Dear Sen. Portman,
As a member of the congressional supercommittee, you are responsible for the fate of a great nation. The market gyrations following the debt-ceiling and deficit-reduction deal told us that the markets no longer have faith Congress can act sensibly for the benefit of the nation as a whole. The markets are made up of adults who know the deficit cannot be significantly reduced without both spending cuts and tax increases.
To succeed, you will have to address two fundamental problems. The first is decades of wage stagnation and our current high unemployment, which have severely hurt demand for goods and services. The second is that virtually all increases in income and wealth have been at the top of the income scale, a serious economic problem.
In terms of the economy as a whole, most of that wealth at the top is essentially useless. At best, it sits in idle investments, making no contribution to demand and economic growth. At worst, it drives speculative bubbles and the development of the grotesque financial instruments — derivatives and mortgage-backed securities — that largely caused the economic collapse.
Demand is the engine that drives production, investment, employment, and tax revenues. Unless you significantly increase demand, you cannot effectively reduce the deficit. As you cut spending, you will reduce demand because you will eliminate jobs now paid through deficit spending. This will decrease tax receipts, adding to the deficit.
In the next several years, cutting spending will not free up money to circulate in the economy (and increase demand) because the cuts must be used to reduce the deficit, not to return money to the taxpayers.
Fundamentally, you cannot reduce the deficit or promote economic growth without dramatically changing the distribution of income and wealth in the economy. Those at the top already have more houses and luxury cars than they can use. Their spending cannot drive the economy. By contrast, the middle class and below will spend every additional dollar. And when they spend it, they will increase demand, promote job growth, and ultimately strengthen the companies owned largely by those at the top.
To channel the necessary resources to the demand-creating middle class, you must significantly increase taxes on those at the top. Use those tax proceeds to fund long-term, absolutely necessary infrastructure repairs and improvements. Use them for short-term hiring for special projects. Far from harming the economy, these taxes would strengthen the economy and increase jobs by putting the money to work creating demand.
The result is a win-win: jobs for those who need them, increased spending and demand, and much stronger investments for those who pay the tax.
In addition to increasing marginal tax rates for the highest incomes, you must reduce the job-killing effects of the low capital gains tax rate and increase the estate tax, which hurts the economy by keeping money on the sidelines. The low capital gains tax rate drives money to investments made to maximize income, rather than for long-term growth. The result is enormous pressure on business to show good results every quarter — a dangerously myopic, short-term dynamic.
As we know all too well in Ohio, one of the easiest ways to increase profits quickly is to send job overseas. Higher short-term capital gains rates would decrease that pressure, as would increasing the holding period needed to qualify for lower long-term rates.
Finally, the estate tax strengthens both the economy and our democratic society. Massive inheritances tend to sit on the economic sidelines rather than circulate through the economy through spending. They are a large dead weight on the economy. More important, the estate tax tends to break up developing aristocratic accumulations of wealth.
De Tocqueville recognized that the early American rejection of laws favoring accumulated wealth was crucial to our fledgling democracy. He would be horrified by the minimal estate tax we have today and by its proposed elimination.
Jordan is a professor and associate dean at the University of Akron law school. The views expressed are his own and do not represent the opinion of the university.