The Price of Inequality: How Today's Divided Society Endangers Our Future (34 page)

The Right suggests that all taxes are distortionary, but that’s simply not true: the rent taxes would actually improve economic efficiency. But there are some new taxes that might do so even more.

A basic principle in economics is that it is better to tax bad things than good things. Compared with taxing work (a productive thing), it is better to tax pollution (a bad thing, whether it’s oil that pollutes our oceans from spills of oil companies, toxic wastes produced by chemical firms, or toxic assets created by financial firms). Those who pollute do not bear the costs they impose on the rest of society. The fact that those who generate water or air pollution (including greenhouse gas emissions) do not pay the social costs of their actions is a major distortion in the economy; a tax would help correct this distortion, discouraging activities that create negative externalities, shifting resources into areas where social contributions are higher. Firms that are not paying the full costs they impose on others are, in effect, being subsidized. At the same time, such a tax could raise literally trillions of dollars over a ten-year period.

Oil, gas, coal, chemical, paper, and many other companies have polluted our environment. But the financial companies polluted the global economy with toxic mortgages. The financial sector has imposed enormous externalities on the rest of society—as we noted, the total costs of the financial crisis for which they bear significant responsibility is in the trillions of dollars. In earlier chapters we saw how flash trading and other speculation may create volatility, but not really create value: the overall efficiency of the market economy may even be reduced.

The polluter pay principle says that polluters should pay the costs that they impose on others. Through our bailouts and a myriad of hidden subsidies, we have in fact been effectively subsidizing the financial sector. There is a growing demand for the imposition of a variety of taxes on the financial sector, including a financial transactions tax, a tax on all financial transactions at a very low rate, or at least on a selected set of such transactions, like foreign exchange transactions. France is already in the process of adopting one. The UK has a more limited variant. The heads of Spain and Germany and the European Commission have advocated such a tax. Even at very low rates, it would raise substantial revenues.

There are other ways of raising revenues—simply stop giving away resources at below-market prices to oil, gas, and mining companies. Doing so can be thought of as a subsidy to these companies. The government needs to make sure that it’s not giving away willy-nilly billions of dollars, as it does when it allows TV stations to use spectrum without charge, when it allows mining companies to pay a minimal royalty, rather than auctioning off the rights to exploit these natural resources, when it conducts a fire sale on oil and gas leases, rather than a well-designed auction to maximize the revenue to the public.
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There are still other ways of raising more revenue: closing the hidden subsidies to corporations buried in our tax code (what we referred to in chapter 6 as corporate welfare), or eliminating the loopholes and other special provisions that have enabled so many American corporations to escape so much of the taxes that they should be paying.

In chapter 6 we presented evidence on the importance that most Americans give to fairness. Earlier chapters showed that, with those at the very top paying a smaller percentage of their income in taxes than those who are not so well-off, our tax system is not fair—and is widely perceived not to be fair. Our tax system relies, to some extent at least, on voluntary compliance; but if the tax system is viewed not to be fair, such compliance will not be forthcoming. We will become like so many other countries where compliance is either weak or attained only through intrusive and forceful measures. But creating a fairer tax system can also raise substantial additional revenues.

Levying additional taxes involves a simple principle: go where the money is. Since money has been increasingly going to the top, that’s where additional tax revenues have to come from. It’s really that simple. The good news is that the wealthy take so much of the nation’s income pie that a relatively small increase in their tax rates would yield large revenues. It used to be said that the top didn’t have enough money to fill the hole in the deficit; but that’s becoming less and less true. With those in the top 1 percent getting more than 20 percent of the nation’s income, an incremental 10 percent tax on their income (without loopholes) would generate revenues equal to some 2 percent of the nation’s GDP.

In short,
if
we were serious about deficit reduction, we could easily raise trillions of dollars over the next ten years simply by (a) raising taxes on people in the top—because they get so much of the nation’s economic pie, even small increases in tax rates raises substantial revenues; (b) eliminating loopholes and special treatment of the kind of income earned disproportionately by the top—from lower tax rates for speculators and dividends to exemption of municipal interest; (c) eliminating the loopholes and special provisions of the individual and corporate tax system that subsidize corporations; (d) taxing rents at higher rates; (e) taxing pollution; (f) taxing the financial sector, at least to reflect in part the costs it has repeatedly imposed on the rest of the economy; and (g) making those who get to use or exploit our nation’s resources—resources that rightfully belong to
all
Americans—pay full value. These revenue raisers would not only make for a more efficient economy and substantially reduce the deficit but also reduce inequality. That’s precisely why these simple ideas have not been front and center in the budget debate. Because so many in the 1 percent derive too much of their income from the sectors that get these gifts—from oil, gas, and other forms of environmentally polluting activities, from the subsidies hidden in the tax code, from the ability to obtain our nation’s resources on the cheap, from myriad special benefits given to the financial sector—these proposals have not been focal points of the standard deficit reduction agenda.

Just as we can design a tax system that raises more money and enhances efficiency and equality, so too for expenditures. In chapter 2 we saw the role of rents in enhancing incomes at the top and noted that some rents are just gifts from the government. In earlier chapters I described the important functions the government needs to perform. One of these is social protection—helping the poor and providing insurance to all Americans when the private sector fails to do so adequately or on reasonable terms. But while some welfare programs for the poor have been curtailed in recent years, what we described in chapter 6 as corporate welfare, subsidies to corporations, increased.

