How the GOP Became the Party of the Rich (part 3 of 3, enjoy)
After the meeting, Cheney set out to remove anyone who stood in the way of the new tax giveaway. He phoned O'Neill and demanded the Treasury secretary's resignation. He also dispensed with economic adviser Larry Lindsey, whose frank assessment of the possible costs of the Iraq War had threatened to derail the tax cut.
Budget-conscious Republicans in Congress who opposed the tax cuts could not be disposed of – but they could be strong-armed. Voinovich and Sen. Olympia Snowe of Maine, who refused to go along with cuts of more than $350 billion, were summoned to the White House for a meeting with Bush and Cheney. "The president wanted nearly a trillion dollars when he started with us," recalls Voinovich. "They were working on us: We need more, we need more." The senators held out for a smaller bill – though in hindsight, Voinovich says, there shouldn't have been any tax cuts. "Just think where we'd be if we'd gone along with what the president wanted," he says, laughing bitterly. "Where would we be today? Oh, my God."
In the end, Cheney's voice was the only one that mattered. In April 2003, when the bill reached the floor, the Senate deadlocked 50-50. The vice president cast the deciding "aye" that moved the tax cut into law. The benefits were even more tilted to the rich than the first Bush tax cuts. When fully phased in, 53 percent of the new cuts went to the top one percent. Those making $10 million or more pocketed an average of $1 million a year – twice the haul they made from the earlier cuts, and every cent of it borrowed. "It was a deficit-financed tax cut," concedes Hubbard, who chaired Bush's Council of Economic Advisers.
The deal privileged gambling on stocks over working for a living: The tax rate the richest pay on their long-term capital gains was slashed by 25 percent, while their rate on dividends fell by almost 60 percent. The move not only fueled speculation of Wall Street, it further widened the considerable gap between rich and poor. "It was a very destructive combination to have a national economic policy that stimulated debt-financed capital gains and then taxed the windfall at the lowest rate imaginable," says Stockman. "That contributed, clearly, to the growing imbalance in household income and wealth."
But Republicans didn't stop there. The following year, they passed the little-noticed American Jobs Creation Act. Named in the same Orwellian fashion as Bush's "Clear Skies" and "Healthy Forests" initiatives, the 2004 law allowed corporations to bring home billions in profits they had stockpiled in offshore tax havens – the very flight of capital that Bush had blessed by torpedoing tax harmonization three years earlier. Under the tax amnesty, corporations repatriated $300 billion in profits they had stashed offshore. But instead of paying the nominal corporate tax rate of 35 percent, they were taxed at just 5.25 percent.
The title of the bill notwithstanding, corporations invested almost none of their windfall in new factories or other measures to create the 500,000 jobs that Republicans had promised. In fact, many companies that received the biggest tax break actually slashed jobs. Hewlett-Packard laid off 14,500 workers – one pink slip for every $1 million in profits it shipped back home from overseas. All told, according to an analysis by the National Bureau of Economic Research, up to 92 percent of the "jobs creation" money was handed out to top executives and shareholders in a frenzy of dividend payments and stock buybacks. And thanks to the GOP's cut on investment income the previous year, wealthy individuals who pocketed the offshore profits paid the same rate on their bonanza, 15 percent, that a waitress at a diner might pay on her tips.
When Democrats regained control of both the House and Senate in 2006, they temporarily halted the GOP's binge of borrowing from the Treasury to give tax cuts to the wealthy. But that didn't stop Republicans from finding other ways to aid the rich. As the economy collapsed in 2008, the Bush administration used the crisis to provide a stealth handout to the nation's banks – even those at no risk of failing. Under the TARP bailout, overseen by Treasury secretary and former Goldman Sachs CEO Hank Paulson, taxpayers were forced to give banks $254 billion for assets worth just $176 billion – a handout of $78 billion to the financial sector, including $2.5 billion for Paulson's cronies at Goldman. "Paulson pushed the money into the hands of the banks – no strings attached, no accountability, no transparency," Elizabeth Warren, then-chair of the Congressional Oversight Panel, told Rolling Stone last year.
As with the offshore profits, the banks used the money to line the pockets of executives and investors – while doing little to speed the recovery of Main Street. "We gave an enormous subsidy to these financial institutions, and they have not returned it to the American people," said Warren. "The administration could have said, 'All right, take this and multiply it throughout the economy.' But Paulson never made that a condition of taking the money."
Taken together, the Bush years exposed the bankruptcy behind the theory that tax cuts for the rich will spur economic growth. "Let the rich get richer and everybody will benefit?" says Stiglitz. "That, empirically, is wrong. It's a philosophy of trickle-down economics that's belied by the facts." Bush and Cheney proved once and for all that tax cuts for the wealthy produce only two things: "lower growth and greater inequality."
The GOP's frenzied handouts to the rich during the Bush era coincided with the weakest economic expansion since World War II – and the only one in modern American history in which the wages of working families actually fell and poverty increased. And what little expansion there was under Bush culminated in the worst fiscal crisis since the Great Depression. "The wreckage was left by Dick Cheney, Grover Norquist and the gang," says Chafee. "This was their doing."
