Back to Reagonomics: What Deficit Reduction and Tax Reform Really Mean for Working Americans

The press section was full when two far-right Republican senators, Tom Coburn of Oklahoma and Mike Crapo of Idaho, took over a room on Capitol Hill on Dec. 2 to announce how they would vote as members of President Obama’s deficit commission. But instead of offering their views on deficit reduction — the ostensible goal of the National Commission on Fiscal Reform — Coburn and Crapo wanted to talk about tax reform.

What they especially liked about the proposal was that the vast majority of its deficit cuts came from reducing spending, not raising taxes. In fact, it would slash tax rates for every level of income.

“We’re at about 92 percent tax reduction versus tax increase,” said Coburn. “If you score that dynamically, we’re gonna get more tax reduction than tax increase.” He then bestowed his highest possible compliment on the proposal.

“This tax plan,” Coburn said, “is Reagan on steroids.”

Coburn and Crapo would vote yes.

Two separate but related forces — one, a perceived fiscal crisis that threatens to drastically raise the national debt over the next decade; the other, the extension of the 2001 Bush tax cuts — are together threatening massive changes in tax policy. These could lock in a dangerous new economic direction for the United States for the next generation at least. In addition, President Obama’s recent tax cut agreement with congressional Republicans includes a provision that could fatally damage Social Security in the decades to come.

Americans in the middle- or lower-income levels should be afraid — very afraid.

A DECLINING STANDARD OF LIVING

Two years after the real estate bubble collapsed, the United States remains mired in a recession. Home foreclosures continue, unemployment remains near 10 percent, and the economy is not recovering quickly enough to bring this figure down. The last time it got this bad, in the 1930s, Washington launched a host of programs to create jobs, revive demand for goods and services, and get the economy moving again. It wasn’t perfect, but it cut unemployment in half and arguably saved the capitalist system from itself.

This time, however, an influential group of economists, policy wonks, and conservative lawmakers, many with strong connections to Wall Street, have kept Washington’s attention focused almost entirely on the federal budget deficit and the national debt. In their version of reality, the only acceptable economic stimulus during a recession is tax cuts, preferably for owners of capital. The deficit commission’s recommendations reflect this philosophy. For the most part, so does the package of tax cuts and benefits extensions that the White House recently worked out with congressional Republicans.

If these changes go through, the likely result will be far lower taxes for corporations and the wealthy; severe cuts in Social Security, Medicare, Medicaid and just about every other important domestic program; and elimination, or at least drastic reduction, of a host of less known tax credits that help working households keep their heads above water. In short, a serious decline in living standards for all but the richest Americans. “Reagan on steroids,” or “Reaganomics II,” just about describes it.

Reaganomics, of course, was the set of policies adopted in the early 1980s when the administration pushed through Congress a drastic set of tax cuts for the affluent that were supposed to spur them to invest, creating jobs and generating explosive economic growth. An uneasy alliance of deficit hawks and free-market conservatives pushed the cuts through.

Since then — and particularly during the George W. Bush administration — the free-market conservatives and deficit hawks have formed a kind of tax-and-budgetary tag team in Washington. One pushes through more and bigger tax cuts and tax breaks for the affluent; the other insists on keeping spending low or even cutting it for programs that help working people — necessitated by, among other things, the lost revenues lost from the tax cuts. The combination has led to a vast shift in taxation: Corporations and high-net-worth individuals pay a smaller proportion of their income in taxes, while the middle class and all but the lowest-income households pay relatively more.

The report issued by Obama’s deficit commission, coupled with the deal the administration and congressional Republicans are now trying to nail down to extend the Bush tax cuts, could make the next 12 months the biggest yet for these two Washington factions.

TAX CUTS FOR THE RICH

The deficit commission’s report — actually, it failed to get the 14 votes needed to be sent to Congress for a vote, so it’s really just the report of the co-chairs, Erskine Bowles and Alan Simpson — calls for close to $4 trillion in deficit reduction. Three-quarters of this would take the form of drastic spending cuts and elimination of a host of “tax expenditures.” Many of these benefit working people, including the earned income tax credit for low-income households and deductions for employers who offer healthcare plans to their workers. Medicare premiums would be hiked and Social Security would adopt a less-generous inflation adjustment formula, lowering benefits for both current and future retirees.

