PERILS TO AMERICA’S DEMOCRACY OF DESCENDING TO A NEO-LIBERAL CAPITALISTIC AUTOCRACY
by Frank Thomas
I agree with Umair Haque's excellent essay, Why America is the First Poor Rich Country, that our historical process of growing income/wealth concentration creates a vicious cycle that persists through generations, effectively corroding our democracy. A theme of inevitably increasing income and wealth concentration under our capitalistic model that the indefatigable researcher, Thomas Piketty focused on in depth. We have an enhanced Free Market Capitalism democracy variant that's dangerously evolving into an Aristocracy - sharp contrast to Europe's constantly refined 'mixed blending’ of socialist and capitalist elements in their multi-party, relatively inclusive Social Democracies. It comes down to a European 'noblesse oblige' culture. That means those with wealth, power, influence recognize that their advantageous positions come with some morally obligated social-economic responsibilities. Unlike the U.S., Europe has on average very low income 'break-levels' where the highest progressive tax rate kicks in for ALL at the same income break- level.
But unlike Europe, we have large numbers in the Top 1%, 5%, 10% income brackets earning increasingly prodigious incomes at much lower tax rates that kick in at very high income 'break-levels.' Besides low inheritance tax rates, this income tax advantage contributes greatly to our nation's huge income inequality and obscenely disproportionate shares of national income and wealth received by the Top 10% vs. the Bottom 90%. The Top 1% has a vast majority of wealth in the economy and control of financial markets. So, we have the 'noblesse' without the 'oblige,' i.e., the most fortunate maximize their income and wealth, with scant attention to a moral obligation to support the lot of the less fortunate and stagnantly progressing middle class. In fact, such 'oblige' behaviour is usually obstructed or given a token last thought by the conservative right.
As I've said before in prior writings, Europe's mature “social democracies” like the Scandinavian countries, Austria, Germany, the Netherlands, Belgium, Switzerland and others are NOT centres of “socialism” where individual freedom and enterprise are lost according to Republicans. This is the constant demonizing ad hominem rant of the American conservative right. With few exceptions, EU countries in the main are quintessentially vibrant capitalistic economies with sound, encompassing, well-managed social welfare and safety nets. An example of a thriving capitalistic economy with an outstanding multi-party structure and social welfare system is the Netherlands. A small country of 18 million people with an economy that has given rise to such world enterprising companies as Unilever, Phillips, Royal Dutch Shell, Heineken, KLM, DSM, ASML.
Europe's social democracies seek to ensure economic and job opportunity fairness, to incentivize opportunities, to provide protections, to restrain corruption and the excesses of capitalism including externalized costs. Europe's social democracies show us that free markets, lower consumption levels (52% of GDP vs. 70% of GDP in U.S.), high societal investments in infrastructure, education, quality social welfare and safety nets can co-exist rather well - even reinforce and complement each other.
In contrast, the U.S. economy and governing system based on a broad, strong working blue collar and middle class is being transformed into a feudal society by a small number of wealthy elites, giant corporations, banks and bought politicians. A society where a fair share in income and asset ownership by the common working folk has disappeared into a 'daily bread', pay check-to-pay check, job survival struggle - now being made appallingly worse by current and rapidly forthcoming technical advances in digitalization, robotization and artificial intelligence. Over recent decades a rough, ultra-demanding, dominant capitalistic paradigm has been in play in America where the working folk are experiencing near zero upward mobility; where a majority of people are failing to progress in good times and are forced to share the brunt of the pain in bad times.
Current levels and trends in income and wealth inequality would certainly have terrified the Founding Fathers. They believed that broad-based property ownership and prosperity were essential to the sustenance of the republic. John Adams wrote that the goal of the democratic government was not to help the wealthy and powerful but to achieve "the greatest happiness for the greatest number." Adams feared that "monopolies of land" would destroy the nation, that an oligarchy arising out of inequality would manipulate voters, creating a system of subordination to all. Does this sound familiar to what's been happening in America?
