Class warfare, redux

December 30, 2005

The New York Times noted today that “a surprise awaits the nation’s highest earners when they file their 2006 tax returns” because “their taxes are going down again.” It’s not the new tax-cut package congressional Republicans are working on as part of their budget deal; the NYT is referring to already-passed tax cuts that are about to take effect.

On New Year’s Day, two additional tax cuts will kick in, allowing people who earn upward of $200,000 a year to claim bigger write-offs for a spouse, their children and other expenses, like mortgage interest on a vacation home.

The bolstered write-offs were enacted in 2001, but with a delayed start date because of their high cost: according to Congressional estimates, the new breaks will cost $27 billion over the short term, exploding to $146 billion from 2010 through 2019. By then, most of the benefits would flow to taxpayers who make more than $1 million a year.

With the nation deep in debt, at war in Afghanistan and Iraq, with Congress voting last month to slash programs for health care and student loans, and with a debilitating shortfall building in Medicare – the decision by Congress to let these particular tax breaks take effect now is flabbergasting.

Indeed, it is, but when these “new” tax cuts are described as disproportionately benefiting the wealthy, what does that mean exactly? The Center on Budget and Policy Priorities spelled it out in a helpful report this week.

More than half of the gains from the two tax cuts — 54 percent of them — will go to the 0.2 percent of households with annual incomes above $1 million, while 97 percent of the tax-cut benefits will go to the 4 percent of households with incomes above $200,000, according to the Urban Institute-Brookings Institution Tax Policy Center.

When the two new tax cuts are fully implemented, millionaires will gain an average of $19,000 a year, which will be on top of the average tax cut of $103,000 they received in 2005 due to other tax cuts that have been enacted since 2001.

As Sam Rosenfeld noted yesterday, this is probably the “ultimate modern ‘dog bites man’ story.” The notion that Republican policy makers not only love fiscally irresponsible tax cuts, but have also ensured that they only benefit those in the upper incomes is routine to the point of cliche. Nevertheless, the Republicans’ deliberate fiscal insanity is still worth pointing out from time to time.

On a related note, Treasury Secretary John Snow said Congress will need to raise the government’s debt ceiling, currently capped at $8.18 trillion. It’s a nice bookend to the tax-cut story, isn’t it?

It’s probably also worth mentioning, as CBPP does, that if Congress repealed both these provisions and the cuts in the reconciliation bill, the net effect would be to reduce the deficit.

  • The strange thing about it is that yes the wealthy get to keep more money, but all this will do is drive up the costs of the goods they buy because the goods are just as scarce as before. After all, Rolex only exports 100,000 watches to the US. Now that the people who buy Rolexes have more money, Rolex can simply charge more for their watches and still expect to sell them all. So no net gain for the wealthy.

    The only point to getting more money is if it allows one to move ahead in the relative income rankings, and this tax cut doesn’t do that. Only with a relative improvement in the ranking do you really see an increase in purchasing power because now you can outbid your peers for scarce goods. Sometimes the super-rich, and their desire for tax cuts, just baffle me.

  • I mean this as a serious question, but what is the GOP defense on mortgage interest deductions on vacation homes? I can come up with a few snarky defenses but nothing that people can say without laughing.

  • Mr. Flibble –

    I think there are still plenty of shoes for
    Condi to buy at uninflated prices.

    What the super rich do with this largesse
    is simply pile up more wealth, to be taxed
    not at all, or at a limp 15% on the realized
    portion of their gains – compare that to the
    working stiff who pays a marginal rate
    of 27% on his EARNED income. Then
    they hand these gigantic sums down to
    their heirs, without taxation, so that family
    fortunes continue to grow in perpetuity,
    even if the heirs are hopeless ne’er-do-
    wells, like GWB.

    I would also point out that the amount of
    wealth pileup far outstrips any inflated
    prices that they might have to suffer
    from a limited increase in consumption
    of scarce luxury goods. We must also
    remember that they own these companies.
    I think they can figure out how to obtain
    what they want without being gouged
    by themselves.

