Budgets, Taxes, and Classes in America


An economic class war between business interests and wage earners has been growing in the U.S. for at least the last three decades. It has also shifted in terms of its focus and emphasis several times. Today's emerging battles over budgets in the U.S.—federal, state, and local—represent yet another major shift and a new front in the intensifying economic class war in America.

 

One of the first fronts emerged in the early 1980s. Its focus was a direct attack on unions and ultimately collective bargaining. Constituting about 22 percent of the labor force in 1980 and more than 50 percent in key strategic industries, union membership in the private sector was reduced to barely 7 percent of the workforce today. Where unions held on, collective bargaining also shifted—from its previous focus on expanding the scope and magnitude of wages and benefits to concession bargaining and a fight over how much wages and benefits would be reduced. Concession bargaining is the general norm continuing to this day. In recent years, however, it has transformed into a new, more virulent form of concession bargaining: the fight over whether entire subject areas—such as the right to bargain over health care or pensions or the union shop—are eliminated from collective bargaining altogether.

 

This direct attack on unions has resulted in a decline in the union wage differential. Historically, that differential has meant union workers get about 25 percent higher pay and even higher benefits than their non-union counterparts. But it has been shrinking. As business has invaded and deepened its penetration on this front, tens of billions of dollars every year have shifted from workers to business, with hundreds of billions more transferred to the corporate bottom line the past three decades.

 

Wages and earnings were further compressed and shifted to business as a result of several additional wage fronts launched in the 1980s and 1990s. One such additional wage front was the shift by business toward hiring contingent labor instead of full time permanent workers. Tens of millions of involuntary part time and temporary jobs—at lower pay and virtually no benefits—were created. That shift continues today. In the past two years alone more than six million involuntary part time jobs have been created. In the last decade, there have been millions more temporary jobs. Like two-tiered wages and benefits systems now in place in many companies, a two-tiered job market—that is two classes of workers—emerged in the U.S. in the 1980s and grew rapidly. The numbers now approach almost a third of the regular work force—that's nearly 50 million jobs at 60-70 percent the pay levels of full-time jobs and billions in additional annual savings to business at the expense of wage earners.

 

To the de-unionization and contingent labor fronts in the economic war must be added the massive offshoring of jobs, as the manufacturing base in the U.S. has steadily been moved abroad. This shift continues today as more than eight million manufacturing jobs have disappeared since the 1990s. And offshoring has begun spreading to service jobs as well as manufacturing the past decade. Some academic sources estimate another 15 million will be offshored during the coming decade. Offshoring of higher paying jobs means still lower average pay and earnings for the U.S. workforce in general.

 

Beginning in 1988, yet another front in the form of "free trade" was launched. For decades now higher wage jobs in the U.S. have disappeared under the pressure of cheap imports as a result of trade treaties. Like the shrinking union wage differential, the import-export wage differential is about 20 percent. That is, new jobs created by free trade pay 20 percent less, while higher paying jobs are lost due to free trade. Unlike the union wage differential, however, the export-import wage differential is growing—i.e. imports are wiping out higher paying jobs and new jobs in U.S. export industries are paying progressively less. The result is for each $1 billion in the U.S. trade deficit, largely the consequence of free trade, the U.S. Commerce Department has estimated 15,000 higher paying jobs are lost. The U.S. has run a trade deficit now for three decades, reaching levels of $700 billion in recent years.

 

Still another front along which economic class war has been the fight over minimum wage. From the late 1970s to the mid-1990s, no adjustments in minimum wages were made by federal legislation. Real wages of the lowest paid fell precipitously as a result, pulling down the general wage level still further—adding to the other wage fronts of de-unionization, concession bargaining, contingent labor, offshoring, and free trade.

