Taxes: How to Soak the Poor
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The Roman tax system was about as inequitable as human mind could conceive it. The kind of tax system the Romans had created looked an awful lot like one the most rightward of conservative zealots could only hope for in the United States of the 21st Century. No, I mean this literally: no estate tax, a head tax that was more or less flat, but that did not fall on the upper class, an empire-wide sales tax, and tax collection that was largely in private hands.
You'd think, from the way the Right talks about taxes that the Roman system should have led to unbelievable prosperity. After all, the people who had the money kept it to invest, and got richer and richer, and they also had an empire, where they could send out their money for higher returns, just as US investors can do so now (Mexico, China, Iraq). So why did Rome fall, you might ask? Do you think maybe the Empire went bankrupt just because it kept on running deficits? Do you think it went bankrupt because the rich didn't pay? Well, it's not quite as simple as all that, but you know from the previous sections that the immediate cause of Rome's fall was because there was no money in the Treasury. For a brief history of the Roman Empire. There was one small levy on the very wealthy, the follis, and that's the one Roman tax the very conservative among us would have thought was just all wrong; after all, it was roughly progressive.
The Romans had what tax "reform" activists like Grover Norquist would like to see now: it was a tax system that took from the poor and gave to the well-connected, what our "reformist" might call Investors. Of course there were some aspects of the Roman system that might look a little primitive in our eyes, like the fact that the main levy was in kind, thereby setting up an empire-wide barter system, but good things first: there was no estate tax.
No, no "death tax," probably because from earliest times, when the King was overthrown by the Roman Senate, the aristocracy held power. Granted, the Senate, and everyone else at the end of the Republic, ceded total power to Augustus and his successors, who were absolute dictators, but as I explained in The Rich , the aristocracy regained power with the creation of a large bureaucracy under Diocletian at the end of the Third Century.
Still, even during absolute imperial rule, the aristocracy was the Emperor's first audience and constituency. The Senators didn't begin to gain the kind of wealth they had amassed by the end of the fourth century until several generations had passed with no imperial expropriations after Diocletian. Proof that rule by the investor class could bring prosperity? Did jobs "trickle down?" By the fifth century, vast fortunes were passed to those few children the aristocrats deigned to have, but by that time few others had much at all; the many (both free and unfree) were poor, so many didn't survive, and they were much poorer, and less secure than they had been a century before.
The levy Senators paid, the follis, wasn't financially significant, either to them, or to the treasury. The main tax was the annona, a levy in kind, set painstakingly by plot and type of land, but essentially a head tax from which Senators were exempt. This was one aspect of the Roman system that superficially, at least, makes it look very different from ours: different people, of different social ranks, paid different levies.
A second difference is one our conservatives would like to adopt, however when they shout, "Abolish the IRS!" Levies were not collected by the government; there was no Internal Revenue Service. Remember mention in the Bible of the hated Roman tax collectors? Not only in Palestine, but throughout the Roman world, taxes in that period were contracted out to revenue farmers. Yes, private enterprise!
Actually, by the fifth century revenue farmers had been superseded by local collectors who were members of and were assigned by their municipal senates. As we shall see presently, those designated often felt that they were condemned, not honored. In any case, by the fifth century the government was going bankrupt. In fact, its revenues had been going down for a long time. The total levies collected from land in the whole Western Empire in 450 were estimated by Sundwall in 1920 to be about 4.8 million pounds, which might be the equivalent of $20 million today. In any case it was probably less than the income of a few wealthy Senators, who may each have earned the equivalent of 15 million dollars a year. Revenue for the Empire had declined from about 13 million pounds in 400. Revenue was going down even though private citizens collected the levies. Newt Gingrich would tell you that private corporations like Mastercard and Visa, would be so much more efficient than the IRS. "Abolish the IRS!" our right-wingers say over and over again. The Roman Empire was far ahead of them, and yet still its revenue went down.
The Roman Empire didn't have a revenue collecting bureau of any kind, only the treasury (the fisc). After Diocletian, revenue farmers were superseded by members of the municipal senates, who were commanded by the fisc to gather set amounts of goods or money equivalents in their local municipalities every year. The "few well-known men" mentioned by Salvian at the beginning of the chapter were in the municipal senates, made up of the Roman equivalent of our middle class, which in fifth century Rome was a very small (and shrinking) group. It was getting smaller in part because of the revenues they had to collect; it's not hard to understand why.
