Class Warfare, Taxes, And The Social Contract

Peggy MunroLet's Talk About MoneyLeave a Comment

Elizabeth Warren, a candidate for the U.S. Senate from Massachusetts, recently responded to Republican charges that President Obama’s proposal to raise taxes on the wealthy constituted class warfare:

“You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

“Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

What a concept, that there exists an implied contract between all members of society, where the contributions of the weakest help to support those of the strongest, and vice versa. It is a world view where everyone gives and everyone benefits.

Ms. Warren’s view is already in practice in small businesses, which honor the social contract not only by paying taxes, but by community involvement, by hiring local workers at a living wage, by purchasing supplies from local merchants, by sponsoring sports teams or parade floats. But the contract loses something in translation when applied to large corporations, which are more interested in the tax breaks they can wrangle than in supporting the communities where they are sited. For these entities, job creation hinges on the location of cheap labor and the lowest price for materials, whatever their source. Rather than contributing to their communities, they often represent a net drain on area resources once preferential tax treatments are factored into the equation.

While the purpose of a for-profit business is to actually earn a profit, there are major differences in the goals based on a company’s size: large businesses are money generators, while small businesses are community developers. Large businesses can exist anywhere, and everywhere, because place matters little, or not at all.
Small businesses, by comparison, are firmly rooted and invested in their communities.

For large corporations, success is measured in increasing profits and shareholder wealth; any obstacles standing in the way are impediments that must be removed.

For small businesses, profit motive is balanced against societal costs. As a small business owner, I am no more eager to pay taxes than my Essex Junction corporate neighbor IBM, but the steps IBM and I each take to minimize our tax bills are quite different. I tend to plow my excess profits back into my business and into my community. I may update my equipment, expand or redecorate my office, or I may even hire additional help, all of which help my local economy. IBM, on the other hand, sends its profits directly to corporate headquarters, to be siphoned off to its millions of shareholders and spent in its facilities around the world. While I annually increase my stake in the local economy, IBM has shrunk its presence dramatically, moving permanent jobs to cheaper states and countries, or eliminating them altogether, increasing hardship rather than prosperity here in Vermont.

This small business operation and investment model helps to explain the Clinton era surpluses, where increased personal income tax rates translated to massive numbers of jobs created and close to full-employment. The subsequent Bush era suffers mightily in comparison, with its accompanying tax rate decreases and little or no net job creation.

It is clear that maintaining artificially low tax rates for the wealthy is not equitable, reasonable, or right, and it violates the social contract. It is a policy that spurs low wage job creation in other parts of the world, rather than giving back to our communities by local job creation and investment.

Class warfare does exist, but the Republicans have misidentified the combatants: the opposing armies are not necessarily the wealthy and working classes, but rather large corporations and small businesses. Small businesses, based in specific locales, provide support far in excess of what their relative size would merit. They do not outsource jobs to other countries where wages are lower, nor can they shelter their profits offshore. Small businesses are community-centric; large corporations are not.

Elizabeth Warren is correct: the wealthy achieve because of the many who build their roads, educate their children, and protect their property, and they owe a collective responsibility to those whose contributions supported them. As a country, we will regain prosperity and economic strength when those at the bottom of the financial ladder see as much relative improvement as those at the top.

We’ve spent much of the last thirty years arguing the truth about rising tides raising all boats. But as any good mariner (and physicist) knows, tides rise from the bottom up, not from the top down.