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The new lending way

Robert Reich

Kai Ryssdal: The White House is pushing back against the notion that the debt limit deadline of August 2nd is somehow negotiable. An administration official -- anonymous, by the rules of the briefing today -- told reporters today the Treasury Secretary's not kidding around about that. There have been some suggestions by Republicans that governmental business as usual might in fact be possible after August.

Commentator Robert Reich takes the long view today and says at least part of our debt problem is the tax code.


Robert Reich: Forty years ago, wealthy Americans financed the U.S. government mainly through their tax payments. Today wealthy Americans finance the government mainly by lending it money. While foreigners own most of our national debt, more than 40 percent is owned by Americans -- mostly the very wealthy.

This huge structural change in how America's rich finance government -- from paying taxes to lending money -- has gone almost unnoticed. But it's critical for understanding the budget predicament we're now in.

Over that four decades, tax rates on the very rich have dropped. Between the end of World War II and 1980, the top tax rate remained more than 70 percent -- and even after deductions and credits was well over 50 percent. Capital gains rates were also higher than today.

Not only are rates lower now, but loopholes are bigger. Eighteen thousand households earning more than a half-million dollars last year paid no income taxes at all. In recent years, according to the IRS, the richest 400 Americans have paid only 18 percent of their total incomes in federal income taxes.

Meanwhile, more and more of the nation's income and wealth have gone to the top. We haven't had such a concentration of money at the top since the Gilded Age of the late 19th century.

America's super rich invest their savings all over the world, wherever they can get the best return for any given level of risk. Treasury bills -- essentially loans to the U.S. government -- have proven good and safe investments, particularly during these last few tumultuous years.

You hear a lot of worries about foreigners dumping Treasuries if they lose confidence in the dollar because of our future budget deficits. What you hear less about are these super-rich Americans, who are just as likely to abandon Treasuries if spooked by future budget deficits.

The great irony is if America's super rich financed the U.S. government the way they used to -- by paying taxes rather than lending the government money -- that long-term budget deficit would be far lower.


Ryssdal: Robert Reich was secretary of labor for President Clinton. His most recent book is called Aftershock: The Next Economy and America's Future. Next week, David Frum. Send us your comments -- click on the contact link.

About the author

Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.
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@PeterC: I've heard this argument before, that the top 1% of earners are paying a larger share of federal taxes than ever before. Could this be because that top 1% of earners are taking in a larger share of overall income than in the past?

By focusing on the effective tax rate Dr. Reich conveniently ignores the fact that the share of federal taxes paid by the top 1% of earners is at or near its highest level since the CBO has been keeping track of the these statistics. In fact, the percentage of federal taxes paid by the top 1% now is considerably above the Clinton years when Dr. Reich was part of the administration (low 30’s then vs high 30’s now).

Dr. Reich, the rich aren’t a homogenous class of fat cats that sit around counting their money and buying expensive toys.

Consider that many of the people that fall in to the top 1% of earners are small business people such as myself. A substantial portion of what I have left after taxes gets reinvested into additional business opportunities, most of which happen to be in the manufacturing sector. Since 2001 when my partner and I purchased our first ailing manufacturing company we’ve tripled our manufacturing related employment. We continued to operate at a loss and put more money into our company for almost five years before we became comfortably profitable.

Each additional dollar that we pay in taxes takes away from additional job-creating opportunities. This isn’t just a myth.

Perhaps the best thing for so-called "Liberals" to do is to acquiesce to everything Republicans and self-anointed "Conservatives" are asking for. Perhaps the American public will only get hip to these issues when they see, as our grandparents did in the 1930s, lines at soup kitchens, no money for granny's retirement and medicine, while the top 2% live it up in their mansions.

Telling it like it is. When will we come to our senses?

THANK YOU RR for bringing the point that the wealthy make money off deficits and government debt. I would point out that that means when the govt gives a tax cut to the wealthy during deficits, the govt has to borrow the money from the wealthy to then turn around and get that same money as a tax cut. And since the Republicans know that a govt default means higher borrowing rates, that is another way for the rich to profit off of government debt. For more:
http://www.mythtakenpolitics.org/2010/11/how-tax-cuts-for-very-wealthy-i...
or for the cartoon version:
http://www.xtranormal.com/watch/7721127/give-me-a-tax-break-give-me-a-ta...

