How the GOP Became the Party of the Rich (part 1 of 3)
The inside story of how the Republicans abandoned the poor and the middle class to pursue their relentless agenda of tax cuts for the wealthiest one percent
By Tim Dickinson
November 9, 2011 7:00 AM ET
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Party of the Rich
Matt Mahurin
The nation is still recovering from a crushing recession that sent unemployment hovering above nine percent for two straight years. The president, mindful of soaring deficits, is pushing bold action to shore up the nation's balance sheet. Cloaking himself in the language of class warfare, he calls on a hostile Congress to end wasteful tax breaks for the rich. "We're going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share," he thunders to a crowd in Georgia. Such tax loopholes, he adds, "sometimes made it possible for millionaires to pay nothing, while a bus driver was paying 10 percent of his salary – and that's crazy."
Preacherlike, the president draws the crowd into a call-and-response. "Do you think the millionaire ought to pay more in taxes than the bus driver," he demands, "or less?"
The crowd, sounding every bit like the protesters from Occupy Wall Street, roars back: "MORE!"
The year was 1985. The president was Ronald Wilson Reagan.
Today's Republican Party may revere Reagan as the patron saint of low taxation. But the party of Reagan – which understood that higher taxes on the rich are sometimes required to cure ruinous deficits – is dead and gone. Instead, the modern GOP has undergone a radical transformation, reorganizing itself around a grotesque proposition: that the wealthy should grow wealthier still, whatever the consequences for the rest of us.
Modern-day Republicans have become, quite simply, the Party of the One Percent – the Party of the Rich.
"The Republican Party has totally abdicated its job in our democracy, which is to act as the guardian of fiscal discipline and responsibility," says David Stockman, who served as budget director under Reagan. "They're on an anti-tax jihad – one that benefits the prosperous classes."
The staggering economic inequality that has led Americans across the country to take to the streets in protest is no accident. It has been fueled to a large extent by the GOP's all-out war on behalf of the rich. Since Republicans rededicated themselves to slashing taxes for the wealthy in 1997, the average annual income of the 400 richest Americans has more than tripled, to $345 million – while their share of the tax burden has plunged by 40 percent. Today, a billionaire in the top 400 pays less than 17 percent of his income in taxes – five percentage points less than a bus driver earning $26,000 a year. "Most Americans got none of the growth of the preceding dozen years," says Joseph Stiglitz, the Nobel Prize-winning economist. "All the gains went to the top percentage points."
The GOP campaign to aid the wealthy has left America unable to raise the money needed to pay its bills. "The Republican Party went on a tax-cutting rampage and a spending spree," says Rhode Island governor and former GOP senator Lincoln Chafee, pointing to two deficit-financed wars and an unpaid-for prescription-drug entitlement. "It tanked the economy." Tax receipts as a percent of the total economy have fallen to levels not seen since before the Korean War – nearly 20 percent below the historical average. "Taxes are ridiculously low!" says Bruce Bartlett, an architect of Reagan's 1981 tax cut. "And yet the mantra of the Republican Party is 'Tax cuts raise growth.' So – where's the fucking growth?"
Republicans talk about job creation, about preserving family farms and defending small businesses, and reforming Medicare and Social Security. But almost without exception, every proposal put forth by GOP lawmakers and presidential candidates is intended to preserve or expand tax privileges for the wealthiest Americans. And most of their plans, which are presented as common-sense measures that will aid all Americans, would actually result in higher taxes for middle-class taxpayers and the poor. With 14 million Americans out of work, and with one in seven families turning to food stamps simply to feed their children, Republicans have responded to the worst economic crisis since the Great Depression by slashing inheritance taxes, extending the Bush tax cuts for millionaires and billionaires, and endorsing a tax amnesty for big corporations that have hidden billions in profits in offshore tax havens. They also wrecked the nation's credit rating by rejecting a debt-ceiling deal that would have slashed future deficits by $4 trillion – simply because one-quarter of the money would have come from closing tax loopholes on the rich.
