Chapter 11: Paying to Renew America

THE ENLIGHTENED SELF-INTEREST OF THE VERY BEST-OFF

Of all the world’s leading nations and modern economies, America is the world’s most prosperous, as measured by per capita income, and this is due in large part to capitalism. No economic system allocates capital more efficiently or rewards effort, skill, and imagination more fairly than capitalism. Capitalism cannot work, however, unless capitalists—those who invest their capital in business enterprises for the purpose of realizing a profit in accordance with the principles of capitalism—can reap the rewards for their successful investments as well as suffer the losses for their bad ones.

Taxing capitalists requires striking a delicate balance. On one side of the scale, public investments necessary for capitalism to prosper must be made and paid for by taxing capitalists, and, on the other side of the scale, capitalists cannot be taxed so heavily that they lose their incentive to put their capital at risk. The best evidence of whether capitalists are being over-taxed is to check out how they are doing financially relative to others.

Although scant data is available to directly measure and track the ownership of wealth, much data is available from governmental sources, such as the IRS, the Treasury, the Census, the BEA, the Fed, and also private sources, that enable economists to inferentially measure and track the ownership of wealth. Relying upon both governmental and private data, two economists, Emmanuel Saez of the University of California, Berkeley, and Gabriel Zucman, London School of Economics and Political Science, published a study in October 2014, WEALTH INEQUALITY IN THE UNITED STATES SINCE 1913: EVIDENCE FROM CAPITALIZED INCOME TAX DATA, as NBER Working Paper No. 20625 (the S&Z Study), that has measured and tracked wealth and income concentration among American families over the last century.

In the S&Z Study, households (families) are defined to include both single persons aged 20 and married couples, in each case with children dependents, if any; wealth is defined as the current market value of all assets owned by households net of all of their debts; and national income is the sum of all personal income as determined by the BEA. As Table XI-1 shows, three facts underscore just how much wealth has concentrated in households at the top:

• first, the top .1 of 1% owns as much wealth as the bottom 90% combined;
• second, the average wealth ($371 million) of the top .1 of 1% is 283 times the average wealth ($1.31 million) of those in the top 90^th through 99^th percentiles; and
• third, the top 1% owns almost twice as much wealth as the bottom 90%.

Given these disparities, capitalism amply rewards those who are successful.

As shown in the S&Z Study, this intense concentration of wealth is the result of a 30-plus year trend, which has been relentless and shows no sign of slowing. This trend has created winners and losers among income groups with groups at and closest to the peak being the winners and those at or closest to the base being the losers. Examples of the losers include the following households:

• The bottom 90% whose wealth share fell by 30%;
• The top 10% to 5% whose wealth share fell by 23%; and
• The top 5% to 1% whose wealth share fell by 15%.

Examples of the winners include the following households:

• The top .1% to the top 1% whose wealth share rose by 20%;
• The top 0.1% to the top 0.01% whose wealth share rose by 104%; and
• The top 0.01% whose wealth share rose by 330%.

From 1979 through 2012, the top 1% has reaped an ever-growing share of America’s wealth while everyone else has either barely kept even or fallen behind.

AMERICA’S CAPITALISTS

Anyone can claim to be a capitalist, but to be a real one requires having money available to invest—it is the difference between being a fan and a player. Capital finances the property, plant, and equipment that make the economy run, and without it, there would not be an economy. Although capital takes many forms, it can be divided into two basic categories: first, “equity,” meaning an ownership interest in a business or a bank, savings, or money market account, and second, “debt,” meaning an ownership interest in an obligation of a borrower to repay a loan. With respect to capital in America as of 2012, the S&Z Study observed the following:

• capital represented 37.1% of America’s total wealth with housing accounting for 16.4%, business assets accounting for 10.3%, and pensions accounting for 36%, and
• the ownership of capital was intensely concentrated with the bottom 90% owning less than 2%, the top 1% owning 75%, and the top .01% owning 28%.

From the overall increase in wealth and its intense concentration since 1979 in the top 1%, there is no hint that capitalists either are not being generously rewarded for putting their money at risk or cannot afford to pay more in taxes. Outside the top 1%, housing and pensions comprise almost all of its wealth, but for those in the top .1%, capital comprises almost all of its wealth. As a practical matter, capital is the only form of wealth that can be invested. Fortunately, America has many champions of capitalism, but unfortunately, it has only a very few capitalists.

