Begin the Healing
Defang the Loan Sharks
For hundreds of years, enlightened governments have regulated interest rates to rein in loan sharks. Now Diff'rent Strokes' Gary Coleman pitches loans at 99.25 percent interest. Some tax "refund anticipation loans" cost the equivalent of 700 percent annual interest.
How did this happen? Back in 1978 the Supreme Court, confronted with a discrepancy between federal and state laws, threw out federal interest regulations and called on Congress to pass new ones. Instead, lawmakers milked the ruling for hundreds of millions of dollars in campaign contributions from credit companies eager to charge any rate they wanted. Thanks to interest deregulation, blue chip investment houses like Lehman Brothers got into the business of subprime mortgages while Goldman Sachs, JPMorgan Chase, Bank of America, and Wells Fargo bought or financed payday lenders that prey on the poor. In the three decades since interest-rate deregulation, credit card and other revolving debt has risen from $128 billion to $968 billion (adjusted for inflation), a 7.5-fold increase. Interest on this debt, at an average rate of about 18 percent, acts like a tax, leaving people with less to spend on the necessities of life.
But the industry wasn't satisfied with this credit boom, and so, in 2005, it prevailed on Congress (with a special assist from then-Senator Joe Biden) to pass a bankruptcy law making it much harder to restructure debt, no matter how predatory, even in case of job loss or illness. And in a little-publicized move, the Bush administration, over the protests of all 50 state attorneys general, also invoked an obscure clause in the 126-year-old National Bank Act to effectively invalidate state predatory lending laws. Repealing these anti-consumer provisions would cost the government nothing, but provide a real benefit for the economy in curbing banks' irresponsible practices, just as consumers are expected to do with theirs.
Save Our Savings
Compared with any other developed economy, Americans save far too little. In 2006, 55 percent of tax returns showed zero interest income from savings accounts. If we were to eliminate taxes on the first $500 of interest earned, people could set aside almost $17,000 with tax-free interest (assuming 3 percent interest) to cushion the shock of a layoff, accident, or illness. Congress could even match savings for low-income people dollar for dollar up to $500 per year, with the government share locked up for 10 years.
A pension is simply wages deferred to old age, which is why federal law requires that corporate pension plans be run "exclusively" for the benefit of the members. But in the past two decades Congress has turned that promise into a cruel joke; thanks to a little-known provision inserted by lobbyists in 2006, for example, workers could conceivably lose up to 85 percent of their pension when a new buyer takes over a company, as my one-time coworkers at the Philadelphia Inquirer recently discovered.
The core problem is that Congress lets companies postpone setting aside pension funds year after year. It also allows them to record as investment gains what they expect to earn in the market—even when they make less or actually lose money. Three years ago these phantom pension gains at General Motors accounted for the carmaker's entire net worth, a telling example of how accounting rules can create economic mirages.
Employee stock ownership plans, devised as a way to help workers build wealth, have also been turned into credit lines for speculators. Government rules allowed buyers of companies to use ESOP money as part of their financing, putting workers' shares at risk. United Airlines employees lost most of their shares' value in the company's 2002 bankruptcy—while CEO Glenn Tilton got a $40 million compensation package. Employees of the media conglomerate Tribune Co. may see their ESOP go bust, too, but CEO Sam Zell's stake is not at risk—because he made sure his equity is guaranteed even if Tribune collapses. Congress should restore protections so that workers get 100 percent of what they were promised, even if taxpayers have to make up the shortfall. It could also hold hearings to shame executives who got rich by shortchanging retirement plans, and make it easier to seize the bonuses of those who looted pensions.
End the Burglar-Alarm Subsidy
Each time police respond to a burglar alarm, it costs taxpayers $50 or more, for a total of $1.8 billion in 2002. More than $800 million of this hidden subsidy goes to ADT Security, a subsidiary of Tyco, which was at the center of the Wall Street scandals eight years ago; in the '90s, Tyco started buying so many mom-and-pop alarm companies that it now controls nearly half of the market. Government data show that at least 94 percent of alarms are false, and a 2000 study in Seattle found that officers responding to alarms make one-ninth as many arrests as those just driving around in patrol cars.
In Los Angeles and elsewhere, the rise of gangs in the 1980s tracked a sharp decline in funding for parks and programs for young people. Ending the burglar-alarm subsidy and shifting the spending to youth programs would reduce crime (saving even more money) and help more kids grow up to become taxpayers instead of tax eaters. Washington could threaten to cut federal funding for any city that fails to charge the alarm companies the full cost of each response, thus encouraging companies to build more reliable systems.
Stop Indenturing Students
Over the past 40 years, the cost of public colleges has doubled, and financing tuition is an $85 billion a year business for credit companies. Sallie Mae, the biggest of the private student loan companies, earns an average 48 percent annual return, three times the return of commercial banks. Students who sign up for loans with what appear to be low fixed rates may discover upon graduating that they face an 18 percent rate; if they make a single late payment, late fees will be tacked on every month until the debt is paid off. And the law makes no allowance for students who can't find a job in a bad economy, or can't work because of illness, or choose to serve their communities by, say, joining Teach for America. Albert Lord, Sallie Mae's chief executive, has become so rich from student lending that he built his own private golf course just outside the nation's capital.
Profiteering off students is not just an obscenity; it ultimately weakens the economy. The abuses at Sallie Mae and other student lenders deserve exposure via congressional hearings. Then perhaps lawmakers will find the spine to make the rules fairer. Indenturing the brightest young minds in an information society is the equivalent of eating your seed corn in an agrarian one. In the long run, you're doomed.
Drag the irs Into the 21st Century
When the 16th Amendment establishing the federal income tax was being debated, advocates argued it would return some portion of "surplus incomes" to the commonwealth. The goal was to make those enriched by the new phenomenon of industrialization pay back the society that made their fortunes possible. Consequently the middle class paid very little; incomes of $3,000 (the equivalent of $66,000 today) were exempt from income tax, and in the lowest tax bracket you paid just 1 percent. Today a single person is taxed at 10 percent once she makes more than $8,950 (twice that for married couples). Social Security taxes start with the first dollar of wages and end at just more than $100,000.
Given the vast sums they have transferred to the superrich in the past 30 years, the 88 percent of taxpayers who make less than $100,000 a year deserve a break. Congress should lower their taxes with an eye toward restoring their capacity to save (thus, as a side benefit, generating fresh capital for investment), while at the same time studying how to create a high-wage economy that can generate more revenue.
At a deeper level, it's time for a national debate about how we can go from our existing federal tax system, which was well designed for the 20th century but now throws sand into the economy's gears, toward an efficient, effective system for sustaining a 21st-century democracy. Congress should begin by holding hearings and giving Treasury a budget for research into alternative revenue sources such as a value-added tax and taxes on greenhouse emissions.
Our nation was founded on the idea that we would shape our own destiny. Structuring our taxes is a critical part of how we do that; and no matter what Sarah Palin told us during the campaign, paying taxes that are fair and just is the duty of a patriot. Time and hard evidence revealed that Reaganism was a disastrous mistake. Now we must get through the terrible night and on to a real morning in America.
Front page image: Jay Mallin/Zuma