By the fifth century, status was frozen, and the town officials (curiales) were required to delegate one of their number to become collector (exactor) for the year in order to collect the annona, the main land levy. However, it was no longer a profitable undertaking. The collector would be responsible for aggregating the amount of goods and currency set by the Imperial treasury (fisc), and would be in charge of a private local military force, called bucellari, to carry out his mandate; the bucellarii were the ones who actually carried away the peasant's seed grain, or his breeding stock, or whipped the village headman to force him to reveal hidden caches of gold. The private army went from property to property, seizing grain, cattle, whatever the fisc had ordered, leaving grief and misfortune in their wake, and of course keeping a little for themselves.
The misfortune of the exactor, was that he (and his family) had to make up the difference between what had been collected and what the fisc had demanded: he had to take it out of his own resources. This made the curiales particularly rapacious, and that is at least partly why Salvian railed at them as tyrants. However, they were not only villains; they were also victims. Since the tax base was continually shrinking, they were often unable to collect what had been mandated by the fisc. Making up the difference often left them bankrupt--unless they could see it coming.
If they were prepared, there were two alternatives left to the unfortunate middle class curiales: they could flee to the hills to become bandits, or they could throw themselves on the unmerciful mercy of the large local landholder, the Senator. Most went on their knees before the Senator, as did most of the independent artisans and peasants still surviving.
The result was increased power for the Senator. He also increased his landholdings, since he absorbed the properties of his new dependents. He was unmerciful because those asking for his mercy were reduced to serfs, and still had to pay the annona if the landowner permitted it. Often, however, he didn't permit the revenue collector on his lands, which was why the curiales and peasants were driven to desperation in the first place, why they saw his estate as a place of refuge, and one of the main reasons why the revenue base was shrinking.
How could the Senatorial estate become a place of refuge, both from the government and from marauders? The Senators had private forces more than equal to the locally hired bucelarii, so they could prevent collectors from coming on to their lands. Some of their estates were as extensive as small kingdoms. Unfortunately, given the times, their private armies were usually not capable of defending them from barbarian invaders.
In any case, the main levy, the annona, was only collected from the humiliores, i.e. people who had did not have honorable status (were not honestiores). That's still dramatically different, in form, from our current system, but the effect of various "reforms" of our system have made it not as dissimilar as you would think.
The Senators did pay the follis, as previously mentioned. No peasant would have been able to pay it, but for the Senators its cost was insignificant. They paid the levy in gold, and it was even mildly progressive, a crude income tax. The wealthiest Senators paid a full pound of gold, the least wealthy only a quarter pound; they paid it every five years, and at the accession of an Emperor. The highest levy was therefore equivalent in contemporary value of approximately $7,500, the lowest payment about $1,875. This would have been impossible for a peasant or middle class curial to pay, but it was not very much for a Senator, considering that they earned several thousand pounds of gold in a year (the equivalent of $10-15 million a year, or $50 to $75 million in the five years usually covered by the follis payment).
The quarter pound of gold was the minimum cost to remain a member of the class, and retain all its privileges. But these privileges were considerable, since Senators needed to establish their status in order to hold the highest offices in the land, like the praetor-ship, the vicariate, and highest of all, the office of consul, all offices with high salaries--and many perks, of course.
Senatorial status made them eligible, but their incomes made it possible for them to hold these offices, since office and promotion both cost money, in terms of the initial outlay--the purchase price--and the obligatory games that had to be financed by them when they gained their new appointments.
Honors were important to members of the Senatorial class, but high government office, as I pointed out in the section on the Rich, was also highly remunerative, not only in terms of the high salaries paid, but also because it enabled them to take advantage of any opportunities connected with government. In fact, according to Emperor Majorian, Senators also used their high offices to collect revenues for their own enrichment.
The Senators' attitude towards taxes is paralleled by American anti-tax rhetoric, such as the slogan, "taxation is theft," so it bears pointing out: government levies are the only reliable way for societies to pay for collective goods and services, at minimum the roads, ports, security and military needed for its survival. Maybe that's one of the lessons of the hurricanes Katrina and Rita along the Gulf Coast, the terrible devastation, some of it avoidable, and the tremendous costs of reconstruction. If a society's elite doesn't pay government levies, and if the distribution of wealth leaves little in the hands of anyone else, then the state can't even afford to do its most essential job: protect its citizens. Then everyone loses, even the wealthy.