Borrowed Household Wealth, The Classic Oxymoron

Although America’s capitalists have never been wealthier, they are not quite as wealthy as it appears. A significant amount of today’s capitalists’ wealth is attributable to an oxymoron, borrowed household wealth. Since 1981, America has created significant private wealth through public borrowing which has increased the national debt. Imagine the folly of cutting taxes on a billionaire by $1 million, letting the billionaire bank the $1 million, financing the $1 million tax cut by adding it to the national debt, and having some set of future taxpayers paying back the $1 million plus interest. In that deal, the billionaire who pockets the current tax cut wins and all other taxpayers lose. Folly notwithstanding, that is exactly how a substantial amount of household wealth has been created. While past folly has been great for the billionaires of the last 30 plus years, it will not be so great for the taxpayers of the next generation or two who will most likely have to pay it back.

Grasping the significance of borrowed wealth requires understanding that (1) nominal household wealth, as measured by the S&Z Study, is the aggregate amount of all household wealth net of all private debt, and (2) borrowed household wealth is that portion of nominal household wealth which is equal to the national debt. America’s real household wealth, then, is nominal household wealth less borrowed household wealth. Borrowed household wealth should be subtracted from nominal household wealth because nominal household wealth is encumbered by an unconditional obligation of the government to repay the national debt from all income and wealth subject to taxation. Just like a mortgage is an encumbrance against one’s home, the national debt is an encumbrance against nominal household wealth.

From 1979 through 2013, both the GDP and nominal household wealth grew, but neither grew (in percentage terms) as much as the national debt, as shown by the following changes:

• nominal household wealth grew, as a percentage of GDP, from 252% to 380% resulting in 2013 nominal household wealth being $62.651 trillion;
• the national debt grew, as a percentage of GDP, from 32% to 106% resulting in the 2013 national debt being $17.548 trillion; and
• if the national debt in 2013 had been held to the same percentage of GDP that it was in 1979, it would have been $5.661 trillion, or $11.887 trillion less than it was; and
• borrowed household wealth (1) increased by $11.887 trillion from 1979 to 2013 and (2) accounted in 2013 for 28% of nominal household wealth as compared with 13% in 1979.

Borrowed household wealth grew by $11.887 trillion because America was unwilling to tax itself to pay for what it spent. Not coincidentally, this increase in borrowed household wealth occurred at the same time that the Reagan and Bush tax cuts (which disproportionately favored those with the highest income) substantially reduced revenue and increased the national debt. So, it is quite likely that much of the increase in borrowed household wealth can be found in the investment portfolios of high-income wealthy investors who squirreled away the Reagan and Bush tax cuts and otherwise benefitted from low taxation.

The S&Z Study shows that no group benefitted more from borrowed wealth than those with income in the top 1%. In 1979, the top 1% had a 24.4% share of nominal household wealth, but by 2013 their share had grown to 41.8%. Since total nominal household wealth in 2013 was $62.651 trillion, the increase of 17.4 percentage points (41.8% – 24.4%) in the top 1%’s share of nominal household wealth was worth $10.901 trillion. Again, not coincidentally, this increase in the top 1%’s share of nominal household wealth closely matches the $11.887 trillion increase in borrowed household wealth. Borrowed household wealth disproportionately benefits high-income taxpayers during years in which the national debt grows and disproportionately penalizes them during periods in which the national debt shrinks.

Although it is never good to increase the national debt (and therefore borrowed wealth), sometimes it is necessary in order to cope with a national emergency. During the period of 1979 through 2009, America was not confronted with a serious national emergency, but nevertheless it increased the national debt, as a percentage of GDP, from 32% to 68%. This increase in the national debt (and the accompanying increase in borrowed household wealth) made America less financially secure by increasing the debt to GDP ratio and redistributing wealth in favor of the top 1%. However, in late 2008 the Great Recession created a national emergency by plunging the economy into a free fall in which GDP was falling and unemployment was rising by 800 thousand jobs a month. To cope with this crisis, the government provided a fiscal stimulus which injected almost a trillion dollars into the economy. The stimulus included both spending increases on public investments and individual tax cuts targeted primarily to those with middle and low-incomes. Fortunately, the stimulus largely succeeded, but it came at the cost of adding substantially to the national debt.

