Jul 29, 2003
Mid-July, the White House announced that the budget deficit for fiscal year 2003, just ended, had reached 455 billion dollars, with next year's estimated even higher. Of course, such figures are rough very rough, actually, since they don't count the continuing cost of the occupation of Iraq or Afghanistan, currently admitted to be five billion dollars a month. In any case, the official deficit is at least 165 billion dollars higher than the previous record set by the first Bush administration in 1992.
Mirroring what is happening on the federal level, states one after the other have been announcing their own budget deficits, which they estimated had reached more than 85 billion dollars for fiscal 2004. Undoubtedly, this is understated; during fiscal 2003, 37 states revised their already enacted budgets and reduced spending by a total of 14.5 billion dollars in the middle of the year, after instituting cuts totaling 50 billion dollars at the beginning of the year.
Administrations, both federal and state, point to the "economic downturn" which has caused the problem. But the National Governors Association has also reproached the federal government for policies that aggravated their situation. It released a study which shows that the federal tax cuts of 2001, 2002 and 2003 are creating havoc with their budgets, since tax cuts enacted on the federal level carry over. For example, the states say that the reductions instituted by the federal government in 2001 in just one tax the estate tax will have a carry-over effect draining 16 billion dollars from state revenues.
Most governors, both Democrat and Republican, complained that the administration set up the "homeland security" program, which requires states and cities to implement a series of measures, but did not provide sufficient money out of the federal budget for them to do so and, in fact, hasn't even sent them all the money that had officially been budgeted. In reality, so-called "homeland security" is the least of the states' problems. Over the years, the federal government has created a maze of programs and then subsequently shifted responsibility for them to the states, without giving the states access to enough federal revenues to cover the programs. Today, almost 250 such programs run the gamut from school breakfast or lunch programs, to emergency shelter for the homeless, to technology literacy, to highway funding, to air pollution control, to clean water funds, to class size reduction, to crime victims compensation, to violence against women prevention, to abandoned mine reclamation, etc.
States and cities, unlike the federal government, are prevented from running an unfunded deficit. And the bond markets put a kind of limit on how much they can borrow. Thus, much sooner than that of the federal government, their budget deficits create a kind of crisis for the politicians forcing them either to cut programs or raise taxes, measures which can create problems for them come the next election. This undoubtedly explains why even some Republican governors have criticized Bush administration fiscal policy although, of course, Democratic governors are more vocal on the issue.
The largest single part of the federal deficit was produced by the latest Bush tax cut, which the White House itself admits subtracts 177 billion dollars from revenues this year. The Los Angeles Times estimates that the cuts of the last three years reduced revenues by 375 billion in 2003 (out of the 455 billion deficit).
Answering criticism that taxes shouldn't be cut again in 2003, with the economy still not out of recession, Bush declared that his newest tax cuts would more than pay for themselves, "jump-starting" the economy, creating millions more jobs, not to mention bringing in more tax money from all the newly hired workers. Of course, he'd said the same thing before pushing through the tax cuts of 2001 and 2002. What jumped up was not the number of jobs, but the rate of unemployment, bounding up to 6.4% in June from 4.2% in early 2001. More than two and a half million jobs were lost in that time.
Creating jobs? Bush? If his administration's aim had been to create jobs, it would simply have taken the revenue it was ready to lose in all these tax cuts and used it instead to hire people to work in the range of things that desperately need doing: teaching; providing medical care to the uninsured, repairing roads, sewers and water systems; setting up childcare centers for working parents; etc. etc. etc.
Bush's pretense, that to create jobs the government first has to cut taxes, was nothing but a very transparent smokescreen for what else cutting taxes, and so giving vast sums of money to the wealthy and the corporations. The tax cut just passed in June gave the corporations another 60 billion dollar gift, on top of the 114 billion they got in 2002. As for the cuts in income taxes paid by individuals, almost two-thirds of the 2003 tax cuts will go to the wealthiest 10% of all taxpayers, according to Citizens for Tax Justice. According to the Washington Post, people with annual income between $500,000 and one million a year will see their income taxes cut $17,307, on average. People making less than $10,000 will enjoy a whopping income tax cut of ... one single dollar. The 2003 cut made permanent and speeded up the reductions in the top four tax rates that had been introduced in the 2001 tax bill. By 2006, the top rate, which had been 39.6% will be reduced to only 35%. In addition, the 2003 bill reduced taxes paid on stock dividends the vast majority of which are earned by the wealthiest 10% of the population.
