If the debate around the fiscal cliff and, particularly, the still-impending sequester demonstrates anything, it’s that Richard Nixon’s one plunge into economic theory—“We’re all Keynesians now,” the former president once said—still holds. Everyone acknowledges that laying off hundreds of thousands of government employees, including 800,000 civilian Defense Department workers, and stopping payment to government contractors will, by definition, destroy jobs, at least until the payments resume. It’s still Republican orthodoxy, to be sure, to deny that government spending actually creates jobs, but even they acknowledge that the cessation of government spending destroys them. Which illustrates that the problem with contemporary Republicanism isn’t confined to their indifference to empiricism but also their indifference to logic. Reasoning—either deductive or inductive—is either beyond them, beneath them or above them.
A second Republican talking point called into question by the fiscal-cliff legislation enacted Tuesday is that the 47 percent don’t pay taxes. In fact, every American employee, including the millions who aren’t paid enough to pay income taxes, saw their payroll tax increased Tuesday by the bipartisan failure of Congress to extend the payroll tax cut that had been enacted as part of the Obama administration’s original stimulus legislation back in 2009. Despite Republican protestations, the payroll tax is a tax, of course, and more particularly, it’s a tax on earned income—to coin a phrase, an income tax. The difference is, it’s not progressive—the working poor are not exempted, and pay at the identical rate as the rich up to the point where taxable income hits its ceiling.
Even more depressing than the complicity of both parties in raising the regressive payroll tax is their complicity in failing to significantly raise the tax rates on dividends and capital gains—the rate was raised just from 15 percent to 20 percent for the wealthiest taxpayers. The Washington Post's Suzy Khimm summarized the new provisions for Wonkblog: “The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.)” Time was when the Democrats were simply opposed to taxing income from investments at a lower rate than income from work. Indeed, in 2003, as the National Journal's invaluable Ron Brownstein has tweeted, only two Democratic senators voted to lower the capital gains and dividend tax rates to the levels they largely declined to raise earlier this week.
Problem is, the never-very-strong case for taxing investment income at a lower rate than labor income has grown weaker still in the era of globalization. If you invest, say, in General Electric (GE), from which you derive dividend income, you’re investing in a company that has hundreds of facilities and many thousands of workers overseas. The investment income you provide the company by buying its stock is as likely to be spent creating jobs in China or India as it is to create jobs in the United States. A GE employee who works in the U.S., on the other hand, is creating value in the U.S. But she’s taxed at a higher rate than a shareholder only a fraction of whose investment creates value here. Assuming one purpose of the tax code is to bolster the domestic economy more than the economy of other nations, taxing that investment at a lower rate than the employee’s labor is completely backward.
As well, wages constitute a declining share of both the nation’s total income and corporate expenditures, reflecting the downward drag that globalization, mechanization and de-unionization have had on workers’ incomes. Wages have fallen from 53 percent of GDP in 1970 to 44 percent today—a shift of nearly $1.5 trillion away from wage income. Profits, and with them, dividends and capital gains, have been growing at wages' expense: J.P. Morgan chief investment officer Michael Cembalest has calculated that reductions in wages and benefits were responsible for about 75 percent of the increase in corporate profits between 2000 and 2007. Taxing wage income at a higher rate than investment income, then, only increases the growing economic inequality that characterizes the pre-tax economy.
There’s no mystery behind the lower tax rates for capital income than for labor income: They simply reflect the continued, indeed growing, ascendency of capital over labor—in the Democratic Party, based on this week’s not-so-grand bargain, no less than in the GOP. Democrats will get a second chance to rectify this imbalance when they have to come up with some more revenues to offset the sequester, which has now been rescheduled to take place two months from now. If the logic of the above arguments doesn’t move them, the fact that Wall Street tilted strongly Republican in November’s election while labor saved their bacon in the presidential, senatorial, and congressional elections in a dozen states might move them yet.
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