UN economic report: 'We need to reverse course quickly'

For Tea Partyers, hearing this report calling for more & bigger fiscal stimulus in developed countries must be likes listening to metal scratching a chalk board.

Sometimes the truth hurts.

U.N. study savages U.S., European economic policy

By Tom Miles

September 6, 2011 | Reuters

The pursuit of austerity measures and deficit cuts is pushing the world economy toward disaster in a misguided attempt to please global financial markets, the annual report of the United Nations economic thinktank UNCTAD said on Tuesday.

The report, entitled "Post-crisis policy challenges in the world economy," savaged U.S. and European economic policies and called for wage increases, stricter regulation of financial markets, including a return to a system of managed exchange rates, and a conscious break with market-led thinking.

"The message here is very pragmatic: we need to reverse our course quickly," said UNCTAD Secretary General Supachai Panitchpakdi.

Supachai, a former head of the World Trade Organization, said the policy response to the crisis, with an emphasis on fiscal tightening, was misconceived and inept.

The report's lead author Heiner Flassbeck said the global economic situation was extremely dangerous and, without more stimulus, a decade of stagnation was the best-case scenario.

The current policies were a disaster, said Flassbeck, head of the globalization and development strategies division at the U.N. Conference on Trade and Development, and a former deputy finance minister in Germany.

"If interests rates everywhere are zero, and if governments stick to the policy of not only keeping fiscal deficits where they are but retrenching, cutting public expenditure, then we will end up in permanent recession," he said.

"Unemployment depends very much on demand. And if you have no demand then you need government to step in with a huge program for stimulating the economy. This was the U.S. scenario in the past. Now it's worse because wages are rising less than in the past so you're going to need a bigger stimulus program."

The recovery from the financial crisis was not only jobless, which was to be expected, but it was also "wageless," he said, with Americans, Japanese and Europeans -- 70 percent of the world economy -- expecting their incomes to stagnate.

In its last report a year ago, UNCTAD said a premature removal of stimulus policies might cause a deflationary spiral with attendant slumps in growth and employment around the world.

"Let's not fool ourselves. This is a realistic scenario for the whole developed world, if we do not understand the lessons now, and really quickly, because we do not have other instruments any more," Flassbeck told a news conference to launch this year's report.

"To revive the economy with a wageless recovery with diminished expectations by the private economy, by private households, what are the instruments at hand? There is nothing."

He said that even if things go well, global economic growth would slow to about 1.5 percent in 2012, less than half the U.N. forecast of 3.1 percent growth for this year.

HERD MENTALITY

The report put much of the blame for the crisis on deregulation of financial markets, which it said invited destabilizing "herd behavior" by speculators, and allowed an over-concentration of banking activities.

"What we've seen in the past and we never learn is that countries seem to have excessive belief in the financial markets. And we've seen time and again that financial markets are not very sound in their judgment," said Supachai.

"But still people keep thinking that they are doing these austerity measures because they want to please the markets so that the markets give them better ratings, including the rating agencies which do not always produce the best assessment."

Flassbeck said the herd mentality was evident whenever equity markets and commodity markets all lurch in tandem on the same day, an effect that could not conceivably be caused by real swings in demand. But the world was ignoring it, he said.

"If the G20 negotiations were not confidential I would tell you that it's ignored even there," he said.

A November summit of the 20 biggest economies would reach "extremely weak" conclusions on tackling the crisis and would underestimate the influence of financial markets, he said.

"We have three areas where the G20 wanted to be strong. The first is the coordination of economic policy: nothing. The second is commodities speculation: more or less nothing; and the third is international global monetary order: nothing. So that's the result of nine months deliberation by the G20."

The U.N. report said the world should introduce a system of rules-based floating exchange rates, which would kill off distorting "carry trades" in which investors borrow currencies with low interest rates to buy higher-yielding currencies.

The system would be based on divergences between the consumer prices or interest rates applicable to different currencies, and unlike the defunct Bretton Woods system, it would cater for continual adjustments in exchange rates.

Who's to blame for wealth inequality?

Republicans.