This is particularly striking, when we consider that these cuts are coming in the federal income tax the only one that even pretends to be (somewhat) progressive, that is, designed to make the wealthiest pay a larger share of the tax bill, given their much larger share of the national income. We can safely predict that whatever small tax reduction people in the lower tax brackets received in their federal income tax this year will be more than eaten up by increases in other taxes which is not true for the wealthy. Cuts in the federal income tax have almost always been accompanied by increases in those kinds of taxes and fees (federal, state or local) whose rate structure is exceedingly regressive, that is, the less you make, the larger the share of your income you pay in taxes; conversely, the higher the income, the smaller the share that goes out in taxes. All in all, the tax cuts just enacted help further reduce the progressive aspect of the income tax.
The junior Bush is certainly not the first president to preside over tax cuts to the corporations and the wealthy class that owns them, nor to pay for them by increasing taxes on working people. Almost as soon as the first federal income tax law was passed in 1913, administrations began introducing tax "loopholes" into the basic code, allowing corporations and the wealthy to avoid the official rate. Nonetheless, until World War II, the lion's share of the federal income tax was paid by wealthy individuals and the corporations. This did not mean working people paid no taxes; they were stuck paying various taxes on consumption and user fees all of which are very regressive. But the war gave the Roosevelt administration the pretext to expand the income tax to most working people. From the end of the war through the end of the 1950s, the percentage of the total government revenues paid by the corporations trended downward, but slowly. During this stretch, the corporations paid nearly 40% of the total federal tax bill, somewhat less in the later years.
The first big change in corporate taxes came during the administration of John F. Kennedy, who introduced an enormous and supposedly temporary "investment tax credit" under the guise of "stimulating the economy." After Kennedy came Johnson, Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush administration after administration continued and "improved" upon the "temporary" investment tax credit, making it the single biggest loophole written into the tax laws. But not the only one. There was a big explosion of so-called "corporate tax shelters" during the 1970s, with first a Republican, then a Democrat in the White House and with the Democrats controlling Congress. The effect of all these shelters was to reduce the taxes that corporations actually pay much below the official rate. By the point Carter took office in 1977, corporate taxes provided only 17% of federal revenues, less than half of what they had contributed in the 1950s. But they were going to go down further. When he left office four years later, corporate taxes provided only 11% of revenues. In 2002, they were 9.6%.
Of course, the issue is not simply individual versus corporate shares. Individuals are divided into a tiny wealthy minority, a somewhat larger privileged layer and all the rest of us. It's Kennedy who also pushed to reduce the rates that the wealthiest individuals pay. Under the slogan of making the income tax system "fair," Kennedy proposed to reduce the top rate for individuals from 90% on the final part of net income to 70%. That cut was enacted in 1964 after Kennedy died, pushed through by Johnson and advertised as a "tribute" to Kennedy. Reagan's administration reduced the rate to 50%. By the late '90s, the top rate had settled at 39.6% officially. With this latest cut, the top rate will be 35%.
Finally, it was also under Kennedy-Johnson that changes in Social Security taxation served to make the federal tax system even more regressive. Social Security is essentially a pay-as-you-go program, with current taxes covering the cost of current retirees. However, in the 1960s, surpluses began to accumulate in the system as the result of Social Security tax increases passed in 1961 and then again in 1965. While some of those surpluses were used to increase Social Security pensions and disability payments, most began to accumulate. Johnson moved to "reform" the system at the beginning of 1968 so that the surplus could effectively be used to fund the government's regular budget, weighed down at that point by the Viet Nam war. From that point on, Social Security taxes were increased as a function of the government's financing needs, not of the needs of the nation's retirees.