But the centerpiece of the plan, hailed by the Washington policy elite when it was announced as a courageous attempt to focus politics on deficit reduction, is actually a package of tax cuts. Bowles and Simpson propose to lower the top tax rate for individuals from 35 percent to 28 percent, while those making up to $210,000 would see their top rate drop from 28 percent to 22 percent. Corporate taxes would drop, too, from 35 percent to 28 percent, and companies would no longer pay taxes on foreign profits when they brought them back into the country.

Bowles and Simpson say this generosity will “make the United States the best place for starting and building businesses” and help U.S. companies compete overseas.

Less than a week later, the White House announced a deal that seemed to go in the opposite direction. The handshake agreement with Republican leaders calls for spending some $900 billion over the next two years, none of it offset by spending cuts or increases in other taxes — meaning it would add to the deficit. Instead, Obama and Senate Republican leader Mitch McConnell packaged it as a way to stimulate the flagging economy.

Assuming it survives a wave of anger from congressional Democrats, the deal between Obama and McConnell will extend the Bush tax cuts for another two years. That’s long enough, the Republicans hope, for them to put one of their own in the White House and pass a bill to make the cuts, which overwhelmingly benefit the most affluent Americans, permanent. It would also keep the tax rate for capital gains and dividends, which is how the rich receive most of their income, at a maximum of 15 percent — less than half the top income tax rate — for two more years. And it would bring back the estate tax — but at a much lower level than Democrats had sought.

To balance this — sort of — the agreement calls for extending unemployment benefits another 13 months, which means that the Democrats will have to push for another ex¬tension at the end of next year, when they’re getting ready for another election and again vulnerable to being held up by the Republican leadership to get it. It would extend the child tax credit, increase the earned income tax credit and create a new tax credit to help cover college tuition. These are the best things in the bill for working people.

REDUCING THE PAYROLL TAX

The deal would also provide a one-year, 2 percent reduction in the payroll tax, which funds Social Security. This is meant to put money in people’s pockets and stimulate the economy to the tune of $120 billion. But this temporary reduction would replace the Making Work Pay tax credit in the stimulus package Obama pushed through Congress last year. Making Work Pay was targeted to help middle- and lower-income workers; the payroll tax credit would provide much bigger savings to high earners, who are less likely to spend it.

What we have, then, is a tentative deal between the president and the Republican leadership that moves the Republicans significantly further down the road to getting the kind of tax system they want, and a deficit reduction plan that would give them one of the lowest sets of tax rates in the world. Permanently.

Are there any silver linings here? The problem with the meager package of measures working people would get in the Obama-McConnell deal is that they are very temporary. And while the Bowles-Simpson plan would eliminate a lot of tax breaks in exchange for those lower rates, the reality is that getting rid of “loopholes” has always been a bit of a fool’s game in Washington.

As Bob Borosage, president of the Institute for America’s Future, a leading progressive-Democrat organization, pointed out in the Huffington Post recently, the bipartisan 1986 tax reform act did the same thing Bowles and Simpson are proposing: lowered rates while eliminating egregious tax loopholes and deductions. “Only while the deductions were eliminated, the lobbies that created them were not.” The loopholes and other dodges came back, and “by 2006, the top 1 percent of Americans (average net worth of about $15 million) pays rates fully one-third lower than they did in 1970.”

That’s Reaganomics.

Washington insiders are saying that the tax-cut deal postpones any attempt to tackle deficit reduction. Outgoing House Ways and Means chair Sander Levin calls the deficit commission plan “unbalanced and unworkable.” But that doesn’t mean Congress won’t take up some of its recommendations, once the president has mollified angry Democrats enough to get his deal with McConnell passed. Obama and Republican leaders both say they will use some of those recommendations in their budget proposals early next year.