As a result of the radical decline in revenues and as a response to the desperate need to recruit more soldiers, the Empire attempted, in 444, to create a new Senatorial tax, graduated by Senatorial rank, in order to maintain the army. The highest ranking illustres were expected to contribute the money needed to maintain three soldiers at an annual cost of 90 gold solidi, while the other two ranks were expected respectively to support one soldier (at 30 gold solidi) and one-third of a soldier (10 gold solidi). This was about as radical a move as the government could make, and the remark by Emperor Majorian in 455 that the Senators removed to their estates and avoided government levies probably applied to this new levy as well as to the annona.
There was one other levy adopted the same year (444), a sales tax of 1/24, the seller and buyer each paying half. Bury remarks that "the government would have done better if it had forced the rich senators of Italy to contribute substantial sums, as they could well have afforded to…."
In our contemporary era, our main tax is on personal income. In form, it is very different from all but the minor Roman fees, above, which is why radical conservatives have been attacking it for decades, arguing that it should be abolished in favor of a consumption levy. From the New Deal until the 1980's, the income tax was relatively progressive, with the highest brackets in the Eisenhower era paying as much as 91% of the income they earned above the cutoff, which was several hundred thousand dollars, while the lowest brackets paid 20%.
For income tax illiterates (most of us?), I should underline that the high income earner only paid 91% of his earnings above the cut-off, and only a portion of that money was taxable; that's why accountants have steady business. He kept higher proportions of income below the top bracket cut-off, and he made sure that a good portion of his income above it was not taxable.
High income earners did have a great incentive to find ways to shelter their incomes in this period, the result of which was, for example, not only municipal bonds, but the many "tax-loss" farms I saw in the Hudson valley in that period; people also parked cash in places like Switzerland and the Cayman Islands, or found other kinds of more sophisticated tax shelters. And they donated to charity, to reduce their income below a bracket cut-off. However, our rate of investment in the 1950's was not low compared to the contemporary period, and the savings rate was considerably higher than the near zero rate it is now, which could lead you to conclude that the high tax rates really did not preclude investment.
I'm not saying high rates encourage investment; I'm sure they don’t, at least not directly. Indirectly, however, they may, by increasing investment opportunities and reducing investment risk--the vast majority of people had more after-tax income in the 1950's to spend on new goods.
The income levy is no longer so progressive. Over the years the brackets have been flattened and their number reduced. In 1964, rates were reduced to 70% for the top bracket, down to 14% at the bottom. This first major tax cut, called "the Kennedy tax cut," was effective in stimulating the late 1960's boom, probably because it was simply aimed at increasing the amount of money available to spend, most of it in additional consumption; it was a "demand-side" tax cut; it did not favor unearned income, or investment, and despite the drop in the top rate, it did not favor high income earners.
The most dramatic change in our revenue structure came with the "Reagan revolution," the reform of 1981, which was billed as a "tax simplification." It was really the first attempt to "reform" the revenue system along the lines called for in conservative economic doctrine. It didn't really simplify much for long, but it reduced the number of brackets in the schedule, and the highest bracket was reduced to 35%, half what it had been before; the lowest bracket rate went down too, to 10% (not half of the 15% previous rate). The result was not the economic gains expected, and since revenues overall were cut dramatically, while government budgets were not, deficits soared.
However, nothing daunted, the economists were sure they were on the right track so they persuaded Reagan to cut taxes again in 1986, this time with more "supply side" features, meaning it was even more "business friendly." The "reformers" also reduced the top rate to 28%. Growth and productivity were still disappointing. Despite increases in the top rate by both George H. W. Bush (back to 31%) and by Clinton (up to 39.6%), the economy grew in the 1990's; under Clinton it even boomed.
It is possible that tax policy didn't have much to do with the inflation/stagflation of the 1970's, the recessions of 1981, and 1991, or that they had anything to do with the boom in the later 90's. It's likely that the price of oil was much more important. In other words, revenue policy as an engine for growth is probably wildly overrated. When it works at all, as it did in 1964, it works simply by pumping up demand, especially of consumers, ordinary people.
When people, ordinary people, have money, then there will be enough demand for investors to invest; investors will be able to make more money. The capital will be there in a wealthy country like ours, if there is demand. If there is no room for increased demand, wealth-holders invest in other things, such as stocks and bonds, collectibles, race horses, or even, like the Roman Senators of old, some will invest in gold.
They will make these kinds of "investments" (not really considered productive investment) if putting money into new products or services doesn't look promising. Gold is not a growth-oriented investment, but if there is no prospect for more customers, more buyers, because their credit cards are maxed to the hilt, or if the world comes to an end…. If the world price of gold keeps on going up, then you will know that the investor class doesn't think there are safe outlets for real investment.
