The 2012 presidential race would be the priciest ever, costing an estimated $2 billion or more. “It is far worse than it has ever been,” said the Republican senator John McCain. And an overwhelming share of the money would come from a handful of wealthy individuals and large corporations. All restraints on spending were off now that the Supreme Court had determined that money is speech—it can’t be limited—and corporations are people under the First Amendment.
So-called super PACs would become the private slush funds of billionaires seeking political influence and a means of fulfilling narcissistic appetites for sheer power. The Texas billionaire Harold Simmons, for instance, would pour at least $12 million into the anti-Obama super PAC “American Crossroads” and even more into super PACs dedicated to getting Mitt Romney elected president. It seems doubtful Simmons’s main motivation was the public good. He had built a West Texas dump for radioactive wastes bigger than a thousand football fields, which he could fill only with the aid of a friendly administration in Washington along with pliant environmental regulators.
The same mix of pecuniary and egoistic motives lay behind the super PAC contributions of other billionaires. The casino magnate Sheldon Adelson would pour at least $60 million into the 2012 election, seeking in part to protect foreign tax shelters worth billions. Super PAC spending via the Wyoming mutual-fund honcho Foster Friess was said to have powered Rick Santorum’s upset win in the Iowa caucuses, which in turn kept Santorum going for months. Not since the Gilded Age had a handful of super-rich individuals so easily used their fortunes to fuel the presidential ambitions of a few people so radically out of the mainstream of American politics.
Meanwhile, nonprofit political fronts like Crossroads GPS, founded by the Republican political guru Karl Rove, gathered hundreds of millions of dollars from big corporations and wealthy individuals like the billionaire oil and petrochemical moguls David and Charles Koch and poured the money like poison into the veins of American politics. The U.S. Chamber of Commerce, under the control of Tom Donohue, became a repository for corporations wanting to influence politics without their customers or even shareholders knowing. Under Internal Revenue Service regulations, such nonprofit “social welfare organizations” were not required to disclose the names of those who contributed to them. How many billionaires and big corporations does it take to buy the presidency and Congress? We would soon find out—although we would not know many of their names.
In May 2012, Politico revealed that Republican super PACs and other outside groups shaped by a network of conservatives—led by Karl Rove, the Koch brothers, and Tom Donohue—planned to spend about $1 billion on the 2012 election for the White House and control of Congress. Koch-related organizations also planned to spend $400 million ahead of the 2012 elections, including county-by-county operations in key states. All this outside spending would be in addition to traditional party fund-raising: the Romney campaign and the Republican National Committee intended to raise $800 million. If all of them—the outside groups and the Republican campaigns—hit their targets, they would outspend Democrats two to one. (President Obama’s super PAC hoped to spend $100 million. Organized labor aimed for $200 million to $300 million.)
Never before in the history of our republic would so few spend so much to influence the votes of so many. Just the spending linked to the Koch brothers’ network exceeded the $370 million John McCain raised for his entire presidential election in 2008. And the $1 billion that outside groups intended to raise from the super-rich and from corporations for the 2012 elections surpassed the $750 million Barack Obama collected in his 2008 campaign.
Yet when real people without money assemble to express their dissatisfaction with all this, they’re told the First Amendment doesn’t apply. Instead, they’re clubbed, pepper sprayed, thrown out of public parks, and evicted from public spaces. Across America, public officials forced Occupiers out of places that had once been open to peaceful assembly. Even in universities—where free speech is supposed to be sacrosanct—students have been met with clubs and pepper spray.
The threat to America is not coming from peaceful demonstrators. And it’s not coming from a government that’s too large. It’s coming from unprecedented amounts of money now inundating our democracy, mostly from big corporations and a handful of the super-rich. And it is happening precisely at a time when an almost unprecedented share of the nation’s income and wealth is accumulating at the top.
We cannot tolerate inordinate wealth for the few along with unbridled money in politics. As the great jurist and Supreme Court justice Louis Brandeis once said, “We may have democracy or we may have great wealth concentrated in the hands of a few, but we can’t have both.”
THE GREAT SWITCH OF THE SUPER-RICH
One of the major returns to the rich from their political investments has been lower taxes. Forty years ago, wealthy Americans helped finance the U.S. government far more than now through their tax payments. Today wealthy Americans help finance the government mainly by lending it money. While foreigners own most of our national debt, over 40 percent is owned by Americans—mostly the very wealthy.
This great switch by the super-rich—from primarily paying the government taxes to now lending the government money—has gone almost unnoticed. But it’s critical for understanding the predicament we’re now in. And for getting out of it.
From World War II until 1981 the top marginal income tax rate never fell below 70 percent. Under President Dwight Eisenhower, a Republican whom no one ever accused of being a socialist, the top rate was 91 percent. Even after all deductions and credits, Americans with incomes of over $1 million (in today’s dollars) paid a top marginal rate, on average, of 52 percent. As recently as the late 1980s, the top tax rate on capital gains was 35 percent.
