Brutal Capitalism Goes to War

Brutal Capitalism Goes to War

Much has been made about President-elect Trump’s penchant for choosing military men to head the Defense Department, the CIA, etc.: Gordon Adams, in the Dec. 9th NY Times warned about Trump’s “Military Government.” Adams’ previous writing has spelled out the growing militarization of US foreign policy, and others has documented both the rising militarization of domestic police forces and the rise of government surveillance.

Yet Brutal Capitalism, led by the Trump Cabinet and the Republicans in Congress, has actually declared war on another front: the American social contract. [Brutal Capitalism might be simply defined as an economy in which those running businesses believe their only responsibility is to shareholders, rather than a shared responsibility to shareholders and employees. That second system is Liberal Capitalism, which has been under withering attack by its Brutal cousin since the 1980s.]

The Republicans have announced a clear agenda: destroy the American social contract created in response to Brutal Capitalism’s deepest crisis, the Great Depression. The American social contract consisted of expanded rights for workers to unionize (Wagner Act, 1935), government-funded old-age pensions (Social Security, 1935), and, in time, medical care for the aged (Medicare, 1966) and the poor (Medicaid, 1965). The GI Bill helped educate millions of veterans, paving the way for the massive expansion of higher education.  The 2012 Affordable Care Act (ACA) established Federal support for private health insurance, and expanded Medicaid in those states that chose to participate [19 declined to do so, nine of them from the old Confederacy].

Simply put, the US Government sharply raised taxes in the 1930s to pay for expanded government spending [much of which has gone to the military]; tax rates remained high until Reagan took office, at which point he cut them roughly in half, while simultaneously raising Social Security [SS] withholding and setting in motion the taxation of SS payments. [Revenues plummeted and the deficit skyrocketed.] George H.W. Bush and Bill Clinton established moderate tax rates, which clearly did not harm economic growth in the 1990s. George W. Bush made further cuts, leaving the government critically short of revenue when the financial crisis of 2007-08 hit: it was a repeat of 1929 (and tax rates were about the same, too).

The social contract allowed some to gain considerable wealth, but permitted far more Americans to have a decent, and rising standard of living. [Yes, the system had many flaws, not least of them the racially biased extension of these benefits, and needed reform by 1980, but that’s not today’s subject.]

Why do the super rich want to destroy this contract? The answer is pretty simple: Baby Boomers. The super-rich do not want to pay for the Baby Boomers’ retirement and especially do not want to pay for the health care they will need as seniors. How urgent is this matter? 4 million Baby Boomers retire each year.

Example? You probably think repealing Obamacare is all about health care. WRONG. Repealing Obamacare is about ending two taxes it created on the super rich: a 3.8% investment income tax (on profits of over $200k) and an 0.9% Medicare surtax on earned income over $200k [in both cases, $250k for couples filing jointly].

What two immediate effects do these retirements have? 1) With respect to the stock market, Boomers who currently pay into retirement funds will stop doing so when they retire. They will instead start removing funds from their retirement savings. In short, instead of buying stocks and bonds, they will be selling them. 2) Boomers who get health insurance through their jobs (as salaried employees usually do) will lose that insurance and go on Medicare, supplemented by the special plans available for that end.

Boomers are now paying into the system, through retirement funds, Social Security and Medicare payroll deductions, and health insurance premiums. In the course of the next decade, roughly 40 million people will stop doing all three of these things and start drawing down retirement funds, start collecting from (instead of paying into) Social Security and Medicare, and will pay much smaller insurance premiums, for the supplemental plans that fill Medicare gaps.

How are we going to pay for all this stuff? The super-rich believe they will have to foot the bill, and they do not want to do so. They need to act now. Their answers?

  • “Repeal” Obamacare, yet the Congress will allow certain health provisions to remain in place, while Congress comes up with an alternative plan. The two taxes will be abolished right away.
  • Enact key elements of Paul Ryan’s tax plan: abolish the estate tax; cut rates on capital gains.
  • Try to convert Medicare to a voucher plan.
  • Try to privatize Social Security.
  • Reconfigure income tax deductions to favor Red State taxpayers.

