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Meet the $700 Billion Club

November 15, 2010

For most of the 1990's, the top income earners in the United States paid a 39.6% tax rate during a time which produced a booming economy for them - and pretty much everyone else. Now, after the Bush tax cut windfall for the wealthy produced a decade of falling household incomes, skyrocketing deficits and record income inequality, Republicans are waging an all-out war to prevent a return to the modestly higher upper income tax rates of the Clinton-era. To give another budget-busting payday to the wealthiest 2% of Americans, the GOP will present the other 98% with the $700 billion tab.
Meet the $700 Billion Club.
For starters, its members are not small business owners. Of course, you'd never know it listening to the myth-makers of the GOP. Last year, Senate Minority Leader Mitch McConnell said of President Obama's proposal to let the Bush tax cuts expire, "I don't think raising taxes is a great idea, and when our good friends on the other side of the aisle say raising the taxes on the wealthy, what they are really talking about is small business."
But as CNN concluded in October 2008, "fewer than 2% of small business owners would pay more under Obama's plan." But in case there was any doubt about the Republicans' deception on the point, the nonpartisan Tax Policy Center quickly put it to rest:

Out of 34.7 million filers with business income on Schedules C, E or F, 479,000 filers fall into the top two brackets, according to an analysis of projected 2009 filings by the nonpartisan Tax Policy Center.
The other 34.3 million - or 98.6% - would be unaffected by Obama's proposed rate hike.

With that talking point demolished, Republican leaders turned to another. President Obama, the GOP Pledge to America declared, "also wants to raise taxes on roughly half of small business income in America." Just days after Bloomberg, New York Times, the Washington Post, TPM and CBPP joined the long list of those debunking the Republican duplicity, Keith Olbermann in a special report destroyed it completely. It turns out that a host of multi-billion dollar firms filing as so-called S corporations, including Bechtel, Coors, PriceWaterhouseCoopers and many more, fall into the GOP definition of "small business." As Paul Krugman put it in August, Republican "politicians are eager to cut checks averaging $3 million each to the richest 120,000 people in the country."
To be sure, the $700 Billion Club has never had it better. After a brief hiccup during the deepest trough of the Bush Recession, the gilded class is again accumulating wealth at stratospheric levels.
A report from the Center on Budget and Policy Priorities (CBPP) found a financial Grand Canyon separating the very rich from everyone else. Over the three decades ending in 2007, the top 1 percent's share of the nation's total after-tax household income more than doubled, from 7.5 percent to 17.1 percent. During that time, the share of the middle 60% of Americans dropped from 51.1 percent to 43.5 percent; the bottom four-fifths declined from 58 percent to 48 percent. As for the poor, they fell further and further behind, with the lowest quintile's income share sliding to just 4.9%. Expressed in dollar terms, the income gap is staggering:

Between 1979 and 2007, average after-tax incomes for the top 1 percent rose by 281 percent after adjusting for inflation -- an increase in income of $973,100 per household -- compared to increases of 25 percent ($11,200 per household) for the middle fifth of households and 16 percent ($2,400 per household) for the bottom fifth.

To be sure, the deficit-exploding Bush tax cuts played an essential role in fueling the gap.
In February 2004, President Bush proclaimed, "we cut taxes, which basically meant people had more money in their pocket." Of course, some people are more equal than others.
As the Center for American Progress noted at the time, "for the majority of Americans, the tax cuts meant very little," adding, "By next year, for instance, 88% of all Americans will receive $100 or less from the Administration's latest tax cuts."
But that's just the beginning of the story. As the CAP also reported, the Bush tax cuts delivered a third of their total benefits to the wealthiest 1% of Americans. And to be sure, their payday was staggering. The Center on Budget and Policy Priorities detailed that by 2007, millionaires on average pocketed $120,000 from the Bush tax cuts of 2001 and 2003. Those in the top 1% stashed an extra $45,000 a year. As a result, millionaires saw their after-tax incomes rise by 7.6%, while the gains for the middle quintile and bottom 20% of Americans were a paltry 2.3% and 0.4%, respectively.

And as the New York Times uncovered in 2006, the 2003 Bush dividend and capital gains tax cuts offered almost nothing to taxpayers earning below $100,000 a year. Instead, those windfalls reduced taxes "on incomes of more than $10 million by an average of about $500,000." As the Times explained in a jaw-dropping chart: "The top 2 percent of taxpayers, those making more than $200,000, received more than 70% of the increased tax savings from those cuts in investment income."