All these "non-productive investments," where the wealthy park their money, are very similar to what Roman Senators did when they put their earnings in gold and land. These current "investments" probably reduce potential demand as well. This is especially true if you compare the effect on demand of a stock market rise with that of an increase in wages, or in government expenditures.
Why is this? Because almost all of an increase in wages--especially of lower wage workers--or expenditures by government, go directly into the consumption of goods and services, whereas much smaller portions of the profits from finance will find their way to consumption; the wealthy can only consume so much. They can invest, of course, but the point is, they will only invest in productive assets if there is demand for goods and services that they can sell. Also, even if there is some demand, much of the investment generated can be made outside the country (which produces few jobs in the US, and may actually eliminate jobs here).
As William Grieder pointed out recently, however, investment in financial goods has been promoted by former Fed chairman, Alan Greenspan, above investment in producing things. Tax policy has followed suit, and as Grieder has noted, the Fed chairman has come out in favor of even more supply-side reforms, i.e. levies that favor investors even more. Wealth has to be protected (remember that the selfish class has to protect its wealth), and therefore financial "investment" must be bolstered to continue to produce returns, even when consumption is stagnant (because of low wages) and debt is rising.
When radical conservatives regained power with George W. Bush, they pushed through additional income tax cuts, because, they argued, Reagan's cuts had fueled Clinton's boom. Maybe they just wanted to keep more of their money. While the Laffer Curve had been out of fashion since the mid-1980's, the Bush administration brushed the dust off the model and proclaimed it's premise: cuts in levies would fuel so much growth the government would take in even more money than before, but meanwhile, Clinton's surplus had to be spent. The cuts that would do this were ones favoring "business" and "investors," ensuring that the wealthy got their money back, the money they had lost from those too high top rates pushed through by Clinton.
Note that when Clinton was President, the conservative Congress demanded "fiscal sanity," and the result was balanced budgets, preventing Clinton from initiating any costly social programs. When Bush II became President that same Republican Congress began talking about tax cuts; it was damned if it was going to worry about a balanced budget, now! And they added prescription drug benefits to Medicare, not caring about the cost, apparently. And after all, the money would come out of the payroll levy. Probably, they hoped that the pharmaceutical companies would make great profits, payback for their very generous campaign donations, mostly to Republicans. It is possible, maybe even likely, that the more Machiavellian among the Republican leadership added the drug benefits with the hope that Medicare would be quickly bankrupted, and therefore would have to be dismantled.
It seems they have the same plan for Social Security. As I pointed out in The Logic of the Selfish Class , Social Security is emblematic of the New Deal and the political choices of the 1930's. It embodies the idea that society as a whole has a responsibility to its individual members and that government is the institution that carries out this idea. Republicans and conservatives act as if we should completely write off the whole New Deal and everything we learned from it.
Nevertheless, Social Security, especially as reformed in the 1980's, has been very useful even to the second Bush administration; its payroll revenue was supposed to be put aside in a "locked box," but without the funds owed to Social Security (the government owes it to itself, but the billions do keep on coming in) it would have been that much harder to borrow the money from the Chinese. The Chinese and Japanese central banks have kept our economy running.
It's interesting, actually, that the Republicans would like to get rid of Social Security. They do, although most are not honest enough to say so. Their general approach however, was offered rather guilelessly by the Young Republicans in front of Senator Rick Santorum's office. They chanted "Hey, hey, ho, ho, Social Security has got to go!"
It's interesting because the structure of the payroll tax is actually regressive at the higher end, not flat: only a fixed percent of wage income is taxed away, up to the 2005 cut-off point at $90,000. Wages above that are not taxed, which means that the percentage of wages the wealthier pay into the payroll tax declines as their wage income rises from the flat 12.4% (including the employer contribution) at every income level up to the cut-off, to half that, or 6.2% for salaries of $180,000 and about 2% on a salary of one million dollars. A wage income of several million dollars? Many CEO's are paid salaries of multiples of that. In addition, only wages and salaries are subject to the levy, and this is true of Medicare, too, even though Medicare has no cap. Therefore, if your income comes largely from dividends, capital gains or interest, the kind of income only the rich tend to live on, your contribution to Social Security and Medicare is even smaller; it may be zero.
For more and more ordinary people the payroll tax is the largest levy they pay to the Federal government. This didn't use to be the case, but this demonstrates one way in which the tax burden is being transferred, year by year. The percentage taken by the payroll tax was raised in the bi-partisan reform of the mid 1980's to better finance Social Security, but an unintended consequence was that the resulting trust fund accumulations ended up subsidizing the rest of the government. Therefore, a modified flat tax, highly regressive at the upper end, enables the government to cut income taxes, especially on the wealthy, i.e. it borrows money from the trust fund to partly finance the resulting deficits caused by the "flattening" of the progressive income tax.
