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The need for tax reform.

In this space in the September 1984 issue of MR ("A Lesson from History") we posed the following questions:

Can we imaging a new New Deal that would have a better chance of survival than the old New Deal? What would it look like? Who would be its friends and who its enemies? What would be its priorities? Its relation to existing parties? Would it need to from its own political party?

These are not purely theoretical questions. They arise out of own own country's unique historical experience. We hope to explore them, along with other related questions, in future issues of MR.

The publication in this issue of Craig Medlen's article "Corporate Taxes and the Federal Deficit" provides a natural opening to discuss one of these related questions, namely, the kind of tax policy which might or ought to be a central feature of a new New Deal in our day.

Boiled down to its barest essentials, Craig Medlen's thesis is that in an advanced capitalist society the capital accumulation (savings-and-investment) process is always in danger of bogging down. The reason is that capitalists (individual and corporate) receive the lion's share of income and normally save a large, and as their incomes grow an increasing, part of what they take in. It these savings are not returned to the income stream in the form of new investments, the result is a reduction in the demand for capital goods (raw materials, machinery, etc.) followed by unemployment and a cumulative shrinkage in demand for both consumption and production goods. This process of contraction will continue until total income has been reduced to the point where savings are no longer in excess of attractive (i.e., profitable) investment opportunities. As much experience in the last half century demonstrates, this means that the economy can limp along for extended periods with heavy unemployment and much idle productive capacity. In fact, during that whole period it has only been during wartime that we have had anything that could rasonably be called full employment and capacity utilization of plant and equipment.

According to this analysis, the dilemma of the mature capitalist economy is that it has a potential for accumulation which is far greater than its ability to make profitable use of the additional capital that realization of this potential would provide. Moreover, as the economy grows over time, as income rises and the accumulation potential increases, the dilemma tends to become steadily more acute. Given this situation, the logical course for the state in a mature capitalist society would be to implement policies designed to regulate the macro-variables of the system in a way that would permit the accumulation process to go forward at a pace both sustainable and consistent with the reasonably full utilization of available human and material resources.

Craig Medlen's argument is that because of the exigencies of the New Deal and the Second World War (prolonged by the Korean war) the United States entered the 1950s with a tax structure which, while not specifically designed to facilitate the accumulation process, was at least not in blatant contradiction with its requirements. Corporation taxes were high both as a proportion of corporate profits and as a proportion of federal revenues, and capital accumulation was proceeding relatively smoothly and rapidly. Under these circumstances, and given the generally reactionary political climate of the times, the owners and managers of the big corporations, consolidating their control over the government through the Eisenhower administration, set about toning down or reversing the economic policies inherited from the 1930s and 1940s. Taxation was of course high on the agenda. Beginning in the 1950s and right down to the present time, as Medlen convincingly demonstrates, the burden of taxation on corporations has been steadily reduced. And it should be added, though this is not part of his story, that at the same time the whole tax structure of the country, including the state and local levels, has been shifted in a regressive direction, culminating in the orgy of tax bonanzas for the rich handed out by the Reagan administration with the help of a complacent Congress.

There is no implication in all this that the increasingly regressive nature of the U.S. tax structure was the cause of the petering out of the long wave of expansion that set in during the 1940s and lasted into the 1970s. As we have pointed out many times in this space, the operative forces here were numerous and powerful, highlighted by a worldwide investment boom and which was itself rooted in the specific economic and sociopolitical conditions created by the Second World War. It was the exhaustion of these forceS, not any particular institutional factors or governmental policies, that ushered in the new period of stagnation in the 1970s. But when stagnation finally did set of again, the tax structure in force played an increasing role in complicating and frustrating government efforts to devise an effective counteracting strategy.

Any such strategy of course must focus on pumping up demand for goods and services--either consumer goods or producer goods or both. Ironically, many of the regressive tax changes of the last quarter century have been ostensibly directed at precisely this goal. Some of them--permitting faster depreciation of capital assets, and granting investment tax credits--are supposed to operate directly on investment through making it more profitable. Others, of the kind particularly favored by the Reagan administration, are supposed to operate indirectly by giving more money to the rich who will then presumably save and invest more. Craig Medlen argues, we think correctly, that tax breaks of the firt kind, while increasing corporate cash flow and hence the financial clout of the corporations, are not likely to result in much investment; and of course breaks of the second kind (those that leave more money in the pockets of the rich) simply strengthen the stagnationist forces that need to be counteracted. Counteracting stagnation by such means is thus a little like putting out a fire by pouring oil on the flames.

