'Deficit Commission' cum 'Hatchet Job on the Middle Class': There Are Better Ways

The current economic downturn is simply not the time to adopt blanket fiscal austerity, with more income inequality today than ever before. Instead, it's time to invest in the middle class, create jobs and spur economic growth.
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Let's talk about the "Deficit Commission". Sounds benign, I know, but this Presidential Commission's chairmen just released their personal recommendations that are purely and simply a hatchet job on the middle class -- to the benefit, as is now so often the case, of the extremely wealthy.

These nine recommendations would:

1.Raise: Social Security retirement age to 69
2.Eliminate: Deductions of health benefits and interest on home mortgages over $500,000, plus other breaks and deductions now relied on by the middle class
3.Raise: Gas tax by 15 cents
4.Lower: Corporate tax rate from 35% to as low as 26%
5.Lower: Individual income tax rates to 9%, 15% and 23%
6.Cut: Federal workforce by 10% by 2015

7.Repeal: Alternative Minimum Tax
8.Raise: Taxes on capital gains and dividends to the higher rates now levied on wage income
9.Cut: $100 billion in defense spending.

If adopted in their entirety, these changes would, the chairmen say, hold down the increase in the federal debt to $3.9 trillion by 2020, versus the $7.7 trillion that the deficit is expected to increase by otherwise. (As a point of reference, the current national debt is about $13.7 trillion.) In percentage terms, the recommendations would reduce the federal deficit to 2.2% of gross domestic product by 2015, compared to 8.9% in the fiscal year just ended on September 30.

Sounds good, right? Wrong! You see, there's this mauling of the middle class that would result from the combined workings of the first six recommendations which can't be ignored. (Numbers 7 through 9 are fine, provided that two major recommendations are added to them, as I'll discuss.)

Paul Krugman early on described the Commission's alleged bipartisanship membership as a "compromise between the center-right and the hard-right", and if the chairmen's recommendations hold up, then boy, did we get that in spades: specifically, a very small-government agenda that has at its core even more wealth transfer to the extremely wealthy. Most of the revenue from the tax increases for the middle class wouldn't even be used to reduce the deficit, rather it would go toward sharp reductions in the top marginal individual tax rate and the corporate tax rate.

The recommendation to increase the Social Security retirement age from 65 to 69 may also sound OK, provided you sit at a desk on Wall Street, but it's blatantly insensitive to those women and men working in factories, doing physical labor, standing on their feet in service industries, or toiling in agriculture. The premise behind this proposed change -- namely, that average life expectancy is rising -- is flawed in the extreme. While life expectancy is indeed rising, it's doing so mainly for high earners who need Social Security least -- for the bottom half of the income distribution, it hasn't budged for thirty years.

Rather than penalizing the hardest working Americans -- again -- how about both "means testing" Social Security, so that only those individuals who need it get it, and eliminating or materially raising the cap on taxable wages (now just $113,700)? These two changes would forever bring the nation's retirement system into financial balance.

Even the sop to the Tea Party to blindly cut the federal workforce (#6) is wrong-headed. Slashing jobs without careful forethought never works out, as any employee who's gone through a mindless corporate 'reduction in force' or RIF can attest. Improved efficiency in staffing is always desirable, but it should be undertaken with a scalpel not a sledgehammer, carefully taking into account whether the important, intended functions of the government would be disrupted -- and a flat 10% cut is a sledgehammer.

The current economic downturn is simply not the time to adopt blanket fiscal austerity, with more income inequality today than ever before. Instead, it's time to invest in the middle class, create jobs and spur economic growth. And to be successful in these efforts, we need to forever disabuse two economic premises that now dominate the thinking of too many Members of Congress, namely that:

  1. Near-term large-scale job creation and long-term deficit cutting are somehow mutually exclusive; and
  2. Progressive taxation can yet be further gutted without completely destroying the fabric of our society and culture.

In fact, well-conceived job efforts, because of their very large multiplier effects, are at least deficit neutral in the medium term and, most likely, substantially deficit reducing. And they are always a more responsible and effective way to reduce the long-term deficit than is slashing spending simply for slashing's sake.

Also, with unprecedented income inequality, the wages of 90% of America's workers stagnant for the past 20 years, and real unemployment of nearly 20%, we must once and for all abandon the "trickle down" theory that since 1980 has dominated U.S. income tax principles and policies. It is "trickle down" and, more recently, costly wars that have mostly left our economy saddled with excessive federal indebtedness, yet there was nary a mention of the former by the Commission chairmen. Nor was there any mention of what extending the Bush tax cuts would mean for the deficit. Per Jackie Calmes of the New York Times, extending all the Bush tax cuts through 2020 would add more than $4 trillion to the federal debt, which is almost exactly what the Commission chairmen's unfair and unbalanced proposals would cut. Extending the cuts for the top 2% alone would add $680 billion of further deficit over the next ten years.

