America's strength is based on a foundation that all of its citizens should have opportunity for pursuit of happiness. During most of the twentieth century, this opportunity was made possible by assuring fairness and reasonableness to our social and economic system. Economists sometimes refer to this period as the Great Compression because we had a majority, strong, and vibrant middle class America, with relatively few extremely poor or wealthy Americans.

The consequences were momentous. The sense of fair play established cohesiveness to our social framework and prevented the polarizing partisanship in political discourse that has become the norm today. But complicated economic theories are not needed to understand what permitted the Great Compression. Although there were multiple contributors, there were three predominant explanations for the Great Compression:

First, most Americans had reasonably safe employer-sponsored health care insurance. This established a basic safety net and narrowed income disparities. Second, we had a progressive tax system in which the highest income brackets rates were about 70-90%. This progressive tax system compressed income towards the middle, increasing the income of low- and middle-income Americans, and decreasing income of high-income wealthy Americans. This also narrowed income gaps. Third, we had strong unions which assured reasonable health benefits and pay for its employees and prevented unreasonable executive pay. This also narrowed income gaps.

Loss of fair economic policy

Today, the safety net of assured affordable employer-based health insurance has been worn away. Therefore, 15% of Americans have no health insurance, millions have inadequate health insurance, and millions more live in fear of losing coverage or choose or remain in substandard and unsatisfying jobs because of health insurance reasons rather than for optimal career decisions.

Progressivity of the federal tax system has also been eroded, especially with respect to:

(1) Income taxes

(2) Capital gains taxes

(3) Payroll taxes

(4) Tax exclusion for employer-based health insurance

(5) Deduction eligibilities

During much of the twentieth century, it was believed that those who succeed the most in our economic system should contribute most. Hence, in the middle part of the last century, federal income tax rates for the highest tax brackets exceeded 90%. The highest tax rates remained high during the Eisenhower Administration and were not lowered to the 70s percent until President Kennedy took office. The rates remained above 60% during the Nixon years and were only lowered to the current mid-30s percent during the latter years of the Reagan administration. President Clinton increased the highest tax rate to 39% but President Bush's ‘tax cuts’ lowered it to the current 35%. Clearly, during much of the twentieth century, both Democrats and Republicans believed in a fair and reasonable income tax system rooted in progressivity.

Simultaneously, the tax rate on earnings from long-term capital gains (e.g., stocks, dividends, and hedge funds) has been decreased to 15%. As low- and middle-income Americans tend to have no or significantly less capital gains earnings, they benefit less from this low tax rate. On the other hand, capital gains account for a large proportion of earnings for high-income wealthy Americans who tend to invest more in stocks and other capital, so they benefit much more from this low tax rate. Thus, much of the earnings of wealthy Americans are taxed at a rate about 13-20% lower than that of middle-income Americans.

Payroll taxes (FICA—15.3%: Social Security—12.4% and Medicare—2.9%) are also relatively regressive. This is for three reasons: (1) payroll taxes are levied only on earned income and not on capital gains or other income; (2) the Social Security tax rate is equal for all income levels and is only levied on those with earned income up to $106,800 (2009); and (3), the Medicare tax rate is equal for all income levels. About 75% of tax payers actually pay more in federal payroll than income taxes.

The tax exclusion for employer-based health insurance benefits is similarly regressive because the benefit applies to all equally regardless of income and premium.

Finally, low- and middle-income earners are usually eligible only for standard deductions, as opposed to high-income earners, who are often eligible for itemized deductions.

The consequence of these taxation policies is that the effective proportional tax burden for middle-income Americans tends to be only a little less than that of high-income Americans. In other words, the reality of the federal tax system is that it is no longer particularly progressive. This is of vital importance because reported tabulations of federal tax burdens stratified by income, often misleadingly over-estimate the tax burden of high income earners. This is because the estimates often exclude capital gains earnings, payroll taxes, and the implications of the health insurance exclusion and deductions eligibility, in their calculations.

The effect of superficially versus comprehensively disclosing tax burden rates is significant. For example, it is often stated by opponents of reform to increase tax progressivity that the top 1% of the population (income at least $328,049), which earns 14.8% of all income, pays about 1/3 (34.4%) of the federal tax burden (2001). Similarly, it is stated that the top 10%, which earns 37.6%, pays about 2/3 (67.7%) of federal taxes. Of note, these tax burdens simulate wealth distribution in the U.S. (the top 1% has 32.7%, and the top 10% has 69.8% of wealth, respectively). But if one includes just one of the above factors (i.e., Social Security taxes) in the calculations, one finds that the federal tax share of the top 1% is, in actuality, much smaller (i.e., 22.7%); similarly, the top 10% pays significantly less (i.e., 38.5%).

