How Obama and Democrats are Not Going Far Enough Regarding Tax Policy and American Job Growth

By Tom Pallow of Third Way Progressives, 3/12/12

This paper is not at all about what one would commonly imagine upon reading its title. It is not at all about President Obama and Democrats not being “progressive” or “liberal” enough. It is about them not going far enough into the radical center, not adopting enough Endogenous Growth policies, or what we call qualityist policies. As of early 2012 Obama and Democrats are certainly not doing these things enough to turn the economy around or to inspire the electorate to vote for him and Democrats this fall.

We are in a unique position in US and world history. The most important change in our lifetimes has been the effective 12 fold increase in global trade that has accompanied the weakening and fall of communism, along with new technologies that make outsourcing across state and national borders as easy and fast as the movement of light. With the fall of communism, every multinational employer in the developed world no longer needed to worry that an investment in an underdeveloped nation might become nationalized by an emerging communist government. This suddenly very different reality opened up a new cheap labor market of 4 billion people. No major nation in the future is ever going to champion socialism or communism, so the old world order is never going to return. Therefore, all successful tax and spending regimes in the future will need to be structured around the realities of this highly competitive global economy. Not only will this new regime make our economy more competitive, but it will make it more egalitarian and more environmentally sustainable than it ever has been.

Regarding tax policy, a good first step in the right direction is the recent plan by Senators McCaskill and Collins to cut the employer payroll tax rate as a way of carving out, or exempting, US employers from any tax increase on the wealthy. Given that about 65% of US employers are taxed at the personal income tax rate, and given that these businesses are generally responsible for creating as much as 90% of America’s new jobs, raising taxes on these job providers is never a good idea in a global economy and especially when the economy is weak. US employers are always a very small percentage of tax payers. For example, the McCaskill-Collins carve out would only cost about 13% of their tax increase on those who make over $1 million that was proposed by them in December 2011 to pay for this year’s employee payroll tax cut. Successful tax policy, now and in the future, given the now global nature of our economy, will need to take full advantage of the little known but extremely important economic reality that a relatively small amount of the money that is earned, even among the highest income earning Americans, is the profits of any business that is taxes as personal income that employs one or more persons in the US.

There are several reasons why a US employer exemption, or carve out, is a very important policy to enact. For one, it is very cheap while it accomplishes much. This is because, with a US employer carve out, the math always works for us. Very little of the earnings of the wealthy, as well as all others, actually comes from the profits of a business that is taxes as personal income that has one or more employs in the US. This means businesses that are sole proprietorships, partnerships, or any businesses that are “pass through” entities, and therefore not C Corporations that are therefore taxed at the corporate income tax rate. The high mark for this number is about 21%. This comes as incomes reach about $350,000 a year or at about what demarcates the top 1% of US income earners. As incomes go higher and lower from this point this percentage drops quickly. For example, within all the income that is earned by the top 5% of income earners in the US, only about 16% of all that income is the profits of any business that is taxed as personal income that has one or more employees in the US, while for the top .5% of US incomes it is about 18%(1,2,3). For the top 1% of US income earners this number is about 21%, and for the top 10% it is about 12%(1,2,3). For the top 2% it is about 19%(1,2,3). The top 5% of earners is roughly all households that make more than $220,000 a year, or about where today’s 33% personal income tax bracket starts. President Obama has pledged to have the Bush tax cuts expire on today’s 33% and 35% brackets, and have them go to 36% and 39.6% respectively, beginning at $250,000 of income a year where about the top 2% of income earners begins.

Again, the McCaskill-Collins carve out for those earning over $1 million a year would only cost 13% of their total tax increase. If this new tax incentive to employ in the US were to motivate more of the wealthy to employ in the US so that this percentage were to increase, then great, more Americas would be employed and the increased demand for labor would increase real incomes and tax revenues.

Reason two why it is important to enacting an employer tax increase exemption is, when raising income taxes on the wealthy without a US employer tax carve out, raising taxes on wealthy growing businesses has the effect of slowing the economy to some degree because capital is taken away quarterly from growing businesses who would otherwise use that capital to invest in new US jobs. This is especially true coming out of a recession when as much as 90% of all new jobs are typically created by businesses that are taxed as personal income, and most of these are within the top income tax brackets.