Left behind in America: Who's to blame for the wealth divide?

By Brian Montopoli

September 7, 2011 | CBS News

Take a moment and think about how you feel wealth should, ideally, be spread among the American people.

If you're like the average respondent in a 2010 Harvard Business School/Duke University study, your response was this: The richest top 20 percent of society, as determined by net worth, should control 32 percent of the wealth. The bottom 20 percent should control about ten percent. And the rest should be spread out among the 60 percent in the middle, with higher-earners taking a slightly larger share.

It probably won't surprise you to hear that those figures don't match reality. But you might well be shocked by just how far off they are. In the study, Americans were asked how they thought wealth was actually distributed; they estimated that the top 20 percent controlled about 59 percent of the nation's wealth, while the bottom controlled about three percent.

That wasn't even close: In reality, the top 20 percent controlled about 84 percent of the wealth, while the bottom quintile controlled just 0.1 percent. The combined net worth of the bottom 40 percent, in fact, accounted for just 0.3 percent of the nation's wealth. (See chart below, where that bottom 40 percent doesn't even show up.)

One indicator of where you fall on the spectrum is race: White households, on average, had a median wealth of $113,149 in 2009 - 20 times the median wealth of black households ($5,677) and 18 times that of Hispanic households ($6,325). That's the largest gap between whites and minorities since the census started tracking such data in 1984.

It's not just wealth. In 2007, U.S. income inequality hit its highest mark since just ahead of the Great Depression in 1929. And that was before the current recession brought joblessness and financial peril to scores of Americans, most of whom are on the wrong side of the wealth divide.

According to the CIA's World Factbook, the United States now ranks 39th in the world when it comes to income inequality. What that means is that only 38 out of 136 countries have a less equitable distribution of income than the United States; the list of countries with a more equitable income distribution includes Iran, Russia, Turkmenistan and Yemen.

The financial gap has been widening. As economist Joseph Stiglitz documented in Vanity Fair in May, the top one percent of Americans have gone from taking 12 percent of the nation's wealth 25 years ago to taking nearly a quarter today. Over the past decade, the income of the top one percent has risen 18 percent; the income of Americans in the middle, meanwhile, has fallen.

And consider this: As of 2009, according to Politifact, the net worth of the nation's 400 wealthiest Americans was higher than the net worth of the bottom 50 percent of the nation's households.

"We have this growing elite that makes the economy of the United States look more like a banana republic than an economic democracy," says Democratic Rep. Jan Schakowsky of Illinois.

There isn't a one-sentence explanation for why America's wealth gap is far wider than Americans say they want it to be - and why it is growing ever wider. But a good place to start is with the decisions made by elected officials in Washington, many of whom are themselves in the top one percent.

Those decisions tend to follow the desires of the affluent. In his 2008 book Unequal Democracy, Vanderbilt political scientist Larry Bartels looked at how senators responded to the preferences of their constituents. Bartels found that senators are "fairly responsive" to the preferences of those in the upper third of income distribution, less responsive to those in the middle third, and "not at all responsive to the preferences of constituents in the bottom third of the income distribution."

In other words, the data suggested that if you're in that bottom third in terms of income, it really doesn't matter what you think - your senator effectively doesn't care.

A bias toward the desires of the wealthiest Americans has resulted in policies that critics say exacerbate the wealth and income divide - among them reduced capital gains tax rates, deregulation of the financial system and a reduction of tax rates on high earners. They say many politicians largely serve the wealthy and leave those on the bottom behind, pointing out that the minimum wage is currently lower than it was 30 years ago after accounting for inflation.

The growing wealth gap is "not an accident or a force of nature, it's clearly the result of public policy," says Schakowsky.

The Illinois lawmaker acknowledges that her party deserves some of the blame - in 1999, for example, many Democrats voted for the repeal of the Glass-Steagall Act separating commercial and investment banks, which most economists say contributed to the 2008 economic meltdown. (Schakowsky did not vote for repeal.) But she says Republicans are largely responsible for the widening income gap, pointing to a policy-based "attack on organized labor" and other initiatives.

