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The Wall Street Tax Debate That Never Was

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"In a remarkable show of bipartisanship, the House gave final approval to the measure just before midnight Thursday, overcoming an attempt by rebellious Democrats who wanted to impose a higher estate tax than the one Obama agreed to." ~ Associated Press

This tax "reform" bill is as stunning for what it ignores as for what it proposes.

Many people have rightly criticized the bill's lavish tax breaks for the super-rich, especially the needless estate tax cuts that will benefit only America's wealthiest 6,600 families. We've also been wringing our hands over the way this bill only worsens our hugely distorted distribution of income and wealth. Even Ben Bernanke is worried: The income gap, he said recently, is "creating two societies. And it's based very much, I think, on educational differences."

Most Americans would agree that our society is splitting apart. But most also would agree that the super-rich probably got there because they are just way smarter than the rest of us. Which is one reason why so many Americans are reluctant to tax the rich. They figure the wealthy deserve what they are smart enough to earn.

What is entirely missing from the debate and from the bill is any recognition that a large portion of the super-rich gained their wealth from the financial sector. And that money is highly suspect:

Wall Street elites "earned" much of it by creating bubbles and toxic assets that had little or no real economic value to begin with--and that ultimately crashed our economy. (If you still have any doubts, please see The Looting of America.)

Have we forgotten how angry we were only a year or so ago when we realized that our tax dollars were going to bail out financial industry high rollers? Remember how galling it was to see $13 billion in tax dollars go to Goldman Sachs to cover its bad bets (at full value) with AIG? And how appalling it was that afterwards when that money went right back into their enormous bonus pool?

It's hard to believe that just a short while ago I naively thought the country was ready to rein in Wall Street. We actually were thinking about how to keep the financial sector from siphoning wealth from the real economy -- like the trust busters did a century ago. I swear I remember politicians, including the President, talking about how lowering Wall Street pay would encourage our best and brightest to turn away from Wall Street and towards science, medicine and education -- work that would strengthen instead of undermine our economy. I even remember former Fed Chair Paul Volcker saying that the only real financial innovation in the last 30 years was the ATM, and the rest of it was all garbage.

For a time, it seemed our society was developing some new common sense about Wall Street's money mischief. We just knew that hedge funds were gaming our system -- and no one could legitimately "earn" $900,000 an hour (the average annual take for the top ten hedge fund managers). Especially not at a time when 29 million of us were without full-time jobs. A year ago, it seemed clear that Wall Street was draining away our economic wealth and adding very little in return.

We were actually debating how best to move this wealth back to the real economy BEFORE it became part of Wall Street's obscene profit, income and bonus pool. Why aren't we doing something about the $100 billion of Wall Street bonuses now being awarded, when we know that money comes from taxpayer bailouts and from suspect speculative activities?

There was a moment, albeit a short one, when it seemed that at least progressives in Congress would focus on the two taxes that would be game changers:

1. A tax on hedge funds. All hedge fund income should be taxed at the top income tax rate of 35 percent and not at the 15 percent capital gains rate. (That would generate from the richest 25 hedge fund gurus alone twice what we'll gain by the opportunistic freeze on federal employee wages.)

2. A financial transaction tax. Place a small tax on each and every financial transaction. This would not affect the trades of 99.9 percent of all Americans. But it would put a major crimp in the games that the big boys play. Let the quants use their brain power to cure cancer rather than to craft complex computerized trading systems that leave society with less than nothing. A small transaction tax could generate over a $100 billion a year from Wall Street--and in the process, bring those ridiculous bonuses and profits back in line with the real economy.

But here we are in December 2010, having a debate about "tax reform" that hasn't even touched on these two tax ideas. Help me out here. How is this possible? Has the progressive moment passed so far into history that it already seems "unrealistic" to even discuss how to stop Wall Street from ripping us off again?

We seem to have contracted financial Alzheimer's. Maybe putting up some yellow stickies would remind us: Wall Street crashed our economy -- not public employees, not lower-income home buyers, not government spending or the deficit or regulations or Fannie or Freddie. Systematic private greed by a handful of giant financial institutions tore a gaping hole in our economy and the perps are getting off scot-free. We don't even have the nerve to make them pay a windfall profits tax to compensate us for a tiny portion of the damage they've done. Wouldn't most Americans welcome some restitution from Wall Street?

Only a year ago people were talking about an angry populist uprising that would make life miserable for the pampered and privileged. Instead we got a Tea Party that attacks government taxes, regulations and spending, and in effect, let's Wall Street entirely off the hook. President Obama seems to have given up any pretense of reining in our financial elites as he invites them to join hands with him at the White House. He even called those who held out against tax breaks for the rich "sanctimonious." Most congressional Democrats are following him down that right-of-center path. And the Republicans are at the head of the parade, leading us back to the future...lower taxes, fewer regulations and more money for the few....and a declining middle class.

To paraphrase Tony Mazzocchi, the late visionary labor leader, it's like the entire political establishment is marching backwards into the 21st century.

Wake me up when we get there.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn $900,000 an Hour: The Rise of Wall Street Billionaires and the New Class War, (hopefully to be published in 2011).