 

Indirect Attacks on Wages

 

Still other fronts in the economic class war opened in the 1980s and 1990s focusing on what are called deferred wages in the form of the destruction of defined benefit pension plans throughout 90 percent of the private sector of the economy and by a shift in relative tax burdens from capital incomes to payroll taxes—i.e., from the wealthiest households and corporations to the 92 million working class households; and by a shift to debt accumulation by the same 92 million.

 

 

More than 100,000 defined benefit pensions have been dismantled over the past three decades. Those pension plans were financed by wages workers chose to forego and instead direct toward their pension funds, to be paid later upon retirement. However, when defined benefit pensions were dismantled, those deferred wages were lost in whole or part. Many plans were converted to 401k personal pensions, in which workers receive on average less than half upon retirement compared to what they would have received in a defined benefit plan. Some got even less, as their pensions were abandoned by business and taken over by the Pension Benefit Guaranty Corporation. Others received nothing as their replacement 401ks collapsed in value, in the last decade alone, by more than $4 trillion.

 

As real wages and earnings stagnated and fell, most of the 92 million working class households the past two decades have tried to maintain their standard of living by means other than increases in wages and earnings. For example, they sent other family members into the workforce (often in contingent jobs at reduced rates of pay); they cashed out their 401ks to pay for education and medical bills; and they added mountains of debt in an effort to try to sustain their prior levels of consumption.

 

Consumer debt is yet another front in the class war and represents a kind of deferred wage, a partial transfer of future wages collected in the form of interest in the present. This includes not only credit card debt, but also student debt and the many forms of predatory mortgage debt like subprimes, adjustables, and reverse mortgage debt. In all cases, interest rates are charged well above normal interest rates that businesses receive for credit and debt.

 

Another front in the economic class war has been the indirect wage recovery by business through the medium of the tax structure. It is reflected in the declining tax burden for the wealthy and corporations, on the one hand, and the corresponding rising tax burden for working class families—a tax shift from wage earners to earners of capital incomes. It began with Reagan's massive $752 billion in business-investor tax cuts in 1982-83, continued under Clinton, accelerated with the $3.4 trillion in Bush tax cuts in the last decade, cuts which have been extended another $400 billion by Barack Obama. Studies show 80 percent of this $3.8 trillion benefit the wealthiest households and corporations.

 

On the other side of this tax front, payroll taxes paid by working class households earning less than $108,600 a year have risen progressively since the mid-1980s as taxes on corporations and investor households have been cut. More than $2 trillion in revenue surplus has been generated the past 25 years by the payroll tax that finances social security. Unfortunately, that entire $2 trillion surplus has been diverted from the social security trust fund by Congress and presidents since Reagan and used every year to offset the growing federal budget deficits. That offsetting of U.S. budget deficits has enabled Congress in turn to pass massive tax cuts for the wealthy and corporations, from Reagan to Obama. In other words, what amounts to $2 trillion of workers' deferred wages paid into social security has been transferred to the wealthy and corporations, in large part to enable the continuing $3.8 trillion dollar tax cuts for the rich and corporations.

 

The general result has been a shift in income from the 92 million wage earner households to the wealthiest 5 percent and 1 percent investor households and their corporations, estimated today amounts to more than $1 trillion a year in terms of income shift. However, the U.S. and global economic system has not been able to extricate itself fully from the 2007/2008 crisis. It has succeeded in stabilizing the financial crisis and economic contraction only in part. Neither has been able to recover to more than half of their prior levels. In the process, between $11-$13 trillion was used to bail out banks ($9 trillion provided by the U.S. Federal Reserve) and subsidize major corporations in the U.S. alone ($2-$3 trillion from Congress and the U.S. Treasury). Wage earners are being targeted by business interests and their policymakers to pay that bill. What it means is a further intensification of the economic class war in America, requiring the opening of new fronts in addition to the old.

