We’re Tumbling Over an Inequity Cliff

This week's fiscal cliff deal codifies the absurd notion that the super rich and the working poor are the same. In so doing, it prevents us from really fixing our racial caste system.

By Imara Jones Jan 03, 2013

By shifting the definition of who is rich, the "fiscal cliff" deal passed by the Congress this week extends many of the notions that have made the United States the most economically unfair it has been in almost 50 years.

At first blush, the American Taxpayer Relief Act, as it’s officially known, makes a lot of progress on the changes required to bring racial and economic fairness to America’s tax code. For the first time in almost 20 years, tax rates on the wealthy will rise. The estate tax on inheritances over $5 million will go up. The capital gains tax, which is the cornerstone of preserving the wealth of the super rich, will edge upward. These are all all positive developments.

But the trouble is not in the top line of the deal, it’s in the details.

By exempting all incomes up to $400,000 from key tax hikes, the American Taxpayer Relief Act treats many of the rich as if they were working poor. Under it, a person earning $20,000 and another earning up to 20 times this amount will see their tax bills remain the same. This is a totally bizarre policy assertion, but the absurdity doesn’t end there.

In point of fact those now earning $350,000 and above actually constitute the top 1 percent all income earners. Therefore, through the $400,000 exemption, this bill in effect reclassifies part of the 1 percent and moves them to the 99 percent. This strange move further skews the tax code towards inequality. 97 percent of the 1 percent are white.

As if that weren’t enough, individuals making close to $1 million could see their tax bills remain the same. That’s because money from two different sources, income (earned from work) and capital gains (earned from investments), will each see no tax changes up to the $400,000 threshold. So a CEO who earns $400,000 in salary and $400,000 from stock options would not be impacted by the rise in rates. That CEO’s $800,000 in total pay would be protected from higher taxes.

The point isn’t just that these de facto millionaires won’t have to pay more. It’s that shielding them from greater responsibility causes problems for everyone else. That’s because insulating many of the elite from tax increases prevents the government from raising enough revenue. And revenue, rather than spending, is the government’s core fiscal problem.

Federal tax revenues in the United States are 18 percent of GDP, the lowest amongst advanced economies. This means that the U.S. funds its government’s activities at about the same level of Mexico, which also collects taxes at about 18 percent of GDP.

As economists Jeffrey Sachs and Andrea Campbell have each pointed out, these revenue levels are simply too low for a global top-tier economy to have modern education, transportation, housing and health systems. These systems form the building blocks of economic opportunity and are essential to constructing a more racially fair economy with greater mobility.

Economic powerhouse Germany collects twice as much in taxes as a percentage of GDP than the U.S. The United Kingdom is the same ballpark.

If we are to break our increasingly racialized economic caste system, then we are going to have to pay for it. The only way to do that is through significantly more tax revenue. Due to the fact that our tax code is consumed with protecting the wealth of the rich, it can’t generate the revenue required to make America’s economy more fair.

In fact, the American Taxpayer Relief Act will provide substantially fewer resources than either President Obama or House Speaker John Boehner originally declared necessary to be effective. All in all, we’ve wasted precious political and economic energy over the past eight weeks to produce a policy that does too little, does it too late, and doesn’t fix underlying fiscal or economic issues.

How did it come to this?

It’s been clear for two years that President Obama has been negotiating with a House Republican caucus that has no intention of actually governing with him. They clearly see their role as tearing the government down rather than ensuring that it works. House Republicans have been willing to push the U.S. back into recession, not once but twice, and to risk default in order to cut taxes on the rich and roll back investments on everybody else.

Non-partisan congressional guru Norm Ornstein has called the current Congress "the most dysfunctional since perhaps the Civil War." This would make sense. Their pro-rich, small government beliefs would have fit right in with that of the pro-slavery House Democrats of the Civil War era.

Given the harshness of the opposition Obama faces, it might be hard for him to determine what to do. But history ought to be his guide.

During his first term in office, Obama often cited Civil War President Abraham Lincoln as his guiding star. He often quoted Lincoln’s words of reconciliation to "bind up the nation’s wounds" and called on America to live up to "the better angels of our nature."

What’s interesting is that Lincoln actually moved from being a conciliatory, middle-of-the-road politician to a hardened leader who asserted vast power in order to bring about required changes.

In the same speech that he appealed to "better angels" Lincoln also said, "if all the wealth piled by the bondsman’s 250 years of unrequited toil shall be sunk … so still it must be said ‘the judgments of the Lord are true and righteous altogether.’ "

Lincoln realized that he might have to violate his most cherished ideals in order to secure higher principles.

Obama’s life has shown that his greatest desire is for racial harmony. But harmony is just another word for balance, and balance only takes place amongst human beings through equity. Therefore, the president’s desire for racial harmony must be matched by action on racial inequity, especially on the economic front.

House Republicans have already promised other destructive economic showdowns in 2013: one on automatic spending cuts and the other on the nation’s debt ceiling. These will provide Obama with additional opportunities for action on racial and economic fairness.

Of course, Lincoln never got the opportunity to figure out how to bring about the promise of equality after his Emancipation Proclamation declared former slaves as "thenceforward and forever free." That act of executive power, rather than of Congress, celebrated its 150th anniversary on Jan. 1, the same day that the American Taxpayer Relief Act was passed.

In the intervening years, we’ve all learned that in order to be fully realized, freedom requires fair and balanced policies. Given the economic imbalance between whites and everyone else–propped up by economic wrongs embedded in our tax code–we have a long way to go. The "fiscal cliff" deal passed by Congress only stretches it out that much further.