Who Pays the Dollars that Finance Bush's War? More on a Fair Tax Burden

President Bush has just sent Congress an “emergency” request for an extra $46 billion in expedited funds for Iraq, Afghanistan and other national security needs. That’s in addition to the $145 billion in war-related spending included in Bush’s original 2008 budget. Which brings me back to the subject of who’s gonna pay for all this.

I listened recently to a right-wing radio talk show host fulminate against liberal “anti-American traitors” who criticize American foreign policy. Within a minute he was on to another of his favorite topics – taxes. “It’s YOUR money!” he thundered, repeating the line we’ve heard so many times before. “It’s not the GOVERNMENT’S money!”

If we’re serious about national defense – as well as all the other things we need (police, fire fighters, roads, bridges, schools, and clean water, to name a few)- it's your COUNTRY. And the principle for who’s gonna pay should be equal sacrifice.

Equal sacrifice means that in paying taxes, people ought to feel about the same degree of pain – regardless of whether they’re wealthy or poor. This means that someone earning $2 million a year ought to pay a larger portion of her income in taxes than someone earning $20,000 a year. Even Adam Smith saw the wisdom of a graduated tax. “The rich should contribute to the public expense, not only in proportion to their revenue, but something more in proportion,” he wrote. (Wealth of Nations, vol. 2, ed. Campbell, Oxford U Press, 1976, p. 840.)

Traditionally during wartime, taxes have been raised substantially on top incomes to help pay the extra costs of war. The estate tax was imposed by wartime Republican presidents Lincoln and McKinley. It was maintained through World War I, World War II, the Korean War, and the Cold War. Now, under Bush, with Bush's war costing more and more, it's being phased out.

During World War I the marginal income tax on the richest Americans rose to 77 percent; during World War II it was over 90 percent. In 1953, with the Cold War raging, Republican president Dwight Eisenhower refused to support a Republican bill to reduce the top rate, then 91 percent. By 1980, the top marginal rate was still at 70 percent.

Combine this logic with the facts I shared with you two blogs ago – about how large a share of national income and wealth the super-rich now claim – and the case for substantially raising marginal income tax rates on the rich should be even clearer.*

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* Postscript: The blogger who asserts that 84.6 percent of all federal taxes are paid by the top 25 percent of income earners, and over a third are paid by the top 1 percent, advances a specious argument. First, most Americans pay more in payroll taxes than in income taxes; in addition, state sales taxes have grown faster than almost any other form of taxation. Both payroll taxes and sales taxes take a much bigger portion of the paychecks of lower-income Americans than of higher-income. Viewed as a whole, the current tax system is quite regressive.

Second, and more to the point, it’s irrelevant how much of the total income tax burden is paid by the top 25 percent, or even the top 1 percent. The ethical and logical issue is what sort of sacrifice individuals are making, or should be expected to make, rather than what sacrifice an economic “class” is making as a whole. The rich have become so wealthy that even if each wealthy American paid a very small share of his or her incomes in taxes, the rich would still, as a group, account for a large share of total income taxes. I find it ironic that conservatives who extol the virtues of individualism and abhor so-called “class warfare” would resort to such a deceptive argument.

Why Credit-rating Agencies Blew It: Mystery Solved

Recently, Treasury Secretary Hank Paulson sharply criticized credit-rating agencies for failing to recognize the risks in hundreds of billions worth of mortgage-backed securities whose values continue to plummet as home-loan defaults grow.

The Treasury, along with the SEC and several congressional committees are now investigating why credit-rating agencies such as Standard & Poors, Moody’s, and Fitch gave thumbs up for so long to securities backed by sub-prime mortgages – downgrading them only in July, after almost everyone on the planet knew they were junk. I mean, you didn’t have to be a rocket scientist to know that mortgage lenders had been pushing low-interest mortgages on people who wouldn’t be able to repay them once interest rates rose. Right?

The real mystery is why this issue has to be investigated. It's obvious why credit-rating agencies didn't blow the whistle. (They didn't blow the whistle on Enron on Worldcom before those entities collapsed, either.) You see, credit-rating agencies are paid by the same institutions that package and sell the securities the agencies are rating. If an investment bank doesn’t like the rating, it doesn’t have to pay for it. And even if it likes the rating, it pays only after the security is sold. Get it? It’s as if movie studios hired film critics to review their movies, and paid them only if the reviews were positive enough to get lots of people to see a movie.

Until the recent collapse, the result was great for credit-rating agencies. Profits at Moody’s more than doubled between 2002 and 2006. And it was a great ride for the issuers of mortgage-backed securities. Demand soared because the high ratings expanded the market. Traders that bought, rebundled, and then sold them didn’t have to examine anything except the ratings. It was actually a market in credit ratings --a multi-billion dollar game of musical chairs. Then the music stopped.

The whole thing rested on a conflict of interest analogous to that of stock analysts who, before the dotcom bubble burst, advised clients to buy stocks their own investment banks were issuing. The remedy for that was to split the two functions – analysis from investment banking.

