“I am a strong believer that increasing taxes will hurt our economy,” Arnold Schwarzenegger declared while laying out his new budget for the state last week, and in this, he is not alone. Back here in Washington, George W. Bush has his folks hard at work at his own forthcoming budget, in which he reportedly will seek to shield up to $30,000 a year in a family’s investment income from taxation — effectively abolishing all taxes on investment.

We are not yet at the point in America where Republicans can defend their policy of tax cuts, or no new taxes, for the wealthy on the basis of their existential preference for the rich. We’re close. George Gilder, the poor man’s philosopher of the superiority of the rich (and the white), has come close to propounding a natural order in which the wealthiest are the most deserving. But there still has to be an economic rationale for this preference, else we’d topple from a de facto plutocracy into a de jure one, which would run inconveniently counter to things like the spirit of the Declaration of Independence. That’s a fight the right-wingers don’t need, so they still go through the motions of making the case that helping the rich helps us all.

But what is it that has made the California economy so dynamic? Low taxes? A laissez-faire economy? Those were never California’s calling cards. Since the military buildup that preceded World War II, the state has benefited hugely from federal military spending. And the California of the post–World War II boom was a high-tax state that spent those taxes on the best public schools and university system in the land, and freeways and aqueducts that worked so well they became the stuff of legend.

With the governorship of Ronald Reagan, for whom the line between fact and fiction was always fuzzy at best, the state developed a bad case of amnesia when it came to understanding the source of its own wealth. In Reaganland, California had grown rich despite the government’s efforts to impoverish it. With the passage of Proposition 13 in 1978 (only after Reagan had left office), the state did retrench its spending somewhat. But the high-tech boom of the ’90s emphasized once again the importance of the aggregation of brain-power at the state’s universities — that is, the role of smart public investment in generating large private fortunes. There’s a reason why Silicon Valley is not in Nebraska.

Arnold Schwarzenegger claims Ronald Reagan as his hero, and he seems to be making much the same mistake as the Gipper. The wealth of California, Arnold seems to believe, comes from the investments of the wealthy, who emerge unscathed from the new Schwarze-
negger budget. Not so fortunate are the 540,000 students enrolled in the University of California or California State University systems. The undergrads are facing a tax hike — excuse me, fee increase — of 10 percent; the graduate students, of 40 percent. Community college students are facing fee increases that will raise their annual bill from $540 to $780 — real money to many of the system’s working-class students.

But beyond effectively imposing tax hikes on low- and middle-income college students and their families, Schwarzenegger is also proposing cutbacks at the UCs and CSUs that can only hurt the state’s economy in the long run. If Arnold gets his way, freshman enrollment in both systems would be cut by 10 percent, shrinking next fall’s incoming classes by 3,200 students at UC and 3,800 at Cal State. Those 7,000 students are to be redirected into the community colleges, which, in a kind of gloomy symmetry, have space available because their enrollments have declined due to the past several years’ tuition hikes. In a sense, Schwarzenegger is giving a generation of students a taste of downward mobility before they even graduate.


More fundamentally, however, the governor is proposing to squander the wealth of the state, cutting back on the most highly prized commodity that California produces: smart, competent young people. He still lacks a full-fledged theory of how favoring the rich benefits society more than favoring the bright, however. For that, we must turn to the president, and not only because Bush combines at the highest levels the qualities of plutocrat and philistine.

For it’s Bush who has made a fetish of eliminating taxation on investment and inheritance, while leaving taxes on income derived from work largely untouched. In his three years in office, working with the numerous right-wing lunatics and occasional feckless Democrats who populate Congress, he’s already phased out the estate tax by 2010, reduced the tax rate on dividends by more than half, and cut the capital gains tax from 20 percent to 15 percent. No such equivalent reductions have been made to the income tax of the middle class (most families come out no more that a couple hundred dollars ahead, if that), and none at all to the payroll tax, which is much the biggest levy on working-class Americans.

There’s more behind this, again, than just the identity politics of the rich. The raison d’être for reducing taxes on investment, every conservative economist and politician will tell you, is that it’s investment that powers economic growth. Problem is, Bush has cut trillions in taxes, chiefly for the wealthy, and the nation has still lost over 2.5 million jobs during his tenure in office. The U.S. is now in the 28th month of the current recovery, and if you average out all our other post–World War II recoveries, we should have now created 7.5 million jobs. Instead, we’ve created a scant 278,000 since the job market bottomed out last summer. Last month, amid Christmas hiring and all, the economy churned out 1,000 new jobs — a statistical burp. Clearly, the theory of investment-led growth isn’t working.

Or, more precisely, it’s not working for the U.S. economy. Corporate profits are surging and investment income is up, but that’s in large part because our corporations are doing their hiring in low-wage nations abroad — the Wal-Marts in China, the high-techs in India. In the era of globalization, cutting taxes on the rich generally and on investment income in particular does benefit a number of nations’ economies. Just not our own.

All taxes are not created equal. If there ever was a rationale for cutting taxes on investment rather than labor, it has utterly ceased to exist in an age when American corporations no longer hire at home. Shifting the tax burden from the rich to college students, though, is worse than pointless, unless Arnold’s goal is to dumb-down a knowledge economy. It actually leaves us at a competitive disadvantage to other states that still believe in sending their kids to college.

But knowledge is so totally over. In D.C. and Sacramento, we’re all about ideology.

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