Wednesday, March 23, 2011

Not another Tax Reform Act

The Wall Street Journal reports that there is much “nostalgia” in Washington for the Tax Reform Act of 1986. The 1986 bill wiped out a lot of tax breaks and lowered tax rates under the guise of eliminating forever the ability of the rich to pay little tax or as often is the case, no tax at all.

The politicians in both capitalist parties are looking back at the 1986 Act in an effort to overhaul the tax code yet again. Treasury Secretary and former Goldman Sachs associate Timothy Geitner (remember he was the guy that forgot to pay $40,000 in taxes) wants to eliminate a whole bunch of tax breaks and reduce the top rate to 25%. Sounds good, close the loopholes so the rich can’t avoid taxes and lower rates generally.  But we have been told this before.

We are hearing the usual arguments from the capitalist politicians that taxes in the US are too high and this stifles job creation. In other words, the poor capitalist is so overburdened with contributions to the public coffers that they simply can’t buy Labor power; and they care about workers so much, that’s why they hire us. As the Journal points out, tax breaks tend to favor the wealthy and those better organized to lobby the state for their interests while lower rates benefit the general public interest. But this is not always how it works. The rich have two political parties and we have no political representation so the people that write the tax laws write them with their own interests in mind.

The 1986 Act was sold to us as the legislation that would make sure everyone paid their fair share of taxes. John Kerry, the Senator from Massachusetts launched a passionate defense of the Act saying, “Ordinary citizens, those people without the use of high paid lawyers and fancy tax shelters ----have had to witness a parade of newspaper headlines heralding the ---hundreds of millionaires who paid no federal income taxes. This proposal will make that kind of unfairness a thing of the past”. (My added emphasis)*

Richard Gephardt, the Democrat from Missouri said at the time, “It makes me angry that 250 families earned over $1 million last year and paid no taxes….This bill makes sure that does not happen anymore.”

This is the standard line every time they want to use the tax code to enrich themselves. There are, as Donald Barlett and James Steele point out in their excellent book, America: Who Really Pays the Taxes, two tax codes, one for the rich and one for the rest of us. And the rich will benefit not only from lower rates as a swap for eliminating tax breaks, but will still have their politicians leave plenty of loopholes for them. and anyway, they have the money and access to lawyers and all sorts of other connections the rest of us don’t have to find these loopholes.

In 1954, the US Congress overhauled the IRS code introducing the “minimum tax” but by the mid 60’s the numbers were going up as rich people were still avoiding federal taxes and some were warning of a taxpayers revolt, so the Tax Reform Act of 1969 was introduced. “Million dollar incomes without tax liability will become a thing of the past” said Wilbur Mills, a Democrat from Arkansas who was the chairman of the House Ways and Means Committee that writes tax law. Nixon signed the 1969 bill promising US workers and the middle class that everyone now would pay their fair share of taxes. “The fairer share” as Barlett and Steele point out, “turned out to be more of the same---nothing.” Well, not exactly nothing, the law that would guarantee the rich paid their fair share led 5 years later to the number of individuals and families with income over $200,000 increasing by 57% from 1966.

No matter. Congress had an idea, the Tax Reform Act of 1976. The 1969 Act didn’t end rich people not paying taxes so the 1976 law would definitely put a stop to it. Chris Dodd was emphatic that the 1976 Act would ensure that “…..wealthy individuals will not be able to use tax shelters to get out of paying income taxes entirely." Gerald Ford signed it and promised: “This bill raises the minimum tax paid by high income persons and eliminates or restricts many tax shelters” and that it will “ensure that each taxpayer bears his or her fair share of the overall tax burden.”

So far so good. But wait! “The numbers keep going the wrong way” . By 1986, the number of people not paying “one penny” in federal income tax climbs again, up 170% from 1974 and 325% from 1969 at the time of the Tax Act to end all previous tax acts, the 1969 one.

