Tax reform is going to be a central component of getting us out of the mess that we are in. Here are seven truths that we – and our politicians – should keep front and center as the necessary reforms are debated:
1. Rhetoric aside, the U.S. has a regressive tax structure – one that imposes a greater relative burden on the poor than on the rich. This is unfair.
2. Increases in tax revenues are clearly going to be necessary to solve our long-term deficit problems.
3. Since the highest income/wealth Americans have the lowest “marginal propensity to consume,” raising taxes on them has the least negative effect (of any possible tax increase) on growth.
4, And since wealthy Americans already have vast amounts of money “sitting on the sidelines”, doing so should have little if any effect on investment.
5. The millionaire club agrees, as do the vast majority of Americans.
6. Continuing to take extreme (far right of center) points of view on this is inconsistent with what the majority of Americans think is fair and reasonable, and will only keep us locked in a stalemate that is very damaging to America.
7. Moreover, increasing taxes on the most wealthy will help to decrease the dangerously high level of income inequality that we have in the U.S., which promotes class warfare, crime, despair, and slow (or non-existent) growth. The levels of inequality that we have are similar to those that existed prior to the Great Depression. This status quo needs to be named for what it is – radical and dangerous.
As a follow up to my post last week on The economic crisis in a nutshell, here is a quick description of what it will take to get the economy of the United States (and the rest of the developed world) back on track:
First and foremost, we must avoid the mistakes that prolonged the Great Depression. We must not tighten either monetary or fiscal policy until we are safely out of the woods. Closely related, we must not confuse high levels of short-term debt with the long-term deficit problem.
Although the far right doesn’t like to hear this, we are going to have to spend our way out of this economic crisis – or endure prolonged stagnation.
But in doing so, we need to shift our spending from consumption to investment. We need to invest in education, infrastructure, sustainable energy, and supportive government policies (including those that promote innovation and help control/reduce health care costs and).
We also need to realize that there is much that we can do as individual consumers and investors. Technology-fueled people power is making it increasing possible for us to reward good corporate behavior (e.g., abiding by the law and being a good employer) and punish the opposite. We all need to exercise that power for the good of our families and the nation.
Finally, we need to get rid of politicians who vote against the interests of the nation and its middle class to make President Obama look bad. Their behavior is irresponsible and dangerous.
We need to stop class warfare (the rich against everyone else) and use tax reform, both corporate and individual, to restore the rapidly shrinking middle class. More on tax issues in my blog post next week.
How, you might ask, did the world get into such a mess?
Here is my version of the “CliffsNotes” answer:
For several decades, the economy has been undergoing a tectonic shift due to the twin forces of globalization and technology change. This shift has bestowed “competitive advantage” to countries that:
- Have large pools of low-wage labor
- A relatively well-educated labor force
- Functional infrastructure
- Supportive government policies
- Little corruption
Along with many other developed nations, the U.S. scores high on #5 and we’re in the middle of the pack on #2, #3 and #4. But to overcome the headwinds caused by #1 – we are not a low-wage country and don’t want to become one – we have to get a lot better on #2, #3 and #4.
For years we have been able to get by with less-than-world-class education, infrastructure and policies because our lifestyle – our wild buying spree – was subsidized by China. China sold us lots of stuff at low prices and also lent us money to buy their low-price stuff (along with houses we couldn’t afford). They did this to keep their people employed and maintain “social harmony.”
To a large extent, the ongoing financial crisis, which hit first in the U.S. and has now moved on to Europe, is a symptom of the massive imbalance that has been created between China and the developed world – not the cause of it.
To be sure, greed has played a big role. And for a long time, too many of us got confused and believed that greed was a virtue rather than a vice. But fundamentally, this greed (and its hand-maiden, stupidity) was fed by artificially low prices – including the low “price” of money (which is interest rates).
But the party is over. And we must now deal with the mess, including a very bad debt hangover.
A mess of this magnitude takes a long time to clean up. And like it or not, it is going to take massive government intervention – more on this in my next post early next week.