"I would say that much more of this has to be laid at the feet of Republicans," she said. "Surely the way out is being blockaded by the Republicans. I don't know that there's any economist right now that would say it's more important to reduce the debt and deficit then to spend and create jobs and stimulate the economy. It's just wrong."

Schakowsky introduced a bill earlier this year to increase marginal tax rates for those making more than $1 million to 45 percent, with the marginal rate going up to 49 percent for income over $1 billion. "We need tax fairness in this country, and the Republicans right now are on a crusade against low-income people," she says.

Conservatives reject this formulation. Kevin A. Hassett, a senior fellow at the American Enterprise Institute, says the focus should be poverty, not inequality; he calls it "immoral" and "unethical" for Democrats to push a "spread the wealth philosophy." Hassett points to Democratic efforts to increase the top marginal tax rate in individuals -- a position some Republicans have deemed "class warfare."

"When you put a high top rate in it will cause economic damage, and that income damage will tend to impact people on the bottom end of the income distribution because they're the most vulnerable," he said. In pushing for an increase in taxes on high earners, he said, Democrats are making a "calculated appeal to the median voter's greed" - and are putting politics "ahead of social justice."

Douglas Holtz-Eakin, the former director of the Congressional Budget Office and chief economic policy adviser to John McCain's 2008 presidential bid, argues that globalization - not congressional policy - has been the key force in exacerbating the wealth and income gaps. When the labor force became "flat" in the 1990s, he said, the economic value of Americans near the bottom of the economic ladder decreased.

"If you bring in billions of new low-skilled laborers into the world economy, the relative value of low-skilled workers go down," said Holtz-Eakin. "I don't think there's anything about a tax policy that's going to undo that. It's a global force." Holtz-Eakin argues that instead of "economically damaging redistribution policies," Congress should be focused on improving education so that low-skilled workers have financial capital.

In their 2010 book "Winner-Take-All Politics," political scientists Jacob S. Hacker and Paul Pierson examined the structural methods through which Washington produces policy that benefits high-income Americans. The key, they found, was the organized pressure put on lawmakers - which includes lobbying, campaign contributions, ginned-up "grassroots" movements and implicit or explicit threats to support rivals.

"Congress is really often responding to organized pressure," Pierson says. "So organization matters enormously, and that has an implication for inequality because businesses and the affluent tend to be a lot more organized than anybody else."

Organized pressure is one reason the government is legally prohibited from bargaining with the pharmaceutical industry over drug prices despite being the largest purchaser of its products; such pressure also helps explain why the Defense Department's budget has spiraled from $51 billion in 1963 to more than $700 billion today.

Former New York Democratic Rep. John Hall, who lost his seat in the 2010 midterm elections, said the pressure on lawmakers to court affluent interests - and craft policy that will make them happy - is intense.

"I would guess that the average member of the House spends at least 30 percent of their time doing fundraising," said Hall. "And it starts right after the election."

He says lawmakers are constantly cultivating "lobbyists or other people who have a lot of money" in order to get reelected, arguing the process "just skews the democracy from one man/one vote to one dollar/one vote."

The situation came under some scrutiny in 2008, when lawmakers' sanctioning of a deregulated financial system resulted in a worldwide economic breakdown and a recession that has endured to this day. Anger over that event - and the bailouts that followed - gave rise to the Tea Party movement, which ostensibly reflected voter anger at a political system corrupted by influence.

But according to Pierson, all voter anger has done is "empower people who are doing everything they can to make inequality worse." The Republican candidates for president - most of whom claim Tea Party allegiance - are now calling for increased taxes on the poor and reduced taxes on the rich. And they want to repeal the Dodd-Frank Wall Street reform bill meant to provide some protection to consumers from the excesses of a deregulated financial industry. (It should be noted that conservatives like Hassett would argue these actions actually help the poor by reducing the tax burden on job creators and eliminating regulations that can hamper productivity.)

