A chunk of our taxes will be bailing out Wall Street and paying to revive Main Street this year. However, there are other ways our taxes could strengthen our sick economy, and they wonâ€™t cost most of us a cent. Hereâ€™s how Congress can make our economy safer, fairer, and more solvent.
In the 1950s, federal taxes were highly progressive: rich people paid more of their income than the rest of us. Of every dollar they made over $200,000 a year, they paid 90 cents to Washington. The government used that money to fund the GI bill, build our road system, and support a prosperous economy.
Now wealthy people are paying 35 cents on the dollar. Their tax rates nose-dived while the rate for middle-income people went up. The richest people in the country are keeping more of their money while everyone else keeps less.
It gets worse. Capital gains â€“ profits that investors get when they sell stocks, bonds, and other financial assets â€“ are now taxed at a 15 percent rate rather than the top 35 percent rate for personal income. The managers who turned Wall Street into a high-risk casino were rewarded with huge bonuses that were taxed at the 15 percent rate. They paid taxes at lower rates than the people who answered their phones.
The biggest gamblers â€“ the top 50 hedge fund and private equity firm managers â€“ took home an average of $588 million each in 2007. They put the entire economy at risk to create â€œreturns that [were] high enough to justify their outrageous fees,â€ as one former hedge fund employee commented. Meanwhile, their wealthiest customers realized yearly returns of 20 percent by borrowing huge sums against their own money. Now that the bubble has collapsed, we are all paying for the risks they took.
We can lessen that kind of dangerous behavior in the future by:
â€¢ Taxing capital gains the same as ordinary income.
â€¢ Creating a new top tax bracket of 50% for very high incomes.
â€¢ Eliminating corporate tax subsidies for excessive executive pay.
â€¢ Taxing financial transactions to discourage the rapid â€œflippingâ€ of financial assets for speculation.
These long-overdue changes will do more than discourage future financial crashes. They will raise about a third of a trillion dollars to help pay for the bailout and the stimulus package. They will make the people who profited from the bubble and caused the crash pay more of the costs. And it will leave them less money to buy politicians and change the rules in their favor.
Extreme wealth is threatening our economy and our democracy. A recent report entitled â€œSold Out: How Wall Street and Washington Betrayed Americaâ€ says: â€œThe financial sector invested more than $5.1 billion in political influence purchasing over the last decade.â€ This stunning figure explains why the financial industry was deregulated. It shows what happens when excessive wealth concentrates at the top of the economy.
Smart taxes can bring the distribution of wealth down to reasonable levels and create an economy that works for everyone. By restoring progressivity to our tax system â€“ making it fairer â€“ Congress can make it safer too.
Dorchester resident Mike Prokosch is the lead author of â€œSafe, Fair, and Solvent,â€ a forthcoming report on taxes from United for a Fair Economy (faireconomy.org).