Better than a tax hike

Yes, I can hear the complaints already. It's a huge wealth transfer. It's punishing the rich. It's redistribution. And it is. And it's a tragedy that poor choices by policymakers and economic actors large and small have forced us to consider once-unthinkable options.

Yet, given the crazy-bad situation we're in, I think it's the best option.

This would be a better way to lean on the rich, from an academic perspective, than income tax hikes. It wouldn't damage future investment decisions the same way. Plus, the top 20% of households in terms of income are already paying 70% of the federal tax burden, according to Congressional Budget Office data, so higher tax rates seem excessive.

Simply raising ongoing income taxes also reduces any incentive the government has to reform big entitlement programs and attack health-care costs -- which, I explained last week, are the real cause of the long-term deficit. (See "Why not jump off the fiscal cliff?")

The other tax-hike option is jacking up capital-gains rates, but that would work against rebalancing the economy away from consumption toward savings and investment. So that's a no-go.

I also like the idea of making this a one-and-done event. Confidence at the top would be hit, temporarily. But if combined with real entitlement reform, a surge of new infrastructure, a stronger housing market and enthusiastic consumers, everyone could end up being better off. BCG also suggests teaming this with a reduction in income-tax rates on the wealthy.

Clearly, there are negatives. People could be encouraged to take outsized risks again, hoping that the government will bail them out if things go wrong. That would need to be addressed.

However, the BCG thinks the benefits outweigh the risks:

"Such a source of action would pose a significant issue of moral hazard, benefiting those who were reckless and imposing a share of the burden on those who were careful. But the government could conclude that the total economic and social costs of a prolonged period of low growth and deleveraging are so huge that unconventional measures are justified."

For the rich, it's better to pay a little now, and then profit from the building of new roads and bridges and the growth revival that results, than to risk a Greek-style social revolt later as governments are unable to deal with the fiscal crunch of aging populations, crumbling infrastructure and slow growth.

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The current solution to the problem of too much debt -- playing for time -- just isn't working.

At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column in his personal portfolio.

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