posted November 11, 2005
Taxes and Economic Class War in America

Copyright 2005 by Jack Rasmus

After more than four years of incessant tax cuts for the wealthy and most powerful corporations totaling in excess of $4 trillion since 2001, George W. Bush and Co. are now preparing to come back for an even bigger tax cut feast at the expense of workers and consumers in America.

Having rammed through Congress record tax cuts on an annual basis from 2001 through 2004—more than 80% of which will have been distributed to the wealthiest taxpayers and corporations by the end of the decade according to the Institute on Taxation and Economic Policy—Bush’s corporate driven tax policies are in the process of regrouping and consolidating in preparation for yet another big tax cut push in 2006.

In his second term, Bush’s first target is to make permanent the $4 trillion in tax cuts already passed, starting with total repeal of the Estate Tax now in its final phase of passage in Congress. Should Bush and corporate America succeed in repealing the Estate Tax and making permanent beyond 2010 Bush’s first term tax cuts, estimates by the nonpartisan Center on Budget and Policy Priorities are the total long term cuts will amount to no less than $11.6 trillion—80% of which once again will accrue to the wealthiest 20% of households and the largest corporations.

To give a sense of the magnitude of the $11.6 trillion tax cuts: defeating Bush’s goal of making the tax cuts permanent and rescinding the cuts to date would eliminate Bush’s alleged $3.4 trillion shortfall in social security, would fully resolve the very real growing crisis in Medicare funding, and would provide free prescriptions drugs for all Americans in need—not just partial payment for drugs for those in retirement.

Bush’s second target, however, may exceed even the mind-boggling $11.6 trillion. The second primary objective, designed to cap off Bush’s tax legacy on behalf of corporate America in his second term, is to totally restructure the entire tax code before leaving office.

The campaign for the second target kicked off with the release on October 18, 2005 of the final report of Bush’s appointed special Advisory Panel on Tax Reform. At the top of the Panel’s list of recommendations were additional massive reductions in taxes on dividends and capital gains, further reductions in the top tax rates for personal income, and elimination of the alternate minimum tax that was originally designed to ensure the very wealthy paid some taxes despite the availability of countless loopholes and tax shelters. Accompanying these major further cuts for the wealthy, however, are further recommendations by the Advisory Panel to end long-standing tax advantages that middle and working class households have been able to take advantage of for many years—such as home mortgage interest, state & local tax deductions, deferral of taxes on health insurance premiums, and the earned income tax credit for the working poor.

After more than four years of George W. Bush tax cuts and Bush’s Advisory Panel’s recommendations, it is now abundantly clear that America is in the midst of a major, radical restructuring of the tax system. The direct consequence of that tax restructuring has been a shift in the federal and overall tax burden between classes in America, a shift which constitutes a major element of an even more fundamental shift in relative incomes between classes in America that has been underway now for decades.

Incomes and Classes in America

Independent studies by economists show that over the last several decades there has been a shift of at least 15% in relative income between classes in America, from the more than 100 million workers earning their livelihood primarily from wages to corporations and the richest 10% of households who earn income from sources of capital such as dividends, interest, capital gains, forms of executive compensation, and the like.

When calculated conservatively—as a percentage of the more than $6 trillion in income reported to the IRS in 2001—that 15% amounts to a relative shift in income between classes of more than $900 billion a year. And that’s well before the policies of George W. Bush and Congress between 2001-2005 have added further to the total. Today the overall shift in incomes annually may easily exceed a $trillion a year…and still rising.

The means by which this massive shift in relative income has been carried out are numerous. High on the list has been the widespread de-unionization of the workforce in the U.S. since 1980.

Hourly union wages and benefits exceed non-union by 30%-45%, depending on calculation methods. In 1980 approximately 22% of the workforce was unionized and more than 16 million workers in the private sector were union members. Today, barely 8 million are unionized in that sector, accounting for only 7.8% of the workforce. And that doesn’t include the additional 5 million potential union jobs that otherwise would have been created in the U.S. were it not for outsourcing and offshoring over the period.

Given a 30%-45% union-nonunion wage differential, a loss of 13 million actual and potential union jobs since 1980 translates today into a significantly lower average hourly wage. That wage was $15.89 as of the end of 2004. Were 13 million more workers unionized, the union differential would result in an average hourly wage at the end of 2004 of nearly $2.00 an hour more, or $17.73 an hour instead of $15.89. The difference produces a total annual savings to corporate America and business in general of at least $99.3 billion a year. And that figure does not include union fringe and insured benefits that easily add another $30-$40 billion a year to the total. In other words, the income lost to workers due to de-unionization today is at least $140 billion a year and growing.

