"Populism Emerges From the Right - Reasons: The Tax Code and Spending"

Sydney M. Williams

Thought of the Day

“Populism Emerges From the Right – Reasons: The Tax Code and Spending”

December 28, 2010

Francis Fukuama (author of The End of History and The Last Man and currently a professor at John Hopkins), in the January-February 2011, issue of “The American Interest” magazine, addresses the apparent conundrum of why, after three decades of an ever-widening income and wealth gap, the populist movement has emerged from the Right – not the Left. In my opinion, the answer lies in taxes, spending, but also within the composition of the Democratic Party.

Robert Reich, Secretary of Labor in the Clinton administration, fulminates on his blog that the very essence of our democracy is at risk because of a growing plutocracy – a marriage of convenience between a concentration of wealth and obedient members of Congress. He writes: “We’re back to the late 19th Century when lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. The public never knew who was bribing whom.” He saves his most pejorative comments for Republicans – the Koch brothers, Fred Malek, Karl Rove and the U.S. Chamber of Commerce. Mr. Reich points out that the current tax bracket of 36% for the highest earners is the lowest in eighty years.

Professor William Domhoff, author of Who Rules America?, writes of the increase in the average CEO’s pay compared to the average worker. In 1980, the average CEO made 42 times the average worker. By 2000, according to the website of the AFL-CIO, that ratio increased to 525 times. The ratio then declined to 319 times by the end of President Bush’s second term. At the end of 2009 it stood at 263 times. (As an aside, the principal explanation for the surge in compensation was the decision in the Clinton administration – of which Mr. Reich was a part – to limit the tax deductibility of corporate pay to $1,000,000. The consequence of that decision was the ubiquitous and generous granting of options as compensation. The result was a multiple increase in executive pay. That trend has declined in the past ten years, though still remains high.

In terms of wealth, Professor Domhoff, in a piece entitled “Wealth, Income and Power”, writes of the concentration of wealth in relatively few hands – the top 1%, as of 2007, owned 34.6% of all privately held wealth. (He describes wealth as real estate, stocks, bonds and cash.) It is true that wealth concentration has meaningfully increased since 1976 when the ratio stood at 19.9%, but it has also declined from 38.1% in 1998. And, the ratio is lower today than it was in 1922.

Like Mr. Reich, Professor Fukuama suggests the existence of a plutocracy – by which he means “not just rule by the rich, but rule by and for the rich.” He may be right, but I question that he may be barking at the wrong tree. He writes: “Scandalous as it may sound to the ears of Republicans schooled in Reaganomics, one critical measure of the health of a modern democracy is its ability to legitimately extract taxes from its own elites.” All governments depend upon some form of tax system and fairness should be a critical and determining factor. However, the tax system should not impede economic growth, which remains the best way to increase tax revenues.

In 1980, according to Mark Robyn and Gerald Prante writing for the Tax Foundation, the top 1% of tax filers earned 8.46% of total Adjusted Gross Income and paid 19.05% of total income taxes, with the marginal tax rate at 70%. In 2008, the top 1% of tax filers earned 20.0% of total Adjusted Gross Income and paid 38.02% of total income taxes, with the marginal rate at 36%. The ratio of taxes paid versus income earned has declined, but not meaningfully, and certainly cannot be explained by the halving of the marginal rate.

Frustration and animosity toward taxes must lie elsewhere and I would suggest that one only has to look at the 16,845 pages that comprise the U.S. Tax Code. Should you be interested, all twenty volumes can be purchased from the U.S. Code of Federal Regulations for $974, including shipping. The Code is filled with deductions, exemptions and credits that only sophisticated accountants can decipher. Its very complexity benefits the wealthy. They’re the ones with high priced accountants. When Warren Buffett complains that he pays a lower tax rate than his secretary, perhaps he should lend her his accountant? The fact of the matter is that many of the very rich don’t care what the marginal rate is, as long as the complexity of the code works to their advantage. It is one explanation for the preponderance of Democrats on Wall Street and also, I would suggest, explains why the Dodd-Frank Bill continues and enhances the concept of banks too big to fail.

Not surprisingly, given Democratic strongholds on the two coasts, City-Data.com reports that of the 15 richest counties in the U.S. only Loving County in Texas is Republican. In fact, Greenwich, CT, a bastion of wealth and privilege, voted Democratic in the 2008 Presidential election. The myth that the rich are huddled within the Republican Party is just that, a myth. The Democratic Party today largely constitutes two totally different, but somewhat symbiotic segments –wealthy, coastal elites along with the poor and disenfranchised. The poor rely on the wealthy for means and the wealthy need the votes of the poor to maintain their status.

According to the Tax Foundation, of 139.6 million tax returns filed in 2008, 52 million got back every dollar the Federal Government had withheld and, in some cases, actually received refundable tax credits like the earned income tax credit. This suggests there are growing numbers of people who, apart from payroll taxes (Social Security and Medicare/Medicaid), pay no taxes – they have no skin in the game.

It is the vast middle classes who feel disenfranchised. The system, in their eyes, has been rigged in favor of the very wealthy and the very poor. It explains, at least in part, the conundrum to which Professor Fukuama alludes: why, in this time of growing income disparities, has populism emerged from the Right – not the Left? It is principally a revolt against excessive government spending – people look at Greece; California; Prichard, Alabama and see the future; they experience a tax system that favors the very wealthy and the very poor. The revolt also reflects a sense that moral standards have lapsed, in this world where communication and globalization require the necessity to adapt quickly. And it manifests the desires of the aspirational. There are millions, including thousands of immigrants, who do not want barriers making it more difficult to become one of the top one percent. That is their wish, and their frustration.

Bailouts for banks, saving the jobs of government workers and the creation of a national healthcare system were not what the middle class wanted in 2009. It is the opportunity to succeed. Following an election rout in November, the most hopeful sign from the administration was when on December 10th, the President told an NPR audience that one of his goals for 2011 will be too “simplify the tax code, lower the rates and broaden the base.” Amen! Let’s hope he means it.