Free Lunch (37 page)

The measure is a ratio. For each additional dollar going to each person in the vast majority, how many went to
each of those in the top 1 percent?

For 1950 to 1975, the ratio is four dollars more at the top for
each dollar going to the vast majority. For 1960 through 1985, the ratio is $17. And for 1981 through 2005, it is almost
$5,000.

Dramatic as those numbers are, they understate the concentration of income. Let's
now compare income growth for the vast majority with the top 1/100 of 1 percent, those 30,000 Americans at the very top of the
income ladder.

For 1950 to 1975, the ratio was $36 to one. For 1960 through 1985, it was $459.
And for 1981 through 2005, it was $141,000 to the dollar.

Examining different periods produces
the same basic result: since the market-based solutions came to dominate government policy, the winners have been the rich, the
very rich and, most of all, the superrich “have mores.”

A major component of the
markets-are-the-solution policies has been the drive to lower tax rates on those with high incomes and on investors. When
President Reagan was elected, the top income tax rate was 70 percent, meaning on the last dollar of income those at the top paid
70 cents in taxes. Those high rates fueled the sale of tax shelters, which advocates of lower rates said would be a much smaller
problem if rates were cut. (Instead, tax shelters continue to proliferate among the rich.)

Today
the top tax rate is 35 percent. President Bush said during the third election debate in 2004 that most of the tax cuts he sponsored
went to low-and middle-income Americans. That was not even close to true.

In fact, most of the
savings—53 percent—will go to people with incomes in the top 10 percent over the first 15 years of the cuts, which began in 2001
and would have to be reauthorized to keep them in effect through 2015. More than 15 percent of the tax cuts will go to the top tenth
of 1 percent, a group that is now 300,000 people.

In addition, because of the Bush tax cuts,
those earning more than $10 million a year pay a smaller share of their money in income, Social Security, and Medicare taxes than
those making between $100,000 and $200,000.

The Tax Policy Center calculated these
numbers at my request in 2005. Their help was sought because the computer models used by the government do not parse the top
1 percent, despite the enormous span of incomes it represents, and a model at the Heritage Foundation was not yet
operating.

The center is a joint project of the Urban Institute and the Brookings Institution, two
middle-of-the-road-to-liberal research organizations in Washington. The economists leading the Center—Len Burman, Bill Gale
and, Gene Steuerle—served as tax policy advisers to President Reagan, the first President Bush, and President Clinton. Again and
again over the years, officials at the Bush Treasury Department have gone out of their way to express respect for both the reliability
of the Tax Policy Center model and the integrity with which the economists who created it have approached their
work.

So when shown the center's analysis and asked for comment, it was not surprising that
the Bush administration said it had no quarrel with any of the findings. A spokesman deemed the model used to generate the
estimates “reliable.”

The administration did press one point that it said was important. The tax
cuts sponsored by President Bush have made the income tax system more progressive, shifting the burden slightly more to those
with higher incomes. The administration emphasized that the president supports a progressive tax code in which the more you
have, the greater the share of your gain is paid in taxes.

The idea of progressive taxation is
central to democracy. Indeed, the idea that taxes should be based on ability to pay was intertwined with the birth of the first
democracy, 2,500 years ago. Ancient Athens had been a tyranny in which each person paid the same tax—a hard burden for most,
a trifle for the rich. Then a moral principle was developed: The more one gained economically from living in civilized society, the
greater one's duty to maintain that society by paying taxes. Every classic worldly philosopher—Aristotle, Plato, Adam Smith, Karl
Marx, David Ricardo, John Locke, and all the rest—endorsed this moral principle, arguably making it the most conservative
principle in Western civilization.

However, the Bush administration claim that the recent tax
cuts had made the income tax system more progressive seems to fly in the face of a recent Internal Revenue Service study. It found
that the taxpayers in the top tenth of 1 percent also saw their share of taxes decline in 2001 and 2002. The Tax Policy Center
computer model results also did not seem to support the Bush administration's claim. Then a Treasury spokesman, Taylor Griffin,
explained. Griffin said that the income tax system is more progressive if the measurement is based on the share borne by the top
40 percent of Americans, rather than the top tenth of 1 percent.

The Bush administration is
right that the share paid by the top 40 percent is higher now than it was in 2000. Those in the 39.9 percent immediately below the
very top may find small comfort in that detail, however.