But de-unionization is only part of the story. Other forces have contributed as well to the lowering of the average real hourly wage relative to what it might have been for tens of millions of American workers since 1980. Such other forces include the dismantling of much of the higher paid manufacturing base in America, its exportation abroad, and its consequent replacement with low pay service work; the displacement of full time regular employment with tens of millions of part time, temporary, and contract work all of which receive significantly lower pay and benefits as well; the deep decline in the real value of the minimum wage; and the general radical restructuring of job markets in the U.S. have all played a role as well in holding back the growth of the average hourly wage.

But the average hourly wage is also only part of the story. Working class incomes have fallen relative to capital incomes for a host of other reasons as well. Not reflected in the hourly wage, affecting union and non-union workers alike, are the further reductions in vacation and holiday pay, paid sick leave, overtime pay, and scores of other less well known job provisions that also contribute to workers’ incomes.

Finally, there is the added factor of the shifting of costs of health coverage from companies to their workers, the destruction of more than 97,000 defined benefit pension plans and their replacement with 401ks or no pensions at all, and the transfer of more than $4 trillion in social security ‘ payroll deductions and accrued interest to the U.S. general budget where it has ultimately been recycled back to corporations and the wealthy over the past 22 years. Company health benefit and pension contributions and social security payroll deductions are essentially forms of “deferred wages?. And as employers have reduced their contributions to benefit plans, shifted costs of the same increasingly to workers, or ‘recycled’ back social security payroll deductions to corporations and the wealthy, the end result has been a still further relative shift of incomes from wages and forms of workers’ non-wage compensation to capital incomes.

The above represent means by which income has been shifting before taxes. Whether de-unionization, exportation of high paying jobs, replacement of full time permanent jobs with part time, temp or contract work, displacement of manufacturing with service jobs, shifting costs of health care and pensions, reducing overtime, cutting paid leave and numerous other pay provisions, etc.—all the foregoing are means for shifting income implemented by employers at the ‘point of production’. They are thus pretax means for enabling the income shift. But such pretax means still leave the additional shifting of income by means of the tax system itself. Indeed, changes in the federal tax structure over the last several decades may represent the single, greatest factor contributing to the overall shift in relative incomes between classes in America since 1980.

The Shifting Federal Tax Burden

The federal tax structure is comprised of four main elements: the personal income tax, the corporate income tax, the payroll tax for social security, and excise taxes. Excise taxes are quantitatively insignificant in the total federal tax mix and may be excluded. The major elements therefore are the personal and corporate income tax, and the payroll tax.

Some argue that since the payroll tax represents income earmarked for distribution back to workers when they retire and start collecting social security it is not really a tax but an income transfer program. But that’s true only in theory, not in fact. The payroll tax has today a dual character. On the one hand it is a transfer program. But it is also a de facto income surcharge tax of 12.4% levied on more than a 100 million workers. This has been the case at least since 1983, when the payroll tax was raised by record levels producing more than $4 trillions of dollars of surplus (in principal and interest) over the past 22 years. That $4 trillion surplus collected by the payroll tax since 1983 has been transferred from the Social Security Trust fund and spent by the federal government to offset its general budget deficits for the last 22 years—deficits caused in turn primarily by two decades of tax cuts for the rich and to pay for chronic, bloated defense spending since 1983. The social security surplus has thus been spent for general budget purposes—that is in a manner much like revenues generated by other federal taxes. In this respect the payroll tax has functioned no differently than the personal and corporate income taxes. That part of the payroll tax that has created the $4 trillion surplus has thus performed as a de facto income tax—a tax levied only on workers earning up to the annual income limit (today $90,000) and exempting all those earning incomes over $90,000. It has functioned as an income tax with a ceiling. The part of the payroll tax that has financed retirement benefits for social security recipients (i.e. the lesser part of the tax) may still be considered an income transfer; but the greater part of the payroll tax, that part that has created the 44 trillion surplus, is in reality nothing less than a targeted income tax surcharge. And the target is the American worker. It is therefore totally appropriate to consider the payroll tax ‘surplus’ in any assessment of the total federal tax burden, and to include it as an integral part of the shifting of that burden between workers and non-workers and corporations.

