Sunday, September 4, 2011

4 Ways Government Policy Favors the Rich and Keeps the Rest of Us Poor

by Jake Blumgart

While most Americans struggle in the face of the recession, the rich are enjoying the benefits of policies that redistribute wealth upward--and crying class war if we complain.

The rich really are different from you and me. There’s the obvious, of course: They have a whole hell of a lot more money. But just as important, they are able to preserve their wealth from the forces that decimate the earning power of your average American. While government programs for working or jobless Americans are under constant attack, the state frequently intervenes on behalf of the rich, or at least lets them keep their earnings, tax free (leaving the rest of us to pick up the tab).

Republicans in Congress, and to a lesser extent the Obama administration, seem to believe that austerity is the best way to deal with our recessionary woes (despite all economic evidence to the contrary). Instead of unraveling the safety net, voters should consider all the ways the government aids and abets the one class of people who clearly don’t need help. 

1. Protectionism for high-income professionals, free trade for everyone else

Economists incessantly extol the importance of free trade. Opening up our markets through treaties like NAFTA and CAFTA results in a flood of cheap consumer goods, which we all enjoy. However, these policies further expose America’s workforce to overseas competition, accelerating the decimation of middle-class jobs. The wounds inflicted by globalization are often shrugged off as a sad, but inevitable, part of the process. Those who would try to preserve these jobs are denounced as Neanderthalic protectionists.

But while many Americans are forced into low-wage work with no benefits, our doctors are thehighest paid in the world. (Every year the medical profession dominates the Forbes list of best paying jobs in the U.S.) How did this happen? They protected themselves from overseas competition. In 1997, a mere three years after NAFTA, the American Medical Association argued that licensing rules for American doctors were too loose and demanded that we greatly restrict the number of foreign doctors practicing in the U.S. Our political elites happily obliged. Five years later, the number of foreign medical students had fallen by half. Our immigration laws also preserve the privilege of the professional classes by banning the government from hiring foreigners in most instances and snarling those who want to work in the private sector in a staggering amount of red tape.

“Our doctors, on average, get paid twice as much as doctors in Western Europe and Canada,” Dean Baker, co-director of the Center for Economic and Policy Research, said in a phone interview. “The income of high-end professionals is a cost the rest of us bear. Our wages are lower because whatever we take home doesn’t go as far if we pay our doctors $200,000 a year, where they’d get $100,000 in Western Europe.”

These government-protected wages also contribute to our grotesque health care costs that are far higher than those of any other developed nation. If we let people from India or China practice medicine here, we would have more medical professionals, pay them less, and pay less for health care. (Many professional workers are subject to the same principal, to a less extreme degree.)

“Most workers in the U.S. are getting paid the same or less as their counterparts,” Baker said. “If you don’t do the same for high-end workers, that’s class war. People have to understand they are being ripped off.”

2. Rich and own a big house? Here’s some money!

In theory, everyone should love the mortgage interest tax deduction. The lucky homeowner gets to deduct the interest on their mortgage from loans to buy, build, or improve her home directly from her income! (Rent is not deductible because renting, as George W. Bush helpfully explains, is unpatriotic.)

There's a catch of course. Rich people have larger mortgages and higher income taxes. Therefore, they get the most out of their mortgage interest tax deductions. Households earning more than $250,000 annually enjoy 10 times the remuneration of households with income between $40,000 and $75,000. Those homeowners earning $30,000 basically get nothing (check out the chart). Those without the income to buy a home, or who just choose to rent, are probably a bunch of impoverished Communists anyway, so they don’t get a damn thing.

Think of it like this: If you earn less than $30,000 a year, or you live in a big city and probably have to rent, your taxes are paying for housing for everyone else. But most of the benefits of the mortgage tax deduction go to rich people who, apparently, really need your money for that 8,000-square-foot McMansion. This is a system so blatantly unfair that everyone from Manhattan Institute economists to libertarian bloggers thinks the mortgage interest tax deduction is an incredibly regressive policy that should have been reformed years ago. 

