And in their sights was not just holding the line on social spending, but their ultimate fantasy of dismantling popular New Deal social legislation — particularly social security — that has seemed untouchable since the 1930s.
In fact, the “debt ceiling” is an artificial creation. The U.S. Constitution doesn’t call for one. Except for Denmark, no other advanced democratic nation has a debt limit. Overseeing government spending is what the political process is all about.
But a radical rump of Republicans, threatening to pull the trigger, succeeded in forcing Democrats to abandon tax increases on the wealthy — at a time when America’s wealthy are as rich as the tycoons of the Gilded Age. Feeling the gun at their temples, the Democrats joined the Republicans in the quest for deeper spending cuts — which will only make the disastrous U.S. unemployment situation worse.
So while programs helping students, the elderly and the poor have been picked over with surgical precision, hedge fund managers can get back to work destabilizing financial markets with full peace of mind, knowing they’ll continue to enjoy a tax rate lower than the mechanics who service their private jets.