Since the late 1970s, our nation has been overtaken by the conservative-right, doctrinaire harangue that a minimally regulated ‘market’ economy equates with democracy; i.e., the 'market' is the foundation of our social-economic-political system. Like Umair Haque, I've examined and am haunted by how our free market capitalism politically influences and controls our economic system at the expense of the social welfare system. Simply said, the conservative right proponents of 'market liberalism' ignore how an unfettered 'market' and lobby-influenced politicians can come to function undemocratically. The moneyed elite and corporations inexorably use their leverage to marginalize the rights, wages, social welfare of average Americans, to exploit their tax advantages to the hilt using exotic tax avoidance structures.
The Founding Fathers clearly viewed government as the protector of the many, not the few. In general, they believed economics - not politics - concentrates wealth and power. Their conception of political democracy was that it extends to every citizen equally - one person, one vote. By contrast, the 'market' tends to recognize only money - one dollar, one vote. It cares less about the penniless, those hit by bad times, those unable to pay for decent healthcare coverage, those unable to pay for their children's trade school or college education. The Founders concluded that the rich and wealthy tend to monopolize society's resources and social welfare distribution. They knew that when income and wealth become highly concentrated, like in our country today, political power can never be democratically shared.
To repeat, the Founding Fathers believed wide disparities in wealth result when an elite manipulates politics to extract monies and benefits from the labour of hard-working citizens as well as marginalize their political power. For example, politics and our highest court aligned to form the legal reality of "corporate personhood" in the Citizens United Supreme Court decision. This decision makes corporations and labor unions free as 'citizens' to fund political candidates, to support or denounce an individual candidate (e.g.by political advertising). And there are no spending limits. Many reputable constitutional experts say the unconstrained corporate political spending is eroding our democracy. The Citizen’s United ruling contributes to making the one person, one vote principle fundamentally ever more compromised, if not a joke. We know that the primary goal of a corporate entity is to generate maximum profits for its shareholders. In contrast, most EU countries set and enforce very LOW limits on political spending by corporations and other associations.
After a long history of massively destructive wars and ruthless rulers-dictators-kingships Europeans have come to accept government’s role to hold income and wealth disparities equitably in balance – in order for the ‘market and democracy’ to operate democratically and harmoniously in any meaningful way. That’s why the maximum progressive individual tax rate in EU countries for ALL citizens averages around 51% on an individual ordinary income over $90,000 or euro 80,000.
This compares to U.S. progressive tax rates of 22% on incomes of $39,500 to $84,000, with step-by-step tax rate rises to 35% on incomes of $200,000 to $500,000 to a maximum tax rate of 37% on incomes above $500,000. Latter compares EU’s maximum average 51% tax rate on all incomes above +-$90,000. Extremely LOW U.S. progressive tax rates on very high levels of ordinary income and even lower rates of 0% to 20% on millions in capital gains – 10% of all American households own 84% of all stock – ensure that the Top 1%, 5% 10% income/wealth classes become richer and richer at the expense of the Bottom 90%.
In Europe, a significant income and social benefit comes from EU redistribution policies that bring a variety of financial gains to every citizen. To name a few using the Netherlands as an example: average student college costs of less than $15,000/year (euro+-13,500) with zero tuition costs in a number of EU countries; quality, reasonable healthcare coverage at an affordable universal monthly premium, of $130 (euro 115) for everyone 18 or above and a government subsidy of up to 70% of the monthly premium for incomes below $35,000 (euro 30,000); a government monthly apartment rental subsidy for low income people of up to 40%, 4-week vacation for everyone partly funded by withheld taxes; up-to-date, quality, well-maintained infrastructure and educational systems.
I'm not suggesting our country should copy the European progressive tax system or economic model which generally works well for most EU countries. And it’s adjusted up or down when societal needs warrant that. The European social-economic model has been achieved by, in addition to other factors noted by Umair, e.g. better economic interactions and redistribution, better public goods, better worker representation, uniform-for-all progressive high tax rates with hardly any deductions. And as mentioned, the highest progressive tax rates average around 51% and generally apply to Everyone with an income above $90,000. Thus, income and wealth distribution is FAR more broadly dispersed in Europe for a good quality-of-life standard for nearly all citizens. Reasonable social welfare benefits and safety nets support those with annual income levels below $35,000.
A good balance between capitalistic market and government social welfare policies has been achieved without the interaction of multiple factors that have caused the great divide in productivity and compensation in America since 1975. Again, I'm not advocating we should adopt a typical European social-economic model like the Netherlands or Sweden, Norway, Germany, Austria. But we could learn a LOT by examining carefully the social-economic workings of these excellent free Market & Government “hybrid” social democracies.