By driving the economy into the ditch, Republicans left the next president little choice but to drive up deficits in the short term by launching a massive campaign of federal spending to ward off a global depression. But even the $787 billion stimulus engineered by President Obama was hamstrung by his predecessor's ongoing giveaway to the wealthy: Republicans insisted that nearly 10 percent of every stimulus dollar be devoted to financing the annual "patch" to the Alternative Minimum Tax – the off-budget legacy of Bush's tax cuts for the rich. This was a $70 billion handout that inflated the cost of the stimulus package without stimulating anything – other than the paychecks of wealthy Americans.
From the outset of the Obama presidency, in fact, Republicans have engaged in a calculated, across-the-board campaign to protect the tax privileges of the wealthiest Americans. Their objective was made explicit by Rep. Eric Cantor during the height of the stimulus debate: "No Tax Increases to Pay for Spending" declared one bullet point on Cantor's website. "House Republicans are insisting that any stimulus package include a provision precluding any tax increases, now or in the future, to pay for this new spending." Having racked up the largest deficits in American history, Republicans suddenly found it expedient to return to their old-school rhetoric of deficit-bashing. "Under Bush, they had a story about deficits not mattering," says Michael Ettlinger, who directs economic policy at the Center for American Progress. "Then, all of a sudden Obama becomes president, and deficits matter again."
The battle reached a fever pitch over health care reform. To truly understand the depth of the GOP's entrenched opposition to Obamacare, it's crucial to understand how the reform is financed: The single largest source of funds comes from increasing Medicare taxes on the wealthy – including new taxes on investment income. According to the Tax Policy Center, Americans who make more than $1 million a year will pay an extra $37,381 in annual taxes under the plan. The top 400 taxpayers would contribute even more: an average of $11 million each
Rarely in American history has a tax so effectively targeted the top one percent. "It took Republicans about four months to figure out how much they hated it," says McIntyre, president of Citizens for Tax Justice. Republican rage over the president's health care plan has far less to do with the size of government or the merits of the individual mandate than the blow to the investor class. If Obamacare remains in place and the Bush cuts for the wealthy expire as planned, top earners will be paying a tax of 23.8 percent on capital gains – more than they have at any time since Clinton cut the capital gains tax in 1997. Health care reform, griped The Wall Street Journal, was nothing but a "sneaky way" for Democrats to wage a "war on 'the rich.'"
A key element of the GOP's war on the poor was cemented by the surprise election of Scott Brown to replace Ted Kennedy in the Senate in January 2010. As a candidate, Brown had made his high-mileage GMC pickup truck the star of his campaign commercials. "I love this old truck," he said. "It's brought me closer to the people." But Brown's real allegiance was to his wealthy donors: the billionaire Koch brothers, who bankrolled the Tea Party, and the financial interests who made a last-minute investment of more than $450,000 to propel Brown into office.
As soon as he was sworn in, Brown set about hollowing out the so-called Volcker Rule, which was designed to bar big financial institutions from using their own money to make risky, speculative bets on the market. By agreeing to provide Democrats with the crucial 60th vote on finance reform, Brown secured an exemption from the trading ban for mutual funds and insurers – a move directly benefiting Massachusetts-based financial giants like Fidelity and MassMutual. Brown also insisted that the Wall Street giants who caused the financial collapse – banks like Goldman Sachs and JP Morgan Chase – be allowed to continue using taxpayer-subsidized capital to gamble on hedge funds and private-equity deals. Former Fed chair Paul Volcker was furious: "Allowing a bank to invest in a speculative fund," he said, "goes against the very intent of the bill."
But Brown wasn't done. At the 11th hour, he forced Democrats to spike a tax on big banks and hedge funds that was designed to generate $19 billion to pay for the costs of financial reform. As a result, consumers and small banks had to pick up the tab. Brown, meanwhile, was richly rewarded for his efforts on behalf of Wall Street: During a three-week period at the height of negotiations, he raked in $140,000 in campaign cash from big financial firms, including Fidelity and MassMutual, Goldman Sachs and JP Morgan.
When Republicans won back control of the House in last year's midterm elections, they followed Brown's lead and moved swiftly to betray their Tea Party backers by running up more deficits on behalf of the rich. Within days of the election, Republicans not only secured a two-year extension of the Bush tax cuts for the wealthy, they also enabled America's richest scions to inherit millions of dollars without paying a dime in taxes. All told, the GOP's two favors for the party's biggest donors were secured in a lame-duck bargain that adds another $858 billion to the debt – an amount greater than the original stimulus plan the Republicans opposed so bitterly.
First, the GOP filibustered a Democrat-led effort to extend the Bush tax cuts on only the first $250,000 of income. The party leadership's hard-line stance – supported by barely a third of all voters – turned $90 billion over to the wealthiest Americans. It also set a precedent for further extensions that would cost nearly $1 trillion over the next decade. At the same time, the GOP drove through a deal that actually raised taxes for couples who make less than $40,000 a year – and then turned much of the extra cash over to couples who earn more than $200,000. Obama agreed to this massive transfer of wealth in order to retain the Bush tax cuts for the middle class – but the only other significant thing he got in return was a one-year extension of jobless benefits for the long-term unemployed.
