In the fall 2004 issue, Kim Klein exhorted nonprofits to pay much more attention to issues of tax policy: “Think about pursuing a strong tax debate and agenda as a part of your fundraising strategy—not only for your organization but for the world.”
If reading an article about taxation feels like an exercise in self-punishment, consider this quote from former IRS commissioner Sheldon Cohen: “People think taxation is a terribly mundane subject. But what makes it fascinating is that taxation, in reality, is life. If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness, charity. Everything’s in there.”
On February 7th, President Bush released his proposed FY2006 federal budget. It’s a whopper. One senator referred to it as a “hide and seek” budget for not only masking the real costs of the war in Iraq, but for hiding the fiscal impact of the last four years of tax cuts. The President’s proposed budget includes reductions in housing, education, healthcare, and veteran’s services.
It’s time to face facts. The nonprofit sector has effectively sat out the last four years of the federal tax debate. Our historical involvement in federal tax discussions has been limited to monitoring tax incentives for charities and advocating targeted spending. In some cases, we’ve rallied to address spending cuts at the state and local levels, but only when they’ve directly touched our programs. We’ve punted, however, on participating in the civic debate about how to pay for society’s services.
Meanwhile, federal tax cuts in 2001, 2002, and 2003 have fueled massive deficits and blocked possibilities for spending on human needs. Over 70 percent of these cuts went to the richest fifth of U.S. households. These tax cuts have “trickled down” to worsen state and local budget deficits, forcing deep and immoral cuts in social spending on poverty, healthcare, and education.
Almost every state in the union has faced terrible budget gaps in the last four years. While the situation this year has improved slightly, 24 states are facing budget gaps of over $35 billion in the coming year, according to the Center on Budget and Policy Priorities.
As the result of budget shortfalls, localities have laid off teachers, firefighters, police officers, and social workers; closed libraries and health clinics; and cut childcare, mental health services, public transit, and pollution control. And the list goes on.
Most of these state and local tax systems are very regressive, imposing a higher burden on the poor than the wealthy. In Washington, Tennessee, and Florida, for example, the lowest 20 percent of income-tax payers pay as much as 14 percent of their income in state and local taxes, whereas the wealthiest 1 percent of income earners pay less than 5 percent.
Congress is currently debating the abolition of the federal estate tax, our nation’s most progressive tax and the only tax on accumulated wealth. Repeal of the tax would be a “triple whammy” on the nonprofit sector. Not only will it reduce federal and state revenue, but it also reduces the incentive for charitable giving. According to both the Brookings Institution and the Congressional Joint Tax Committee, repeal of the estate tax will lead to a decline in charitable giving between $6 and $13 billion a year. This takes the form of bequests to larger charities, the establishment of new foundations, and contributions to community foundations that go to smaller and local charities.
Understanding the Power of the Anti-Tax Movement
How did we get into a situation where raising adequate revenue is politically impossible and increasing taxes is the ultimate sin? Why are state tax systems allowed to remain so regressive, with undue burdens on low-income taxpayers?
Part of the explanation is that there is a well-funded anti-tax, limited government movement that includes national organizations such as Americans for Tax Reform and Citizens for a Sound Economy and includes a network of state and local limited government policy and grassroots groups. They have a long-term strategy and program.
Over several decades, they have succeeded in changing the terms of the debate and political climate on state and federal fiscal issues. As a result, most state legislators are afraid to raise taxes to face their budget deficits. Nor will the federal government provide meaningful aid to the states to enable them to overcome the budget shortfalls.
According to some of the architects of the right-wing “starve the beast” program, the federal and state budget disasters are right on schedule. The push for privatization of Social Security is only part of this program. Their agenda can be characterized as “shrink, shift, and shaft.”
SHRINK. The extreme right has long had a goal of greatly shrinking or limiting government, essentially rolling back central elements of the New Deal and Great Society reforms, such as college loans, homeownership programs, public health insurance and pension programs, and programs that aid the poor. Underlying this program is an ideology about the limited role of government that is deeply out of step with the majority of Americans, who believe government should create a level playing field. Anti-government activists view budget deficits as a means to force budget cuts and thwart new spending initiatives. How else can conservatives justify the rationale for further federal tax cuts while our annual deficit exceeds $500 billion?
In truth, tax cutters don’t want to shrink all parts of government. They want to dismantle government programs that foster social justice, and broaden wealth and opportunity for all Americans. They also aspire to weaken the elements of government that regulate corporations to protect workers, the environment, and community interests. Their vision of limited government could be characterized as a “ Watchtower State” —with our tax dollars paying only for military, police, fire, and property rights protection.
