The Betrayal of the American Dream (15 page)

Today young Americans have more education than ever, but it’s not doing them much good. The entry-level hourly earnings of college graduates today are lower than a decade ago: $21.77 in 2010 compared with $22.75 in 2000, according to the Economic Policy Institute (EPI). This decline had little to do with the 2008–2009 recession. EPI data show that earnings of recent grads fell all through this past decade. In fact, entry-level wages have barely risen in the last three decades. While a degree is better than no degree, there are “really no safe havens—even for college graduates,” says Carl E. Van Horn, a professor of public policy at Rutgers University. “Everyone needs to calibrate, to readjust their expectations to meet the harsh realities that show little sign of letting up.”

Even worse, more and more graduates leave college with suffocating debt loads that will make it impossible for many to achieve the lifestyles of their parents.

By the end of 2011, total outstanding student loan debt in the United States totaled more than $1 trillion—more than all credit card debt. The average college student graduates with a debt of about $24,000. Some owe $100,000 or more. Overall, student debt is growing by $100 billion a year. Those with a vested interest assure students they are not merely borrowing money, but investing in their futures. For some, it’s true. For many, it isn’t.

This trend creates a domino effect in the economy. It means that young people, the traditional first-time homebuyers, are unable to obtain a mortgage, hence priced out of the market. This further impacts the already dismal prospects of the homebuilding industry. The previous generation of homeowners, now ready to move up, can’t because the pool of potential buyers for their homes has shrunk. Lastly, there can be no meaningful economic recovery until the housing sector rights itself. Since 2006, the country, under the guidance of Wall Street, Washington, and the super-rich elites, has run up $7 trillion in housing losses. As the Federal Reserve explains in its dry, understated way: “Declines on this scale are unprecedented since the Great Depression.” Only the morbidly optimistic believe that any of this can be fixed within the foreseeable future.

Forty years ago, student loan debt was such a non-issue that it barely registered as a liability in America. The rising cost of college has been a major reason for the growth of student debt, but a parallel cause has been the economic collapse of the American middle class. In years past, many middle-class parents could save enough to pay for the education of their children. No more.

The amount of student debt was relatively unchanged throughout the 1970s, but in the 1980s—a period that coincided with growing problems of middle-income families—student debt began to spike. From 1999 to 2011, it recorded the sharpest rise yet, increasing 511 percent.

The result is that growing numbers of young American college graduates begin their working lives (if they’re lucky enough to have a job) deep in debt and have no money to save, buy a home, or start a business—all the options of earlier generations.

More and more of them default on their loans. The U.S. Department of Education estimated defaults at nearly 9 percent in 2011, but other sources, including the
Chronicle of Higher Education,
say that the actual default rate is much higher, at least 20 percent. Whatever the number, default often makes the plight of borrowers much worse.

In 2005, bowing to the wishes of Wall Street and the financial industry, Congress passed a law that made it much harder for anyone to file for bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act came down especially hard on those struggling with their student loans by making it next to impossible for anyone with college loans to seek relief in bankruptcy court.

Student loans are the only form of debt for which bankruptcy isn’t an option. Instead, borrowers have to undergo a costly process called “loan rehabilitation” run by companies holding the debt, a process that piles on more charges and plunges them even deeper in the hole. “This effectively obligates the borrower to a much larger debt than when the loan defaulted, often double, triple, or even more than the original loan amount,” according to
StudentLoanJustice.org
, a grassroots group.

This means that many Americans who have college loans will never pay them off, says Nicholas Pardini, a Villanova University graduate student in finance who has followed and blogged on the issue. Instead, he says, they’ll be relegated to a “lifetime of debt slavery.”

Debt slavery at home or iSlavery abroad? With those consequences, can we really be proud of the trade policy we’ve been following for the last thirty years?

CHAPTER 5

THE GREAT TAX HEIST

M
ost Americans agree that the rich should pay more taxes. Poll after poll indicates that a majority—including even a few billionaires such as Warren Buffet—would like to see higher taxes on the wealthy.