The income tax won't be progressive for long, at least not if the selfish class has its way. Either "reform" will take the form of a modified flat tax, or the radical conservatives will try to abolish it in favor of a national sales levy. After the massive tax cuts of George W. Bush in 2001, which converted government surpluses "extending as far as the eye could see" into a return to the huge deficits of the 1980's, we had a "jobless recovery." Of course 9/11 and the new high costs for security didn't help the economy. But since Bush's first cuts acted as a stimulus that seemed to be only profit-deep, and the main result was that the government and the country was becoming indebted to the rest of the world--principally China and Japan--what did the government offer the second time around, and what did the Republican Congress enthusiastically welcome? More revenue cuts, cuts that make permanent the shift in income levies away from investors and towards workers. The reductions value money (or its owners) more, and workers less. Wages don't get the breaks given to capital gains, dividends and interest payments. And meanwhile we are fighting an expensive war. In addition to fighting a war, we now we need massive rebuilding and services, because of the disaster of the hurricanes, but not to worry, we'll just borrow more from the Chinese. What we won't do (no one will even suggest it) is to raise taxes on the wealthy, take back some of those cuts, or even slap a surcharge on windfall profits, like the ones the oil companies are gouging out of the rest of us.
After the hurricane, President Bush insisted that his legislative agenda, including the abolition of the estate tax, more breaks for stock market income and deep cuts in social programs like Medicaid, food stamps and student loan programs were still on track. The Senate and House leadership began to back away from this position, once the full scope of the disaster became apparent, but the President's statement does tell you something: it's much more important, he and his followers seemed to say, that "investors" keep their money, so they can create jobs, even if the jobs aren't created (note that jobless "recovery"), than it is to rebuild New Orleans' levees and help the destitute there. I can just hear them saying (behind closed doors): "Deficits are a good thing, because they force the government to cut its services." It was thinking like that which probably inspired the drastic cuts that prevented rebuilding the levees in New Orleans in the first place.
Cuts, cuts, cuts. Isn't that what contemporary conservatives have been preaching for years? They aren't quite as blatant as the Romans of the fifth century whose wealthy Senators controlled the revenue system to their advantage and bankrupted the government. But hasn't Grover Norquist and others talked about "starving the beast," meaning the federal government? One result of "starving the beast" was visible to all: the New Orleans disaster, caused in part by the large cuts in funding for rebuilding the levees protecting the city, and in the cuts to FEMA, which crippled its effectiveness to respond to the disaster. Another large part was surely incompetence at the highest levels, the result of cronyism, and deregulation, but we'll discuss that later. The point here is that just as the Senators in the fifth century "starved the beast," with the result that Roman roads, ports and harbors became unusable, our contemporary selfish class has already shown it intends to do likewise.
There is also a corporate income tax. In 2003, the last year for which there is data, it raised only 7.4% of federal revenues, the lowest portion since 1934 (except for the severe recession year of 1983). "Corporate taxes averaged 2% of GDP in the 1990s," but about 10% in 1950, or put another way, corporate income levy accounted for 28% of federal revenue in the 1950's, but now accounts for less than 10%. Quite a shift!
An aside here: The shift in levies away from investors and away from corporations and towards workers and work has been justified by a lot of economic theory--much of it paid for by large corporations and donors, who benefit, of course, since their tax burdens have gone down, while those of workers have risen. I'll try to put it into easily understood terms. Generally, the idea is that in order to unleash the "power of the market," incentives for investment need to be increased. Since tax cuts in 1964 appeared to fuel a boom, and since conservatives are ideologically allergic to government programs, they fastened on targeted cuts in levies as a solution that would not only reduce the size of government, but would increase their returns on investments. So they reduced "marginal" rates on capital gains. Under W, the government reduced or eliminated levies on dividends as well, even though dividends are paid by mature corporations to stockholders who have simply "invested" in stock, not in new production.
