I have a friend who often talks to the press about economic affairs, sometimes too candidly for his own good. His company, a big investment firm, occasionally cracks the whip and tells him to restrain his views because they harm the corporate image.
Needless to say, he gets a little frustrated at times. Who wouldn`t in such a climate? But he says some things that need to be said in these perilous times.
For instance, on taxes and the deficit: ”I have a simple solution. I think we should raise the tax rates on the rich substantially. Just consider: You are the federal government, and you are borrowing money from the very wealthy in society and paying them interest on the money. If you just taxed this money, you would not have to pay them interest.”
This, of course, was the substance of the tax bill that President Bush vetoed a few months ago, but it does not mean this approach is dead. My friend believes it`s very much alive after the Los Angeles riots.
Sooner or later, it`s going to occur to the poor living in cities that low tax rates for the well-to-do have been a key reason why their areas have become impoverished in recent years. The deficit has been a boon for the military and for the elderly on the spending side, and for higher-income groups on the revenue side.
Who has gotten squeezed? Low-income groups living in the cities found almost annual trims in the federal safety net. In addition, cutbacks in federal aid programs forced states and localities to rely more and more on their own resources. State and local governments pushed the burden for these cutbacks as far down the line as they could.
”Ultimately, the burden for the cutbacks fell on the most vulnerable group-the kids-as the ripple effects of budget cuts in Washington were passed down the line to the local schools,” he said. ”It has been a gradual process.”
Sooner or later, he says, it`s going to occur to the federal government that it makes more sense to collect more taxes from society`s most privileged groups than to pay them increasingly large chunks of interest on the debt. This is more likely to occur when a president from a post-War War II generation is elected to office.
Isn`t the power to tax the power to destroy? In general, yes, but the top tax rate fell to such a low level during the Reagan years that it now is threatening the nation`s infrastructure and undermining society`s cohesion. The pendulum swung too far. The power not to tax proved to be the power to destroy, too.
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Debt is nothing more than a tax on the next generation. But when the next generation gets into power, there are ways to get even. Higher taxes is one. Another is to trim back programs for the elderly, particularly the affluent elderly. My friend believes that one idea that may become popular is forcing the affluent elderly to cash in the equity on their homes before they become eligible for government benefit programs. Reverse mortgages do just that.
While favoring higher taxes for the wealthy at the federal level, my friend believes that state and local governments are going to have to be aggressive in passing out tax incentives to lure industry and jobs to their areas.
”The government of Bridgeport, Conn., is going to have to `buy` a business or two to provide jobs for its people,” he said. ”No taxes on profits for 50 years, whatever it takes. If it doesn`t, the town is going down the toilet and the government should be kicked out of office.”
But isn`t this inconsistent-favoring higher taxes at the federal level and lower taxes on business at the state and local level? Not really, he says. ”At the state level, you are giving up revenues you do not have in order to get revenues you did not have a chance of obtaining. It`s an investment. At the federal level, you are raising taxes to get rid of interest payments.”
This does not mean going back to a 50 percent top tax rate. That probably was too high, and retarded economic growth. But today`s deficit keeps interest rates high and eats up enormous amounts of investment capital that could go into creating new enterprises in the nation`s urban areas.
It is wrong to say that this is mere redistribution of the wealth. What it would do is create a new pool of entrepreneurial capital that would go toward creating new companies and jobs. Many societies, my friend says, have decided that interest is evil-something paid to people who do not want to take risks.
Even today, our long-term interest rates are too high and encourage the well-to-do to put their money into safety. When America built itself into a great country back in the 1950s, when the middle class could afford to buy a new home, long-term rates were half of what they were today. And the federal deficit was not nearly so imposing.
To save our cities, to save a generation, the nation needs to put its money back to work.