Given these circumstances, the only practical way for the government to pump up demand is to spend more than it takes in, i.e., by running deficits. The stimulating effect of a given deficit, however, is reduced by the dampening effect of a regressive tax structure, i.e., one that transfer income from lower-income people (spenders) to higher-income people (savers). And when, as in recent years, there is a trend toward an increasingly agressive tax structure, it follows that deficits have to grow just to maintain a given level of stimulation. Pumping up demand through deficits is thus like pumping up pressure in a leaky tire. And if the leak is getting bigger (i.e., if the tax structure is getting more and more regressive), you have to pump harder to stay even and still harder to get ahead.

Keeping this logic in mind, and taking account of the return of stagnation in the 1970s, we should not be surprised by the history of the federal deficit during the last quarter century (see accompanying table). From the modest level of $4.2 billion in the early 1960s (0.74 percent of GNP) the deficit steadily grew to $122.1 billion in the early 1980s (4.08 percent of GNP). The big increases naturally concide with the return of stagnation in the 1970s. But despite their enormous magnitude, these growing deficits proved quite incapable of overcoming stagnation which persisted into the 1980s, and even today, after nearly two years of cyclical upswing, is reflected in an unemployment rate of 7.5 percent and a manufacturing capacity utilization rate of only 82.6 percent (the figures are for July, the latest available at the time of writing).

This is not the place to attempt to deal with all the implications of continuing to rely on big and growing deficits to counteract stagnation. We have touched on some of the issues involved in the April 1984 issue of MR ("The Federal Deficit: The Real Issues"), putting particular emphasis on an aspect which is usually neglected in media discussions of the problem, namely, the effect of deficits, combined with high interest rates, in expanding the relative share of federal expenditures devoted to paying interest on the national debt. Noting that the growth of these interest payments in recent years has far exceeded the rate of increase of total federal expenditures, we drew the logical conclusion:

This trend is bound to continue if present policies are unchanged. With projected deficits in the range of $200 billion a year, the Congressional Budget Office estimates that the federal debt will climb another $1,000 billion in five years. Assuming interest rates of 10 percent, that would mean an interest burden of $200 billion a year (more than the government now spends on social security). In other words, if present trends continue, the interest share of the budget may before long reach 25 percent--a doubling of that ratio in the next five years compared with a doubling in the preceding ten years.

To grasp the full meaning of this development, one must keep in mind the fact that the national debt (basically in the form of government bonds and notes) is owned for the most part by financial institutions, corporations, and upper-income individuals. These are the recipients of the interest paid on the national debt, while the revenues out of which the payments are made are extracted from the body of taxpayers as a whole, including the vast majority of middle- and low-income receivers. It follows that as long as interest rates remain high, a growing national debt is a most efficient mechanism for redistributing income from the lower to the higher reaches of the income structure.

Clearly, this is an untenable situation which, barring a miracle, is bound sooner or later to culminate in a profound crisis affecting pretty much all aspects of the U.S. economy and society. (It is of course possible--perhaps even probable--that such a crisis will be precipitated even sooner by an international financial/debt panic and/or a collapse of the domestic banking system). When the crisis comes, the stage will be set, as it was in the comparable crisis period of 1929-33, for far-reaching changes at the governmental level. Fifty years ago the result was Roosevelt's New Deal. Our hypothesis is that the next time around could open the way for a New Deal.

