Samuel Cohn: Global Social Trends

The Tax Revolt: How the Conservative Middle Class

Became A Serious Problem for Capitalism

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We normally think of conservative people as being pro-business and pro-capitalist. We normally think of small businessmen as being pro-business and pro-capitalist. For a long time that was true.
   

The recent rise of the tax revolt has changed all that. 
     

The conservative middle class in America now hates big government. The conservative middle class in America wants to see tax cuts. The conservative middle class is sick of politicians wasting public monies. They would like to see those funds returned to businesses and individual people where the money would go into the economy and create jobs. This sounds like it would be good for the economy and good for capitalism. 
   

In fact, the tax revolt is one of the biggest threats that capitalism faces today. This is certainly not the intention of anti-tax conservatives. These people are completely pro-small-business and pro-economic-growth in their hearts and intentions. People who want to shrink the state do this out of good intentions. They do this because they think it will make America more effective and more prosperous. They could hardly be more misguided.

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The analysis that follows comes from one of the greatest intellectual misfits of the 1970’s: James O’Connor. James O’Connor was one of those idiosyncratic geniuses whom everybody refused to believe in his time. He considered himself a Marxist, so middle-of-the-road and conservative social scientists didn’t even read him. He had little interest in the clichés of 1970's leftists. The Marxists of the time obsessed over all-powerful American imperialism and the economic power of large American manufacturers. When was the last time the United States was all powerful in foreign policy, with American factories raking in zillions in profits? 
   

O’Connor said three things that nobody wanted to hear.
Ecological issues were going to turn into a bigger issue than labor issues.
The social class that would matter in future politics was the conservative middle class and not a leftist working class.
Government budgetary issues were going to be a key issue in the future of capitalism.
   

He was right on all three points. Everyone now knows that ecological issues are one of the most serious issues facing the planet today. The other points are less well accepted but just as important.
O’Connor’s Argument.

   

James O’Connor argued that government spending is essential to the growth of capitalism. If the government does not make a number of critical purchases, then economic growth stalls. Without big government there is
a) No defense.
b) No education
c) No infrastructure and
d) Very little scientific research.
     

Let’s imagine that education, infrastructure and scientific research are useless – or if you like, education, infrastructure and scientific research would be picked up by the private sector if government funding disappeared. Both O’Connor and I would disagree with that. However, let’s assume this so that the present argument can be made in the most conservative way possible.
     

Imagine the only thing a government does that is useful is to provide a strong national defense. The government is the only body that can provide a strong national defense. Fortune 500 companies and businesses do not create armies and navies. They may sell equipment and weapons to armies and navies. But corporations do not fight wars by themselves. Selling weapons is profitable but fighting wars is not. You invest in soldiers and materiel that get killed or blown up. No one makes money paying for soldiers and materiel that get blown up. Governments create national defenses as a service to their nation. However, doing so is an expensive, loss-making proposition. 
     

Defense is absolutely essential for the survival of capitalism. American corporations need to protect their raw material supplies overseas. Corporations need to protect their production facilities overseas. In order to trade, corporations need to have the seas and the skies protected against pirates and raiders. Diplomatically, corporations need to be protected against the rise of hostile foreign governments who could close off whole parts of the world to American commerce. And of course, American businessmen need to be safe when they travel, even if they are only travelling for pleasure.
     

Technically, other forms of government spending are useful too. Imagine if there were no public schools or universities, no police forces, no fire departments and nobody to build or plow the highways? But even if defense spending were the only form of spending that mattered, spending on the protection of American interests overseas is obviously a crucial national imperative. 
     

If government spending is so useful, why do middle class conservatives hate the government so much? Why are conservatives so reluctant to pay taxes?
     

The short answer to this is that the middle class has historically been stuck with paying the bills for the federal government. O’Connor showed how the middle class provides a disproportionate share of the revenue taken by the government, while the benefits of government spending have gone to people who are not the middle class. Small business and non-poor individuals pay the most and get the least, while other groups pay the least and get the most. When one thinks of paying the least and getting the most, the first image that comes to mind is welfare recipients – or in the minds of some people, illegal immigrants. (Many illegal immigrants pay a lot of taxes, notably sales taxes, but take very few government benefits. This makes immigrants net contributors to the government pot.) The argument that the American native-born poor get more benefits than they pay in taxes is a clearer and more obvious case. 
     

What people miss is that large businesses, such as Fortune 500 companies and mega Wall Street banks also pay very few taxes and receive large amounts of benefits. O’Connor calls such companies monopoly capital.
     