If, as during the Great Recession, it becomes necessary to increase the national debt, it should be done in a way that does not unnecessarily concentrate more wealth in the top 1%. Increasing the national debt to finance both (1) increased spending on public investments that grow the middle class and (2) tax cuts that lead to increased individual consumption do not unnecessarily concentrate more borrowed household wealth in the top 1%. Increasing the national debt to finance tax cuts that enable the top 1% to bank them unnecessarily concentrates wealth in the top 1%. The fact that over the last 40-plus years the top 1% has substantially increased their share of America’s wealth simultaneously with a growing national debt can be attributed almost exclusively to giving tax cuts to the top 1% that they were able to save. This policy was the cornerstone of the Bush tax cuts. Anyone who doubts the influence of those who represent the top 1% in the tax game need only look at their success in enacting tax cuts that uniquely benefited the top 1% by taxing the return on capital at rates lower than taxing wage income.

REESTABLISHING AMERICA’S FINANCIAL SECURITY

In 2013, America’s public debt ($11.983 trillion) to GDP ($16.498 trillion) ratio was 72%, the highest level in generations. To ensure that the economy creates real household wealth and establishes financial security, America must put its financial house in order by getting its public debt to GDP ratio down to a manageable level. As a reaction to the growing national debt wrought by the Great Recession, the 2010 Simpson-Bowles Report warned of a “Looming Fiscal Crisis” and argued that America will not be financially secure until it resets its fiscal priorities to reduce its public debt to GDP ratio to no more than 40% by 2036. In other words, America should conduct its financial affairs by complying with the 40% Rule. Tolerating public debt in excess of the 40% Rule exposes America to the same danger that confronts a family who taps out its credit card to have a vacation instead of reducing its debt. As long as the family does not have to deal with an emergency, things may work out, but if someone in the family has a medical emergency, there will be no way for the family to pay for a visit to the ER.

Financial security protects America against national emergencies much like fire insurance protects homeowners against fires. Paying the taxes necessary to maintain financial security is much like paying insurance premiums. If a homeowner’s house does not catch fire, paying premiums seems a waste, but if the house burns down, in retrospect, then the premiums seem cheap. America, unlike an individual, cannot afford to go naked in the face of catastrophic risks—too much is at stake for too many.

By 2013, America’s public debt had grown to $5.755 trillion over what would be required to satisfy the 40% Rule. To bring America into compliance with the 40% Rule would have required not only that no future additions be made to the public debt, but that America start paying it down. Complying with the 40% Rule would have been a heavy lift in that in 2013, as a percentage of GDP, total government spending was 22.7% and taxing was only 16.7%, a six-percentage point differential. Without even paying down any public debt, in 2013, taxes would have had to be increased by $990 million, or about 75% of the $1.316 trillion that was paid under the personal income tax in 2013, just to keep the problem from getting worse. Since 2013, the spread between spending and taxes has worsened. In 2016, the CBO (based on then-current law) projected for the period 2016 through 2046 that (as a percentage of GDP) government spending would increase from 21.1% to 28.2%; revenues would increase from 18.2% to 19.4%; and the public debt to GDP ratio would increase from 75.4% to 141.1%. In 2021, the national debt is over 100% of GDP and accelerating. America’s capacity to cope with national emergencies has become dangerously imperiled.

In terms of financial security, America is much like a tight-rope walker who is performing without a net, and the price for America purchasing a net will almost certainly mean substantially higher taxes for an extended period.

Paying for America’s Financial Security

As a practical matter, paying for America’s financial security must be based on the ability to pay principle if for no other reason than that blood cannot be extracted from a stone. Increasing taxes on those whose income and wealth have stagnated or fallen over an extended period would result in intolerable economic, social, and political stress.

Comparing the 2012 model of wealth distribution among various income groups with the 1979 model, as shown in Table X-2, reveals which income groups have the greatest ability to pay higher taxes to assure America’s financial security.

Table XI-2 shows that in 2012, compared with 1979, the share of wealth for the top 1% rose substantially while the share of wealth for the bottom 99% fell, and within the top 1% most of the rise went to the top .01%.