3. A sales tax for bread but not for bonds (or stocks or futures)

The stock market is the playground of the rich. 83 percent of stocks are owned by one percent of the population. Trillions of dollars are sloshing around in American stock markets, enriching the lucky few and periodically endangering the world economy. But the government gets nothing from this constant trading blizzard.

Sales taxes, which disproportionately hit low-income families, are in force across the nation. Taxes on financial transactions, which would disproportionately affect the rich, barely exist. There is a tiny financial transaction tax, generating $900 million annually, bankrolling the Securities and Exchange Commission. The New York Stock Exchange suffers under the yoke of tax that raises $14.4 billion a year, enough to handle New York’s fiscal deficit, with $4.4 billion leftover. Don’t fret though: The traders don’t pay a dime. It’s all rebated after they tally up how much they would be paying the state government, if anyone bothered to collect.

If New York would get $14.4 billion a year from its theoretical tax on financial transactions, think how much money the United States might make with a national tax. The London Stock Exchange currently operates with a tax for stocks (bonds, securities, and so forth aren’t covered) that pulls in $40 billion annually. The billions upon billions America could gain from such a tax would go a long way toward easing our budgetary woes. Instead, we are debating raising the social security retirement age and fundamentally weakening Medicare.

Wall Street claims such a tax would stall economic growth. “If you look at the seven fastest growing stock markets in the world, each and every one of them has a financial transaction tax,” said Robert Pollin, professor of economics at the University of Massachusetts-Amherst and co-director of the Political Economy Research Institute. “China, Singapore, South Korea—all the emerging markets have one. It’s not preventing these economies from growing. Having the tax is not a barrier to a successful financial market.”

Pollin argued a tax would disincentivize excessive trading for short-term profit, one of the causes of the economic meltdown. Short-term traders would get hit by the tax often while those who invest their money responsibly, and for the long term, wouldn’t have to pay much. (Last week, the National Nurses United union used the same argument when it lobbied 61 different Congressional offices in support of a financial transaction tax.)

4. Tired of payroll taxes? The wealthy aren’t because they don’t have to pay 

When most people get their paychecks, income taxes are taken out up front, before they ever get their hands on the money. Not so the super-rich, that blessed class of executives, movie actors, big business owners, hedgefund managers, and star athletes. Through a variety of byzantine loopholes, they get to pay their income taxes years, if not decades, in the future. (There’s no interest on this late payment either).

“The biggest single way that the rich benefit from the tax system is that you pay your taxes before you get your money, they pay their taxes by and by,” David Cay Johnson, Reuters tax columnist and Pulitzer Prize winner, told me. “This amounts to a loan from the taxpayers. You take $1 you don’t have to pay taxes on today, [invest it and] make 8 percent real return over the next 30 years, and inflation runs 3 percent. At the end of 30 years that one dollar is worth 10 dollars and inflation has eroded the value of the tax to 40 cents.”

But the federal government needs that money now and if they don’t get it from the super-rich (or from taxing, say, financial transactions) they’ll get it by borrowing. This borrowing adds to our debt, leading to conversations about “shared sacrifice,” which leads to massive holes in the budget, which leads to underfunded programs like the Peace Corps, community health centers, Pell Grants, and the National Park Service.

This isn’t an exhaustive list of the ways our political system rewards the rich for being rich. Don’t forget all the moaning over ending the Bush tax cuts for the wealthy, which discounts the fact that the so-called “Bush tax cuts for the middle class” also help the rich and give them much more money on an individual basis. Or that many of America’s largest corporations haven’t paid a cent of income taxes in years.

There is little chance of these policies, most of which are tax-related, being changed to address the deficit. There is nothing harder to dislodge than entrenched privilege. This is especially true when one of the two major political parties refuses to raise taxes under any circumstance and controls a major policy choke point. (The unchecked torrent of money for lobbying and campaigning advantages the rich as well.)

Keep that in mind while you work until you drop, with little hope of Social Security-backed retirement. At least the rich will be able to enjoy the program:They live longer.

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