The richest 0.1% of Americans have seen their share of pretax national income rise from less than 3% in 1970 to more than 12% in 2007 — the highest proportion since the creation of the income tax in 1913. Yet even as the rich grew vastly richer, Washington decided they needed more help. Since 1995, the top 400 households have enjoyed a 45% cut in their federal income taxes (they paid 30% of individual income in 1995 and 16.6% in 2007). In 2007 alone, that saved the top 400 filers $46 million — per household.
In the coming weeks, you will hear a great deal of discussion about whether maintaining tax relief for the rich passed in 2001 will create jobs. You will hear much less about the real issue raised by the tax-cut debate: America's fraying democracy.
Most economists agree that extending Bush-era tax cuts for the highest-income Americans would do little to stimulate the economy. The nonpartisan Congressional Budget Office recently ranked extending the 2001 tax cuts last among 11 options for creating employment. It noted that even within that option, extending tax cuts for the rich would be the least helpful tax-cut extension, because wealthy people would be likely to bank their tax savings rather than spending them.
Good ideas for putting Americans back to work are running into a wall of congressional opposition in the face of deficit worries. Yet the same members of Congress who denounce deficit spending are ready to find vast sums for the idea that ranks dead last.
For a while, pundits chalked this up to election-year pandering. Yet multiple polls have confirmed that by large margins, Americans don't favor keeping the high-end tax cuts. This means politicians are flocking toward a proposal that is at once ineffective and unpopular.
Of course, no one is really surprised by the GOP position. Even if jobs were plentiful, Republicans would be insisting on extending all the Bush tax cuts. Budget surplus? Budget deficit? Weak economy? Strong economy? For roughly two decades, the Republican answer has been the same: tax reductions for the most well-off. At times the mantra seemed particularly absurd: Just before the invasion of Iraq, House Majority Leader Tom DeLay told a group of bankers that "nothing is more important in the face of a war than cutting taxes."
Today, the Republicans' main argument is that breaks for those at the top are crucial for small businesses — even though, as House Republican leader John Boehner recently admitted, the overwhelming majority of small-business owners won't be affected. The benefits of extending the upper-income tax cuts instead will go overwhelmingly to the richest of the rich (tax filers making more than $1 million a year will save an average of $128,832 each), while costing roughly $1 trillion over the next decade in lost revenue and increased interest costs on the national debt.
If you wanted to encourage small-business job growth, there are much more cost-effective ways to do so. But that would not advance the Republicans' campaign to lock in the vast top-end tax cuts passed a decade ago.
The roots of that tax-cutting campaign go back more than a generation. In the wake of a major political mobilization of corporate America in the 1970s, the GOP forged a political coalition bringing together anti-government libertarians, social conservatives and powerful business backers. Tax cuts increasingly proved to be the glue of that coalition, feeding into the conservative cause by starving government (at least in theory) while showering very specific largesse on the GOP's deepest-pocketed supporters.
The real puzzle is why Democrats, the putative party of the little guy, offer cover for these top-heavy initiatives. In 2001, and again today, a nontrivial contingent of Democrats has been willing to blur the conflict and hand victory to the tax cutters, proving that gridlock can be overcome when doing so benefits the well-off.
It's hard to remember, but a small but crucial bloc of Democrats that included Sen. Dianne Feinstein was the key to passing the tax cuts in 2001. This time around, 31 House Democrats have written to Speaker Nancy Pelosi to insist on retaining the upper-income cuts. What might be called "Republican-for-a-Day Democrats" are not always moderates in GOP-leaning districts. Charles E. Schumer of New York, for example, has been one of the fiercest defenders of favorable tax treatment for hedge-fund managers, a widely condemned tax loophole benefiting the superrich that still survives four years after the Democratic capture of Congress.