More about taxes

The phenomenon illustrated in my previous blog about taxes is explained by Richard Wolff. The following analysis is an excerpt from his book of A Cure for Capitalism and it is about the United States primarily, but it can be applied to Canada as well.

“In capitalist economies, governments are often caught between the demands of assertive coalitions of business and richest citizens and the demands of the mass of the people. In the United States (aka Canada) since the 1970s, such business coalitions have successfully obtained extensive government services and supports while simultaneously reducing their federal tax burdens and regulations. The burden of taxation was increasingly shifted onto the working classes (called “middle classes”). For example, whereas federal taxes on business had brought in far more than taxes on individuals in the 1940s, by the first decade of this century, that relationship had been starkly reversed: federal taxes on businesses brought in a quarter of the tax revenues collected from individuals. And whereas in the 1950s and 1960s, the richest US individuals faced a top income tax rate of 91 percent, repeated declines brought the top bracket to 35 percent by the first decade of this century… In the simplest terms, corporations and the rich partly utilized the explosion in profits that began in the 1970s to wield enough political power, in ways explained bellow, to shift the federal tax burden from themselves onto the “middle classes”.

The framework and rationale for this remarkable shift of the federal tax burden was neoliberalism. In more common language, the tax-shifting maneuvers were promoted as “job-creation” policies. With fewer taxes to pay, corporations would expand and rich individuals would invest: twin sources of more jobs. This theoretical argument is weak, however. Many other factors combine to determine whether and how much corporate or individual income saved from taxes will be spent on growth and investment. The empirical argument is weaker still: for every example of tax reduction encouraging job growth, counterexamples illustrate the opposite. Nonetheless, justified as creating jobs, tax reductions on the corporation and the rich occurred repeatedly and dramatically throughout the last thirty years. This was less because corporations and the rich wanted them – nothing new there – than because mass working-class opposition was not sufficiently mobilized to prevent them.

To explain how and why the political forces led to that outcome, I will begin by noting how corporations and the rich used their rising profits and their falling tax burden to shape politics. As they altered the tax system to their advantage, they worked hard to define “the tax issue” politically as having nothing to do with shifting burdens from one social group to the other. Politicians and politically motivated think tanks inundated public discourse with affirmations that all taxes were excessive burdens that sustained wasteful bureaucrats. Government employees did much that was useless or worse. Above all, they argued, government assistance sustained people who thereby avoided work or lost whatever work ethic they ever had. Costly and wasteful dependence on state support – and hence ultimately on taxes – replaced productive labor in private enterprises. Worse still, those who did work, the working classes, had to pay ever more taxes to support those on state support who did not. Likewise, taxes on corporations and the rich supported those who did not work while dampening and discouraging the corporate expansion and private investment that created jobs.

Corporations and the rich became load advocates of cutting taxes and wasteful, counterproductive government “welfare spending”. This would be the best policy for everyone. Politicians became advocates of restrained federal spending, balanced budgets, fiscal conservatism, and so on. Corporations and the rich funded political allies who made sure that tax cuts went mostly to them.

The pursuit of these politics had many detrimental outcomes. Reduced government tax revenues raise the question of what to do about the expenditure side of the federal budget. With lower tax revenue, Washington could more easily justify cutting social welfare spending. However, the groups calling for less government spending always encountered a daunting problem that often enraged them and strained their political relationships: the interests of many corporations and the rich people in US  capitalism are served by and depend on federal supports and spending. These beneficiaries fiercely protect the federal spending they want by using their profits and personal wealth to that end. Such beneficiaries include the military-industrial complex, energy companies, transportation companies, the health care industry, agribusiness, and many other commercial interests. Such groups also oppose cutting various kinds of social spending when they fear employees might successfully secure higher wages and salaries to offset such cuts.

The working class also resists federal spending cuts upon which it relies. Many in the working class want lower federal taxes, but without cuts in important areas of federal spending. Because the working class has for many years lacked the organization that might mobilize funds sufficient to compete with the profits and personal wealth that corporations and the rich use to buy political influence, it wields its influence in a disorganized and generally less effective way: through voting. Workers support candidates they perceive as being committed to lowering the overall tax burden without lowering the widespread benefits of federal spending.

The two sides place contradictory demands on the federal government and politicians elected to federal offices, who have responded by repeatedly cutting taxes on corporations and the rich, especially – but also, to far lesser degree, on the working class. Likewise, to the same end, they tend to avoid spending cuts that could risk alienating their financial supporters or voting constituents. However, that is widely recognized as a dangerous situation. Such moves have often ended political careers, serving as an object lesson to party leaders and elected officials that the far better political strategy is to find a way to both keep taxes down and government spending up.

The only way to accomplish this “resolution” of the contradictions capitalism imposes on the federal budget is deficit spending. The federal government must borrow if it is to sustain (or raise) federal expenditures while cutting (or not raising) federal taxes. Federal borrowing was, before the 1980s, a more exceptional practice and largely repaid thereafter. During the Great Depression, the Roosevelt administration championed deficit spending in a new way, as a key device in overcoming and reducing the social pain of major economic downturns. The work of Keynes defined deficit spending as an appropriate countercyclical fiscal policy – but deemed such deficits exceptional and thought they should be repaid once an economic downturn had given way to an upturn.

After 1980, it became routine practice to expand federal deficits and thus also the national debt in the United States and many other countries. Thus, when the major capitalist downturn hit in 2007 and continued for years, the federal government’s sudden, large counter-cyclical spending imposed big deficits and big increases on an already elevated US national debt. The severity and the urgency of the 2008 and 2009 economic crises and the resurgence of Keynesian economics combined to encourage and justify all the government borrowing. However, debt levels that had been rising since the 1970s, coupled with post-2007 explosion in additional debt, raised a new problem for capitalism internationally.

The major public lenders to borrowing governments were banks, insurance companies, large corporations, and wealthy individuals, as well as other cash-rich national governments. By 2010, these lenders were becoming concerned that the debt levels of the borrowing governments were becoming “dangerous”, lest they find taxpayers unwilling to pay the additional taxes or forego public services and jobs to free up the money to service such crisis-driven debt increases.”

The analysis goes on, but I have to stop somewhere. I hotly recommend to read the book.