The intransigence over the debt ceiling enraged Republican stalwarts. George Voinovich, the former GOP senator from Ohio, likens his party's new guard to arsonists whose attitude is: "We're going to get what we want or the country can go to hell." Even an architect of the Bush tax cuts, economist Glenn Hubbard, tells Rolling Stone that there should have been a "revenue contribution" to the debt-ceiling deal, "structured to fall mainly on the well-to-do." Instead, the GOP strong-armed America into sacrificing $1 trillion in vital government services – including education, health care and defense – all to safeguard tax breaks for oil companies, yacht owners and hedge-fund managers. The party's leaders were triumphant: Senate Minority Leader Mitch McConnell even bragged that America's creditworthiness had been a "hostage that's worth ransoming."
It's the kind of thinking that only money can buy. "It's a vicious circle," says Stiglitz. "The rich are using their money to secure tax provisions to let them get richer still. Rather than investing in new technology or R&D, the rich get a better return by investing in Washington."
It's difficult to imagine today, but taxing the rich wasn't always a major flash point of American political life. From the end of World War II to the eve of the Reagan administration, the parties fought over social spending – Democrats pushing for more, Republicans demanding less. But once the budget was fixed, both parties saw taxes as an otherwise uninteresting mechanism to raise the money required to pay the bills. Eisenhower, Nixon and Ford each fought for higher taxes, while the biggest tax cut was secured by John F. Kennedy, whose across-the-board tax reductions were actually opposed by the majority of Republicans in the House. The distribution of the tax burden wasn't really up for debate: Even after the Kennedy cuts, the top tax rate stood at 70 percent – double its current level. Steeply progressive taxation paid for the postwar investments in infrastructure, science and education that enabled the average American family to get ahead.
That only changed in the late 1970s, when high inflation drove up wages and pushed the middle class into higher tax brackets. Harnessing the widespread anger, Reagan put it to work on behalf of the rich. In a move that GOP Majority Leader Howard Baker called a "riverboat gamble," Reagan sold the country on an "across-the-board" tax cut that brought the top rate down to 50 percent. According to supply-side economists, the wealthy would use their tax break to spur investment, and the economy would boom. And if it didn't – well, to Reagan's cadre of small-government conservatives, the resulting red ink could be a win-win. "We started talking about just cutting taxes and saying, 'Screw the deficit,'" Bartlett recalls. "We had this idea that if you lowered revenues, the concern about the deficit would be channeled into spending cuts."
It was the birth of what is now known as "Starve the Beast" – a conscious strategy by conservatives to force cuts in federal spending by bankrupting the country. As conceived by the right-wing intellectual Irving Kristol in 1980, the plan called for Republicans to create a "fiscal problem" by slashing taxes – and then foist the pain of reimposing fiscal discipline onto future Democratic administrations who, in Kristol's words, would be forced to "tidy up afterward."
There was only one problem: The Reagan tax cuts spiked the federal deficit to a dangerous level, even as the country remained mired in a deep recession. Republican leaders in Congress immediately moved to reverse themselves and feed the beast. "It was not a Democrat who led the effort in 1982 to undo about a third of the Reagan tax cuts," recalls Robert Greenstein, president of the nonpartisan Center on Budget and Policy Priorities. "It was Bob Dole." Even Reagan embraced the tax hike, Stockman says, "because he believed that, at some point, you have to pay the bills."
For the remainder of his time in office, Reagan repeatedly raised taxes to bring down unwieldy deficits. In 1983, he hiked gas and payroll taxes. In 1984, he raised revenue by closing tax loopholes for businesses. The tax reform of 1986 lowered the top rate for the wealthy to just 28 percent – but that cut for high earners was paid for by closing tax loopholes that resulted in the largest corporate tax hike in history. Reagan also raised revenues by abolishing special favors for the investor class: He boosted taxes on capital gains by 40 percent to align them with the taxes paid on wages. Today, Reagan may be lionized as a tax abolitionist, says Alan Simpson, a former Republican senator and friend of the president, but that's not true to his record. "Reagan raised taxes 11 times in eight years!"