Daniel Bennett

Thank you, thank you, thank you Dr. Reich) Always calling at as it is and having the historical facts at hand.

To answer the Hauser's Law and it's twin "science fiction" rationale the Laffer-curve, they both are based on the cunning abilities of the rich and super rich to evade the tax laws through slight of hand, shenanigans, and plain criminalities. However with the recent confessions. exposures and gimlet eyes scrutiny of Wikileaks and conscientious insiders,of the Swiss and other offshore dens of thieves and gangsters,that pass for Banks, is it time to revisit the Laffer curve and it's pathetic off shoots?

For my money, the American people and the world at large would be served well more effectively if we dropped bunker busting bombs on Swiss catacombs and send the Swiss gnomes scurrying with their generations of ill begotten goods, stolen riches and arrogated gold, to kingdom come. Then,and for once we all will be able to share the fruit of our planet evenly under one and just progressive tax law.

After every Reich post, I see the same Tea Party talking points about how liberals want to tax tax tax the rich, hike rates up to 90%, and everything would be solved. It's a nonsensical straw man argument, of course. The point is not that we need to bleed the rich dry, it is that the rich are paying a far lower tax rate than ever before and raising it would not cause the sky to fall, demonstrated by the '50s, '60s, and '70s. Additionally, this would certainly put a dent in the deficit, allowing us to balance the spending cuts vs tax increases solution a bit more toward the latter. (This is especially true of the Ryan plan, which isn't even 100%/0% in favor of spending cuts but rather 110%/-10% when you factor in tax cuts for the rich.) As for the 19.5% of GDP argument, the supposed spike in spending percentage is based largely on a shrinking of GDP, not an increase in government spending. Tacking according to this number makes as much sense as keeping your food budget at 19.5% of your income even after Dad loses his job.

Many on the Left like Robert Reich claim that if we only raised taxes to historical levels, all our problems would be solved. There are several problems with this. First of all, taken to its logical conclusion their argument implies that we would be better off if tax rates were one hundred percent of income, which anyone with common sense can see would be a disaster. Second, history shows that when taxes rates were first cut---in *half*---from the levels liberals drool over, tax *revenues* actually *rose*. And third, since most of those who are truly *rich* actually support the Left---if they *really* think their taxes are too low, no one's stopping someone like George Soros from *giving* money to the government; it's hard to take them seriously until they put their money where their mouth is.

Actually, Hauser is wrong. No more than 15 years past when Reich was a member of government, we were on a better footing. A deficit is not a bad thing most people own homes because of deficit spending in spite of platitudes to the contrary.
Running a deficit especially this one could be easily handled by not allowing any more discretionary spending on military adventurism a la Bush. The quarrel over the deficit only comes about when those who gain the most from a bent system are blind to what allows them to circulate and enjoy their wealth. By refusing, to recognize that they must insure a better standard for those that have less they eventually cut their own throat.
The services this country needs and demands are exactly the services that those with the upper incomes should be supporting. The rich have a choice build fortified communities to protect themselves from the people they need. They could employ corporate police and military personnel along with medical and educational facilities and the people to staff them or insure that populace they wish to protect themselves against has a reason beyond patriotism to live in a condition where the entire health, education, and safety mattered and not the interests of a few

Robert Reich doesn't mention a very key datum: Hauser's Law, which is the observation that over the last 60 years, the federal government has only collected 19.5% of GDP as federal tax revenues, WITHOUT REGARD TO TAX RATES! That was true in the 50's, the 60's, the 70's, and so on. Even back when the top tax rates were in excess of 50%.

Reich keeps whining that the rich don't pay enough taxes because the rates are too low. Sorry, Robert, but even if you raised them to whatever level you think is right, the federal government would *STILL* be in deficit and accumulating U.S. Public Debt.

Because he ignores these facts in his commentaries, he is offering false hope.

http://online.wsj.com/article/SB1000142405274870351490457560294320974195...

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