Tax Analysts®Tax Analysts®

Article Archive

May 16, 2006
The Perils of Populism
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

The Perils of Populism

Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail:

* * * * *

Populism is all the rage among Democrats. Since Sen. John Kerry's loss in the 2004 presidential election, activists have been urging the party to go left. Liberal bloggers have been at the vanguard of the insurgency, attacking centrist groups like the Democratic Leadership Council (DLC) and calling for a new, more authentic, and unapologetic embrace of liberal ideology.

Tax policy figures prominently, if improbably, in this internecine struggle. Democrats of every stripe tend to agree on most tax issues, but that hasn't stopped the neo-populists from using taxes in their effort to wrest control of the party. In fact, the populist tax agenda has much to recommend it. But it springs from an atavistic longing for the imagined past of progressive taxation. Populists should be careful with this creation myth, for it threatens to exacerbate the very problems they seek to solve.

The Promise of Populism

The populist style in American politics has a long and storied past. It has been used to advance a range of disparate agendas, including some unsavory ones. Farmers laid claim to the capital "P" when they founded the Populist party in the late 19th century. But small "p" populism has been used to defend organized labor, New Deal liberalism, anti-immigrant nativism, and Jim Crow segregation. Clearly, populism comes saddled with a programmatic, not to mention moral, ambiguity.

But populism is not an empty or incoherent label. As historian Michael Kazin argued in his influential 1995 study, Populist Persuasion, it describes a political tradition marked by producerism: a view of American society pitting those who work for a living against those who don't. Producerism put farmers and workers at the center of society, casting them as protagonists in a titanic struggle between The People and The Interests. But the producerist Weltanschauung was the original big tent: It made room for a range of middle-class comrades, including small-business-owners, professionals, and entrepreneurs.

Liberal pundits John B. Judis and Ruy Teixeira have stressed that point while urging Democrats to build a new coalition around producerist thinking. "Populism's producer ethic," they said in 2002, "fits the 'high-achieving rich' better than the 'shiftless poor.'" Interpreted broadly, populism cum producerism could become the nexus of a Democratic revival.

Democratic activists have embraced that expansive definition of producerist ideology, claiming a huge potential constituency for their new brand of liberal politics. At the same time, many of those same activists have adopted a narrow definition of party leadership, seeking to read many prominent Democrats out of the liberal community.

Hostile Makeover

David Sirota has been a crucial player in the insurgency. Rising quickly through the ranks of Democratic politics and liberal punditry, he has championed the interests of average Americans against Big Money and Corporate America. And make no mistake about the capitalization: Sirota paints pictures with a broad brush, and he likes his villains -- no matter how diffuse -- to seem unitary, coherent, and dangerous.

Sirota has been getting a lot of press lately for his recently published neo-populist screed, Hostile Takeover. And screed it is. Don't run out to buy this book if you value nuance, careful thought, reasoned argument, or civility. This is no-holds-barred, bare-knuckled political vituperation. As one reviewer, Matthew Yglesias of The American Prospect, has charitably observed, Sirota is famous -- at least among liberals -- for having "pioneered a bracing, take-no-prisoners prose style that combines overstatement with rhetorical flair." Perhaps. But it might be more accurate to say that he pioneered an over-the-top, overheated polemical style that confuses overstatement with rhetorical flair.

Sirota believes that American government is a wholly owned subsidiary of Corporate America. "Just as the mom-and-pop store in your town was bought out by the big corporate conglomerate, so has our government been the victim of a hostile takeover," Sirota writes. "Over the last thirty years, Corporate America has applied its most effective business tactics to the task of purchasing the one commodity that's not supposed to be for sale: American democracy."

The corruption of American government has been both obvious and subtle. In brazen fashion, business buys favors from craven politicians, chiefly but not exclusively through campaign contributions. Even more dangerous, however, is the success that Big Money has enjoyed in shifting the terms of political debate.

"In speeches, town meetings, community events, television advertising, and all the other channels of modern political communication, corrupt lawmakers parrot Big Business's lies, myths, and half-truths -- all designed to make us believe policies that sell us out are actually in our best interest," Sirota declares with characteristic self-restraint. "The result, much to the pleasure of Big Money interests, is a deliberately distorted and dishonest political debate wholly divorced from the day-to-day economic realities facing ordinary Americans."

Sirota insists that Big Money has corrupted not just Republicans but also Democrats. He scorns centrist politicians, especially the grandees of the DLC. Big Money owns the DLC and uses it to deflect dangerous ideas bubbling up from the Democratic rank and file, he complains.