But Reagan wound up sowing the seed of our current gridlock when he gave his blessing to what Simpson calls a "nefarious organization" – Americans for Tax Reform. Headed by Grover Norquist, a man Stockman blasts as a "fiscal terrorist," the group originally set out to prevent Congress from backsliding on the 1986 tax reforms. But Norquist's instrument for enforcement – an anti-tax pledge signed by GOP lawmakers – quickly evolved into a powerful weapon designed to shift the tax burden away from the rich. George H.W. Bush won the GOP presidential nomination in 1988 in large part because he signed Norquist's "no taxes" pledge. Once in office, however, Bush moved to bring down the soaring federal deficit by hiking the top tax rate to 31 percent and adding surtaxes for yachts, jets and luxury sedans. "He had courage to take action when we needed it," says Paul O'Neill, who served as Treasury secretary under George W. Bush.
The tax hike helped the economy – and many credit it with setting up the great economic expansion of the 1990s. But it cost Bush his job in the 1992 election – a defeat that only served to strengthen Norquist's standing among GOP insurgents. "The story of Bush losing," Norquist says now, "is a reminder to politicians that this is a pledge you don't break." What was once just another campaign promise, rejected by a fiscal conservative like Bob Dole, was transformed into a political blood oath – a litmus test of true Republicanism that few candidates dare refuse.
After taking office, Clinton immediately seized the mantle of fiscal discipline from Republicans. Rather than simply trimming the federal deficit, as his GOP predecessors had done, he set out to balance the budget and begin paying down the national debt. To do so, he hiked the top tax bracket to nearly 40 percent and boosted the corporate tax rate to 35 percent. "It cost him both houses of Congress in the 1994 midterm elections," says Chafee, the former GOP senator. "But taming the deficit led to the best economy America's ever had." Following the tax hikes of 1993, the economy grew at a brisk clip of 3.2 percent, creating more than 11 million jobs. Average wages ticked up, and stocks soared by 78 percent. By the spring of 1997, the federal budget was headed into the black.
But Newt Gingrich and the anti-tax revolutionaries who seized control of Congress in 1994 responded by going for the Full Norquist. In a stunning departure from America's long-standing tax policy, Republicans moved to eliminate taxes on investment income and to abolish the inheritance tax. Under the final plan they enacted, capital gains taxes were sliced to 20 percent. Far from creating an across-the-board benefit, 62 cents of every tax dollar cut went directly to the top one percent of income earners. "The capital gains cut alone gave the top 400 taxpayers a bigger tax cut than all the Bush tax cuts combined," says David Cay Johnston, the Pulitzer Prize-winning author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else.
The cuts also juiced irrational exuberance on Wall Street. Giving a huge tax advantage to investment income inflated the dot-com bubble, observed Stiglitz, "by making speculation more attractive." And by eliminating capital gains taxes on home sales, the cuts fueled the housing bubble: A study by the Federal Reserve estimated that the tax giveaways boosted housing transactions by 17 percent through 2007.The most revealing aspect of the tax cuts, however, came from a simple mistake. In a major blow to the inheritance tax – America's most progressive form of taxation – the GOP cuts nearly doubled the amount that the rich could pass on to their heirs tax-free. From now on, the first $1 million would be exempt from federal taxes – unless your estate was worth more than $17 million. In those rare cases, the superwealthy would have to pay taxes on their entire inheritance.