The remedy here is to do much the same: bar issuers from paying credit-rating agencies for rating their securities. If investors want to examine securities' ratings, they or the pension or mutual funds they invest through can subscribe to the service – just as movie-goers subscribe to publications where reviews appear. Message to Treasury and SEC: Stop the investigations and issue this simple rule.

The logic of Taxing the Rich, and Why Dems are Afraid to Use It

No candidate for president has suggested that the nation should raise the marginal tax rate on the richest beyond the 38 percent rate it was under Clinton (it’s now 35 percent, but the richest of the rich, as I’ll explain in a moment, are paying only 15 percent). Yet new data from the IRS show that income inequality continues to widen. The wealthiest 1 percent of Americans are earning more than 21 percent of all income (the data are from 2005, the latest the IRS has examined). That’s a postwar record. The bottom fifty percent of all Americans, when all their incomes are combined together, is earning just 12.8 percent of the nation’s income.

The biggest emerging pay gap is actually inside the top 1 percent. It's mainly between CEOs, on the one hand, and Wall Street financiers – hedge-fund managers, private-equity managers (think Mitt Romney), and investment bankers – on the other. According to a study by University of Chicago professors Steven Kaplan and Joshua Rauh, more than twice as many Wall Street financiers are in the top half of 1 percent of earners as are CEOs. The 25 highest paid hedge fund managers are earning more than the CEOs of the largest five hundred companies in the Standard and Poor’s 500 combined. CEO pay is outrageous; hedge and private-equity pay is way beyond outrageous. Several of these fund managers are taking home more than a billion dollars a year.

You might think that Democrats would do something about the anomaly in the tax code that treats the earnings of private-equity and hedge fund managers as capital gains rather than ordinary income, and thereby taxes them at 15 percent – lower than the tax rate faced by many middle-class Americans. But Senate Democrats recently backed off a proposal to do just that. Why? It turns out that Dems are getting more campaign contributions these days from hedge fund and private equity partners than Republicans are getting. They don’t want to bite the hands that feed.


Taxing the super-rich is not about class envy, as conservatives charge. It’s about the nation having enough money to pay for national defense and homeland security, good schools and a crumbling infrastructure, the upcoming costs of boomers’ Social Security (the current surplus has masked the true extent of the current budget deficit, but it won’t for much longer), and, hopefully, affordable national health insurance. Not to mention the trillion dollars or so it will take to fix the Alternative Minimum Tax, which is now starting to hit the middle class.

If the rich and super-rich don’t pay their fair share of this tab, the middle class will get socked with the bill. But the middle class can’t possibly pay it. America’s middle class is under intense financial pressure. Median wages and benefits, adjusted for inflation, have been going nowhere for thirty years; health costs are soaring (employers are quickly shifting co-payments, deductibles, and premiums to their employees), fuel costs are out of sight, the prices of the houses occupied by the middle-class are in the doldrums.

What’s fair? I’d say a 50 percent marginal tax rate on the very rich (earning over $500,000 a year). Plus an annual wealth tax of one half of one percent on net worth of people holding more than $5 million in total assets. Can’t be done, you say? Well, the highest marginal tax rate under Republican Dwight Eisenhower was 91 percent. It dropped under JFK to the 70 percent range. You say the rich will leave the country rather than face a marginal tax of 50 percent? Let them, and take away their citizenship.

If the Democrats stand for anything, it’s a fair allocation of the responsibility for paying the costs of maintaining this nation. So far, neither the Dem candidates for president nor the Senate Dems have shown a willingness to uphold this fundamental principle. It seems the rich have bought them out.

Don't Count on Corporations to Lead on Global Warming

Al Gore deserves kudos, but do all the corporations that are going green deserve praise, as well? Can we count on corporations to lead the way on global warming? No, on both counts.

Consider British Petroleum, which a few years ago shortened its name to BP and has promoted itself with a $200 million ad campaign as the environmentally friendly oil company that will go "Beyond Petroleum." So far, though, it’s invested a tiny fraction of its oil profits in non-fossil based fuels, and caused the worst oil spill in the history of Alaska’s fragile north slope. Going green for public relations might help the bottom line but doesn’t help the environment.

Other companies are going green because they can save money that way. By using new cleaner technologies, for example, Dow Chemical lowers its energy costs and reduces carbon emissions. By packaging its fresh produce in plastics made from corn sugar instead of petroleum, Wal-Mart also cuts costs. Alcoa saves some hundred million dollars a year by reducing its energy use, thereby helping the environment. I think it’s great these and other companies are cutting their costs and increasing profits, but this is what companies are supposed to do. It’s called good management.

Some investment banks and private-equity firms are going green because they anticipate regulations that will make green pay off and reduce returns from companies that don’t go green. Goldman Sachs recently pushed TXU, a big Texas power company, to cut the number of coal-fired plants it was going to build because Goldman anticipates stricter regulations of coal-fired plants. Goldman isn’t praiseworthy; it’s just watching its money.

