The Greed of the “Bottom Half”

We’ll shortly be hearing the objections of deficit hawks to the deficit reduction package Demos, The Century Foundation, and the Economic Policy Institute. No doubt they’ll echo the criticisms that have already been leveled at the deficit-shrinkage roadmap Rep. Jan Schakowsky put on the table earlier this month. To get a sense of what those criticisms are likely to be, I recently had a close look at a Schakowsky critique by The Atlantic’s resident deficit hawk, Derek Thompson.

The first thing that makes Thompson’s November 16 piece interesting is that it actually acknowledges the existence of Schakowsky’s plan. The second thing, only slightly less extraordinary, is that Thompson makes an effort to analyze and understand the proposal. It took the New York Times nearly two weeks after Schakowsky released it to even note that it was there (and even then, didn’t provide details).

What’s most remarkable about Thompson’s analysis, however, is that he lectures Schakowsky for not squeezing poor and low-income workers hard enough.

Is this a plan to reduce the deficit? Absolutely. But it is mostly a plan to increase taxes on businesses, rich people — and especially rich businesspeople. Corporations would pay the government more of their business income. Employers would pay the government more of their employees’ wages, while owing the feds more of their own wages, too. And investors would pay the government more of their investment income from corporate stock returns. A deficit reduction plan should also be a pro-growth plan. But the concentration of higher taxes on business, investment and upper-middle class workers is troublesome, especially as the bottom half of the country is asked to give up practically nothing on top of enjoying its lowest effective tax rates in recent history.

Let’s see what this all means. The “bottom half of the country” have been having it too good for too long. Low-income Americans do indeed face low effective tax rates, thanks mainly to the Earned Income Tax Credit. But Thompson seems to think that’s an excuse for demanding greater sacrifice from them. He seems to forget that these people suffer from high debt burdens, high unemployment, and little prospect – under current policies – of a brighter economic future for years to come.

Thompson’s right, of course, that “a deficit reduction plan should also be a pro-growth plan.” But his idea of pro-growth, just as it is for the other center-rightists whose deficit reduction plans have been garnering press attention lately, is pure voodoo economics. Just like the supply-side nostrums that Ronald Reagan peddled 30 years ago, Thompson appears to be calling for lower taxes on business and investment – who, incidentally, would benefit far more from the Bowles-Simpson deficit reduction scheme than would “upper-middle class workers.”

The idea, presumably, is that “business” and “investment,” given reliably low tax rates, will unleash the dynamism and creativity they’ve been holding in check the past three years, generating a new economic boom-time. The problem with this theory is that we’ve already tried it. Following the near-collapse of 2008, the Federal Reserve pumped America’s major financial institutions full of no-cost loans while the Treasury threw further funds at them in the form of TARP money.

It didn’t work. Some of the money Wall Street sat on, either using it in effect to protect the bad assets it refuses to write off its balance sheets, or pumping the funds back into its high-stakes trading desks. Until the economy recovers in some other, more robust way, there’s no reason to think “business” and “investment” will respond to lower tax income rates in any other way.

Yet that is the fundamental economic premise not only of the Bowles-Simpson plan, but of the other recent attention-getting deficit reduction package, the Bipartisan Policy Center plan concocted by Alice Rivlin and Pete Domenici.

The other question, of course, is what’s so terrible about raising taxes on companies? Says Thompson of Schakowsky,

All told, she gets $130 billion from removing tax benefits for companies without lowering the corporate income tax rate. The unfortunate upshot is that we would have one of the highest effective tax rates in the developed world, and companies would have a greater incentive to keep their businesses outside the US.

Let’s take a look at those tax increases, most of which take the form of eliminating tax breaks. First, let it be noted that those tax breaks, combined with the current corporate tax rates, actually place American companies among the world’s less taxed businesses. Second, the fact is that many of the breaks Schakowsky proposes to repeal are egregious, unproductive, and should have been abolished long ago.

For instance, there’s the Active Financing Tax Deferral for financial firms, which makes it easier for them to defer taxes on income earned abroad – and thus to outsource American jobs. There’s the tax policy that favors debt, which encourages companies to leverage themselves to the gills – a major factor in the recent financial crisis. That one alone accounts for more than half the “tax increases” Thompson decries.

Then there’s the tax break that allows companies to write off “intangible assets,” the details of which are slanted to subsidize mergers and acquisitions – and thus encourage American business to concentrate more on churning their ownership than on productive activities. Finally, I’ll point to – the list goes on – elimination of the deduction for business meals and entertainment.

Nothing further need be said about that one. (Except, did you hear about the Wall Street trader who threw a bizarre bachelor party in Miami the other day that included his being handcuffed to a dwarf? I wonder how much was expensed out of the amounts spent by the attendees at that affair.)

Does Thompson really think that ending these giveaways would have the slightest effect on American productivity, GDP, job creation, or any other legitimate economic growth factor?

Meanwhile, Thompson tags as “fairly radical” Schakowsky’s proposal to eliminate the cap on employers’ contributions to Social Security and restore the cap on workers’ contribution to 90% of earnings, plus a surtax above that amount. In fact, raising the cap to 90% is one of the proposals included in the Simpson-Bowles plan. It’s been around for a long time. Even George W. Bush expressed interest in it from time to time. It’s hardly radical.

Thompson complains also that Schakowsky won’t consider what he calls “smart Social Security reductions for richer retirees.” This is also known as means testing. As has been shown in study after study, it can’t produce meaningful reductions in Social Security costs unless it digs deeply into the benefits going to the middle class.

In the end, Thompson’s objections to Schakowsky’s plan amount to class warfare: a plea to preserve the privileges the financial elite have acquired by dint of decades of hard lobbying, at the expense of the middle class and low-income households. Look for the Demos-Century Foundation-Economic Policy Institute proposal to meet with much the same response.

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