Kerry's class war

George W. Bush has a war, and now John Kerry has one too - a class war.

At Georgetown University, Mr Kerry opened fire when he vowed to raise taxes on the top 2 per cent of earners while cutting taxes on the other 98 per cent. The idea is not only to create jobs - Mr Kerry says he can get 10m of them - but to create economic opportunity. Mr Kerry wants to plough through class barriers like an Abrams tank. Or, as he put it, to reclaim America on behalf of those who seek to travel "paths to a better life".

The explicit targeting of high-earning individuals is an old American tradition. Still, every class war is different. Mr Kerry's reveals much both about the economy today and its future as he plans it.

Start with Mr Kerry's plan for corporations. He wants to cut corporate tax and rearrange the law to make it harder to outsource. Observers have focused on the inconsistency in criticising outsourcing at a time when his wife, Teresa Heinz Kerry, holds a big strake in HJ Heinz, an international company. But what is more important is the overall plan. Cutting US corporate taxes is great - they are relatively high. But to argue that tax protectionism brings the strongest growth is weird. So weird that the only other recent candidate to espouse it was Pat Buchanan - not someone, one suspects, to whom Mr Kerry wants to be compared.

On the personal side, Mr Kerry would increase the top marginal rate on the highest earners, moving it from the current 35 per cent back to the 39.6 per cent rate set by Bill Clinton.

The first reason for this move is clear: Mr Kerry wants to reverse the work of George W. Bush. But there is another reason for the increase: top-bracket taxpayers are these days an easy target.

Back in, say, the late 1970s, raising taxes on the top-bracket crowd would have been more challenging, to put it mildly. Then, millions of households, many of them firmly middle-class, were confronting rates in the thirties or higher. They were in those brackets because the wind of inflation had blown them there. These people were already disgruntled - they were the ones who started that decade's tax revolts. And they made up a healthy share of the electorate. Antagonising them was not a good idea.

Today, however, it is a different story. There is little inflation. Brackets are indexed. To get to the top bracket, if you are a married couple, you have to have taxable income of $311,950. Even in the US there are very few households - under a million - that enjoy that kind of income. In terms of votes they are insignificant. Going after this group therefore is less like desert combat than clubbing seals.

The hostile fashion in which Mr Kerry refers to high earners - "the wealthy" - is also important. Coming from a man as wealthy as he is, it seems odd. The hostility also suggests he sees top earners as unproductive old money, the leisure class.

There are indeed year-round snowboarders in this category. But a typical "top 2 per cent" household would be two immigrants, an oral surgeon and a dentist, with three children. They would live in San Francisco, or Chicago - a place where costs are so high that dollars are worth less. These people do not feel rich. But "real" bracket creep (to put it technically) has pushed them past the top threshold and into Mr Kerry's sights.

Partnerships, sole proprietorships, and "S-Corps" (an arrangement under which company profits flow directly to individual returns) are all taxable at individuals' rates. These three groups represent 90 per cent of small businesses. And it is small businesses in the US, not venerable international corporations, that create the most jobs. Indeed, the US Small Business Administration estimates that three-quarters of net new jobs are generated by small businesses. High earners are veritable job machines.

Imposing new taxes on them therefore seems counter-productive, especially when one of your stated goals is job creation. It is also harsh, since, as a group, high earners already shoulder one of the heaviest tax burdens in US history. A Congressional Budget Office study released even as Mr Kerry was preparing his speech shows that the top 1 per cent of earners pay 34.4 per cent of the income taxes. The top 5 per cent pay more than half of such taxes.

Here, Mr Kerry would counter that the tax distribution table looks different when you include payments Americans make to the national pension system, Social Security. But even when you include Social Security, the picture remains skewed: the top 10 per cent of households pay half the taxes. (Besides, if Mr Kerry wanted to, he could acknowledge that Social Security is the real American fiscal challenge and advocate its reform. But he has shown little interest in opening that front).

Mr Kerry's next and overall defence would be: "This worked for Bill Clinton." But it is assuming a lot to believe the 1990s can return. As Mr Kerry has noted, for example, the US now outsources abroad. Higher taxes on sole proprietorships at home will facilitate their creation in Shanghai. So much for keeping jobs at home.

In short, we should forget Teresa and her accounting, tempting topics though they may be. The Kerry attack on top earners matters more.

Even as he talks of breaking down class walls, Mr Kerry is reinforcing them. Even as he talks of growth, he is laying plans that would slow it. It does not get more inconsistent than that.

© Copyright 2004 Financial Times

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