Of course, whenever proposals to reduce or eliminate subsidies (hidden or open) are broached, the recipients of those subsidies try to defend them as being
in the public interest.
There is here a certain irony, in that many of these corporations and recipients of government largesse simultaneously argue against government spending—for a small government. It is human nature that self-interest shapes judgments of fairness. The influence can, in fact, be subconscious. But as we have repeatedly observed, these subsidies and the efforts to get them distort our economy and our political system.

In the next section, we’ll explain how, by cutting these subsidies, and spending the money elsewhere, we can actually increase employment.
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S
QUARING THE
C
IRCLE:
S
TIMULATING THE
E
CONOMY IN AN
E
RA OF
B
UDGET
D
EFICITS AND
I
NADEQUATE
D
EMAND

If the economy were at full employment, we would focus on the “supply side” effects of reforms to the tax code and expenditure programs, reforms like the elimination of corporate welfare reduce distortions, thereby increasing productivity and GDP,
even as they raise more revenue
.

Today, however, the Right advocates a curious combination of supply- and demand-side measures: deficit reduction, it is somehow argued, will restore confidence in the country and its economy, and thus be positive; and tax reductions will improve the efficiency of the economy and put money in the hands of those who can spend it well. Of course, if deficits are to be reduced at the same time that taxes are being reduced, it means expenditures have to be reduced by a lot. And that’s the true agenda—downsizing government. Indeed, since most on the Right want to protect military expenditures, the necessary reductions in education, research, infrastructure—all the nondefense expenditures—would eviscerate these programs.

But this agenda would not only jeopardize the country’s future growth; it would deepen the current economic downturn. In this section I explain how the government can stimulate the economy even while it keeps its focus on debt, and how the agenda of the Right almost surely will be disastrous.

The government could borrow today to invest in its future—for example, ensuring quality education for poor and middle-class Americans and developing technologies that increase the demand for America’s skilled labor force, and simultaneously protect the environment. These high-return investments would improve the country’s balance sheet (which looks simultaneously at assets
and
liabilities) and yield a return more than adequate to repay the very low interest at which the country can borrow. All good businesses borrow to finance expansion. And if they have high-return investments, and face low costs of capital—as the United States does today—they borrow liberally.

The United States is in an especially good position to pursue this strategy, both because returns to public investments are so high, as a result of underinvestment for a quarter century, and because it can borrow so cheaply
long term.
Unfortunately, especially among the Right (but even, alas, among many in the center)
deficit fetishism
has gained ground. The rating agencies—still trusted in spite of their incredibly bad performance in recent decades—have joined the fray, downgrading U.S. debt. But the test of the quality of debt is the risk premium that investors demand. As this book goes to press, there is a demand for U.S. T-bills at interest rates near zero (and in real terms, negative).

Although deficit fetishism can’t be justified on the basis of economic principles, it may be becoming part of the reality. The strategy of investing in the country’s future would in the medium to long run reduce the national debt; but in the short run, the government would have to borrow, and those under the influence of deficit fetishism argue that doing so is reckless.

There is another strategy that can stimulate the economy, even if there is an insistence that the deficit
now
not increase; it is based on a long-standing principle called the
balanced-budget multiplier
. If the government simultaneously increases taxes and increases expenditure—so that the
current
deficit remains unchanged—the economy is stimulated. Of course, the taxes by themselves dampen the economy, but the expenditures stimulate it. The analysis shows
unambiguously
that the stimulative effect is considerably greater than the contractionary effect. If the tax and expenditure increases are chosen carefully, the increase in GDP can be two to three times the increase in spending.
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And while the deficit is neither increased nor decreased immediately—by assumption—the national debt is decreased over the intermediate term, because of the increased tax revenues from the increased growth that is brought about.

There is final way of squaring the circle—stimulating the economy within the confines of the debt and deficit—that works even if government can’t increase its overall size. And that’s where the reforms we discussed in the preceding section become particularly relevant.

We can take advantage of the extent to which different taxes and expenditures stimulate the economy, spending more on programs that have large multipliers (where each dollar of spending generates more overall GDP) and less on programs that have small multipliers; raising taxes from sources with low multipliers while cutting taxes on those with high multipliers. Money spent paying for foreign contractors in Afghanistan doesn’t stimulate the American economy; money spent paying unemployment benefits to the long-term unemployed does, simply because these individuals are so strapped that they tend to spend every dollar given to them. Raising taxes on the very rich reduces spending by at most around 80 cents on the dollar; lowering taxes at the bottom increases spending at almost 100 cents on the dollar. Hence making the tax system more progressive not only reduces inequality but stimulates the economy as well.
Trickle-up economics can work, even when trickle-down economics doesn’t.

Even the rich can benefit from the increased GDP, in some cases even enough to offset the increased taxes they would have to pay. Because government programs that increase rents (whether paying too much in government procurement, subsidies for rich farmers, or corporate welfare) go disproportionately to those at the top, cutbacks in these—with the money going for increased investments and improved social protection—increase equity, efficiency, and growth; and in the current situation the overall economy is also stimulated.

The Greek factor

The unfolding debt crisis in Greece and other problems elsewhere in Europe have instilled a fear of debt in many quarters. Many people who look at Europe’s crisis see it confirming their prejudices: it’s what happens when one has high taxes and debt and an excessively generous welfare system. But this interpretation of what has been happening in Europe is simply wrong, and there are marked differences between Greece’s situation (and the situation of other European countries) and that of the United States—differences arising from the monetary system.