There was another point the Bush
administration could have made, but did not. It concerns the 400 very-highest-income taxpayers, a truly thin slice of Americans. To
get into that group in 2000 required an income of at least $88 million. They averaged almost $174 million each. Those 400 taxpayers,
about 1,200 people, were so well off that they had more than 1 percent of all the reported income in America in 2000. The Bush
administration continues to analyze the incomes and taxes of the top 400 taxpayers, but will not disclose the numbers for years
after 2000, which would have shown the impact of the Bush tax cuts.

Here is what I found by
analyzing the 2000 data as if the Bush tax cuts had applied. A separate analysis by Robert S. McIntyre of Citizens for Tax Justice,
using more sophisticated techniques, produced almost identical figures.

Out of their average
incomes of nearly $174 million, under the Bush tax cuts the top 400 taxpayers would have paid the government 17.5 percent in
income, Social Security, and Medicare taxes. For people who make $100,000 to $200,000, the tax burden is much higher at 20.6
percent.

Even more interesting results arise from comparing the effects of the Bush tax cuts
with the changes for investors that President Clinton signed into law in 1997. During Clinton's two terms, the effective income tax
rate of the top 400 fell from almost 30 percent to 22.2 percent. Applying the Bush tax cuts yields a rate of 17.2 percent for income
taxes only. That means Clinton gave the richest of the superrich a much bigger tax cut than Bush. Under Clinton, their effective tax
rate fell by almost eight cents on the dollar; under Bush, it fell only five.

Societies in which the
few deepen their pockets while the many see theirs grow lighter are not stable. America is so fabulously prosperous that we have
seen only at the extreme edges the kind of political upheaval that can grow from a loss of hope and a lifetime of work for a
shrinking paycheck. And when the growing income gap of America is compared to other countries, we look most like three nations
whose societies most Americans would not find appealing—Brazil, Mexico, and Russia.

A
young life is a terrible thing to waste. Most modern nations try to limit childhood poverty for reasons both moral and practical.
Better than one in six American children live in poverty, about 12.3 million children in 2005, the Census Bureau calculated.
Compared to other modern nations, many of them far less rich, the United States does poorly by its children. In terms of material
well-being, the United Nations ranked the United States seventeenth on a list of 20 modern countries, right below
Portugal.

Allowing so many children to grow up in poverty imposes huge costs, but is of little
or no value in terms of soliciting campaign contributions. So just how much does it cost our society to have so many children grew
up in poverty? What are the costs of reduced productivity, smaller incomes when they grow into adulthood, a greater propensity to
commit crimes, and the costs of being less healthy? About $500 billion a year, according to a study commissioned by a liberal
advocacy group, the Center for American Progress. But once Congress heard that report in early 2007, and the inevitable criticisms
that the number was just an estimate, it quickly turned its attention back to matters more pressing to the party of
money.

Even Alan Greenspan, the once-obscure economist whom President Reagan elevated
onto the national stage and who then served as Federal Reserve chairman, warned Congress in 2004 about the widening gap
between the rich and the poor. “For the democratic society, that is not a very desirable thing,” Greenspan said.

We now have almost three decades of experience with the idea that markets will solve our problems. The
promised results are not there and there is no reason to believe that they are over the next horizon, just a few more subsidies away.
Electricity costs more and its delivery is less reliable. Many hundreds of billions of tax dollars have been diverted to the rich,
leaving our schools, parks, and local government services starved for funds. Jobs and assets are going offshore, sometimes to the
detriment of not just the economy, but national security.

We have layered subsidy upon
giveaway upon legal absolution for reckless conduct in a chaotic attempt to protect jobs, and it has not worked. We pour billions
into subsidies for sports teams and golf courses, a folly Adam Smith railed against in his day. Our health care system costs us far
more than that of any other industrial country and yet we live shorter lives than the Canadians, Europeans, and the Japanese. We
stand alone among modern societies in making tens of millions of our citizens go without health care, many of whom die or
become disabled because of this nutty idea that medicine is a business, not a service. We have erected obstacles to the earnest
but poor who seek to better themselves through library study and higher education.

And our
politicians in both parties are hypocrites of the first water, nearly every one of them. They vote to make the poor sacrifice again and
again so that the rich can have more, yet they run for office handing out photos showing that they regularly attend religious
services. To those who do not get this last point, take a moment to ponder the inner thoughts of the Pharisees. Do you think they
thought themselves evil? Of course not. In their own minds, they had justifications for what they did, assuring themselves that they
were the most moral of men.

