Borrowing Away Our Freedom

I have never considered the federal and state tax systems to be unjust because they are marginally progressive, even as my own income grew and I got kicked into higher marginal tax rates. People who make more money ought to pay higher marginal rates because, in my view, they benefit the most from our country's brand of free market capitalism. The questions are whether we should single out one or two industries and tax compensation in those industries at higher rates than we do others and, if we do, how much more should people working in these industries pay?

By the late 1970s, the top marginal federal income tax rates were in the neighborhood of 80%. Both political parties were involved. Part of it grew out of having to pay for the Vietnam War and other misadventures. Part of it involved notions of fairness that have changed dramatically in the last 30 years. Leaving aside flat-tax advocates and those who would simply tax consumption (the most regressive), the income tax is more than likely here to stay. When marginal rates were slashed during the Reagan administration and then slowly and modestly grew back in the 1990s, compensation managers were working hard to maintain competitive advantage in attracting talent in any number of industries. If the top marginal rate went up, increased compensation and perks followed. Lawyers and accountants got more creative.

When states like New York faced deficits, they borrowed rather than increase income tax rates. When the federal government passed unfunded mandates on state governments, they often borrowed more. Borrowing just to keep the government running is usually considered poor management but many states did it because their legislators were afraid of being associated with increasing taxes for any reason. When increased revenues were needed, "sin" taxes, lotteries, increased fees on toll roads and other strategies were used to help balance budgets. Wealthy people might have complained but most of the fee increases hit poorer people the hardest. Legislators were more interested in getting re-elected than in making wise policy decisions.

As a general rule, Americans are not stupid. They knew what was happening but lacked the political will or organization to make changes. In lieu of a real solution, many people began to attack those who made what they considered too much money. In some cases they might have been right. CEOs and other senior executives of publicly traded companies making $10-20 million per year irrespective of the profitability of the company were easy targets. Confiscatory taxes were not and will not be a solution. Financial industry executives started private hedge funds with their compensation being considered capital gains, taxed at 20%. Energy company executives could move to hedge funds, energy trading or any number of other industries.

Good governments pay their bills and balance their budgets and have the political will to eliminate tax loopholes and reserve borrowing for infrastructure improvements and other long-lasting projects like expanding public transportation. It's not that much different than a household that borrows for vacations they can't afford to take or a flat-screen television to replace a perfectly serviceable tube television but will not borrow or bother to replace a leaking faucet or purchase more energy efficient appliances. Priorities get shifted around and sometimes turned on their heads. When credit was easy to get, we forgot that our parents and grandparents actually saved money and used it to purchase luxury items and were unwilling to borrow for necessities. They bought houses they could afford with a large downpayment and drove at least one of their cars for 10 years instead of trading them in every three years. Most were not poor. They were frugal, responsible and lived within their means. If we held our legislatures to the same kind of principles we would not constantly face the prospect of huge deficits or, if we did, we would have a rainy day fund that governors love to talk about but rarely, if ever, establish.

The biggest tragedy of the second Bush Administration was its squandering of a budget surplus that could have been used for any number of good reasons. You can't fight an expensive war - whether the war is necessary or not - and cut taxes at the same time. If we didn't believe it then, we ought to believe it now. You can't borrow most of what you need from foreign countries and expect to keep control over your own economy. You can't tell states that since the federal government can't afford to fund a program, the states will have to pay even if they, too, face deficits. That's what our government has done. It did not have to happen. We let it happen.

It might help if we turned our national focus away from divisive social issues (gay marriage and reproductive freedom chief among them) and zero in on how to become energy independent and stop relying on the Chinese and others to keep us afloat by lending us billions - perhaps trillions - and all of the control that is associated with being a lender.

If you doubt me and your grandparents are still alive, ask them. I am pretty confident they would agree with me.