Table XI-3 shows, in 2012 dollars, how much less in wealth the bottom 99% had and how much more in wealth the top 1% had as a result of the $62.651 trillion in 2012 nominal household wealth being distributed on the basis of the 2012 model instead of the 1979 model.

The 2012 model, compared with the 1979 model, resulted in the top 1% having $10.901 trillion more in wealth and the bottom 99% having $10.964 trillion less in wealth.

This shift in wealth ownership did not just happen; it is the product of (1) impersonal market forces and (2) politically determined tax policies. Two market forces—globalization and technology—have favored the return of capital over labor, as follows:

• Globalization gave American capital access to cheap foreign labor; and
• technology-enabled capital to reduce labor costs through automation.

With globalization suppressing wages and with automation eliminating many skilled jobs, labor income has either (1) stagnated or fallen for those many who have only ordinary skills or (2) sharply risen for those few who have extraordinary skills.

As evidence that both market forces and tax policies have favored capital over labor, the composition of national income has tilted strongly in favor of capital since 1979. In 1979, the labor share of national income was 78% and the capital share was 22%. By 2012 the labor share of national income had shrunk to 72% and the capital share had grown to 28%. As the capital share, relative to the labor share, of national income has grown, both capital income and labor income have concentrated at the top.

Table XI-4 shows that in 2012, compared with 1979, the share of capital income increased for households whose share of wealth is in the top 10% while the share of capital income for those in the bottom 90% fell, and within the top 1% the highest percentage increase went to the top .01%. The increase in capital income for the top .01% percent (1) stems from a trend beginning around 1980 that has resulted in capital consuming an ever-growing share of the top .01%’s wealth and (2) underscores the principle that capital tends to beget capital, particularly if it is taxed at lower rates than labor income.

Table XI-5 shows that in 2012, compared with 1979, the share of labor income increased for households whose share of wealth is in the top 10% while the share of labor income for those in the bottom 90% fell, and within the top 1% the highest percentage increase went to the top .01%.

The CEO pay to typical worker ratio explains much of why this concentration has occurred. In 1978, the CEO to worker pay ratio was 29.9%, but by 2014 the ratio had grown to 303.4%, a more than tenfold increase. In today’s economy, any worker who does not have an extraordinary skill and is not able to efficiently execute it cannot expect to command much of an income.

While income and wealth concentration attributable to impersonal market forces is natural, such concentration attributable to tax policy is not. Tax policies that tax capital income at lower rates than labor income in the midst of a long-term trend of capital concentration are the product of the raw politics of the tax game. All of this helps explain why wealth and income have intensely concentrated in the top 1%.

Taxing and the Top 1%

From 1979 through 2012, taxes were cut for all income groups, but none more than for the top 1%, and, within it, the top .01%, as shown on Table XI-6.

Table XI-6 shows that taxes were cut by 30% for the top 1% and 36% for the top .01%. The tax game resulted in those with the highest incomes getting the largest share of tax cuts, not just in absolute terms but in percentage terms. Not coincidentally with these tax cuts, from 1979 through 2013 (1) the national debt (as a percentage of GDP) rose from 32.04% to 100.55%, and (2) borrowed household wealth increased by $11.887 trillion in 2013 dollars.

With taxes having been cut substantially more for the top 1% than everyone else, progressivity became a fatality of the tax game. For the period 1979-2012, the multiples by which the pre-tax and after-tax income of the top 1% of households ranked by wealth exceeded that of the bottom 90% grew dramatically, as shown on Table XI-7.

Table XI-7 reveals two dominant trends from 1979 through 2012, as follows:

• First, the pre-tax income of the top 1% grew 242% more (1338%/552%) and the top .01% grew 380% more (2101%/532%) than that of the bottom 90%.
• Second, even more than pre-tax income, the after-tax income of the top 1% grew 246% (1338%/544%) more and the top .01% grew 3.86 times more (21.01/5.44) than the bottom 90%.

Increases in pre-tax income are prizes won in the marketplace while increases in after-tax income are prizes won in playing the politics of the tax game. While it is easy to understand why a very few extraordinary income earners and capitalists can win pre-tax increases in the market place, it is hard to understand why ordinary income earners who have millions more votes than extraordinary income earners and capitalists have lost the politics of the tax game for the last 40-plus years.