Then something strange happened. Due to a "drafting error," the final bill failed to include the exception for the superwealthy. Everyone in both parties agreed that it had been a mistake. But instead of fixing the error, Republicans blocked a pro forma correction to the law – meaning that even the wealthiest estates would pay no taxes on the first $1 million. The move effectively secured an $880 million tax cut for the rich – one that Congress never intended, and never voted for. Ari Fleischer, the then-spokesman for Rep. Bill Archer of the House Ways and Means Committee, exulted over the undemocratic tax cut for the wealthy. "When a mistake works against the government and for the taxpayers," he explained, "we're in no rush to correct it."
Republicans, abetted by conservative Democrats, passed the tax cuts with a veto-proof majority, and Clinton signed them into law. But for the remainder of his term, Clinton repeatedly blocked Republican demands for further cuts. "He vetoed one tax cut after another," says Robert McIntyre, director of Citizens for Tax Justice. In 1999, in a triumph for fiscal sanity, Clinton rejected a massive $792 billion cut to inheritance and investment taxes. The mood during the veto ceremony in the Rose Garden was festive. A five-piece band played "Summertime," and the living was easy. Unemployment stood at 4.2 percent, and stocks were booming. "Our hard-won prosperity gives us the chance to invest our surplus to meet the long-term challenges of America," Clinton declared. The Republican tax cuts, he warned with eerie prescience, would return America to a period of "deficit upon deficit" that culminated in "the worst recession since the Great Depression."
Then came the election of George W. Bush, the first president of the Party of the Rich.
Within months of taking office, Bush delivered a tax break to the rich that trumps anything he accomplished through the actual tax code. "The most important thing the Bush administration did in the whole area of taxes," says Johnston, "was to kill tax harmonization."
"Tax harmonization" was economic jargon for a joint project by the world's developed countries to shut down offshore tax havens in places like the Cayman Islands. At the time, such illicit havens were costing U.S. taxpayers $70 billion a year. For Republicans, going after big-time tax evaders should have been as American as apple pie. As Reagan once said of such cheats: "When they do not pay their taxes, someone else does – you and me."
But for Bush and other leaders of the Party of the Rich, blocking corporations from hiding their money overseas wasn't an act of patriotism – it was tyranny. Rep. Dick Armey, the GOP majority leader, railed against tax harmonization as an effort to create a "global network of tax police." One of Bush's biggest donors, Enron, was using a network of nearly 900 offshore tax hideaways to pay no corporate taxes – while reporting massive profits that later turned out to be fraudulent. In one of his first acts as president, Bush "basically vetoed the initiative," says Stiglitz.
The veto spurred a cavalcade of corporations – including stalwart American firms like Stanley Works – to pursue phony "headquarters" in Bermuda and other lax-tax nations. The move not only encouraged some of the world's richest companies to avoid paying any U.S. taxes, it let them book overseas-"expenses" that qualified them for lucrative tax deductions. In one of the most notorious cases, GE filed for a $3 billion tax rebate in 2009, despite boasting profits of more than $14 billion.
But Bush wasn't content to simply make the world safe for corporate tax evaders: He also pushed to deliver $1.6 trillion in tax cuts for the wealthiest individuals. On paper, at least, the federal government looked like it would soon be rolling in cash. Assuming the economy continued to grow as it had under Clinton, the Congressional Budget Office forecast a federal surplus of $5.6 trillion by 2011. Nearly half that bounty was already spoken for – the government needed some $3 trillion to shore up Social Security and Medicare – but that still left $2 trillion to play with.
Still, those numbers were only a projection. "It's certainly not money in the bank," Fed chairman Alan Greenspan warned incoming Treasury Secretary O'Neill over breakfast at the Federal Reserve. Yet there was no such note of caution in the White House. The month after Bush took office, the president's then-budget director, Mitch Daniels, suggested in an internal memo that $5.6 trillion was likely too small a figure. Daniels concluded that Bush's plan was "so fiscally conservative" that even after cutting $1.6 trillion in taxes, fixing Social Security and setting aside $900 billion in a contingency fund, the government would still have enough money left over to retire $2 trillion in debt. |
