Written by G. Ross Stephens   

The class war is over. The wealthy and corporate elites won. Over the last three decades wealth and income were redistributed using the tax code. Now, with their mantra of ‘No new taxes’ (meaning don’t tax our source of campaign funds) and facing a national debt crisis, Republicans are keeping the nation in political turmoil so they can regain total control of Congress and the Presidency.

Fiscally, the situation was different during the post-World War II era down to fiscal year 1981 (President Carter’s last budget year) when wealth, income, and corporations were taxed. Most corporations were national and subnational. Through Democratic and Republican administrations, we were outgrowing the national debt. Excepting a brief hiatus under President Clinton, since Ronald Reagan was inaugurated: taxes on corporations and the wealthy were radically reduced and abated with all sorts of giveaways; foreign policy and the economy militarized; national defense and other services privatized; as the domestic infrastructure deteriorated and the national debt exploded.

Between 1946 and FY1981, in 2007 constant dollars (taking out inflation), the national debt declined at a rate of 0.6 percent a year; reducing the national debt from 128.3 percent of the total economy to 32.5 percent – a three-fourths decline as percent of gross domestic product (GDP). This was a time-period when federal revenue rose at an annualized rate of 3.3 percent. Spending increased at a slower rate, 2.7 percent annually, and the economy (GDP) grew slightly faster than revenue, 3.4 percent per year. Small annual alterations can make a huge difference over time (Figure 1).

After 1981, the ‘Greed is good era’ resulted in a three-fifths decline in the annual rate at which revenue increased, down to 1.3 percent annually as expenditures were maintained at the same level causing the national debt to detonate to 6.5 percent annually. As a percent of the economy, debt reversed from declining 3.8 percent per year during the earlier time-period to rising at a rate of 3.7 percent. Keep this up and very soon the public debt will reach its 1946 level with no revenue to reverse the trend (Figure 2).

Analyzing annual change in federal expenditures, 1946 through 2010, indicates no relationship between spending and GDP during the year the change occurred. But when lagged one year there is a 26 to 27 percent positive correlation; lagged two years, this positive relationship drops to about 11 percent; and lagged three years, the correlation turns negative to a minus 13 percent. Either the stimulus lasts only two years after it is passed or other factors are more important.

Trend analysis for this 65 year period indicates annual revenue collection is more closely associated with the ups and downs of the economy, more important, and longer-lasting than expenditures, whether or not that change results from increases in GDP or increasing effective tax rates. Both during the year an increase or decline occurs and lagged one year, the direct association of revenue collection with GDP is in the 23 to 25 percent range; lagged two years, 48 to 49 percent; lagged three years, 20 percent. These findings are statistically valid (to the 95 to 99 percent level) and reveal highly significant relationships given the comprehensive character of these data (Appendix Table 1).

Federal revenue collection is at least three-times more important than expenditures as an economic stimulus. It takes two to four years for a change in fiscal policy to work its way through the economy, but the second-order consequences, like debt and failure to maintain domestic infrastructure, can last for decades.

American experience contradicts Republican justification for giving tax breaks to the wealthy; so-called ‘supply-side economics.’ The theory governments give tax breaks to the wealthy, they invest in the means of production, employment and government revenue increase, and everyone benefits. . . . It doesn’t work.

Corporations now span multiple political jurisdictions. Business can invest anywhere taxes are low and labor cheap. They trade governments off against one another usurping governmental sovereignty. With the Supreme Court decision in Citizens United v. Federal Election Commission, 2010, multinational and even foreign corporations with operations in the U.S. can vote with undisclosed amounts of their money in our elections.

In the U.S., public authority is so fragmented – both horizontally and vertically – geographically and functionally separated among nearly 90,000 miniscule polities that are unable to compete with functionally integrated private corporations spanning multiple jurisdictions. At least half of the nation’s tax base has been effectively excluded from the tax rolls given influence of money in elections.

There is no way to solve the national debt crisis without imposing taxes on corporations, the wealthy, and probably everyone else. As Alexander Hamilton noted in 1787, without adequate revenue “. . . one of two evils must ensue; either the people must be subjected to continual plunder . . . or the government must sink into a fatal atrophy, and, in a short course of time, perish.” (Federalist No. 30)

Since the end of World War II, American history contradicts the tax stance of corporate vassals in Congress. An old Chinese proverb is close to what Elinor Ostrom contended for her 2009 Nobel Prize in economics,

The Law will hang the man,
Who steals the goose from off the Common.
But that same Law will let the rascal loose,
Who steals the Common from the goose.