11/25/2008 05:12 am ET | Updated May 25, 2011

Conservative Tax Policy Is Corporate Socialism

John McCain claims that Obama's plan to cut taxes for 95 percent of Americans earning less than $250,000 annually, including the majority of small businesses, and raise them for corporations and the wealthy would be disastrous given the current economic crisis. Obama's goal is to relieve middle class taxpayers facing declining wages and savings, and rising unemployment as prices for necessities skyrocket and consumer credit hits the wall. They will also help shore up declining demand for goods and services, which is causing further business distress and more lay-offs. CNN reported 8,500 new lay-offs this week alone.

John McCain decries middle class tax cuts as "socialism" because they "spread the wealth around." What are tax cuts for corporate America and the wealthy then? There indeed has been an increase in "socialism" in the U.S. but a smokescreen of conservative ideological rhetoric has hidden it for decades. A closer look at conservative tax policy reveals the extent of McCain's hypocrisy.

McCain proposes continuing the Bush tax cuts for businesses and the wealthy with promises that they will spur economic growth and job creation for the middle class. Sound familiar. It's the same old song that Reagan sang in the 1980s when business tax breaks were the centerpiece of "supply side" economics. The lyrics are: businesses need tax cuts so they have more money to invest in expanding and modernizing production and creating good jobs. That's how the benefits of business tax cuts trickle down to you!

What about the wealthy? Conservatives sing on: cutting their taxes is smart because they will save that extra income. They will drive right down to their hometown banks and deposit it in their savings accounts. The banks will then invest that money wisely by loaning it to worthy businesses whose owners will use it to create more jobs. We've heard this tune again and again. At this critical juncture in our history, it is wise to briefly review the past performance of this tax policy.
Reagan's tax policies provided huge tax rebates for the largest corporations as well as lower rates for them and the wealthy to "stimulate economic growth and job creation" during the severe recession of the early 1980s. Major industries, like steel and autos were seeing their shares of foreign and domestic markets erode as foreign competition intensified. Tax breaks were expected to help manufacturers improve their competitiveness and their abilities to create good jobs. They would upgrade their capital bases (plant and equipment) using the latest technology and implement state-of-the-art managerial techniques. The wealthy were expected to bank their tax savings, providing more potential investment funds for the ailing economy. What would happen absent business tax cuts? Employers would leave the country and take their jobs with them.

How successful were these policies? They didn't rejuvenate our manufacturing base. Companies continued to close plants and ship jobs overseas. Rather than investing to upgrade and expand capacity in their primary product lines, major corporations used the money primarily in two ways. First, they paid their stockholders higher dividends. Second, they used it to diversify into "more profitable" areas through mergers and acquisitions. For example, USX (US Steel Company) used its tax rebate to acquire Marathon Oil rather than invest in its own steel operations. Using steelworkers' pension funds, USX also invested in its major rival - Japanese steel!
Mergers and acquisitions produced job redundancies. Corresponding positions in the companies involved often were combined, others were simply eliminated. Remaining employees often saw their workloads but not their incomes increase. What about the wealthy? They didn't invest in steel either nor did their savings increase. Instead, they rushed to furriers, Tiffany and luxury car dealerships and spent it.

Nonetheless, over the past three decades, conservative tax policy has spread like cancer to states and localities. Competition among them for elusive good jobs accelerated. Lower business taxes in conjunction with other "incentives" came to define a "good business climate." Taxpayer dollars were diverted from other uses, like education, to pay for it.

What were these "incentives"? Beyond business tax breaks, state and local governments began spending tax dollars on land for business sites, site-specific road, water and sewer systems, construction of shell buildings ready for occupancy, and workforce training, often without a target employer in sight. However, by the late 1990s, research on business location decisions had determined that only one factor was highly significant for them - wage levels, the lower the better.

When employers opted for the incentives, they were rarely required to indicate what return taxpayers could expect. The number, quality and duration of the jobs in which the public was investing were never specified. More important, to my knowledge, no in-depth cost/benefit analyses have ever been conducted to determine the true social return from this brand of public investment.

What has been the fundamental problem with conservative tax policy? Neither government nor taxpayers have had any control over what businesses and the wealthy actually do with their tax savings. Absent restrictions that require companies and the wealthy to use their savings for investments designed to create jobs, how that money is spent is entirely up to its recipients. Witness AIG. American taxpayers have doled out millions (probably billions) of dollars through business tax cuts and incentives without any preconditions. The public has foregone valuable public goods and services while diverting scarce tax revenues to corporations and the wealthy blindly assuming that they would be used in the best interests of Americans.

Conservative tax policy has been nothing less than the socialization of investment and risk. Conservatives have very effectively used fear of job loss and economic hardship to convince the public to accept this form of socialism without questioning its underlying rationale or expected returns. Until now. The current economic crisis is leading people to seriously question conservative policies. Rather than trusting big business and the wealthy with our economic futures, we would be much better served if we had an ownership stake in investments made with our tax dollars. Why not? If and when such investments do pay off, at least we'll be entitled to a share of the wealth. Up to now, we certainly have absorbed more than our fair share of the losses.