(Click here for full size image.)

So it should come as no surprise, as Vermont Senator Bernie Sanders lamented last month, that under President Bush the 400 richest taxpayers saw their tax rates halved - and their incomes double.

As the New York Times revealed in October 2009, by 2007 the top 1% - the 1.5 million families earning more than $400,000 - reaped 24% of the nation's income. The bottom 90% - the 136 million families below $110,000 - accounted for just 50%.

But with the devastating Bush recession, the upper class joy ride hit a speed bump. As the media a year ago lamented the downturn's impact on the tragically rich, David Leonhardt and Geraldine Fabrikant of the New York Times concluded concluded, "After a 30-year run, [the] rise of the super-rich hits a sobering wall."

They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.
But economists say -- and data is beginning to show -- that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.

As it turned out, that time wasn't just soon. It's already here.
The Los Angeles Times announced the return of record-setting income inequality in an article titled, "Millionaires Make a Comeback." After getting pummeled as Wall Street plummeted in 2008, the rich have begun to recoup their losses. The short period of Gilded Interrupted is over:

In 2008, as the financial crisis raged, the stock market hit bottom and the Great Recession ate into the economy, the number of millionaires in the United States plunged.
But last year the number of millionaires bounced up sharply, new data show.
And after that decline and rebound, the millionaire class held a larger percentage of the country's wealth than it did in 2007.
"It's been a recession where everyone took a hit -- with the bottom taking a bigger hit," said Timothy Smeeding, a University of Wisconsin professor who studies economic inequality. But "the wealthy alone have bounced back."

Bounced back, it turns out, with a vengeance. The Boston Consulting Group found that "the number of U.S. households with at least $1 million in "bankable" assets climbed 15% last year to 4.7 million after tumbling 21% in 2008." Despite there being 10% fewer millionaires than in 2007, the percentage of Americans' total wealth held by those households was slightly higher, growing to 55%.
Writing in the Washington Post, Ezra Klein neatly summed up the dynamic which has restored income inequality to record highs:

The basic story here is that assets have recovered so much more quickly than the broader economy that in 2009, "the millionaire class held a larger percentage of the country's wealth than it did in 2007." In other words, inequality has actually gotten worse. If you want to see why that's unexpected, check out the chart I cadged from the Center for Budget and Policy Priorities: After the Great Depression, inequality fell and didn't recover until 2007. That's about 80 years. After the Great Recession, inequality fell and didn't recover until ... 2009? That's one year.

And still, Republicans insist the Treasury must be starved on their behalf. The price tag for Americans' largesse for the wealthiest who need it least? $36 billion in 2011 alone, and $700 billion over the next decade.

To help sell these lottery-style winnings for the wealthy, Republican leaders including Mitch McConnell, John Boehner, Judd Gregg, John McCain, Tom Coburn, Carly Fiorina, Marco Rubio and an endless parade of others insisted that the Bush tax cuts did not contribute to the mushrooming national debt and that "tax cuts pay for themselves." An unapologetic Senator-elect Rand Paul at least had the honesty to declare who he supported in the one-sided class war:

"There are no rich. There are no middle class. There are no poor...We all either work for rich people or we sell stuff to rich people. So just punishing rich people is as bad for the economy as punishing anyone. Let's not punish anyone."

Of course, with the overall federal, state and local tax burden at its lowest level since 1950, no one is talking about punishing anyone. At a time of war and red ink, bumping upper crust tax rates by four percent to still-historically low levels isn't punishment, but basic fairness and common sense.
Nevertheless, President Obama and some of his Democratic allies are wavering on even that small step. While the White House continues to send signals that a temporary extension of tax breaks for the $700 Billion Club is a subject for negotiation, New York Senator Chuck Schumer on Sunday offered a compromise. "It would be much better," Schumer suggested, "to raise the limit to a million dollars."
As it turns out, polls show that the American people - including those who voted on Election Day - are just fine with letting the Bush tax cuts expire for those families earning over $250,000 a year. But each passing day, that seems less likely.
Which would mean that the $700 Billion Club would emerge as the big winner. Again.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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