Aftershock: The Next Economy and America's Future (16 page)

The yearly cost to the federal government of these wage supplements would be $633 billion. The cost of the tax cuts for middle-income families would be billions more. But these lost revenues would be replaced by the following two initiatives: a carbon tax, and higher taxes on the top 5 percent of incomes.

A carbon tax
. We should tax fossil fuels (coal, oil, and gas), based on how many tons of carbon dioxide such fuels contain. The tax would be collected at the mine or port of entry for each fossil fuel, and would gradually rise over time in order to push energy companies and users to spew less carbon into the atmosphere. (A yearly auction for the “right” to pollute under a certain maximum cap that tightened year by year would theoretically have the same effect and generate about the same amount of money—but only if permits were not handed out to politically powerful polluters free of charge or exchanged for imaginary and unverifiable “offsets” that a company might claim by, say, planting trees in Brazil.)

If initially set at $35 per metric ton of carbon dioxide or its equivalent, such a tax would raise over $210 billion in its first year alone.
By the time it reached $115 per ton, it would yield about $600 billion per year. The public wouldn’t pay this tax directly, but indirectly as the prices of goods rose in proportion to how much carbon was used in their production. For example, a tax of $115 per ton would add about $1 to the price of a gallon of gasoline and 6¢ per kilowatt-hour to the price of electricity.

If the revenues from the carbon tax went into wage supplements, middle- and lower-income Americans would still come out far ahead. A carbon tax would have two additional advantages. First, it would push energy companies and businesses to invest in new ways to reduce greenhouse gases, and in lower-carbon
fuels and products; it could thereby lead to the development of cheaper and more efficient sources of energy. Second, by stimulating such investments, the carbon tax would also boost aggregate demand.

Higher marginal tax rates on the wealthy
. In a nation facing a widening chasm between the very rich and everyone else, it is not unreasonable to expect those at the top to pay a higher tax on their incomes, from whatever source (wages, salaries, or capital gains).
I propose that people in the top 1 percent, with incomes of more than $410,000, pay a marginal tax of 55 percent; those in the top 2 percent, earning over $260,000, pay a marginal tax of 50 percent; and those earning over $160,000, roughly the top 5 percent, pay 40 percent.
These taxes, when added to the modest amounts contributed by taxpayers who earn between $50,000 and $160,000 under my plan, would raise $600 billion more than our current tax system per year. Added to the $210 billion generated by the carbon tax just in its first year, the total new revenues would be $810 billion initially and would increase as carbon tax revenues increased. These would more than pay for the income supplements and tax cuts I propose. I would use the surplus for additional initiatives listed in the following pages that require funding, and for reducing the federal deficit.

Under my proposal, income from capital gains would be treated no differently from income derived from wages and salaries. Someone with a total income of between $50,000 and $90,000 would pay 10 percent, even if a majority of that income is from capital gains. That is substantially less than the 15 percent tax rate on capital gains today. By the same token, someone with a total income of several million dollars would pay a marginal tax of 55 percent on all income, regardless of how much of it came from capital gains. (
The four hundred highest-income taxpayers in 2007, each with an average income of over $300 million, paid
only 17 percent of their total incomes in taxes that year, because most of their incomes were treated as capital gains. This makes a mockery of the ideal of a progressive tax system.)

Furthermore, these tax rates are not out of line with most of our history over the last century, during which time the nation’s productivity and overall economy grew quickly.
As noted, from 1936 to 1980, the top marginal tax rate was 70 percent or more.
Since 1987, the official top rate has remained below 40 percent, and the effective rate, after all deductions and credits, between 20 percent and 25 percent. Yet higher taxes on top earners have not correlated with slower growth, the claims of so-called supply-side economists to the contrary notwithstanding. During the almost three decades spanning 1951 to 1980, when the top rate was between 70 percent and 92 percent, average annual growth in the American economy was 3.7 percent. Between 1983 and the start of the Great Recession, when the top rate ranged between 35 percent and 39 percent, average growth was 3 percent.

So-called supply-siders are fond of claiming that Ronald Reagan’s 1981 tax cuts caused the 1980s economic boom. There is no evidence to support their claim. In fact, that boom followed Reagan’s 1982 tax
increase
. The 1990s boom likewise was not the result of a tax cut; most of it followed Bill Clinton’s 1993 tax increase.

My proposal is not a Robin Hood–like redistribution. The wage supplements and tax reductions I’m proposing for the middle class would enable them to spend more, and their spending would help move the economy to full capacity and sustained growth. Consequently, companies would enjoy higher profits, and the stock market would rise. Although the rich would pay higher taxes and thereby receive a somewhat smaller share of the economy’s overall gains, those overall gains would be much larger than they would be otherwise. Hence, richer Americans are very likely to come out ahead compared to where they were before—as
they did during the Great Prosperity, when they paid substantially higher taxes but enjoyed the fruits of faster growth.

A reemployment system rather than an unemployment system
. The old unemployment insurance system was designed to tide people over until they got their jobs back at the end of a downturn. Nowadays, most job losers never get their jobs back, and the ranks of the long-term unemployed are extraordinarily high. People who are unemployed for long periods have difficulty getting back into the job market, and they drain family assets. High levels of long-term unemployed strain our social safety nets. What’s needed is a
reemployment
system that speeds and smoothes the way for those who become unemployed to find new jobs.

One piece of such a reemployment system would be wage insurance. Any job loser who takes a new job that pays less than his or her former job would be eligible for 90 percent of the difference, for up to two years. After two years, many workers would have acquired enough on-the-job training to render them sufficiently productive to warrant wages nearly as high as the wages they formerly had on the job they lost. Wage insurance would speed the movement of laid-off workers into new jobs because it would induce them to take jobs that pay less rather than wait for ones that pay as much as the job that was lost. It would thereby save the costs of unemployment benefits and would generate added revenues as reemployed workers pay income taxes earlier than otherwise.