Daniel Henninger of The Wall Street Journal notes, tellingly, that “words found nowhere in the deficit commission’s draft include ‘fairness,’ ‘the wealthiest,’ and ‘the top 1 percent.’” The explicit purpose is to make the United States the safest possible place for capitalists. McConnell said, “It is my hope that this effort will serve as a catalyst for achieving the spending and entitlement reform that our country so desperately needs.” Note that McConnell never mentions tax increases. But he does mention “entitlement reform,” which means Social Security and Medicare.

UNDERMINING SOCIAL SECURITY

The temporary 2 percent payroll tax holiday in the president’s deal would significantly reduce the money going into the Social Security trust fund. That means the program could run out of money to pay benefits a lot earlier than it’s currently projected to (which may be why a number of Republican lawmakers have suggested such a move in the past). The Obama-McConnell deal calls for the government to fill the gap with other tax revenues. But that would place Social Security in competition with everything else the government does, robbing the program of its fiscal independence.

Besides, in today’s Washington, there’s little chance that a “temporary” 2 percent payroll tax break won’t be extended and eventually made permanent, further reducing the program’s self-sufficiency. That would be “the beginning of the end of Social Security as we know it,” says Barbara Kennelly, president of the National Committee to Preserve Social Security and Medicare.

Bowles and Simpson go even further. Besides eroding Social Security’s inflation protection feature, they would gradually raise the retirement age. The objective is partly to lower the long-term cost of Social Security — the later you retire, the smaller your lifetime benefit — by motivating Americans to keep working past retirement age. But it wouldn’t be that simple. More elderly are staying in the workforce already, because the value of Social Security benefits is eroding while the cost of healthcare for seniors skyrockets. But many employers shun older workers, fearing they will demand more money and possibly boost health insurance costs. Those who can find jobs frequently have to settle for low-wage, temporary, often physically demanding positions. The net result is to swell the ranks of the minimum wage and casual workforce, helping keep wages low.

And what about workers who spend their whole careers at hard physical labor and can’t keep on working after retirement age? Bowles and Simpson recommend creating a “hardship exemption,” allowing them to start receiving benefits according to the current schedule. But they don’t spell out how this would work. How would “physically demanding” work be defined? Would each and every individual have to be evaluated before being allowed to collect benefits? And who would do this? The Social Security Administration and other agencies that administer the Disability Insurance program would be the logical choice. But they are so overwhelmed that workers applying for disability often face a years-long ordeal just to find out if they are eligible.

Bowles and Simpson also propose to means-test Social Security, cutting benefits for higher-wage workers. While that might sound progressive, the definition of “higher wage” would have to extend deep down into the middle class in order to save significant money. Members of the middle class, who no longer enjoy lifetime pensions from their employers, are in much more danger of ending their lives in poverty than they used to be. For instance: Social Security Works, a research and advocacy group in Washington, calculates that under Bowles-Simpson, a 25-year-old worker who retires in 2050 at age 65 with a career-average wage of $68,934 would see her Social Security benefit cut by more than one-third. Social Security is not that generous a system to begin with.

At that rate, the program would be well on its way to irrelevance for a great many Americans. On the road to extinction, that is.

THE ROAD AHEAD

Congressional Democrats are mad at being left out of the deliberations while Republicans and the White House concluded their deal. Sen. Bernie Sanders of Vermont said initially that he would “do everything I can to defeat this proposal,” including staging a filibuster. As The Indypendent goes to press, other leading Democrats, including House Speaker Nancy Pelosi, are signaling that they would end their opposition to the measure in return for minor concessions. During this time of economic suffering, it shouldn’t have been impossible to win the battle for public opinion by emphasizing that Republicans were holding the tax cuts of ordinary Americans hostage to gain tax breaks for billionaires. But Obama ducked that fight before it began, and it appears many Democrats will follow the same path of least resistance.