Under supercapitalism, it’s naive to think corporations can or will sacrifice profits and shareholder returns in order to fight global warming. Firms that go green to improve their public relations, or cut their costs, or anticipate regulations are being smart, not virtuous.

So don’t expect corporations to lead the charge on global warming. That’s government’s job. And next time you hear a company boast about how environmentally friendly it is, hold the applause.

Nix the Farm Bill

I’ve got a way to reduce global poverty, decrease the number of workers crossing our borders illegally, save American taxpayers money, and cut your supermarket bill -- in one fell swoop. How? Get rid of US farm subsidies and tariffs.

They were supposed to be a temporary remedy for small farmers during the Depression. But, renewed every five years regardless of which party controls Congress, farm subsidies keep going and going. They've been costing taxpayers some $11 billion a year. The Senate is now considering the latest version, and it's hardly better than what's come before.

Look, I have no problem insuring small farmers against major losses. But farm subsidies go mostly to big agribusinesses that hardly need them.

But the big problem isn't just the waste of taxpayer money. Americans -- including the US media and even Washington politicos -- tend to regard agriculture policy as the exclusive domain of legislators from farm states. Yet our farm policy is the single most damaging thing we're doing to the world's poor. Ending farm subsidies and tariffs would be the single most important thing we could do to reduce global poverty.

Fewer than 2 percent of Americans even work on a farm. Yet about half the population of the developing world depends on farming for their livelihoods. They can’t earn what the global market would otherwise pay them because America’s subsidized farm exports keep prices artificially low.

American cotton growers, for example, export cotton for just over half what it costs them to produce it. Which means more than 10 million African cotton farmers are stymied. If we stopped subsidizing our cotton businesses, world cotton prices would rise, increasing the value of cotton exports from Africa by some $300 million a year.

Meanwhile, the average American tariff on agricultural imports is 18 percent – much higher than the 5 percent average tariff on other imports. So not only do the world’s poor suffer because of our outdated farm policies, but Americans get hit with a double-whammy – we’re subsidizing US agribusiness with our tax dollars while paying some $35 billion a year more for our food than we’d pay if we didn’t also protect agribusinesses.

Our farm policies are even encouraging illegal immigration into the United States. That's because many of the world’s poor who can’t earn enough by farming are desperate to immigrate – legally or illegally – to richer countries like America.

Message to the U.S. Senate: You want to fight global poverty and illegal immigration? You want to reduce the budget deficit? You want to give American consumers a break? There's no simpler first step to accomplish all these things than to end farm subsidies and tariffs.

Why Charity Doesn't Begin at Home

An acquaintance of mine who just returned from the Clinton Global Initiative in New York told me she was so inspired by all the charitable contributions pledged during the event that she had decided that charity was a more important means of dealing with poverty -- around the world as well as here in the United States -- than government action. That struck me as a curious conclusion. While charitable donations in the United States this year are expected to total more than $200 billion, a record, a big portion of this impressive sum -- especially from the wealthy, who have the most to donate -- is going to culture palaces: to the operas, art museums, symphonies and theaters where the wealthy spend much of their leisure time. It's also being donated to the universities they attended and expect their children to attend, perhaps with the added inducement of knowing that these schools often practice a kind of affirmative action for "legacies."

I'm all in favor of supporting the arts and our universities, but let's face it: These aren't really charitable contributions. They're often investments in the lifestyles the wealthy already enjoy and want their children to have too. They're also investments in prestige -- especially if they result in the family name being engraved on the new wing of an art museum or symphony hall.

It's their business how they donate their money, of course. But not entirely. Charitable donations to just about any not-for-profit are deductible from income taxes. This year, for instance, the U.S. Treasury will be receiving about $40 billion less than it would if the tax code didn't allow for charitable deductions. (That's about the same amount the government now spends on Temporary Assistance for Needy Families, which is what remains of welfare.) Like all tax deductions, this gap has to be filled by other tax revenues or by spending cuts, or else it just adds to the deficit.

I see why a contribution to, say, the Salvation Army should be eligible for a charitable deduction. It helps the poor. But why, exactly, should a contribution to the already extraordinarily wealthy Guggenheim Museum or to Harvard University (which already has an endowment of more than $30 billion)?

A while ago, New York's Lincoln Center had a gala supported by the charitable contributions of hedge-fund industry leaders, some of whom take home $1 billion a year. I may be missing something, but this doesn't strike me as charity. Poor New Yorkers rarely attend concerts at Lincoln Center.

It turns out that only an estimated 10% of all charitable deductions are directed at the poor.

So here's a modest proposal. At a time when the number of needy continues to rise, when government doesn't have the money to do what's necessary for them and when America's very rich are richer than ever, we should revise the tax code: Focus the charitable deduction on real charities.

If the donation goes to an institution or agency set up to help the poor, the donor gets a full deduction. If the donation goes somewhere else -- to an art palace, a university, a symphony or any other nonprofit -- the donor gets to deduct only half of the contribution.