 

Following the November 2010 congressional elections, a new front in this economic class war was opened. In past decades, workers in manufacturing were the focus of the direct attack on unions and wages. The de-unionization and decline of collective bargaining hit them hardest. Offshoring and "free trade" eliminated millions of their jobs. Their pensions were decimated at the greatest rate. Service industry workers in the private sector were shuttled into low pay, no benefit contingent jobs. They also suffered from stagnating minimum wages. But public sector workers and their unions were relatively untouched in the business assault on unions and private sector wages. Public sector unionization rates remain around the 35 percent level, virtually unaffected by the past 30 years. Public sector wages and benefits continued to grow modestly, much as private sector wages and benefits did prior to the 1980s. In today's new budget-deficits front, however, public sector workers are now the central focus. Business interests are intent on finishing the job of destroying unions by extending the attack to public sector wage earners.

 

This attack on public workers is taking several forms. In part, the business strategy is to reduce the unionization rate by making membership in public sector unions purely voluntary. That is, end the "union shop" in the public sector by extending the idea of the "right to work"—i.e., the open shop—to that sector on a general scale as well. As it has in the private sector, the open shop will almost certainly result in halving union membership in the public sector .

 

A second thrust is to eviscerate collective bargaining in the public sector by declaring bargaining over pensions and health care benefits no longer permissible. This would be followed, no doubt, by converting current defined pension benefit plans in the public sector to 401k plans—much as occurred similarly in prior decades in the private sector. Most public sector governments and agencies have already set up 401ks in parallel to defined benefit pensions. They are not yet mandatory. But they are in place, much like they were set up initially in the private sector. That is, until the defined benefit plans were dismantled. Having a 401k alternative ready in the wings makes it easier to convince workers to accept the dismantling of their defined benefit plan, which is clearly the plan of many state governors and countless municipal governments as well.

 

A parallel attack on public workers' health benefits is also taking shape. The attack on health care deferred wages in the public sector will likely take two possible forms: once new laws prohibiting bargaining over health benefits are introduced, public workers will be required to pay a far greater share of health insurance premiums than at present, as well as higher deductibles and co-pays; or they'll be given a cash stipend payment to buy their own insurance coverage. This latter option is already embedded in the 2010 Obama healthcare law for private sector workers without insurance coverage. It is also a hallmark of the Tea Party/Paul Ryan budget bill in Congress that is designed to provide stipend payments in lieu of Medicare coverage for senior retirees on social security.

 

Even more severely impacted will be the working poor in the private sector—i.e. those at minimum wage levels who have no health insurance coverage but who receive Medicaid benefits provided by the states (subsidized heavily by the federal government). In some states, Medicaid payments are targeted for reduction by half or more. It will mean devastation for the households of the working poor, which are overwhelmingly single women heads of households with children.

 

 

Another major front will certainly involve reductions in social security payments and benefits to retirees. It is virtually guaranteed that the retirement age will be raised to 68 and 69. The payroll tax on social security was radically restructured in the mid-1980s to allow for yearly increases in the payroll tax base on which the payroll tax rate is levied. It was understood back then that the increases in the payroll tax would be necessary to accommodate the 77 million baby boomers who would begin retiring in 2012. The aforementioned $2 trillion plus surplus in the social security trust fund was designed to provide for that surge in retirement. However, as previously noted, that surplus has been spent by Congress to offset part of the massive budget deficits for the past 25 years—deficits created largely by tax cuts for the wealthy and rising war spending.

 

There is no crisis in social security, in other words. But going forward, that $2 trillion will have to be made up. The proposals in all the budgets—Obama's, the deficit commissions, the Senate gang of six, and the Tea Party/Ryan counter-budget—all concur that benefits must be reduced instead of replacing the permanently borrowed $2 trillion surplus by raising taxes on the rich. A simple measure, levying the 12.4 percent payroll tax on all forms of income, not just wages, would more than restore the $2 trillion and ensure social security benefit payments for the next century and then some.

