Jack Rasmus

COMMENTARY: THE FOLLOWING IS THE SECOND OF TEN INSTALLMENTS ON ‘AMERICA’S TEN CRISES’, ADDRESSING THE U.S. ‘INVERTED’ TAX SYSTEM, WHICH HAS BEEN TURNED UPSIDE DOWN OVER THE PAST THREE DECADES, SHIFTING TAXES FROM THE RICH AND CORPORATIONS TO MIDDLE AND WORKING CLASS AMERICA.

The U.S. tax system has been ‘turned on its head’ over the course of the past three decades. It begins with Reagan in 1981 and his $752 billion tax cuts (on a base GDP or only $4 trillion), the vast majority of which accrued to the wealthy and their corporations. A massive shift in income, led by (but not limited to) tax cutting effects has been the outcome. The top tax rates in 1980 were 50% and 70%, they are now nominally 35% (income and corporate) and 15% (capital gains and dividends). However, the effective federal tax rates are 16% for the rich on average, after their tax lawyers get to squeeze the IRS. And State and local taxes on the rich and corporate America have declined even more, as local governments ‘race to the bottom’ in recent decades to desperately try to attract businesses to move to their states. And let’s not forget the $1.4 trillion multinational corporations have stuffed in their offshore subsidiaries in order to avoid paying even the nominal 35%, or their periodic blackmailing of Congress to lower the 35% to 5% to bring back those profits—which they did in 2004 and are proposing once again in Congress. Not to be outdone, don’t forget the $4-$6 trillion that hedge funds, very high net worth individual US investors, and other financial institutions have squirreled away in their 27 offshore ‘tax havens’ to avoid paying the same.

Conversely, taxes on the bottom 80% of US households have risen on net, when one considers the historic hikes in payroll taxes since 1985 and other increases in state and local taxes and fees. The payroll tax alone the past quarter century has raised nearly $3 trillion in federal revenue—money that did not go into the social security trust funds for long but was ‘borrowed’ by Congress every year to help pay for—you guessed it, more tax cuts for the rich and wars. The Bush tax cuts of 2001-04 alone, more than 80% of which has accrued to the top 20% and corporations, has cost nearly $3.5 trillion over the past decade. Should those tax cuts continue for another decade (which is the No. 1 goal of Republicans and corporate America after the election) it will cost the US deficit another $4.6 trillion, according to the Congressional Budget Office’s 2012 projections. The Bush tax cuts represent Reagan tax cuts ‘on steroids’.

Immediately following the US November 2012 elections, in a matter of weeks, watch for even more generous tax cuts for the rich and their corporations—agreed to by both parties. At the heart of the deal will be an extension of most of the Bush tax cuts, and now a reduction as well of the top tax rate for corporations and the wealthy, from the current 35% to around 25%. Middle class tax deductions will be reduced to pay for the deal in part, but most of the cost will be absorbed by massive cuts in spending on health care, education, and other services including Medicare, Medicaid, and Social Security disability benefits. Token, difficult-to-enforce tax loophole closings will help sell the deal, as well as continuing of payroll tax cuts that gut Social Security’s Trust Fund by more than a hundred billion dollars a year—thus serving to ‘starve the beast’ further, as conservatives like to say, and bringing the entire social security system closer to crisis down the road.

The inverted tax system today cannot continue without even greater negative consequences for the US economy long term. It not only has resulted in a massive shift of income upward, and a stagnation in consumption for the bottom 80% households, but has served as a primary excuse for directly attacking the deficits it has produced by cutting spending on programs that are essential for continued economic growth as well.

What the inversion of the U.S. tax system over the past three decades shows is that the U.S. is ‘not broke’. There is at least $5 trillion in cash being hoarded by the rich and their corporations today as a result of the inverted tax system in America. The so-called deficit and debt problem could be cut in half immediately by simply discontinuing the Bush tax cuts as a whole; and eliminated completely by simply rolling back the tax cuts for the rich back to 1980 levels. The inverted tax system is also the no. 1 contributor to the massive income inequality that now characterizes American society. It is also a major reason why sustained economic recovery has not occurred since 2009.

What is needed is a new tax structure that takes the current inverted system and puts it back on its feet, taxing the rich and corporations at appropriate rates once again while reducing taxation for the working and middle classes in order to ‘re-redistribute’ income and to free up income to produce real consumption growth once again.