Since millionaires and billionaires already have plenty of money, they are able to save their tax cuts. Saved tax cuts, unlike spent tax cuts, compound wealth and income disparities because saved tax cuts are invested and yield a return to the investors. From the period 1979 through 2012, the bottom 90% at best saved very little and more often than not either saved nothing or drew down on savings while the top 1% more often than not saved in a range from about 35% to more than 50%. It is a safe inference that tax cuts that went to those in the bottom 90% were not saved, but those that went to the top 1% were saved and thereby compounded wealth and income disparities. To a significant extent, income and wealth concentration intensified because of the politics of the tax game.

Given the long-term trend in the concentration of income and wealth in the top 1%, increasing their taxes is a good place to start in paying for America’s financial security.

Wealth and Income Concentration

Beginning in the last third of the 20^th century, globalization and technological advances accelerated natural tendencies toward wealth and income concentration. Simultaneously with these forces working their will, taxes were cut for all groups, but none more so than for the best-off, particularly capitalists. From 1979 to the present, except for a brief interlude in 1987-1990, income derived from the return on capital has been taxed less than labor income as a result of preferential tax rates for capital gains and dividends as well as a cornucopia of business tax preferences. Former presidential candidate Mitt Romney’s 2011 tax return epitomizes the advantage that capitalists have over wage earners in tax policy. Romney reported $13,709,608 in income, all of which was attributable to a return on capital or business income and none of which was from wages, and he paid $1,935,708 in taxes for an effective tax rate of 14.1%. Had the same $13,709,608 in income been from wages, and if Romney had taken the standard deduction, his tax would have been approximately $4,750,000 for an effective tax rate of 34.6%, or 20 percentage points more.

The Romney example underscores that capitalists are not only skilled at making money, but they are also especially skilled at playing the tax game in getting and keeping tax preferences that uniquely benefit them. Imagine how wage earners, particularly those who make big bucks like Romney, such as successful CEOs, star athletes and entertainers, and big-time lawyers and doctors, might wonder as to why their taxes are more than twice that of capitalists who have the same income. Tax preferences for capitalists account in large part for the dramatic increase in wealth concentration and the emergence of borrowed household wealth. The reasons for wealth and income concentrating as a result of inexorable market forces, such as globalization and technology, are easily understood, but wealth and income concentrating because of politically driven tax preferences that uniquely benefit the top 1% is not so easily understood.

In America, the rich can get richer as long as everyone else does not get poorer. Wealth and income concentration are not a societal, economic, or political problem as long as the vast majority of ordinary Americans believe that they and their children have bright futures. However, once the vast majority of ordinary Americans lose this belief (particularly if they see the top 1% is getting richer while they are getting poorer) then wealth and income concentration most likely will run afoul of the Golden Mean.

In a democratic society, too much wealth and income concentration becomes a bad thing when the vast majority of its citizens come to believe that it is a bad thing. Some things, as Aristotle might warn, can become so bad that they can fracture a society and threaten a nation’s future (remember the Social War in Athens and Solon’s solution). Given the trend of wealth and income concentration over the last 30-plus years, an increasingly large number of ordinary Americans are coming to believe that it has gotten out of hand. Rather than waiting to see where the breaking point is for excessive concentration, steps should be taken sooner rather than later to do something about it. Aristotle might advise that excesses are better avoided than remedied.

TWO MODELS FOR WEALTH AND INCOME DISTRIBUTION: 1979 OR 2012

Although many forces are working to increase wealth and income concentration, these forces are not inevitable. Globalization and technological advances could be slowed or even reversed, but to do so would be economically self-defeating. Instead, tax policies can either intensify or mitigate wealth and income concentration. In this respect, America has two models from which to choose—the 1979 model (with less intense concentration) or the 2012 model (with more intense concentration). Taxes can be either (1) increased to provide America with financial security and pay for the public investments necessary to grow the middle class or (2) cut to increase borrowed wealth and expose America to increased financial insecurity and social turbulence. Also, taxes can be made more progressive and simpler to mitigate income and wealth disparities or not. Over the next generation, Americans have a choice to make, do they want a 1979 model of income and wealth concentration or a 2012 model. Which model is chosen will play out in the tax game.

