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Wealth, poverty and taxes: Lingle taking own route

By Robert M. Rees
Moderator of 'Olelo Television's "Counterpoint" and Hawai'i Public Radio's "Talk of the Islands"

For those who keep up with the debate surrounding the theory and practice of taxation, the State of the State address by Hawai'i's first Republican governor in 40 years was surprising in its deviation from the conventional wisdom of the Republican Party.

Gov. Linda Lingle walked away from two articles of faith now held dear by economic conservatives: 1) The best immediate economic stimulus when times are tough is a tax cut; and, 2) Tax cuts should go to the haves and not the have nots so the effects can trickle down to the rest of us.

Instead, Lingle announced that "Substantial tax cuts must wait until ... the economy has improved."

This was precisely contrary to what President George Bush said only a week later in his State of the Union address: "If ... tax relief is good for Americans three ... years from now, it is even better for Americans today."

Lingle did go on to propose raising the standard income-tax deduction, but not as an economic stimulus so much as because it "makes our tax system more progressive and equitable by providing tax relief directly to low-income taxpayers."

Lingle also said that eventually she would ask for repeal of the regressive excise tax on food and medical services. "People should not be taxed for being sick, or when they are simply feeding their families," Lingle said.

The governor's proposals might have come from a liberal Democrat, and certainly Lingle has chosen the road not taken by the Republican White House.

The Bush administration is seeking to implement the supply-side and trickle-down notions of former President Reagan's favorite thinkers, George Gilder and Arthur Laffer, the very two whose ideas Bush's father once characterized as "voodoo economics."

Besides reinforcing Reagan's belief that a woman's place is in the home, Gilder convinced Reagan that Adam Smith's "invisible hand" — the force that Smith supposed leads the unfettered pursuit of self-interest to new heights of productivity for the common good — is at its best when guiding the relentless gratification of greed by the wealthiest among us.

For his part, Laffer contributed his now-famous Laffer Curve. It expresses the truism that people won't work if taxed at the 100 percent level. From this no-brainer, as liberal economist John Kenneth Galbraith stated in his critique, Laffer concluded that the very wealthy aren't working hard because they earn too little money and the very poor on welfare aren't working hard because they receive too much.

This proposition was immediately embraced by the affluent, primarily because it is rare that those making even absurd amounts of money don't come to believe they deserve to keep every penny. As the protagonist in Tom Wolfe's novel "Bonfire of the Vanities" utters to himself and others about the outrageous incomes of bond traders during the 1980s: "This wasn't dumb luck but, rather, a surge of collective talent (by) Masters of the Universe."

It was the acceptance and implementation of trickle-down economics that led economist Paul Krugman of Princeton, in the Oct. 20, 2002, New York Times Magazine, to conclude that it is no longer simplistic to describe "Democrats as the party that wants to tax the rich and help the poor, and Republicans as the party that wants to keep taxes and social spending as low as possible."

President Bush's 10-year plan to reduce taxes by $674 billion confirms this generalization. The centerpiece of the plan is to eliminate taxes paid by individuals on stock dividends, a cut that by itself will generate $300 billion in taxpayer savings over the next 10 years.

White House political strategist Karl Rove says the cut is aimed at "the little guy," but 45.8 percent of the savings will go to the top 1 percent of income-earning households. The top 5 percent will receive 70 percent of the savings.

So severe are these skews that Sen. Tom Daschle, Democratic leader in the Senate, refers to Bush's overall proposal as the "Leave No Millionaire Behind Act." He points out that the average millionaire will rake in an extra $88,000 a year.

Bush supporters respond that the proposed tax cut is almost exactly proportional to income taxes currently paid. As the former chief economic adviser to Bush, Lawrence Lindsey, puts it: "Families making more than $200,000, who pay 45 percent of the income tax under current law, will get 40 percent of the tax cut. Families making less that $100,000 will pay 28 percent of the income tax (under current law) and will get 34 percent of the tax cut."

