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Paying For It

December 15, 2007

Robert B. Reich

Over a decade ago when, as Secretary of Labor, I hollered about the scandal of widening inequality in America, I’d get phone calls from Democratic officials who politely asked me to shut up. After all, I was part of the administration, and my complaints made it seem as if the administration wasn’t doing nearly enough. It wasn’t. We hadn’t delivered on Bill Clinton’s 1992 election promises. An expanded Earned Income Tax Credit helped the poorest, but the old working class was going nowhere. At Alan Greenspan’s insistence (Greenspan’s memoirs make this crystal clear), Clinton jettisoned most of his agenda to cut the budget deficit. In return, Greenspan lowered interest rates and created a booming economy that helped Clinton get reelected. The boom also created enough demand to lift blue-collar wages and temporarily halt widening inequality.

But controlling for the business cycle, the underlying trend hasn’t changed. Recent data from the IRS show that the wealthiest 1 percent of Americans are earning more than 21 percent of all income – a postwar record. The bottom fifty percent of all Americans combined are earning just 12.8 percent. The consequence of fiscal austerity and unwillingness to raise taxes on the rich is that America doesn’t have the means to lift the bottom half. So what are leading Democrats prescribing? More of the same.

There are only two economic philosophies in America – trickle down and bottom up. Trickle down means the rich get richer and pay less taxes. Supposedly they use their extra income to invest in America, which makes all of us more productive. But it doesn’t work that way. In a global economy, investments don’t trickle down; they trickles out to wherever on the planet the rich can get the highest return. If trickle down worked as advertised inequality wouldn’t be widening so fast.

Bottom up means giving all Americans what they need to be productive – universal and affordable health coverage, good schools, a chance to attend college, job retraining, affordable child care, and good public transportation to and from the job, for starters. But as we learned a decade ago, this requires money – even more, now. So the question is how the nation can afford it and also give the soon-to-retire baby boomers the Social Security and Medicare they expect, pay for homeland security and national defense, invest in non-fossil based fuel technologies, and repair the nation’s decrepit infrastructure (recall the pipe that blew out in New York last July and the bridge that collapsed in Minneapolis). I haven’t even mentioned the trillion dollars necessary to shield the middle class from the Alternative Minimum Tax. Even if we cut corporate welfare, eliminated subsidies to agribusiness, and banned all earmarks, we wouldn’t have nearly enough.

The only way is to stop obsessing about balancing the budget and start pushing for a serious tax hike on the rich. Yet all Democratic presidential candidates are styling themselves “fiscal conservatives” and none has suggested raising the marginal tax rate on the richest beyond the 38 percent rate it was under Bill Clinton (it’s now 35 percent, and the richest of the rich – the hedge fund managers, private equity managers, and venture capitalists – are paying only 15 percent, since their earnings are treated as capital gains). They may talk bottom-up economics but they’re still wedded to trickle down.

Who should pay what? The principle should be equal sacrifice. In paying taxes, people ought to feel about the same degree of pain – regardless of whether they’re wealthy or poor. Someone earning $2 million a year ought to pay a larger portion of her income in taxes than someone earning $20,000 a year. Even Adam Smith saw the wisdom of a graduated tax. “The rich should contribute to the public expense, not only in proportion to their revenue, but something more in proportion,” he wrote.

The standard right-wing argument is that a big portion of taxes are already paid by America’s rich. That’s not only wrong (it leaves out payroll taxes, sales taxes, and “sin” taxes – all of which are highly regressive) but it’s irrelevant. The rich have become so wealthy that even if each paid out a minuscule percent of their incomes in taxes, they’d still – as a group – account for a significant share of the total. The ethical and logical issue has nothing to do with the sacrifice an economic “class” makes but the sacrifice an individual makes. I find it ironic that right wingers who extol the virtues of individualism and abhor so-called “class warfare” resort to such specious arguments.

So what’s fair? I’d say a 50 percent marginal tax rate on the very rich (earning over $500,000 a year). Plus an annual wealth tax of one tenth of one percent on net worth of people holding more than $5 million in total assets. Can’t be done, you say? Well, the highest marginal tax rate under Republican Dwight Eisenhower was 91 percent, and the American economy did fine. You say the rich will leave the country rather than face a marginal tax of 50 percent? Let them, and take away their citizenship. That should be the Democratic version of tough love.

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people.

This article originally appeared in The American Prospect.

Copyright 2007 Robert B. Reich

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