    And the merely rich do pretty well
    themselves.

    For a classless society that prides itself
    on equal opportunity, this ought to be
    something of an embarrassment, but it
    doesn’t seem to bother anybody,
    least of all those who get hurt the worst
    by this shameless policy of trickle down
    economics.

  • Whenever I get into arguments about the so-called death tax with conservatives, I point out that there is an inherent contradiction in their worldview. Conservatives just HATE people getting money without working for it when it’s welfare or medicaid. The poor, they say, should WORK for their money – it builds character. But the right LOVES it when people get something for nothing via inheritance.

    And as to the argument that getting something for nothing is bad for one’s character, I have two words to say:

    PARIS HILTON

  • Hark,
    My point is that the growth of family fortunes doesn’t translate into real progress for a wealthy person unless, say, my progress outstrips yours. Social science research on the super-rich indicates that they continually compare the perks and privileges their wealth brings (whether art, desirable real estate, or political influence) with those of their peers & rate themselves accordingly. So if they think a tax cut is going to enable them to get ahead of their competition, then they are wrong. My point wasn’t that Condi would have to do without her shoes, but rather that her relative status remains essentially unchanged. If her power and prestige are unaffected by the tax cut, then what was it all in aid of?

    You raise another good point with respect to the perversities of accumulating wealth via this tax cut, since it is really an artificial and temporary increase in one’s bank account (besides being ephemeral, for reasons I just mentioned). Saving is good for the individual, but bad for the economy. Spending money is what makes the economy work. Hoarding it, even simply paying off debt, inhibits economic growth. If anyone needed a tax cut, it’s those people who are having to borrow to pay their debt. This is yet another reason why I don’t understand this notion of tax cutting for the rich. People get rich because others are willing to spend money. But if people don’t have money to spend, or refuse to spend what they have, then businesses will fail and rich people will inevitably become less rich.

  • “Saving is good for the individual, but bad for the economy. Spending money is what makes the economy work.”

    Amen Mr. Flibble. If these asshats were concerned at all about truly helping the economy, they would start by cutting the taxes of those who need to spend the extra money and would in fact spend the extra money.

  • Hark,
    I just thought of a better example of what I mean. Pretend that you and I are bidding for a scarce resource (say, the favors of a Congressperson in the form of a government contract–he can awared it to either you or me, but not both of us). Congresspeople, after all, cannot do favors for everyone, so they have to pick and choose where to bestow their influence.

    So you and I (and all of our peers) just got $1 million from the government in the form of a tax cut. Yes, we have more money. But the Congressperson still cannot help more than one of us. So the cost of influence will go up and those people who were ahead of us before the windfall would still win the contract just like before.

    Do you see? This tax cut is not only a phony benefit for the rich, but, as I said in #7, it is actually hurtful.

  • Mr. Flibble,

    There is one price that can be driven down by these tax cuts – people. More un(der)employed with less oppurtunity will do more less. You’re right that people gain no advantage buying things, but they gain an advantage purchasing more people. The material comforts become less and less comforting as more exciting/interesting avenues are searched for. Debauchery increases as the ruling class become comfortable and disillusioned by their own power(Gannon/Guckert anyone?).

  • “More un(der)employed with less oppurtunity will do more [for] less”

    True, perhaps, but to no real advantage. Because if we (in the aggregate) pay people less, we would ultimately be forced to lower our prices in order for people to buy enough of our products and services to enable us to stay in business. Profits therefore decrease along with our wealth. If the rich make everybody into serfs making 10 cents a day, then GM, Delta, and Walt Disney World executives would either have to bite the bullet and charge less or go under and join the servile ranks.

    That’s the real irony of Bush’s economic policies–they are superficially “pro-wealthy” but ultimately everybody loses. Unfortunately, the wealthy don’t realize this.

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