Few Americans realize it, but the Democratic Party adheres to the basic premise of Marxist political parties.

The defining characteristic of a Marxist party is class warfare. The demonized class is “the rich,” whether the rich are capitalists, pharmaceutical companies, oil companies, California utility companies or upper-income taxpayers.

Like Marxists, Democrats frame policy issues in terms of “the rich” versus the “little guy.” Sometimes the “little guy” is a powerful environmental organization like the Sierra Club, which can lock up millions of square miles in a single stroke of a president’s pen. At other times, the “little guy” is AARP, a powerful lobby group that blocks necessary Social Security reforms in the name of the elderly.

The odd feature of class warfare is that the little guy, who is portrayed as being crushed under the heel of wealth, usually wins. The “little guy” is a propagandistic distraction that conceals the real power.

For example, in California right now the “little guy” is electricity consumers; “the rich” are the utility companies. Environmentalists succeeded in forcing California utilities to generate electricity by burning clean natural gas. Environmentalists also succeeded in obstructing natural gas exploration and pipeline construction. Throw in an especially cold winter [where is global warming when you need it!], which drives up the price of natural gas, and California regulations, which hold down the price that utilities can charge consumers for electricity.

You don’t have to be an economist to know that this is a formula for bankrupting California’s utility companies. However, polls show that 54 percent of Californians believe that their state’s utility crisis is phony, merely a ploy for the utility companies to raise the price of electricity.

This total disconnect from reality is the result of many decades of class warfare. The disconnect is in every policy arena and can be seen most clearly in tax policy.

Bill Clinton, Al Gore and a jillion professors and media pundits claim President Bush’s plan to cut tax rates is unfair. “It would give the ‘people’s surplus’ to the rich” is the oft-repeated refrain.

The fact of the matter is that 54 percent of the surplus belongs to the top 5 percent of taxpayers (those with incomes above $114,729), who pay 54 percent of the income tax revenues (see Special Report, Tax Foundation, Washington DC, Nov. 2000). To be fair, Bush’s tax cut must hand the surplus revenues back to the people whose tax payments created the surplus. Fairness requires 54 percent of the tax cut to go to 5 percent of the taxpayers.

Not even Republicans will be this fair. The rich will get back far less of the surplus than they paid in, and the poor will get far more. Despite this fact, Democrats will demonize the rich even though Bush’s tax plan will shift more of the burden to their shoulders.

The Democrats’ class warfare has been so successful that it rules Republican tax policy. The Bush plan will cut tax rates more in the lower brackets than in the higher, thus raising the relative share of the tax burden paid by the rich.

It is unlikely that you will ever hear this fact from The New York Times, Washington Post, CNN or the television networks. But you will hear much class warfare rhetoric. That’s the Marxist way.

In the United States, investors in general and especially the rich are forced to pay tax rates far higher than the statutory maximum. The top income tax rate is approximately 40 percent, but on April 15 rich people with investments in equity mutual funds and investment partnerships will pay a far higher rate.

This is happening because of tax laws and the way the stock market behaved last year. The first couple of months stock prices rose considerably; then they declined, ending the year below their beginning values.

Anticipating a decline, fund managers sold stocks that had appreciated in order to realize the gain before it evaporated. The IRS requires that gains realized by mutual funds be apportioned to fund holders for tax reasons even though the gains were more than wiped out for the fund holders by the general decline in the overall value of the mutual fund.

In other words, investors are taxed on phantom income. Two examples:

I know a teen-ager saving for college. He began the year with $9,210 in his mutual fund and ended the year with $7,928, a loss of $1,282. Despite this loss of 14 percent, he must report short-term capital gains income of $690 with a tax liability of $103.50 because the fund sold some appreciated stocks prior to the market decline.

Now consider the case of a rich man with 1000 times more money than the teen-ager. He starts the year with $9,210,000 and ends with $7,928,000, a loss of $1,282,000. Yet, he had $690,000 in phantom capital gains and owes $276,000 in taxes.

A fair tax system would tax the investor on gains only when he actually realizes gains by withdrawing from the fund or exiting from the equity partnership. But a fair tax system is precluded by the ignorance and animosity that class warfare generates. Not even Republicans can escape from Karl Marx’s influence.

[Perhaps if they started reading Ayn Rand…–Editor]

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Paul Craig Roberts

Paul Craig Roberts is the John M. Olin fellow at the Institute for Political Economy, research fellow at the Independent Institute and senior research fellow at the Hoover Institution, Stanford University.