Reason three, without an employer tax carve out, US employing businesses have an incentive to close up shop in the US and outsource to foreign countries in order to avoid the higher tax. This is especially true within the US when states that raise their income taxes will often see employer flight to US states that are not raising their income tax or do not have a state income tax. This is a big problem right now with our cash strapped states. The current problems in Illinois are just the most recent example, and their example will deter others states from raising their income tax. These states, along with Illinois, will continue their cash flow problems, but a state employer tax carve out with a state income tax increase would solve this problem. There is more concerning this problem below.

Reason four is one of the most important reasons. The greater the employer tax carve out is made, that is, the larger the difference in effective tax rates are made between the US employing wealthy and the non- US employing wealthy, the greater will become the tax incentive for the non-US employing wealthy, or others who want to become wealthy in the future, to find ways to stay wealthy or become wealthy by employing fellow Americans. This tax incentive will greatly increase economic growth and the demand for labor in the US. It is only increases in productivity along with increases in the demand for labor primarily in the private sector that has the effect of raising real wages for the poor and middle class.

Reason five is as important as reason four. Because American voters will soon realize that an employer tax carve out strategy will not slow down the economy but actually increase private sector jobs, our federal and state governments will be able to raise income taxes far above where Americans would otherwise let them go. As this occurs, the above reason four will only become more pronounced, thus creating a virtuous cycle of increasing private sector job growth that will also be accompanied with increasing government revenues!

Reason six is as important as reasons four and five. These increased tax revenues will allow our governments to fully fund new industrial policy projects that will further grow the US private sector while allowing us to fully fund current government programs. Fully funded governments, along with a robust private sector that is aided by new industrial policy projects will increase the demand for labor in the US so high as to increase real wages in the US for the first time since 1967. 1967 was when the global economy really began with the end of the Kennedy GATT trade rounds that signaled the weakening and eventual fall of communism!

Reason seven, our federal deficit and debt problems, along with those of our states, that have the effect of creating economic uncertainty and trepidation that then slows the economy, will be no more!

In his American Jobs Act President Obama proposed an employer payroll tax reduction that holds the possibility of working much like the McCaskill-Collins US employer carve out. The problem is that Obama proposed that this tax cut only exist for one year when it needs to be permanent. We can only hope that if this part of the American Jobs Act were ever passed, a part of this tax cut would be made permanent, along with the Bush tax cuts expiring on the top two income tax brackets, thus creating an income tax increase with a permanent US employer tax carve out.

If President Obama does not aggressively sell such an idea by the general election season he will lose reelection. Under current proposals, it will not take long before the Republicans will be able to explain that all of Obama’s proposed tax increases will only cover about 10% of our federal deficit. Obama’s proposed expiration of tax rates on the top two income tax brackets, his Buffet Rule which is essentially a capital gains tax increase on those earning over $1 million, his taxing carried interest at the ordinary income tax rate, his valuing itemized deductions at 28% for those earning over $250,000, and his elimination of oil tax preferences and corporate jet depreciation will altogether raise only about $150 billion a year while our deficit in 2011 was over $1.5 trillion. Therefore, the president will be asking to raise all of these taxes on a still slow and probably even slowing economy just to cover 10% of our deficit!

I know that Democrats like to point to polls that show that most Americans favor many of these tax increases. But very importantly, if you study the actual wording of the questions in these polls you will see that most of these polls make it appear as though these tax increases would create an equal trade off with spending cuts in order to cover our full deficit. These questions read as though these tax increases would cover 50% of the deficit with spending cuts covering the other 50%. However, given that they would only cover about 10% while likely slowing the economy, the Republicans will easily be able to argue that we have a spending problem not a revenue problem and that Democrats will destroy any economic growth we have. However, with US employer tax carve outs this problem will be eliminated. In fact, due to reason number four above, we will be able to argue for and enact even larger tax increases. Moreover, when dynamically scored, which is closest to reality, due to the accompanying economic growth that would be created by it versus the economic constraints that would be created otherwise without it, an employer tax carve out with a tax increase would raise four to five times that government tax revenues than would an equal tax increase without an E.T.C.O.! So hopefully President Obama will push for a permanent employer payroll tax cut and sell it as a US E.T.C.O. that would accompany a tax increase on the wealthy.

