February 27, 2009

Obama's Tax Plan Would Increase Equality

After the American Century

President Obama has been forced to spend much of his first month in office dealing with Bush's mistakes, particularly economic mistakes. With the submission of a new budget proposal, however, he has begun to present his own vision. He does not want to spend all his time being a fireman putting out Republican fires. Rather, he wants to redesign the economic fabric so that the economy is stronger and more resilient.

In the short term, Obama is spending lavishly to try to escape the mess Bush created. That is the gigantic budget one reads about. But longer term Obama wants to return to the tax system of that most dangerous radical, Dwight D. Eisenhower. During Ike's presidency (1953-1961) taxes on the wealthiest Americans were high, and although adjusted they remained so during the 1960s as well.

During these years the real income of the middle class (in other words their income once adjusting for inflation), rose steadily. After the weak economy of the 1970s, however, Ronald Reagan pushed through dramatic reductions in the tax rate on the wealthy, which began a sizable redistribution of wealth that has lasted for almost thirty years. I lay out the basics of this change in Contemporary American Society (161-166). Just before Reagan lowered taxes on the wealthiest Americans, the top fifth of all US citizens received 43.7% of all income, while the bottom fifth got just 4.3%. In other words, the top fifth made ten times as much as the bottom fifth. By 2005 the poorest fifth had sunk to just 3.4%, while the top fifth received 51.3%. The top fifth made fifteen times as much as the bottom fifth.

What about the middle 60%, the second, third, and fourth fifth? During the same 25 years all of them, the entire middle class, lost out to the wealthiest fifth. In short, between 1980 and 2005, fully 80% of all Americans saw their share in the nation's wealth drop.

With the collapse of the Reagan-Bush economy and its favoritism for the rich, it is time for a new tax code. Something radical. Something that Dwight D. Eisenhower and Harry Truman each supported. That something is familiar to anyone in Scandinavia, and is called progressive taxation. The object of public policy is not to take money from the poor and middle class and give it to the rich, but to give all classes an equal chance to increase their stake in society.

Expect to hear howls of protest from the Republicans and cries of socialism and fears of big government, and the usual rhetoric of the right. For Obama wants to reverse the Reagan revolution. He wants not just to end the Bush tax cuts that threw the budget into deficit years ago, but also to raise taxes on the top fifth of society, in order to pay for the sweeping changes he wants in energy policy, education, and medical care. Over the next decade, Obama wants to get almost $1 trillion in new taxes from the wealthiest Americans. In case you want to know, they are defined as people with incomes of more than $250,000 a year. (More than 1.4oo,000 DK).

Obama is also hoping to save some money through cuts to the Defense Department, partly from winding down the engagement in Iraq and partly through cutting spending on programs that have outlived their usefulness with the end of the Cold War. I wish him luck but am not too optimistic about this phase of his plans. One would have thought that the fall of communism might have reduced defense spending drastically. Back in c. 1990 there was lots of talk of a "peace dividend." There was talk of spending more money on infrastructure, notably decaying bridges and roads. But there was not much of a peace dividend then, and Obama's first defense budget is larger, not smaller, for the two year period of 2009 & 2010, weighing in at a gigantic $1.3 trillion.

Realistically, Obama is more likely to move in the direction of fiscal responsibility via higher taxes on the rich. He will probably be accused of class warfare, but he is trying to end the pillaging of the poor that began under Ronald Reagan. Obama is rejecting "trickle down" economics. He wants the US government to take more responsibility for health and education, and to give Americans back the growth and equality they had in the prosperous 1950s and 1960s. No doubt he will be called a radical and a socialist for trying to do this. Few sensible people ever mistook Dwight D. Eisenhower a socialist.

For a Nobel Prize-winning economist's positive evaluation of the Obama budget, click here.