Steele Yourself

I walked into an ornate hearing room in 1982 as a journalist covering a Senate panel debating a massive tax bill as the late Senator Russell Long, a member of the famed Louisiana political family of Democrats and populists, chided his colleagues for dithering over some needed tax increases. Around here he quipped with a sly grin, it’s always “don’t tax him and don’t tax me, tax that fellow behind the tree.”

Long’s comment, one of his favorites, came during a debate over proposed tax increased needed to reverse the impact of deep tax cuts that President Ronald Reagan had championed in 1981. Instead of reviving the economy as Reagan had promised, the tax cuts exacerbated the dire fiscal situation Reagan he’d inherited from President Jimmy Carter. Long’s witty message to his colleagues spoke to a larger truth, though. Politicians love to bluster about doing the right thing for the “American people,” but when it comes to raising taxes, they look for that fellow behind the tree.   

Congress actually passed the bill being debated that day over Regan’s opposition. The Tax Equity and Fiscal Responsibility Act of 1982, otherwise known as TEFRA, increased some excise taxes and closed some loopholes — measures that helped raised revenues to offset the deep deficits that characterized the Reagan years. But TEFRA was an exception to the rule. 

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Indeed, Reagan’s relentless drive to cut taxes set in motion an unraveling of the tax code that spanned four decades. The cuts made the fortieth president a Republican hero. Less publicized is the role those tax cuts played in the nation’s descent into inequality and the  indelible mosaic of a red and blue America.

James B. Steele, a distinguished journalist and author, has documented the role that tax policy played in creating inequality in America. In a report published by the Center for Public Integrity, a non-profit investigative news organization, and Bloomberg Tax, a news outlet that provides legal and regulatory information for tax professionals, Steele detailed how the wave of tax cuts unleashed by Reagan played a huge role in making America a dramatically different place.   

“Income inequality in America is at heights not seen for a century,” he reported. “A variety of factors have contributed, including the erosion of good paying manufacturing jobs, deregulation, a weakened trade union movement and the elimination of pensions and other rungs in the safety net. But taxes have been a principal engine of worsening economic inequality simply because the wealthy, thanks to their success in Congress, now have more money and make campaign contributions to politicians so the cycle isn’t interrupted.”

Steele’s journalism is the kind we don’t see much of anymore thanks to the hollowing out of the news industry by the forces of social media. Most news organizations simply don’t have the money to pursue ambitious reporting from journalists like Steele, winner of two Pulitzer prizes for his tax reporting. So I decided to share his project to remind us of what we are missing.  

James B. Steele and his latest book, America: What Went Wrong? The Crisis Deepens

Steele traced changes that Congress enacted in the tax code from the days when America had twenty-five federal tax brackets with rates that ranged from 14 to 70 percent to the current seven tax brackets with rates of 10 to 37 percent. In the interim four decades, he shows how Republicans, with help from some Democrats, enacted tax breaks that created massive budget deficits while slashing taxes for wealthy Americans and corporations and doing next to nothing for those further down the income ladder. 

Some of the Congressional largess is blatant. Reagan’s 1981 tax cut, for instance slashed the top income tax rate from 70 to 50 percent, giving the wealthiest Americans a yearly tax cut of $6.7 billion. The tax cuts went to only 82,000 of America’s 95 million taxpayers. 

“Cutting taxes for the rich over the past forty plus years has had a huge impact, leaving less money for public programs that benefit millions of Americans.” Steele reports. “Where the tax code once strove for a certain balance — the more you earned the more you paid — the rates have been reduced so much that there’s not nearly much difference now between the top rate a billionaire investor pays on their income and what a middle class salaried professional pays on theirs.” 

There are plenty of examples of egregious individual tax breaks in Steele’s report that have been covered by other Capitol Hill journalists, such as the tax breaks former President Donald Trump used to evade taxes on his income. What distinguishes Steele’s reporting is how he strings together policies enacted over four decades into a narrative that places privilege over fairness. You can read his report in less than twenty minutes here.

Steele reports that the dubious philosophy underlying the tax cuts didn’t work. Reagan and others argued that the cuts would pay for themselves by stimulating the economy, thereby creating more jobs and higher government revenues. But the Congressional Research Service, a credible non-partisan force in Washington, in 2012 reached the same conclusion as many skeptical economists: Tax cuts didn’t spur economic growth as much as they increased income inequality. 

Although Steele may not agree with me, legitimate arguments exist on both sides of the political aisle about the appropriate levels of taxation for shareholder dividends, profits earned on the sale of stocks and bonds, the role of tax policy in investment decisions and the level of corporate taxation. It’s hard to refute Steele’s portrayal of the big picture, though:

Tax cuts lined the pockets of the wealthiest Americans and not those on the lower rungs of the income ladder. 

His journalism shows how an experienced journalist with a seasoned eye can illuminate details that elude the average citizen. “Many corporate tax provisions are so complex as to be indecipherable to the average person, and even to most lawmakers. A change in one percentage point here, an add-on or a word there, the insertion of a date — any one of those can be worth millions of dollars to a corporation giving it permission to to something previously prohibited,” Steele reports. 

He shows how the power of one legislator in the pocket of powerful individuals can have a huge impact, too. Democrats and Republicans widely denounced an IRS policy that lets private equity and hedge fund executives pay taxes on their pay at nearly half the going rate. Yet when then Senate came up with a provision to narrow that loophole, Senator Kyrsten Sinema, the Democrat turned independent from Arizona, used her leverage in the closely divided chamber to kill it. Investment firms have contributed $2.7 million to her over the past five years, Steele reports. 

Steele also reports on sly tax provisions tucked into tax laws that Congress often enacts to stick it to the middle class. Congress enacted the Setting Every Community Up for Retirement Enhancement or the SECURE Act in December 2019, the waning days of the Trump administration.

Prior to the SECURE law, someone who inherited an IRA from, say, a deceased parent, could withdraw payments over their entire life. SECURE, Steele reports, mandates that withdrawals must be taken within ten years, triggering tax bills for beneficiaries while they are no doubt in higher tax brackets. 

“That means a middle class worker who inherits a $1 million IRA might pay $240,000 to $320,000 in taxes. A scion of a wealthy family who inherits $100 million in stock pays no capital gains taxes and can cash it out whenever desired thanks to favorable tax laws and clever tax planning,” Steele reports.  

The nation’s household income structure reinforces Steele’s reporting and shows how Republicans and Democrats alike find the middle class a juicy target for raising taxes needed to cover the deficits they create. Households that earn between $50,000 and $200,000 a year represent about 52 percent of the American population. Those with incomes of more than $200,000 represent only 11.6 percent according to the U.S Census Bureau. In other words, for people writing the tax laws, the 52 percent is where the money is. 

That doesn’t mean pondering tax increases for the very rich is a waste of time. America’s 724 billionaires hold more wealth than the bottom 64 percent of the nation’s population and usually have far lower tax rates than the rest of us. Those in the lowest tax brackets often pay a higher percentage of taxes on their income as the billionaires.

Steele’s report shows the value of the kind of journalism that makes politicians uncomfortable. Senator Long chaired the Senate Finance Committee for fifteen years and ushered through his fair share of tax breaks, particularly for the oil industry. Were he alive today, he’d probably warn his colleagues to steer clear of journalists like Steele by amending his favorite quip: “Don’t let him report on you, and don’t let him report on me, tell him to report on that fellow behind the tree.”

—James O’Shea

James O’Shea is a longtime Chicago author and journalist who now lives in North Carolina. He is the author of several books and is the former editor of the Los Angeles Times and managing editor of the Chicago Tribune. Follow Jim’s Five W’s Substack here.