Some radical adjustments indeed are needed to our "economic-social miracle paradigm:" a sky-high costly Military-Industrial complex; an unaffordable, poor coverage basic quality healthcare for all; trillions in investments required for a 3rd world obsolete infrastructure and weak pre-college education system; absence of a united, aggressive, innovative, pragmatic transition to green energy sources and lifestyle supported by a president who denies the existential reality of human-induced fundamental climate change, calling it a hoax, pure scientific rubbish!
Stagnant tax revenue and GDP growth in combination with $trillions needed in infrastructure and education investments, new records of Defence spending, steeply rising health care costs, 2017 tax cuts going mostly to the Top 10% and corporations in GOOD economic times are accelerating federal Deficits, Debt and Interest to new record levels. Thus, there’s little financial cushion for WEAK economic times. Federal deficits have been soaring to $779 (+15%) billion in FY2018, to $984 billion (+11%) in FY2019 to an expected rise of over $1.1 trillion in FY2020.
Obama inherited a huge unemployment level of 9.9% in July 2009; massive federal money pump-priming brought that down to 4.7% in 2016, to 4.1% in 2017. Around 85% of Trump’s Jan. 2017 tax cuts went to the rich and corporations. But data indicates the tax cuts are not being recovered by economic growth and a low 3.8% unemployment in March 2019. We are in a cycle where spending is growing faster than tax revenue generation and we are doing this in GOOD times.
TABLE 1: U.S. FY 2017-2018 & 2019-2020 Budget s Yield High Deficit Trend & Stagnant Growth in Tax Revenues
|
|
FY 2016-2017
|
FY2017-2018
|
% Growth
|
|
TAX REVENUES :Data in Billions
|
|
|
|
|
Individual Income Taxes
|
$1,587.00
|
$1,684.00
|
6.10%
|
|
Corporate Income Taxes
|
$297.00
|
$205.00 30.9%
|
|
|
Payroll Taxes
|
$1,162.00
|
$1,171.00 0.7%
|
|
|
Excise Taxes/Other Taxes
|
$269.00
|
$270.00
|
0.4%
|
|
TOTAL REVENUES
|
$3,315.00
|
$3,329.00
|
0.40%
|
|
SPENDING
|
FY2016-2017
|
FY2017-2018
|
% Growth
|
|
Social Security
|
$945.00
|
$987.00
|
4.50%
|
|
Dept. of Defense
|
$569.00
|
$601.00
|
5.60%
|
|
Other Spending
|
$2,205.00
|
$2,195.00
|
-0.40%
|
|
Interest on Debt
|
$262.00
|
$325.00
|
26.6%
|
|
TOTAL SPENDING
|
$3,981.00
|
$4,108.00
|
3.20%
|
|
DEFICIT
|
$666.00
|
$779.00
|
17.0%
|
The Jan. 2017 tax cuts aren’t generating sufficient additional GDP growth to make tax revenues higher than they would have been if the tax cuts had never been passed. In fact, the CBO had forecast FY2018 government tax revenues at $3.53 trillion. But, revenues were actually $3.32 trillion or $200 billion less, contributing to a $779 billion deficit (+15%). In FY2019, tax revenues increased less than 1% while spending increased much more causing another sharp increase in the federal deficit to $984 billion (+26%). This occurred with a 2.5% GDP growth rate and a low 3.8% unemployment rate. Same story for FY2019-2020 where the deficit is expected to rise to $1.1 trillion (+11%) with a 2.5% GDP growth rate.
What’s the lesson here? The Trump tax cuts for the rich and corporations in GOOD economic times are in fact helping to accelerate America’s growing budget deficits. The tax cuts are way short of paying for themselves. Tax savings to the rich and corporations do not Trickle Down. Yes, more workers have jobs but mostly at marginal, bare survival wages. And then there are the financial pressures coming from critically needed substantial investments in our infrastructure and pre-college education systems. What happens when the economic situation slows down?
