The Symptoms

There is an increasing disparity between the rich and poor in the United States (See Int'l Herald Tribune, MSN Money).  “Data from the United States Department of Commerce and Internal Revenue Service indicate that income inequality has been increasing since the 1970s, whereas it had been declining during the mid 20th century."  Salaries for the middle class have not kept up with the cost of living recently and now both spouses have to work in many families.  We risk becoming like a Latin American country or returning to the robber baron years at the end of the 19th century.  The wealthy and companies also have an interest in restoring balance, since our service/knowledge based economy depends on a high quality workforce.  People are the engine of our economy.

The Problem

The US was created uniquely as a meritocracy, in contrast with the aristocracies of Europe.  A free market was recognized as the best tool to achieve that, but only if regulated properly. The accumulation of wealth has given the rich and corporations undue access and influence [link] over the government, which has been used to relax the rules.  The result has been a free market running wild and creating a new monied aristocracy. 

The system is out of balance.  Reagan had many good policies, such as cuts to the high 70% tax bracket, cutting of wasteful government spending, and a defense buildup to end the Cold War.  However, those policies have been extended too far, with unfairly generous cuts to taxes for the rich and excessive defense spending which is running up a deficit that threatens the economy.

Most of the problems are at the federal level, but there are a number of issues California can address.  Below is a discussion of California first, then federal.

California

Problems

Unbalanced Tax Burden – Just as low federal capital gains taxes shift the burden to income tax, and thus from wealth to wage earners, so do low California property taxes shift the burden to income tax and new property buyers.  This is because of  Proposition 13 which also has other unintended consequences – new (generally poorer) buyers pay more property taxes than older (generally richer) owners; new businesses pay more, schools have to get money from the state instead, communities have to court businesses that will generate sales tax revenues, speculation and sprawl is fostered.

Proposition 13 also forces the state into dependence on fluctuating revenue with yearly budget problems. State revenue fluctuates yearly since it is dependent on volatile income and capital gains taxes, rather than stable taxes such as property taxes.  For background see California Tax & Spending Categories.

Poor Education – Due to poor secondary education, and high college costs, opportunities for good jobs are limited for many.  This also limits the skilled workforce needed for the high-tech California economy.

High costs –the cost of living is higher in California than most places, largely due to high housing costs and health care costs.

Deadlock – The above problems are not addressed due to a dysfunctional Legislature caused in large part by extremism on both sides due to gerrymandered districts.

Solutions

Fix the tax structure, including modifying Proposition 13 to exclude corporate landowners and high income homeowners from its limits, and also remove the 2/3 voter requirement for special taxes.  Also close corporate tax credit loopholes and expand sales tax to services.

Improve education, including higher teacher salaries based on performance.

Address effects that make housing expensive, and revise the health care structure to eliminate insurance as the middleman for everyday care.

Fix CA budgeting, initiative and election processes, including revising redistricting by approving Proposition 11.

Federal

Problems

The 3 main problems appear to be:

1. Taxes favor capital over wages.  Special interests modified the tax code to favor those with wealth, in the form of what is taxed, tax rates, loopholes (that only the rich can exploit) and subsidies.  The proportion of taxes paid by the middle class relative to the rich has increased as a result.  Tax cheats force the rest of us to pay more.  $100 billion a year is lost due to off-shore tax havens.  $350 billion in tax revenue is now lost due to lack of enforcement by the IRS. The share that corporate tax revenues comprise of total federal tax revenues also has collapsed, falling from an average of 28 percent of federal revenues in the 1950s and 21 percent in the 1960s to an average of about 10 percent since the 1980s (see also Tax Foundation).

2.  Skewed business framework.  Structure and regulations artificially favor those with capital (money) over those with wages.  Our current system disproportionately rewards those with more capital, and makes things difficult and more expensive for those with less.

3. Budget waste.  Money wasted with defense contractors, other pork and excessive transfer payments bites people twice - paying taxes and having their dollars devalued by the resulting deficit.  There are huge, unneeded subsidies for already high-priced crops and mortgage lenders – and we’re paying for it.  We can cut the defense budget in half and still spend 4 times as much as our closest competitor, China.

The History

We’ve never had a totally free market (that would be the mafia).  The government sets the rules for the market, and provides the infrastructure and education of its workers.  There is a balance between workers and capital (money).  Both need to be encouraged for an optimum market.  The balance has been cyclical throughout US history, from workers (Homestead Act), to capital (robber barons, trusts), to workers (New Deal), to capital (post-Reagan cuts of taxes & services).

The U.S. has spurned socialism (which communist countries proved doesn’t work – there is no incentive to work hard if you’re paid the same as the guy who doesn’t), and also has spurned unfettered capitalism (the robber baron era showed this doesn’t work).  The country has adopted a mix, with more capitalism than Europe.

Capitalism needs to be regulated, because companies have a never-ending incentive to increase profits for investors, which means keeping salaries down for workers.  They chase profits like the Terminator - they never have enough - each new CEO has to meet a higher bar, maintaining the existing profits is not enough.  This pressure is an unavoidable aspect of a free market, which, even with its flaws, is the best system there is.  But it could be better.  The US form of capitalism is somewhat self-destructive, focusing on short-term gain rather than long term investment.  This is driven not by capitalism alone, but by the way it is structured, with the quarterly report requirements, etc. 

What is not the problem.

The solutions

Restoring balance to taxes