Class Warfare Fails When Only 'Rich' Pay Taxes

Going into this election cycle, Democrats thought that corporate financial scandals would reinvigorate the class warfare issue for them. But it hasn’t worked out that way. New data from the Internal Revenue Service and the Securities Industry Association help explain why.

Throughout the 1980s, Democrats beat the class warfare issue like a drum. The rich were getting richer as a result of Ronald Reagan’s policies, they said. This led to the poor getting poorer and a disappearing middle class, so we heard over and over again.

The truth was that the economic pie was getting bigger, meaning that every income group was steadily getting better off. The rising share of income going to the wealthy, therefore, was not coming at anyone’s expense.

To the extent that the middle class was shrinking, it was not because those previously in the middle class were becoming poor, but because they were joining the ranks of the rich. Moreover, a high degree of income mobility meant that those classified as poor one year could easily find themselves in the middle class the next. Conversely, those among the rich for a time often fell into lower income categories later.

For these reasons, the class warfare issue never bit as deeply as Democrats thought it should. Although there were many press reports on the subject, when voters went to the polls they still tended to support candidates favoring tax cuts against those wanting to soak the rich.

The trend reversed a little under Bill Clinton, but not much. He ran on a middle class tax cut in 1992. And when raising taxes on the rich in 1993, he only raised the top rate to 40 percent – far below the 70 percent rate under the previous Democratic president, Jimmy Carter. In 1997, Clinton even supported a Republican-sponsored tax reduction that included a cut in the capital gains tax.

Even rhetorically, Clinton wasn’t much of a class warrior. On the contrary, he tied himself tightly to corporate America and a balanced budget. Although many Democrats were uncomfortable with his espousal of historically Republican policies, few were critical. They were just as eager as Clinton to take credit for the economic boom of the 1990s, even though it did them little good politically, as Republicans took the House and Senate in 1994.

As a consequence, Democrats got out of practice with the class warfare issue. In contrast to the 1980s, very few articles appeared in the major media blaming Clinton’s policies for the huge increase in income going to the rich-much greater than on Reagan’s watch.

Even those who continued to preach class warfare found the atmosphere less hospitable. One reason is that having pushed a tax increase on the rich in 1993, Democrats couldn’t very well demand more such increases when the budget deficit was moving into surplus. And the stock market boom drew many new investors into the market, changing their perspective from that of working class to investor class.

These factors are still making it difficult for Democrats to get traction on class warfare. For example, the SIA recently reported that, despite the huge $7 trillion decline in the stock market over the last 2 years, stock ownership continues to rise. The number of households owning corporate equities rose from 49.2 million in 1999 to 52.7 million this year, and the number of individual investors increased from 78.7 million to 84.3 million.

New IRS data also make it difficult for Democrats to claim that the rich aren’t paying their fair share. According to just-released figures for 2000, the top 1% of taxpayers, ranked by income, now pay 37.4% of all federal income taxes. The top 5% now pay more than half of such taxes, and the top 10% pay better than two-thirds.

While it is true that these people also report a large share of the income, their tax shares are far higher than their income share. For example, the top 1% reported 20.8% of income, but their tax share was almost twice that. The reason is that they pay very high tax rates. The average tax rate for those in the top 1 percent is 27.45%. Everyone else paid 12.1%-less than half what the rich paid.

As a result of the high share of total taxes paid by the rich, the poor and lower middle class pay almost nothing in the aggregate. The bottom 50% pay just 3.9% of all federal income taxes.

The political importance of this is that a large number of Americans have no stake in the outcome of the election. Since they bear none of the cost of government, they simply don’t care who wins. So they stay home on Election Day.

But as the tax burden rises on the taxpaying class, they have an increasing incentive to vote because they have a big stake in the results. Thus Democrats are finding that their class warfare message has little impact, since it resonates mainly with non-voters, while the Republican tax cut message hits home with taxpayers.