Much has been made lately of those whose income is in the top 1 percent, who supposedly don’t pay their “fair share” of taxes. They have been denounced as close to common thieves. But think of the gains that they generate for others. We have rigged our tax policies so that, depending on the year, close to 40 percent of the income tax revenue comes from the 1 percent of the population that controls 20 percent of the wealth.
Close to half the population pays no federal income tax at all. This is a political disaster in the making.
The American economy is currently stagnating for two main reasons. At the top of the system, a relentless program of redistributive taxation undermines incentives for long-term investment and growth.
Yet from this vain pursuit of economic equality, we get declining standards of living for all. Simultaneously on the ground, excessive regulation of labor and real estate markets chokes off growth — employer by employer and house by house.
Our lopsided structure cannot last. Stock market losses cut the total income of so-called “one percenters” by around 30 percent between 2007 and 2009, with the greatest losses in the top 0.1 percent.
Higher tax rates will drive that overall level of wealth lower still, given that so little government revenue comes from the bottom half of the income distribution. Low tax revenues plus shiny new entitlements create an unsustainable situation where 40 percent of current expenditures are funded by long term debt, on which principal and interest payments will soon come due.
The correct policy flattens the tax rates to boost growth to the top, by leaving more wealth in private hands for intelligent wealth creation. Short-term tax horizons make it difficult for intelligent investors to implement long-term planning, which drives foreign capital from our shores, and sends American capital abroad.
The problem at the top is compounded by a similar paralysis at the bottom. Job creation best occurs in competitive markets. It is hampered when a purported jobs bill starts with “buy American” and “prevailing wage” provisions that pay homage to protectionism and monopoly unions.
Job creation is not helped when the Obama administration takes after Boeing for refusing to build new plants for the benefit of its intransigent unions, and proposes endless changes of national labor law in order to strengthen the hands of unions in organizing drives.
Still more jobs are destroyed by stiffer enforcement of overtime, minimum wage and antidiscrimination laws, all of which nix hiring by cautious employers. The prospect of heavy, but uncertain levies, to fund Obamacare injects yet further caution.
Housing policy is no better. Constant delays on foreclosure keep people in possession of their homes after chronic default imposes a permanent pall over housing markets.
Borrowers with no equity in their home, are more concerned with staving off foreclosure than maintaining their premises. Existing housing stock does not get resold in the market at prices that reflect its present value. Yet further subsidies are channeled via the Federal Housing Administration to perpetuate the cycle of high-risk lending.
All of this must stop if American government hopes to avert the rapid dissipation of human and physical capital. Deregulation has advantages that no system of government subsidies can hope to match.
Dial back on the full-court press against job creation and mortgage foreclosure, and jobs and new construction will follow. But the stagflation will continue so long as unsound regimes of taxation, public expenditure and market regulation place a hobnail boot on the throat of the American economy.
Richard A. Epstein is the Laurence A. Tisch professor of law, New York University Law School, a senior fellow of the Hoover Institution and a senior lecturer at the University of Chicago Law School. This piece was adapted from his broadside, “Why Progressive Institutions Are Unsustainable,” available from Encounter Books.