A final comment on the payroll tax: It is important to understand that the full 12.4% payroll tax is paid by workers, despite employers technically contributing half, or 6.2%. Numerous studies show, for example, that employers reduce compensation to labor in other ways in order to offset their 6.2% contribution to the payroll tax. Corporations don’t pay payroll taxes; they collect them from their workers by reducing workers’ other forms of compensation in an equivalent amount and then pass on that collection, along with workers’ 6.2% direct deduction, to the federal government.

The Corporate Income Tax / Workers’ Payroll Tax Shift

When the total federal tax burden is viewed broadly in the above terms what clearly appears is a major relative shift in that tax burden—away from corporations and onto workers. As the corporate income tax has fallen dramatically as a percentage of total federal tax revenues, the payroll tax as a total share has risen just as dramatically.

Federal Tax Revenues by Major Source
Year Personal Income Tax Corporate Income Tax Payroll Tax

1977 44.3% 14.4% 29.9%
1988 44.1% 12.5% 36.8%
1992 43.6% 9.2% 37.9%
2003 44.5% 7.4% 40.0%
Source: Historical Tables, U.S. Budget, GPO, 2004.

As of 2005 the corporate income tax has fallen even further, to barely 6% of total federal revenues, while the payroll tax has continued to rise. A tax shift has therefore clearly taken place between the corporate income tax on the one hand and the payroll tax on the other, with workers paying an ever-increasing relative share of federal tax revenues and corporations a corresponding lesser share. As a consequence, in turn, corporate income has risen relative to workers’ income, which has fallen.

The Shift Within the Personal Income Tax

The shift in the total federal tax burden has occurred in yet another, albeit less apparent way. The above Table 1 shows a stable 44% of total federal tax revenues collected from the Personal Income Tax. But both workers and non-workers pay the Personal Income Tax. What is not readily evident in that stable 44 percent range for the Personal Income Tax is a second shift that has be en occurring ‘within’ the Personal Income Tax over the same period.

Major tax cut legislation passed since the 1960s have been overwhelmingly weighted in terms of their distribution effects in favor of wealthy households and corporations. Approximately two-thirds of the roughly $11.2 billion 1964 tax cut under President Lyndon Johnson went to the wealthiest income groups and corporations. Under Nixon in 1971, $8 billion of a $9 billion tax cut went to corporations. Under Nixon and Carter in the 1970s inflation and ‘bracket creep’ nearly doubled the total federal tax burden for a typical median working class family while barely affecting the wealthy. But a shift of incomparably greater magnitudes occurred under Ronald Reagan compared to his predecessors.

Reagan’s 1981 tax cut amounted to more than $750 billion. $600 billion of that represented cuts in personal income taxes. And the lion’s share of that $600 went to the wealthiest 5% of taxpayers. 60% of all taxpayers—those representing annual income levels of less than $20,000—actually experienced a net increase in taxes. Another 20% with income levels between $20-$30,000 received paltry cuts averaging only $26 a year. Meanwhile, the wealthiest 20% of taxpayers—the richest 5% in particular—received well over 80% of the $600 billion in personal income tax cuts passed by Congress under Reagan that year.

From 1988 to 2000, under George Bush senior and Clinton, cuts in personal income taxes for the wealthiest households continued to grow, but now were enabled primarily by the passage of widespread tax shelters and tax loopholes instead of cuts in tax rates per se. As a result, for example, between 1990-1997 the number of individuals who filed but did not pay any tax increased from 24 to 29 million. This compares to the 1950-1970 period when the number of filers who paid no taxes declined by 3 million. Offshore tax havens in the Caribbean and elsewhere that sheltered $200 billion of income for wealthy Americans in 1983 grew rapidly thereafter, to where more than $6 trillion remains hidden from the IRS offshore today. The one major tax cut legislation of the 1990s, Clinton’s 1997 ‘Tax Relief Act’, accelerated the reduction in income taxes for wealthy households by significantly cutting capital gains, estate and gift taxes. It is estimated that Clinton’s 1997 Act reduced personal income taxes by $100 for every upper income household, compared to only $5 for a typical working class median income household.

As Joseph Stiglitz, Nobel prize-winning economist and head of Clinton’s Council of Economic Advisers in the 1990s admitted in his 2003 published book, The Roaring Nineties, Clinton “lowered taxes on very rich individuals who made their money from speculation, and on CEO’s who were making millions from stock options….It was a pure gift to the rich?.

The lopsided nature of the cuts in the Personal Income Tax, combined with the proliferation of tax shelters, tax havens, and loopholes for wealthy taxpayers (and corporations) since 1980 has meant that while the Personal Income Tax’s share of total federal revenues has changed little, within that Tax a greater relative burden has been shifting to working class payers of the Income Tax and from the wealthiest households.

