For all that the current presidential campaign looks like
Tweedledum versus Tweedledumber, this high-stress month of April--with
its annual angst of tax filing and the additional problems of a
ballooning bear market that hints of 1929--has serious watershed
potential. The national political debate could get some new issues:
wealth excesses, "trickle-down" inflation and tax fairness.
In the 2000s, just as in the 1970s, the 1930s and the 1890s, a tough
bear market and its aftermath could be what brings about an economic,
governmental and regulatory overhaul. A serious stock-market decline
always serves as a political as well as financial indicator. Brother
bear--the Ursa Major of economic disillusionment--has been the power
behind populist and progressive booms from William Jennings Bryan through
Franklin D. Roosevelt. Say what you will about the old bruin, he's been
the most reliable reformer in U.S. history.
Let's begin with the surging wealth issue. For weeks now, voters have
been hearing from Federal Reserve Chairman Alan Greenspan and others
about the "wealth effect" that is forcing up interest rates. But rising
awareness of the perils of the wealth buildup of the top 1% is also
generating proposals to address it, ranging from wealth taxes to stiffer
As for tax sensitivity, it's a given in April. Middle-class and
upper-middle-class breadwinners, just filing their 1999 income tax
returns--after infuriating experiences with phased-out exemptions,
eroding itemized deductions and brutal self-employment taxes--have
already figured out a potentially explosive truth: Many, particularly
two-income couples, are paying at higher marginal rates than
$20-million-a-year corporate CEOs or the insta-millionaires of the
Internet. The idea of tilting more tax cuts toward the top 1% of
Americans, the centerpiece of Texas Gov. George W. Bush's campaign, would
be one of the first delusions gored by any major bear rampage.
Barring some firestorm such as war with China over Taiwan, the
possibility of a major stock-market rout--it's still premature to call it
a probability--is the biggest "x-factor" in year 2000 politics and
economics alike. Over the last four years, as stock averages rose faster
than Jack's beanstalk, Americans lost the economic nervousness they had
felt from 1991 to 1994. They were willing to tolerate old gripes--about
the unfairness of the tax system and the top 1% of Americans grabbing the
biggest gains--as long as mutual funds were booming and a high-tech "new
economy" seemed at hand. But these psychologies, too, would be clawed by
any bear market.
Greenspan has had a lot to say about wealth in recent months, and the
"effect" he's warning against is that of soaring stock markets
stimulating inflationary spending by the public, especially by the
Dow-dazzled top 10th of the population. But he is also mindful of another
wealth effect: The U.S. budget has been balanced over the last three or
four years principally because of soaring federal-tax receipts from
stock-related capital gains, especially executive stock options.
The share of U.S. wealth in the hands of the top 5%--and specifically
the top 1%-- has reached levels not seen since 1929 and expanded by more
than $1 trillion. New data show corporate CEOs now receiving 475 times as
much in annual compensation as the average blue-collar worker, an
all-time record disparity. But the rich have had to share this cornucopia
with the Internal Revenue Service as well as with yacht dealers and hedge
funds so that, even at low tax rates, it's been the key source of deficit
The reverse could be true with a bear market. The budget could go back
into the red in a year or so, putting pressure on popular spending
programs, scotching GOP arguments for top-bracket tax cuts and increasing
pressure for new revenue from tax increases just when current economic
data are profiling the top 1% or 2% of Americans as the fattest financial
geese in the history of the republic.
Meantime, the political radar screen is ping-pinging with
wealth-effect warnings in almost every sector. On the tax front, when
Donald Trump was a possible presidential candidate, he proposed a onetime
15% levy on the wealth of those who counted it in the millions.
Meanwhile, Sen. John McCain (R-Ariz.) opposed the huge tax cuts proposed
by Bush because they were too favorable to the wealthy.
Favoritism to the rich, both in the United States and the rest of the
world, is also edging into the U.S. political debate. This week's
demonstrations in Washington against the World Bank and the International
Monetary Fund include protests against their role as global bailout
mechanisms for rich investors. In late March, Treasury Secretary Lawrence
H. Summers, citing new evidence that the Latin American rich-poor gap
increased during the 1990s, called for the Inter-American Development
Bank to raise interest rates charged its richest customers and devote a
larger portion of its resources to poverty programs.
The race for the Democratic nomination for New Jersey's U.S. Senate
seat is turning into a wealth-effect barometer. Half-billionaire Jon S.
Corzine, a retired Wall Street investment chief executive, has been
making the extraordinary boast that his company's policies helped local
businesses create or maintain 700,000 jobs. Meanwhile, his rival, former
New Jersey Gov. Jim Florio, brandishes studies that show the rich-poor
gap in New Jersey is widening, and he blames policies that favor big
But Greenspan's talk about the wealth effect is most important because
it is now clear that his too-easy monetary policies helped create the
"irrational exuberance" and speculative-wealth bubble he has been warning
against. Published summaries of Greenspan's inept 1996-99 official
analyses reveal his misjudgments of economic growth rates, the same
strength now producing sharp inflation in New York City and San
Francisco-Silicon Valley real-estate markets and threatening to spill
over into what could be the first "trickle-down" inflation in U.S.
history. It's obvious that the oil-price hawks of the Organization of
Petroleum Exporting Countries were also motivated to share in the U.S.
Some who worry about wealth excesses would prefer to target the
speculators who do much of their buccaneering on borrowed money, the
margin accounts that let stock buyers borrow as much as 50% of the money
they invest. As of late March, total margin debt was more than $200
billion, up 87% from a year earlier. As was true in 1929, these margin
accounts have been responsible for some of the extreme tech-stock
volatility, and curbing the borrowed-bucks speculators could help cool
the wealth effect.
The wealth angles of current U.S. tax policy are sort of like the
Caribbean in April 1492. You know Christopher Columbus and the political
explorers will arrive by fall, but for now, Bush and Vice President Al
Gore have little to say. However, the direction in which the tax debate
will head if and when a bear market enters the picture is clear, as
millions of Americans just finishing their Form 1040s for 1999 will
The basic thrust of U.S. tax policy since the early 1980s has been
threefold. First, to increase massively the tax burden on wage and
self-employed labor through FICA (Social Security and Medicare) tax
increases while reducing the burden on corporations, whose share of total
federal tax payments has plummeted. Second, to reduce to 20% the rate on
capital gains, which make up roughly half the reportable income of most
of the big moneymakers. Third, to make sure, through a series of
phase-outs and self-employment levies, that the highest marginal rates
concentrate on middle- and upper-middle-class Americans rather than the
truly rich. What's extraordinary is that voters stand for it.
Consider: a two-worker professional couple with $160,000 a year could
be in the 40%-42% marginal rate group when you allow for Social Security,
Medicare and self-employment taxes, all income-based, on top of the 31%
basic rate, together with such silent middle-class fiscal killers as the
phasing out of exemptions and itemized deductions as certain income
levels are reached. This is in marked contrast to the 20% marginal
(capital gains) rate paid by the typical corporate CEO on his top dollars
from stock options or the same rate paid by a 28-year-old Internet
tycoon. If some experts are correct in saying that the United States is
the only major nation with such a skewed rate structure, the tax politics
of the next downturn should see pressure to raise the rates on
corporations and the rich.
The "wealth effect" isn't just some Federal Reserve jargon. Broadly
construed, it stands to emerge as a central issue of U.S. politics. *
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Kevin Phillips Is Author of "The Politics of Rich and Poor." His Most Recent Book Is "The Cousins' Wars: Religion, Politics and the Triumph of Anglo-america."
Copyright 2000 Los Angeles Times