I meant to post this earlier this week, but didn’t get to it until today. Earlier this week, James Stewart, a fellow member of Omega Lambda Tau Social Society (a co-ed Greek organization that I helped found at Clarkson University Warren
“As a thought exercise, what policies would lead to a larger middle class while not increasing the number of poor or rich?”
My response follows, addressed to him directly, but I think worth sticking up here as a post.
Stew,
Thanks for the spelling help. Good question and one I wish we would focus on. Here are my suggestions, which are not all complete, but some are stabs that can help or concepts to start with that can be fleshed out:
1) Lower the Corporate Income Tax rate to circa 15% or so, or at least drop it to a point that it makes it competitive with other major industrialized countries. Rational: We need to encourage business growth, within corporations not sidelining monies to offshore or other non-US locals, to keep investments domestic. When tied with my other ideas, the concept is to not pay out dividends, but grow business and markets with the goal of increasing exports in the long term.
2) Segment and split capital gains taxes. For instance, I would increase capital gains taxes on payout of dividends, but drop or moderate them on the gains made on the trading of securities. Likewise, I would lower the rate on real estate transactions, so that is becomes attractive to invest again in real estate. Right now we are painting capital gains with a wide brush, and this needs to be looked at carefully. The goals we need to have are to allow business to grow, but not pay out huge dividends to those that hold the securities and, rather, encourage them to reinvest in either that company or other emerging companies (thus expanding capital venture options). Likewise, we need to jump start our real estate market by making it attractive to make gains that derive from that market.
3) Alter the progressive tax code to add at least two more tiers at 500K and 1M, and cap the amount that can be offset by donations (and this shouldn’t be minute, but also not too large an amount (a.k.a. circa $250-500K)). Individuals holding wealth does not breed more wealth, it stuffs it under the mattress. The goal ought to be to discourage holding sizable personal income, but instead invest that money in businesses (see above) and look to derive gains from sources that spawn more wealth. I support progressive personal income taxation, as there is a distinct opportunity benefit derived in this economy/this system from one being able to incorporate and “make it” based on your own merits with relatively limited interference/control by the government in your endeavor, and those that benefit the most have gained a disproportionate amount of that benefit. This is antithetical in some circles, but I would also indicate that if we allow individual incomes (please make note I am not talking about corporations) to climb and concentrate in a few hands, in a near-fixed wealth environment/resource constrained world, then there will be less that have the means to buy the products and services that are produced, thus decaying the ability to generate wealth through the creation of said goods and services. In other words, having a group to sell your goods to that has the means to buy them, enriches the seller, and, if reinvested, creates more buyers to sell to and further enrich. This is not socialistic, it is precisely why and how Henry Ford was successful. He made a car that his line worker could afford and paid wages to them that enabled them to pay for the cars made, building a working class, enriching Ford Motors, and, honestly, having a drastic effect on the macro-economy as a result.
4) Preserve the home mortgage interest deduction for your primary residence and up to one other property. The value of this deduction, however, would have to modulated and caped at the median rate of the cost of homes in the geographic area you live in. Ergo, if you have a house at medium value for the area you live in, you get the full deduction for the interest payed. If however, your home is 25% above that median value, then your deduction is on the interest paid is reduced by 25% (so a house at double the value of the median price in that market would not get a deduction on the interest paid). Simply this allows a double investment in real estate, to help spur that market, but controls the market from over building, especially at the high-end, by keeping housing values somewhat homogenous as the value of the benefit decreases. This helps grow the middle by encouraging home ownership, but also not outpacing the growth in housing values with income. The measure of assessed value would need to be looked at, but given that almost all jurisdictions do some sort of assessment, it could be the full value assessment of your local municipality as the basis. Lastly, this helps elsewhere, by allowing a second deduction, to enable rental properties to be available and attractive, thus giving a stepping stone and method to buy-in.
5) Remove targeted tax breaks unless they support investment in infrastructure or commercial competitiveness that is already in evidence and creates domestic jobs. I support an infrastructure bank concept (e.g. tax outgoing transfers of capital from the country to enable the building of revenue to put into infrastructure here at home) and short term, up to a threshold, assistant breaks in federal taxation for specific technological or market innovations that employ people here at home. Infrastructure is a sunk cost to doing all of our business and also enables the commerce to flow, thus we need to invest and reinvest, constantly, in improving and rebuilding the fundamental pathways to do this (e.g. ports, rail, roads, electrical systems, networks, water, energy flows, damns). Ideally, spend on infrastructure so that it is truly sustainable, not just environmentally, but socially, economically, and from a protective perspective. Critical to this would be to convert our oil based transit systems to some other domestically available fuel (gas and electric) by developing programs and incentives to build natural gas stations to enable natural gas cars to take off, for instance (e.g. the Pickens Plan). We need to kill things like long term oil tax breaks, or farm subsidies like we have today, that result either in gluts in markets (depressing prices and reducing jobs), or that are not in our best interest, long term, to invest in (e.g. oil infrastructure).