But as income and wealth have accumulated at the top, so has the political power to reduce taxes. The Bush tax cuts of 2001 and 2003, which were extended for two years in December 2010, capped top rates at 35 percent, their lowest level in more than half a century, and reduced capital gains taxes to 15 percent. In the half century spanning 1958 to 2008, the average effective tax rate of the richest 1 percent of Americans—including all deductions and tax credits—dropped from 51 percent to 26 percent. During the same period the typical middle-class taxpayer went from paying 15 percent of income in taxes to 16 percent.
In 2011, according to the Internal Revenue Service, the four hundred richest Americans paid an average of 17 percent of their income in taxes. That’s lower than the tax rates of many middle-class Americans, as I’ve already said. Mitt Romney paid less than 14 percent on income in excess of $20 million, in both 2010 and 2011. That’s because so much of the income of the super-rich is classified as capital gains, which, at 15 percent, creates a loophole large enough for the super-rich to drive their Ferraris through. Well-heeled tax lawyers and accountants are kept busy year-round figuring out how to make the earnings of their clients look like capital gains. Congress still hasn’t closed the “carried interest” loophole that allows mutual-fund and private-equity managers to treat their incomes as capital gains.
Great wealth creates opportunities for ever greater tax loopholes. In 2010, eighteen thousand American households earning more than half a million dollars paid no income taxes at all. The estate tax (which affects only the top 2 percent) has also been slashed. As recently as 2000 it was 55 percent and kicked in after $1 million. Today it’s 35 percent and kicks in at $5 million.
At the same time, the share of government revenue coming from corporations has been dropping—due in no small part to squadrons of corporate lawyers and lobbyists finding and creating ways to cut their companies’ tax bills. American companies are booking higher profits than ever, but corporate tax receipts as a share of profits are at their lowest level in at least forty years. According to the Congressional Budget Office, corporate federal taxes paid in 2011 dropped to 12.1 percent of profits earned from activities within the United States—a sharp decline from the 25.6 per
cent on average that companies paid from 1987 to 2008. The nation’s biggest corporations, like GE, find ways to pay no federal taxes at all. Congress has quietly cooperated, creating tax breaks that allow companies to write off investments or shelter their earnings abroad.
The only major tax increases in recent years have fallen on the rest of America. Middle- and lower-income Americans are shelling out larger portions of their sinking incomes in payroll taxes, sales taxes, and property taxes than they did thirty years ago. The Social Security payroll tax continues to climb as a share of total government tax revenues. Yet the payroll tax is regressive, applying only to yearly income under $110,100 (the ceiling in 2012). That means it takes a far bigger bite out of the pay of the middle class and the working poor than out of the rich. Sales taxes at the state and local levels are soaring, along with property taxes and tolls on highways, bridges, and tunnels. These also take bigger percentage bites out of the incomes of average Americans than they do out of those of the rich.
What are the super-rich and big corporations doing with all their savings? They’ve put significant sums into Treasury bills—essentially loans to the U.S. government—which have proven to be good and safe investments, particularly during these last few tumultuous years. Hence the great switch of the super-rich. Maybe I’m old-fashioned, but it seems to me people at the top, who have never had it so good, should sacrifice a bit more. That way the rest of us—who are struggling harder than Americans have struggled since the 1930s—won’t have to sacrifice quite as much.
Some apologists point to the generosity of the super-rich as evidence they’re contributing as much to the nation’s well-being as they did decades ago, when they paid a larger share of their earnings in taxes. Undoubtedly, super-rich family foundations, such as the Bill and Melinda Gates Foundation, have done much good. Super-rich philanthropic giving is on the rise. Here’s another parallel with the Gilded Age of the late nineteenth century, when magnates like Andrew Carnegie and John D. Rockefeller established philanthropic institutions that survive today.
But a large portion of charitable deductions claimed by the wealthy go not to the poor. They go to culture palaces—operas, art museums, symphonies, and theaters—where the wealthy spend much of their leisure time, and to the universities they once attended and expect their children to attend (perhaps with the added inducement of knowing that these schools often practice affirmative action for “legacies”). I’m all in favor of supporting the arts and our universities, but let’s face it: These aren’t really charities, as most people understand the term. They’re often investments in the lifestyles the wealthy already enjoy and want their children to have too. They’re also investments in prestige—especially if they result in the family name being engraved on the new wing of an art museum or symphony hall.
It’s their business how they donate their money, of course. But not entirely. In 2012, the U.S. Treasury would receive about $50 billion less than if the tax code didn’t allow for charitable deductions. (Not incidentally, this is about the same amount the government would spend in 2012 on Temporary Assistance for Needy Families, which is what remains of welfare.) As with all tax deductions, this gap has to be filled by other tax revenues or by spending cuts, or it just adds to the deficit. I see why a contribution to, say, the Salvation Army should be eligible for a charitable deduction. But why, exactly, should a contribution to the Guggenheim Museum or to Harvard University? A while ago, New York’s Lincoln Center had a gala supported by the charitable contributions of hedge fund industry leaders, some of whom take home $1 billion a year. I may be missing something, but this doesn’t strike me as charity, either. Poor New Yorkers rarely attend concerts at Lincoln Center. It turns out that only an estimated 10 percent of all charitable deductions are specifically directed at the poor or organizations expressly dedicated to helping the poor. In other words, the great switch of the super-rich isn’t into charity. It is, as I said, from supporting government through taxes to supporting government through lending. As it turns out, that’s not nearly enough support.