Over the years, Social Security has produced almost a trillion and a half dollars in surpluses, while the rate of Social Security taxes has continued to go up. Today, Social Security taxes provide 39% of the federal government's total revenues, compared to 6% in 1950. In other words, this drastically regressive tax, which weighs heaviest on the lowest paid layers of the working class, has been used to reduce the role of the mildly "progressive" income tax in raising revenue.
The overall result of all these changes has been to make the overall tax system much more favorable to the wealthy. In 1998, the wealthiest one percent of the population, which controlled 47% of the country's wealth actually paid only about 10% of all federal revenues.
While Kennedy and Johnson began the revision of the tax system, they were careful at the same time not to openly oppose the population. In fact, they attempted to assuage the vast social movements of that period by extending older social programs, and introducing hundreds more. While most of those programs were initiated by the federal government, from the beginning many of them were administered by the states. The most important of them, like Medicaid, were considered "entitlements" that is, if someone met the criteria for using the program, they were entitled to a defined benefit, regardless of the state of the public budget. It was the federal government that had the means to fund such programs, and in their early years when the movements were still alive it did so. But early on, even under Johnson and later Nixon, the first steps were being taken to transfer not only the administration of the programs but also the ultimate financial responsibility to the states. In the 1970s, Nixon proposed to bundle together three different categories of programs, affecting housing, jobs and social services; then give to the states "block grants" for each category, with the authorization to spend it (or not) as they chose on the individual programs. By the end of the Nixon-Ford term of office in 1976, about 60 programs had been so transformed, with more than 400 still continuing to operate as federally funded entitlements.
Big theories were invented to justify this transfer of programs to the states by people like Daniel Moynihan. "The states are closer to the people they served. They know better what is needed. Bureaucracy would be eliminated. Etc. Etc." Behind this demagogy, a very different aim was at work: to put financial responsibility for those programs, or part of it, with the states, whose revenue sources were more limited and whose tax structure was more regressive. It was nothing but a way to start cutting the programs without appearing to do it and at the same time to relieve the wealthy of part of their tax "burden."
The pace of this shift picked up under Carter, who also made the first big outright cuts on some of the social programs, cutting out, for example, the 26-week extensions from unemployment benefits and changing the inflation formula that determined the amount of food stamps that poor families would receive.
Then came Reagan, whose name is associated with all these cuts. Having declared war on budget deficits in his first budget address, Reagan proposed reforms to the tax code that produced the biggest deficits seen since World War II only to propose the so-called "Balanced-Budget and Emergency Deficit Control Act" of 1985. The act supposedly required the federal government to automatically cut all programs a certain percentage in order to bring the budget in balance by 1990. It came as no surprise that social programs and public services took these cuts, even while military expenditures, interest payments to banks and a range of other goodies for the corporations escaped the budgetary ax. And while some of the most blatant "loopholes" enjoyed by individual corporations were cut out by the Reagan administration, there was never any possibility that overall corporate taxes might be raised to cover the deficit. In fact, they were reduced still further thus setting in motion more deficits, "requiring" more cuts.
In 1986, pointing to the 736 billion dollar deficit racked up during his first four years in office, Reagan proposed actual cuts in almost every single social program, including Medicaid, housing assistance, child nutrition, social services, tuition assistance, etc. In most cases, these cuts were accomplished by revising the qualifications for using them. More restrictions were added to what Medicare would cover. By that time, it had already been "reformed" so many times anyway that retirees were paying a significantly bigger share of their income on medical expenses than they had been before Medicare was passed. They were now going to pay an even bigger share, through a combination of increasing premiums, increasing co-pays and restrictions on services.
While these cuts are associated with Reagan's name, we should remember that the Democrats controlled the House of Representatives during those years by very big margins (the smallest was 242 to 190).