6) Address long-term entitlements, specifically Social Security. There needs to be several things put in place: a) Means testing that says if you are able to support yourself over a certain floor you will have scaled back benefits to a certain ceiling. The floor should be set at a level that accommodates a median income level within the geographical area of the person in question as compare to an active worker, and the ceiling would have to be at some percentage (say 25%) above that level. The essence of this is that we should not be paying out social security to those that are socially secure. b) recalibrate the full benefit age (for the old age portion of the benefit) for anyone that was born after 1975 to be 5 years earlier than the life expectancy for them at their 40th birthday, and partial benefits at 3 years prior to that. I have mentioned this before elsewhere, but the point is social security was not intended to be your retirement income, and at the time of its original passing life expectancies were much lower than today. The goal ought to be to allow for a reasonable time for folks to terminate work and enjoy the end of their life, and have social security in doing so, but allowing folks to get 10 or more years of benefits is well beyond the original scope, or what we ought or can afford. c) remove the cap on payments into Social Security over so much in income (I am not certain as to what the exact number is, but I think its circa $120K). This program is to ensure that we don’t have to pay for other social welfare programs for the elderly/disabled when they are unable to earn anything on their own to support themselves. Thus what is happening is that essentially everyone in society is hedging against having to derive other methods of taking care of the elderly and disabled by ensuring they have enough minimal income in order to support themselves. Paying in dollar for dollar, accordingly should apply for all income levels and ranges, and not be regressive in requiring the income earned below a level to be taxed fully and above the cap not at all. This will help with the long-term solvency.
7) I would delve into the medical realm, but I don’t have concrete solutions to these problems, but they are problems that need to be addressed. The problem is we have a belief socially that healthcare ought not be about the ability to pay for it, but available when we need it as a response to fundamental human needs. But we also believe that healthcare is a service that is provided in an economic market that shouldn’t be exempted from supply and demand factors merely because of our compassion (however, we don’t want to acknowledge the cost, either, of the clean-up of bodies from streets from those unable to get healthcare). I don’t see healthcare as a right, personally, but many do. Much of this is from seeing how the other half of the world operates. Until we can deal with the fact that we can’t afford to keep everyone alive forever, and get past saving life vice saving the quality of a life, we won’t solve this easily. But, this needs some answers, and I am not sure repealing the Healthcare Law helps, nor keeping it as it is. One last point, and I mean this sincerely on this issue and that of Social Security. Our generation needs to get on board with the idea that neither Social Security or Medicare may be around when we need them (mainly because the supposed fixes have already been mortgaged). Thus we need to understand that while we are going to pay a boat load for these programs, what the programs really end up being is a way for us to facilitate paying for our parents to grow old and pass-on, which we would otherwise have to pay out of our pockets, anyhow.
8) Rethink the wisdom of defined contribution programs for American retirements. The going trend, for many years, has been to go from defined benefit (traditional pensions) to defined contribution (401k and 403b) programs for retirements. The challenge with this, long term, centers on the question of, is it wise to have the vast majority of Americans retirement security based on the whims of the market (bond, stock, or otherwise)? The discussion on social security above, presumes that, like today, the majority of Americans have some sort of nest egg available to draw on when they retire beyond Social Security. Given that the stock market is speculative, the bond market depends on the faith and credit of the institution that is borrowing, and that commodities (especially futures) can be highly erratic, putting more and more individual investors into a market they poorly understand, as a way to secure their future, creates an unwieldy situation where there aren’t strong enough economic poles that can steer the private economy away from a titanic crash. I would submit, that there ought to be a look at creating a mix of social security, defined benefit programs and defined contributions, such that the capital markets have better direction in making investments rather than simple speculation as to the potential value increase in this or that security (or bond, or what-have-you). It gets back to ensuring that we have some market control mechanisms, where fundamental business value trumps market value in decision making. I believe that the old pension fund managers did well in this, as they had to get constant returns rather than speculative returns over time, and hence, defined benefit plans, while somewhat over generous in some cases, brought market stability, ergo enabled middle class growth through companies that had fundamental value rather than market value, per se.
9) Fix immigration policy and re-look minimum wage laws. I personally believe we ought to liberalize our immigration laws in the sense that if you are here illegally, you have no protection in the form of a minimum wage. Honestly, we need folks that are cheap labor to compete with China India California
10) Step back from national standards in education, and develop a Science, Technology, Engineering and Mathematics (STEM ) educated pool. Simply put, we need Clarkson grads and the like to get us going. When we continue to churn out more English Lit and General Business Admin grads than Engineers and the like, we are going to loose our edge. I suggest we create a program that gives States a pool of funds to get folks educated in STEM areas and provide start-up grants for entrepreneurs that come out of these pools to continue our innovation edge. National testing and other prescriptive solutions in education hurt us, we need to be performance and outcomes based, and create incentives to not choose the easy History major over the harder Chemical Engineering degree.
11) Repeal the 17th Amendment. By having state legislatures select Senators, it will modulate the federal government’s power to send unfunded and other mandates to the States, as well as provide stability to the federal legislature with regards to influences and lobbying (it would be at the state level, and actually make it more responsive to regional issues). While seemingly un-democratic, this would actually take some of the power in Washington Washington Washington
12) Pass a Line Item veto amendment to empower the President. Likewise, repeal the current budget law and replace it with a budget law that budgets portions of the government for more than one year, while others are approved annually. This way, budgets passed with deals for 10 years from now have to meet line item scrutiny and have to be lived with over several administrations. It also forces us to live by our choices in the long and short term. I really think that part of the government’s problem in its economic effect is that it is always planned a year out and everything is revisable. This breeds instability, and consequently, minimizes investment in future efforts.
Again, these are ideas, and not necessarily fully fleshed out. I think that each has merit, but each has consequences. I tend towards Keynesian economic principles, but in the classical sense, not as described today (e.g. giving a tax break can spur economic activity, much as JFK did in the 60’s). I also recognize what corporations and the private economy is critical to this, but I also think that government has a role to keep it within some bounds. I think you can see here some ideas from both sides.
Yours,
Erik
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