So, let's knock out or seriously modify the six offending recommendations -- DOA, as they say -- and add two recommendations that would be instantly fairer and more effective.

America's income inequality is the result of specific policies, especially tax policies, championed, as Frank Rich says, by "Washington Democrats and Republicans alike as they conducted a bidding war for high-rolling donors in election after election." And with this 'war' at the behest of the wealthy now largely ended, we find ourselves living in a nation where the top 1% of American earners make about 25% of the nation's pretax income and have much lower tax rates than ever before. The next nine percent of earners behind them make the next 25% or so of the nation's pretax income.

Warren Buffett says that rather than argue whether the Bush tax cuts for the extremely wealthy should be allowed to expire at the end of the year, "if anything, the wealthiest Americans should pay even more in taxes." Bill Gates, Sr. says the same thing. And I agree.

As for corporate taxes, Candidate Obama had it right when he told the United Steelworkers in July 2008 that: "Change is ending tax breaks for companies that ship jobs overseas and giving them to companies that create good paying jobs here in America." Implicit in this statement, was his commitment to reducing unfair "tax expenditures", which are those loopholes, deductions and credits that allow businesses and wealthy individuals to avoid paying many taxes.

(I know that the phrase "tax expenditures" is very misleading - "tax benefit provisions" would be more apt. Regardless, these things are humongous.)

In 2009, individuals' tax expenditures cost the federal government $1.05 trillion, when the sum total of all personal income taxes paid was $915 billion. The tax expenditure for individual income earned overseas alone costs us $6 billion a year. The obvious challenge is to preserve the tax expenditures that fairly benefit the middle class and poor, while cutting them for the wealthy.

On the corporate side, JP Morgan Chase estimates that up to 40% of the almost $1 trillion in cash now held by non-financial S&P 500 companies is in foreign jurisdictions, removed from the 25 to 35% taxes which they would have to pay the U.S. Treasury otherwise. These companies have recently been imploring the administration and Congress to give them 'amnesty' of the sort President Bush did in 2004 and 2005 when he gave similarly-situated companies a temporary cut in the corporate tax rate to 5.25%, which prompted them to return as much as $400 billion to the U.S.

But what these companies want us to forget is that almost none of this $400 billion was used to create American jobs. Almost none.

What also gets ignored is that since 2004-2005 tax avoidance schemes have become even more sophisticated and costly to the Treasury, as we know from studying the recent actions of Google. Like multinational company after multinational company, Google employs offshore "transfer pricing" schemes between and among its foreign subsidiaries to allocate its income to tax havens while attributing its expenses to higher-tax countries. These income-shifting schemes -- and they are just that, "schemes" -- use strategies known as "Double Irish" and "Dutch Sandwich" to move most of Google's foreign profits through Ireland and the Netherlands to Bermuda and thus reduce its overseas tax rate to a measly 2.4% and its overall effective tax rate to a meager 22.2%, compared to the 35% U.S. statutory corporate tax rate.

Google alone cut its U.S. taxes by $3.1 billion in the last three years using tax schemes, and international income shifting overall costs the U.S. government $60 billion in annual revenue. And to this $60 billion figure should be added another $90 billion or so of annual loss to the Treasury from those "tax breaks for companies that ship jobs overseas" that Mr. Obama spoke about to the Steelworkers in 2008.

A muckety-muck in PricewaterhouseCoopers LLP's national tax practice in Boston (Irving Plotkin) said in discussing Google's actions that, "A company's obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally."

The problem, Mr. Plotkin, is that when it comes to taxes, as every middle class American worker knows, "legal" is simply whatever benefits high-priced corporate lobbyists and individual wealth advisors can persuade Congress to grant their rich clients.

So, rather than buying into the six deeply flawed recommendations of the Deficit Commission chairmen, how about if the administration, progressives in Congress, and the final Commission recommendations instead say "yes" to means-testing Social Security and Medicare benefits, "yes" to eliminating or raising the cap on Social Security taxable wages, and "yes" to cutting the myriad tax expenditures now going to the wealthiest individuals and multinational corporations that are so unfair to the middle class?

A vibrant American middle class growing from the bottom up has always been the very best thing for America, and it is critical to our long-term economic growth and a vibrant democracy. It's really all that matters now -- for workers and businesses alike -- and these three new recommendations would almost alone help restore this balance while materially cutting the deficit that the Commission was chartered to address.

Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.

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