Reagan's 1986 budget was really a kind of turning point; and not just because the cuts were so overt; but also because it imposed an actual cut of four billion dollars in "revenue sharing" with the cities. With the exception of one year when Carter had introduced a one billion-dollar reduction in revenue sharing, the cuts in federal revenues for city and state run programs had been accomplished by the freezing of funding or at least keeping it below the rate of inflation and population increase. But the 1986 budget introduced the overt cutting of funds for these programs. Every administration since has followed Reagan's lead.
Clinton continued the Reagan demagogy about deficits to justify still further cuts in social programs. Most notable was the near suppression of Medicare funding for long-term stays in nursing homes, which in the course of a few years in the mid-1990s was cut from one year to one month. Medicaid was supposed to pick up the cost of this care. But, in fact, it picked it up only for those elderly people who had used up practically all their retirement savings first. This also had an impact on state funding since Medicaid is partially funded by state governments, while Medicare is 100% federally funded. And because the amount spent on nursing home coverage is so large, the shift of nursing home stays over to Medicaid caused enormous shortfalls in state Medicaid funds. It wasn't long before the states themselves would begin to impose severe cutbacks on what they would pay for Medicaid.
By Clinton's second term in office, he could claim he had balanced the budget if no one noticed that he was counting very big surpluses in Social Security and highway funds to do it. Bragging about his "balanced budget" didn't prevent him, however, from carrying out the most severe attack yet seen on social programs. Working with the Republican congress, the Democrat Clinton eliminated "Aid to Families with Dependent Children," the federal program which for 60 years had provided assistance for low-income mothers and children. This cornerstone of federal social policy was replaced by block grants to the states called "Temporary Assistance for Needy Families." Work requirements and severe time limits were established after which the states were required to cut mothers and their children off assistance. To cover what was being done, Clinton proposed an increase in funding to subsidize child care so mothers could go to work, but these programs were never funded at the level that would have been needed to provide enough facilities even at the beginning. Clinton instituted further cuts in social programs in 1997, reducing funding for vocational education, food stamps, Medicaid.
Clinton's drive to continue the cuts in order to have a "budget surplus" demonstrated clearly that the issue was not the budget deficit, but the desire of the bourgeoisie to put their hands on still more of society's wealth. And they weren't the least bit ashamed that they did it by reducing those programs that stood between the most destitute and life on the streets.
Bush stands in a long line of presidents whose main preoccupation was to protect the interests of the wealthy at the expense of the population. If there's anything different about this Bush administration, it's only that it's more blatant when it talks about what it is doing.
Joshua Bolten, the new director of the budget, was quoted by the New York Times, asserting that the enormous deficit caused by these tax cuts is "manageable if we continue pro-growth economic policies [the name the administration gave to its tax cuts] and exercise serious spending discipline." In other words, we can go on giving tax cuts so long as we can cut spending. Representative Jim Nussle of Iowa, Republican chairman of the House Budget Committee, was even more crass during budget discussions. He asserted: "Tax cuts do not cause deficits.... We do not have to borrow money to reduce taxes. You only borrow money in Washington for spending." In other words, if there were no spending, there would be no deficit! And they seem hell-bent on getting rid of spending, or at least that part that serves the population.
In Bush's 2004 budget, not a single social program funded by the federal government out of its own revenues was given enough money to prevent cuts in the programs. Not Medicaid, not aid to children, etc. Not a single public service. Not roads, bridges, water systems, sewage systems, air quality, public health, etc. None of them received enough money to keep outlays only just even with inflation and the increase in the population. Most of them suffered actual money cuts. Even education which Bush declared to be his priority took a cut. Bush's pretense that he increased funding for schools rested on the new funding he maneuvered to provide indirectly to religious education. Public-school, secular education was cut, once again.
There could be nothing more indicative of Bush's arrogance than his budget cutting veterans' medical and educational benefits in the very middle of the Iraq war. How ironic that he tried to turn Jessica Lynch, the young woman taken captive in Iraq, into a symbol. Actually she was of Bush's cuts. Her brother reported that she went in the army because she wasn't able to get a job and that she hoped to get education benefits when she came out so she could go to college to become a teacher. Even while she lay in the hospital, warmly praised by Bush, he was pushing through a budget that cut back on the veterans' educations benefits she would need to attend college.
