by Jane Mayer
To popularize his radical budget plan, Ryan would need help, and Noble soon came up with a way for the donors to deliver it. He suggested they pay for expensive private polling and market testing to help Ryan fine-tune his pitch, as well as a campaign by “Astroturf” groups to create a drumbeat of public support. It was an intriguing idea, but it teetered on the edge of impropriety. Drafting the government’s annual budget was a core congressional function.
At first, in the beginning of 2011, the donors were unenthused about the idea. Having already paid for an expensive election, they didn’t understand why they now also needed to pay for polling and focus groups about government policy. But in the following months, this changed, and mysterious money from the Koch network started flowing. Much of it moved from the donors to a 501(c)(4) “social welfare” group cryptically called the TC4 Trust, working closely with a subgroup focused on budget issues called Public Notice. The TC4 Trust was little more than a UPS box in Alexandria, Virginia, but between 2009 and 2011 it reported revenue to the IRS of approximately $46 million and gave away some $37 million to other conservative nonprofit groups. It defined itself as a free-market advocacy group and filed papers with the IRS proclaiming that “the grant funds shall not be used for political activity.” But it soon was paying for polling and a public advocacy campaign aimed at shaping and selling the Republican budget.
Ed Goeas, the president of the Tarrance Group, a Republican polling company that worked on the budget project, said that the challenge was to minimize political damage from cuts to entitlement spending. “It wasn’t about developing policy,” Goeas said, “it was about selling it.” The solution, it appears, was to avoid the frank use of the word “cut” when talking about Medicare or Social Security. “There was discussion that you could deal with it as ‘getting your money’s worth out of the government,’ ” said Goeas. “You could talk about it as ‘more effective’—but not as cutting it. It had to be more about ‘efficiencies.’ That was a large part of it,” he said. Public Notice, which paid for the research, also mounted a public advocacy campaign describing the deficit as a looming catastrophe. “Public Notice was one of the Koch Brothers’ groups,” Goeas confirmed, adding that his firm worked “for it for three or four years” while simultaneously advising Ryan.
Ryan evidently proved eminently teachable. He was expert in the fine print of the budget but less certain about the public relations. So long as what emerged from these sessions was in line with his values, he was described as grateful for the help. Moreover, unlike most such advice, it came prepaid. As President Obama worked up his own budget proposal that spring, a process at the heart of governing, he had no idea that some of the richest people in the country, with huge stakes in the outcome, were partly paying to shape and sell the Republican alternative.
As the attention lavished on Ryan suggested, tax issues loomed large on the victorious donors’ agenda. Dull though the mechanics can be, as Neera Tanden, the president of the liberal Center for American Progress, puts it, “When oligarchs control the levers of government, they get the spoils. It’s litigated through tax policy.”
Even before the Republicans formally took control of the House, the president felt forced into making concessions on tax issues vital to the donor class. In December 2010, he reached a deal that temporarily extended unemployment benefits to the millions of Americans still out of work, along with reducing payroll taxes and providing other help for the middle class. In exchange, Obama gave Republicans what they most wanted—an extension of the Bush-era income tax cuts that had disproportionately benefited the wealthy, which were slated to automatically expire.
Those cuts had lowered the top income tax rate from 39.6 percent to 35 percent. With bipartisan support, Bush had also slashed taxes on unearned income, most of which went to the rich. Taxes on dividends, for instance, were reduced dramatically from 39.6 percent to 15 percent. Taxes on capital gains, the overwhelming bulk of which were reaped by the wealthy, fell from 20 percent to 15 percent. As a result, many of the richest Americans were taxed at lower rates than middle- and working-class wage earners.
A 2008 study of the wealthiest four hundred taxpayers, for instance, showed that they earned an average of $202 million and paid an effective income tax rate of less than 20 percent. Fully 60 percent of their declared income derived from capital gains. In other words, the effective tax rate on earning $202 million was lower than the rate paid by Americans earning $34,501 a year.
The tax code hadn’t always been so lopsided. As income grew increasingly concentrated at the top during the twentieth century, the tax code grew more generous to those with extreme wealth in response to the political pressure they put on lawmakers. The first peacetime income tax was enacted in 1894 as the result of William Jennings Bryan’s Populist movement and applied to only the richest eighty-five thousand Americans out of a population of sixty-five million, or the top 0.1 percent. But the Supreme Court struck it down after the robber barons waged a proxy legal battle. Eighteen years later, the Sixteenth Amendment to the Constitution legalized the income tax, which in the beginning was only levied on the very rich. Rates were especially high in wartimes, when the taxes were seen as part of the patriotic duty of the privileged. During World War I, top earners paid a rate of 77 percent, and during World War II they paid a rate of 94 percent. (It was this tax that the Scaife family had avoided with its elaborate trusts and foundations.)
Soon, though, those at the very top succeeded in shifting the burden to those beneath them, so that by 1942 nearly two-thirds of the population paid income taxes. The rates remained relatively progressive for decades, with the top bracket paying a 50 percent rate in 1981. But the 1970s kicked off a three-decade-long “tax-cutting spree” during which the wealthiest 1 percent succeeded in getting their average effective federal tax rate slashed by a third, and the very, very richest, the 0.01 percent of the population, did even better, getting its effective federal tax rate cut in half. Unsurprisingly, the distribution of wealth in America grew increasingly skewed.