 

The most notable target, however, is Medicare, which is in serious financial trouble for three simple reasons: (1) escalating double-digit health care costs for nearly two decades now, caused by health insurance companies, for profit hospitals, drug companies, and for profit clinics; (2) the George W. Bush Prescription Drug plan, or what is known as Part D of Medicare, which in effect meant that Medicare would have to pay whatever the drug companies charged with no tax or revenue raising as part of the Bush bill; (3) funding by an absurdly low payroll tax. Where else can 40 million senior recipients of comprehensive health care receive benefits for a tax of barely 3 percent on payroll? Compare employer provided health insurance coverage that costs employers-employees on average about 25 percent of the employee's annual income—and for far less coverage than does Medicare for seniors. Raising the Medicare payroll tax by 1-2 percent would essentially eliminate its shortfall problem. Instead, as in the case of social security the new front of budget-deficits means making (retired) workers pay in the form of high premiums for Medicare and lower levels of coverage.

 

The Real Causes of Deficits And Trillion Dollar Debt

 

During the eight years of the Bush presidency, U.S. budget deficits averaged nearly $500 billion a year, according to the U.S. Commerce Department's Bureau of Economic Analysis. With the eruption of the banking panic and crisis of September-November 2008, during Bush's last months in office, the annual budget deficit ballooned in 2009 and 2010. When Bush came into office the U.S. federal government debt was $5.6 trillion, according to the Federal Reserve, and is now estimated at $14.3 trillion. About $9 trillion was added over the past decade to the debt as a result of accumulated annual deficits. Public workers, retirees on Social Security and Medicare, and the working poor getting Medicaid are not the fundamental causes of these deficits and the debt. The roughly $9 trillion run-up in the deficits-debt over the past decade is attributable to the following causes:

 

·   escalating defense and war spending

 

·   the Bush tax cuts

 

·   collapse and slow growth of tax revenues due to recession and poor chronic job growth

 

·   tax avoidance and tax fraud by wealthy investors and multinational corporations

 

·   the bailouts of banks and corporations associated with the recent economic crisis

 

·   and runaway health care costs' impact on Medicare-Medicaid

 

Escalating Defense and War Spending

 

According to the U.S. Bureau of Economic Analysis, which maintains the national income accounts for the federal government, defense spending in 2001 was $342 billion. By 2010 it was $698 billion, more than double. That's an annual inflation rate of 8.2 percent, more than 4 times the average of 2 percent for the entire economy—which results in excess spending of $1.526 trillion over the decade. The U.S. Congressional Budget Office (CBO) estimates the direct cost per U.S. soldier in Iraq-Afghanistan is $525,000 each and further claims that if U.S. troop numbers are reduced to the 60,000 minimum expected to remain as the U.S. pulls out by 2015, the costs will still continue to rise roughly another $600 billion.

 

The $1.526 trillion requires additional borrowing of that amount by the U.S. government. That means a further cost in terms of interest payments on the debt. Since defense spending runs around 20 percent of the U.S. annual budget, we can add another $352 billion over the past decade to the $1.526 trillion. That raises the cost of the wars and Defense Department cost over-runs to $1.878 trillion.

 

Even so, that's not the total cost of defense and the wars. There's the cost of Homeland Security, about $40 billion a year for each of the past ten years. The cost of nuclear weapons resides in the Energy Department budget, not in Defense. That's more. Then there are the costs of the CIA and the military component of USAID. Let's not forget the future costs for veterans' medical, disability, and education benefits when they return, also in other federal department budgets. And not least, there's the estimated $50 billion plus a year on black budget projects involving super-secret military research and development that isn't indicated in the federal budget. All that over a decade conservatively adds up to a total of $3.078 trillion.

