A change of course

The critics of Obama’s tax proposals accuse him of being divisive, of promulgating a policy of envy, and of promoting a confrontation between the rich and poor. In short and without hesitation, they say it is class warfare.

The words used are meant to escalate the political drama over what is basically a course correction that is needed in order to create a strong and healthy domestic consumer demand for goods and services without a return to catastrophic debt.

The federal tax policies initiated under President Reagan and continuing through today with a few exceptions created fundamental changes in the make-up of federal taxes, shifting from a progressive tax system that was based on an individual’s income to a more regressive approach based on payroll taxes.

The result of this and other policy shifts that privilege capital gains over labor income has meant that, over the past three decades, the share of income coming from capital gains and business has increased. As a result, between 2005 and 2007, the after-tax income received by the wealthiest 20 percent exceeded the after-tax income of the remaining 80 percent.

This increased disparity was created by government policy and it needs a similar federal initiative to make the necessary corrections. The philosophy behind the current system has led to fiscal crisis and the loss of consumer power by an important sector of the population that had maintained the economic cycle by getting further in debt instead of accruing personal savings.

Changing this model is the key proposal in Obama’s State of the Union message. Tax incentives for the manufacturing sector and an increase of taxes on the nation’s wealthiest is a way to find a balance that will generate jobs and at the same time strengthen rather than weaken the middle class.

Reagan’s tax policy was also redistributive in its time. Thirty years later, the results are clear and they are the best argument for a change now.