The vast majority of these cuts came in funding of programs, the final financial responsibility for which had already been transferred over to the states. At this point, most of the important programs have been shifted in the form of "block grants" to the states, with Social Security, Medicare, Medicaid and Head Start remaining as important exceptions to this trend. Regarding Social Security and Medicare, Bush has introduced a series of proposals whose ultimate aim is to privatize the running of these programs. His administration is right now proposing to the states that they take over the financial responsibility for Medicaid and Head Start, turning them both into so-called "block grant" programs. To get the states to agree, the administration offered inducements that might tempt states that are today strapped for cash. In the first four years of the Medicaid program, for example, the states that agreed to accept "block grant" money in exchange for assuming final responsibility would get a bonus on top of a federal grant based on what the administration "projects" they would receive under current funding provisions. But such long-term projections have always been notoriously wrong 17 billion dollars too low for 2002. If the current projections are wrong, the states will be forced to pay the difference since the "block grant" puts a cap on federal payments. Furthermore, the bonus that the states get right now is, in fact, only a loan which has to be paid back in the final three years of the program with some interest. A similar proposal was made for Head Start.
Governors worried about next year's election might easily sign on to the scam. In any case, it's the first wedge of a frontal attack aimed at dismantling Medicaid and Head Start. With good reason, the Los Angeles Times recently referred to "the small-government hardliners inside and outside of Congress who make no secret of hoping that the huge tax cuts will force substantial reductions in federal entitlement programs." And not just in Congress. They intend to do it by forcing the states to shoulder the burden of all social spending, as well as public services.
Mid-July, the state of California suddenly stopped payments to day care centers serving 429,000 children throughout the state. Some centers closed their doors within a day or two. Others cut staff and reduced hours. These centers, which are subsidized, serve what the government euphemistically calls the "working poor," that is, working people whose wages are so low they can't afford such "luxuries" as the cost of unsubsidized day care, running from $500 to $600 a month per child.
Unable to agree on a plan to overcome the state's enormous budget deficit, and with both parties positioning themselves for a possible recall of the current governor, Democrat Gray Davis, the state legislature could not agree on a budget for fiscal year 2004, which began on July 1. The state stopped payments for a variety of social services: day care centers, the hospitals and nursing homes that serve California's 6.4 million people covered by Medicaid (called Medi-Cal in California). And legislators threatened they would have to cut payments to community colleges and public schools, as well as public services, including road repairs in cities and counties by the end of July if they had no agreement.
In fact, it was a drama staged for the purpose of demonstrating how much worse things could be than the eventual cuts that the legislature was going to impose and it was every bit as melodramatic as the heated public discussion between the state's finance director (a Democrat) and the Republican Party's assembly budget chief, which threatened briefly to erupt into a fist fight. Behind the scenes, however, the usual workings of government were going on. The Republican and Democratic party leaders of the state senate made it clear they were working together to patch together a compromise. Said Jim Brulte, the Republican senate leader: "We don't have one, but I think I know the parameters of an agreement, and I think [Democratic] Senator Burton knows the parameters of an agreement." The "parameters" turned out to be increased vehicle license fees, cuts in Medi-Cal payments, tax revenues "borrowed" from the cities which hadn't offered to lend it to the state and which themselves will now face a bigger "budget crisis" as well as increased tuition costs at community colleges that serve the working class. To show that everyone must sacrifice, the senate deal even imposed some fines on polluters if they get caught, of course. But what it did not do was rescind any of the massive tax breaks that California has extended to corporations in recent years. The senators weren't ready to refuse to pay for the outrageous long-term contracts that Davis had signed with the same power companies that had driven electric rates sky high. Nor did they think about suspending interest payments to the big banks that hold California's bonds. No, they did exactly what they had done a few months before, when the two parties "suddenly" discovered the state had a "fiscal crisis." In April, they cut nearly two billion dollars of state funding, mostly from the public schools and health-care programs, and "borrowed" almost two billion from the state workers' pension fund.