Except for our technology, our electricity and powerful motors,
we are the same as the ancients. And like great societies that we can look back upon, which reached a high point and then headed
down the road to oblivion, we too are taking from the many to give to the few. “He that oppresseth the poor to increase his riches,
and he that giveth to the rich, shall surely come to want,” it says in Proverbs 22. Wise words to memorize.

We have become a society in which this injunction, and many others like it, are ignored. Even when we seek
to help people, as with the drug benefit for older Americans, the mechanism often is designed first and foremost to take care of the
corporate rich. The net effect of our policies, the evidence for which is overwhelming, is that we are redistributing income up.
Through subsidies and tax cuts and rules that depress the incomes of most workers, the immediate future looks very bright for the
already rich. Indeed, to borrow from the song, their future's so bright they gotta wear shades.

So what, if anything, can we do? Here's the good part. After reading all of these blood-boiling stories, we
actually can do something. The whole idea of America is that we can solve any problem we want to solve. We can form a more
perfect union, establish justice, ensure domestic tranquillity, provide for the common defense, promote the general welfare, and
secure the blessings of liberty to ourselves and our posterity. For some thoughts on what we can do, please read
on.

WHAT TO DO?

R
ONALD
REAGAN SET THE NATION ON A NEW COURSE IN
1980
with his simple question,
“Are you better off now than you were four years ago?” We now have a quarter century of experience and data that allows us to
judge whether to stay the course or change direction.

In real terms, America today is more than
twice as wealthy as in 1980 and the economy is putting out two-thirds more per person. Those are tremendous accomplishments.
So where are the benefits of all this increased wealth and economic output?

Incomes for the
vast majority have stagnated, not grown. The share of workers earning poverty-level or lower wages declined only slightly, from a
little more than 27 percent of all workers in 1979 to a little under 25 percent in 2005. For private production and nonsupervisory
workers, which covers four out of five wage-paying jobs, pay increased in real terms, but just barely. The increase was the
equivalent of getting a raise each January of about a penny an hour. This average wage increased from $15.78 to $16.11, or just 33
more cents per hour after 26 years.

Family incomes are up slightly, but that is because more
people hold two jobs and a growing share of women with children earn wages. Having less time for child rearing imposes its own
social costs.

The percentage of American children living in poverty in 2004 had barely changed
since 1980, with growing poverty among whites and Hispanics more than offsetting a one-third decline in the poverty rate among
young African Americans.

Year after year, we are told there is less money for the basics that
sustain society. Hospitals close. Libraries reduce hours, buy far fewer books, and in some places are shuttered. Schools eliminate
classes in music and art and, in some places, reduce the teaching of arithmetic because of federal mandates to test in only one
subject, reading. Maintenance of the infrastructure is deferred for lack of funds, a malign neglect of public assets that results in the
collapse of bridges and dams, in sinkholes that appear out of nowhere, and explosions of steam pipes and other unseen urban
support systems.

This is not for lack of government spending. Despite all the rhetoric about
cutting taxes, combined federal, state, and local spending as a share of the economy is basically the same now as in
1980.

The official figures understate reality, however. Government keeps borrowing as well as
taxing. Borrowing is a kind of tax on the future that crowds out other spending. Interest on the federal debt in 2006 totaled more
than $405 billion, an amount equal to all the individual income taxes paid from early August through year-end. The government did
not have the cash to make all of these interest payments, however, since so much of it was paid by taking on more
debt.

Our state and local governments also cut spending on basics, while taking on ever more
debt. Under Governor Jeb Bush, for example, Florida cut state taxes by $19 billion while borrowing $22 billion on which its citizens
now must pay interest.

This has happened when the overwhelming focus of policy in
Washington, and to a lesser extent the state capitals, has been on the economy. Both parties have bought into the Reagan policy
of speaking about government in economic terms, mostly in how it takes from you in taxes and costs business through regulation.
Ask not what you can do for your country; listen instead to what government should do for your bottom line.

