Class Backwards

The curious thing about President Bush’s economic stimulus plan is that almost nobody outside the White House believes it will have much of a stimulating effect. This is hardly knee-jerk liberal naysaying: Many of the president’s conservative allies—all but the most sycophantic of them, really—concede that while the economy might benefit from an economic espresso, the president’s proposals are strictly decaf.

As Irwin Stelzer of the conservative Hudson Institute put it in the neoconservative Weekly Standard: “This tax package is only tangentially about stimulus; it is really all about fundamental economic restructuring and social engineering, Republican style.” So Democrats and liberals who label Bush’s plan as a sham that thinly veils a right-wing agenda on taxes and class politics are making a point that supporters of the president can readily concede.

The cornerstone of Bush’s proposal is the elimination of dividend taxes, amounting as it does to over half of the overall $674 billion in proposed tax cuts. In the weeks since it was unveiled, Democrats have savaged the plan as yet another Republican handout for the well heeled, and the numbers certainly bear this out. An analysis by the Urban-Brookings Tax Policy Center finds that 28 percent of tax cut dollars in the first year will go to the top 1 percent of earners (incomes above $316,000), but only 8 percent will go to the bottom 60 percent. In subsequent years, the tilt magnifies: In 2010, those with incomes in the top 1 percent will reap over 42 percent of tax cut dollars from Bush’s current proposal, with less than 7 percent of cuts going to the bottom 60 percent.

Administration mouthpieces respond to these calculations (which look about the same when the Bush Treasury Department does them) with a few recurring themes. One is the tiresome and fatuous cry of “class warfare”—as if objecting to a plan that cuddles the rich is somehow more class-conscious than proposing one. In a country where average worker pay (inflation adjusted) rose 10 percent to $35,000 in the last 30 years, while average CEO compensation at large companies rose 2,700 percent to over $37 million, denying the role of class in political economy is akin to trivializing the role of oxygen in breathing.

Unable to credibly deny that the tax cut trends wealthy, the White House argues that rich people deserve the lion’s share of tax breaks because they pay most of the taxes. This is valid—but only up to a point. Our progressive federal income tax should and does collect substantially more revenue from the affluent than from those down below. Those with the highest 1 percent of incomes account for a quarter of all federal income tax revenue, and the top 25 percent of earners pay about two-thirds of all federal income taxes.

But it takes looking beyond just federal income taxes to get the full story—and to see the flaw in this argument. The working poor and middle class are hit hard by the deeply regressive payroll tax for Social Security, and state and local sales and property taxes further undermine progressivity. (The effective state and local tax rate for Tennesseans earning less than $38,000 is more than twice as high as for those earning more than $119,000, according to a recent state-by-state analysis by the Washington-based Institute on Taxation and Economic Policy.) With its convenient omission of the bigger picture on overall taxes, the administration’s economic discourse paints a distorted picture of who pays taxes and needs or deserves tax relief.

As a last resort, elimination of the dividend tax is pitched as a moral remedy— “the right thing to do,” according to one conservative think tank—for the injustice of taxing the same earned dollar more than once. Firms currently are subject to corporate taxes on earnings paid out as dividends, and the dividend itself is taxable as income for the shareholder who receives it. Such “double taxation” amounts to an “anti-growth” feature of our tax system, according to Dean Stansel of the libertarian Cato Institute (who, by the way, sees the basic concept of a progressive income tax rate structure in the same sinister light).

The notion that policy should turn on the question of how many times a dollar is taxed in the economic food chain is one of those things that makes sense only until you actually think about it. For starters, businesses are increasingly able to shelter earnings from corporate taxes, so the assumption that a particular dividend dollar has already been taxed is suspect. A particular dollar earned may be taxed numerous times as it winds its way from employer to paycheck to bank account to spending transaction, and counting how many times depends on debatable assumptions about when a dollar is no longer the same dollar.

If conservatives were so concerned with the fundamental ethics of double taxation, they long ago would have gasped in horror at the combination of income taxes and payroll taxes, which hit the same dollar of wage income twice. But here, because of the structural regressivity of payroll taxes, we’re talking about a hit that’s nastiest for low- and middle-income earners, so why fuss? It’s only when double taxation harms country clubbers cashing dividend checks that the moral imperative kicks in. Class warfare indeed.