Home > taxes, upward income redistribution > Expiration of Bush tax cuts for the 1 percent are a step forward, but not enough

Expiration of Bush tax cuts for the 1 percent are a step forward, but not enough

from Mark Weisbrot

President Obama is currently confronting mostly Republican opponents over whether to extend the Bush tax cuts to the richest 1 percent of taxpayers. Between 1979 and 2007, the richest 1 percent received three-fifths of all the income gains in the country. Most of this went to the richest 10th of that 1 percent, people with an average income of $5.6 million (including capital gains).

So this is a no-brainer in terms of fairness: Allowing the Bush tax cuts to expire for the richest 1 percent of Americans would reverse some of the vast upward redistribution of income that has taken place since the late 1970s. However a couple of caveats are in order. First, restoring these taxes for the rich and the super-rich would not by itself do anything for the weak economy, nor for the 23 million people who are unemployed, involuntarily working part time, or have given up looking for work. In fact, by itself it would have a negative impact on the economy and employment in the immediate future if the federal government didn’t use the extra revenue to increase spending.

However, in the current political climate there is much political pressure to reduce the budget deficit, especially over the next few years. So taking back these tax cuts could help us avoid other budget cuts that will hurt people. Or, alternatively, it could open more space for the federal government to engage in stimulus spending – which is what we need to move closer to full employment.

Of course, the federal government should be engaged in stimulus spending right now, but it is being held back by superstitious beliefs about the public debt. In reality, we don’t have a federal debt problem: Net interest payments on the federal debt are less than 1.4 percent of our national income, which is about as low as it has been for the past 65 years. But that is not well known, and right-wing forces have been aggressive and well-financed in their attacks on federal spending. So if revenue is going to be raised, it should come from the people who have vastly increased their too-big share of the economic pie in recent decades.

The other caveat is that we can’t reverse most of the upward redistribution of income through the tax code. As my colleague Dean Baker has persuasively argued, most of this redistribution has taken place through the rewriting of rules so that markets deliver more to the rich and less to everyone else. A stellar example of this is the current strike by Caterpillar workers in Joliet, Illinois. The big manufacturer of earth-moving equipment had record profits of $4.5 billion last year, and $1.6 billion in the first quarter of this year. Yet it is trying to force its workers to freeze their already reduced wages, and pensions for six years and pay more for their health insurance. The company has hired replacement workers and promises to shove these terms down its workers’ throats.

This kind of greed-based assault on ordinary workers would not have happened in the pre-Reagan era, before changes in labor law and practices made it much easier. It is these kinds of institutional changes that will have to be reversed if we are ever going to return to a society in which the majority of people can aspire to a middle-class existence. Reforms such as the Employee Free Choice Act, which would restore the right of workers to join a union, will have to become law and be enforced. Workers – not just in manufacturing but throughout the economy – will have to have some bargaining power. Otherwise, the ugly and increasing concentration of income, wealth, power and political corruption that has transformed this nation over the past three decades will continue.

  1. July 30, 2012 at 11:51 am

    It is difficult to find impirical evidence one way or the other as to whether restoring these higher taxes on the super-rich will help the economy. Too many other variables are involved whenever rates change to draw any conclusions from the evidence. My colleage has been working on a substitute: comparing the top tax rates and the unemployment rates from several different countries, looking for a trend. He has found a small negative correlation – higher tax rates associated with lowr unemployment numbers. This is weak, and he is looking into isolating other known variables. But he cannot find anything that would suggest a positive correlation.

    If you buy into the idea that the rich only need incentives to create jobs (incentives other than demand, which is what conservatives are arguing), then actually, there is a reason for higher top rates to improve the economy by themselves. With higher rates, there is more of an incentive for investing. To the extent that this “investing” is the same thing as what economists call physical investments, then this is definitely an incentive in the right direction. Of course, as long as bigger incentives exist elsewhere, such as overseas accounts or businesses, and other types of loopholes, this won’t work.

    If you believe, on the other hand, that the high unemloyment rate is strictly a matter of low aggregate demand, then this alone won’t help the economy any in the short run. Other than create revenue for the government. There could be long run benefits, though. If this change is considered to be permanent, then it WILL affect other decisions down the road. You mentioned the fairness issue: in the future, the revenue will have to balance out somehow; if this creates a situation where the super-rich pays a larger share, in the long run it will mean that the middle class will pay a smaller share. This change will create more aggregate demand based on different MPCs.

    I do understand that other arguments are being made. Such as: the government will have an added incentive to simply spend more. That the idea of “starving the beast” won’t be solved with higher revenue. I don’t belong to the party that is making those kinds of arguments, though.

  2. Alice
    July 31, 2012 at 3:58 am

    I must take a minute here to strongly disagree
    With the idea that allowing these tax cuts for the wealthy to expire ” will not do anything for unemployment and will not do anything to stimulate the economy ”

    This is so incorrect i dont know where to begin. The whole point is to swing back the misappropriations made by the wealthy from the middle and the poor over the past 40 years mostly since Reagan started giving the wealthy hefty tax cuts and making the rest stump up for the resulting deficits and costs of OUR public services.

    The redress needs to happen. The US needs another Tea Party, not against its own government, but against its own wealthy and their corporations who have attempted to fool you all.

    The truth is, ordinary americans, need a greater share of the countries wealth and the wealthy need less because the middle and poor do spend more. They dont hide their money in offshore tax havens whilst yelling for more tax cuts and fewer public services that help everyone else. They dont use Rupert Murdoch to contort the media into a propaganda vehicle for the policies that support the few against the vast many.

    No it doesnt go nearly far enough. Taxes must be raised on the rich so that they contribute instead of forcing all others into servile wage slavery, poverty and debt.

    It is up to the American people to rid itself of liars and restore a true democracy, destroy the corporatocracy that is governing it, and undo the past 40 years of economic damage.

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