Better yet, the President and all others looking to create an E.T.C.O. should look to institute an Employee Tax Credit along with an employer payroll tax cut. Regarding employer tax carve outs for income tax increases, while an employer payroll tax cut has some advantages over a US Employee Tax Credit, a US ETC has more advantages, but a combination of the two is optimum. An ETC is a credit against a final income tax bill that has a flour cap at a particular effective rate. For more on US ETCs see our website, ThirdWayProgressives.org.

An employer payroll tax cut does have the advantage that the tax cut is awarded immediately with the first employment of an individual, while with an ETC the tax cut is awarded latter, after a profit is made. The immediacy of the payroll tax cut makes the cost of capital for the employment of new hires lower than it would be with an ETC. Further, it is important in the global economy to make employing fellow citizens as easy as possible and an employer payroll tax cut helps in this regard. However, Social Security and Medicare must be paid for, and employer payroll taxes cover about 18% of our total federal revenues, therefore only so much can be cut. For these and another very important reason our tax plan proposes an employer payroll tax cut for new hires while relying primarily on a US ETC to achieve most of the tax carve out.

The most important advantage of a US ETC is that it will allow our 31 states that do have income taxes to enact state employer carve outs, while with an employer payroll or withholdings tax cut this would not be possible. Given that the economic competition for employment between our states is even more intense than it is between the US and other nations, employer tax carve outs are a must for our states! Employer payroll tax cuts as carve outs are impossible for our states because most of these tax rates are already very low in places, too low to create tax carve outs. More importantly, these payroll taxes, that usually come in the form of unemployment and disability insurance taxes, are generally structured as to create very valuable tax incentives, with those businesses and industries that have high rates of unemployment and injures paying higher tax rates and those without them paying lower to often extremely low tax rates.

It is very important that these tax incentives are maintained. Therefore, in order to create carve outs, state ETCs will need to be enacted. Further, given that most tax policing is done by the IRS and that states have much less resources in this regard, it would be very inefficient for each individual state to have to do all of its policing for its ETC. For this reason, and the fact that we can only cut federal payroll taxes so far, the federal government should enact a US ECT as part of an employer tax carve out strategy. Hopefully we are concerned as much about the welfare of our state governments as we are the federal government.

Another very positive feature of December 2011’s McCaskill-Collins Bill is its “technology company,” venture capital investment tax credit or possible carve out. However, this tax credit’s shortcoming is that it is only for investments in technology companies that are expanding in the US, while it should be for investments in all companies that are expanding in the US. Also, many problems will arise be trying to define what a “technology company” is.

Our qualityist capital gains tax plan would raise to 25% today’s top capital gains tax rate from 15%. However, it would carve out, and slightly lower from where the rates are today, capital gains tax rates on four basic investments that would all need to have a minimum of jobs created in the US. These four fundamental investments are: first issue bonds, stocks bought at IPO, venture capital investments, and the underwriting of any of the above three investments. More on our capital gains tax plan can be found at ThirdWayProgressives.org. These four investments are the primary products of the financial market that allow it to raise capital for growing businesses in America. Generally in order to expand, small businesses raise venture capital, medium sized businesses launch IPOs, and large corporations float bonds. With our qualifications for increased employment in the US in order to achieve the lower tax rate, the financial markets will be generating jobs in the US like never before!

The virtues and math in our capital gains tax plan are nearly identical to that of a US employer tax carve out with an income tax increase. Generally, only about 5% to 12% of all gains in the financial markets come from the above four fundamental investments. However, these four investments are responsible for nearly all of the job growth that is facilitated by the financial markets. It is not that the other products in the financial markets are not important to the economy. It is just that a higher capital gains tax on them would have little to no effect on American job growth. Except for first issue mortgage backed securities that could also receive a lower tax rate with little cost, virtually all of the rest of the financial products sold are preexisting stocks and bond, and options and derivatives. This other, typically 90% or more, of the financial markets, even with a much higher capital gains tax rate, would retain enough liquidity in their market as to not present any adverse effect on the businesses that rely upon them. However, the more investment we have in the four fundamental financial vehicles, the lower will be the cost of capital for American businesses that are expanding in the US. The greater the difference in tax rate between these four investments and all the other financial vehicles that are generally speculative paper trades, the more American economic growth will occur through financial markets via this tax incentive and the more tax revenues will be raised. Therefore, our capital gains tax regime will allow the federal government and our state governments to be able to raise capital gains tax rates far above were they are today while actually improving the economic efficiency of our financial markets! This capital gains tax policy would also have the very positive effect of decreasing the likelihood of speculative investment bubbles occurring.

