Tuesday, September 12, 2006

Benefit the Few, Harm the Many: The Bush Tax Policy

Before we turn the page on another 9/11 observance, go over to Norm Jenson's excellent blog and watch the tape of Stewart's painfully genuine monologue from his first show following the attacks. It is one of those rare moments of television that you will never forget. Then check out the transcript of yesterday's essay from Keith Obermann (click the graphic).

Now today we'll be hearing from my GOP partner, Mr. Terry McKenna, on the issue of the economic state of our middle class. It evokes a debate recently held between MSNBC's Eric Alterman and his various right-wing antagonists. First, a word about Dr. Alterman. It appears he's been booted from MSNBC.com—this is his last week there, and he will be moving his sterling weblog to the Media Matters site, whose feed we carry in our sidebar here.

Let me be very clear about where I stand on this issue: it makes me physically ill to think that such a lucid, intelligent, and deeply human voice within the mainstream media should be pushed aside. It makes no economic sense: the man's a best-selling author of five or six books; has appeared on TV and radio on shows as diverse as Larry King and Air America; and his blog justly receives massive traffic (I know this because DR has been a beneficiary of that traffic—we get 1,000 page views in a week whenever one of my missives from his mailbag gets published; and the one time he linked directly to DR from his main column, my server positively groaned from the effect). It makes no intellectual sense: this man has a well-earned academic pedigree (not a free pass through Yale), and he teaches at two or three major universities. Finally, it makes no political sense: Alterman is, to my mind, one of the two leading Democratic/liberal voices of the MSM (the other is Paul Krugman of the New York Times op-ed stable). In other words, he represents opinions that are supported by somewhere between 55 and 65 per cent of the American voting populace, depending on which poll you favor. He represents this demographic with fiendishly meticulous research, scientific rigor, and an often eloquent floridity. Want proof of that? Check out this piece he wrote for 9/11, which preceded the announcement of his sacking at MSNBC.

Now I do not favor boycotts and mass movement-style bans on media outlets; that is the stuff of the right wing religion and demagoguery crowd. I will only note my personal choice here: come Friday, I'm deleting my bookmarks to MSNBC.com, and I'll tell them about it, too (I haven't had cable TV for some 15 years, so that's not a problem). But again, whether you would choose to do that is another matter (hell, if I had cable, I'd have a hard time turning off Keith Olbermann, for one thing); but I would strongly recommend that you bookmark that Media Matters link above and visit Alterman regularly.

And now, Terry McKenna on the economy, tax policy, and the middle class:

Each week I start with a theme and hope that by the end, I’ve come up with something. This week, I’ve returned to the economy. And my question is, who are we running the economy for? In a democratic republic, the answer should be for everyone.

A recent bit of economic news suggests that the benefits of our “free” economy are not being distributed equally. For middle income folks, incomes are down – the figures are even worse for the poor. This promises to be a good issue for Democrats during the upcoming election season - if they can find the right way to sell it.

The data themselves are complicated and even progressives are not of one mind as to the meaning. Here are two articles that challenge us not to get too worked up over the issue of inequality, by Stephen Rose and Matthew Yglesias respectively. For a more typical progressive point of view, read Paul Krugman of the NY TIMES, here and here (you’ll need access to NY Times Select, either by paying for it or via trial subscription). His take away message is that the deepening inequality is troubling.

Mr. Krugman also suggests that conservatives are worried. Perhaps he’s right: his conservative colleague, David Brooks, has already written two pieces giving his take – the first championed our “meritocracy”; the second proposed new economic and social policies (including keeping the estate tax).

We should leave the quibbling to the experts. All the parties agree that inequality is a problem worth studying. Those on the left want to minimize inequality; those on the right want to be able to reassure us that despite the inequality, things are ok.

In any case, if we are running the economy for the benefit of everyone, then how do George Bush’s economic policies fit in?

Economic policies should do the following (at least):

1) allow for growth;
2) make the downturns more bearable;
3) make prosperity as widespread as possible; and
4) provide for just and fair tax policy.

Hmmm. A just and fair tax policy, what does that mean? Under George Bush, a just and fair tax policy means tax cuts – and these cuts supposedly drive economic growth.

Growth is important, but do lower taxes drive growth? I charted annual GDP growth over the past 50 years. The middle gray bar stands for “0” annual growth. The red splotches mark off notable recessions. Although simplistic, this tool shows that our GDP (and thus our economy) has grown and shrunk in a continuous set of business cycles. The only apparent change is a slight lessening of the ups and downs starting in the late 80’s (which may be due to the more aggressive monetary policy starting with Alan Greenspan). By the way, significant tax cuts occurred in the early ’60,s ‘80s and in the past few years – can’t tell, can ya!

So growth and recession flow from the business cycle – and not from tax policy.

Then what drives growth?

We suggest the following:

1) the diversity of the US economy
2) the free movement of capital
3) the lack of internal restrictions to forming new enterprises
4) the freedom of employers to hire and fire at will (Europe is an example of an economy where this is not true – and it’s their biggest problem)

OK, so Bush’s tax policy doesn’t do what it is supposed to. But, does it do any harm? The obvious answer is YES!. Tax cuts have fostered a growing deficit and a dangerous cycle of borrowing. Already, there is tremendous pressure to cut government programs, notably Medicaid. The pressure will only get worse in the next decade as Social Security payments increase. If Social Security benefits are cut – as seems likely now – the damage will be concentrated on those who can least afford it, the aged and the poor.

Thus the Bush economic policy (tax policy) is fraudulent and harmful!

Does anyone benefit? Yes, but a surprisingly small number. Let’s illustrate with Federal estate tax. Estate taxes have never touched more than a small number of all estates. Under the current provisions, only about 7,000 are obliged to file a tax return. And most of the estate tax revenue comes from an even smaller subset. Yet if the estate tax is completely abolished, the loss in revenue will be as much as $1 trillion over a decade – see the chart below.

The balance of the Bush tax cuts have been similarly skewed, so that most of the benefit goes to a small pool of wealthy taxpayers. So we have a policy that is completely unjustified in a democracy – harmful to many and benefiting few.

What would progressives propose instead? To begin with, we’d start with genuine tax reform. The tax system should be designed to generate sufficient revenue to operate. And the burden should be shared among all of those who can afford to pay taxes (what was once called a progressive tax system). Estates and large corporations must share the burden with the rest of us.

Then we’d work to repair the torn social safety net. Writers from Malcolm Gladwell to Paul Krugman have pointed out how the employer sponsored benefits system is faltering. From my position in the insurance industry (and as a manager within corporate America) my guess is that we are even closer to a collapse than we realize – it's just that the data have not caught up with reality.

The two biggest problems are with pensions and health insurance.

Health insurance:

Most people receive coverage through work. Benefits are NOT portable and are EXPENSIVE (family coverage costs approximately $9,000 per family). Laid off workers generally cannot afford to maintain coverage under COBRA, and this coverage is only temporary. Private health coverage is almost impossible to obtain and is even more expensive.


The old style defined benefit program is broken. For companies in decline, the system leads to bankruptcy (think of the airlines and the auto industry). 401k’s would be OK, but there are large numbers of workers who have neither (think of all the consultants, part time and temporary workers).

It’s time for progressives to address both. If progressives get together, surely we can come up with a better way.

And no, I’m not going to outline solutions – this time we need real fundable programs, not pipedreams designed by op-ed writers. And let’s get the professionals involved – the actuaries and finance guys – we should be able to come up with something that works and that is worthy of our democratic ideals.

—T. McKenna

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