SHIFT. Central to the right-wing fiscal program is to shift the tax burden and weaken the progressive tax system. For three decades, the thrust of this agenda has been to cut taxes on wealth and capital gains, and shift the burden of paying for government onto wage and consumption taxes —hence the focus on tax cuts that primarily benefit the rich, such as repealing the federal estate tax and cutting dividend and capital gains taxes.
A second shift is to move tax and spending off the federal government and onto states and towns. As discussed previously, local tax systems are much more regressive because of their dependence on broad-based consumption taxes. The irony of this was dramatized two summers ago when many parents received checks from the IRS for the expanded federal Child Tax Credit. But as some families got checks for $400 per child, they simultaneously witnessed their local services deteriorate, while local and state fees, sales taxes, and property taxes were increased to make up for the federal tax “cuts.”
The SHAFT part of the program is in the myriad budget cuts and shifts eroding the quality of life for working people. But these tax cutters are counting on the American public not to connect the dots between local service cuts and federal budget policies.
We can now look forward to a “permanent tax cut offensive,” with a long list of additional tax cuts on the 2005 and 2006 agenda, including “tax reform.” “You’ll have a tax cut each year,” said Grover Norquist of the Americans for Tax Reform, architect of the “shrink, shift, and shaft” strategy. “Our goal is to shrink government to the size where we can drown it in a bathtub.” 1
In the next two years, the nonprofit sector needs to keep its eye on two federal tax developments in addition to the current effort to privatize Social Security. First, there will be a push to “make permanent” the 2001 and 2003 tax cuts. They were temporarily passed so as to mask their long-term costs, which contribute to deep deficits for decades to come. But Congress passed them anyway, planning to finish the job later. We should rigorously work to prevent the most regressive tax cuts, such as repeal of the federal estate tax, from being made permanent.
To appreciate the long-term costs of making these tax cuts permanent, we should put them in the context of the tremendous publicity being focused on the revenue gap of the President’s Social Security “crisis.” The Social Security trustees project a $3.7 trillion gap in the Social Security trust fund between now and 2078. The cost of making 2001 and 2003 tax cuts permanent over the next 75 years will be $11.7 trillion, $2.9 trillion of which are tax cuts for the richest 1 percent of households, those with annual incomes over $337,000. In sum, rolling back tax cuts for the very rich will almost entirely address any solvency concerns. 2
Second, in 2006, Congress will take up the issue of “tax reform.” The President has appointed a commission to make recommendations for reforming the system. “Tax reform” means about as much these days as “natural food”—you still need to look beyond the label to understand the ingredients. Most likely, the “tax reform” that Congress debates will continue in the “shift and shaft” mold by attempting to replace the federal income tax with a flat tax or national sales tax.
Those of us concerned about public investment, equality of opportunity, social welfare spending, and other public services are being “out-organized” by this neo-conservative anti-tax movement.
The good news is that coalitions are forming in many states to oppose budget cuts and advocate for progressive tax reforms. In New Jersey, a coalition of labor, children’s advocates, and other community organizations won passage of a “millionaire’s tax,” an increase in the top income tax rate. California healthcare advocates also won a ballot initiative to pay for social services with an income tax hike on the wealthy. Virginia activists persuaded their governor and conservative legislature to raise taxes rather than make further cuts.
Children’s advocates in Massachusetts and Washington State have launched a grassroots education campaign that includes posters and a Web site called Tax Cuts Hurt Kids (www.taxcutshurtkids.org). At the national level, the Fair Taxes for All coalition is tooling up to fight future tax cuts and dramatize the connection between the federal tax breaks for multimillionaires and the deteriorating quality of life at the local level. These efforts are spirited and have the potential to spark new advocacy as nonprofits and citizens increasingly feel the negative impacts of the cuts for communities.
There is something unseemly about Congress’s current push to permanently cut taxes for the rich during a war. Never in the history of U.S. warfare has Congress pushed tax cuts—let alone permanent tax cuts—for the very wealthy. Historically, the opposite has been true: wealth has been “conscripted,” in the form of progressive income and estate taxes, to at least symbolize that everyone is sacrificing in some way.
During World War II, President Franklin D. Roosevelt understood that national domestic unity against Hitler depended on a sense of shared sacrifice by both Rockefeller and Rosie the Riveter. Top income rates were boosted, and the estate tax was increased so that fortunes exceeding $50 million would be taxed at 70 percent. FDR spoke out boldly against war profiteering, saying, “I don’t want to see a single war millionaire created in the United States as a result of this world disaster.”
