The Price of Civilization: Reawakening American Virtue and Prosperity (32 page)

Other possibilities include a tax on bank balance sheets (proposed by Obama but not enacted) and a tax on financial transactions. Even a tiny levy on each stock trade or foreign exchange transaction could
raise tens of billions of dollars, much of which currently shows up in the gargantuan bonuses on Wall Street. New York State, for example, levies a transfer tax on the sale of stock shares of a mere $0.01 to $0.05 per share, depending on the share price. This small tax collects around $15 billion per year.
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Under the pressure of the Wall Street lobby, however, the New York State government has, since 1981, been rebating the revenues right back to the brokerage firms.

A final option, one that will likely be adopted sometime in the coming decade, is to introduce a value-added tax. The United States is the last of the high-income countries to introduce such a tax, and the absence of the VAT is the main reason why U.S. tax collections as a share of GDP are much lower than in Europe. The VAT is relatively easy to collect, creates low distortions, and raises considerable revenues. The main problem is that it is mildly regressive, meaning that it tends to collect a higher proportion of incomes of low- and middle-income households than of rich households. Even that might be acceptable and fair, however, if the tax proceeds are used overwhelmingly for the poor. Then the overall combined effect of increased taxes and spending would still be progressive on balance, that is, helping the poorest disproportionately to their income.

The upshot is the following: Perhaps 4 percent of extra GDP could be collected as of 2015 mainly by taxing the rich (2 percent), tightening corporate taxation (1 percent), strengthening tax enforcement (0.5 to 1 percent), taxing financial transactions, and taxing carbon emissions (0.5 percent). Introducing a VAT would raise even more revenues and could be phased in over several years. The point is that there are lots of options, and most of them could be concentrated near the top of the income distribution, where they belong.

How far should we go in raising tax revenues? To balance the budget entirely, we would have to raise 6 percent of GDP, identified earlier as the financing gap. To stabilize the ratio of debt to GDP, we can afford to aim a little bit lower. Suppose that we aim to stabilize the debt-to-GDP ratio at around 60 percent of GDP, a policy that would at least keep the U.S. budget out of long-term trouble. If
the GDP is itself growing by around 3 percent per year, a year-in, year-out budget deficit of 1.8 percent of GDP is consistent with a stable debt-to-GDP ratio. In other words, closing 4 of the 6 percentage points of GDP of the structural deficit would be enough to stabilize the debt-to-GDP ratio at 60 percent.

My point is not to settle the precise issues on spending and taxes, as these should be left to a far more detailed analysis by budget experts and to vigorous public deliberation and decision making. My point here is to insist that the rich should pay their way, and that they can easily afford to do so. All of the angst of canceling vital government programs to close the deficit is a charade put on by the rich for the rich. With a fair tax structure and a just contribution of the rich to the rest of society, we can afford a truly civilized America.

Let me clarify a point about this argument. Opponents of tax increases on the rich claim that the rich already pay more than their fair share. They claim that as much as half of the working population pays no federal taxes at all and that the richest 1 percent already pays 40 percent of the federal income taxes, compared with just 21 percent of pretax household income they receive. More taxation of the rich, according to these numbers, looks punitive.

These claims are not correct, however. First, almost all workers pay federal taxes, in the form of payroll taxes for Social Security and Medicare if not as federal income taxes. It is simply not correct to claim that the poor and working class escape from federal taxation. Second, the issue is not really the share of taxes paid by the rich but the level of taxation relative to income. Suppose that taxes were eliminated for everybody except the top 1 percent of households, whose taxes are reduced to just $1 per year. In this extreme (and deliberately silly) example, the rich would pay all the taxes, but we would not call their tax burden high.

To assess the burden of taxation, we should compare the taxes levied relative to income. In this regard, the income tax rates paid by the richest 1 percent have declined markedly from 1980 till now, falling from around 34.5 percent of income in 1980 to around
23.3 percent of income in 2008.
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Yes, the poorer households also received tax cuts (the average tax rate on the bottom 50 percent declined from 6.1 percent in 1980 to 2.6 percent in 2008), but against meager and stagnant incomes; the rich, on the other hand, received tax cuts against soaring incomes and ended up with a historically unprecedented share of the nation’s post-tax income.

Let me close this discussion by repeating a point that I made at the start of the book. I am not in the slightest against the accumulation of wealth, even vast wealth. I am not recommending a “class war.” There is no case for equalizing incomes through massive redistribution, and there would be a lot of grief and economic chaos if we tried. My point isn’t to bleed the rich but to call upon them to pay a decent and responsible share of the national needs. If poverty were eliminated, if all who wanted to go to college could afford to do so, if the poor lived as long as the rich, we could worry less about the responsibilities of the rich to the rest of society. We are not far away from those hallowed goals—if we invest in them. That’s the rub. We need the rich today to do their modest part to enable all of society to share in prosperity. By passing that hurdle, we would reduce the need for long-term transfers from rich to poor in the future.

The Return to Civic Responsibility

For thirty years, tax increases have been vilified and rejected at the polls. That might continue, but if so, America’s days as global leader and prosperous economy are numbered. For thirty years, almost all proposals for initiatives to upgrade the infrastructure and improve education for the poor have been crippled by inadequate budgets. Let me suggest three reasons why a new political majority might mobilize around a program of reduced deficits and increased public investment.