ALERT # 1

The canary in the coal mine of this all-out war is the 3.8% investment tax. The Republicans will talk about the health care elements – like coverage for children up to age 26 and provisions about pre-existing conditions – but will say nothing about the tax, which they will abolish in the dark recesses of Capitol Hill. If Congress acts immediately to “abolish” Obamacare, read the fine print: the key provision, for the rich, is the abolition of that 3.8% tax. They will also abolish Obamacare’s 0.9% Medicare surtax on wage incomes over $200k.

ALERT #2

The new HHS Secretary will seek to turn Medicare into a voucher program. That will end worries about medical cost inflation, because the government will no longer be paying for medical care: it will simply give people a fixed amount to help them buy insurance (sound familiar, doesn’t it?). The result will be that millions of older Americans will have to choose among food, housing, and health care. Look at what health insurance, particularly for older people, buying on their own, will cost. This change will drive every older American (aside from the very rich) into HMOs. Health care will be rationed.

ALERT #3

Secretary of the Treasury Mnuchin and the other Goldman Sachs refugees will push to privatize Social Security. What does that mean? It means Americans will be able to invest the amounts paid into Social Security in private retirement funds. [Bush tried, and failed, to make this change.] This change has several positive effects for the super rich. 1) It provides access to the only domestic source of funds large enough to balance out the Boomer problem. 2) It provides firms like Goldman Sachs with massive new sources of revenue, because someone has to manage all those stock transactions, mutual funds, and annuities. 3) Most importantly, it prevents the enactment of the only real solution to the Social Security [SS] funding problem. What is that solution? The Congressional Budget Office testified (in 2010) that Congress needed to set the SS income limit at the same percentage of total US earned income that served as the basis for the Reagan reform of 1984: about 92%. The current maximum income subject to SS is about $120k. Hillary Clinton proposed raising that limit to $350k (i.e., roughly the 92nd percentile). We now tax slightly less than 85% of all earned income. If you make over $350k, your SS withholding would go up about $28k.

For those of you unaware of these laws, just to be clear: a person making $120,000 and a person making $1,200,000 currently pay the same in SS withholding. The person making $12,000 or $120,000 a year is paying 6.2%; the person making $1.2 million is paying 0.6%.

The rich are not going to rely on SS for their retirement, and they see no reason why they should pay for your retirement, either.

So, what do the Republicans have in mind, and who will be affected?

  • Abolish the estate tax. It currently strikes fewer than 1% of estates (>$10 million). The current rate is 40%. Donald Trump says he is a billionaire. Ok, for every $1 billion he leaves his children, the abolition of the estate tax will save them $400 million. Current revenue from the estate tax is modest, but given the massive wealth owned by the Boomer generation (about 2/3rds of the national total), the government could reasonably expect this amount to go way up between now and 2030. Ultra rich Boomers, like Trump, are desperate for immediate repeal.
  • Repeal Obamacare and that nasty old 3.8% investment profit tax and the equally terrible 0.9% surtax for Medicare.
  • Cut capital gains taxes (Both Ryan and Trump have proposed a range of 6-16.6%).
  • Cut income tax rates, with an especially large cut for the top marginal rate.
  • Eliminate the income tax deduction for state and local taxes. Why? Let’s see, the top marginal state income tax rate in California is 13.5%, in NY and Oregon, it’s about 10%. Texas and Florida have no state income tax. Local property taxes? I live in Arlington, VA and our average property tax is about 3 times the average property tax in Arlington TX. [VA’s income tax rate is 5.7%]
  • States with high taxes – which their taxpayers can now deduct from their Adjusted Gross Income – will suddenly find their taxpayers outraged by an effective increase of their local taxes by a percentage equal to their top marginal Federal rate (for many middle class people, currently 28%, perhaps only 25% in the new plan). Result? Strong local pressure to reduce income and property taxes, and to balance that out by cuts in local services, especially school budgets.
  • Who are the big losers?  Half of all state and local tax deductions in 2014 [total deductions were $28 billion] went to those making between $75,000 and $200,000, and another 20% to those making $200-500,000.  When the richest 1% look to shift the burden of government onto others, they focus on those immediately below them, who have enough wealth to make it worthwhile, but not enough power to protect themselves.
  • Mollify the Realtors by nominally keeping the mortgage interest deduction, but raise the standard deduction (the plan calls for $24k for a couple) to an extent that only those living in McMansions will still pay enough in mortgage interest to make it worthwhile to deduct. Again, those living in areas with high housing costs (think Blue) will be the big losers.
  • Push privatization of public school systems, to further gut out universal system of primary and secondary education. The new Education Secretary supports this shift to school vouchers. [Medicare vouchers, school vouchers – you get the idea.] In the tense climate created by the abolition of the state and local taxes deduction, pushing vouchers as a way to cut spending will be a popular idea. On this one, look for minority communities to bear the burden: we will not even have the fig leaf of separate but equal.