This is evident in Table 2 that follows, which shows the federal tax burden (defined as Income and Payroll taxes paid) for a median income (i.e. working class) family in comparison to a wealthiest 1% family’s federal tax burden.

The Shifting Federal Tax Burden, 1965-2002
Year Median Income Family Top 1% Income Family
Effective Federal Tax Rate Effective Federal Tax Rate

1965 11.5% 66.9%
1980 23.6% 31.7%
2002 30.3% 21.0%

Sources: U.S. Treasury, Congressional Budget Office, House Ways & Means
Committee, as reported in Jack Rasmus, The War At Home: The Corporate
Offensive From Ronald Reagan to George W. Bush, Kyklos Productions,
August 2005, p.101.

George W. Bush’s First Term: 2001-04

During George W. Bush’s first term in office, every year a major tax cut package was introduced and passed by Congress. Moreover, each was highly skewed in terms of its distribution effects, benefiting the wealthiest households and to the most powerful corporations.

Bush’s first tax cut package in 2001 cost taxpayers approximately $1.7 trillion. Nearly
$1 trillion involved cuts in the top rates of the personal income tax. 72% of all taxpaying households and 95 million taxpayers (virtually all workers, small businesses and self-employed) received none of that $1 trillion. 71% of the cuts went to the wealthiest households earning more than $147,0 00 a year in income. Another $138 billion of the cuts involved major changes in the Estate Tax, which benefited less than 1.0% of all taxpaying households.

Whereas Bush’s 2001 tax cuts targeted wealthy individuals, his 2002 cuts benefited primarily corporations and businesses, providing four tiers of various kinds of depreciation tax write-offs for businesses and expanding corporate tax loopholes. The latter resulted in a flood of tax rebates to corporations by the government. As result of Bush’s 2002 tax cuts not only did many large multinationals no longer have to pay taxes at all, but they were actually given refunds as far back as five years by the U.S. government. For example, in the following year, 2003, companies like Boeing received a $1.7 billion tax rebate from the federal government. The banking giant, JP Morgan Chase received $1.38 billion in rebates. AT&T $1.39 billion.

In see-saw fashion Bush’s 2003 cuts targeted wealthy individuals once again, with major reductions in the taxation of dividends and capital gains, as well as further cuts in depreciation for businesses and even more tax subsidies for corporations. The cost of the dividend and capital gains cuts amounted to at least another $800 billion for the decade.

The net gains from the first three years of Bush’s tax cuts for the lowest 80% of income groups—i.e. virtually all working class and small, self-employed businesspeople—are estimated at between only 10%-14% of the total tax cuts of more than $3.5 trillion.

Finally, in 2004 the focus shifted once again to corporate tax cuts and concluded with another roughly $350 billion, according to conservative estimates (and more than $500 billion by others), in tax cuts for the largest corporations—including a virtual ‘tax holiday’ that allowed more than $650 billion in profits illegally held offshore by large multinational corporations to be brought back to the U.S. and taxed at a minimal 5.25% instead of the normal 35% corporate rate.

Nor did the tax cut juggernaut on behalf of corporations and the wealthy slow in 2005. In lieu of highly visible comprehensive tax cut packages that occurred on an annual basis during his first term, further corporate tax cuts continued in 2005 on an industry by industry basis. Most notable was the recent energy industry legislation benefiting big oil companies already reaping super-profits as result of near-monopoly price gouging; multi-billion dollar subsidies granted to the Tobacco industry to help cover their losses from legal suits; and other industry tax ‘sweeteners’ granted in order to garner broad industry support for passage of the Central America Free Trade Agreement, CAFTA, in July 2005.

The Estate Tax Boondoggle

In late summer 2005 attention thereafter focused on Bush efforts to totally repeal what little remained of an Estate Tax gutted earlier in 2001. Prior to 2001 the Estate Tax applied to only 2%, or 52,000, of the 2.5 million heads of households who died that year. Fully 98% of households were thus exempted from the Estate Tax altogether even prior to Bush’s cuts in the tax. And for the 2% for whom the tax still applied in 2000, there was a $1.35 million exemption before a 55% tax rate on the estate applied.

Following Bush’s Estate Tax cuts in 2001, however, fewer than 1% remained subject to the Estate Tax. In 2005 that represented only 13,700 of the more than 2.6 million heads of households projected to die this year. Thus nearly 40,000 households who were once subject to the tax prior to Bush are now excluded from it under the 2001 revisions. Moreover, of those 13,700 still subject to the tax, their exemption level has been raised to $4 million in 2005 and their tax rate reduced to 45%. Furthermore, under the current law, by 2009 the exemption will rise to $7 million and only 2,400 will be subject to the tax.

