Scrooged by the Democrats: Will the Rich Ever Pay Their Fair Share?

| Wed Dec. 24, 2008 6:46 PM EST

All of us who have been taught the Biblical story of Christmas (since my grandfather was a Methodist minister, that certainly includes me) will remember that Jesus is supposed to have been born in a stable because there was "no room at the inn." Less often repeated is the reason why his parents had hit the road in the first place, despite the fact that Mary was nine months gone at the time. According to the Book of Luke, "it came to pass in those days, that there went out a decree from Caesar Augustus that all the world should be taxed." The Romans ordered all people to go to their home towns to register for a census, which was needed in order to institute the new tax system. That's why the holy family was schlepping the 90 miles from Nazareth to Bethlehem when Mary went into labor.

The Bible never tells us how much Joseph—an impoverished carpenter with two dependents, one of them a kid who wasn't even his—ended up having to pay in taxes. But it's safe to assume that the local Romans, and the wealthy Sadducees who supported them, got off easy in comparison to working stiffs like Joseph. Maybe they even got off as easy as rich Americans have, under the tax cuts passed by the Bush Administration in 2001 and 2003.

During the Democratic primary campaign, Barack Obama, along with all of his Democratic contenders, promised a swift repeal of these tax cuts. A rollback of tax cuts benefitting only corporations and the wealthiest individuals was supposed to provide the financing for Obama's policy proposals, from education and health care to infrastructure and green energy. But by September, the Democratic nominee was already backpedaling on his pledge, and within three weeks of his election, Obama's economic advisors confirmed that, after all, the new president might just let the Bush tax cuts expire on schedule in 2011, rather than eliminating them two years earlier. The decision is based on the premise that it is unwise—in economic as well as political terms—to raise taxes during a recession, since lower taxes stimulate the economy.

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At the same time, New York's Democratic governor David Patterson has refused to consider instituting a temporary "millionaire's tax" to address his state's desperate financial needs, choosing instead to slash vital social programs. Patterson claims that such a tax will drive businesses and wealthy individuals out of New York and further depress the economy. (This despite billionaire Mayor Michael Bloomberg's declaration that among his rich friends, he'd "never heard one person say 'I'm going to move out of the city because of taxes.'")

But an analysis by the Center for Budget and Policy Priorities, released earlier this year, debunks the myth that tax cuts for the rich more than "pay for themselves" by fueling economic growth.

There is no evidence that the tax cuts caused any increase in economic growth, let alone growth sufficient to offset their cost. In fact, the 2001-2007 economic expansion was among the weakest since World War II with regard to overall economic growth. Moreover, revenue growth was very poor during 2001-2007. Real per-capita revenues fell deeply in 2001, 2002, and 2003 and have since risen to barely 2 percent above their 2001 level. Over the course of other postwar economic expansions, they grew by an average of 12 percent.

Capital gains taxes, CBPP found, have the effect of lowering revenue in the long run. And tax cuts financed by deficit spending—as they were under Bush, and undoubtedly will continue to be under Obama—are especially harmful.

Brookings Institution economist William Gale and now-CBO director Peter Orszag concluded that the 2001 and 2003 tax cuts are "likely to reduce, not increase, national income in the long term" because of their effect in swelling the deficit. [The Congressional Budget Office's] recent study of a deficit-financed extension of the 2001 and 2003 income-tax cuts found that "real [Gross National Product] per person would decline by 13 percent in 2050" relative to an extension that was financed through a balanced mix of revenue and spending changes effective immediately.

Even the Bush Treasury Department's analysis of the cost of the 2001 and 2003 tax cuts "estimated that they would generate only enough economic growth to cover less than 10 percent of their long-term cost. Furthermore, that estimate was based on a best-case scenario; it depended on the assumption that the cost of the tax cuts would be fully offset by spending cuts."

Likewise, on the state level, a recent study looked at a much stiffer "half-millionaire's" tax that went into effect in New Jersey. While the study found a tiny increase in the "out migration" rate among wealthy residents, it detected no damage to the economy. In fact, it found that overall, the state's tax revenue increased by $26 for every $1 lost.

Especially during a recession, if we put more money in the pockets of the rich, it is likely to stay right there—in their pockets. On the other hand, if we put more money in the hands of low- and middle-income workers through tax cuts, and in the hands of the poor and unemployed through increases in government programs (food stamps, TANF, unemployment benefits), that money is virtually guaranteed to go directly into the economy, since its recipients have no choice but to spend it on their basic needs—food, clothing, gasoline, doctor's bills. A few of them might even be able to afford a room at the inn.

This post also appears on James Ridgeway's new blog, UNSILENT GENERATION: "Information and commentary for pissed-off progressive old folk (and future old folk)... because we're not dead yet."