Welcome to the next world of a potential financial crisis of all crises. Despite all the ‘hurrahs’ about our economy’s current 2.75% GDP growth rate and unemployment rate of 3.8% in March 2019, The Joint Committee on Taxation, the Tax Policy Center, the CBO and Penn Wharton Budget Model are warning that the new Trump tax law is going to continue to lead to higher rising $1 trillion annual deficits over next 3 or 4 years.
SUMMARY
The years after WWII into the late 70s through were ones of substantial economic growth, a broadly and equitably shared prosperity. Inflation-adjusted incomes grew at roughly the same rate for all income brackets, approximately doubling between the later 1940s and mid-1970s. The Top 1%’s share of U.S. annual income before taxes (including capital gains) peaked at 23.9% in 1928 before the Great Depression, fell to 10% in 1980, recovered to 23.5% in 2007 before the Great Recession, then fell somewhat, and is now back on path to a 25 % income share of U.S. income. Helped by Trump’s Jan. 2017 tax cuts to the rich and corporations.
The top individual tax rate was reduced to 37% on an increased break-level income $500,000. The corporate Statutory tax rate and Effective tax rate after special deductions were 35% and 27%, respectively. The 2017 tax cut law lowered the Statutory rate to 21%, thereby creating an Effective corporate tax rate today of +-18% after special deductions. Given this gigantic tax cut gift to corporations and the many tax avoidance loopholes still available, is it any wonder corporations paid an obscenely TINY 7% share (down from 10% in previous years) of total government tax revenues in FY2018. This monstrously low 7% share will inevitably drop further in subsequent years. It compares to a 50% share of all government tax revenues being paid by personal income taxes and 36% by payroll taxes. This change and the disproportionate income growth advantage of the Top 1% and 10% under the 2017 lowered progressive tax rates on high incomes and annual incomes above $500,000 have intensified our nation’s perilously deep income/wealth divide.
Under Trump’s 2017 tax law, 60 of our largest corporations paid zero taxes on $79 billion U.S. profits in 2018. In fact they received a $4 billion tax rebate. Prior to the new tax law, 30 corporations paid zero taxes. The Effective tax rate of corporations that paid taxes was a TINY 17% in 2018. That rate was the lowest since 1947, and substantially below the new 21% statutory tax rate.
In 1974, the average U.S. CEO salary was 50 times the average worker wage vs. 46 times in Europe. Today, the average U.S. CEO salary is over 310 times the average worker wage vs. 55 times in Europe. That will get ever worse, if possible, under the new 2017 tax law.
Umair Haque is right that the American public has little idea on what led to the extraordinary U.S. income and wealth gap compared to no such development in Europe. In his words:
"Why didn't Europe's "labour share of income" - that is, how much regular people receive - decline, like in the United States? The simple answer, of course, is "more social democracy, and less capitalism." But what does that mean? It means that European structures and institutions are radically different from American ones - so different, that many Americans have little idea such things ever exist.
Having lived and worked in Europe for nearly 40 years, I compliment Umair Haque for an incisive essay on our deep societal disintegration and polarization that keeps intensifying. About all I can say is what others like Umair are saying: we must open our eyes, minds and hearts to our country's severe disunity and structural problems and come to shared solutions. This calls for a reawakening of our civility towards each other, reclaiming cooperatively the social and economic balance and spaces in our society in favour of the small, the ignored, the local accountable community, the cooperative, the small existing and promising upstart enterprise.
Thinking creatively, constructively, cooperatively outside-the-box was what made our nation great before and after WWII through the 1970s. That more pragmatic, compromise, cooperative approach was working reasonably well and fairly for post WWII generations born in the 1920s, 1930s, 1940s, 1950s, 1960s to late 1970s. But things have been going mostly downhill ever since for the average American.
All of the above brings me to some thoughtful words by Leroy Greason - former professor, dean, president of my alma mater Bowdoin College in Maine who died August 28, 2011:
"We are seldom absolutely right. Even when most alive and living beyond ourselves, we had best walk humbly with our gods." As one colleague of Mr. Greason remarked, "His greatest gift was his ability to find common ground among disparate people and to inspire them to work together."
We desperately need qualities like that in these times of overlapping, complex fundamental societal and environmental changes within and outside our traditional spaces and thinking process.
Frank Thomas The Netherlands March 16, 2019
Edited and Added To: December 1, 2019