Sirota's argument has several problems, but the most infuriating is its patronizing treatment of American voters. While claiming to treat "ordinary Americans" with respect, it actually casts them as dupes. Sirota believes that Americans are mad as hell, alienated from politics and disillusioned with both parties. But they're too unsophisticated to understand what's really going on. "Most people, of course, sense this takeover, sense the corruption, and sense that they are being lied to on a regular basis," Sirota writes, "even if they can't put their finger on exactly what it all results in."

This is simply warmed-over Marxism, heavy on the cultural hegemony and false consciousness. The book treats elections as a farce and explains the outcomes as some sort of tragic mistake. Voters are deprived of their agency, reduced to objects of manipulation. Indeed, Sirota respects everything about his "average Americans" -- their pain, their suffering, their outrage. Just not their intellect.

When will liberals stop ascribing their failures to voter ignorance and gullibility? Blaming the victim will not deliver Democrats from political purgatory. And cloaking condescension in producerist ideology does a disservice to the populist tradition.

Populist Taxation

How does neo-populism play out on the policy arena? After careening through his overheated introduction, Sirota considers a range of topics, emphasizing the influence of Big Money and suggesting ways to counter it. With the pleasant myopia of a policy journal, let's ignore all those chapters except the first, which considers tax.

Sirota offers up a conventional set of Democratic policy prescriptions. He wants to roll back President Bush's tax cuts (pretty much all of them), crack down on corporate tax avoidance, and beef up IRS enforcement. At one point he explores some novel territory, suggesting that any future tax cuts should be distributed equally among taxpayers. And he means equally: the same dollar amount for every person. In a feat of confused analysis, Sirota manages to connect that idea to the Bush tax rebate of 2001, giving the White House improbable, and undeserved, credit: "And though these rebates were far outweighed by larger tax cuts for the wealthy, they were a step in the right direction, because they moved toward treating every American equally." They did? And here I was thinking that they were a transparent and wholly cynical effort to buy middle-class support for a dubious tax program.

Like almost all leading Democrats, Sirota wants to eliminate preferences for capital income, including low rates on dividends and capital gains. And he suggests eliminating all narrow preferences except those targeting his cherished "average Americans": He would retain a scaled-back version of the mortgage interest deduction, as well as generous child credits. Not surprisingly, Sirota would keep the estate tax but raise the exemption to $5 million. Finally, he endorses two changes to the Social Security payroll tax: an exemption for the first $10,000 in wage income, to be paid for by an increase in the income cap.

I'm not sure how that tax agenda distinguishes Sirota from all the "corrupt" Democrats ostensibly in bed with Big Business. I can't imagine the DLC, for instance, would object to most of those ideas. Generally speaking, Sirota's plan sits comfortably in the mainstream of Democratic thought. I'm sure that characterization would gall him, intent as he is on extending his us-versus-them paradigm deep into Democratic ranks. But it's true.

The Problem With Populism

Sirota's tax program is not without its problems. Like most Democrats, he seems fascinated with corporate income taxes, pinning much of his program on tough new enforcement for that beleaguered fiscal tool. "Big business argues that corporate taxes must be eliminated in the United States to keep American companies competitive with companies based in Third World tax havens," he declares with characteristic overstatement. "As if we should blindly engage in a race to the bottom for status as the world's biggest and best corporate banana republic."

That's all very nice, and not entirely unreasonable. But it hardly constitutes a thoughtful response to the pressures of globalization. In fact, it's little more than wishful thinking. Global tax rates on corporate income have been declining for a long time. Democrats need to address the implications of that trend, not stick their heads in the sand and think fondly of the 1950s, when both statutory and effective rates exceeded 50 percent.

Indeed, Democrats should do some original thinking on the subject, perhaps suggesting a little old-fashioned tax reform. How about trying to broaden the base while lowering the rates? Martin A. Sullivan has made the case for that sort of classic tax reform in the pages of this magazine, and Democrats should give the idea some thought. (See, for example, Tax Notes, Jan. 30, 2006, p. 440, Doc 2006-1557, or 2006 TNT 20-8.)

But alas, many Democrats -- at least those in the Sirota mold -- don't seem to like lower rates. Not in any context, and not for any tax. Even when coupled with base-broadening reforms, they treat lower rates as a giveaway to the rich.

Consider Sirota's view of the 1980s: "During the Reagan era, the top 10 percent of the population saw its effective tax rates plummet, while almost every other segment of the population saw an increase," he declares. Well, not exactly. To support his claim, Sirota cites The Politics of Rich and Poor by Kevin Phillips. But Phillips's data -- based on numbers from the Congressional Budget Office -- tell a more nuanced story.

