Today's New York Times includes a biting op-ed by Paul Krugman, titled simply "Letter to the Secretary," Mar. 24, 2006 New York Times at A21. He comments, in the style of an open letter to Treasury Secretary Snow, on the recent PR blitz by Administration officials praising an economic success story that they claim is being missed by most Americans.
Krugman first urges that the administration be careful about claims it makes for decreases in some measures of inequality between 2000 and 2003, because they are mostly based on the stock market bubble burst in 2000 that temporarily lowered wealth indicators for the best-off Americans. Since then, the economy has grown but it has not provided much improvement to ordinary Americans. Instead, the tiny fraction of the very richest have gotten even richer very fast.
"[T]he available indicators suggest that after 2003, incomes at the top and the overall level of inequality came roaring back. That surge in inequality explains why, despite your best efforts to talk up the economic numbers, most Americans are unhappy with the Bush economy." . . .
"The economy grew reasonably fast in 2004, but most families saw little if any improvement in their financial situation. Instead, a small fraction of the population got much, much richer. For example, Forbes tells us that the compensation of chief executives at the 500 largest corporations rose 54 percent in 2004. ... Average income rose, but only because of rising incomes at the top."
Krugman then goes on to caution Snow against attributing the stupendous rise in CEO incomes to market forces and increased productivity as he did in a recent speech.
"Executive pay isn't set in the marketplace; it's set by boards that the executives themselves appoint. And executives' pay often bears little relationship to their performance. ... When you were appointed to your present job, Forbes pointed out that the persformance of the company you had run, CSX, was 'middling at best.' Nonetheless, you were 'by far the highest-paid chief in the industry.'"
Finally, Krugman notes that the current administration spin claiming that the tax cuts are primarily beneficial to the middle class is simply inaccurate.
"[U]sing the right measure--the effect of the tax cuts on after-tax income--the bias toward the haves and have-mores is unmistakable. ...Once the Bush tax cuts are fully phased in, they will raise the after-tax income of middle-income families by 2.3 percent. But they will raise the after-tax income of people ... with incomes of more than $1 million[] by 7.3 percent."
The clincher to the tax cut argument comes when the full context is considered, as this column has persistently argued and as Krugman notes. Making the tax cuts permanent now will require either huge spending cuts or an increase in borrowing or both. Ultimately, as even conservative economists are beginning to say openly, it will require increased taxes to pay for the borrowing and make up for the havoc wrought by inappropriate cuts to important social programs that will cause more and more Americans to spiral into fiscal problems due to poor health without health insurance, problems of the elderly without decent pensions, and joblessness due to lack of public support for public education.
It is unlikely that Congress will simultaneously cut the percs that go through tax expenditures most directly to the wealthiest Americans. The wealthy are the ones that most benefit from charitable contribution deductions--especially where they can contribute property and deduct the untaxed appreciation rather than merely their actual investment basis. Because of the high values of their homes and their ownership of multiple properties, they garner by far the most benefit from the home mortgage interest and property tax deductions. They even receive the lion's share of the benefit from many state and federal direct expenditures to protect property that appear on the surface to be wealth-neutral, such as programs to maintain and restore sandy beaches in areas where the wealthy have second or third homes.
Instead, ordinary Americans will bear the brunt of the tax cuts through spending cuts for programs that benefit them most such as student loans, Social Security and Medicare/Medicaid. Worse still, it will likely be ordinary Americans who are called on in the future to pay steeply higher taxes in order to repay the staggering debt built up over the last five years primarily to fund the tax cuts for the wealthy and the wars of choice in Iraq and Afghanistan.
The likely result is an increasingly dangerous inequality between the haves at the top of the wealth and income distribution and ordinary Americans. As Krugman notes,
"[s]ince middle-income Americans will feel the brunt of these cuts, yet received a relatively small tax break, they'll end up worse off. But the wealthy will be left considerably wealthier."
It's time to put first and foremost in our discussions of tax and economic policy the question of what kind of society we want in the future. We should place a high priority on a sustainable economy that provides opportunity for all to develop their human capital, and therefore we should treat increasing inequality as an indicator of worrisome problems that must be addressed.
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