The argument for this kind of policy is all very logical-seeming, as much economic discussion appears to be, but it may be no more rooted in reality than Plato's Idea, or the Muppets; it hasn't been shown to work. This so-called "supply-side" policy is supposed to stimulate investment, growth and jobs; what it stimulates is the accumulation of wealth among the already wealthy and profits for corporations. At the same time, the burden on the poor and middle class has been increased. It's a little like three card Monte; you look for the card that moved, but it's really the card you didn't see: you get a few dollars in a tax cut--and end up paying more in other ways. Even though there are cuts, work is taxed more heavily than what is euphemistically called "unearned" income (capital gains, etc.), so that the cuts give a lot of money back to the wealthy, and only token amounts to everyone else. Still, say the gullible, "I got something back."
Since the effect of the above "reforms" (and of a transfer in burdens to be discussed below) has been to redistribute income upward, there may well be a negative effect on investment that has not been recognized by mainstream economists. Since fewer people have adequate income, the great American Consumption Machine isn't getting the money it needs, even with the long-suffering average Joe and Jill taking on ever-increasing debts. The result has to be that the risk to investors making productive investments has been increased by these reforms. There just aren't the customers out there; if you can't produce something that is cheaper and better than something people already buy, then the risk of your investment failing has to be pretty high. So, what to do? Abolish levies on capital gains? No. Raise all of them, except, perhaps, direct investment in productive assets in this country. And on high incomes of all kinds.
The best strategy for increasing investment is to put money into the hands of those who have too little of it, not into the hands of those who have too much.
Other kinds of government levies, some of them invisible to the poor, have had to be raised to make up part of the losses in revenue caused by the cuts, transferring the costs of governments at all levels to taxation that is not progressive at all. In fact, most of these other extractions take more from the poor and middle class proportionally and in total amounts; they are regressive taxes.
And then, since not all of the revenue lost in the cut in levies is recouped by the government, because it really can't cut its programs too much more, there is the cost of the deficit, itself. First, the government borrows from the Social Security trust fund. Sometime in the future, revenues will have to be raised to pay out to retirees, or the system will be allowed to go bankrupt--more costs transferred, this time to the poor elderly starving on the streets like the Roman proletariat when they lost their dole. And then, because the trust fund monies are not enough, the Government borrows from the world; first from those who have money, and then from the banks of China and Japan. In both cases, the interest paid on these loans will come from those who are taxed for their work, and paid to those (bondholders) who pay no tax on it, usually the wealthy. Somewhere down the line, also, international banks will stop lending us money unless we repay it at higher and higher rates of interest, which also means there will have to be higher taxes in the future--unless the "full faith of the United States Government" is dispensed with, and Uncle Sam declares bankruptcy. At that point, goodbye world economy.
And if both personal income and corporate income taxes have been cut, where does the money come from? Actually, there are a number of answers. First, to the extent that the Federal government continues to pay for programs, it runs large deficits when it cuts revenues, as long as it continues to run the same programs. Even the IRS, in its Worksheet Solutions Tax Reform Acts of 1969 and 1986 states as a benefit for low income people that cuts in revenue reduce government programs serving them. Since many of these programs are still being financed by states, there has obviously been a transfer of costs away from the Federal Government, which means that the burden has also been transferred.
So, how do states raise money? Many have no income tax, first of all, and those that do have followed the federal government in cutting their rates rather radically. As a consequence, in New York State for example, counties have been called upon to contribute more and more to Medicaid, the costs of which continue to rise in part because of the increase in the numbers of working poor.
Why are there all these poor people if we've reformed our tax system "to create jobs?"
Where do counties and school districts and towns get the money to finance the higher costs not covered by the Federal Government or the state? From property and sales taxes; both are highly regressive, except, possibly within categories. A mansion is assessed at a higher value, and pays a higher tax than a hovel, but homeowners gain a discount on their income tax, on the basis of the property levies they pay, and on their mortgage interest payments. Furthermore, rental properties tend to be assessed at higher rates than private homes, and renters pay into those revenues when they pay their rent without getting any discount, although most don't realize it. They don't see it. Renters, as a group, are less well off than homeowners, but they end up paying property tax at a higher rate.
In addition, business establishments of all kinds also pay property taxes, and those rates tend to be considerably higher than residential rates. That's fair, someone might say; after all, businesses have the money. The problem is that this is before-tax money; it is an expense that is passed on to customers. In other words, ultimately, the property levy on business becomes a consumption tax, much like a sales tax.
Consumption levies generally, and sales levies particularly, hit the poor much more heavily than the wealthy, unless the levy is specific to something like fur coats, or yachts. Let's take some hypothetical examples. If multimillionaire William Albright III works very hard at spending, buying a yacht, a new Acura SUV, fur coats and jewelry for his wife, tuition at private school for his children, seats at the Metropolitan Opera, and so on, perhaps he manages to spend $400,000 on consumption. But he "earns" (his investments earn) over a million dollars in a year. So, less than 40% of his income is subject to sales levies, and he may have avoided them, anyway, on some of his high ticket items. If the combined state and local sales levy is 5%, his maximum effective rate will be only 2%.
