Our dire fiscal and economic problems are crying out for a bold solution. We need to simultaneously stimulate our economy to grow faster and create more jobs, raise sufficient tax revenue to pay for our growing spending commitments, and address a widening inequality gap which threatens to undermine the basic principles of a free and just society. How are we going to accomplish all of these tasks at the same time?
It seems to me that the best way is to thoroughly reform our income tax system based on the following principles:
- Lower tax rates on marginal income to encourage more investment and entrepreneurship. Such changes can be made revenue neutral by eliminating deductions, loopholes and other tax preferences. This would apply to corporations as well as individuals.
- Establish a new low percentage (1% – 2%) wealth tax with a relatively high personal exemption ($5 million – $10 million). This would bring in approximately $200 billion per year to be used for reducing the deficit. Equally as important it would be a visible sign that the wealthy are making a significant contribution towards solving our fiscal problem. This will make it more acceptable to lower marginal tax rates on income in order to boost economic growth.
Fiscal conservatives often oppose any increase in tax revenue because, they think, it is likely to be used for new spending rather than for lowering the deficit. One way to overcome this concern is to pass a Balanced Budget Amendment to the Constitution. This would make it much harder to increase spending. The problem is that it will be very hard for Congress to pass such an amendment and have it ratified by ¾ of the states.
But something has to be done. The longer we wait and the more debt we build up, the more painful it will be to extract ourselves when the next crisis occurs as it surely will.