Monday, September 20, 2010

Entitlements, Taxes, Inequality and Three-Way Class Warfare

The facts about taxes, entitlements and wealth inequality do not neatly fit any ideological straitjacket. This is blinding many to the seeds of 3-way class warfare in the U.S.

Longtime readers know that I reject all ideologies as misleading shortcuts taken to avoid rigorous independent analysis. This is why I am routinely accused of being "right-wing" and "left-of-center" in the same week, if not the same day.

Those who cling to "conservative" and "progressive" ideologies are bound by their quasi-religious faiths to ignore inconvenient facts about taxes, entitlements and wealth inequality. So let's start with the highly inconvenient facts which do not fit ideological straitjackets.

1. We have become a nation of complicit takers, with roughly half the populace receiving Central State-distributed cash or benefits. An astute reader recently summed it up: we have become a nation of takers. This is difficult to square with the shrill cries about the "social safety net" being shredded: Obstacle to Deficit Cutting: A Nation on Entitlements (

Efforts to tame America's ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.

At the same time, the fraction of American households not paying federal income taxes has also grown to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

A little more than half don't earn enough to be taxed; the rest take so many credits and deductions they don't owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.

As recently as the early 1980s, about 30% of Americans lived in households in which an individual was receiving Social Security, subsidized housing, jobless benefits or other government-provided benefits. By the third quarter of 2008, 44% were, according to the most recent Census Bureau data.

Some 41.3 million people were on food stamps as of June 2010, for instance, up 45% from June 2008. With unemployment high and federal jobless benefits now available for up to 99 weeks, 9.7 million unemployed workers were receiving checks in late August 2010, more than twice as many as the 4.2 million in August 2008.

Payments to individuals--a budget category that includes all federal benefit programs plus retirement benefits for federal workers--will cost $2.4 trillion this year, up 79%, adjusted for inflation, from a decade earlier when the economy was stronger. That represents 64.3% of all federal outlays, the highest percentage in the 70 years the government has been measuring it. The figure was 46.7% in 1990 and 26.2% in 1960.

Politically inconvenient fact 1: The U.S. is a full-blown Welfare State that borrows 40% of its budget to keep the swag flowing. While we can debate whether this is sustainable, good, bad, doesn't go far enough, etc., any government which spends 2/3 of its vast budget cutting checks to individuals is a welfare State.

"Conservatives" rail against "welfare" but their protest is the acme of hypocrisy, for "conservatives" have approved tax breaks for the super-wealthy ("corporate welfare") and also accepted with greedy nonchalance all the so-called "middle-class" welfare swag: Medicare (not self-funded by Medicare taxes), the mortgage interest deduction, Social Security (not self-funded, despite the propaganda), etc., i.e. the "welfare" they qualify for.

As for borrowing trillions to fund this "acceptable" welfare: the "fiscal conservatives" are once again the ultimate hypocrites, as they have approved stupendous deficits for 30 years with no qualms; indeed, their favored lackeys have repeatedly claimed "deficits don't matter." As long as you're collecting the swag, then they certainly don't matter to you; but they do matter to the nation (but who cares about the nation, really? Self-sacrifice is literally outside the current politics of experience.).

The vast Welfare State is also inconvenient for "Progressives/Liberals". They approve of all existing welfare, of course, and issue high, keening calls for more, more, more. What is inconvenient is paying for the Welfare State we already have.

The "progressive" ideology insists that the American Empire and military-industrial industry absorbs "most" of the Central State revenues. Clearly, this is not the case. The Empire (which I constantly rail against) is probably a "good deal" financially, if not morally, as the cost (roughly $700-$800 billion a year) "buys" unequalled soft and hard power, both of which are difficult to value until you don't have them.

The "progressive" faith holds sacrosanct the idea that all Federal welfare could easily be paid if only the wealthy "paid their fair share" (see below).

The real wealth of the nation is held by the 13,480 households which earn $10 million or more annually. Let's say we could nail each of those households with an additional $1 million tax bill. That would raise a meager $13 billion.

