America: Who Stole The Dream? U.S. Needs Big Reforms Once Again

Last in a series

The times are trying.

Corporations merge to form mega-corporations with far-reaching power and influence. Workers put in ever-longer hours to make ends meet. Families feel under siege. The gap between the country’s richest citizens and average workers widens daily. The government imposes its most onerous tax burden on working people and families. And it taxes most lightly the nation’s wealthiest citizens.

Political attacks have become so personal that good people are discouraged from running for office. Local governments compete with one another to lure businesses by giving economic incentives to companies. Stories of government corruption appear with startling regularity on the front pages of newspapers.

America in the 1990s, right?

Wrong.

America in the 1890s.

To understand where you are today - and why - you might just turn back the clock a century.

To understand where you can be tomorrow, you might recall how citizens in that earlier era dealt with the same forces you confront.

There are, to be sure, differences between the America of the 1990s and a century ago. One stands out above the others.

Back then, a powerful reform movement took shape and a third party, the Progressive Party, brought about wholesale changes in the way government operated.

The Progressive Party’s reforms gradually were co-opted, one by one, by the two major parties, the Democrats and the Republicans. By the time the Progressive Party passed out of existence, many of the changes it had proposed were in place.

Because government needed more revenue and the rich were not paying their fair share, the income tax was enacted.

Because businesses were peddling tainted meat, food and medicines, pure food and drug laws were enacted.

Because companies were forming trusts that wielded unprecedented powers, the antitrust and monopoly laws were enacted.

Because half the nation’s population was denied the right to vote, the women’s suffrage law was enacted.

The reformers set a tone that produced yet more legislation in the decades that followed - from child-labor laws to unemployment compensation, from minimum wage to Social Security.

All these changes resulted in a legislative framework to protect the average citizen and small businesses from the excesses of big business, special interests, and those who exploited others and used government to their own personal advantage. Over time, that framework gave rise to the largest middle class in history.

Now that framework is being dismantled. The economy that is evolving is balkanizing America - pitting social groups against one another, widening the gap between the have-mores and the have-lesses.

What is at stake is nothing less than the cohesiveness of American society, as the economy threatens to leave behind those without health insurance, without pensions, without good jobs.

This is not to say that Washington policy-makers deliberately set out to enact laws and programs to set citizen against citizen, or to reduce American living standards. Indeed, many acted out of the best of intentions.

Too often, though, government policy-makers have based their decisions on faulty assumptions or erroneous beliefs that have had unforeseen consequences. Nowhere is that more true than in policies that affect the U.S. economy.

How can we begin to restore a measure of fairness in American society, ease the gap between the have-mores and the have-lesses, halt the loss of good manufacturing jobs and improve the condition of the beleaguered middle class?

The list of possible reforms is long. The suggestions that follow are starting points, a place to begin the debate. Some could easily be implemented; others would be difficult.

Trade

Global trade was promoted on the basis that it would benefit everyone. But the concept is valid only if there is true reciprocity - if each nation provides equal access to its own market.

That hasn’t happened.

Instead, as foreign competitors discovered that Washington lacks the will to get tough on trade, they lowered tariffs but raised other barriers to entry of U.S. products into their markets.

Washington’s response was to continue to negotiate agreements with countries that promise to open their markets, yet never do, at least not to the extent that the United States does.

The emphasis needs to be changed from exports to imports, at least until trade is brought into balance. That means placing controls on imported goods.

Access to the world’s richest consumer market should be granted on the basis of national interest, not because of a blind adherence to an abstract economic theory like “free trade.”

Critics will complain that such a policy could set off a global trade war, that it would force up wages and risk inflation.

Perhaps.

But the Japanese have been managing trade for more than 30 years and no trade war has erupted.

As for wages, you might ponder this: Why do the people in Washington dismiss executive pay increases that go up 100 percent or 200 percent as of no consequence, yet call for restraints when the wages of working people go up 5 or 6 percent?

In any event, a new trade policy needs to look beyond simply balancing the books on imports and exports.