Critics argued that the extraordinarily rich had managed to shirk their fair share. But this was not how Charles Koch looked at it. He argued that “there is no ‘fair share’ ” of the tax burden. The notion that cutting taxes on the wealthy shifted the burden to others, he said, was a false premise. Everyone’s taxes should be cut, he argued. The aim, he said, was to shrink the government. “Our goal,” he wrote in an impassioned essay in 1978, is “not to reallocate the burden of government; our goal is to roll back government.”
From the standpoint of a radically antigovernment libertarian, paying lower taxes wasn’t a matter of greed; it was a matter of principle. Libertarianism elevated tax avoidance into a principled crusade. Indeed, Koch argued that it was a moral act for the wealthy to cut their own taxes. As he put it in the same essay, “Morally, lowering taxes is simply defending property rights.” It was, as the Libertarian Party platform put it in 1980, the responsibility of citizens to “challenge the cult of the omnipotent state.”
Foster Friess, the Wyoming mutual fund manager who had joined political forces with the Kochs since the 1980s, depicted opposition to taxes as selfless too, but from a slightly different angle. He argued that the public benefited more when the wealthy paid less because the rich could do more good with their money than the government. “Wealthy people self-tax,” he argued, by contributing to charities. “It’s a question—do you believe the government should be taking your money and spending it for you, or do you want to spend it for you?” He argued, “It’s that top 1 percent that probably contributes more to making the world a better place than the 99 percent.”
Charles Koch, however, favored neither taxes nor charity. As he explained in a speech in 1999, “I agree with the 12th century philosopher, Maimonides, who defined the highest form of charity as dispensing with charity altogether, by enabling your fellow humans to have the wherewithal to earn their own living.”
But according to the cultu
ral critic and Jewish scholar Leon Wieseltier, who has taught several university courses on Maimonides, “This is false and tendentious and idiotic.” He explains, “Maimonides did indeed prize the sort of charity that made its recipient more self-reliant, but he believed that the duty of charity is permanent” and that the responsibility to help the poor was “unequivocal and absolute.” In fact, he points out, Maimonides declared that “he who averts his eyes from the obligation of charity is regarded as a villain.”
While Koch and others in his group described their opposition to taxes as matters of pure principle, they put the Obama administration under constant pressure to accept tax cuts that directly increased their own wealth at the expense of everyone else. To reach the deal in December 2010, for instance, Republican negotiators insisted on cuts in estate taxes that would cost the Treasury $23 billion and save some sixty-six hundred of the wealthiest taxpayers an average of $1.5 million each.
The demand didn’t materialize out of thin air. For years, some of the Republican Party’s wealthiest backers, including the Kochs and the DeVoses, had been agitating to abolish what were cleverly dubbed “death taxes.” The Kochs joined with sixteen of the other richest families in the country, including the Waltons of Walmart and the Mars candy clan, in financing and coordinating a massive, multiyear campaign to reduce and eventually repeal inheritance taxes. According to one 2006 report, these seventeen families stood to save $71 billion from the tax change, explaining why they willingly spent almost half a billion collectively, lobbying for it, beginning in 1998.
They were represented by a handful of front groups, including the American Family Business Institute, which strove to cast the tax break as necessary to preserve family farms. Unfortunately, in 2001, the group couldn’t find a single family farm put out of business by the estate tax. After Hurricane Katrina, the same group scoured the country to find a storm victim whose heirs were hurt by the estate tax, in order to create some sympathy for its cause, but again failed to find a single one. In truth, only 0.27 percent of all estates were wealthy enough to be affected by estate taxes.
The lengths that some members of the Kochs’ donor circle went to, hoping to ensure the biggest possible share of their family’s fortunes, were impressive. The Koch brothers were far from alone in having litigated aggressively against their relatives. One member of their network during this period, Susan Gore, heiress to a piece of the Gore-Tex fabric fortune and founder of a conservative think tank called the Wyoming Liberty Group, was so intent on increasing her personal inheritance that she tried to legally adopt her ex-husband in order to claim that she had as many children as her siblings and thereby enlarge her portion of the family trust. But in late 2011, a judge rejected the seventy-two-year-old heiress’s scheme, ruling that she could not count her former husband as her “son.”
Although it enraged progressives, President Obama reluctantly consented to many of the Republicans’ demands, including the enlarged exemptions from the estate tax. He had campaigned against extending the Bush tax cuts for those earning over $250,000 a year, but in December 2010, with the Republicans poised to take over the House, he tried to convince his disappointed supporters that this was the best deal they were likely to get for some time. “It used to be that you could govern by peeling off a couple of Republicans to do the right thing,” he said, “but now, Glenn Beck and Sarah Palin are the center of the Republican Party—and there is no possibility of cooperation.”