So the politicians, some of them like Geitner and Bill Bradley who was involved in the 1986 Act, want to introduce another Tax Act that will eliminate tax breaks and lower rates. (Does it appear that they keep repeating themselves?) Their top ten tax breaks to eliminate include the following:

• Deduction of mortgage interest on owner-occupied homes
• Exclusion of employer contributions for health insurance
• Reduced tax rate on capital gains
• Deduction of state and local taxes
• Exclusion of retirement contributions and earnings
• Deductions for charitable contributions

The WSJ points out correctly that there will be some war if some of these breaks are eliminated and it is unlikely that the politicians will risk some of them although they have little choice from their point of view. They will find revenue from other sources and cut expenditures such as increasing the retirement age etc. Taxes will have to be raised in the form of a VAT like the Europeans have and perhaps they will add an energy tax.

But the thing for us to recognize is that the 1986 Act did the same as all the others no matter what they all said back then. By 1989, three years after the landmark Tax Act, the number of people earning over $200,000 that paid no taxes rose again, up 1,081% from 1986. Today  we have not only millionaires but billionaires and corporations paying little or no tax. The London Observer once pointed out that some $11 trillion dollars of individual private money, not corporations, was being stashed in offshore accounts to avoid taxes.**

So it’s pretty obvious that the politicians of the rich will not tax themselves. It is important to note, as Barlett and Steel do, that not only do these capitalist politicians fleece us in the tax code, the cost to the taxpayer of writing them is enormous, amounting to billions of dollars; it helps keep their bureaucracy afloat. There are two tax codes, one for them, one for us.

Some on the left would argue then that it is pointless to raise the demand to tax the rich as they won't do it. This is a mistake. In fact, “tax the rich” or “make the rich pay” is a demand that comes out of the movement as it struggles to find its feet.  It is a perfectly natural response from those entering active politics for the first time. The important thing for activists is to gauge the mood of a movement at any given time and support and/or raise demands that will take the movement forward, defending it against reformist demands that weaken it in one direction and ultra left demands that do in another. Demands are also organizing tools.

This does not alter the fact that the rich will always flee from high tax climates to low tax ones, from high wage areas to low wage, non-union communities with oppressive governments. GM is not in Mexico or China to raise wages. Nike is not in Vietnam to do so either.

In order to seriously tax or go after the rich we have to have our own mass political party, a party of all workers that can attract the middle class and small business. (Small business not being a tech company with 400 employees as the likes of the WSJ would see it). When the capitalists attempt to move production or plants, or flee with capital, we can, with our own party raise the issue of public ownership (nationalization) of either plant or capital. But most workers will learn these things only through the struggle for reforms.

Through these struggles and the capitalists’ response to them, we begin to draw conclusions about the limits of the capitalist economy and capitalism to meet our needs. The idea that we can’t tax our way to a fair and equitable society, that capitalism cannot be made “user friendly” and cannot be reformed in a serious way,  gains credibility, and the idea of collective ownership, management and control of society’s productive forces and production for need not profit becomes a much more viable option.

* The information here can be found in America: Who Really Pays the Taxes
** Super-rich hide trillions offshore: Observer, Sunday March 27, 2005


Martin MacKerel said...

My one quibble with this post and others like it is that there is no accounting for inflation. Saying that the number of people making $X went up by Y% over some period is not very informative unless we use inflation-adjusted numbers.

Today in the Bay Area, an annual income of $200,000 is two professional salaries. Obviously, such a family is not doing too badly, but they are still "working class" in the extended sense: they must exchange their time, their labour power, for money.

$200,000 in 1966 was a hell of a lot: the equivalent of $1.3M today. So someone making that in a year could retire right away: clearly not "working class" in any meaningful sense of the term. In all likelihood it was unearned income.

Source for conversion

Richard said...

I agree that inflation numbers have to be included when we are comparing economic statistics or talking about buying power or wage rates and other stuff. My intention with this piece though was more about the political process, and their manipulation of it.

MaggieP said...

One undeniable fact is that the corporations and the rich have decreased their taxes and increased ours. Their share of the national pie has increased and ours has decreased; the inequality gap has widened. That's what the tax reforms seem to accomplish.