Tag Archives: class warfare

Class War in the Tax Code

I know that taxes are a really boring subject, as is talking about billions and trillions of dollars as if any of us could understand such magnitudes. But a one-sided class war is being fought every day in the U.S. tax code, and getting even a glimpse of the amounts of money involved can change our sense of why taxes matter. If the government would stop redistributing income through the tax code and instead tax investors the way it does workers, homeowners, and consumers, many things that we can’t afford today would be easily affordable.

California, for example, doesn’t have enough money to pay home care workers (who are basically state employees) both minimum wage and overtime – the state is short some $350 million. Those workers average about $17,000 a year, with lots of overtime that is paid at straight wages. In Chicago there’s not enough money to have guidance counselors and social workers in the schools where they are most needed or librarians to staff most of the libraries. The Chicago Teachers Union estimates that it would cost about $300 million to remedy these and other deficiencies, but doing so would have a big impact on educational results. In order to save the Detroit Institute of Arts’ collection from being sold to get Detroit out of bankruptcy, city workers with $19,000 annual pensions had to give up about $900 each while the state of Michigan found $200 million for a one-time contribution to the city’s pension fund.

These amounts seem very large from an individual perspective. Even the smallest, $200 million, is more than 100 times what an average professional worker earns in a lifetime. The cumulative total of $850 million could fund the payrolls of six top teams in the National Football League. But in the world’s largest economy, whose national government now spends about $4 trillion a year, these hundreds of millions of dollars are the equivalent of nickels and dimes.

I have chosen these state and local situations at random, but thousands of state and local governments are similarly “taxed out” politically, if not economically. States and municipalities compete with each other to keep taxes low in order to attract businesses that, they hope, will create more jobs; few of them are in a position to initiate new taxes on investors. The federal government, on the other hand, has lots of room to run in taxing the top income earners and wealth holders.   Local governments tax property wealth, which is widely distributed among the population, but nobody taxes financial wealth, which is greatly concentrated in the top 10% and 1%. Likewise, state and local governments are highly dependent on sales taxes for things like clothes and meals at Appleby’s, which nearly everybody buys, but there is no sales tax when you buy a stock or bond.

This is how class war is waged in the tax code. If financial wealth were taxed like property wealth, and if buying a stock or bond were taxed like buying a shirt or skirt, all underfunded public pensions could be funded; home care workers could make a living wage; we could have the kind of massive infrastructure program we need; veterans wouldn’t have to wait months to be seen by Veterans Administration doctors; and we could cut our debt and deficit at the same time as we cut other taxes. And if income made from investing rather than working were taxed at the same graduated rates as earned income, we could do even more. We could have smaller class sizes and more teachers. We could staff government agencies at levels that would enable them to actually fulfill their functions – including enforcing our labor laws. Add it all up, and millions more workers could have decent jobs.

So why do we tax income you work for at higher rates than income you don’t work for? Because investors are winning a class war that most workers don’t know is being fought. Why does it seem natural to tax real property (houses, buildings and land) but not financial property (cash, stocks and bonds)? Because investors long ago won a class war that home owners don’t realize was ever fought. And why are meals at Burger King taxed but not stocks and bonds? Because investors are winning a class war that consumers don’t know is being waged.

How much additional money would the government have if unearned income were taxed at the same rates as earned income, if financial wealth were taxed at the same rate as property wealth, and if a sales tax was levied when buying a corporate stock the way it is when buying a pair of shoes? I did a little research and found out that it’s quite a lot – at least $800 billion a year. While implementing an equitable system of federal taxation would involve many administrative, legal, and political difficulties, it could solve financial problems at the state and local as well as the federal levels. None of the difficulties is insurmountable, but first we need to simply ask why investors get discounts and free passes in the tax code. Maybe they really are more valuable and important than the rest of us. But let’s discuss that in public rather than simply assuming it in the tax code.

In the meantime it’s clear that if the government taxed investors like it taxes workers, home owners, and consumers, we’d have more than enough money to do all the things I list above. After all, providing what’s needed for home care workers in California, school children in Chicago, and pensioners and art museums in Detroit would only cost $850 million (with an “m”). We could raise nearly 1,000 times that much — at least $800 billion (with a “b”) — if the government would declare a cease fire in the class war and stop redistributing income.