No mystery cloaks the reason for wealth and income concentration in the top 1%. Since 1979, those advocating the interest of the top 1% have consistently won all but a very few of the major contests in the tax game by enacting policies based on the following principles:

• Taxation should be less progressive.
• Tax preferences favoring the return on capital over labor income and giving advantages to some politically favored businesses should be expanded.
• Tax cuts are more important than making necessary public investments and reducing the public debt to GDP ratio to closer to 40%.

Adherence to these politically-determined tax principles has resulted in more rather than less wealth and income concentration and has exposed the American economy to the danger of being unable to respond financially to a national emergency. These principles have substantially contributed to America trading in the 1979 model of wealth and income concentration for the 2012 model.

If after having tried out the 2012 model America decides that it prefers something more like the 1979 model, then new tax policies will have to be enacted based on the following principles:

• Taxation should be more progressive.
• Taxation should be simplified by ending all tax preferences.
• Tax rates should be adjusted from time to time to assure compliance with reducing the public debt to GDP ratio to 40%.

Enactment of policies consistent with these principles over time (sooner or later depending on the specifics) would move wealth and income concentration toward the 1979 model and away from the 2012 model.

Capitalism Has Been Good for America and the World

Not only has capitalism been good for America, but it has also been good for the world. Worldwide capitalism has created wealth on a scale never known before in world history, and nowhere more than among America’s current crop of capitalists, those in the top 1%. Worldwide capitalism—America’s gift to the world—was made possible because of (1) America’s commitment after World War II to preserving world peace and (2) its example to peoples all over the world that the American way of life based on personal freedom and capitalism offered them the best hope for a better life. Sustaining and growing world capitalism depends on America continuing its commitment to preserving world peace and continuing to renew its example that the American way of life should be the model for how the world’s peoples can best improve their lives.

Capitalism prospers best in a nurturing environment where (1) capital is free to roam EVERYWHERE in the world in search of its highest return, (2) contracts are sacrosanct EVERYWHERE capital is employed, and (3) disputes are resolved peacefully EVERYWHERE capitalists do business. All capitalists have an interest in supporting efforts, both nationally and internationally, which create and preserve an environment that nurtures capitalism. Throughout most of history, however, capitalism has had to contend with environments ranging from mildly unfriendly to downright hostile.

For the 1^st, 2^nd, and 3^rd centuries, Rome’s Pax Romana provided the rule of law, peace, and security for most of the civilized world; for much of the 18^th and 19^th centuries, Great Britain’s Pax Britannia provided for greatly expanded international commerce as well as relative peace and security for most of the world; and for the last half of the 20^th and first part of the 21^st centuries, America’s Pax Americana has greatly expanded the rule of law and international commerce as well as maintaining peace and security throughout most of the world. In between these periods, the world had to suffer through the Dark Ages, several plagues, religious wars, social upheavals, revolutions, and the catastrophic World Wars of the 20^th century, all of which were terrible for business in general and capitalism in particular.

At the end of World War II, America, as the world’s strongest nation—politically, economically, and militarily—took the lead in forming (1) a network of worldwide mutual security alliances, (2) a series of trading agreements that opened up international commerce as never before, and (3) international institutions like the United Nations to preserve world peace. These actions lead to what historians have called the “Pax Americana” under which a growing number of the world’s nations have accepted (and now more or less attempt to live under) the following principles:

• Adherence to the rule of law including in particular respect for property rights;
• Agreement to peacefully resolve all conflicts among nations; and
• The establishment and maintenance of free-capital and labor markets.

As America has spread these principles, the world’s under-privileged have seen for themselves how America’s fusing of personal freedom with capitalism has made for a better life for more people than any other system. The American model has led to the peaceful triumph of capitalism over socialism and communism with a growing number of the world’s have-nots now believing that capitalism, not socialism or communism, offers them their best chance for a better life. Internationally, the peace and expansion of the rule of law made possible by the Pax Americana and the triumph of capitalism as the world’s accepted economic model for progress have combined to create worldwide capitalism.