But even the GOP's big payday for the wealthy pales in comparison to the handout that Republicans secured by gutting the estate tax. With the expiration of the Bush tax cuts, the inheritance tax was set to snap back to its Clinton-era standard: exempting the first $1 million of all estates from taxation, and stepping up the tax rate on the wealthiest estates to 55 percent. Instead, Obama agreed to raise the exemption to $5 million and lower the top tax rate to 35 percent – an apparent horse trade demanded by the Senate's second-ranking Republican, Jon Kyl of Arizona, who then allowed the president's nuclear-stockpile treaty with Russia to move forward in the Senate.
Shockingly, the deal actually sweetened the bargain the super-rich had received in 2009, enabling the heirs to the richest 0.25 percent of estates to pocket an extra $23 billion they would have otherwise owed in taxes under Bush. In fact, under the terms Kyl demanded, the federal government will spend more to eliminate or cut taxes for 100,000 rich people than it will to extend unemployment benefits for 7 million Americans.
In a little-noticed detail, the two-year deal also created a loophole that allows the wealthiest couples to pass on $10 million to a child today – while they're still living – without paying a penny of tax. That means the rich can offload their wealth to their children before it increases in value – evading higher estate taxes in the future. "In the next two years," one tax attorney crowed to The Wall Street Journal, "wealthy people have an unprecedented opportunity to push a lot of the value of their assets out of the estate-tax system." According to tax historians, the new rules create the most generous tax environment for wealth transfers for the super-rich since 1931.
And that was just the beginning of the budget-busting handouts the GOP demanded for the rich. In April, Republicans in the House passed a budget that would have slashed income taxes on corporations and the wealthiest Americans to just 25 percent – a $3 trillion giveaway that would have been financed by doubling out-of-pocket expenses for future retirees on Medicare. Top Republicans like Cantor have also pushed for a replay of the American Jobs Creation Act – endorsing a new tax amnesty that would allow corporate giants like Apple and Pfizer to bring home $1.4 trillion in offshore profits that would be taxed at just 5.25 percent – a favor for the wealthy that would generate another $79 billion in deficits. "At the same time they're talking about these big deficit problems, running around saying, 'We're broke,' they're contemplating one of the most egregious tax giveaways in recent memory," says Greenstein of the Center on Budget and Policy Priorities. "The potential windfall gains are beyond enormous – and the lion's share would go to shareholders of these big corporations and their executives."
Never mind that the previous tax amnesty in 2004 created virtually no new jobs, as corporate executives eagerly pocketed the windfall for themselves: Republicans are once again claiming that the tax amnesty will enable corporations to spend their repatriated wealth putting Americans back to work. Mitt Romney, the GOP presidential front-runner, promises that the flood of corporate cash will generate "hundreds of thousands if not millions – of good, permanent, private-sector jobs." That flies in the face of basic economics, given that corporate America is already sitting on hundreds of billions in domestic cash reserves. What the tax amnesty would do, however, is boost stock prices. According to an analysis by JP Morgan, as much as two-thirds of the $1.4 trillion that would be brought back into the country would go to stock "buybacks and dividends" rather than "new factories, new jobs and new equipment," as Romney claims.
JP Morgan has a big stake in the debate – as do fellow bank-bailout beneficiaries Citigroup, Bank of America and Goldman Sachs. Combined, the four financial giants have $87 billion in untaxed profits stockpiled offshore. That's similar to the combined offshore profits of drug giants Pfizer and Merck at $89 billion. Tech giants Cisco and Microsoft have more than $61 billion they'd like to bring home, while Big Oil companies Exxon and Chevron have $56 billion. The company with the most to gain, by far – with offshored reserves of $94 billion – is corporate America's most notorious tax scofflaw, GE.
Romney's rival for the GOP nomination, Rick Perry, has also endorsed the tax amnesty for giant corporations. But for Perry, the proposal doesn't go far enough on behalf of the rich. "Why not talk about how you are going to repatriate those dollars at a substantially lower rate than 35 percent?" Perry said recently, stumping in New Hampshire. "Like zero."
In September, Perry went even further, proposing a flat tax that would take a sharp bite out of the paychecks of the poorest Americans – while slashing taxes by more than 40 percent for the wealthiest. When confronted by a reporter over the fact that his plan would give millions to the rich, Perry replied: "I don't care about that." His plan is almost as regressive as Herman Cain's original 9-9-9 plan, which called for increasing taxes on 84 percent of Americans – squeezing $4,400 a year out of every middle-class couple to finance a $455,000 tax cut for millionaires. What's more, both Perry and Cain want to abolish the estate tax entirely and eliminate all taxes on capital gains. A similar plan by Michele Bachmann would enable 23,000 millionaires to pay no taxes at all – while allowing the top 400 earners to pocket nearly two-thirds of their income tax-free, and then pass those riches on to their heirs without paying a penny. "It's madness," says Stiglitz. "And it is dangerous to the fiscal order. The wealthy know very well how to convert normal income to capital gains income."
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