Mitt Romney, one of the frontrunners for the GOP nomination, unveiled a job-creation plan Tuesday that eliminates capital gains taxes on many taxpayers and opposes union interests; his chief rival, longtime Texas governor Rick Perry, touts his economic record while presiding over a state with the fourth-highest poverty rate and the highest-percentage of minimum wage jobs in the nation.

Last January, the Supreme Court eliminated restrictions on the right of corporations to spend unlimited amounts on politics, making it easier for wealthy organizations and individuals to apply pressure to lawmakers. The 2012 election cycle has seen the rise of so-called "Super PACs," massive political action committees raising tens of millions of dollars to help candidates win elections.

Meanwhile, outside groups like Crossroads GPS serve as a conduit for anonymous donors to pour further millions into the political system each election cycle - and their influence can often decide which candidate makes it to Washington. Schakowsky says the influx of hundreds of millions of dollars into the political system explains why many Americans cast ballots for lawmakers who back policies that widen the wealth and income gap. "The electoral environment is very skewed right now to the wealthiest Americans," she says.

Pierson argues that since it's effectively impossible to get money out of politics, the best hope for the middle and lower classes is to organize and exert pressure that counterbalances the influence of the wealthy. Some such groups, like the AARP, already exist, and organized labor has long been a major force in politics -- though the labor movement has suffered a decades-long decline in membership and influence. Asked if the wealth gap could get wide enough to spur more Americans to organize to counterbalance the influence of those at the top of the ladder, Pierson was pessimistic.

"I'd like to say yes to that," he said, "but there's nothing in the experience of the last couple of decades that makes me confident that when people get frustrated they'll produce the kind of politics that are going to reverse things."

(YAWN) Another multi-victim shooting rampage

Said one witness who saw the shooter entering the Nevada IHOP: "I had my pistol; [but] I wasn't going up against an automatic rifle. I'm sorry. I wish I would have shot him in the back now as he was going toward IHOP, but I wasn't clear on the situation."

Obviously the answer is for more Americans to carry AK-47s so they're not outgunned by mentally disturbed shooters with AK-47s.

We also need to shoot more people in the back.

Guns keep us safe! Guns don't kill people, people kill people! And some people are just evil and disturbed, and there is absolutely nothing we can do to prevent such shooting rampages except arm all the good people of America to the teeth.

Disbelief, Shock In Carson City After Shooting Rampage

By Mark Memmott and Eyder Peralta

September 7, 2011 | NPR

URL: http://n.pr/p2tQAp

Post Office gets a raw deal

I've written before about how the U.S. Postal Service, which is mentioned in the U.S. Constitution, gets a raw deal from Congress. Meanwhile, many Americans castigate it as a model of "government" inefficiency.

First, let's recall that the USPS gets no money from the federal gov't. Zero.

Second, let's recall that Congress has obligated the Postal Service to fully fund in the present its future pension obligations, something no other gov't agency or private corporation is required to do, not even Social Security! (Indeed, most private firms with pensions have simply abandoned them.) So, the Postal Service's impending "bankruptcy" is a direct result of its inability to fully cover an obligatory pension fund payment this year of $5.5 billion (!).

Third, Congress continues to mandate both Saturday delivery and "universal delivery" to every podunk address with a mailbox -- and each delivery has to cost the same, since Congress decides the price of stamps, not the Postal Service, which is not allowed to react to the "free market."

Finally, Congress forbids the USPS from introducing innovative revenue-generating measures such as selling additional items and services, like banking (in Japan the Post Office is the country's largest deposit bank). By the way, the NYT article misses the major reason why USPS is low on revenue. It's not just because of the Internet and UPS/FedEx/DHL, but also because the recession and lower economic activity in the country has drastically lowered year-on-year postal volume.

So don't you dare listen to those who say the Postal Service is a sick dog and an example of how government never works. It's run as a business which must cover all its own costs, unfortunately, in fulfilling its mandate, it is micro-managed and hamstrung by Congress.