Our overall qualityist tax plan also has a C Corporation tax plan that uses ETCs to incentivize job growth in the US along with further rewarding and incentivizing compensation above the US norm for US employees. Our overall plan also contains tax policies designed to create a more environmentally sustainable and safe economy. All of these plans can be found at ThirdWayProgressives.org.

But tax policy is not the only area where we need to adapt government policies to the realities of our highly competitive global economy. Qualityism resides in the world of the New Growth, or Endogenous Growth, Economics School, a school that is only a few decades old and not completely defined. Like most Endogenous Growthers, qualityism believes that economies are affected positively by three primary factors. Like the Keynesians, qualityists believe that it is important that governments take an active role in keeping consumer demand high. Yet like classical or supply-side economists, qualityists believe that it is very important to keep the cost of capital low for the private sector by keeping taxes low on employing businesses and capital formation. The above qualityist tax policies and others that can be found at ThirdWayProgressives.org destroy the public policy catch 22 that we have been in for the past 100 years regarding this unfortunate tradeoff between Keynesian and supply-side economics, and our new global economy is too competitive, complex, and demanding to put up with this catch 22 any longer! But qualityists also believe that there exists a third primary engine of economic prosperity that is at least as important as the other two. This engine is the emergence of new technologies and methods of production.

Like New Growth or Endogenous Growth economists, and like those on the right who call themselves Real Business Cycle theorists, qualityists see economic growth and the business cycle as being dominated by the arrival of new technologies, products, and methods of production that will be bought and invested in even if consumer demand is low or the cost of capital is high. When one examines historically how relatively small portions of the economy can be responsible for very large portions of the growth of an economy, the reality for this perspective becomes extremely evident. Some studies have shown that as much as 60% to 90% of the economic growth in an economic expansion occurs in what begins that expansion as only 2% to 3% of GDP. For example, housing, healthcare, and cell phones were responsible for an extremely large percentage of the total economic growth in the US between 2002 and 2008. Between 1992 and 2000 it was personal computers and the internet that drove growth. Between 1982 and 1990 it was commercial real-estate and computers for businesses. In the 1970’s it was gasoline and inflation. In the 1960’s it was aerospace and war. In the 50’s it was TVs and other consumer electronics. In the 40’s it was war, in the 30’s government, in the roaring 20’s cars, trucks, and radios, and in the 10’s cars and war. Before 1913 there took place shorter economic cycles that were most effected by railroad expansions.

Yet unlike Real Business Cycle theorists who believe that the best policy is for governments to simply not get involved and let this real cycle play out, Endogenous Growthers and qualityists believe that the government should, and has in the past but never so optimally, facilitate and add to new technological developments. When one recognizes that the private sector alone has never been able to produce at close to peak potential scientific and technological outputs, and given our need for more environmentally sustainable technologies among others, it is easy to realize that the government should be doing much more in this area. It has been said by those who study the subject that the free market alone only generates about half of the R&D that the economy could efficiently produce(4).

A majority of the most impressive achievements of mankind were financed and designed with government funding, from the pyramids in Egypt, to the ships that were designed via Prince Henry the Navigator of Portugal and then financed by the royalty of Spain that discovered the New World, to the moon landing, satellites, and the internet. Moreover, war financing has generated much technological improvement, from arguable everything but the pyramids above, to many improvements in the combustible engine and most improvements in aerospace. Given our technological needs as a growing species with only one planet, we should not rely on the inefficiencies and horrors of war as the catalyst for needed technological improvements!

It is wealth and better technologies that allow societies to preserve their environments while acquiring what they need and desire, not economic constraints and poverty. The poorest and least politically and economically free nations of the world are all its least environmentally preserved. Therefore, it is the free market in accordance with predictable, transparent, and robust government R&D support, along with tax incentives both on the purchasing and profit end, which will preserve our environment. But it is also the free market with such government support that will best allow us to fulfill our economic needs, wants, and dreams that are not hampered in any major way by environmental concerns. The people of the world are made better off if a favorite play toy of many that the private sector alone would have taken 50 years to develop is there to enjoy 25 years earlier because a government helped in the development of that product and production. Further, when structured properly, workers are able to engage in jobs that produce higher rates and qualities of output while enjoying a larger share of that output.