 

The Bush/Obama Business Tax Cuts

 

Between 2001 and 2004 George W. Bush pushed bills through Congress every year that cut taxes on wealthy households and investors capital gains, dividends, and inheritance. According to the Center for Budget and Policy Priorities, the total tax cut over the decade amounted to $3.4 trillion and 80 percent of that, or about $2.7 trillion, accrued to the top 20 percent households and about half that to the wealthiest 5 percent. These tax cuts were extended by Obama and the "Teapublicans" last December for another two years, at a further cost to the U.S. Treasury of an estimated $400 billion. Add to this the approximately $320 billion in tax cuts passed in Obama's 2009 stimulus bill and another $90 billion in Bush's economic stimulus package in the spring of 2008. That's a total of about $3.5 trillion in tax cuts over the preceding decade lost to the U.S. budget.

 

The conservative estimate of $3.5 trillion tax revenue lost to the U.S. budget, plus the $3.0 trillion in war and defense cost run-ups, amounts to a $6.5 trillion contribution to the $14.3 trillion debt from these two sources alone. That's more than 70 percent of the $9 trillion debt added since 2000.

 

Corporate Contribution

 

A recent report by the U.S. Commerce Department, a pro-business source, indicated that big multinationals like General Electric, Caterpillar, and big tech and drug companies over the past decade reduced their U.S. work forces by 2.9 million while increasing their offshore jobs by 2.4 million. The 2.9 million job loss equates to an average annual loss in total income in the U.S. Treasury of around $25 billion a year. That's a total revenue loss of about $250 billion over the past decade alone. That total does not include the loss of additional state and local tax revenue, or the additional federal revenue sharing with the states that was required by the federal government to make up for the state-local tax revenue loss.

 

But an even greater loss is the result of these same multinational corporations refusing to pay their required foreign profits tax. By means of yet another loophole, with the exception of 2005, for more than a decade now they have been deferring paying taxes on foreign profits earned from their offshored operations. The Financial Times estimated that, as of mid-year 2010, non-financial U.S. multinationals were sheltering $1 trillion in taxable revenue in their offshore foreign subsidiaries, refusing to pay their share of taxes on it. Adding the preceding tax revenue losses due to multinationals offshoring of 2.9 million jobs, manipulation of loopholes, and refusal to pay taxes on foreign earnings according to U.S. tax law—the total revenue loss to the U.S. government comes to more than $1 trillion.

 

The two remaining major causes of the debt and deficits today are the recent bailouts of bankers, corporations, and investors by the Obama administration, and the accelerating rise in health care costs for the government (and all of us) that have driven the cost of Medicare, Medicaid, and prescription drugs to record heights.

 

Concerning bailouts, the 2009 stimulus provided $260 billion in subsidies to the states and cities in 2009/2010. However, it didn't resolve the state-city fiscal crisis which continues to worsen, and now that there is no more stimulus, the fiscal crisis of local government grows progressively worse. Other direct bailout costs include $500 billion in direct grants and aid to major corporations, like AIG, GM, the government agencies, Fannie Mae/Freddie Mac and others. That's at least $760 billion in direct contributions to the deficit and debt.

 

Of course, the banks got bailed out as well. To the tune of $9 trillion. But that was done through the U.S. central bank, the Federal Reserve, largely by means of 0.25 percent free money loans. But that $9 trillion does not show up in the federal budget or add to the total federal debt. It's another set of books.

 

The last major cause of federal deficits and debt over the past decade is the behavior of the health insurance companies, the for-profit hospital chains, and the prescription drug companies. George Bush's contribution to price gouging by this rentier-capitalist cabal was to pass a drug company subsidy bill and then make sure it didn't get funded. That required borrowing and thus a further debt run-up of at least $500 billion and rising. Add to that another $200 billion in excessive price driven increases in Medicare and Medicaid costs to federal and state governments over the decade, and the total is around another $1.5 trillion.

 

In conclusion, escalating war spending, corporate tax cuts, shelters, fraud, bailouts, and runaway health costs make up the fundamental causes of the deficits and, in turn, account for the $9 trillion added to the U.S. federal debt.

Z


Jack Rasmus is the author of Epic Recession: Prelude to Global Depression and the forthcoming Obama's Economy: Recovery for the Few (kyklosproductions.com and jackrasmus.com).