“During WWII, every town had tire drives and rationing,” said Charlie Richardson of Military Families Speak Out. “Right now it’s the opposite. They are trying to isolate as many people as possible from the impact of the war. During the Civil War, rich people could buy their way out of the draft. Now the wealthy don’t have to pay anything to avoid the draft—and they get tax cuts on top.”
Part of our message is to point out the grotesque inequality of sacrifice that is occurring in U.S. society—and the ways in which these tax cuts for the wealthy reinforce this inequality. Cutting veterans services, for present and future veterans, to pay for tax cuts for the wealthy should not be tolerated.
The resentment toward taxation is rooted in the excessive individualism in our culture that demands all the benefits of collective wellbeing but is unwilling to pay the bill. It is a failure to recognize our interdependence and the necessity of solidarity for our survival and flourishing. Taxation is not only the “price we pay for civilization,” as noted by Oliver Wendell Holmes, it is the price of solidarity.
Right-wing zealots are waving the flag of “individual liberty” and “it’s your money” to push an agenda that will weaken America’s ladder of opportunity and fuel one of the greatest upward redistributions of wealth in a century. This “Robin-Hood-in-Reverse” will greatly reduce the quality of life for the vast majority of Americans, unless it can be stopped.
The first step is to defend the erosion of our country’s most progressive taxes, such as the estate tax. The moral justification for taxing great wealth at higher rates, and imposing estate or inheritance taxes, is that the wealthy have benefited disproportionately from the defense of property and the fertile ground created by public investment for private wealth. In the words of Bill Gates Sr., it is a “payback to society, the price of building and protecting wealth in the United States.”
At stake is the question of what kind of society we want to become. Do we want to dismantle the ladder of opportunity we have attempted to build over the last half century? Do we want to further polarize our country along the lines of wealth and power?
Ultimately, defense of a progressive revenue tax system must be linked to a broader moral framework and vision of what kind of communities and society we want to have. This is something that nonprofit sector can uniquely add to this debate.
Gates, William H. Sr. and Chuck Collins. Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes. Boston: Beacon Press, 2003. http://www.faireconomy.org/commonwealth/
Graetz, Michael J. and Ian Shapiro. Death By a Thousand Cuts: The Fight Over Taxing Inherited Wealth. Princeton, N.J.: Princeton University Press, 2005.
Johnston, David Cay. Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich and Cheat Everyone Else. New York: Portfolio, 2003.
Zepenauer, Mark. Take the Rich Off Welfare. Boston: South End Press, 2004. http://www.southendpress.org/books/welfare.shtml
Educational studies and research on tax fairness issues on the Web:
Citizens for Tax Justice: www.ctj.org
Tax Policy Center : www.taxpolicycenter.org
Center on Budget and Policy Priorities: www.cbpp.org
United for Fair Economy: www.faireconomy.org
A number of states have developed popular education programs about state and federal tax issues. See www.faireconomy.org.
Join State and Federal Coalitions. Not just out of self-interest, but out of your desire to save the republic. Join Fair Taxes for All , with over 550 organizations around the country, to oppose permanent tax cuts and stop additional tax giveaways to the wealthy and corporations. See www.fairtaxesforall.org.
Creative Actions to Connect the Dots. Find creative posters to download and post at your organization. See www.taxcutshurtkids.org.
Stop Repeal of the Estate Tax. Join the effort to stop repeal of our nation’s most progressive levy, the estate tax. You can personally sign the “Call to Preserve the Estate Tax” and get plugged into Responsible Wealth’s informal advocacy network at www.responsiblewealth.org. Learn more about the estate tax and the nonprofit sector at www.ombwatch.org.
1. NPR, in a profile of Norquist done by Mara Liasson for the Bob Edwards show on May 25, 2001. You can listen to it here: www.thenationaldebate.com/blog/archives/2005/02/norquist_sidest.html.
2. Richard Kogan and Robert Greenstein, “President Portrays Social Security Shortfall as Enormous, but His Tax Cuts and Drug Benefit Will Cost at Least Five Times as Much,” Center on Budget and Policy Priorities (February 2005), See: www.cbpp.org/1-4-05socsec.htm.
Chuck Collins is Senior Fellow at United for Fair Economy (www.faireconomy.org) and co-author, with Bill Gates Sr., of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Beacon, 2002). He is also Senior Fellow at Class Action, see www.classactionnet.org.