But it hasn’t happened. And it isn’t likely to happen. The ruling class won’t let it happen.

In today’s America a minority sets policy for the majority, the opposite of what democracy should be.

Two numbers starkly tell the story:

In 1955 the richest Americans—the four hundred households with the highest incomes—paid 51.2 percent of their income in federal taxes.

In 2007, on the eve of the global financial meltdown, the four hundred richest Americans paid 16.6 percent of their income in federal taxes.

The figures do not come from some liberal soak-the-rich think tank: they’re from the Internal Revenue Service, part of the periodic number-crunching that the IRS performs on tax returns.

The victory of the ruling class has been more decisive in setting tax policy than in any other area, with trade running a close second. Three decades of tax cuts have lowered tax rates for corporations as well as the wealthy. Some of those savings have been reinvested in Washington so the victors could hold on to their gains and seek more. It’s no coincidence that campaign contributions and lobbying expenditures have surged in the last generation, and they will continue to escalate.

After buying Congress, the super-rich secured a stamp of approval from the U.S. Supreme Court, which in 2010 gave its blessing to unlimited campaign contributions to a candidate by anyone with the money—individual or corporation. This means it will be harder and harder for the will of the people to override the money machine of the ruling class. A sign held by a protester at Occupy Wall Street in the fall of 2011 framed the issue: I DON’T MIND YOU BEING RICH. I MIND YOU
BUYING MY
GOVERNMENT!

The tax cuts for those at the top have greatly exacerbated inequality in America. Equally devastating is their effect on the deficit and what that will mean to the middle class for years to come. The tax cuts for the wealthy from 2001 to 2008 cost the U.S. Treasury $700 billion in lost tax revenue. To cover the shortfall, Treasury printed more money and added $700 billion to the national debt. Paying interest on that debt will fall on many middle-class taxpayers for decades.

Having added to the national debt, the wealthy are now funding initiatives that decry the deficit and call for cuts in programs that provide safety nets for middle-class Americans such as Social Security and Medicare.

Meanwhile, during the period when the richest Americans received their enormous tax cuts, the taxes on the middle class actually went up. In 1960 the middle 20 percent of U.S. taxpayers paid 15.9 percent of their income in total federal taxes. By 2007, the same group of taxpayers was paying 16.1 percent, according to a report by the Wealth for Common Good, a Boston-based network of business leaders and wealthy individuals that advocates a more equitable tax system.

During World War II, most Americans—both corporations and individuals—contributed a fair share through an income tax that was progressive: those who could afford to pay more did so. The very richest saw their tax rate go up to 94 percent on taxable income over $200,000 (equivalent to $2.5 million in 2011). The theory was that people should be able to get by on $200,000. Tax rates came down somewhat in the 1960s and 1970s, but it wasn’t until the 1980s that the tax bills of the wealthy really began to tumble after Congress converted the tax code into a boutique bank offering all sorts of products tailored just for them.

When Ronald Reagan took office in 1981, the top tax rate on salaries and wages was 50 percent; today it is 35 percent. The tax rate on unearned income—dividends and interest for example—was 70 percent. In 2012 it was 15 percent. The maximum tax rate on income from capital gains was 28 percent in 1980; in 2012 it was 15 percent.

Another dramatic change was the tax cut in 2003 for dividends paid to individuals by corporations. For much of recent history, dividends were taxed at a similar rate as salaries and wages. But before 1980, they were taxed at a higher rate than so-called earned income—money received in wages. The long-held theory was that people who worked for a living should not pay taxes at a higher rate than someone who lived on investment income. George W. Bush’s Jobs and Growth Tax Relief Reconciliation Act of 2003 repealed that notion by slashing the maximum tax rate on dividends to 15 percent. This was a crowning moment in the annals of the great tax heist for the benefit of the wealthy. This one tax cut alone put billions of dollars into the pockets of the richest Americans. According to the Joint Committee on Taxation, which is required to prepare estimates of the implications of tax legislation passed by Congress, the dividend reduction cost the U.S. Treasury more than $100 billion over seven years. Politicians, economists, and media figures are fond of saying that more and more Americans own stock. President Bush later defended his 2003 tax cut on dividends by saying that “American families all across this country have benefited from the tax cuts on dividends.... Half of American households—that’s more than 50 million households—now have some investment in the stock market.”