The notion that there is no way to fund the ballooning Welfare Corporate-State partnership except by taxing tens of millions of households at much higher rates is highly inconvenient to those who believe "the wealthy" can easily shoulder the $1.5 trillion the State borrows every year just to fund current welfare.

You want Swedish-style cradle-to-grave welfare? Then prepare to pay 60% tax rates--and not just the wealthy--everybody pays. That's the trade-off. Only the Swedes don't have a global Empire to support, so the effective rate in the U.S. would undoubtedly be higher than 60%.

It also appears that the cradle-to-grave welfare systems are not sustainable; those nations are finding that demographics and rising costs are rendering even 60% tax rates insufficient. The net result is a flourishing black market as everyone who can exits the crushing burdens of the "official" economy. That's also inconvenient for "progressives," who often imagine people are delighted to pay high taxes as long as they receive benefits.

It's also inconvenient that we can't blame "the bureaucracy" for the budget deficit. Take away the 65% transferred to individuals, the $700-$800 billion expended on Empire and $250 billion or so on interest paid on external debt (not the bogus inter-governmental debt owed the Social Secutity Trust Fund for its non-negotiable IOUs) and you have precious little bureaucracy to slash in the $3.5 trillion Federal budget ($1.5 trillion of which is borrowed).

2. The political consequences of this explosion of entitlements is political complicity in the status quo. I addressed this is Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010).

In effect, voters who are collecting cash and benefits from the Central State and its Global Empire become complicit in the dominance of that State and Empire: they will meekly comply with State edicts and remain silent, lest their share of State swag be threatened.

This is how the State buys off its citizens with bread and circuses.

It's also how the majority--those drawing shares of State bread/swag--come to exercise political tyranny over the much smaller class of those paying taxes to fund the State swag:

According to the Congressional Budget Office (CBO), the top 20% paid 86.3% of all Federal income taxes, 43.6% of Social Security, 87.8% of corporate taxes and 34.1% of Federal excise taxes.

After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.

The top 20% paid 68.7% of all Federal taxes: Income taxes, Social Security and Medicare, excise and corporate taxes. The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.

No wonder voters love State swag--80% of the citizenry pay little to no income taxes--and the 7.5% Social Security tax deducted from their paychecks is a modest burden compared to those routinely handing over 40+% of their earnings to the Federal and state governments.

3. There are two classes of citizens paying taxes: those with earned income and a much smaller but wealthier class with vast unearned income. The truly pernicious fact revealed by effective tax rates is that those earning significant incomes from their own labor/enterprises pay most of the taxes, while the tiny slice of citizens who own most of the productive assets of the nation pay a much smaller percentage of their income because unearned income gets the big tax breaks.

This is not coincidental. If you control $100 million (to take a round number), a mere $100,000 "invested" in campaign contributions will "earn" you a specially devised tax break worth millions every year--especially if you join up with a few cronies and distribute several million dollars to craven politicos desperate for your millions to help them keep their place at the overflowing trough of State/Empire power and wealth.

In Who Rules America?, Sociologist G. William Dumhoff draws an important distinction between the net worth held by households in "marketable assets" such as homes and vehicles and "financial wealth." Homes and other tangible assets are, in Dumhoff's words, "not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale."

Financial wealth such as stocks, bonds and other securities are liquid and therefore easily converted to cash; these assets are what Dumhoff describes as "non-home wealth" on his website Wealth, Income, and Power.

As of 2007, the bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7% and the top 20% held fully 93%.

In a classic "divide and conquer" tactic, the State's Power Elites have sold a slew of new taxes to fund the guaranteed-to-implode "healthcare reform" (a.k.a. increased funding of sickcare cartels) on those earning $250,000 or more.

Everyone earning 10%-20% of that sum loudly applauds "sticking it to the rich" (the Tyranny of the Majority in full flower) while failing to note that the truly wealthy--the ones who don't have any earned income because they don't work in salaried jobs, the ones who own roughly half the nation's productive assets--pay nothing but a slice of their unearned income--much of which is protected by various specially crafted tax breaks.

