Wayne O'Leary

Taxmageddon Reform

In the end, the president and his Democratic allies stood on the edge of the “fiscal cliff,” looked over into the forbidding unknown below, and decided they couldn’t risk stepping off. It was in keeping with the extreme caution in policymaking that still defines the Obama administration and the centrist Democrats even after November’s resounding win at the polls.

The White House was transparently desperate to make a tax deal with its Republican opposition during the lame-duck session of the 112th Congress, unwilling to extend negotiations a week or two into the new, less conservative 113th, when a settlement more satisfying to progressives — and more beneficial to the country — would have been there for the taking.

The Kabuki dance we saw play out was part of what is now a well-established pattern: President Obama lays out his objectives, sets the parameters for discussion, and then immediately begins to soften his position in pursuit of compromise; obstructionist Republicans, who know their man, hang tough, understanding that eventually they’ll get much of what they want, even if (as was the case) the president holds most of the cards.

Here’s what they got in December’s wrangling over revenues: a minimalist income-tax rate increase that affected less than 1% of earners, leaving the prosperous upper-middle class (and the lower portion of the upper class) untouched; a small rise in capital-gains and dividend taxes that preserved the “carried interest” loophole and largely spared private-equity moguls; and a miniscule hike in estate taxes that didn’t come close to approximating the levels of the pre-Bush years. In an ironic twist, the Democrats, who railed for 10 years against the Bush tax cuts, ultimately accepted them as settled policy.

On income taxes, the Obama reform merely returns us to the Clinton-era top tax rate (39.6%) in force from 1993 to 2001, a level nowhere near the hefty rates levied on the wealthy before Ronald Reagan began hacking away at them in the 1980s.

On capital-gains and dividend taxes, the new law replaces the absurdly low 15% rate with a more reasonable 20%, where it was just prior to Bush, but again, applicable only to the highest investment incomes and nowhere close to the 25-to-35 percent that prevailed from the 1960s through most of the 1990s.

And on estate (or inheritance) taxes, the richest Americans will pay incrementally more — 40% after exemptions of $5 to $10 million, rather than the present 35% — but once again, nothing close to the 55-to-80 percent rates imposed between 1930 and 2000, and less than even the modest 45% initially proposed by the president.

The very minor adjustment to the estate levy, in particular, is a munificent holiday gift to the One-Percenters that was overlooked in the tumult and shouting over income-tax rates. It dilutes the essence of reform by perpetuating the subsidized maintenance of a hereditary ruling class that can continue from generation to generation, influencing public policy without contributing in any meaningful way to the economic well being of the nation. These are not family farms being passed on — they are largely exempt from this tax — but vast monetary bequests in the multiple millions or billions of dollars.

One of the worst features of the fiscal-cliff tax increase is that it doesn’t kick in until close to the half-million-dollar mark in income ($400,000 for individuals and $450,000 for households in annual salaries and/or investment returns), thereby abandoning promised intentions to include the upper 2% (over $250,000). What this can mean for Americans in different circumstances is instructive.

Take, for example, the comparative tax obligations of a typical wage earner making $40,000 a year (close to the national average) and someone (say, a high-echelon business manager or professional) earning $400,000 annually. The imagined wage earner will pay 2% more in Social Security payroll taxes on his entire wage base starting this January, because the temporary payroll-tax reduction (from 6.2 to 4.2 percent) was not renewed in the reform package; this means his annual federal tax will rise by $800.

By contrast, the salaried individual will pay an additional $2,274 in Social Security taxes on his first $113,700 in income (the unconscionable 2013 payroll-tax cutoff), plus a 0.9% Medicare surcharge on incomes over $200,000 amounting to $180; that’s three times as much added tax ($2,454), but it’s on 10 times the income, a bargain for the high-salary guy, three-quarters of whose earnings are untouched by the payroll tax. His effective payroll-tax increase amounts to just 0.61%, a third the rate increase his lower-paid counterpart will be assessed.

And, of course, the $400,000 fellow will pay no additional income tax on either salary or investments under the revenue deal; he’s part of the favored upper-middle class bordering on membership in the One Percent that Washington has chosen not to burden with further taxes. Illogically, the December tax increase exempts better than 99% of the population in the name of protecting “the middle class” from taxation.

The truth is we can’t solve our fiscal problems without both a broader-based tax increase that raises everyone’s contribution a bit, plus a greater input from members of the One Percent, whose average annual income was an astounding $1.2 million in 2008. A good place to start would be to level the playing field by adding some new tax brackets at the top end to tap the ultra-wealthy, scaling up from 39.6 to perhaps 50 percent.

So why, given the obvious shortcomings of the Taxmageddon deal, didn’t the president go “off the cliff?” After all, the reform will raise only $600 billion or so over 10 years, far short of the $1 trillion or more in revenue supposedly necessary to address the deficit without massive spending cuts, including to entitlements. The answer is there were other priorities, namely, reassuring Wall Street, which dislikes uncertainty and unpredictability.

Wall Street and “the market” are the primary constituents of both political parties, and the deal struck satisfies the necessary symbolism of having rich investors pay “a little more” without really jeopardizing their interests; it thereby paves the way for more “shared sacrifice” down the road. The sound you hear is the other shoe dropping.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy, and he is the author of two books.

From The Progressive Populist, February 15, 2013