Postal Service Is Nearing Default as Losses Mount

By Steven Greenhouse

September 4, 2011 | New York Times

URL: http://www.nytimes.com/2011/09/05/business/in-internet-age-postal-service-struggles-to-stay-solvent-and-relevant.html?pagewanted=1&_r=1&hp

The faux moderation of 'shared sacrifice'

I was trying to suspend judgment as I read Yale professor Stephen L. Carter's call for "shared sacrifice" from all Americans, because he was trying to sound all reasonable and non-partisan. Then I hit the following paragraph, and I was certain he was either ignorant or a fraud:

But progressivity is merely one factor in working out tax rates. It isn't the reason taxes exist. They exist to raise revenue, a point easily forgotten in the rhetoric of the day. And there isn't nearly enough income in the upper bracket to make a serious dent in the nation's debt.

First part -- true. Second part -- dead wrong. And he either knew it, so he didn't even attempt to back up this bald assertion, or else he was too lazy to look up actual statistics on U.S. personal income, taxation, and government spending. A correct understanding of all three is required to determine things like Americans' tax-paying ability and tax fairness.

So let's look at the truth, starting on the personal income side.

Between 1947 and 1973, the typical American family's income roughly doubled in real terms. Not so after. Excluding the top percentile, from 1976 to 2007, average real incomes in the U.S. grew by only 17.9 percent, compared to, say, 26.4 percent income growth among the bottom 99 percent in France over the same period.

Meanwhile, the top 1 percent of U.S. income earners captured 58 percent of total income growth. And between 1979 and 2007, after-tax income for the wealthiest 1 percent of Americans rose by 281 percent!

Correspondingly, real average U.S. wages have been flat since 1973, with a slight uptick from 1995-2001, but over the past two years actually falling, although U.S. workers' productivity (output per hour) has increased steadily over the entire period. (See income-output charts here.) Economics tells us that rising productivity translates to rising income; refer to the figures above to see where most of that income went.

Today the average per capita income of Americans is $25,000; and real median household income is below $50,000. 46,000,000 Americans must rely on food stamps. Two-thirds of Americans could not scrape together $1,000 for an emergency expense right now if they had to. And one-third of Americans has no savings.

By contrast, today the top 20 percent of income earners owns 75 percent of all U.S. net wealth, with the top 1 percent alone owning about 35 percent of all net wealth and 43 percent of all financial wealth. Furthermore, the top 10 percent controls 98 percent of all financial securities, and 81 percent of all stocks and mutual funds. The top 1 percent alone controls 61 percent of all financial securities! (To put this much financial wealth into historical context, consider that, even with its recent falls, the Dow Jones Industrial Average today is higher than it was in the bubble period of early 2006, as is today's NASDAQ, so the rich are still doing very well for themselves.)

Perhaps most tellingly, today the 400 wealthiest Americans own more wealth than the bottom 50 percent of all American households. You have to reach back to the Great Depression to find income inequality this great.

Next, the taxation side.

Faced with a national debt approaching $15 trillion, and a recent report that Americans are paying the smallest share of their income in taxes since 1958, it seems logical -- nay, unavoidable, to consider tax increases. But taxes on whose income? Again, let's briefly look at the history that got us here.

From 1965 to 1978, the top marginal tax rate was steady at 70 percent for individuals making at least $100,000, heads of households making at least $180,000, and married couples making over $200,000.

Then under Ronald Reagan, as income inequality inexplicably increased, the tax burden on Americans shifted from the very rich to everybody else: in 1982 he cut off the top three income brackets, thereby reducing the top rate to 50 percent, and set the top income threshold at $85,600 for couples, $41,500 for singles, and $60,600 for heads of households. Later Reagan further reduced the top rate to 38.5 percent, then 28 percent.

More significantly, over two terms Reagan reduced the number of tax brackets from 16 to five to only two. This last change, with the 1987 tax reform act, was nominally a tax decrease of $8.9 billion, but what it did was flatten the overall tax burden, making it less progressive, i.e. "shared sacrifice" in Prof. Carter's terms. (See Reagan's budget director Bruce Bartlett's instructive op-ed on the flattening of federal income tax rates from Reagan to the present.)