That’s because, dollar for dollar, imports cost more American jobs than exports create. The reason: Imported products, especially those from developing countries, most often are made in labor-intensive industries, such as apparel. Goods exported by the United States, on the other hand, tend to be produced by industries that require less labor, such as agriculture.

To curb imports would require raising tariffs and other trade barriers on products from countries that have consistently failed to open their markets. If other nations, for whatever reason, limit access to their markets, then the United States needs to respond in kind. It’s called fair trade.

Immigration

Restore immigration to pre-1990 levels and scale back the skilled-worker and guest-worker visa programs that have led to widespread abuses. Using immigration policy to create a labor surplus, thereby helping to hold down wages or limit wage increases, should never occur.

Adding to the foreign-worker glut is an army of illegal aliens. No one knows their exact numbers, but it is estimated they are in the millions. And that’s after 2.7 million illegal aliens were granted amnesty in 1986 and allowed to become U.S. citizens.

The U.S. Commission on Immigration Reform, which was headed by Barbara Jordan, the former Democratic congresswoman from Texas who died in 1996, described the need for action this way:

“Curbing illegal movements into the country would … benefit the wage structure, working conditions and employment opportunities of U.S. citizens, legal permanent residents and other authorized workers.”

The commission took special aim at the group responsible for attracting illegal aliens: American businesses that hire illegal aliens, especially businesses that tend to violate other labor and workplace laws.

The most prominent non-agricultural industries that hire illegal aliens, the commission found: “construction companies, manufacturers of food products, manufacturers of apparel and textiles, eating and drinking establishments and hotel and lodging services.”

“If employers were forced to comply with labor laws and reduce their reliance on unauthorized workers, it is likely that wages and working conditions would improve for the legal work force,” the report said.

To that end, the commission said it believed that stepped-up enforcement of all labor and workplace laws - from minimum wage to work safety - would be “an effective tool in reducing unauthorized work.”

Global wages

Companies that produce goods in foreign countries to take advantage of cheap labor should not be permitted the kind of unlimited access to the American market that kills jobs here.

A potential solution: Impose a tariff or tax on imported goods equal to the wage differential between foreign workers and U.S. workers in the same industry. That way, competition would be confined to who makes the best product, not who works for the lowest pay.

Thus, if Calvin Klein wants to make sweat shirts in Pakistan, his company would be charged a tariff or tax equal to the difference between a Pakistani worker’s earnings and what a U.S. apparel worker makes.

Or if Microsoft wants to have its computer programming done in India, the company would be charged a tariff or tax equal to the difference between the salaries of Indian and U.S. programmers.

If this, or some similar action is not taken, the future is clear. Wages of American workers will continue to slip, along with their standard of living.

Taxes

Re-establish the progressive income tax, which rests on the principle that tax rates should rise with income. This structure was in place from the beginning of World War II into the 1960s and 1970s, which coincided with the great expansion of the middle class.

The top tax rate might apply to, say, taxable income over $5 million, with the top rate at, possibly, 70 percent, rather than the 91 percent top rate that covered some taxable income from 1954 to 1963.

To spread the tax burden more equitably, a dozen or so brackets should be added, down to a tax rate of 5 percent. The bottom tax rate in 1996 was 15 percent; the top rate was 39.6 percent.

To simplify the system, all deductions should be eliminated, as well as the preferential capital gains tax. All dollars would be treated alike. A middle-class working family whose income is derived solely from a paycheck would not be taxed at a higher effective rate than someone whose income is derived from speculating on Wall Street.

All this deals with the federal income tax. Truth to tell, state and local taxes are weighted even more heavily against middle-income and lower-income workers. To right this situation, the federal government could create a system of rewards and penalties when distributing federal money to the states. The more progressive a state’s tax structure, the more federal aid it would receive.