Jack Metzgar
Chicago Working-Class Studies

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For those who want to check my homework, here’s how I arrived at these big numbers.

Unearned income (capital gains and dividends) is currently taxed at 20% regardless of income level. If it were taxed at the same graduated rates as earned income, United for a Fair Economy estimates it would produce $160 billion in additional federal revenue.

Local governments live off wealth taxes, but these are applied only to “real property” (houses, buildings and land) not to financial property (cash, stocks or bonds).   The average property tax rate is 1.38%. According to Dean Baker at the Center for Economic and Policy Research, the total value of outstanding U.S. corporate stocks in 2014 is about $28 trillion. Thus, a 1.38% “property” tax on stocks would produce $386 billion in new revenue. I could not find a number for the total value of bond holdings in the U.S., but a 1.38% tax on bond wealth would surely add enough for a financial property tax to produce at least $500 billion a year.

The Tax Foundation does not compute an average for “combined state & average local sales tax rates,” but among the 47 states that have a sales tax (3 states do not have any), almost all are above 6%. So using 6% as a sort-of-average sales tax and applying it to the $60 trillion in stock trades in 2013, it would produce an astounding $3.6 trillion – nearly enough to fund the entire U.S. Government. This would be wildly unrealistic, as it would wreck the stock market and kill investment, but it gives you a notion of how lucrative even a very small sales tax on stock transactions could be. HR 1000, introduced by Rep. John Conyers, would impose a sales tax of 0.25% on stock trades (that’s a tax of 25 cents on a purchase of $100 in stocks), and that would produce $150 billion in new revenue. This much more modest amount is what I used to get a total of “at least $800 billion.”

 

Work and Taxes

If I earned more than a million dollars a year, I would be for the Buffett Rule – not for the reasons that famous billionaires like Warren Buffett and George Soros are for it: because it’s just fair.  I’d be for it because in the long run it would save me money by distracting the public from seeing the roots of class warfare as it is fought in the U.S. Tax Code.

The Buffett Rule says simply that anyone who earns more than $1 million a year should pay at least 30% of their income in federal income taxes.  Legislation to institute this rule is supposed to be voted on this week in the U.S. Senate, sponsored by Democrats and ballyhooed by the Obama Administration.  It won’t pass the House, of course, so it won’t actually affect anyone’s taxes, but it’s a helluva good campaign talisman for Obama and Democrats to run on.

The point of the Buffett Rule is to avoid the kind of obvious inequity that Warren Buffett pointed to in his August New York Times op-ed:  In 2010 Buffett, the second richest man in the world, paid only about 17% of his income in federal taxes (income and payroll taxes) while the 20 people who work directly for him paid an average of 36% of their much smaller incomes.

The Buffett Rule was not devised by Buffett, but by the Obama Administration.  And the first thing that should be noted is that even at 30%, Buffett and other millionaires will still be paying less than the 20 people who work for Buffett, including his now-famous secretary.  More importantly, however, Buffett was clear about why he and other investors paid lower effective tax rates than most workers: income that you do not work for is taxed at a lower rate than income you do work for.

Why this isn’t a scandal in a country that supposedly prides itself on its “hard-working people” is a mystery to me.  If you get your money by investing in stocks and bonds, your income is taxed at a 15% rate because it is unearned.  What’s more, you pay nothing in payroll taxes (i.e., nothing for Social Security and Medicare) because you’re not on anybody’s payroll.

Buffett himself actually still works and draws a salary, and on that part of his income he pays a top rate of 35% and regular payroll taxes on the first $110,000 of that income. But the vast majority of his income comes from investments – capital gains and dividends – and on that part he pays only 15% and no payroll taxes.  Here’s how Buffett explains it: “If you make money with money . . . your percentage may [even] be a bit lower than mine.  But if you earn money from a job, your percentage will surely exceed mine – most likely by a lot.”

Fair shares and percentages aside, the U.S. Tax Code literally says that investors are more valuable than workers, and therefore, should be taxed less. Or it says that investors need more encouragement to invest than workers need to work.  In any case, our tax code fairly screams that only losers and suckers work for a living.