At the same time, those at the top have done fabulously well. Chief executive officers, who in 1980 made
about 40 times what workers did, now make hundreds of times more than their workers. The hedge-fund managers make
astonishing sums, the top 25 each averaging $11 million
per week
in 2006, while
paying taxes at lower rates than middle-class workers. The share of national income going to the top 1 percent, the top tenth of 1
percent, and the top 1/100 of 1 percent are at levels not seen since Herbert Hoover was president. The share of stocks, bonds, and
other corporate wealth owned by those at the top keeps rising despite all the individual retirement plans government has promoted
to replace the traditional defined-benefit pension. The number of people with savings accounts at the bank or credit union
dwindles, while the supply of tax-free bonds sold to the highest-income Americans proliferates.

These results should not surprise. For a generation the policy of the federal government has been to make
the rich richer, even when those riches come at the expense of everyone else. There are many elements to this policy. Giveaways
of money and seizures of property to avoid market forces, for example, impoverish everyone but the recipients of this largesse.
Rules that make it easy to rig markets, break unions, and shortchange workers all benefit the rapacious among the rich. Then there
are trade policies that allow capital to move freely across borders, combined with a determined effort to make less government
information available on the grounds that it will interfere with the privacy of businesses. For the already rich the least risky, most
profitable way to grow even richer is through government favors, be it cash, property, favorable rules, or law enforcement that
either lacks the resources to act or looks the other way.

We have gone astray.

The founders did not create America to make us rich. Washington, Jefferson, Franklin, and the others were
among the wealthiest men in the colonies. They were not seeking to enhance their own wealth when they stuck their necks out.
They risked their lives and property for the principle of self-determination, for the idea that whatever our problems, we can solve
them ourselves better than King George, a parliament we did not elect, or any power not accountable to the people.

The founders risked their lives so that the human spirit might flourish and make the world a better place. They
created America so that we could be free to live our lives as we choose without regard to religion or creed, to which we have since
added race and gender.

At first, they failed. The original American government collapsed
because the Articles of Confederation bore little relationship to the self-evident truths articulated by Jefferson and the common
sense of Thomas Paine. That failure should remind us that the government we have, and the freedoms it protects, are
perishable.

The second American republic has endured for more than two centuries because,
under the Constitution, we devised elegant and principled solutions to problems that have vexed man since the first organized
society. One was the need for a government with the revenue and authority to act, but that derived its powers from the consent of
the governed, working for their benefit, not as a power unto itself. Another was creating a structure of three separate and equal
branches to make, administer, and interpret laws. This structure limits the use of power, the great corrupter.

Under the Constitution, we enumerated the rights of the people, including the right to speak our minds,
worship or not as we choose, and be free from predation by the state, which historically dealt with the inconvenient individual by
having him killed or thrown in the dungeon. All of our other rights ultimately stand on that one, habeas corpus, the right to have our
case for freedom heard by an independent judiciary. Since then, we have expanded the franchise beyond white men with property
to everyone who reaches adulthood.

In this way we created a nation of laws, not of men. We
set forth the principles for this bold experiment in 52 words whose eloquent wisdom we too often forget:

Those concepts inform our guideposts: Society. Justice. Peace. Security.
Commonwealth. Freedom. What did not make the list as a purpose of our nation? Individual riches. That we may each become rich,
if we choose and luck is with us, is a by-product rather than a purpose of our system of government.

Yet for more than a quarter century, we have acted as if economic gain is the great purpose of government.
Our Supreme Court has equated with free speech the dollars given to politicians in the form of campaign contributions,
concentrating the corrosive effect of money on sound policy by giving greater voice to those with both the means and the reason
to influence who wins elections. Our policies have resulted in concentrations of wealth and income at the very top that make us
more like Brazil, Mexico, and Russia than Canada, Europe, Japan, and Australia. And we have seen that the fear Reagan spoke
of—that the rabble would drain the government's treasury—has come true, but with a twist. It is the rich who are gorging
themselves on the government with giveaways, favors, contracts, rules that rig the economy, tax breaks, and secret
deals.

No society can endure if it ignores the problems of a growing share of its people. Adam
Smith told us this when he wrote, “What improves the circumstances of the greater part can never be regarded as an
inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor
and miserable.”

We are not merely 300 million individuals who share the same geography, but
a society—and a great one provided we remain true to the precepts of liberty and justice for all.

Three principles can help guide us to make wise decisions about our economic policies. They epitomize the
fact that rules define a civilization:

How many of your family, friends, and
neighbors are you willing to see bankrupted by medical bills or condemned to awful disabilities or early death because they cannot
afford proper health care? How much should you, your family, and people like you sacrifice so that corporations, including
insurance companies, can maximize their profits by providing only the minimum care necessary?