Monopoly capital pays few taxes because they are entitled to do legally. Large corporations have access to a wide variety of exemptions of which they quite rationally make full use. The New York Times listed no fewer than eighteen Fortune 500 companies that paid no income tax between 2008 and 2015. They include industrial giants such as General Electric and Duke Energy. Large companies also shield substantial proportions of their income from taxation by moving their money overseas. These include companies like Apple, Microsoft, Coca-Cola and Abbott Laboratories. Internet giants such as Google and Amazon benefit from the low rates of taxation on e-business. (https://www.nytimes.com/2017/03/09/business/economy/corporate-tax-report.html) 
     

There is nothing immoral or shocking about this. Nearly all taxpayers make the most of the deductions to which they are legally entitled. I am no exception to this rule. When I do my own personal taxes, I take every deduction I have the right to take. Fortune 500 companies and large banks simply have the right to take more breaks than do the rest of us.

 

However, if large corporations have their income shielded or partly shielded from taxation, this means that the expenses of the federal government have to be paid by other people. The poor pay very few taxes. They simply don’t have any money. 
     

So, who does that leave to pick up the tab? There are only two groups left with money that could be tapped: small businesses and rich individuals. These are the people who pay for the federal government. Small businesses get soaked. Rich individuals get soaked. For all the discussion of the unfairness of the “top one percent”, the top one percent actually pays plenty of taxes. When Bill Gates was at Microsoft, his company paid relatively a very small share of its income in taxes. Bill Gates in contrast probably paid and still pays a fat share of his income in taxes. What happens to Bill Gates happens to doctors, lawyers, independent accountants, and small business owners.
     

Conservatives picked up on the fact they were being soaked a little faster than other people did. They were complaining about taxes for a long time, long before the Tea Party was a reality. Liberals blew them off. They were wrong for doing so.
     

Although small businesses and rich individuals pay the lion’s share of federal taxes, they get a small percentage of the benefits of government expenditure. Consider:

1. Most government procurement goes to large companies. This is particularly the case in defense, where small operators are in no position to build sophisticated large-scale armaments. 

2. Most notably large companies get bailed out by the government when they have financial troubles. Small businesses and individuals are left to go bankrupt. In the most recent financial crisis, the federal government provided millions to protect General Motors and the Wall Street banks. In contrast, thousands of small firms were allowed to fail. Even greater numbers of small businessmen lost their homes. 

3. Most regulations are written with significant input from lobbyists who work for particular large corporations. There are “small business associations”, but these are divided among themselves and have to represent very heterogenous populations of firms who do not share common interests.  
   

The bottom line is small businesses, wealthy individuals and the middle class are paying disproportionately large amount of the expenses of the government, while receiving a disproportionately small amount of government benefits. This makes taxpayers resentful of government bureaucrats, resentful of welfare programs and resentful of government waste. 
     

Worldwide, the middle class tolerated this for a long time. Recently they have lost patience. Around the world, conservative voters are putting pressure on politicians to shrink the state and cut taxes. This is not just an American phenomenon. It is not just the Tea Party. It is not just the result of propaganda by Fox News or electoral machinations by the Koch Brothers. This is happening globally in nations with a wide variety of media profiles and a wide variety of mechanisms for funding elections. Generally, the parties that respond to these voters are conservative parties, or centrists in coalition with conservatives. Sometimes these conservatives also have ethnic agendas. Sometimes they don’t. 
     

The table below shows the nations that have lowered personal income or corporate tax rates since 2010. At least 28 nations reduced personal income tax rates. Over forty nations reduced the corporate tax rate. Both rich and poor countries cut their tax rates. Tax cutters can be found in the Americas, in both Eastern and Western Europe, in Sub-Saharan Africa, the Middle East and Asia. Shrinking the state is a global phenomenon.  
 
         

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If government expenditure is generally useless, then these shrink-the-state initiatives would be harmless or even beneficial. However, if government expenditure actually does something useful, then the shrink-the-state movement is intrinsically dangerous. Shrinking America’s military reach seems unwise in a world that is increasingly hostile to American interests. Reducing expenses on education does not seems wise in a world where economies depend on technological excellence. Reducing expenditure on law enforcement seems unwise in a world with increasing gang violence. Reducing expenditure on ecological preservation seems unwise in a planet with dwindling natural resources and increased environmental threats. Reducing expenditure on public health seems unwise in a world where germs are becoming steadily antibiotic resistant and new diseases are coming into being. 
     

Will all of this lead to the end of capitalism tomorrow? Of course not!
     

The economy will still lurch along. Private property will remain in the hands of its owners. Life will continue to be more or less normal.
     

But a growingly weak economy means a growingly weak state. A nation that cannot defend itself means a nation that has to cede to the policy wishes of foreign powers. Both economic and political dominance will shift to those governments that are better financed. Stodgy economic growth will just lead to stagnation.
     

Death from economic stagnation is slow. Flint, Michigan used to be a wealthy, prosperous city. Now it is a poverty zone with few economic prospects. Flint, Michigan is still better off than the slums of Rio de Janeiro, or the desert lands of Northern Chad. Houses still have flush toilets, and both doctors and hospitals are available. But Flint is poorer now than they were at mid-century. 
     

I would rather live in Silicon Valley than in Flint. And if higher taxes are necessary to create the societal and scientific infrastructure needed to do that, I would call the taxes a fair trade.

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