Now, take working poor Willy Wonka. He earns less than enough to get by. He may earn $10,000, but with his wife and kids, his expenses are closer to $12,000, i.e. he is spending about 120% of his income. Yes, he goes into debt. Debt among lower-income workers is increasing at an alarming rate. Most of his expenses could be subject to sales levies, although let's say that his rent is not, so that $6,000 of his expenditures do not pay sales levy. That leaves $6,000. His effective tax rate, even on the half of his income left after rent, is 3%. Considering that Willy Wonka can barely get by as it is, while William Albright III has a hard time even spending what he spends, and has 60% of his income still left over, doesn't this look just a little bit unfair? And yet sales and business property taxes are becoming larger and larger portions of the revenue base.
There are also other sources of revenue, like the gas surcharge, "sin taxes" on alcohol and tobacco and gambling, the proceeds from state lotteries and gambling, and fees for government services. These also come more out of the pockets of the poor and middle class, or account for a much larger proportion of their incomes than for those of the wealthy: in other words they are regressive levies no matter how you package them.
The bottom 80% of income earners, with an average income of about $30,600, pay just under 25% of their incomes in total taxes, i.e. income, property and sales taxes at all levels, while the top one percent of income earners, with average incomes of $978,000, pay only a slightly higher percentage: 32.8% of their incomes at all levels. Effectively, in other words, we already have a flat revenue system, even without counting the elimination of the estate tax. If we moved towards a consumption levy, or a "hybrid," as proposed by Fed Chairman Alan Greenspan, in which we would maintain the flattened income levy, because of political constraints, and add a consumption levy, the result would clearly be to tilt the levy burden onto the poor and away from the wealthy.
To summarize: more and more of government revenues come from the poor and middle class, less and less comes from the corporate elite. In other words, our revenue system is beginning, in its effects, to look more like the one that prevailed in the late Roman Empire of the fifth century. We haven't gotten there yet, but we will, if the selfish class gets their way.
And what do we get for this flat tax system? At very least, the present system does not address the growing inequality of incomes (and ultimately of power) that we see in this country, in which the distribution of income, (wealth is even more unequal), is the most inequitable of any industrialized country, and getting more so.
This inequality has major costs. Just as in the late 1920's, before the crash of '29, consumption of the well-to-do is too small a proportion of overall consumption. While it may be growing, fueling a high-end housing boom, for example, it cannot carry the whole economy, only the purchasing power of the majority of the people can do that, and their purchasing power is falling. Indebtedness can only provide the money for people to buy things for so long; it is not a formula for long-term growth if people have to go into debt simply to maintain their current level of consumption.
What is needed is an increase in income levies at the higher end of incomes (restoring some of its progressivity) and, at very least, taxing financial gains at no lower rates than wages. If we still feel the need for incentives to create jobs, then the incentives would have to be very narrowly focused and enforced: create jobs and the investment proceeds would win a tax discount. Jobs lost or "downsized" should face a surcharge. These reforms would be accompanied by other cuts: cuts in all other kinds of levies, of property and sales, especially. That could be done if the hike in income taxes were to go to fund school districts and local governments and if they were accompanied by more progressive income taxes at the state levels. The Federal money to state and local jurisdictions would be contingent on raising state income taxes and cutting local levies, unless they were also based upon income.
I know that no one wants to talk about raising taxes, but in fact we've faced continuous increases for all the years "conservatives" have campaigned for tax cuts: there have been increases in sales and property taxes that are much more burdensome than income levies, because they are levied on those least able to pay. I know, also, that conservative economists rail against systems that redistribute income downward. They argue that "incentives" need to be created for investors. But again, the greatest incentive for an investor is the demand for a good or service. If the majority of people are too poor, or too indebted to buy a new product or service, then all the "incentives" in the world aren't going to make the investment profitable.
What do the wealthy do with "their money" if the "incentives" leave them with more money, and yet investment opportunities are not promising? Why, they invest the extra in the equivalent of the fifth century's gold: collectibles, financial instruments, gold, houses, whatever, but demand doesn't increase much from these purchases, and is reduced in the future compared to what it would be if it were other people's incomes; we will all be poorer as a result.