Whatever the case, passage of the Obama-McConnell deal would clear the way for consideration of some of the Bowles-Simpson proposals. In 2011, Republicans will no doubt press for adoption of lower tax rates — Obama reportedly is considering a proposal of his own, aiming to beat them at their own game. The deficit hawks, meanwhile, will be looking for a deal on Social Security. Much of this is possible because in the spring the administration will be asking Congress to raise the national debt limit, enabling the Treasury to borrow enough to keep government functioning. The price of cooperation in the Republican House will no doubt be high.

I tend to dislike sports metaphors, but in this case I can’t resist: The deficit hawks have pitched a fat one right across the plate. Unless someone steps in quickly to stop them, the free-market conservatives are about to hit it out of the ballpark.

Eric Laursen is co-author of Understanding the Crash, an illustrated history of the policies that led to the 2008 economic collapse, and author of The People’s Pension: The War Against Social Security from Reagan to Obama (AK Press, spring 2012). His writings are available atpeoplespension.infoshop.org/blogs-mu. 

Meet the Social Security Wrecking Crew

ERSKINE BOWLES
Co-chair of the National Commission on Fiscal Responsibility and Reform, he was chief of staff in the second Clinton administration, where he pushed for deficit reduction and cutting entitlements. Bowles has spent most of his career as an investment banker and is a director of Morgan Stanley & Co., for which he reportedly receives $335,000 a year. One widely discussed idea for reducing the federal deficit that his commission didn’t consider was a tax on financial transactions.

MITCH MCCONNELL
Senator from Kentucky and Republican minority leader, he was also chief negotiator in the talks with the Obama administration that recently ended in a deal to extend the Bush tax cuts. His importance as a Republican leader has grown steadily since the Democrats retook control of Congress in 2006, as he has consistently organized his party to oppose every major Obama initiative. Earlier this year, he said, “The single most important thing we want to achieve is for President Obama to be a one-term president.”

BARACK OBAMA
He charged his deficit commission with developing a plan to balance the budget over the next five years and “propos[ing] recommendations to the President that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending.” It went further than that, proposing a tax-reduction scheme and a full-fledged plan to slash Social Security and Medicare. While Obama defended Social Security against privatization during his presidential campaign, he never explicitly rejected cutting the program. “We’re going to have to take on entitlements and I think we’ve got to do it quickly,” he said in an October 2008 debate with Republican candidate John McCain.

PETE PETERSON
A Wall Street legend, Peterson co-founded and made a large fortune at the Blackstone Group, one of the world’s largest private equity firms. For nearly 30 years, he has campaigned to cut the deficit, principally by slashing Social Security and Medicare. The Concord Coalition, the Committee for a Responsible Federal Budget (CFRB) and his own Peter G. Peterson Foundation are just a few of the groups he has bankrolled. The president’s deficit commission is another, since the Peterson Foundation and the CRFB supplied two senior staffers free of charge to help keep the commission’s expenses down.

Peterson generally uses conciliatory language, stressing that he wants to restore Social Security to fiscal solvency, not destroy it. But every now and then a different intention peeks through. In 1996, he wrote in a magazine article, “I have concluded — reluctantly — that a fully funded, privately managed, and portable system of personal retirement accounts should be mandatory. The system I envision would initially supplement Social Security — and over time might increasingly substitute for it.”

HARRY REID
As Senate minority leader in 2005, Reid — along with House minority leader Nancy Pelosi — was instrumental in sending President Bush’s campaign to privatize Social Security down to humiliating defeat, paving the way for the Democrats to regain control of Congress the next year. Still in command of the Senate, Reid will play perhaps the leading role as Congress works through the president’s tax-cut deal with the Republicans and considers adoption of the deficit commission’s recommendations.

ALAN SIMPSON
Bowles’ co-chair was a longtime Republican senator from Wyoming who co-sponsored his first bill to cut and partially privatize Social Security in 1995. He has also campaigned against organizations that defend the program, such as the AARP. Simpson is a popular figure in Washington, where he tends to make off-the-wall, insulting statements. He ran into trouble early in the commission’s existence, when he told an activist, “We’re trying to take care of the lesser people,” a gaffe he compounded a few days later by calling Social Security “a milk cow with 310 million tits.”