12/12/2012 4:15 PM ET|
Smarter ways to tap the rich
Simply letting the Bush tax cuts for the wealthiest Americans expire won't fix the fiscal mess. Two creative ideas: Public-private infrastructure projects and a one-time, 26% wealth tax.
The fiscal cliff negotiations in Washington have hit an impasse with Republicans and Democrats entrenched in familiar positions. Democrats want tax hikes on the rich. Republicans want cuts to entitlement programs.
For many, the debate has boiled down to "Why don't the rich pay their fair share?" Taxes on the wealthy are the one policy tool that the majority of Americans support.
As I discussed last week (see "Why not jump off the fiscal cliff?"), ending the Bush tax cuts for the rich (worth around $80 billion a year) or ending them plus limiting deductions, as President Barack Obama has proposed (around $160 billion), won't solve the country's fiscal woes. It won't even come close. The fiscal cliff adds up to a $720 billion economic hit next year, and most of that comes from the expiration of the Bush tax cuts for the middle class.
But the rich do have an important role in getting us out of this mess. Below, I outline two ways the upper crust can break us out of this funk and return us to the path of prosperity.
We need to put their money to work if American jobs are going to return. But income tax hikes aren't the best way to do it.
2 problems, 2 solutions
In another recent column, (see "Is the economy a lost cause?"), I lamented the slow decline in America's economic vigor, with measures such as labor productivity and per-capita growth of gross domestic product having stalled. U.S. society has become increasingly overburdened by the cost of senior care and old debts, and, as a result, we're now neglecting critical investments in capital, infrastructure and young families.
This is unsustainable. If America's potential growth rate -- its economic speed limit -- continues to drop, the tax base will continue to shrink even as rates rise. Reliance on government welfare programs will grow, and the system will collapse on itself.
It's unacceptable in a country as prosperous as ours to have families killed by falling bridges and failing levees. It's unacceptable for time to be wasted on commuting nightmares on par with those in Romania and Hungary. And it's unacceptable to see America's productive capital base -- its machinery and equipment -- rust away due to a lack of business confidence and a corporate system that encourages companies to hoard profits overseas.
For the sake of discussion, let's focus on infrastructure. What's the scale of the problem? California has the country's worst road congestion and faces a $100 billion project backlog. Nearly three-fourths of the major roads in Massachusetts are in poor or mediocre condition. More than half the bridges in Rhode Island are structurally deficient or functionally obsolete. Overall, the American Society of Civil Engineers gave the country's infrastructure a "D" grade and recommended an investment of $1.6 trillion over the next five years.
That's point one.
Point two is that, for a variety of reasons, economic growth has become more unequal over the past few decades. Part of it is technological change. Part of it is rapid globalization and the downward wage pressure created by an army of cheap foreign labor. The result has seen benefits accrue disproportionately to the top.
According to Federal Reserve data, median household wealth for the middle class (in 2010 dollars) has actually fallen from $70,200 in 1989 to $65,800 in 2010. For the top 10% in terms of income, it has increased from $655,200 to nearly $1.2 million over the same period. It's the same story with income: Median income for the middle class dropped to $43,400 in 2010 from $45,800 in 1989, but it rose to $205,300 from $175,900 for the top 10%.
Research by Marianne Bertrand and Adair Morse, both of the University of Chicago, finds that as the rich spent lavishly with their new wealth, everyone else tried to keep up. Coach (COH) bags for everyone!
That, according to research from the International Monetary Fund, drove people into debt -- mortgages to chase the housing bubble, consumer credit, and now, student loans. Government played a role, too, borrowing to fund social programs as people voted to increase their welfare via the tax code and public spending.
As a result, household and government debts have surged, and they now hinder economic growth. Household debt as a percentage of disposable income went from around 70% in the 1970s to a peak of 134% in 2007 to 113% now. Government debt as a percentage of GDP has increased from around 30% in 1980 to near 100% now.
The reason the Federal Reserve's aggressive efforts to stimulate the economy haven't had a bigger impact is because people are unwilling or unable to increase borrowing. The government is focused on budget cutbacks, not investment. And households are focused on shedding debt to find their way back to a sustainable standard of living.
Moreover, the academic research shows that not only does higher debt limit economic vitality, but it increases the risk of financial crisis as well.
VIDEO ON MSN MONEY
A fixed tax rate for every American rings true in any 'fair-minded' argument; but taxation only addresses the INCOME side of the equation. What about SPENDING?
- Fact is, Government does not have an INCOME problem, they have a SPENDING problem. If annual budgetary costs require 100% of the GDP, a fixed rate - no matter how high - cannot capture enough funds to cover the SPENDING. There is no such thing as a 'fair share!'
- Not one penny of our nation's bloated annual budget, National Debt or looming 'fiscal cliff' scenario is the fault of the tax-paying class. (except idiots who knowingly vote irresponsible social spenders to political office) - Even then, the actual spending is done by the law-making spenders, not the private sector wage earners.