And, finally, the corporate income tax. Thanks to sharply lower rates and a variety of tax concessions, corporations in the 1990s pay comparatively less income tax than corporations paid in the 1950s. During that earlier decade, corporations accounted for 39 percent of all income tax revenue; individuals supplied 61 percent. For the years 1990 through 1995, the corporate share dropped to 19 percent; the individual share rose to 81 percent.

To restore some measure of balance, the top corporate tax rate, now 35 percent, should at least be raised above the highest personal rate, 39.6 percent. In the 1950s, the top corporate rate was 52 percent.

A variety of corporate deductions should be eliminated or scaled back. These include the essentially unlimited deduction for interest payments and the carryover deduction of losses, both of which fuel mergers and takeovers. Also, foreign tax provisions should be amended so that U.S. multinational companies no longer would be able to move income around the world to escape payment of taxes.

Social Security and Medicare

It is generally understood that shortly after the turn of the century, if not before, both the Social Security and Medicare systems will have to be drastically revised. They are running out of money. That means either a hefty tax increase, a reduction in benefits for retirees, a delayed retirement age, or some combination of all three.

One solution would be means-testing of benefits - restricting the programs to those within a certain income level. The system should be changed from a retirement plan for everyone to a retirement plan for those who need it. Again, the issue is one of balance.

In 1993, 453,833 retired people with incomes over $100,000 collected Social Security benefits. They received checks amounting to $6.6 billion.

That’s the equivalent of all the Social Security taxes paid by 1.3 million young working families with incomes of $40,000 a year - a direct transfer from them to retirees whose incomes range from 2-1/2 to more than 25 times their incomes.

Everyone would continue to have Social Security taxes deducted from their paychecks, but benefit payments would be ended to individuals and families whose incomes exceed, say, two to three times median family income. That would be between $80,000 and $120,000. Social Security benefit payments to them would be stopped only after retirees had collected what they had paid into Social Security, with interest.

Medicare, too, should be means-tested. The inequity of America’s health-care system was summed up by a Philadelphia physician: “I have patients who come to my office in chauffeur-driven limousines. They own three or four homes. And Medicare pays their bills. Does this make sense?”

This in a society in which 40 million or more people go without health care because they cannot afford it.

Executive salaries

Corporations are free to pay their executives whatever they want. But that doesn’t mean companies should be permitted to write off the full amount on their tax returns, shifting the cost to taxpayers.

One possible solution: Tie tax deductibility to a multiple between the highest- and lowest-paid workers. For example, if the lowest-paid worker earns $20,000, then the company would be precluded from deducting more than, say, 15 times that amount, or $300,000, for the pay of its CEO on its corporate tax return. The balance of the compensation would come out of the shareholders’ pockets, rather than being partly funded by the taxpayers.

Campaign finance and lobbying

Absent sweeping reforms in campaign financing, all other reform efforts are likely to fail.

That’s because the money flowing to candidates and political parties, in staggering amounts, comes from corporations, wealthy individuals, political action committees, and other interest groups - all with agendas that are often at odds with what is good for average Americans.

Over the years, critics of the current system have generally agreed on the need for a number of reforms, including these:

Impose a limit on the amount that can be spent to run for office.

Ban contributions by political action committees to candidates.

Close the loophole in campaign finance law that allows donors to circumvent limits on contributions to candidates by making contributions in unlimited amounts to political parties.

Restrict the amount of out-of-state money that a candidate may accept while running for office.

Only by limiting the money that pours into politics will the power of special interests be curbed.

A century ago, Americans were confronted with similar choices and they made their voices clearly heard. Across the land, societies and leagues and committees sprang up to bring about sweeping changes in government, business and society.

Will history repeat itself?

As before, the people will decide.

MEMO: This sidebar appeared with the story: THE AUTHORS Donald Barlett and James Steele have covered economic issues for more than 25 years and have worked together as an investigative reporting team for The Philadelphia Inquirer since 1971. They won a Pulitzer Prize in 1975 for “Auditing the IRS” and a second Pulitzer in 1989 for “The Great Tax Giveaway.” This article presents their conclusions on where to look for answers.