First, and most important, a new fiscal framework is needed to lift the United States out of its current economic crisis and its dangerously
large budget deficit. Second, political support for higher taxation on the rich is stronger than it appears. Recent opinion surveys suggest a readiness of the broad public to support a rise in the tax burden on high-income households. Third, the United States may be set for a fundamental realignment of the “governing majority” on fiscal issues as a younger and more progressive generation comes to the fore of politics and as minorities (especially African Americans and Hispanics) constitute a growing proportion of the voting population.

A new governing majority will depend on two breakthroughs. The first is that voters, not big money, once again determine election outcomes. We need to break out of the money-politics-media trap. The second is that government be able to translate increased revenues into effective public services and infrastructure. We need, in short, a return to civic virtue, in which Americans recommit to contributing to the common benefit and to cooperating for mutual gain. Yet we won’t even get started if the public’s confidence in Washington remains so dreadfully low. Reform of government is a vital component of any successful economic reform. The challenge of government reform is the topic of the next chapter.

CHAPTER 12.
The Seven Habits of Highly Effective Government

We have seen that winning campaigns and holding power require money and lots of it. Turning money into power and power back into money are Washington’s two main industries. The big corporations and the politicians play the leading roles. The corporations finance the campaigns and then lobby for corporate deregulation and the contracting out of core government functions. The politicians squeeze money from the corporations in return for political services.

In 2010, the conservative members of the Supreme Court “discovered” a new constitutional right of corporations to plow their shareholders’ money into political campaigns without legal limits, special internal controls, validation by shareholders, or any obligation of disclosure, in a decision called
Citizens United v. Federal Election Commission
. In his dissent, Justice John Paul Stevens harshly criticized the conservative majority for ignoring common sense as well as a hundred years of settled law:

Although they make enormous contributions to our society, corporations are not actually members of it … The financial
resources, legal structure, and instrumental orientation of corporations raise legitimate concerns about their role in the electoral process.
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The role of big money in politics has completely sidelined competent public administration. Government has been outsourced to private contractors, the ones who pay the campaign bills for Congress and the White House, which sign the checks for the contracts. As a result of deregulation and outsourcing of federal functions, we live through one abject failure after the next.

The list of recent government failures is long and growing. The intelligence agencies failed to anticipate 9/11. The Bush administration launched a war over Iraqi weapons of mass destruction that did not exist. The Iraq and Afghanistan occupations were totally botched, brought down by ignorance, lack of planning, and corruption of U.S. contractors. Hurricane Katrina shattered our confidence in our emergency response system. The banking crisis shattered our confidence in financial regulation. The banking bailout destroyed any remaining sense of fairness between Wall Street and Main Street. And now we face budget deficits unprecedented since World War II, but continue to grant massive tax breaks to the richest Americans.

Can government do better? Of course it can, as it does in many other parts of the world. But to do better, Americans need to be crystal clear about what is going wrong so consistently. I propose that the federal government adopt Seven Habits of Highly Effective Government:

• Set clear goals and benchmarks.
  
• Mobilize expertise.
  
• Make multiyear plans.
  
• Be mindful of the far future.
  
• End the corporatocracy.
  
• Restore public management.
  
• Decentralize.
  

Set Clear Goals and Benchmarks

There is a lot to be said for stating our goals clearly. John F. Kennedy, one of America’s most inspiring leaders, explained it this way:

By defining our goal more clearly, by making it seem more manageable and less remote, we can help all peoples to see it, to draw hope from it, and to move irresistibly toward it.
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Great leaders set great goals. When Kennedy called for America to send a man to the moon and back within the 1960s, he gave a remarkable explanation for why he called on America to make such an arduous and challenging effort:

[W]e choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills.
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America should define its long-term economic goals similarly. There is, of course, no single moon shot, no variable such as gross domestic product or the unemployment rate, that can encapsulate all of our economic aspirations, but we can effectively define the major goals of a mindful economy as I did in
chapter 10
, with specific targets for the year 2020. In a mindful society, such goals will be widely known, and progress toward the goals will be systematically reviewed each year in the State of the Union address and the annual budget proposal. Specific objectives are frightening to make and even harder to achieve. Yet, as Kennedy said, the aspiration to accomplish great goals helps us organize the best of our energies and skills.

One part of setting bold but achievable goals is to benchmark America’s performance with other countries. There are many such benchmarking exercises, but they are paid little attention by Washington and the public. If the political leadership and the American public begin to pay more attention to these benchmarks, they will better understand the case for reform.

Mobilize Expertise

The problems facing America have become much more complex over time, and the political class lacks the capacity to deal with them. The problems are global, interconnected across many areas of politics and policy, and often highly technical. The climate change challenge, for example, involves agriculture (both as a source of greenhouse gas emissions and as a highly vulnerable sector), electricity generation and distribution, federal and private land use, transportation, urban design, nuclear power, disaster risk management, climate modeling, international financing, public health, and global negotiations. Could one imagine a problem less easily handled by a layman Congress operating on a two-year election cycle?

The government’s departments are organized along the traditional lines that reflect the era when issues hit the American political radar screen, not the crosscutting challenges that we face today. The departments of Labor and Commerce date from 1913, during the Progressive Era. The Department of Energy dates from 1977, following the first oil crisis. It was almost dismantled by the Reagan administration on free-market principles. We have no departments for sustainable development, climate change, international economic development, or national infrastructure. The White House offices in these areas provide no substitutes for a department. Obama’s former “climate change czar” Carol Browner had a staff of fewer than a dozen professionals, almost all of whom were focused on congressional liaison rather than the technical substance of the climate change and energy agenda.