The worth of worldwide capitalism to capitalists is of an incalculable value as measured by their money-making potential. Never in the world’s history has capitalism had a more accommodating environment than now. However, the workings of worldwide capitalism and technology have now put the American model—the reality that personal freedom and capitalism working in tandem will produce a better life for all—at risk. While worldwide capitalism has increased the return on capital because of the unprecedented competition of the world’s businesses for scarce capital, it has suppressed the wages of ordinary American workers by subjecting them to unprecedented competition from an abundance of cheap foreign labor and technological advances. Worldwide capitalism, then, has simultaneously made (1) capital more valuable (thereby enriching capitalists) and (2) the labor of ordinary workers less valuable (thereby impoverishing many ordinary Americans). Any economic system that creates excessive wealth in a very few and stagnating and falling incomes in the many will not last in a democratic society.

The Pax Americana did not magically appear. It arose out of a political consensus in which the vast majority of all Americans came to believe that (by becoming actively involved in world affairs to preserve international peace and extend the rule of law to more nations) America could make the world a better place and improve the lives of ordinary Americans. The American model also did not magically appear. It is the progeny of a century’s work to (1) provide social insurance to the aged, infirm, and poor; (2) expand civil rights to all races, colors and creeds; (3) enact progressive taxes that enable those with middle and low incomes to have a higher standard of living; (4) increase educational opportunity for those with middle and low incomes; and (5) regulate industry to assure a more livable environment, all of which have created an American quality of life that is the envy of the world’s have-nots. Creating and sustaining the Pax Americana and the American model have cost taxpayers (primarily upper-income Americans) trillions of dollars and the blood of hundreds of thousands of soldiers (primarily the children of middle and lower-income Americans). Contributions of blood and treasure both have been vital to creating and sustaining the Pax Americana and the American model, and both contributions should be respected by all.

Nothing continues forever and that includes worldwide capitalism. Two pillars—the Pax Americana and the belief of many of the world’s have-nots that the American model offers them the best chance of a better life—support worldwide capitalism. These pillars, in turn, rest on a foundation grounded on the belief of an overwhelming majority of ordinary Americans that personal freedom coupled with capitalism offers them a better life than any alternative. If ordinary Americans ever lose their belief in the American model of personal freedom and capitalism, then the foundation on which the two pillars that support worldwide capitalism will collapse.

For capitalists who doubt the value of worldwide capitalism, they should imagine doing business in a world in which (1) domestically, America is afflicted with class and ethnic strife, political instability, an under-educated and demoralized workforce, and declining mass consumption; and (2) internationally, warfare is common, the rule of law is rare, and international commerce is problematic. In such a world, capitalism would work only sporadically in a few safe havens, and the prosperity that it has brought to capitalists would evaporate. Out of pure self-interest, capitalists should support whatever is necessary to renew and bolster the belief of ordinary Americans that the American model offers them a better life than any alternative.

AMERICA’S CHOICES

If America is to be renewed as a nation in which the vast majority of ordinary, hardworking, law-abiding Americans and their children are to live better lives, then America has a choice to make. Will all working Americans be permitted to share in Americans growing wealth, or will America’s growing wealth be confined to the top 1%? The answer to this question will play out in the tax game where it will be nobly won or meanly lost. Renewal of America depends on getting its financial house in order and making the public investments necessary for economic growth and growing prosperity for all working Americans, and this requires raising taxes.

In deciding how much and who to tax, Americans will have to answer the following questions:

Should taxes be raised so that America can get its financial house in order? [Y] [N]

Should taxes be increased or cut for those on the brink of poverty? [Y] [N]

Should taxes be increased or cut for those with median and lower incomes? [Y] [N]

Should taxes be increased or cut for those with above-average incomes? [Y] [N]

Should taxes be increased or cut for those in the top 1%? [Y] [N]

Should labor and capital income be taxed at the same or different rates? [Y] [N]

Should any two taxpayers who make the same income pay taxes at different rates? [Y] [N]

Should the after-tax income of working Americans reflect America’s overall economic growth? [Y] [N]

Should taxation be dramatically simplified? [Y] [N]

Do the income and wealth disparities between the top 1% and bottom 90% of 1979 offer enough incentive for America’s top 1% to be successful in business and invest their capital? [Y] [N]

The answers to these questions will either renew America for ordinary Americans or leave America on the existing track of concentrating wealth and income in fewer and fewer.