by Robert B. Reich

The tax deal negotiated between the president and Republicans is the latest version of trickle-down economics. It also confirms the Republican story of what happened to the economy and how to fix it: The bad economy is big government's fault, and the solution is to shrink government.

But the Republicans' story is wrong.

Here's the real story. Trickle-down economics has been a resounding failure. The Reagan and Bush tax cuts on the wealthy didn't help most Americans.

For three decades, an increasing share of the benefits of economic growth has gone to the top 1 percent. Thirty years ago, the top 1 percent got 9 percent of total income, before taxes. Now they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged, adjusted for inflation.

As a result, America's vast middle class no longer has the purchasing power to keep the economy going. (The rich spend a much lower portion of their incomes.)

The crisis was averted before now only because middle-class families found ways to keep their spending up even though their wages flattened -- by women going into paid work, by working longer hours, and finally by using their homes as collateral to borrow. But when the housing bubble burst, the game was up.

The solution is to reorganize the economy so the benefits of economic growth are more widely shared.

Exempt the first $20,000 of income from payroll taxes, and apply payroll taxes to incomes over $250,000.

Extend the Earned Income Tax Credit -- a wage subsidy -- all the way up through families earning $50,000.

Make higher education free to families that now can't afford it.

Create an infrastructure bank to repair and rebuild our crumbling roads, bridges, and water and sewer systems.

Create a new WPA to put the long-term unemployed back to work.

Pay for all this by raising marginal income tax on millionaires to 70 percent. This won't hamper economic growth. Under President Dwight Eisenhower, whom no one accused of being a socialist, the highest marginal rate was 91 percent, and the economy flourished.

A millionaire marginal tax of 70 percent would also go a long way toward eliminating the nation's future budget deficit.

But here's the obstacle. As income and wealth have risen to the top, so has political power. Money is being used to bribe politicians and fill the airwaves with misleading ads that block all of this.

The midterm elections offered dramatic evidence. Shortly after Election Day, for example, NBC News reported that Crossroads GPS, one of the biggest Republican secret-money organizations, got "a substantial portion" of its loot from a group of extremely wealthy Wall Street hedge fund and private equity managers. Why would these hedge-fund and private-equity managers sink so much money into the midterm elections? Because they oppose a proposal by congressional Democrats to treat the earnings of hedge fund and private equity managers as ordinary income rather than capital gains (subject to only a 15 percent rate), as they're now treated.

In other words, the real problem isn't big government. It's power and privilege at the top.

So another part of the solution must be to limit the impact of big money on politics. This requires, for example, publicly financed campaigns, disclosure of all sources of political spending, and resurrection of the fairness doctrine for broadcasters.

It's the same power and privilege that got the Bush tax cuts in the first place, and claimed the lion's share of its benefits. It's the same power and privilege that phased out the estate tax.

By agreeing to another round of massive tax cuts for the wealthy and another huge cut in the estate tax, the president and the Democrats are just continuing Republican policy.

Cutting taxes on the rich while freezing discretionary spending (which the president also agreed to do) says, in effect, the underlying problem is big government, and the solution is to shrink government and expect the extra wealth at the top to trickle down to everyone else.

It's another version of the same trickle-down economics America has been force-fed for 30 years, as the rich have become richer and almost nothing has trickled down.

When will we learn?

Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of the new book "Aftershock: The Next Economy and America's Future."

 

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The President's Tax Deal Is Just More Trickle-Down Economics | Politics

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