- Our fiscal problems are not the Working People's fault, it is the Spending People's fault.
- Our Government does not have an INCOME problem, it has a SPENDING problem - or more accurately, a HUGE personnel problem.
This is the first time in history that taxes wern`t raised to pay for wars.They sold war
bonds to help pay for wars and people were asked to sacrifice.Bush knew that keeping
taxes low was a cheap way of getting reelected in 2004.Young people didn`t have to
worry about the draft.As much as I hate war I`d buy war bonds when the market was
down 37% during the Bush years.
- Stagnation is caused by inactivity - Inactivity is caused by too much control over free motion - Freedom is the answer... Freedom is ALWAYS the answer. Rich people need freedom too!
- America needs rich people who are free to spend and invest their money as they see fit. We also need our Government to STOP spending money as they see fit. Yet we are told to despise the rich and trust our Government. Only a fool would fall for this line.
- Wake up fools! - Can't you see that Government greed is far worse than corporate greed?
- In the evolving life cycle every society, government develops an insatiable appetite to assume control over the rich person's wealth, the working man's labors and the poor person's dependency.
- Sadly, the working class and the poor are too easily duped (or maybe just stupid) to see who their real enemy of freedom is! ..... Hint... it's not the rich.
Folks, this fiscally conservative (social moderate) longtime MSN homepage user has decided to walk. I have moved on to the SmartMoney homepage.
I can no longer tolerate nor will I waste my time with bozo's like Cramer and Mirhaydari.
Reality Check: Disposable income? - What's that?
If 100% of America's GDP is needed to fund Government Services, there is no such thing as Disposable Income. Freedom of any kind is a myth in a Socialist economy. The rally cry for Socialism is "Economic Patriotism!" The rally cry of the human soul is " Freedom to Achieve or Die Trying!"
Anyone here actually believe that it would be one time event?
I think not. It would set an extremely dangerous precedent.
FIght this with every fiber of your being. Buy real gold coins, a safe and a gun.
TAXPAYER ! & MIRAGE BRAIN:You guys don`t know the first thing about taxes
or the economy.Just the opposite ofwhatever you guys say is right.
A single sentence lifted from this article says it all… “Government debt as a percentage of GDP has increased from around 30% in 1980 to near 100% now.”
Let’s see if I understand this percentage of GDP thing? – Are we to understand that back in 1980, in order to pay all operating expenses, Uncle Sam needed 30% of all the money earned by American Workers each year? - Wow, that’s bad enough; but today, they need 100% of every dollar earned by American Workers each year? - Am I reading this correctly? – If the annual cost to run our government equals our Gross Domestic Product, then anyone with a modicum of intelligence can see the only 3 solutions available to us…. They are as follows:
– A. Tax everyone at the rate of 100% – Everyone. Permit not a single person to keep a single dime of their own money, because Uncle Sam needs to confiscate 100% of the entire GDP as fuel for its massive engines.
- B. Make Government stop spending so much –Constitutional mandate stipulating that Annual Operational expenses of the US Government cannot exceed X% of GDP. (I suggest 20-25% - done!)
– C. Let there be a protracted Government shut down – a shut down managed like a well structured bankruptcy, designed to get our nation talking about the difference between necessary and unnecessary government services.
Enough partisan bickering about Dems vs Repubs! If the press were doing their job, they would frame the discussion around these 3 solutions only; because there is no other. Political sanity will not return to the United States until journalists push the National debate to hard questions about how much Government do we really need? – How much Control and Care do we really want? - What % of our lives do we want them involved? Do we want 30%, 60%, 100% ? These are the questions that need to be answered. It is a waste of time to quibble about this matter from any other angle. America is at the point where we must either give ourselves completely to the structure of Socialism – and begin PAYING our 100% socialist dues – OR, we need to exorcise ourselves from the Socialist demon altogether.
The only other sensible option would be State secessions.
Infrastructure investment sounds great....... until you run into the EPA, also known by folks in the midwest as the Economic Prevention Agency. As a former petrochem engineer and now a transporation engineer, I can testify to the incredible length of time it takes to get things done.
The USACOE thinks every road ditch is a valuable wetland. An environmental assessment takes a year. An EIS takes two to four years. How is the new oil pipeline from Canada to Oklahoma coming Mr President?
It takes less time to build a project than it does to do the environmental document for the FHWA and EPA. I saw this bozo on PBS compare this type of redtape to Wall Street deregulation and he inferred less regulations would lead to disaster. Please, leave the fantasy world of the university and try to build something and make a profit in the real world!
Republicans -- note this is what you offer... does not matter it they agree to it.
1. Revise the tax laws eliminating loopholes and special treatments.
2. Cut spending to reduce the deficit.
3. Give the middle class a tax reduction.
Get out of the socialist crosshairs. Obama will not look like such a hero if he is against a tax break for middle class. No one is going to be better off if we end up with a one party system.
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