Add it all together and you see how the ultra-rich, aged about 55-70, are desperate to make sure they do not have to pay for the retirement and old age health costs of their own generation.  They will try to shift these costs into the private sector, which will not only save them money on taxes but will also generate income for their businesses (like Goldman Sachs).  Win-win.

American workers, and many in the middle class, will face desperate times in the 2020s, on the order of the early stages of the Depression, when the Hooverites of this world did so little, in part because tax rates were too low to generate enough government income to pay for increased spending.  Tax rates in 1929 (capital gains and top marginal income tax), btw, were virtually identical to those of 2008.  Trump would bring them back to that level, and, in some cases, below it.  When the bill starts coming due, in the mid-2020s, the government will not have enough revenue to respond.

The worst part is that these sorts of policies might lead to a short-term economic boom, because of cash flowing into the economy.  We’ll see inflation of 4-5% in 2019-21 (also deliberate, in part to reduce the value of the national debt), wiping out purchasing power of older people with fixed incomes.  When the bill comes due in 2022, the government won’t know where to turn, lacking capital, lacking a tax base, and having run up major debts in 2017-20. Those older folks will have seen their fixed assets decline in value, due to inflation, will have lost their Medicare and Medicaid (many of those on Medicaid are over 66), and will perhaps lose SS income due to that system’s shortfall during a transition to privatization.

What can we realistically hope to do to stop this assault? Some actions are a done deal, in my view: look for Congress to repeal those Obamacare taxes and the estate tax in the first weeks of the session.

AARP is a powerful lobby, and they will fight privatization of Social Security and Medicare vouchers. Key Republican Senators like Susan Collins of Maine will have to stand with the Democrats if SS is to be saved, but those opposed to the privatization scheme will have to face the reality that the only real solution is to eliminate the fixed $ withholding limit, and set that limit at the 92% envisioned by Reagan and Tip O’Neill in 1984. Republicans will never vote for that.

We will be at an impasse on both SS and Medicare, because Republicans are not going to vote for the taxes needed to stabilize either.

Deduction “reform?” I’m guessing the state and local taxes deduction will indeed go the way of the dodo.   Deficit hawks will object to raising the standard deduction to $24k for a married couple, or, if they approve it, will raise the deduction gradually, perhaps starting with $18k (as against today’s $12k) for a couple. That will still zap most mortgage deductions, but leave intact the deductions that cost the Federal government the most money. Why? Of the $70 billion in mortgage interest deductions, about 3/4ths went to the top 20% of taxpayers.   The bottom quarter will no longer be taking their deduction, because it will be less than the new standard deduction, but the McMansion owner with the $1 million+ mortgage will still do so.

Lower tax revenues will naturally be cited as a reason to gut EPA and other government agencies the Republicans have long targeted. In my little corner of the world, I worry that the National Endowment for the Humanities will get abolished. Since I like to breath, I naturally worry about EPA, too.

The end result of all this greedy stupidity will be what it usually is: increased social instability. Add in the militarization – and the spread of military equipment to police departments (a policy Trump wants to accelerate) – and you have the potential for a truly awful social, economic, and political crisis.

 

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