For workers who need additional skills, income support of 90 percent of the former wages would be provided for up to a year while a worker is engaged full-time in approved training or education programs. Longer-term training has been shown to be more effective than short-term, especially when it gives people
the basic tools they need to continue learning on the job. If job seekers choose to enroll in programs that prepare them for fields in which labor is likely to be in short supply, such as nursing or teaching, they would receive income support for an additional year of training and education. As participants acquire the kinds of skills that are rewarded in the new economy and fill positions for which there are labor shortages, we could all expect to reap the benefits of this program in the longer term through stronger economic growth, higher tax revenues, and less dependence on social safety nets.

I estimate the total new costs of a reemployment system to be $3 billion a year over and above the $2.35 billion that the federal government now spends on unemployment insurance in an average year. In time, however, the costs of the reemployment system would drop as the skills of the labor force improved and the rate of long-term unemployment declined.

Any remaining shortfall in revenues to cover this program would be made up by a severance tax on profitable corporations that lay off their workers. Under the current system, employers do not pay the social costs of layoffs—including additional unemployment benefits and the extra needs of families in distress. It stands to reason that companies would be less inclined toward layoffs if they had to pay these costs. What is needed is a one-time severance tax on any layoff equal to 75 percent of the full cost of the laid-off worker’s yearly salary, for all workers under the median wage, and 50 percent for all workers above it, up to 200 percent of the median. Such a tax would not only give employers more incentive to keep workers on, but would also help pay for the wage insurance and skill upgrades of the reemployment system.

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School vouchers based on family income
. Over the longer term, the best way to boost the earnings of Americans in the bottom half is to improve their education and skills. To that end, spending on public schools should be replaced by vouchers in amounts inversely related to family income that families can cash in at any school meeting certain minimum standards. For example, the $8,000 now spent per child in a particular state would be turned into $14,000 education vouchers for each school-age child in a poor family, and $2,000 vouchers for each child in a very wealthy family.

School vouchers in this progressive form would improve overall school performance by introducing competition into the school system. They would also give lower- and middle-income families more purchasing power in the education market. Schools located in neighborhoods where there are many lower-income families would get immediate infusions of billions of dollars to upgrade their physical plants, buy new textbooks, and hire more and better teachers. Yet under my proposal, such schools would not be able to count on these extra revenues forever. After an initial three years, they would have to compete with other schools that might put those sizable vouchers to even better uses. Some competitors would be organized as independent, nonprofit “charter” schools. Others would be public schools located nearby in adjoining school districts or communities.

I would also expect wealthy suburban school districts to compete vigorously for lower- and middle-income children and the generous vouchers they would bring. These upscale districts would need the money in order to make ends meet; they couldn’t possibly meet their expenses at $2,000 per student. They would even have a financial incentive to arrange vans to transport the children from poorer neighborhoods.

Progressive vouchers should also be made available to families
to support early childhood education, providing stimulating care for all children from infancy until they are ready to enter first grade. Few other educational expenditures have so uniformly and consistently shown such positive results.
Children in these programs are more likely to graduate from high school, attend college, and be fully employed when adults than are children who have not participated. Children in these programs have been shown to earn more, commit less crime, and experience less teenage pregnancy.
A total of $20 billion per year should be devoted to early childhood education. This money would come from the reverse income tax.

College loans linked to subsequent earnings
. A large and growing percentage of college students from lower- and middle-income families must finance their education with student loans. This discourages some students from pursuing higher education for fear they won’t be able to get jobs that pay enough.
In 2009, about two-thirds of incoming college students expressed concern about their ability to pay for their education. More than half of them had taken out loans. This way of financing higher education imposes an additional burden on students who wish to pursue lower-paying professions like teaching or social work rather than higher-paying professions like business and corporate law. The system thereby robs society of many low-wage professionals whose work is socially useful and desirable.

We need to change the way higher education is financed in America. Tuition should be free at all public colleges and universities. Students who elect to attend a private college or university should be eligible to take out a federal loan. Graduates of public colleges and universities, and borrowers of federal loans, should be required to pay a fixed percentage—say, 10 percent—of their taxable earnings for their first ten years of full-time work into a
fund that finances public colleges and universities and provides loans to students attending private colleges and universities. After that, graduates would have no further obligations; loans would be considered fully paid. This way, graduates who pursue low-income occupations such as social work, teaching, or legal services would be subsidized by graduates who pursue high-income occupations including business, finance, and corporate law.

Ten percent is my best estimate, but as long as the payback percentage were set to recoup the full cost of tuition at public universities or the loans for private, the system will not require any additional federal revenues.

Medicare for all
. The passage of health care legislation in 2010 represents only the first step toward reform. The next stage should be Medicare for all.
The most efficient way to provide all Americans with high-quality health care is to allow everyone to sign up for Medicare and to subsidize the costs for middle-class and lower-income families.

It will become apparent that the 2010 reform cannot adequately contain soaring health care costs. Health care premiums, deductibles, and co-payments will continue to eat up more and more of the paychecks of the middle class. Americans spend more on health care per person than any other nation in the world, and costs are rising faster than inflation. Yet we have the highest infant mortality of all the world’s advanced industrialized nations, and life expectancy in the United States is shorter than in forty other nations, including Jordan and the Cayman Islands. We are the only wealthy nation that does not ensure that all citizens have coverage; as of 2010, some 45 million people were without insurance.