Tax Refunds Help Rich, Hurt Poor By MICHAEL MARCHANT Commentary

Tuesday January 04, 2005

Not since 1929, the year that marked the beginning of the Great Depression, has wealth in the U.S. been so heavily concentrated among the richest 1 percent of the population. This trend towards economic inequality increased sharply in 1970, and since that time there has been an enormous shift in the distribution of national income from the working class to the wealthiest Americans. For every consecutive year between 1970 and 2000, the annual incomes of the richest 10 percent of Americans have risen, without exception, while the annual incomes of the bottom 90 percent have declined. Even more startling, however, is that this income shift went almost entirely to the richest 5 percent (annual incomes of $178,000 and above), with the richest 1 percent (annual incomes ranging from $384,000 to $777,000) seeing the greatest increase compared to all other income groups. This trend is likely to grow by leaps and bounds during Bush’s second term in office. 

This gross economic inequality can be explained, in part, by a regressive tax system in which the poor and middle class often pay more in taxes than the rich, as measured by percentage of income. Take Bush’s latest round of tax cuts that will take full effect in 2005: Those with incomes over $1 million a year will receive a tax cut of $135,000 a year, while those with incomes less than $76,000 will get about $350 on average. That is, while millionaires will be given a raise that amounts to 13.5 percent of their income, the majority of Americans will see their incomes increase by approximately 1 percent. With respect to the tax on capital gains, from which the richest Americans earn virtually all their income, the tax rate in 1987 was 28 percent. Today, that number has dropped to 15 percent. How about U.S. companies that are forever threatening to take their money overseas due to the heavy tax burden they face in this country? It turns out that between 1996 and 2000, 63 percent of all U.S. companies paid zero corporate income taxes on revenues totaling $2.5 trillion. Furthermore, five trillion dollars is now sheltered in offshore tax havens by individuals and U.S. companies. That number was $200 billion in 1983. 

The combination of tax cuts for the wealthy and a seemingly endless “war on terror” that has cost hundreds of billions of dollars has resulted in record budget deficits at the federal and state level. These record deficits are exactly what is desired by the neo-conservatives in Washington DC and in state government who have used these deficits to justify the dismantling of Roosevelt’s New Deal programs and the privatization of services historically performed by the public sector. This shift from public to private has further exacerbated the problem of economic inequality in the U.S. With its narrow focus on profits and market share, corporate America must cut “costs” in order to remain competitive. These costs include paying employees a living wage, providing workers with health insurance, ensuring workplace safety, and overtime pay. To get a sense of how workers have fared in the private sector over the last couple decades, consider the following: In the early 1980s, typical U.S. CEOs earned about 40 times the pay of their average employee. Today, they earn more than 400 times the pay of their average employee. This gap has widened despite the fact that worker productivity rose continuously between 1973 and 2000. In fact, output per person in the U.S. is the highest in the industrialized world.  

While many of the aforementioned policies regarding taxation, military spending, and privatization are planned and implemented in corporate boardrooms, in Congress, and in the executive halls of government, the consequences are felt sharply at the local level where city and county governments are starved as states take away local revenues to address growing budget deficits. In Berkeley, the city’s residents, led by the anti-tax group BASTA, dealt a further blow to the city by rejecting four tax measures this past November that would have funded much needed city services. The result will be further cuts to city services that will mean the loss of jobs that pay a living wage and offer comprehensive benefits, and a reduction in services provided to low-income residents.  

Apparently, Berkeley residents voted down the four local tax measures because they believe that they pay too much in local taxes. It is true that Berkeley residents pay more in local taxes than residents of other cities throughout the state. But the issue of local taxation is best understood in the broader context of wealth and income inequality. In other words, it is difficult to take seriously the grumbling about excessive local taxation from residents who earn $100,000 or more a year. These folks are among the richest 10 percent in the country and this group has seen their real income increase every year for the last 30 years, in part because they are the beneficiaries of regressive state and federal tax policies. On the other hand, the grumbling from low and middle-income residents (and from new homeowners who typically pay well over half a million dollars for Berkeley homes) seems to be more legitimate, in my opinion. But it is precisely this group of low and middle-income earners who are best served by a strong and viable city government. For one, they benefit from the extensive city services that are available to all residents. Secondly, a strong city government will, in theory, mean that good public sector jobs will be available to residents from a variety of socio-economic backgrounds. Whether the goal is a just society or the creation of solid public sector jobs for generations to come, funding local government by supporting modest and progressive tax increases makes good sense.