In order to have the kind of reform I've outlined, again, as I noted at the ends of the previous sections, change of this kind will only come if there are major political changes. They can come only if the selfish class loses its power. But changes in tax policy alone will make little impact, if other changes are not adopted, the kinds of changes outlined in the previous and succeeding chapters.
Appendix:
Let's look at the Economics arguments for these kinds of tax cuts. Economists theorized that economic behavior was particularly affected by marginal tax rates. A marginal rate is the additional portion of a dollar that would be extracted for each increase in the tax rate. If one additional dollar of income moved you into the next bracket, from 15% to 20%, you would retain only 80 cents, instead of 85 cents of that additional dollar. If this were a levy on the returns to investment, would the reduced returns persuade the investor not to invest? If it was from a hike in wages, would it really persuade the worker not to work more? After all, they will still make more, in both cases, just not quite as much more.
The investor would make more, since he would still retain a large part of the additional income, just not quite as much as he would have if the rate were lower; it should not determine whether he makes a profit, or sustains a loss, since the tax is only a percentage of the profit, not all of it. The same is true of wages; the worker bumped up into a higher bracket still keeps the same proportion of income below the cutoff, and still gains more above the cutoff than he would if he refused the raise, only slightly less than if the bracket rate had moved with him. Are people really so aware of the marginal rate? History seems to say that they are not; even when the top marginal rates were above 90% in the 1950's, investment was robust and workers worked as many hours as they were offered. After all, even if 91% of your income above, say $200,000, is taxed away, you still make more money than if you didn't have that income--nine percent more.
The argument for reducing levies on capital gains follows the same logic: if you reduce the marginal rate, investment is supposed to rise, because after tax income will rise; you are thereby increasing incentives for investment--any investment, even in collectibles or foreign factories which replace American jobs. But remember, this is after-tax income, so it does not affect pre-tax returns. Investors make decisions on the basis of whether they are going to make money; if their after-tax income is reduced by a higher rate, they might shelter profits by plowing them back into the company. Is that a bad thing? If they are going to make money, they will make it even if marginal rates are higher.
The only way that the marginal rate will affect investors' decisions to invest is their calculation of risk. If they figure that their after-tax return is not great enough to justify the risk, they won't invest. It is possible that higher marginal rates on capital gains will have an affect on investors in the sense that it will make them somewhat more risk-averse, but the loss of revenue from capital gains will have to be made up for in taxes on workers wages--this has happened--which in turn leads to lowered demand for goods and services. But lowered demand increases the risk to investors even further.
To put it another way, if you cut levies on capital gains, and maintain government functions, then ultimately you will have to raise taxes on work, that is on wages. Investment in production depends on people buying more, but if their relative burden rises, workers, or the poor and middle class, are going to buy less. Then who is going to buy the additional goods and services? The Walmart answer is to provide more lower-priced goods, but since Walmart employs relatively few people at marginal wages, and exports manufacturing jobs to low-wage places like China, the result is: even fewer Americans will have good jobs, which will reduce potential consumption even further, and therefore reduce investment opportunities, or increase investment risk. Walmart's approach is a beggar thy neighbor strategy, in which the poorer get more affordable goods at the cost of better jobs, while the corporation's owners earn billions. Is the answer, then, to cut rates on capital gains even more, or to cut government spending where that is politically feasible? The disaster of New Orleans is largely the result of politically feasible program cuts; poor people are routinely ignored, because they have no political clout--until, perhaps, they appear on nightly TV news.
Municipal bonds, or "munies," were the answer to high marginal tax rates for wealthy people: dividends were tax free, even avoiding state income levies if they were bonds within your state of residence. It wasn't a bad answer. Wealthy people could put money into these bonds to avoid levies on at least some of their income. Investors were encouraged by the absence of taxes on bond dividends to invest in bonds floated for building bridges, highways and water systems; municipalities were able to borrow money at lower rates (typically munies paid lower rates of interest), and therefore the local governments could build infrastructure at lower costs. These reduced costs kept local levies lower than they would have been if the local governments had to float bonds on the regular market. The rationale was that these municipal projects were for the public good, not for private profit.
However, the same argument really doesn't work for dividends on all stocks and bonds. First of all, they are not for the public's good, unless you accept the idea that anyone's private enrichment benefits everyone. Second, taxes on dividends may affect financial speculation, but they rarely affect real investment. This is because mature corporations pay dividends to stockholders, not venture capitalists, not new corporations, and recipients of dividends haven't invested in new capital, but in financial instruments (stocks) that have been on the market for years.
For more on how the selfish class has operated in the past, and in the present see The Selfish Class