In 1992, G.H.W. Bush inched the top rate up to 31 percent by adding a third (top) bracket, caught hell for it from Republicans, and lost the next election to a mega-rich right-leaning third-party candidate. Then during the economic boom of the Clinton years, the top rate was increased slightly to 40 percent; meanwhile, Clinton added two top tax brackets for individuals making over $115,000 or heads of households making over $127,000, i.e. taxes on the middle class hardly increased. Clinton's nudge back toward the historical norm was labelled by Republicans as "the largest peacetime tax increase in American history." Incidentally, Clinton ended his second term with the first U.S. budget surplus since -- there's that fateful year again -- 1973.

And during the G.W. Bush years the top rate was lowered to 35 percent, where it remains today for single or head of household tax filers earning over $379,000 per year. Bush also added a new bottom rate of 10 percent.

Overall, we can see that, starting in the 1980s, the rich sloughed the tax burden off their shoulders and onto those of the middle class, whose income was never sufficient to cover rising federal expenditures.

Although it is true, as many Republicans remind us, that the richest 20 percent of Americans pays nearly 70 percent of federal taxes, and the top 1 percent alone pays nearly 30 percent, it is also true that the richest 20 percent earns more than 60 percent of all U.S. income, and the top 1 percent alone earns more than 20 percent. From that perspective, our tax system appears only mildly progressive.

If we look at all taxes (federal, state, and local) -- although Prof. Carter instructs us not to -- and compare them to relative incomes, then we clearly see how the system skews toward the very rich's favor. The top 20 percent (top quintile) of U.S. income earners pays about 30 percent of its annual income in taxes, whereas the bottom 20 percent (bottom quintile) pays about 17 percent of its income, the second quintile pays about 20 percent, the third (middle) quintile pays 25 percent of its income, and the fourth quintile pays nearly 29 percent. That is, overall effective U.S. tax rates are highly regressive. Which Prof. Carter says he is against.

As a final note on taxes, I must respond to Carter's misleading statement that, "When almost half of households pay no federal income taxes, the concept of shared sacrifice vanishes, and America becomes not that to which we contribute but that from which we receive." Indeed, about 46 percent of U.S. households will have no tax liability in 2011, but 17 percent of them because they are elderly with little or no income. Given their lifetime of working and paying taxes, we should be fine with that. So actually less than 30 percent of households pays no income tax, and of those, 28.3 percent does pay payroll tax (plus state and local taxes). Lastly, not to get too wonky but, due to popular tax credits, much of that 28.3 percent does pay federal income tax, too, they just get it refunded once a year, hence they do "share the pain" of having income tax deducted from every paycheck as they try to make ends meet, although I realize that doesn't lower the deficit.

That leads us, finally, to the federal spending side.

The income disbalances and flattening of tax rates described above started at about the same time the U.S. started to rack up massive annual budget deficits, first under Jimmy Carter (-$288 billion), then ballooning under Ronald Reagan by $1.8 trillion, G.H.W. Bush by $1.4 trillion, Bill Clinton by $1.4 trillion, then G.W. Bush by $6.1 trillion (!). Much to everyone's dismay, since Barack Obama took office the federal debt has increased by about $4 trillion -- but this was mostly due to plummeting tax receipts, both from G.W. Bush's tax cuts (which Obama kept in place) and the worst economy since the Great Depression. (Note: only Bill Clinton decreased America's debt-to-GDP ratio, meaning the national economy grew faster than the national debt.)

One might suppose that all this spending went to shore up the incomes of poorer Americans, yet a comparative analysis of social spending shows the U.S. spends about as much as Canada and Australia as a percent of GDP, which both have a much smaller debt-to-GDP ratio than the U.S. (Note: we should not include SS and Medicare in this discussion because they are not funded from income tax, the subject at hand). No, the biggest increase since the 1970s has been in defense spending, especially the $2 trillion already spent in Iraq and Afghanistan.

So we see that the same presidents who preached lower taxes on the rich were the same ones who blew up the national debt. Coincidence? I think not.