Democrats counter that the Bush proposal doesn't take into account payroll taxes for Social Security and Medicare, levies that account for almost as much federal revenue as do income taxes, but that hit lower and middle-income groups the hardest.

To the Bush administration, all this criticism is downright Marxian. Explains White House Press Secretary Ari Fleischer, "It's class warfare to say that there are wrong people in America, and those people are not deserving of tax relief."

Accusations of class warfare aimed at proposals to redistribute income are not new. In 1895, when Republican Party reformer Joseph Choate successfully argued to the U.S. Supreme Court that a federal income tax is unconstitutional, Choate characterized the tax as "communistic in its purposes and tendencies."

In spite of Choate's characterization, it was President Theodore Roosevelt, an icon of the modern Republicans and one of Bush's favorites, who only a few years later proposed an income tax on the grounds that: "The dull, purblind folly of the very rich men is breeding a very unhealthy condition of excitement and irritation in the popular mind."

No one is suggesting yet that Lingle sees the world the way Roosevelt did, but certainly she seems to possess some of the same concern that excessive inequity can lead to trouble. Robert Heilbroner spells out this trouble in "The Triumph of Capitalism": "There is an inherent pulling apart in a social order composed of two realms — one built on the verticality of wealth, the other on the horizontality of democracy."

We live in a country where the verticality of wealth means that the wealthy do very well while 32.9 million other Americans officially live in poverty. It's bad enough that 11.7 percent of Americans live in poverty, defined as $18,105 annually for a family of four and $9,030 for an individual, but even worse that more than 22 percent of black Americans and 25 percent of American Indians and Alaska Natives live in poverty.

Incredibly, almost 45 percent of black American children younger than 18 are coming of age in poverty.

In Hawai'i, about 10 percent of us live in poverty, and here, too, there are definite and alarming skews. For example, Hawaiians suffer high poverty levels, and the American Journal of Public Health has attributed at least part of the health problems of Hawaiians — the average life span is 10 years less than for any other ethnic group — to poverty and its grim penumbras.

Patterns of distribution of income suggest further inequities.

In Hawai'i, based on resident tax returns for 2000, the top 2.7 percent of returns accounted for 20.1 percent of adjusted gross income, and the top 14.1 percent for 45.6 percent of the income. At the other end of the scale, the bottom 52 percent accounted for only 17.9 percent of adjusted gross income.

In the United States, distribution of income by quintiles for 2001 shows that the lowest 20 percent of households earned only 3.5 percent of aggregate income but that the top fifth earned 50.1 percent.

If we plot on a graph the percent of income earned cumulatively by each of the population quintiles, and compare the resulting curve to the straight line of perfectly equal distribution of income, we have something called a Lorenz curve.

From this we can derive a measure of inequality called the Gini Coefficient, a numerical expression of the gap between the actual curve and the straight line. If there is no gap, there is perfect equality, and the coefficient is zero. If there is perfect inequality, where one of us makes 100 percent of the income and the rest of us earn nothing, the coefficient is one.

Some oligarchic countries in Latin America, where only the very wealthy have a chance at life, have Gini Coefficients as high as .700.

East Germany, during the depths of its stupefying emphasis on equality, was at .200. Britain, where Prime Minister Tony Blair recently told a Labour Party conference that it's time again to make redistribution of wealth a party objective, is at .300.

The United States and Hawai'i have coefficients in the .460 and .400 ranges, respectively.

There is no magic Gini Coefficient number that separates good from bad. The danger — and this is what Lingle seems to realize — is that the coefficients in the United States have been creeping upward.

This is especially ominous in Hawai'i, where we already have created the type of oligarchy foreseen by David Halberstam's "The Next Century." It is opportunity limited to those born into fortuitous circumstances and whose well-connected parents can afford private schools.

This is why, in her State of the State address, Lingle emphasized the need for opportunity based not on who you know but on what you know. Unlike President Bush and the Republican Party, and unlike even most Democrats in Hawai'i, Lingle senses the stress of two seismic plates — the verticality of wealth and the horizontality of democracy — pulling in opposite directions.

Even better, she is doing something about it.