Between 1977 and 1984, seven income deciles saw a decrease in their effective tax rates, while three saw an increase. To give Sirota credit, the increased rates were clustered in three of the bottom four deciles, but it's hardly fair to say that most people saw a tax increase. Still, rich taxpayers got the biggest cuts, with those at the pinnacle (in the top 1 percent and 5 percent) doing much better than everyone else.

The data get more interesting when extended to include the Tax Reform Act of 1986. Almost every income decile saw an increase in its average tax rate between 1984 and 1988, except for the bottom two, both of which enjoyed a modest cut. But over the longer period from 1977 to 1988, five deciles saw their effective rates rise while four saw them fall (those in the eighth decile saw no change). The cuts were located in the 2nd, 6th, 7th, and 10th deciles. Top-tier taxpayers still did the best, even after the tax reform act recaptured some of the early 1980s rate reductions.

As a whole, the data describe a more complicated reality than Sirota suggests with his breezy claims about plummeting rates for the rich. Thoughtful Democrats might conclude that the early Reagan tax cuts were bad policy, granting favors to the rich and penalizing the poor. But tax reform did much to right that imbalance, reducing effective rates for the poorest Americans while reclaiming from rich taxpayers some of the early 1980s windfall.

But apparently that story won't play in Peoria -- too complicated for those witless but oppressed voters, I guess. Sirota obligingly clarifies our murky reality by reducing the 1980s to a one-dimensional era of greed run amok. No reason to muddy the waters with boring and complicated thoughts about the effect of base- broadening tax reform.

A Misusable Past

Sirota seems to long for a return to good old-fashioned progressive taxation, which seems to involve steep rates on wealth and capital. But he's confused about the history of that idea and is unconcerned with its pitfalls. Indeed, Sirota seems blithely unaware that his policy preferences might worsen the corruption he sees in every corner of American politics.

Early in his tax chapter, Sirota constructs a narrative of fiscal decline, including a creation myth. Early in the century, he writes, Americans reached "a consensus answer" on the best way to fund government: graduated income taxes on people and corporations. "It seemed simple enough," he explains. "The Rockefellers and the Mellons would pay a higher tax rate than their servants because they could afford to. In return, the wealthy were the disproportionate beneficiaries of a safe, secure, well-run national infrastructure."

That happy mixture of ability and benefit theories apparently worked nicely for some (unspecified) period. But all was not well; the forces of darkness were busy trying to undermine that popular regime. "Slowly but surely," Sirota contends, "arguments opposing this perfectly functioning system began to take hold."

The rest, apparently, is history, with America racing down the road to ruin, with progressive taxes under constant attack by "a small coterie of tax-cutting zealots who possess a cultish devotion to the idea that allowing the superwealthy to accumulate more wealth is the highest economic good." By the 1980s everything had gone to hell, leaving us with "a tax structure flipped on its head."

That's a nice story, convenient for those of us who like progressive taxation. Too bad it doesn't have much to do with reality. The birth of the income tax was a long process, marked by bitter debate and contentious struggle; there was no "consensus answer," certainly not in the beginning of the 20th century and probably not until the 1920s -- when Treasury Secretary Andrew Mellon made the world safe for income taxation by cutting rates.

It's also worth pointing out that Sirota's golden age of progressive taxation was marred by some very regressive taxes on consumption. Excise levies on items of popular consumption remained a pillar of federal finance until World War II, provoking outrage among some politicians and indifference among others.

Corrosive Corruption

For the sake of argument, let's accept the notion that federal taxes were once more progressive than they are today. Why did the system change? Sirota has a simple answer. "Using everything from subtle loopholes to brazen tax cuts targeted at the wealthy," he writes, "moneyed interests have used huge campaign contributions and lobbying resources to transform a once progressive system into one with one single goal: making the rich richer."

That seems generally accurate, if predictably overstated. And it suggests a problem that Sirota chooses to ignore: Progressive taxation in the populist mode -- replete with steep marginal rates -- has an inherent tendency toward self-destruction. In fact, it breeds precisely the sort of corruption that Sirota so despises.

The real golden era of progressive taxation -- those happy days of World War II when rates climbed over 90 percent -- went a long way toward creating the modern market for loopholes and preferences. Many midcentury liberals, including tax experts in the Roosevelt Treasury, understood the dangers inherent in high rates: When they get too high, Big Money steps in to bring them down. If Big Money can't do it with a frontal assault (as it has during the last six years or so), it will do it incrementally by poking holes in the tax base.

So when populists like Sirota counsel higher taxes on the rich, they might give some thought to the problems that come with that agenda. And before they dismiss traditional tax reform, they might consider the benefits of trading lower rates for a broader base.