With the specter of financial Armageddon raised in headlines everywhere, two questions keep occurring to me. Where will the government find the $85 billon to bail out AIG and other Wall Street giants? And how will we pay for the proposed Main Street recovery, including federal aid to states, relief to homeowners, and public works projects for the unemployed?
The Bush administration plans to add to the $400 billion projected deficit and our $9 trillion national debt. But it's irresponsible to shift the bill entirely to the next generation. The corporations that rigged the casino economy and the wealthy CEOs and investors that profited at everyone else's expense should bear the recovery costs, not our kids and grandchildren.
We can't recover the money from the companies now. They have extracted the profits and their CEOs have cashed they gilded paychecks. The speculators bought mansions, private jets, and small islands. Lehman Brothers declared bankruptcy on Monday and 25,000 workers are on the brink of unemployment. But Lehman CEO Richard Fuld is sitting pretty, with his $354 million compensation from the last five years and a mega-mansion in Greenwich, Connecticut.
When a CEO or employee improperly takes money from a company and is forced to pay it back, it is colorfully referred to as "disgorgement." In 1999, managers of Compaq Computer cooked the books and gorged on bonuses based on misrepresented profits. The government forced them to pay it back.
But what happens when a whole sector of the economy has been cooked and billions of dollars have already been stashed in offshore bank accounts? How are the crooks held accountable for robbing our entire economy?
Here are six actions that will fairly generate over $400 billion a year to pay for a broad-based economic recovery and reduce the extreme inequalities that fueled speculation at the outset.
Institute a Financial Transactions Tax. Congress should levy a tax on financial transactions such as sale and purchase of stock and more exotic transactions such as credit default swaps, options, and futures. The UK has a modest financial transaction tax of 0.25 percent, a penny on every $4 invested. This is negligible for a long-term investor, but imposes a cost on the fast-buck flippers. Estimated annual revenue: $100 billion.
Impose an Income Tax Surcharge Rate on Incomes Over $5 Million. The 50,000 households with annual incomes over $5 million are the bigger winners from twenty-five years of Wall Street deregulation. They've also seen their effective tax rates decline under President George W. Bush. Instituting a 50 percent tax rate surcharge on incomes over $5 million and a 70 percent rate on incomes over $10 million would generate $105 billion a year.
Eliminate the Tax Preference for Capital Gains. Wealth extracted from Wall Street windfalls will pay out income for years to come. There's no economic reason for taxing income from corporate dividends and capital gains at 15% while taxing income from actual work at 35%. Taxing wealth and work at the same rates would generate $95 billion a year in revenue.
Progressive Inheritance Taxes. When great amounts of wealth passes to the next generation a portion of it should be taxed. A progressive estate tax could generate $50 billion a year in the short term, but much more in outlying decades.
Eliminate Taxpayer Subsidies for Excessive CEO Pay. Five loopholes that benefit top executives should be abolished. These include eliminating offshore deferred compensation, capping the tax deductibility of excessive pay, and eliminating double standards for stock option accounting. Closing these tax loopholes would generate $20 billion a year. (Read more about this in this recent report from the Institute for Policy Studies and United for a Fair Economy.)
Close Offshore Corporate Tax Havens. Congress should prevent corporations from playing games by claiming expenses in the United States and profits in countries that don't collect taxes. According to the Government Accountability Office, two-thirds of US corporations paid no corporate income tax between 1998 and 2005. Closing this loophole would generate over $100 billion.
Government action should prioritize protecting ordinary people and the real productive economy, not further reward the superrich and the speculative sectors of the economy. A fair plan to the pay for the recovery is a good start.