The obvious remedy to this moral abomination is to tax capital gains and dividends (called “unearned income”) the same as wages and salaries (called “earned income”) on the principle that you should not be taxed at a higher rate for earning your income.  That’s how it was after Ronald Reagan signed the 1986 tax reform law, and for most of our history before that.  It was under Presidents Bush I, Clinton, and Bush II that investor privilege was installed in our tax code.  (See the Citizens for Tax Justice’s recent report, “Policy Options to Raise Revenue.”)

Taxing capital and labor income at equal rates would produce much more revenue for the government: $53 billion a year, according to Citizens for Tax Justice, while the Buffett Rule would raise only $17 billion (with other estimates being as low as $5 billion).  You can see why as a greedy, but rational millionaire I’d embrace the so-called Buffett Rule in order to shift the focus away from the basic class bias of our tax code.

There is a theory behind privileging investors by taxing them less.  Namely, investors are “job creators,” and any additional taxes on them will lead to less investment and, thus, slower economic growth, fewer jobs, and even higher unemployment than we have now.  I’ve critiqued this theory before, giving it some credence when it was initially articulated in the 1970s, but showing how it is clearly irrelevant today because investment lags not for lack of money (of which investors have plenty), but for lack of consumer demand that would give investors a reason to invest.  But that’s just me.  I’m not one of the greatest investors of all time.  Here’s what that guy said in his August op-ed:

Back in the 1980s and 1990s, tax rates for the rich were far higher . . . . .   According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.  I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

There are a lot better rules to derive from Buffett’s puckish op-ed than the one the Democrats are using to embarrass Mitt Romney, whose effective tax rate of 14% is even lower than Buffett’s.  Taxing all income at the same graduated rates, for example, would be both simpler and fairer.

While I was writing this post, the Obama-Biden campaign sent me an e-mail asking that I sign a petition supporting the Buffett Rule.  I signed it because Obama’s tax policy is way better than Republicans’ proposed tax cuts for the wealthy.  But the at-least-30%-for-millionaires is a political gimmick without principle, and it leaves in place a tax code that dishonors work and the people who do it.

Jack Metzgar

Chicago Working-Class Studies

On Violence and Class Warfare

“Class warfare.”  Lately, it is breaking out everywhere.  The phrase, that is.  Over the last 10 days commentators, pundits, comedians, and, finally, Democratic politicians have gotten into the game.  Elizabeth Warren, the new wonder woman Democratic Senatorial candidate in Massachusetts went viral with her plain-spoken rebuke of the Republicans’ use of the term “class warfare.”  In an amateur video made by one of her volunteers she explained how factory owners benefit from the roads and the schools that the rest of us pay for:  “There is nobody in this country who got rich on his own — nobody.”

And just last Wednesday, in a move that seemed inspired by the popularity of Warren’s Youtube video, Obama gave an inspiring speech in front of a bridge to somewhere — the home districts of John Boehner and Mitch McConnell:  “There’s a lot of people saying, ‘this is class warfare.’ Well, if saying that billionaires should pay the same share in taxes as a plumber or a teacher is class warfare, then you know what? I’m a warrior for the middle class.”  Obama has been urged by dozens of columnists, including Sally Kohn of the Washington Post and Chris Weigant of Huffington Post to take the language of class warfare seriously, and to fight hard on the side of the not-rich.

Why? Because there is a war going on, and the working- and middle-classes are losing.  Last week America’s most widely read economist, Paul Krugman, gave us four reasons why “class warfare” is top down, rather than bottom up.  You can see a great visual distillation of Krugman’s point with this cartoon from Clay Bennet.

It turns out that this kind of class warfare—the kind that comes from the top down — is pretty bad for the economy. You can read from the IMF report that shows the negative economic effects of the wealth gap, or take a gander at new September CIA rankings for income inequality.  The survey is based on the “Lorenz curve,” in which “cumulative family income is plotted against the number of families arranged from the poorest to the richest.”  It ranks the US as 39th worst out of 136 counties surveyed.  The people of Yemen, Pakistan, Poland, Egypt, and Vietnam, just to name a few, suffer less disparity between the rich and the poor than we do.