Weakening of unions

Also today, union power has been eroded. Not only has union membership fallen, but government policy has been obstructionist to union organization and membership. It is generally accepted that unions were instrumental in maintaining reasonable employer-based health insurance and income for its members. Unions also helped maintain a balance of power between management and labor, preventing excessive executive pay. Management knew if they gave themselves too much pay, unions would insist on sharing the apparent corporate profits more equitably with workers, thus limiting executive pay. In the 1970s, the ratio of chief executive officer (CEO) pay to average worker pay was about 30:1; today, the ratio exceeds 300:1 despite huge corporate losses, layoffs, and government bailouts. So today, a small elite cadre of executives (and other celebrities in sports and entertainment) are allotted unreasonably high pay (with bonuses and stock options etc.) but the tax rates and these earnings are exceedingly low. No wonder the income gap in the U.S. has risen so dramatically.

How does tax inequity affect Vermont?

First, because Vermonters tend to fall into the categories of low- and middle-income, they tend to have high proportional tax burdens, resulting in the subsidizing of the luxurious life styles of many people with high-income in other states. In fact, MSNBC (April 2009) recently reported that Vermonters have the highest tax burden in the country. Second, the federal government has insufficient revenue to provide important social services (e.g., health care, education, social security) and to pay off the national debt. Third, as a consequence of insufficient federal revenue, state grants are also insufficient, resulting in levying of high state and local property taxes to pay for essential public services.

I believe the U.S. must and can return to a fair and reasonable economic system. I am mystified that our representatives in Washington have allowed the current system to have happened and that they are not fighting the political fight of their lives to rectify the inequity. In my years in the Navy, I learned the military ethos of leaving ‘no man behind’. I believe the powers in Washington have left the people behind.

So, how can we return equity to our economic system?

First, we need significant health care reform, providing universal coverage and high quality and cost-effective care. I believe a single-payer health insurance system (Medicare for all) is the only means that can reasonably be predicted to achieve these goals based on evidence rather than opinion. The current considerations for health care reform in Congress are incremental improvements at best, and may in fact be detrimental, because they may result in the putting off of significant reform. In addition, we should reform the tax exclusion for employer-based health insurance which currently is regressively equivalent for all income brackets (everyone gets the exclusion irrespective of income). The tax exclusion should be removed for high-income earners, whether in the current employer-sponsored or in a future government-sponsored health insurance system. Please see Health Care for details.

Second, we need to return to an equitable progressive tax system. The objectives of tax reform would be to increase revenue in order to decrease the tax burden on low- and middle-income earners, fund vital social programs, and to pay down the national debt. The specific tax consequences would be to increase taxes for very high-income Americans (few Vermonters) and decrease taxes for low- to middle-income Americans (most Vermonters).

A return to equitable progressive taxation can be accomplished with the following five tax reforms:

First, the Bush ‘tax cuts’ should be allowed to expire (as they are currently scheduled to do in 2010).

Second, we should increase the upper income tax brackets on very high-income earners (e.g., families with income above $350,000) incrementally up to a maximum of 50%. Thus, the upper tax bracket for earnings between $350,000 and $500,000 would increase from 35% to 38%; for earnings between $500,000 and $650,000, it would increase from 35% to 41%; for income between $650,000 and $800,000, it would increase from 35% to 44%; for income between $800,000 and $950,000, it would increase from 35% to 47%; and finally, for income above $950,000, it would increase from 35% to 50%. A similar pattern should be developed for single high-income earners (e.g., above $250,000). This would significantly increase revenue yet remain well below the maximum income tax rates of the last century.

Third, we should establish progressive tax rates for capital gains (stocks, dividends, and hedge funds)—similar to or in the spirit of the tax rates for ordinary earned income.

Fourth, we should close obvious tax loopholes in the tax system. We should modify the current loophole that allows hedge fund managers to pay tax rates of only 15%. This loophole has resulted in loss of some fifty billions of dollars annually in tax revenue. As noted, the hedge fund earnings tax rates should match ordinary income tax rates. We should also outlaw corporate use of overseas havens for tax avoidance.

Fifth, we should modify payroll taxes to have progressivity.

We should also require more equitable sharing of corporate profits by limiting allowable ratios for executive to employee pay for publicly traded companies (SEC-regulated). For example, the maximum allowable ratio for CEO to median employee pay might be capped at 50 to 1. Similar but lower ratios should be developed for other executives, such as CFO etc. Such ratio caps would result in fairer sharing of corporate profit but would not hinder economic incentive as executives could still earn high income (they would just have to provide higher income to employees as well).

Education

Finally, higher education is unreasonably expensive in the U.S., even at publicly supported universities. We should significantly increase subsidies for higher education for low- and middle-income families who currently often cannot afford tuition or suffer economic burden financing tuition.