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James Sites' Proposal for U.S. Tax Reform

Preliminary note: James N. Sites was the head of public relations for the U.S. Treasury Department during the Ford Administration. He developed a speaking tour for his boss, William E. Simon, to promote the free-enterprise system. It was wildly successful. Simon’s reputation as a spokesperson for conservativism grew until he threatened to overshadow the President in popularity. When Ford decided to seek re-election, he asked Simon to end the speaking campaign. Simon dutifully complied.

Sites then became senior vice president of the National Association of Manufacturers where he attempted to develop an educational program to promote free enterprise. Here he ran afoul of some west-coast members favoring Ronald Reagan who saw Sites as an agent of Simon, Reagan’s potential rival. Sites went on to assume high-level positions in publishing and other fields.

Few today remember that the '70s-era conservative boomlet associated with Reagan actually began with Secretary of Treasury Simon. It is with this historical background in mind that we read an article written recently by James Sites, Simon’s associate, which seems most “unconservative” in its views. He is advocating higher taxes on the wealthy.

 

The article reads:

“ While most of America slept, business interests have been quietly carrying out a radical restructuring of the US economy during the past half-century. The result is a startling jump in the share of national wealth going to upper-income groups. Simply put, the rich are getting richer while virtually everyone else is standing still or losing ground. The recession has sharply widened this ominous gap.

One revealing statistic underscores this seismic shift: National wealth held by the richest one percent (1%) of the population almost doubled from 1976 to 2007--from 19.9% to 34.6%. That’s right: 1% of the population now owns MORE THAN ONE THIRD of the nation’s wealth.

Equally revealing, in 1960 chief executive officers (CEOs) at leading corporations were making 42 times the average worker’s pay; by 2007 this had multiplied by nearly nine. To 344 times the average worker’s pay!

Translating their rising economic power into political clout, the New Rich simultaneously got Washington to cut the top marginal rate levied by the Internal Revenue Service (IRS) on taxable income from 91% in 1963 to 39.6% in 2003. Under President Bush this was then cut further to the present 35%. The Bush tax cuts also brought the rate on dividends down from 39.6% to 15%, and on capital gains from 20% to 15%. These cuts were made despite skyrocketing government spending for the wars in Iraq and, later, Afghanistan, leading to massive budget deficits.

How these tax cuts work in practice is shown in a Tax Foundation study of the 2007 tax returns of 141,000 people (the top one-tenth of one per cent of taxpayers). This showed that the average of these taxpayers had income of $7.4 million ($7,400,000.00) yet paid $1.6 million, or just 22 %, in Federal income taxes. This left $5.8 million, or 78%, for other purposes (which included state and local taxes).

Why 22% and not 35%? Because the Super-Rich steer much of their money into investments yielding capital gains and dividends, which, as noted above, are now taxed at far lower rates than ordinary earnings.

Defenders of the present tax situation point out that the top 1% of taxpayers now account for 40% of Federal income taxes. Which is one big share. But is it excessive? Hardly. Not in view of the outsized flow of wealth to this 1%, PLUS their investment tax advantages.

Put another way, the US today finds itself in the peculiar position of having a relative handful of people gobbling up America’s increasing wealth like a hog who has become so big that he’s able to root everyone else away from the national money trough. Politicians, meanwhile, fearful of the hog’s lobby- ing clout and eager for his lavish contributions to re-election campaigns, don’t dare to rein him in.

How did the New Rich manage to pull off this portentous economic retro-revolution? The answer lies in a classic case of greed-driven demand for CEOs colliding with limited supply. A few corporate boards started the ball rolling by looking for and paying almost any amount to land an executive who could cut a firm’s costs, raise profits and pump up its stock price. Management and compensation consultants and headhunters then merrily joined the bidding. Yes, merrily…since the higher these people pushed CEO salaries, the higher the fees they received. The result: A nationwide CEO feeding frenzy. And thus was born a new generation of “economic royalists,” as President Franklin D. Roosevelt could have called them.

Under today’s winner-take-all approach, predatory CEOs simply hog the profits that once were shared more evenly with investors, customers, employees and the broader community the firms are supposed to serve. Remarkably, however, protests from these shortchanged groups are hard to find.

Moral issues clamor to be addressed here. Ordinary people finally woke up to the problem of runaway executive compensation when Washington in 2008 began bailing out failing big banks with taxpayer money, only to discover that the firms (think AIG, etc) blithely continued to pay their leaders and other “experts” millions in pay and bloated bonuses. All the while millions of fellow Americans were (and are) losing their jobs, their homes, their savings, their businesses.

So much for calls for sharing the burdens of recession! One thinks of the exasperated comment made by besieged attorney Joseph Welch during the McCarthy era: "Have you no sense of decency, sir?"

