With the Exception of Jan Schakowsky’s Plan, Current Deficit Reduction Plans Will Accelerate Wealth Redistribution in Favor of the Wealthiest Americans

In his nonsensical rambling, Tom Friedman often claims that the earth is getting flatter (see e.g. The World is Flat).  What he means is that the internet has moved economic opportunity across the world’s population.  This is a rather delusional and distorted view of what is happening to the non-rich populations of the earth.  But in one sense, he is correct.  The American middle class is being flattened.

“Trickle down” economics has been, in reality, “trickle up” economics. As Robert Reich has indicated in his recent book Aftershock, in 2007, 24% of all income accrued to the wealthiest 1% of the U.S. population. That’s the worst maldistribution of wealth in this country since right before the beginning of the Great Depression. As recent as the late 1970s, the top 1% earned 9% of all income (page 6).

I recommend Nicholas Kristof’s recent New York Times column for a concise and readable explanation of current income and wealth inequality in the U.S. (“A Hedge Fund Republic?” November 18, 2010).  Citing figures published by the Economic Policy Institute, Kristof points out that “The top 1% of Americans owns 34 percent of America’s private net worth….”  The bottom 90% owns just 29%, which means that the top 10% owns 70%.

There are several macro-economic reasons for the redistribution of wealth in the past several decades.  Taxes are just one reason, but tax codes and the federal, state, and local tax systems in general have been drastically revised in favor of the highest earners and the wealthiest citizens.  The highest marginal income tax rate has been reduced from 70% to 36% while State and local sales taxes (due in large part to a loss of federal transfer dollars) have increased from a low of 2% to 3% in the late 1970s to 8% to 9%.  Consumers are also charged taxes on a variety of services provided by regulated industries such as telephone service. 

Capital gains taxes have been lowered from 25% to 15% since Ronald Reagan took office.  With an increasingly complicated tax code with loop holes that benefit only the wealthy, labor (payroll) has been heavily taxed while capital (capital gains) has increasingly escaped taxation.

The Simpson-Bowles recommendations and the Rivlin-Domenici recommendations for deficit/debt reduction would further flatten the progressive income tax structure and increase regressive sales taxes.  Both sets of recommendations would also increase Medicare and Medicaid payments for beneficiaries and lower Social Security benefits.  A freeze for three years in federal employee and military personnel pay is included in Simpson-Bowles.

Neither plan includes a fair inheritance tax, increase in the capital gains tax, or a financial transaction tax.  Jan Schakowsky’s plan would, amongst other things, do the following:

  1. Tax capital gains and dividends as ordinary income.
  2. Reform the estate tax with a progressive schedule of marginal tax rates.
  3. Eliminate the deduction for business meals and entertainment.
  4. Limit the deductibility of financial corporate debt interest payments.

She has recommended a host of other tax revisions that would reduce the deficit by hundreds of billions of dollars by 2015 without putting a heavier burden on middle and low income Americans.  This is the opposite of the other deficit reduction plans.

0 thoughts on “With the Exception of Jan Schakowsky’s Plan, Current Deficit Reduction Plans Will Accelerate Wealth Redistribution in Favor of the Wealthiest Americans

  1. I would like to suggest some reading;

    “Nickle Dimed” and “Perfectly Legal” by David Cay Johnston = among the best investigative journalist on tax scandals.

    “Capitalism Hits The Fan” by Richard D. Wolff

    When I am exposed to republican rhetoric it seems like deja vu 30 years ago. Still saying the same things and still financial institutions go down which in my viewpoint looks rather orchestrated.

    I say review the Reagan/Bush Savings and Loan theft,the fall of Lehman Bros and of course AIG,Bank of America and Citibank debacle. Jeb Bush and cousin George Walker were employed at Lehman Bros.

  2. A local USA economy

    Food for thought:

    1. The U.S. health care system is typically characterized as a largely private-sector system, so it may come as a surprise that more than 60% of the $2 trillion annual U.S. health care bill is paid through taxes, according to a 2002 analysis published in Health Affairs by Harvard Medical School associate professors Steffie Woolhandler and David Himmelstein.

    2. Social Security adds to the deficit Reality: It’s not just wrong—it’s impossible! By law, Social Security’s funds are separate from the budget, and it must pay its own way. That means that Social Security can’t add one penny to the deficit.

    3. Benefit cuts are the only way to fix Social Security. Reality: Social Security doesn’t need to be fixed. Baby boomers were being planned for decades ago.

    But if we want to strengthen it, here’s a better way: Make the rich pay their fair share. If the very rich paid taxes on all of their income, Social Security would be sustainable for decades to come. Right now, high earners only pay Social Security taxes on the first $106,000 of their income. But conservatives insist benefit cuts are the only way because they want to protect the super-rich from paying their fair share.

    4. Politicians forget to tell the news media privatizing Social Security will add $700 billion to the deficit annually for the next 20 years.

    5. Medicare is NOT free. Millions of people using medicare insurance STILL pay into medicare insurance every month.

    6. The military industrial complex requires 60% of every tax dollar…. way tooo much money.

  3. What do you think about indexing capital gains to inflation? It seems to me that this would neutralize many of the conservative arguments against the cap gains tax, eg the fact that long term investments can be heavily taxed in real terms despite a low nominal tax rate.

    Why isn’t the AMT indexed for inflation? It seems like a no-brainer to me.

    Also, we need to shut down offshore tax havens–another no-brainer that nobody seems to want to talk about.

    The lack of an inheritance tax is a shameful scandal. I can’t believe so many people fall for that inane “death tax” propaganda. What we need is an inheritance for everyone. Why not redistribute wealth after death by creating a national trust fund which would pay a national dividend to everyone? This would be a good way to ensure that everyone owns a piece of the productive machinery of America and would insulate workers from the increasing automation of production.