The Rich or Everyone Else?

By Robert Reich, Robert Reich's Blog

20 September 10

The defining issue: Who should get the tax cut - the rich or everyone else?

ho deserves a tax cut more: the top 2 percent - whose wages and benefits are higher than ever, and among whose ranks are the CEOs and Wall Street mavens whose antics have sliced jobs and wages and nearly destroyed the American economy - or the rest of us?

Not a bad issue for Democrats to run on this fall, or in 2012.

Republicans are hell bent on demanding an extension of the Bush tax cut for their patrons at the top, or else they'll pull the plug on tax cuts for the middle class. This is a gift for the Democrats.

But before this can be a defining election issue in the midterms, Democrats have to bring it to a vote. And they've got to do it in the next few weeks, not wait until a lame-duck session after Election Day.

Plus, they have to stick together (Ben Nelson, are you hearing me? House blue-dogs, do you read me? Peter Orszag, will you get some sense?)

Not only is this smart politics. It's smart economics.

The rich spend a far smaller portion of their money than anyone else because, hey, they're rich. That means continuing the Bush tax cut for them wouldn't stimulate much demand or create many jobs.

But it would blow a giant hole in the budget - $36 billion next year, $700 billion over ten years. Millionaire households would get a windfall of $31 billion next year alone.

And the Republican charge that restoring the Clinton tax rates for the rich would hurt the economy - because it would reduce the "incentives" of the rich (including the richest small business owners) to create jobs - is ludicrous.

Under Bill Clinton and his tax rates, the economy roared. It created 22 million jobs.

By contrast, during George Bush's 8 years, commencing with his big 2001 tax cut, the economy created only 8 million jobs. And as the new Census data show, nothing trickled down. In fact, the middle class families did far worse after the Bush tax cut. Between 2001 and 2007 - even before we were plunged into the Great Recession - the median wage dropped.

It's an issue that could also be used to expose the giant chasm that's opened between the rich and everyone else - aided and abetted by Republican policies. As I've noted before, in the late 1970s, the top 1 percent got 9 percent of total national income. By 2007, the top 1 percent got almost a quarter of total national income.

These figures don't even count in taxes. The $1.3 trillion Bush tax cut of 2001 was a huge windfall for people earning over $500,000 a year. They got about 40 percent of its benefits. The Bush tax cut of 2003 was even better for high rollers. Those with net incomes of about $1 million got an average tax cut of $90,000 a year. Yet taxes on the typical middle-income family dropped just $217. Many lower-income families, who still paid payroll taxes, got nothing back at all.

And, again, nothing trickled down.

As I've emphasized, the U.S. economy has suffered mightily from the middle class's lack of purchasing power, while most of the economic gains have gone to the top. (The crisis was masked for years by women moving into paid work, everyone working longer hours, and, more recently, the middle class going into deep debt - but all those coping mechanisms are now exhausted.) The great challenge ahead is to widen the circle of prosperity so the middle class once again has the capacity to keep the economy going.

In other words, this is the right issue. It's the right time. It allows Democrats to explain what the Bush tax cuts really did, why supply-side economic is bogus, and the economic challenge ahead.

Even if Democrats feel they have to respond to the Republican charge that taxes shouldn't be raised on anyone when the employment rate is 9.6 percent, they have a powerful fallback: Extend the Bush tax cuts for everyone through 2011, then end them for the rich while making them permanent for the middle class.

Get it, Democrats? Please don't blow it this time.

Robert Reich is Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written twelve books, including "The Work of Nations," "Locked in the Cabinet" and "Supercapitalism." His upcoming book, "AFTERSHOCK: The Next Economy and America's Future," is due out in mid-September. His "Marketplace" commentaries can be found on publicradio.com and iTunes.