What kind of program in the area of taxation would be an appropriate response to the problems facing a government caught up in such an acute crisis? The problem here is obviously not how to reform the U.S. tax code but rather how to change the whole disastrous trend of policy that has prevailed throughout most of the post-Second World War period. What would be need at the very outset would be a dramatic gesture signaling to the population as a whole that an era had come to an end, the era of kowtowing to capital and hoping for trickle-down benefits for everyone else. And for this what could be more appropriate than an immediate announcement of a new beginning consisting of measuring combining symbolic with substantive significance: first, imposition of a steep rise in the rate of corporate income tax; and second, repeal of federal taxes impinging on consumer goods and services. These obviously would not be isolated measures but rather parts of an emergency program which would have the dual purpose of coping with the immediate crisis and pointing the way to a new course for the future.

What kind of additional measures should follow and how soon would depend on the circumstances of the time, but at any rate there should be no attempt to play down the necessity of a sweeping fiscal reform designed not only to eliminate the glaring inequities of the present system but also, and no less importantly, to make it at least possible for the economy to function well enough to meet the basic needs of the population--needs which at a minimum include jobs for those willing and able to work and a decent income and living conditions for everyone.

Our assumption of course is that in a really acute crisis situation, the Congress would be willing to approve New Deal-type legislation designed to mobilize popular support behind an emergency program of survival. The 1933-34 experience supports this assumption. The U.S. ruling class that had governed virtually unchallenged ever since the First World War was shaken to its roots by the intensity of the crisis. Its fondest shibboleths were blown away; its faith in its own system of law and order was undermined; it stood naked and afraid before its own victims. At this crucial juncture Roosevelt perceived as a savior: whatever he proposed was eagerly approved.

In retrospect, it is easy to see that neither the savior nor the victims had any clear idea of what had happened or what to do. The result was a mish-mash of half-baked schemes (such as the National Industrial Recovery Act) and rescue operations (such as the Reconstruction Finance Corporation for the corporations and work relief for the unemployed) which, for all its illogic, at least had the merit of checking the tendency to disintegration and anarchy. A measure of stability was restored, and the stage was set for the great struggles of the next few years with their mixed outcome of necessary partial reforms and overall failure.

History doesn't repeat itself, but it does have a way of recreating its crises and opportunities. As the new period of crisis approaches, it is clear that there are striking similarities to that of 50 years ago. The ruling class, having forgotten what it had only half learned from the Great Depression, is as vulnerable as its predecessor under Herbert Hoover (and it is far from clear that it has the capacity to throw up another Roosevelt). The victims are no better organized or led than they were before. But there is one eifference that could be crucial. An awful lot has happened since roosevelt took office is 1934, and an enormous amount has been learned from this supercharged historical experience. The nature of the world crisis was little understood a half century ago. Today, in contrast, there exists a rapidly evolving body of socially availale knowledge that both clearly identifies this crisis as a crisis of capitalism and begins to direct the consciousness of humanity to the unavoidable question of our time: how to exist under capitalism while at the same time working to replace it with a livable human society?

The ideology of the ruling class naturally rejects this understanding, perhaps more emphatically in the United States than anywhere else. In this it has the support and assistance of a large and vocal intelligentsia which holds all the powerful and prestigious positions in the countryhs cultural apparatuses. But its hegemony is far less solid and complete than it seems to be. Anyone who gets around this country knows that there are subversives everywhere--Marxists of various kinds, let liberals, troubled religionists, radical populists. Most of them keep a low profile under present conditions. But with few exceptions they know the crisis is on the way, and when it comes many of them will be shocked into playing, or at least being ready to play, a more activist role. The resources will then be available from which to recruit not one but many "brain trusts" far more sophisticated and relevant to the needs of the moment that the odd-ball group Roosevelt brought to Washington in the early days of his first administration.

What we are saying is that the crisis will create the opportunity and at least the possbility to launch a new Deal with stronger theoretical underpinnings than the original New Deal and hence a better chance of charting a course that really responds to the interests of the great majority of working people. If we assume an initial period during which the ruling class is too scared and disoriented to mount effective opposition, sufficient successes may be achieved through emergency measures--especially a massive jobs program--to rally the political support necessary to give the new course a meaningful lease on life. Then again, as in the mid-1930s, the stage would be set for great struggles to determine the shape of a longer-run future.

The time to prepare for these struggles is now. They may be on us sooner than you think.
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Publication:Monthly Review
Date:Nov 1, 1984
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