Economic Inequality: Still A Political Hot Potato (Page 2)

Economic Inequality:   Still A Political Hot Potato
(Page 2)

The Subprime Scandal and the Racial Wealth Divide

Conservative legislators often blame the victim when they try to address a social problem.   For example, when it comes to domestic gun accidents or deaths from lung cancer, conservatives argue against government intervention in the form of restrictions on handgun ownership or taxing cigarettes companies to pay for health care.   The subprime scandal, which was an underlying cause of the financial meltdown on Wall Street, gave conservatives a chance to invoke this argument once again.   It is no surprise that they took it.

For example, earlier this year, Sen. McCain was only too willing to criticize small home buyers - many of whom were people of color and/or of very modest means - for being ignorant of the terms of their adjustable rate mortgages, thus precipitating financial ruin for themselves, their families, and ultimately their communities.   (And in the bitterest of ironies, it is the fate of these lower-income people upon which the fate of the entire financial world now rests - a poetic reversal, as it were, of Rand's Atlas Shrugged.)   Only recently, as it became clear that a full-scale economic catastrophe could not be avoided without preventing a complete collapse of the housing market, has Sen. McCain begun to speak differently, offering some relief to those he deems worthy of a break.   Sen. Obama has also proposed some relief.   But both have ignored the racial divide that has been a part of the subprime problem.  

The fact is that many mortgage brokers went door-knocking in poor communities of color and sold what amounted to bait-and-switch packages to people who could ill afford them.   When you are peddling the American dream of owning your own home to people who never thought they could afford to do so, and your sales manager is pressuring you to write up more and more mortgages each month, you throw ethical concerns to the wind.   After all, why should these brokers have cared about the little guy, when they could simply bundle these mortgages and sell them up the chain of larger and larger investors, ultimately to Wall Street investment firms like Lehman Brothers?

Sen. Obama has at least got it right that deregulation was a major contributor to the subprime scandal, allowing more and more complicated, unsound mortgage loans to flourish.   Sen. McCain cannot escape his history of support for deregulation as a card-carrying Republican conservative.   However, both candidates would do well to accept what some analysts are saying ought to lie at the heart of any solution:   mortgage debt forgiveness.  

During the housing bubble, the paper values of homes continued to inflate to levels that were unsustainable.   In essence, people were sold a faulty product.   If it were a car that blew up, we would know whom to blame. In this case, who should be held accountable for the subsequent - and inevitable -- downturn?     Should the government sympathize mainly with the lenders and cover their losses?   How much help should it provide to the debtors, who were deceived into believing that they were on the road to owning their own home?  

Activists such as Bruce Marks of the Neighborhood Assistance Corporation of America have argued that loan restructuring is vital, along with a moratorium on foreclosures.   Others have proposed a shift in bankruptcy laws so that bankruptcy judges can intervene to help homeowners.   Whatever the answer, both Sens. McCain and Obama should be willing to admit that the subprime crisis created wealth for investors on the backs of poor people who should not be made further victims.   They are the ones who need immediate relief.  

Taxes:   For the Common Good?

Although both candidates say they want to cut taxes for the middle class, the actual impact of their plans is very different.

McCain's tax cuts aid the wealthiest sector, what he lauds as the entrepreneurs who will spur the engine of economic growth that is supposed to benefit everybody.   Obama's tax cuts benefit lower- and middle-income people, who have been squeezed by rising costs and declining real wages.   Obama also wants higher taxes on the wealthiest individuals earning over $250,000 -- the top 5% in income.  

According to the non-partisan Tax Policy Center (TPC), the difference in overall tax plans is stark for the 147,000 families in the top 0.1% of income - those who make over $3 million per year.   While McCain offers a $296,364 tax cut to them, Obama would raise their taxes by $701,885.   For families earning $37,600 to $66,350, McCain cuts taxes $319, and Obama cuts taxes by $1,042.   The distribution of taxes proposed by Obama would be more progressive, with a greater increase in taxes paid by the wealthiest people.   As a result, the Obama tax plan would do more to reduce economic inequality. [For more info, see: Evaluating Candidates on Taxes.]

Is it fair that unearned income from investments is taxed at a much lower rate than income from work?   McCain says yes -- he'll keep the capital gains rate at 15%. The rationale for lowering this rate, first under Clinton and again under Bush, was to encourage capital investment, which would trickle down to workers.   Instead, this giant giveaway to the investor class was followed by flat wages for most of us and massive net worth and income increases for the very wealthy.

Obama does a bit better.   He would raise the capital gains rate to 20% for single taxpayers with income over $200,000, or married couples who earn more than $250,000. UFE believes that all forms of income should be treated the same; this would help reduce economic inequality.

The US has one tax on accumulated wealth: the estate tax.   Both candidates propose cutting it too much.   According to TPC, McCain wants to cut the estate tax so sharply that over five years, it would produce 88% less revenue than under current law.   Obama's plan would cut the revenue over five years by only 48%.   But our country needs a stronger tax on inherited wealth than either candidate supports.  

John McCain is enthusiastic about extending the Bush tax cuts of 2001 and 2003, which increased the national debt during Bush's tenure by 80%.   In other respects as well McCain hews to Republican orthodoxy, as he has repeatedly voted to decrease taxes on corporations and to repeal the estate tax.   Perhaps most disturbing, he seeks a new law that would mandate a three-fifths majority vote in Congress for any tax proposals, making it much more difficult to change the tax code, which currently benefits the wealthy and corporations.

But the elephant in the room that neither candidate mentioned during all the debates was the corporate tax system.   Theoretically, corporations are supposed to be taxed at a 35% rate.   Sen. McCain has complained loudly about that rate, saying it is the second-highest among major economies and that it adversely affects our competitiveness.   He proposes to reduce it to 25%.

Obama says he would close corporate tax loopholes but would not lower the rate.   He has proposed eliminating tax breaks for companies that move jobs and production overseas, and wants to provide incentives for companies that create jobs in the U.S.   These proposals would mean dramatic increases on corporate taxpayers, but some would say not enough.

In reality, as a July 2008 report by the Government Accountability Office revealed, between 1998 and 2005 about two-thirds of all corporations doing business in our country paid no taxes.   That's right: none.   Why didn't either candidate bring up this salient fact?   Furthermore, for the corporations that do pay taxes, the effective rate (the rate they actually pay after all the loopholes and exemptions) is 24% not 35%.   And the fact is that total US corporate income taxes are a smaller share of our GDP than for the other G7 countries.

In contrast to the major party candidates, Ralph Nader has pointed out that corporate tax rates have declined drastically since the 1950's and 1960's as a percent of the federal budget and has argued for ending all loopholes.   Cynthia McKinney of the Green Party has argued along the same lines.   Both candidates are willing to take the rhetorical gloves off and call our economic system corporate welfare.

Neither major party candidate speaks about the need for a wholesale overhaul of the tax system to create a much more equitable economy.   Both Sens. McCain and Obama offer only modifications to a code that has contributed to economic inequality at a level not seen since before the Great Depression.