Our Banana Republic

OP-ED COLUMNIST
Our Banana Republic
By NICHOLAS D. KRISTOF
Published: November 6, 2010


In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie.

But guess what? You no longer need to travel to distant and dangerous countries to observe such rapacious inequality. We now have it right here at home — and in the aftermath of Tuesday’s election, it may get worse.

The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.

C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.

That’s the backdrop for one of the first big postelection fights in Washington — how far to extend the Bush tax cuts to the most affluent 2 percent of Americans. Both parties agree on extending tax cuts on the first $250,000 of incomes, even for billionaires. Republicans would also cut taxes above that.

The richest 0.1 percent of taxpayers would get a tax cut of $61,000 from President Obama. They would get $370,000 from Republicans, according to the nonpartisan Tax Policy Center. And that provides only a modest economic stimulus, because the rich are less likely to spend their tax savings.

At a time of 9.6 percent unemployment, wouldn’t it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools.

Likewise, an obvious priority in the worst economic downturn in 70 years should be to extend unemployment insurance benefits, some of which will be curtailed soon unless Congress renews them. Or there’s the Trade Adjustment Assistance program, which helps train and support workers who have lost their jobs because of foreign trade. It will no longer apply to service workers after Jan. 1, unless Congress intervenes.

So we face a choice. Is our economic priority the jobless, or is it zillionaires?

And if Republicans are worried about long-term budget deficits, a reasonable concern, why are they insistent on two steps that nonpartisan economists say would worsen the deficits by more than $800 billion over a decade — cutting taxes for the most opulent, and repealing health care reform? What other programs would they cut to make up the lost $800 billion in revenue?

In weighing these issues, let’s remember that backdrop of America’s rising inequality.

In the past, many of us acquiesced in discomfiting levels of inequality because we perceived a tradeoff between equity and economic growth. But there’s evidence that the levels of inequality we’ve now reached may actually suppress growth. A drop of inequality lubricates economic growth, but too much may gum it up.

Robert H. Frank of Cornell University, Adam Seth Levine of Vanderbilt University, and Oege Dijk of the European University Institute recently wrote a fascinating paper suggesting that inequality leads to more financial distress. They looked at census data for the 50 states and the 100 most populous counties in America, and found that places where inequality increased the most also endured the greatest surges in bankruptcies.

Here’s their explanation: When inequality rises, the richest rake in their winnings and buy even bigger mansions and fancier cars. Those a notch below then try to catch up, and end up depleting their savings or taking on more debt, making a financial crisis more likely.

Another consequence the scholars found: Rising inequality also led to more divorces, presumably a byproduct of the strains of financial distress. Maybe I’m overly sentimental or romantic, but that pierces me. It’s a reminder that inequality isn’t just an economic issue but also a question of human dignity and happiness.

Mounting evidence suggests that losing a job or a home can rock our identity and savage our self-esteem. Forced moves wrench families from their schools and support networks.

In short, inequality leaves people on the lower rungs feeling like hamsters on a wheel spinning ever faster, without hope or escape.

Economic polarization also shatters our sense of national union and common purpose, fostering political polarization as well.

So in this postelection landscape, let’s not aggravate income gaps that already would make a Latin American caudillo proud. To me, we’ve reached a banana republic point where our inequality has become both economically unhealthy and morally repugnant.

I invite you to comment on this column on my blog, On the Ground. Please also join me on Facebook, watch my YouTube videos and follow me on Twitter.

Tax System Favors Wealth Over Work
Sunday 07 November 2010

by: Gerald E. Scorse, t r u t h o u t

Tea Partiers rage against taxes and say they’re too high. Wrong, says billionaire Warren Buffett: on the rich, they’re too low.

The tax code holds the answer to this standoff, and the code backs Buffett. Taxes may be the bane of the Tea Party, but they’re a relative boon for the wealthy. Let’s look at some of the ways America’s tax system keeps Warren Buffett’s fortune in Warren Buffet’s hands.

The major vehicle is George W. Bush’s 15 percent levy on long-term capital gains - the lowest since FDR’s first term - and on corporate dividends. The top 1 percent of US households owns nearly 40 percent of all privately held stock, from which the dividends flow. Similarly, the super-rich get more than half their income from capital gains, as documented by tax expert David Cay Johnston in his book “Perfectly Legal.” In the meantime, for the working middle-class, the tax rate on wages is 25 percent.

Taxing income from wealth at little more than half the rate of income from work: it’s the perfect recipe to make sure that Warren Buffett (and all the Buffett wannabes) pay effective tax rates far below what their incomes suggest.

How far below? In 2006, Buffett told an interviewer that his tax bill was “far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office” (and he repeated the statement only recently). His shame in 2006 hits home still: “How can this be fair? How can this be right?”

The tax code sets marginal rates too, and these were gutted by President Reagan in 1981 and again in 1986. He slashed the top rate from 70 to 28 percent, and made the code even less progressive by cutting the number of brackets from 15 to four. The yearning for tax simplification (fewer brackets) trumped the case for progressivity (more brackets).

There are six today, with the top four taxed at 25, 28, 33 and 35 percent - a narrow spread, easily offset by provisions like the capital gains rate. The top rate kicks in at about $400,000 of taxable income, a practice Johnston told Truthout he finds “bizarre.” It’s a long way, he argued in a recent email, from $400,000 to $1 million, $5 million, $100 million and hedge-fund billions: “Why don’t we have higher rates for those incomes?” he asked.

Even the bottom marginal rates help top earners. A millionaire, filing singly, pays the same 10 percent on the first $8,375 of taxable income as the working poor, and so on, up the income scale. As the Center on Budget and
Policy Priorities notes, the real winners from extending Bush’s middle-class tax cuts wouldn’t be middle class: “In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000 … ”

The tax code is also loaded with deductions that effectively rain down dollars on the rich. The code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top. All deductions get written off at 35 percent, starting with personal exemptions and standard deductions. This alone trims $7,315 off the tax bill of a post-65-year-old couple. The serious money goes to itemizers, with Uncle Sam handing out five-figure amounts to help pay mortgages on pricey real estate. (Step limits on personal exemptions and itemized deductions are set to return in 2011. The limits expired in 2010 as the last phase of Bush’s 2001 tax cuts.)

President Obama once proposed capping the mortgage interest deduction at 25 percent, the middle-class rate. His idea was attacked as class warfare and quickly died. This summer, in a piece titled “The Class War We Need,”
conservative columnist Ross Douthat was aghast to learn that the owners of McMansions were defaulting at twice the usual rate. “The rich are different from you and me,” he wrote. “They know how to game the system.”

They also know that Congress always stands ready to tilt the tax laws their way. When the market crashed in 2008, lawmakers rushed to pass a one-year suspension of required distributions from retirement accounts. Only the haves stood to gain. Those who actually needed the distributions had to take them and pay taxes. The haves took a pass and saved thousands. Back to Douthat: “In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores.”

It’s taken a fortune in lobbying and campaign contributions, but America’s tax system is bearing golden fruit. As even a conservative can see, it’s shifting income to the wealthy.