Bush’s claim is entirely misleading. While 50 percent of Americans own
some
stock, often just a few shares, ownership of shares and equities is concentrated in the hands of the wealthiest Americans. They are the ones who receive substantial dividends from stocks, and they are the ones who benefited overwhelmingly from the dividend rate cut. That tax cut, along with other Bush-era tax favors for the rich, is why the top 1 percent of Americans prospered to such an extreme during the last decade.

Studies by economists Thomas Piketty and Emmanuel Saez have concluded that “two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top U.S. households.” This is why the top 1 percent, they said, “held a larger share of income in 2007 than at any time since 1928.”

If Congress had not enacted these tax cuts, if Congress had not opened new loopholes for its friends, and if Congress had closed a few existing loopholes, we would not be having discussions about the dangers of the federal deficit. Tax cuts didn’t just fatten the bank accounts of rich people—they plunged the nation deeper into the red. As for the folks in Washington who made it all possible—mostly Republicans—they now want working people to cover the costs through reduced Social Security and health care benefits at the same time that they want to guarantee that the rich, the beneficiaries of all the largesse, will be insulated from any tax increases.

Any attempt to increase taxes would provoke stiff opposition from the elite, but when they whine about the taxes they pay, there are two things they never mention: in their grandparents’ day, the rich paid taxes at twice the rate they do in the twenty-first century. Some don’t come anywhere near paying even the maximum rate. By the IRS’s own count, of the 400 tax return filers with the highest adjusted gross incomes in 2008, not one paid taxes at the top rate of 35 percent. It was the same for 2007 and the same for years before that. Those numbers underscore a longtime tax truism: if the top rate is 2 percent, some rich people will claim it is too high. Even the very rich who paid taxes did not come close to the top rate. For 30 of those 400 filers, their effective tax rate was under 10 percent. And for 101 of the top earners, the effective tax rate was between 10 and 15 percent.

Beyond the top 400, a whopping 18,783 individuals and families with incomes of more than $200,000 paid not one cent in federal income tax for 2008. That was up 1,782 percent from 1995, when only 998 individuals and families reported that they owed no income tax, according to IRS data. And that exponential growth occurred during a time when the people at the top of the economic pile seized more of the nation’s overall wealth than at any time since the years leading up to the Great Depression.

Some high-income folks will threaten to pack up and leave the United States when they think taxes are too high. That obviously is everyone’s right. But once that right is exercised, they should cease to enjoy any of the privileges that come with U.S. citizenship.

Corporations also will threaten to vote with their feet and move business operations to another country. That, too, is their choice. But they also should face a similar loss of U.S. benefits—like all the standard legal protections they enjoy courtesy of the taxes they should pay, but don’t even pay now. Think patents, copyrights, and the American legal system, among others. Would Apple have achieved its lofty stock price absent such protections?

To fully appreciate the inequity of the U.S. tax system, visit your local bank and ask a teller to show you some Capital Gains dollar bills.

When you get a puzzled stare, ask for some Dividend dollar bills.

If there still isn’t a hint of recognition, drop the big one: you would like to see a Carried Interest dollar bill.

If the teller still has a quizzical expression, just say that you will settle for some old-fashioned Work bills—the kind you get from your job as a store clerk or as a schoolteacher or as a carpenter.

You might think that a dollar is a dollar. After all, it can be used to buy an ice cream cone or pay your child’s tuition or cover medical expenses. But to the IRS not all dollars are equal. Long ago, members of Congress, responding to the wishes of their well-heeled constituents, ordered the IRS to treat some dollars differently. This arrangement ensures preferential tax treatment for the privileged, including members of Congress, many of whom are millionaires. If all dollars were treated the same, as they should be, the deficit would disappear, with only a few adjustments in tax rates. But that would mean that the super-rich and the privileged would have to pay more taxes. It’s not about to happen.