Sunday, November 14, 2010

Redefining Class Warfare

Historically, class warfare has been defined as actions taken to redistribute wealth from the rich to the less affluent. The op-ed by Frank Rich, cited above, provides data that suggests that we need to redefine class warfare. The data indicate that in "building a bridge to the 19th century", or to the new gilded age that characterized America at the turn of the last century, the warfare has been conducted by the super-rich against everyone else. It has been accomplished with the assistance of politicians in need of contributions to fund increasingly expensive election campaigns. Even as the income gap between the top earners and the middle class has widened, tax policy has made the after tax income gap even wider. Moreover, the arguments made to preserve tax policies that favor the super-rich, are shown to be specious when we consider the current debate over the extension of the Bush tax cuts which made the federal tax code considerably less progressive.

The administration favors extending most of the Bush tax cuts ; it would reset the top marginal tax rate for households with incomes over $250,000 back to the rate that was in force during the Clinton administration. The GOP calls this class warfare. Their argument is disingenuous at best. They frame it as a war against small business owners, few of whom would be considered as super-rich. In other words they understand that it is easier to defend small business than the super-rich politically, even though the increase only applies to 2% of small business owners who are in that income category. Moreover, even for those with incomes between $200,000 and $500,000, the average tax increase would be around $700 per year. Their hypocrisy is even greater when they make believe that they care about budget deficits and the national debt with full knowledge that maintaining the Bush tax cuts will add $700 billion to the national debt by 2020.

The new gilded age is not about small business owners who are portrayed as the target for the tax increase. It is about the top 1% of Americans who have seen their incomes rise dramatically in recent years. In 1976 the top 1% received 9% of the national income. This group received 23.5% of the national income in 2007 while the incomes of the middle class have barely risen at all. To make matters worse, the tax burden has been shifted from the top 1% to the middle class by changes in tax policy. Tax rates for the top 1% are 33% lower than they were in 1970. This has been done by reducing the top marginal income tax rate dramatically, but also by substantially cutting taxes on dividends and capital gains. Of course, the tax cuts on capital gains and dividends primarily benefit the super-rich whose share of the wealth in America is even greater than its share of income.

In conclusion, there has been class warfare in America for the last 30 years. It has been conducted by the super-rich who have seen their share of income rise at the same time that their taxes as a percent of their income has fallen. We need to understand that there is a difference between tax cuts and a shift in the tax burden. The super-rich pay more in taxes than the middle class because they earn more taxable income but the critical metric is not the amount of taxes paid. The tax incidence for the super-rich has fallen at the expense of the middle class. It is also important to understand that a tax cut has the same impact on the national debt as an increase in government spending. Tax cuts only reduce the national debt when they are paid for with spending cuts. The largest tax cuts occurred in the Reagan and Bush administrations. They were not paid for with cuts in spending, they were funded with debt. Consequently, they are responsible for the most of the increase in our national debt prior to the Great Recession.


  1. welcome back to feudal Europe... nobles need not pay taxes!

  2. At this stage in the game, I would prefer letting all of the tax cuts expire rather than extending all of them. Since having the cuts extended only for the middle and lower classes seems to no longer be a possibility, this would be the most fiscally responsible thing to do. That is, assuming, that we actually care about the deficit as opposed to using it as a talking point.

    Its a political risk, but it would be interesting to see how the newly elected Republican House could defend allowing taxes to increase on the middle class because they also had to increase for the rich.