David Cay Johnston has a new book out--Free Lunch--about the growing inequality in America and the ability of the "wealthiest Americans" to do well from tax cuts and tax expenditures on their behalf. I will review the book in a post shortly, but I intend to start backwards--with Jonathan Chait's review of Johnston's book and Johnston's response.
Jonathan Chait is a senior editor at The New Republic. He reviewed Johnston's book in Other People's Money, Feb 3, 2008. The review is snidely anti-populist in tone. He casts liberals in America as being of two types--moderates who supported the Clinton presidency and anti-corporate populists who supported Nader. The populists, he says, have mostly receded into the background during the Bush years, but he worries about them appearing again.
But Chait paints too starkly, and therefore gets it wrong. One can value the role of business enterprises in invigorating the economy (ie, not be anti-corporate) and yet view with alarm the increasing power of large multinational corporations that cross borders with ease and push sovereign nations to bend to their desires while minimizing the taxes they pay to any country. One can think it is enormously important for the country to invest in its people rather than in its war machine (i.e., be a populist at heart) and yet recognize that there are limits to the individuation that is possible or desirable in a democracy--ie, that a radical libertarian approach can be equally harmful to the polity.
Chait complains about Johnston's depiction of the government acting on behalf of the rich to redistribute income up, saying instead that "the government's taxation disproportionately falls on the rich, and its spending disproportionately benefits the nonrich." You hear this a lot. Chait is, however, wrong here as well, since when you take all the federal taxes and benefits into account, our system is very close to flat rather than progressive. If you attribute all of the tax expenditures in the system appropriately, the system may well be regressive.
Remember, for one thing, that much of the income of the rich doesn't get reported as taxable income--it's the rich who get tax free interest from investing in municipal bonds, for example, and the rich who have ample retirement plans far beyond the realms of ordinary taxpayers. The rich are able to take huge mortgage deductions (most of us don't have homes that have million dollar mortgages, after all). The rich are able to deduct the fair market value of the art work that they donate to musuems, even though they may have invested very little in the art when they purchased it --i.e., getting a deduction for fair market value rather than basis). The rich, of course, pay income taxes on a good bit of their income at the preferential capital gains rate--much less than others pay on their wage income. Social Security payments go to everyone, rich or poor, and the highest monthly checks go to those who made the most money while they worked. Government expenditures to restore beaches after storms cost taxpayers an enormous amount--and much of it benefits directly the wealthiest Americans who have the most luxurious beachfront properties. Roads tend to be much better maintained in wealthy neighborhoods than in poor ones (though that is mostly state and local tax monies rather than federal monies).
The rich pay a good bit in taxes, but, after all, they own the lion's share of the assets and garner a disproportionate amount of the income. They really don't pay as much as they ought to at this point--because the progressive rate scale doesn't take into account the astronomical incomes of some of those at the very top. The top bracket starts at just over $300,000--but that means that the wealthiest Americans who earn half a million, $1 million, $6 million, or $15 million a year are all paying tax at the same rate, so that the progressivity at the lower scale of the income tax is no longer reflected at the upper scale.
I've said in this blog often that there are really just two choices for government policy: redistribute upwards, on the assumption that the economy will expand most rapidly when the elite are preferred, and job growth and opportunities will then trickle down to the poorest at the bottom over time (the Reagan revolution); or redistribute downwards, on the assumption that the economy will expand most reapidly when the poor are preferred, and job growth and opportunities for the poor will create an expanding economy that benefits everyone (democratic egalitarianism and generally the liberal position). There's not much to recommend the trickle down theory--somehow the rich just keep getting richer and the infrastructure and human capital needs of the country are neglected. There's a good bit to recommend the growth from the bottom up theory--we had a great example of how well it works after World War II when soldiers came back to find money available for college educations and the economy boomed.
Johnston replies to Chait's review in a short letter at this link. He defends his record as a Republican who values fiscal conservatism but is not anti-corporate, indicating that he thinks the problem is failure of the free markets that can 't be fixed by regulation.
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