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December’s machinations were just the opening act, it turned out, in an unfolding drama in which Republicans in the House would eventually threaten to default on paying America’s debts, potentially pitching the fragile U.S. economy into a calamitous free fall, in order to extort further tax and spending concessions favored by wealthy donors. All of this played out against a backdrop of growing economic inequality and stagnating social mobility. The United States, which idealized itself as a classless society in which everyone had the opportunity to get ahead, had in fact fallen behind many other rich nations in terms of intergenerational economic mobility, including such old-world, class-bound countries as France, Germany, and Spain.
Advancing the agenda of America’s wealthiest winners under such circumstances would ordinarily be a hard sell. After all, in 2011, twenty-four million Americans were still out of work. The Great Recession had wiped out some $9 trillion in household wealth. But after forty years, the conservative nonprofit ecosystem had grown quite adept at waging battles of ideas. The think tanks, advocacy groups, and talking heads on the right sprang into action, shaping a political narrative that staved off the kind of course correction that might otherwise have been expected.
A key skirmish in this battle was the reframing of the history of the 2008 economic crash. From an empirical standpoint, it was hard to see it as anything other than a wipeout for the proponents of free-market fundamentalism and an argument for stronger government regulations. Like the Great Depression, it might have been expected to produce a backlash against those seen as irresponsible profiteers, resulting in more government intervention and a fairer tax system.
Joseph Stiglitz, the liberal economist, described the 2008 financial meltdown as the equivalent for free-market advocates to the fall of the Berlin Wall for Communists. Even the former Federal Reserve chairman Alan Greenspan, Washington’s free-market wise man nonpareil, admitted that he’d been wrong in thinking Adam Smith’s invisible hand would save business from its own self-destruction. Potentially, the disaster was a “teachable moment” from which the country’s economic conservatives could learn. This is not what happened, however. They instead started with their preferred conclusion and worked backward to reach it.
In what the economic writer and asset manager Barry Ritholtz labeled Wall Street’s “big lie,” scholars at conservative think tanks argued that the problem had been too much government, not too little. The lead role in the revisionism was played by the American Enterprise Institute, whose board was stocked with financial industry titans, many of whom were free-market zealots and regulars at the Koch donor seminars.
Specifically, AEI argued that government programs that helped low-income home buyers get mortgages caused the collapse. Ritholtz noted that these theories “failed to withstand even casual scrutiny.” There was plenty wrong with the government’s quasi-private mortgage lenders, Fannie Mae and Freddie Mac, but numerous nonpartisan studies ranging from Harvard University’s Joint Center for Housing Studies to the Government Accountability Office proved they were not a major cause of the 2008 crash. Yet by shifting the blame, Ritholtz noted, those “whose bad judgment and failed philosophy helped cause the crisis” could continue to champion the “false narrative” that free markets “require no adult supervision.”
Self-serving research from corporate-backed conservative think tanks wasn’t exactly news by 2011, but what was surprising, Ritholtz contended, was that “they are winning. Thanks to the endless repetition of the big lie.” Phil Angelides, the chairman of the bipartisan commission that Congress set up to investigate the causes of the crash, was also taken aback by the revisionism. In an op-ed column, he tried to remind the public that it had been “the recklessness of the financial industry and the abject failures of policymakers and regulators that brought the economy to its knees.” Instead, though, he said, “those at the top of the economic heap” were peddling “shopworn data” that had been “analyzed and debunked by the committee.” He conceded that history was written by the winners and that by 2011, while much of the country lagged behind, most of the financial sector had bounced back and “the historical rewrite is in full swing.”
Soon politicians backed by the same conservative donors who funded the think tanks were echoing the “big lie.” Marco Rubio, a rising Republican star from Florida, for instance, who had defeated a moderate in the 2010 Republican Senate primary with the help of forty-nine donors from the June 2010 Koch seminar, soon proclaimed, “This idea—that our problems were caused by a go
vernment that was too small—it’s just not true. In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies.”
Against this backdrop, on April 15, 2011, Ryan’s budget plan, now packaged as “The Path to Prosperity,” came up for a vote in the House of Representatives. In the past, its prospects had been uncertain at best. Not just Democrats but many Republicans had deemed previous versions too harsh. A year earlier, Speaker of the House John Boehner had given it only lukewarm support. But by then the Republican caucus had moved far to the right, and the proposal had been repackaged. It now passed easily in the House 235–193, losing only four Republican votes but not attracting a single Democrat.
In the name of fixing Medicare, it shrank it to voucher-like “premium supports,” with which senior citizens could buy private medical insurance. It also transformed Medicaid into a tattered patchwork of state-run block grants while cutting overall funding. Further, it repealed the Medicaid expansion that was a part of Obama’s Affordable Care Act. At the same time, it reduced income taxes into two rates, cutting the top rate down to 25 percent—half of what it was when Ronald Reagan was elected. Theoretically, any losses were to be made up by eliminating deductions, but these were not specified. As the New York Times reporter Noam Scheiber summarizes it in The Escape Artists: How Obama’s Team Fumbled the Recovery, Ryan’s plan cut taxes for the wealthy by $2.4 trillion in comparison with Obama’s proposed budget and then cut spending by $6.2 trillion. He describes it in short as “right-wing lunacy.”