4. The net result of this rising inequality is a high concentration of political power which flows from (and protects) the unearned income streams derived from the highly concentrated wealth. I have covered various aspects of this disparity in wealth, income taxes and political power numerous times. For example:

Housing and the Collapse of Upward Mobility (April 16, 2010)

The Con of the Decade Part I (July 8, 2010)

The Con of the Decade Part II (July 9, 2010)

One Year Later, No Sign of Improvement in America's Income Inequality Problem:

Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3 trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision to increase the national debt from $5 trillion to $11 trillion. The combination of increased government spending and lower taxes helped the top 1% considerably.

Two Americas: The Gap Between the Top 5% and the Bottom 95% Widens (August 18, 2010)

As total household income declines, the wealthiest Americans take home a larger piece of the national income pie. In 2008, Americans reported $8.4 trillion in total income, down 4.6% from 2007. Adjusted for inflation, that is down 8.4%, the sharpest decline in total income since the brief recession that began in 1990.

David Stockman, director of the Office of Management and Budget under President Reagan, recently noted in an editorial that the top 1% of Americans received two-thirds of the gain in national income from 2002 to 2006.

Economists Emmanuel Saez and Thomas Piketty have reported that the top 10% of earners took home about half of all income as of 2007.

The number of people in the highest reaches of income also fell--tax returns reporting income of $1 million or more fell by 22% to 321,294, and the number of returns that reported income of more than $10 million fell 36% to 13,480.

The Political Class, the super-wealthy with vast unearned income and those drawing entitlements are all satisfied with this arrangement. Cash and cash equivalents paid to individuals by the Central State have ballooned up 80% above inflation, taxes on the super-wealthy are modest, and the difference--the $1.5 trillion annually needed to keep the swag flowing to the concentrated wealth/power holders (the Plutocracy) at the top and the complicit bottom (standard-issue welfare)--is borrowed from the Federal Reserve and global mercantilist sources of excess dollars accumulated from monumental trade imbalances.

Since the political class of "conservatives" and progressives" are equally dependent on and beholden to the holders of concentrated wealth for their political power, then their protests against the deficits, welfare, corporate power, etc. all ring hollow.

Citizens who decry the deficits while defending the programs which benefit them as untouchable are equally complicit.

You see where this is going in terms of class warfare. The political status quo is perfectly happy to keep the deficit-welfare state-Empire going: the super-wealthy contributors (whose wealth flows from lightly taxed unearned income) who enable their grip on power are happy enough with the status quo, as are the bottom 60% collecting State-issued benefits and checks.

The only class which is unhappy with the status quo are the citizens who earn substantial incomes from their labor and/or enterprises. They pay most of the taxes, and are taxed at much higher effective rates than the super-wealthy. As this class shrinks to a minority, the Plutocracy and the lower 60% thus share the same goal: saddle this class with whatever higher taxes become necessary to maintain the Empire and Welfare State status quo.

That sets up a three-way class war. The status quo will be defended by those benefitting from it: the top 1% and the bottom 60%, and the political class. The 20% who pays most of the taxes and receives relatively fewer benefits will be squeezed from both ends of the inequality spectrum.

But this alliance may fray as times get harder. The Plutocracy may find that despite their ownership of the mainstream media, the lower complicit class may begin chafing under the collar. Jaguars and Mercedes luxury vehicles may get "keyed" more often as symbols of Plutocratic over-reach, and politicos who could count on the masses being conveniently M.I.A. (not showing up to vote) may find a rising interest in upending the political feeding trough.

The 20% who earn the most and pay the most taxes have one basic choice against the Tyranny of the Majority and the concentration of wealth and political power: they can opt out. Quit the high-paying corporate gig, sell the business or close it down, cut their hours, move overseas, buy land and move to rural states, etc.

When the high-earners bail out, the status quo will truly be in trouble, because the top 1% has no desire to pay higher taxes, and the bottom 60% have little enough ability to pay more taxes. That's when the entire bloated, top-heavy Empire/Welfare State implodes, and the checks stop coming.

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