More class warfare

Bruce Bartlett
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Posted: Jul 30, 2004 12:00 AM

 A key element of the John Kerry-John Edwards campaign is an us-versus-them theme, where ?us? are the poor and middle class and ?them? are the greedy rich. Edwards famously characterized this dichotomy as ?Two Americas? during his run for the Democratic nomination. The clear implication of the Democrats? message is that the rest of us would somehow be better off if the rich were worse off. Yet according to a July 29 New York Times report, they have gotten exactly their wish. So why are they still complaining?

  According to the report, the wealthy were decimated by the stock market collapse that began in 2000. They suffered the greatest income losses of any income group. Every income class above $200,000 -- the top 2 percent that Kerry and Edwards say must pay more taxes -- suffered an income loss between 2000 and 2002 (in inflation-adjusted terms). The losses ranged from 10.5 percent for those with incomes between $200,000 and $500,000, to an amazing 63.4 percent for those with incomes above $10 million.

 One out of every eight persons with an income above $200,000 in 2000 had an income below that by 2002. The ranks of those with incomes above $10 million fell by more than half, with their aggregate income falling from $300 billion to $110 billion.

 This does not mean we should cry for those rich people whose incomes have fallen. No doubt, the vast bulk of them are probably still doing very well compared to most Americans. But there is reason to question why they should be heaped with scorn by the Democratic Party and punished with higher taxes when they have just suffered staggering income losses.

 Interestingly, the data show that the bulk of the middle class did fairly well between 2000 and 2002. Despite the recession and higher unemployment, every income class between $25,000 and $200,000 saw an income gain. Those with incomes below $25,000 saw a small income loss of 1.4 percent, which was probably compensated for in large part by the 2001 tax rebate and increase in the child tax credit. (The data are for before-tax income and thus exclude the effect of tax cuts.)

 Kerry and Edwards would have us believe that the federal budget deficit is largely due to tax cuts for the rich. But the article refutes this idea, noting that those tax cuts mainly affecting the rich didn?t take effect until 2003. Says the Times: ?Falling incomes, rather than tax cuts, appear to count for the greatest share of the decline in income taxes paid. That is because the higher one stood one the income ladder, the greater the impact was likely to be from the stock market crunch.?

 This raises an important point about steeply progressive income tax rates, which are so strongly supported by liberals. For every $1 increase in income by the wealthy, the government gets about 35 cents. So when the wealthy do well, so does the government. That is why the share of total income taxes paid by the top 2 percent of taxpayers -- those targeted by Kerry and Edwards -- was 41.3 percent in 2001, according to the Internal Revenue Service, though their share of total income was 22.4 percent.

 But this means that the converse is also true. When aggregate incomes fall, those of the wealthy are going to fall the most, meaning that federal tax revenues are going to fall much more. Even in taxation, it?s live by the sword and die by the sword. For this reason, many economists favor a flat rate consumption tax to smooth tax collections. Since consumption varies less than income over the business cycle, government revenues would be far more stable from year to year, rather than skyrocketing up when times are good and collapsing when times are bad.

 Kerry and Edwards seldom ever explain that their plan to raise taxes on the top 2 percent of taxpayers means higher taxes for those making $200,000 per year, a good income to be sure, but one that few Americans likely would classify as ?rich.? With overtime, many cops and firemen make close to $100,000 per year. If they have a working spouse, they are probably in the top 5 percent and within shouting distance of being in the top 2 percent. And even if they themselves never get to that income level, they hope that their children will.

 Thus the basic problem with scapegoating the rich for every problem in society, as Kerry and Edwards do, is that far more people identify with the rich than they imagine. Sophisticated liberals know this. As Bob Kuttner, editor of the left-wing American Prospect magazine, recently wrote in the Boston Globe, ?Because nearly everyone identifies upward, you don?t gain traction in American progressive politics by baiting the rich.?

 Kerry and Edwards don?t seem to have gotten the message.

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