Intelligent Taxation for a Growing Economy

By Edward J. Klein

A radical redistribution of wealth has occurred in America over the past thirty years, resulting in the majority of Americans having less than they had in the 70's. Much of the cause lies with tax programs that reduced taxes on the wealthy and increased them on the less advantaged. Essentially, we gave away the entire economic boom to 1% of the people.

The average American family pays twice the rate of taxes of the average family in the 1960's, while the wealthiest Americans have had their tax rate drop by more than 1/2. The result has been a concentration of 40% of the nation's assets in the hands of the wealthiest 1% of the people, while the government's expense is borne by working people. Dr. Klein would return our income taxes to a progressive system similar to that employed in the 1950's (adjusted for inflated salaries), when our nation had it's greatest economic growth. This would cut taxes for the average family by 1/2, without any loss of total revenue. The economy would receive the enormous stimulus resulting from 90% of Americans having more money to spend.

You might be saying, "But I heard the economy was booming!" It is, temporarily, because 90% of Americans are amassing unprecedented consumer debt and student debt in order to purchase the items they need. During this present boom, average hourly earnings, in real dollars, of working people in this country are more than 9% lower than in 1973. The worst hit are entry-level workers without a college education. Male high school graduates earned 27.6% less in 1997 than in 1979, while the decline for women was 18.3%. In order to compensate for lost wages, Americans are now working longer hours than the people of any other major industrialized nation. All this during an era of economic boom.

Where has all the money gone? Essentially to the wealthiest 1% of Americans. They now control the same amount of wealth as the bottom 92% of people. That distribution is twice as bad as that of India, and more resembles a banana republic than an industrial nation. Worse, the system is not stable. It is increasing the rate of concentration of wealth, so that we're headed toward a time when 2/3 of the nation's wealth is held by 1% of the people. That's called feudalism. To reverse this trend, we need to change a number of tax programs.

First, we should reinstate a progressive tax system, as stated above, so the wealthy begin paying their share of taxes. Second, Social Security tax should be an 8% tax on all income, not a 12.4% tax on working people's income. That would return 4.4% of working people's income to the economy. Social Security tax as it is presently run, taxes only the first $76,200 of earned income. People who earn more pay no Social Security tax on the additional income, and people who are wealthy enough to earn from investments pay no Social Security tax at all on that income. Social Security presently taxes only the people least able to pay. More alarmingly, the Social Security system has lent $500 billion to the general fund to make up for other budget short-falls. That means an additional portion of the regular government's expense is being borne by those least able to pay.

The third system that requires change is the home mortgage interest deduction. This program is particularly insidious, because it leads working people to believe they are getting help in owning a home. In fact, the opposite is true. Only 18% of families with incomes under $75,000 get this deduction. Those who benefit most from this program are those with a million dollar mortgage. If you don't own a home, or if your home has less than a million dollar mortgage, your tax dollars are helping those folks with the million dollar mortgage buy their home. This results in a tax loss of $47 billion, about twice as much as is spent for all federal low-income housing programs. A return of this $47 billion to the general tax fund could allow further tax cuts for lower and middle income Americans. So, the next time you walk through a neighborhood of $1-1.5 million homes, think about your tax dollars that went into purchasing them.

The fourth system that requires change is the capital gains tax. Presently, 89% of stocks and bonds are owned by the wealthiest 10% of Americans. During our present market boom, they are paying only 20% tax on that income, less than many working people pay on their earned income. The result is further concentration of wealth, and the need to raise taxes on the less-fortunate in order to raise enough tax revenue to run the government. Capital gain income needs to be taxed as regular income, on a steeply progressive scale.

Changing these four tax programs would drop taxes for the average American family by one-half, without any loss in tax revenue. The economy would have the enormous stimulation resulting from 90% of Americans having more money to spend. Our present economy is precarious, because consumer debt is very close to the melt-down point where the majority of Americans will no longer be able to borrow to purchase the things they need. This is especially true for young Americans, who are accumulating unprecedented student loan debt just to go to college. They will not have significant purchasing power for a decade after graduation. If 90% of Americans were to drastically reduce their purchases, the economic downturn could be enormous.

In 1998, the 400 richest Americans increased their net worth by $114 billion. If they kept only $34.6 billion and returned the rest to the public sector, as they should have with proper taxation, here's how that $79.4 billion could have been spent: 1) $48.4 billion would bring all poor Americans up to the official poverty line. 2) $7.2 billion would double the 1998 needs-based federal Pell Grants for college undergraduates. 3) $8.7 billion would pay for Head Start pre-school for the 2/3 of eligible children who are refused access. 4) $15.1 billion would triple the 1998 federal spending on training and employment.(Source: SHIFTING FORTUNES,by United for a Fair Economy and Holly Sklar,ISBN 0-9659249-2-0, p.17).

As a nation, we have unimaginable wealth, we just have not shared it yet. There is enough for each American to have an abundance in their lives, we just need to distribute it fairly. It would not require a radical change of systems, just a return to the relative distribution of wealth that the nation had 30 years ago.