Tea Party tax rant a case of barking up wrong tree

Business Times - 04 Oct 2011

Tea Party tax rant a case of barking up wrong tree

Accusing Mr Obama of being a Marxist means putting Mr Buffett in the same boat


REPUBLICAN lawmakers and the party's presidential candidates are bashing President Barack Obama's proposal to increase the tax rate on America's millionaires as a form of 'class welfare'. Speaking to conservative radio host Michael Berry, Tea Party Representative Allen West, a Republican from Florida and a Tea-Party icon, insisted that by calling to raise the tax burden on the wealthy, Mr Obama was intentionally harming the US economy because he was a 'Marxist' and a 'socialist'.

And so apparently is Warren Buffett, the second-wealthiest person in America. After all, as Mr Obama explained, his proposal to make Americans such as Mr Buffett pay more of their income to the federal government was based on the advice he had received from that infamous Marxist, Warren Buffett . . .

The 'socialist' plan advanced by Mr Obama suggests that those Americans earning more than US$1 million a year pay at least the same tax rate as middle-class earners whose median income is about US$50,000 and who pay some 20 per cent in taxes a year.

As Mr Buffett has been telling audiences across America in recent months, the hundreds of millions that he makes every year are taxed at just over 17 per cent - a lower rate than what his secretary pays. Hence, the so-called Mr Buffett Rule: If you make more than US$1 million a year, you should pay at least the same tax rate as your secretary and janitor.

In fact, those making more than US$1 million a year - or for that matter, US$500,000 a year - are supposed to be taxed at a rate of about 35 per cent. But thanks to a series of tax deductions and loopholes approved by the Wall Street- friendly Congress in recent decades, they pay well less than that. For example, capital gains, which is the main source of income for financial tycoons such as Mr Buffett, are now taxed at 15 per cent and a bunch of well-paid tax lawyers and accountants allow the Buffetts of the world pay as little as possible in taxes.

If one listens to the narrative promoted by conservative Republicans and their allies in the Tea Party, business executives, Wall Street bankers, and hedge fund managers are seeing their wealth being taken over by those socialist bureaucrats in Washington and are being forced into destitution while their money is being redistributed to the lazy and non-productive people.

In reality - as opposed to the imaginary universe where many of the Republicans seem to be residing - the marginal tax rates on the wealthy has been dropping and are the lowest they has been since 1945. Under the Dwight Eisenhower administration, it was more than 90 per cent and it has been falling dramatically since then, thanks to legislation promoted by presidents from both parties and approved by large majorities in Congress.

Much of this kind of reverse wealth redistribution has been initiated and administered by politicians in Washington, driven by the influence of the free-market ideology preached by Republican president Ronald Reagan as well as by Democratic White House occupant Bill Clinton.

And, indeed, lower taxes and less regulation seemed to be raising productivity levels in the US. The economic boom of the 1990s helped create a political environment under which the wealthy were encouraged to make even more money and allowed to pay even less taxes on it. That was when the tax rate on capital gains dropped from 35 per cent to 15 per cent and the accompanying deregulation of the financial industry took place.

After all, at a time when the economy was growing and even members of the middle class were getting richer - or at least that was the way things looked then - there seemed to be less political pressure to extract more tax money from the new class of billionaires. The revenue of the federal government was growing, allowing Washington to continue subsidising a very generous welfare state - while balancing its budget.

That may explain why for so many years there has been almost no discussion in Washington and elsewhere over the growing income gap in the US, where the top one per cent's share of national income has doubled over the past three decades - from 10 per cent in 1981 to well over 20 per cent today, and the richest one-tenth of one per cent's share has tripled.

These numbers should have probably ignited political debate even before the start of the financial meltdown and the ensuing Great Recession. No democratic system can remain viable in the long run when a small minority of the citizens end up controlling larger and larger chunks of the national income.

But the collapse of the financial system and the destruction of what had served as the main sources of the (imaginary?) wealth for the middle class in the last two decades - rising house prices and pension plans that were invested in the stock market - made most Americans poorer than ever.

Adding insult to injury was what amounted to another form of reverse wealth-distribution. The tax money of middle class Americans was utilised to bail out the financial institutions on Wall Street at a time when most Americans were losing their wealth and their jobs.

And just when more and more Americans required more and more assistance - unemployment benefits, welfare payments, housing assistance, healthcare costs - from a welfare state that depends in turn on revenues from a debt-ridden federal government in order to survive another day, Republicans are proposing that the time has come to, well, shrink the welfare state in order to pay the debt of the US government. At the same time, the Republicans want to reduce the tax rates on what they refer to as 'job creators'.

The notion that raising the tax rate - by a few percentage points - on Mr Buffett and his wealthy friends is going to discourage them from creating new jobs makes very little sense at a time when companies are not hiring because they recognise that the demand for their products is going to remain low for some time to come.

In fact, Mr Buffett and other millionaires and billionaires recognise that the obliteration of America's middle class is bound to erode the foundations of the American economy and create a political backlash that could harm their own interests. Better to pay more now in order to help sustain the welfare state - while reforming and making it more cost-effective - than face, in the not-so-distant future, an angry electorate bent on punishing the rich.

Moreover, America's productive job creators benefit when the nation's infrastructure is being rebuilt, its schools produce educated workers, its citizens are healthy, and its police and fire-fighters can protect their property and business.

So it is not surprising that many of the nation's wealthiest do not buy into the radical Tea Party's no-taxes dogma and are adhering to the genuine conservative principles. They are willing to pay their fair share in helping their fellow citizens rebuild the ailing national economy.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


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