In the Wealth of Nations, the economist Adam Smith weighed in on the problem of the rich accumulating too much profit.  He railed against the “merchants and masters” who complained about high wages, but not their own high profits:  “Our merchants and masters complain much of the bad effects of high wages in raising the price and lessening the sale of goods. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

In the meantime I find the invocation of the term “class warfare” completely fascinating, in part, because, as columnist Robert Mentzer argues, the term “class warfare” actually gets us talking about class.  On the other hand, when the term is used, it is usually referencing some change in wealth distribution, and not actual warfare—nothing akin to real battles, pitch-forks, or heads on a pike.  When was the last time that the working class was organized enough to do any real bodily harm to the capitalist class?

The last time the term “class warfare” was used often and sincerely to refer to a violent revolution by workers was during the Gilded Age in the US and Britain.  The best example comes from the the son-in-law of Karl Marx, Edward Aveling, in a published lectured titled “The Curse of Capital”:

You will ask:  ‘Will you not have a frightful struggle and will it not end in bloodshed?’  Possibly.  I do not know.  ‘Is it not setting class against class?’  Yes;  and Socialists mean to devote their lives to setting class against class.  We preach class warfare.  We hope it may not be a warfare of bullets and steel, but if it is class warfare even this, alas! is possible.  It is a warfare of the labour class against the capitalist class.

 That was some real class warfare being proposed by an English radical at the height of the trade union movement in Britian, in 1884.  But good luck finding similar moments in American history.

Here, most working-class radicals have stayed away from violence.  One of America’s most violent working-class incidents, the Haymarket Affair, took place in the midst of a massive (and, we should remember, successful) national movement for the eight-hour work-day.  After two workers were killed at a protest outside the McCormick Harvesting Machine Company in May of 1886, Chicago anarchists called for a rally to protest the deaths of the slain workers in Chicago’s Haymarket square.  During the rally, which had been calm and peaceful up to that point, someone threw a pipe bomb at a police line.  Police and some of the protesters opened fire, killing crowd members as well as other officers.  Eight anarchists were tried, found guilty, and hung.

Just before he was hung, the anarchist August Spies shouted, “The time will come when our silence will be more powerful than the voices you strangle today.” The Haymarket Affair was one of those moments in which class warfare became truly violent, and from the top-down as well.  Reading the last words of the Chicago anarchists, who were likely falsely accused, poorly tried, and tragically executed, I am led to reflect upon the execution of Troy Davis last week.  After he was killed, my friend Robert Perkinson, who is a prison scholar and the author of Texas Tough, posted a photograph in his facebook feed from the 1930s of a banner hanging out of a window in New York City that read:  A MAN WAS LYNCHED YESTERDAY.

While he was not actively engaged in class warfare, Troy Davis is a casualty in the war on the working class.  His execution is just one more terrible reminder that when class warfare becomes violent, that violence tends to flow from the top down.  As Cynthia Tucker wrote in Grio last week,  “If Troy Davis had been a high school principal or a funeral home director or the proprietor of a soul food restaurant, he probably wouldn’t have landed in the middle of an investigation into a police officer’s murder. Had he been a member of Savannah’s black middle-class, he likely would have been treated with a bit more deference by the criminal justice system.”

For many of us who believe that the death penalty is wrong, and that Davis’s execution was particularly wrong, it has been a sobering week.  We can take some comfort from the fact that the national discourse has turned powerfully and seriously towards class.

As for class warfare, most of us who are fighting with, for, and in the working class are not about to issue—or answer—a call to arms.  But if it is a war of words that is in the offing we have a lot to say.  We will not be silent.

Kathy M. Newman

The War on the Working Class

For the last month, the attacks by Republican governors and state legislators on public sector unions in Wisconsin, Ohio, and elsewhere have dominated national news.  The target is not just these unions but on the labor movement in general.  But state bills barring or restricting collective bargaining are just one battlefront in a growing war on the working class – a war that will have consequences for the middle class, as well.

Of course, this isn’t a new war.  Unions and the working class have been under assault since the 1970s, when companies closing plants in places like Youngstown explained their abandonment of American industrial communities as “economic necessity” because American workers were too expensive.  In the 80s, Ronald Reagan led one of the first governmental battles when he fired air traffic controllers in the PATCO strike.  During the 90s, labor regulations made organizing unions increasingly difficult, and employers began to rely more on contingent and part-time workers and to outsource even supposedly secure middle-class jobs. At the same time, deregulation and tax policies helped income inequality grow ever larger as programs to aid the poor were dismantled – by a Democratic president, no less.  Business practices encouraged lowering wages and reducing benefits – moves that many workers, including those in unions, accepted out of fear of losing their jobs altogether.  During the economic crisis of the last two years, hundreds of thousands of workers have lost jobs while corporations stockpile some of the largest cash reserves in history.  Think we’re exaggerating?  Billionaire Warren Buffet doesn’t think so.  He’s said that there is a class war going on in America and that his side is winning.