Ordinary people cannot comprehend how ANY business executive or expert of ANY kind can so contribute to the common weal or general public interest as to justify salaries and bonuses of $10 million or $50 million or $100 million a year. People are shocked and howling mad…not only at the public-be-damned businessmen who plunder their firms of these startling sums but also at political leaders who they feel do nothing to curb such outrages.

Unprecedented concentration of wealth also raises grave operating questions for our economy. Mass production with full employment requires mass purchasing power. As more and more of the benefits of production go to fewer and fewer people (and often wind up in secret foreign bank accounts), mass purchasing power now seems to come mainly through massive expansion of consumer debt. When this reaches its inevitable limit, economic collapse follows--like NOW!

Meanwhile, one wonders if the US is drifting into a dangerous rich-poor class structure and the rising social instability this could bring. Political democracy cannot exist for long without what ordinary people feel is economic justice. Is the New Rich unwittingly creating the kind of conditions that could one day end in a demagogic political reaction? Does anyone remember the class struggles that led to the bloody French Revolution of the late 1700s or the calamitous Communist Revolution of 1917 in Russia? Do the New Rich really care? Or are they so preoccupied with their luxury life on the top deck of the Ship of State that they’re unaware the hull has sprung massive leaks below the water line?

The longterm decline of labor unions, from one third of the work force in WWII to the present 12% (with half of these in the public service sector), has contributed subtly to the rise of the New Rich. Strong labor unions once served as an indispensable “countervailing” force in curbing management excesses. This is now gone. So where in the unions’ place are the counter-forces that should be wielded by big pension funds or by far-sighted business leaders? Or by an outraged news media? Or by popular revolt like that posed by the Tea Parties (whose anger seems aimed not at business but at government)?

This leaves America’s one hope of correction in the hands of the president, Barack Obama. Will he have the insight and courage--the statesmanship—to push basic changes in tax policy through a Congress notoriously reluctant to act in this area? After the bruising battles fought over health-care?

The Bush tax cuts of 2001-3 are to end late this year, setting the stage for a Washington showdown on this issue. These cuts were weighted in favor of wealthy taxpayers, who appear to be gearing up to lobby fiercely for their continuation. This overview, however, shows this would be a grave disservice to the public, especially in this dangerous new era of unprecedented Federal spending and towering budget deficits. Another raw disservice would be any attempt to pass a national sales or Value Added Tax (VAT), which would be highly regressive, hitting low-income groups the hardest.

Indeed, if the New Rich are able to prevent an increase in high-end income taxes, many will take this as proof that America has finally passed the point of no return on the road to government of the wealthy, by the wealthy and for the wealthy.

This overview also shows what should be done to return to a national policy of levying taxes on those most able to pay:

1. Allow the IRS rate on that portion of taxable income exceeding, say, $250,000 annually, to return from the present 35% to the pre-Bush level of 39.6%. The same with the tax rate on dividends.

2. Retain the current capital-gains tax rate at 15% as a needed spur to investment in modernized plant and equipment, economic expansion and new jobs.

3. Enact a stiff new tax on that portion of a person’s taxable income exceeding $1 million a year. This should be set as high as politically possible--and as high as "yield efficiency" permits--between 39.6% and the 91% top marginal tax rate of the Truman-Eisenhower-Kennedy years, 1950-1963...with ALL of the additional money thus raised being devoted directly to CUTTING tax rates for those making less than $100,000 per year. This would not only correct today’s badly unbalanced distribution of tax burdens but it would also singularly stimulate consumer spending and economic recovery AND the general tax receipts needed to start bringing down the government’s huge budget deficits. It would also help rein in on the runaway pay and bloated bonuses of Wall Street financiers, bankers and other CEOs, returning some of the vast sums they are now taking from their firms to use by the people.

The Tea Party movement, along with everyone else except the New Rich, should rejoice at this third proposal. However, Tea Party-ers seem obsessed with demanding across-the-board tax cuts…which would only perpetuate present inequalities and leave the New Rich laughing all the way to the bank. One can sympathize with Tea Party-ers’ opposition to big government, which has indeed become too unmanageable, too bureaucratic, too intrusive into our lives and too subject to waste, graft and corruption, as this one-time Federal appointee can attest to. Yet, Tea Party-ers appear painfully unaware of the past half-century’s radical restructuring of our economy and its dangerous concentration of wealth at the top AND of the need for commensurate tax policy changes. Or that taxes can and should be raised on a few so that taxes can be cut for the many. Perhaps they should read this article!

Good luck, Mr. Obama! In the coming showdown on this issue, you will have tremendous support from a deeply concerned American people…IF you inform them of the facts and mobilize them. In the process, you may well save not only the remaining remnants of our competitive enterprise system but also American democracy itself.”

 

to: issue #3 - taxation

 

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