This is all related to the neo-liberal consensus over the past 30 years that: 1) the very rich, especially those who earn income from capital as opposed to wages, power our (consumption-driven) economy, while workers are but inputs who have no choice but to lower themselves to the cheapest standards of global labor supply; and 2) low taxation on the rich is the only economic instrument in government's toolbox, both in good times to reward them for their investments, and in bad times to encourage them to continue investing. The unspoken last word in this consensus is that 3) government spending is "out of control"... except for the things we can't live without. Too bad we can't agree what those are.

But back to Prof. Carter, who argues, basically, that it would not be fair to increase taxes on those Americans making more than $379,000 per year, nor would it be useful, because their income isn't great enough "to make a serious dent in the nation's debt."

Yet what is unfair about letting the Bush tax cuts expire for the top 2 percent, saving $700 billion over 10 years? Or better yet, going back to the 1986 top rate of 50 percent, and levying it on individuals making over $379,000 per year? And why not do as America's richest man Warren Buffet suggested, and create new top tax brackets for those making over $1 million (about 315,000 households or 375,000 individual taxpayers) and $10 million (over 8,000 households) per year? Indeed, if the super rich don't have any money to pay off our nation's debt, as Carter claims, then my goodness, who in America does?

Beyond a real progressive income tax, there are other ways to share our sacrifice, like a 0.5 percent financial transaction tax as in the UK and EU, which could raise over $175 billion per year in the U.S. yet hardly be felt by individual investors. And various luxury or excise taxes. Not to mention closing corporate tax loopholes and shutting down offshore tax havens, which, according to the NYT, have helped to reduce the corporate share of U.S. tax receipts from 30 percent in the 1950s to 6.6 percent in 2009.

Carter purports to show why Democrats and Republicans are both wrong on taxes, but he spends most of his op-ed urging cuts in federal employees' salaries and tax increases on the bottom half of income earners, both of which Democrats oppose. Well this Democrat smells a red herring. Morally, historically and arithmetically Carter's arguments don't add up.

Happy Labor Day!

Both Parties Misunderstand Taxes, Sacrifice

By Stephen L. Carter

September 1, 2011 | Bloomberg

Taxes are in bad political odor these days. True, there has been no era in which taxation was popular, but we seem to have reached a moment of particular confusion. We have one major party dedicated to the bizarre principle that nothing that is not taxed now should ever be taxed again, and another dedicated to the equally bizarre principle that taxes are a magical elixir that will eliminate the nation's indebtedness while touching only those who happen to own private jets.

In this strange and wondrous atmosphere, I would like to say a word or two in defense of taxation, and then to suggest that each party is on the track of an important truth, even if, in the rush for partisan advantage, each also misunderstands the virtues of its own position.

Taxes will inevitably go up. The Democrats are right about that much. Alas, they get the reason wrong every time they try to explain. The reason taxes must rise is not that millionaires and billionaires have too much money, or that corporations aren't paying their fair share. It's that the federal government, under the joint leadership of the two parties, has fallen so deeply into debt that its need has grown desperate. Under no plausible scenario are we going to grow ourselves out of the remarkable hole we have dug. In what ought to be a national embarrassment, our government needs more revenue to pay not for a more glorious future but for a tragically wasted past.

Narrow Tax Base

The Republicans, too, are wrong, in their opposition to any increase in any taxes for any reason. But they are right that the Democrats have made an absurd fetish of progressivity, and that the constant chatter about asking the rich to sacrifice makes it sound as if taxes are the punishment one suffers for success. And they are right in admitting, in their unguarded moments, what the Simpson-Bowles Commission pointed out: that the tax base is too narrow.

[ Progressivity isn't a "fetish," it's both a moral fairness question -- those who earn more, pay more -- and a question of math -- the bottom income earners in America have nothing to contribute to federal coffers: they have zero or negative net worth, and will for the next decade at least, since the housing bubble was their only source of wealth. - J ]

The middle of a fragile recovery may not be the proper time to increase taxes. This is particularly true given that Americans are, at the moment, highly leveraged, and many might have to take on additional debt in order to pay additional taxes. Perhaps we would be wise to wait until what Harvard University economist Kenneth Rogoff calls "the Great Contraction" -- getting rid of debt -- has run its course.