THE DECLINE OF THE PUBLIC GOOD
A society is embodied most visibly in public institutions—public schools, public libraries, public transportation, public hospitals, public parks, public museums, public recreation, public universities, and so on. But much of what’s called “public” today is increasingly private. Tolls are rising on public highways and public bridges, as are tuitions at so-called public universities and admission fees at public parks and public museums. Much of the rest of what’s considered “public” has become so shoddy that those who can afford to do so find private alternatives.
As public schools deteriorate, the upper middle class and the wealthy send their kids to private ones. As public playgrounds and pools decay, the better-off buy memberships in private tennis and swimming clubs. As public hospitals decline, those who can afford it pay premium rates for private care. Gated communities and office parks now come with their own manicured lawns and walkways, security guards, and backup power systems.
Why the decline of public institutions? The financial squeeze on government at all levels since 2008 explains only part of it. The real story began thirty years ago. When almost all the gains from growth started going to the top, the better-off began shifting to private institutions. They simultaneously started to withdraw political support for public ones, using their political clout to reduce their tax payments. This created a vicious cycle of diminishing public revenues and deteriorating quality, spurring more flight from public institutions.
The great expansion of public institutions in America began in the early years of the twentieth century, when progressive reformers championed the idea that we all benefit from public goods. Excellent schools, roads, parks, playgrounds, and transit systems were meant to knit the new industrial society together, create better citizens, and generate widespread prosperity. Education, for example, was less a personal investment than a public good, improving the entire community and ultimately the nation. This logic was expanded upon in subsequent decades—through the Great Depression, World War II, and the Cold War. The “greatest generation” was bound together by mutual needs and common threats. It invested in strong public institutions as bulwarks against, in turn, mass poverty, fascism, and communism.
Yet increasingly over the past three decades, “we’re all in it together” has been replaced by “you’re on your own.” Global capital has outsourced American jobs abroad. As I’ve noted, the very rich have taken home almost unprecedented portions of total earnings while paying lower and lower tax rates. A new wave of immigrants has hit our shores, only to be condemned by demagogues who forget we are mostly a nation of immigrants. Not even Democrats any longer use the phrase “the public good.” Public goods are now, at best, “public investments.” Public institutions have morphed into “public-private partnerships,” or, for Republicans, “vouchers.”
In his standard stump speech the presidential candidate Mitt Romney charged that President Obama and the Democrats created an “entitlement society,” and Romney called for an “opportunity” society. But he never explained how ordinary Americans would be able to take advantage of opportunities without good public schools, affordable higher education, good roads, and adequate health care.
Romney’s so-called entitlements were mostly a mirage anyway. Medicare is the only entitlement growing faster than the gross domestic product (GDP), but that’s because the cost of health care is growing faster than the economy. Social Security hasn’t contributed to the budget deficit; it’s had surpluses for years. Other safety nets are in tatters. Unemployment insurance reaches just 40 percent of the jobless these days. The only reason food stamps and other benefits for the poor spiked after 2008 is that more Americans fell into poverty after getting clobbered by the Great Recession that hit in that year.
Outside of defense, domestic discretionary spending is down sharply as a percentage of the economy. This spending is “discretionary” in that Congress d
ecides how much to fund such programs in annual appropriations bills. So as the budget is squeezed, these programs are the first to be whittled back. Yet they include the most important things we do as a nation to invest in the future productivity of all our people. With declining state and local spending, total public spending on education, infrastructure, and basic research has dropped from 12 percent of GDP in the 1970s to less than 3 percent in 2011.
Most federal programs to help children and lower-income families are in this vulnerable category as well. Yet more than one in three young families with children (headed by someone thirty or under) were living in poverty in 2010, according to an analysis of census data by Northeastern University’s Center for Labor Market Studies. That’s the highest percentage on record. In 2011, according to the Agriculture Department, nearly one in four young children (23.6 percent) lived in a family that had difficulty affording sufficient food at some point during the year. An analysis of federal data by The New York Times showed the number of children receiving subsidized lunches rose to twenty-one million in 2011, up from eighteen million in 2006–2007. Nearly a dozen states experienced increases of 25 percent or more—signaling a surge in child poverty. Under federal rules, children from families with incomes up to 130 percent of the poverty line, $29,055 for a family of four, are eligible.
America is still in the gravitational pull of the worst economy since the Great Depression—with lower-income families and kids bearing the worst of it—and yet the nation is cutting programs Americans desperately need to get through it. Local family services are being terminated. Tens of thousands of social workers have been laid off. Cities and counties are reducing or eliminating their contributions to Head Start, which provides early childhood education to the children of low-income parents. It gets worse. The automatic budget trigger of January 2013 to cut the federal budget takes an even bigger whack at domestic discretionary spending. States no longer receive federal stimulus money—money that was used to fill gaps in state budgets over the last two years. The result is a downward cascade of budget cuts—from the federal government to state governments and then to local governments—that are hurting most Americans, but kids and lower-income families in particular.
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