What We Need: Tax Reform
and Debt Reduction

Edward J. Dodson

[An unpublished commentary, July, 2010]

From the 1930s until the 1980s government responsibilities in the United States evolved to counter the negative outcomes associated with deregulated economic activity and a system of law that failed to protect workers, consumers, children, the elderly, minorities, women and gays from the whims of what is appropriately thought of as the propertied elite. We should not forget that from the time of George Washington on property equated with political power and control over law. The Great Depression proved to many that "the Democracy" was seriously threatened and undermined by vested interests and the purchase of political support for privilege.

The economic problems of the 1970s, associated as well with monopoly (this time of fossil fuels) and the transfer of income and wealth to those who controlled these natural resources, were misinterpreted in the United States as a result of too much government. And so, Americans embraced the so-called supply-side economic ideas advocated by members of the Reagan administration. The problem was that reductions in the rate of taxation imposed on capital gains (i.e., the sale of any and all assets without regard for whether such assets are really a capital good) and on the incomes of the wealthy did not result in the production of new capital goods. Rather, the added disposable income went primarily into speculative investment activities that generate nominal profits for investors and huge transaction fees for those who package such investments. From the early 1980s on we became a society addicted to credit-fueled (i.e., highly leveraged) speculation in property markets, in land, in stocks and bonds, and other paper assets that have active secondary markets.

So, with reductions in taxation on those who were benefiting most from deregulation and with constantly expanding government expenditures because of legislated entitlements and skyrocketing military spending it should not surprise anyone that the Federal debt has mushroomed out of control.

Focusing on the spending side of the equation is critical, of course. But, we desperately need to revamp our system of how government raises its revenue so that compliance is simplified and the source of revenue comes increasingly from "unearned" (i.e., speculation-derived) income flows. Back in 2003 or 2004 I proposed to the Bush administration's commission on federal tax reform a plan that would accomplish this outcome. What I proposed is to exempt all individual incomes up to the national median, removing all other exemptions and deductions. Then, above this level (a level that essentially exempts people who work producing goods and providing services), increasing tax rates would be applied to higher ranges of income, the rates and ranges set by the Congress in order to achieve a balanced budget. We should remember that our economy did rather well when the highest income ranges were taxed at over 80%. To stimulate investment in capital goods (and job) creation, we should return to use of tax credits awarded to businesses based on investments in plant and equipment.

An integral part of this overall approach is to then begin to replace outstanding government debt as bonds mature with fully amortizing bonds that return both interest and principal to investors. The amount required to service the national debt would then be calculated in the balanced budget deliberations. In this way, our national debt could be retired in a generation. And, instead of the nation borrowing and paying interest to the "haves" (and taxing those who have less in order to service the debt), the taxation of those with the deepest pockets and greatest ability to pay would more fairly pay for the costs of government.