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By Cutting Taxes on the Rich, We've Incentivized Greed--How Do We Return to Fairness?

The Right wants to return to the "happier days" of the 1950s--but forgets that one of the main reasons for that era's prosperity was very high taxes on the wealthy.

It is curious that the American Right, which waxes nostalgic for the happier days of the 1950s when the United States was supposedly more moral and more united, ignores one of the central reasons behind that middle-class era: very high taxes on the rich.

Granted, some on the Right may love the Fifties because it was a time of racial segregation and second-class status for women. But what arguably made the era work was the fact that the U.S. tax structure “disincentivized” greed by ensuring that excess wealth was mostly recycled back into the Treasury for use building the nation and supporting research and development.

During Dwight Eisenhower’s presidency the top marginal tax rate – what the richest Americans paid on their top tranche of income – was around 90 percent. In the 1960s, under John F. Kennedy, that was lowered to around 70 percent, but that rate still meant the rich had a limited incentive to be greedy since they wouldn’t get to keep most of their extra money.

All that changed with Ronald Reagan’s presidency and his slashing of the top marginal tax rate by more than half (before it was adjusted upward slightly late in Reagan’s years and then during Bill Clinton’s presidency before being reduced again to 35 percent under George W. Bush).

Various tax loopholes and lower rates for capital gains also have let many of the richest Americans enjoy tax rates about only half of even those lower marginal income tax rates. Billionaire Warren Buffett has famously described paying a lower tax rate than his secretary, meaning that he and others in his category get to keep about 80 percent of what they make.

In other words, the American tax structure has been roughly turned on its head. From the rich paying between 70 and 90 percent on their top income, some now pay 20 percent or less, which means there is a much bigger incentive to be greedy.

Arguably, it was that incentivized greed – more than any of the social movements like civil rights for blacks and equal rights for women – that eradicated the rhapsodized Fifties and the middle-class culture that it represented in the nostalgic view of many Americans.

So, it’s ironic that the defense of lower tax rates for the rich is at the heart of the Right’s current political agenda. Some leading Republicans have even suggested that “tax reform” should impose at least some income tax on the poor and working class so the tax rates on the rich can be lowered even more.

It’s ironic, too, that the core of today’s economic crisis is that American bankers became so excessively greedy – spurred on by the prospects of “earning” bonuses in the tens of millions of dollars and keeping nearly all that money – that they blinded themselves to the risks from exotic financial products built on an unsustainable housing bubble.

If the tax rates had been kept at Eisenhower or Kennedy levels, not only would there have been plenty of money to keep the United States modern and strong but there likely would not have been the kind of financial crisis that, since 2008, has cost millions of jobs and required massive government borrowing to bail out the greedy bankers.

Thus, in a variety of ways, the Right’s orthodoxy of low taxes on the rich (or the “job creators,” as Republican wordsmiths prefer) has been a major driver in creating today’s massive federal debt and in savaging the middle class.

Two Societies

The data is now clear that the last three decades have witnessed a divergence between haves and have-nots unprecedented in the United States, at least since the lead-up to the Great Depression when a similar era of income inequality set the stage for financial disaster.

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