Shifting tax burden redefines 'class war'

By MICHAEL HILTZIK

March 4, 2009 12 AM PT

“Class warfare” comes in many flavors. There’s the variety practiced by feudal overlords upon their serfs, and the variety waged by the Jacobins of the French Revolution against the monarchists.

Then there’s the variety that Republicans claim to find in President Obama’s proposed budget -- a taking from the rich to reward the undeserving poor. The rhetoric has spread quickly, moving from the libertarian Heritage Foundation to the ranks of GOP presidential hopefuls like flames leaping from tree to tree in the Angeles National Forest.

“Lenin and Stalin would love this stuff,” says former Arkansas Gov. Mike Huckabee. “The Union of Soviet Socialist Republics may be dead, but a Union of American Socialist Republics is being born.”

Yet the true class war of recent American history is the one that has pitted the upper 1% of income earners against almost everybody else. Over the last three decades, a period that spans Republican and Democratic administrations alike, average family income has scarcely budged an inch, while the wealthy have grown measurably wealthier.

In 1979, the top 1% of U.S. households earned eight times as much as the middle 20% and 23 times as much as the bottom fifth; by 2005, the Congressional Budget Office found, the upper crust touched 21 times as much as the middle class and 70 times as much as the bottom. Adjusting for inflation, the average American worker made 16% less in 2004 than in the 1970s, according to economist Benjamin M. Friedman.

Will the Obama budget redress this imbalance? Let’s take a measured look at what he proposes.

The budget plan would restore the top income tax brackets to their levels before the 2001 Bush tax cuts, with the topmost rate rising to 39.6% from 35% now, hardly an excessive increase. The higher taxes kick in at $250,000 for a married couple and $200,000 for individuals.

For those taxpayers, Obama would ratchet back itemized deductions. He also would raise more money from hedge-fund managers, shareholders and other recipients of investment income. Obama says the money would help pay for programs aimed chiefly at lower- and middle-income wage earners, including a tax credit, relief from healthcare expenses and more aid for education.

Does this constitute redistribution of income? You bet. That’s what government does. George W. Bush redistributed income too -- from the lower- and middle-income wage earners who pay the bulk of Social Security payroll taxes to the higher earners whose income tax cut was financed out of the Social Security surplus.

Plenty of taxpayers have felt uneasy about this tendency.

“All the tax rebates to the rich never made sense to me,” says Roger A. Wells, 80, a retired computer executive in Manhattan Beach who considers himself firmly middle class and is a lifelong Republican whose GOP pedigree dates to his father’s local party chairmanship in Michigan. “I fully endorse the idea that it’s about time the middle class got a crack at it.”

The relevant discussion is really about how much income redistribution is proper, and how much the economy can sustain. Obama’s critics contend that his budget will take so much from the people and institutions driving economic growth that it’s “dangerous,” to quote Rep. Eric Cantor (R-Va.).

They suggest that wealthy investors and entrepreneurs won’t work so hard to help the economy if they get to keep less of the bounty, like the striking industrialists in an Ayn Rand novel.

Consider economist Larry Kudlow, who last week declared that “raising the marginal tax rate on successful earners, capital, dividends and all the private [investment] funds is a function of Obama’s left-wing social vision.”

Kudlow, who holds forth in this vein every day on CNBC, claimed that hornbook economics teaches that “countries that spend more produce less, while nations that tax less produce more.”

But Kudlow sang a different tune last September, when he spoke up in favor of the big bank bailout. “Once every few decades or a couple of times a century,” he said in an exchange with Sen. Bernie Sanders, a Vermont socialist, “even conservatives have to use government” -- prompting Sanders to congratulate him for joining the socialist ranks.

Furthermore, the supposed link between high government spending and reduced growth is imaginary.

“No matter how you torture the data, there is no negative relationship between a commitment to a welfare state and the rate of growth in how well off we are,” Peter Lindert, an economist at UC Davis and a leading student of the subject, told me recently. “There really is no case for saying that what Obama is proposing will damage economic growth.”

To be fair, some people don’t think Obama can collect all the money he needs by raising rates only on incomes over $250,000. “He’s going to reach down, and people making more than $100,000 will pay more,” predicts Kip Dellinger, a Westside certified public accountant. Throw in a payroll tax hike to shore up programs such as Medicare and Social Security, he said, and the combined maximum tax bite on top earners could approach 60% -- “and that would have a really negative impact on economic growth.” He thinks the middle class will end up getting socked if the Obama budget becomes reality.

Still, in both economic and social terms, the consequences of America’s rising income inequality have been dire. Wages stagnated while the money that otherwise would have gone to workers went instead to shareholders and overcompensated CEOs.

This deprived lower- and middle-income Americans of purchasing power; to maintain their standard of living they -- all right, we -- took to borrowing on our credit cards and home equity. The harvest is today’s credit crisis and a dizzying falloff in consumption.

The income inequality trend has had a socially corrosive effect. Friedman, the economist, observed in 2006 that the period from 1953 to 1973, when median family income doubled, was one of great social progress, encompassing the civil rights movement and President Johnson’s Great Society program.

Over the following decades, however, stagnating incomes for most Americans brought “a fraying of the U.S. social fabric,” Friedman wrote. Public opinion turned sharply against immigration, affirmative action and welfare, with attacks on the latter program displaying “a vindictive spirit that was highly uncharacteristic of the United States in the postwar era.”

Obama’s proposed budget, by reversing the transfer of wealth from lower- and middle-income Americans to the wealthy imposed by the Bush tax cuts and by the economic mantras of a generation, won’t in itself restore a sustainable balance to the economy, but it will start the process.

Better-paid workers will be better able to consume goods and services without going into debt, and the frenetic search for profits in financial engineering, rather than in productivity and innovation, will fade. And we’ll know whether the talk of “class warfare” echoing so widely today represents the roar of a permanent overclass, or the death rattle of the old guard.

Michael Hiltzik’s column appears Mondays and Thursdays.

You can reach him at michael.hiltzik@ latimes.com and read his previous columns at www.latimes.comhiltzik.