In other words, only the very rich today are at all subject to the Estate Tax as it now exists. Notwithstanding this fact, Bush and his wealthy backers have been pressing throughout 2005 for immediately and permanent repeal of even today’s watered-down Estate Tax. And even when that tax is scheduled to disappear altogether after 2009 under current provisions, they prefer not to wait four more years and instead seek its quick repeal nonetheless. The Republican House, with the votes of 42 Democrats, thus passed immediate and permanent repeal of the Estate Tax in April 2005. Only a threat of filibuster in the Senate now stands between waiting four more years for its eventual demise and its immediate, permanent repeal in 2005.

It is estimated that a full and permanent repeal of the Estate Tax will amount to approximately $1 trillion in lost tax revenue and interest over the next decade, followed by $ trillions more over subsequent decades.

Hurricane Katrina has recently dealt a wild card into the table stakes Estate Tax cut game, however. With what looks like $500 billion at minimum needed to rebuild the Gulf Coast, it will be difficult (though not impossible) for pro-corporate/pro-wealth interests to pass another $ 1 trillion tax cut for the wealthiest 1% of taxpayers at the same time.

As a contingency, Bush and the pro-wealth interests in Congress have developed a fall back position nearly as generous in the event permanent repeal is not immediately possible. Led by Republican Senator, Jon Kyle of Arizona, an alternate proposal on the table in the Senate at present is to raise the Estate Tax’s exemption immediately to $7 million (or higher) and immediately reduce the 45% tax rate to a 15% rate equal to the tax on capital gains. That would produce a tax cut for the wealthiest 0.3% households of more than $700 billion over the coming decade alone, with more to follow. And even that $700 billion is probably an underestimation, since other provisions in the legislation and before the courts at present will render state level Estate Tax laws that now exist null and void as well.

However the final results are calculated and whatever the details of the final outcome, it is virtually assured that another massive tax cut for the wealthiest taxpayers is about to pass with the Estate Tax overhaul or repeal. Another major landmark in the Great American Tax shift will have been established by Bush and friends. And another major impetus given to the shifting of incomes between classes in America.

Bush’s Next and Biggest Step: Radical Restructuring of the Tax Code

Nowhere is the economic class war being waged in America today more evident than on the tax front. Shifting class incomes by means of restructuring the tax system is the most efficient of available means—if by ‘efficient’ is meant the ability to shift to greatest amount of income from one class to another in the relatively shortest period of time. Attacking working class incomes ‘at the point of production’, industry by industry and company by company, is often a more drawn out and more risky process for corporate America. There is more uncertainty. There is always the possibility of disruptions of production. Unions, should they exist, must first be tamed, neutralized, or gotten out of the way. Events currently in the airline industry, and about to unfold in the Auto industry, are an example of how ‘messy’ the latter can sometimes get. Coordination among companies is complex and unpredictable. And corporations abhor unpredictability. Better to pay lobbyists and politicians $ hundreds of millions and do the job centrally through the political-legislative process. Of course the two approaches—from the ‘bottom up’ at the point of production and from the ‘top down’ through the legislative-political process—are not mutually exclusive. Both approaches have been applied with significant success by corporate America over the past quarter century.

With only three years left in Bush’s second term an even greater conflict over shifting taxes and incomes between classes in America is about to unfold. The Bush-Corporate grand plan is to lock in pro-corporate and pro-wealth provisions in a radically restructured Tax Code for generations to come. However, a new element is about to be added in 2006 to the battle over taxes. Unlike during Bush’s first term, when 20% of Bush’s tax cuts included concessions to middle and working class families in order to sell the 80% of cuts for the wealthy and corporations, now Bush’s Tax Panel is recommending raising taxes on working and middle class Americans that exceed many times the minor concessions granted during the years 2001-04 to this same group. The Bush Panel’s proposals to eliminate deductions for state and local taxes, sharply reduce the home mortgage interest deduction, cap deductions for insurance premiums, and end the earned income tax credit will all raise the tax levels for middle and working class Americans, even while tax rates and levels for the wealthiest decline even further.

A great theft of workers incomes by corporate America has been underway in earnest since 1980. The economic class war now intensifying under George W. Bush is about to enter an even more aggressive phase. And the conflict over the radical restructuring of the tax system, and its impact on shifting incomes between classes in America, will be at the center of that continuing economic class war.

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