California's situation with a 39 billion-dollar deficit may be extreme, but it's not unusual. All of the states face similar "crises," and all resort to the same means of dealing with it. The majority are proposing to cut jobs and/or reduce state workers' wages and benefits. The state of Michigan, for example, proposed to take 240 million dollars each year in concessions from its employees, in some combination of wage and benefit cuts, or job cuts which figured out to more than $4,000 a worker each year.
All the states are making large cuts in social programs, public services and/or education. For Medicaid alone, as many as1.7 million people will be cut from its rolls if current proposals are enacted. Childcare, for which there are already long waiting lists in 19 states, is being cut back further. So is "Temporary Assistance for Needy Families." Funds for rural road construction, fire protection, flood control, urban sewer systems, road repairs, food inspections, public health, etc. have all been reduced. Massachusetts even cut back on funding for flu vaccine.
For the 2004 budget year, governors in 29 states recommended tax and fee increases totaling 17.5 billion dollars, the largest amount since 1979. Given that the poorest layers of the population pay a much bigger share of their income for these kind of taxes and fees than do the wealthy, they are bearing the burden of paying for this latest state "deficit crisis."
In reality, they are paying so that more tax breaks can be given to the corporations. Even while the states speak of a crisis, they continued to hand out new tax breaks to the corporations. The state of Michigan, for example, just offered Boeing a 300-million dollar tax credit if it would open a plant in Michigan (its bid was trumped by the state of Washington which offered a billion-dollar credit). Sneak a look at Michigan's website aimed at attracting new business to the state: the state brags that it has given out tax breaks and tax cuts totaling 15 billion dollars in less than a decade. Budget crisis? What budget crisis? The only one around is the one that the states themselves have created by extending tax break upon tax break to the corporations. In 1998, the state of Illinois changed the formula for corporate taxes in such a way that corporations, which had contributed only 5.2% of state revenues in 1998, by 2002 were contributing even less, 3.7%. This reduced revenues to the state by nearly 100 million dollars a year. Globally, the corporations pay about 4% of their profits to the states today, compared to 6%, 20 years ago. But there is no move to rescind these tax breaks, now that the states are facing a "crisis." In fact, the "crisis" was created by these tax breaks and a range of other ways the states have used their revenues to enrich the bourgeoisie.
The governors and the legislators of the states may complain that the federal government has created a problem for them. But they have exactly the same policy on their level that the federal government does on its level. But it's more striking because state taxes are so much more regressive than federal taxes. Today, the poorest one fifth of the population pays almost 12% of their income in state and local taxes, while the top one percent pays only 5%. And not only are these taxes regressive, they've been made more so over the past few years.
This is an exact picture of capitalist society today what it is and how it operates. Instead of using the resources of the state to help correct inequality and to develop public services that could allow the population to live more comfortably, the political representatives of the bourgeoisie are increasing the inequality with all their gifts to the wealthy, while dismantling the very social programs that could serve to overcome the worst consequences of this inequality. That's exactly what it means increasing inequality when they propose to undercut Head Start, the program which provides funds to put children from disadvantaged families in school early, not only helping them to overcome the lack of educational background in their homes, but also giving them access to medical care and decent nutrition in the early formative years. They even let their public services decay their roads, water systems, sewers the things which government supposedly exists to provide.
This is a society that has gone completely mad. Its political representatives act in favor of a very small number of very wealthy people, and let everyone else, everything else be damned.
This country the wealthiest in the world has never been this rich. And yet, less and less will it provide even a bare subsistence to those in need of it.
Today, the political leaders carry out attacks on the least privileged and on the conditions of life for all the working people in a more and more naked fashion. They no longer even look over their shoulders to see if their actions spur a response. They have had too little opposition for too long a time. They believe they can cut what they want, no matter whom they harm.
We must stop it. There will be no end to what they try to take from us, until working people start to resist.