But rise taxes eventually will, and, if we are smart, they will cover a broader base. Indeed, it is at once amusing and depressing to hear all the talk of shared sacrifice when we are discussing tax increases mainly on those earning more than $250,000 a year. Part of the magic of this figure may be that few federal employees get paid as much. But one in five earns upward of $100,000 a year.

This is worth mentioning because there isn't much in the way of shared sacrifice when a taxpayer who makes, say, $275,000 a year has to pay an extra 3 percent on the amount over $250,000 ($750) while a civil servant earning, say, $175,000 a year retains all of her income. Bear in mind that a tax increase is, in effect, a reduction in income. If sacrifice is to be truly shared, why not ask federal employees to accept an across-the- board salary reduction of, say, 2 percent?

Shared Sacrifice

True, this wouldn't yield much revenue. The most recent publicly available figures, for 2009, put federal nondefense salary spending at a bit more than $15 billion a month, or $180 billion a year. Even if (as seems likely) the figure has now reached $200 billion, a 2 percent cut would save a mere $4 billion annually. Yet, as a symbolic gesture, it would do far more than any presidential address to convince voters that the government is serious about shared sacrifice.

I don't suggest this plan because I think federal employees are overpaid. I don't. But neither are the vast majority of those who happen to earn more than $250,000 in the private sector. Still, if cutting federal salaries in return for cutting the income of other taxpayers seems too much to ask, perhaps we should consider another way of sharing the sacrifice: We should broaden the tax base. Simpson-Bowles suggests reducing rates as part of the broadening, while also removing most deductions. Many liberals object that the plan would reduce the progressivity of the tax code. But this response is a non sequitur.

The progressive tax structure rests upon the eminently sensible notion that those who earn more should be taxed at a higher rate. Those of us who have benefited more -- whether because of hard work or good luck or, probably most often, some combination of the two -- ought to pay a larger part of the revenue burden. We can afford it, and, as my late father often reminded me (borrowing without attribution from Oliver Wendell Holmes), to pay taxes to the government of the U.S. is a privilege.

But progressivity is merely one factor in working out tax rates. It isn't the reason taxes exist. They exist to raise revenue, a point easily forgotten in the rhetoric of the day. And there isn't nearly enough income in the upper bracket to make a serious dent in the nation's debt.

Liberals are fond of quoting from a 1936 speech in which President Franklin Roosevelt decried "a small but powerful group which has fought the extension of those benefits, because it did not want to pay a fair share of their cost." Nice line. But it's easy to forget that F.D.R., in the very same paragraph, reminded his listeners of the "vast majority of citizens who believe the benefits of democracy should be extended and who are willing to pay their fair share to extend them."

Paying More

Precisely right. A vast majority of Americans should be willing to pay taxes. All but the very poorest should contribute financially to the great American experiment. The shared sacrifice should certainly be progressive, but it should also be shared. When almost half of households pay no federal income taxes, the concept of shared sacrifice vanishes, and America becomes not that to which we contribute but that from which we receive.

(It is frequently said, in response to this argument, that almost all employed Americans are taxed by the federal government, because they pay Social Security and Medicare taxes. But these, at least in theory, are special-purpose levies, flowing into accounts that will someday benefit the payer personally. If in fact these fees simply constitute a part of the tax burden for general purposes of governance, Washington is free to confess at any time to decades of misleading the public.)

Taxes are in themselves neither good nor evil, and both parties should stop talking as though they are. They are simply one among many ways of raising revenue. There was a time when the federal government relied almost entirely on import duties for its income. Lately its addiction has been to borrowed money. Perhaps a future generation will discover some other magical means for supporting the state. In the meanwhile, if indeed we need to sacrifice, let's at least sacrifice together.

[ This is a lame attempt by Carter to set up an "equal wrong" on both sides so he can knock down Democrats. But Democrats have never blessed or glorified taxation as a virtue in itself. Certainly no politician is dumb enough to call taxes "good," but only necessary. On the other hand, Republicans do call taxation "stealing" and IRS agents "thieves" and "thugs." - J ]