Despite Federal investigations that clearly lay the blame for the economic crisis at the foot of banks and the finance industry, the working class has become a scapegoat for the country’s economic and social problems.  Like commentators once said of Reagan, business and finance interests seem to be coated with Teflon.  Overwhelming evidence of their responsibility for the financial crisis slides right off.  Former Lehman Brothers exec John Kasich blames public workers, not the financial industry, for Ohio’s crisis, while in Wisconsin, the Koch Brothers are funding Scott Walker’s effort to blame workers for a budget shortfall that he just increased with yet another big tax cut.

Until recently, the attack was largely cultural as journalists, politicians, and commentators focused on exaggerated versions of working-class culture as the source of a variety of social ills.  During the 2008 election, we were told repeatedly that the working class was too racist to vote for Obama, and that claim of rampant racism was all too easy to reprise as the Tea Party started disrupting town hall meetings about health care.  Those ideas held even as Obama won the election and research showed that most Tea Party members were not working-class.  We hear it in the debate over education: if only poor and working-class parents spent more time reading to their kids, we would be more competitive against those well-educated Chinese.  And now it’s about the economy: if only those greedy public workers would stop insisting on getting affordable health insurance and reliable pensions, the rest of us could pay lower taxes and businesses would like us better – maybe they’d even bring jobs back to Ohio, Wisconsin, New Jersey, Indiana, or Michigan.

As states and the U.S. Congress are formulating budget bills, the attack is ramping up, and the ground is shifting.  It’s no longer enough to misrepresent or denigrate the working class.  In order to balance budgets that have been seriously skewed (or screwed) by huge tax cuts, mostly to the wealthy, our leaders say we need to cut services.  States are cutting back on health care programs for the poor, slashing funding for education (Walker’s budget for Wisconsin cuts $834 million from K-12 schools), and raising user fees on things like car registration and college tuition – regressive funding strategies that take a much larger bite out of the household budget of poorer families than of wealthier ones.  The budget bill passed by House Republicans cut funding for health care for poor women and reduced funding of Pell Grants, and Obama joined the fight by cutting heating assistance to the poor.

With these moves, the war has shifted from rhetoric to daily reality.  The result will be ugly.  Cuts in education at all levels will reduce both the quality and accessibility of education.   Cuts in health care will increase incidents of medical problems and could increase the birthrate among lower-income women who would no longer have easy access to the most reliable forms of birth control.  The attacks on public unions will lead to an immediate decline in household income for thousands of families and, in the longer term, less secure retirements.  Increasingly, older people will struggle to get by on reduced pensions.  The result will be increasing demand for state services such as Medicaid, food stamps, and other programs, as well as increases in homelessness.

Meanwhile, the working class and the middle class are losing their voice in the democratic process.  That’s true in the workplace, where both unionized and non-union workers have fewer opportunities to help shape working conditions and both feel increasingly vulnerable to being fired on a boss’s whim.  And it’s true in electoral politics, where the primary national organized voice for the poor, working-class, and middle-class, the labor movement, will lose political influence as unions lose the ability to protect workers’ rights.

No one knows yet exactly how the majority of Americans, who support collective bargaining for public sector workers and who view governors like Walker and Kasich negatively, will respond when these bills finally pass and take effect, or when state and federal budgets undermine opportunity for those who already have fewer resources and options.  Will Americans stand together to protest, as so many have done in Madison and Columbus, and if so, will those protests be any more effective in changing policy than what we’ve been seeing?  What will it take to get us to stand up for social and economic justice, not only for teachers and firefighters but for everyone in the working class and the middle class?  To move us to demand the reinstatement of the American dream? How much will we take before we engage fully in the class war?  The time is now.

Sherry Linkon and John Russo, Center for Working-Class Studies