For all of these reasons an important feature of qualityism is structuring the most fair and economically efficient way for the government to assist the private sector in increasing the economies overall scientific and technological output. As importantly, qualityism is structured so that the people of a nation who pay for their government’s successful R&D support receive just compensation for these expenses while their workers are able to benefit from an increased demand for their employment. For this to be done in a way that is predictable, transparent, and not swayed by political influence is of utmost importance. Fortunately, such a method is also one that would be most economically efficient and without waist.

In the last several years our federal government under programs like the Energy Policy Act of 2005 and some assistance of General Motors has began to move in this proper direction. However, many of these programs have provided assistance at points of production that create waist and can be adversely altered by political influence. It is very important to remember that the point of production where governments can assist the private sector with the least amount of waist and adverse political influence is during the basic and applied research and development stages.

President Obama’s newly proposed National Network for Manufacturing Innovation at first glance looks to be the right step in the right direction, as has long been the Brookings Institute’s, Energy Discovery – Innovation Institutes. However, with only $500 million to $1 billion to be spent over four years with the new NNMI, this is a baby step when an Olympic long jump is needed. Nonetheless, if structured properly it will take relatively little time before it is found that this program more than pays for itself. I dont’t mean “pays for itself” using typical squishy Washington DC accounting, so the monies earned through the program could be ploughed back into it. However for now, at the very least and with this year’s election, a real commitment to this program needs to be made!

What is suspected that the NNMI would do, because it is reported to be molded after Germany’s Fraunhofer Institute, is to invite as many private business participants as possible to come together along with the government to brainstorm over what possible technological developments they would like to collaborate in developing that they would all find benefit in using once developed. Those ideas that attract the most private sector R&D investment commitments would then also receive government R&D funds and other basic science support. With the right government incentives the intellectual property developed would then be produced and used in the US.

At present there is a debate within the Obama administration as to whether the NNMI should be structured with incentives for businesses to manufacture in the US those products that arise using the NNMI government funds. Unless China and India offer to pay, and I dont’t mean lend, the NNMI funding, the answer to this question should be yes. More specifically what should happen is that as federal, state, and local funds begin to rise on a particular project, so too must correspondingly rise the percentage of payroll that a business has in each jurisdiction relative to its global payroll in order for it to have a right to the intellectual property developed. Failure to do so would mandate very high royalties and fees in order to use the intellectual property. Further, the best way to calculate payroll increases would be to measure them through the amount Employee Tax Credits earned. Given that our ETCs as part of our personal income and corporate tax plans allow for ever greater ETC rewards that can be given to businesses that compensate their employees at ever greater amounts above the norm, the NNMI would then maintain, create, and attract higher paying jobs in the US. Germany’s Fraunhofer Institute provides 70% of its funding via its own internal profits, with only 30% of its funding coming from German governments. With the right incentives and tax structure the NNMI would more than pay for itself!

Such institutes in the US will need to expand far beyond what is being proposed above. A very extensive NNMI along with robust state involvement and connected institutes through business incubators and our universities will be a must. One of the missions of our universities should now be to be their own business incubators with manufacturing institutes. Large “patent pools” and networks should be formed within and among them. Students, private groups, and perhaps even non-affiliated individuals would give up exclusive intellectual property rights in exchange for a predetermined percentage of royalties. The exclusivity of each patent pool would be determined by the university and each program coordinator. Private investors, existing businesses, and those within the business incubators would then be able to license any such patents with similar payroll, ETC, and/or royalty commitments as would exist above with the NNMI. Further, universities should stop using not always relevant math courses as “weeder” courses into many science and engineering degrees. Albert Einstein, perhaps the greatest physicist of all time, was a well below average mathematician. It is safe to say that many of the futures greatest inventors and scientists may be the same.

All of this will be part of a transformation of our universities that is typical for a time period that has experienced an even more profound economic transformation, our rapid movement into the global economy. After the Civil War and around the turn of the last century the mission of America’s universities was greatly broadened. Prior to the Civil War American college students could typically only receive degrees in one of five subjects: law, medicine, theology, philosophy, or science. But as our economy was rapidly transformed from agricultural to industrial during this period, within our colleges and universities the subjects of philosophy and science splintered and became specialized eventually into what we know them to be today. During this period higher education became much more relevant to the needs of society. A similar revolution is now upon us, and reluctant schools will only suffer.

Given this reform to higher education along with the NNMI, it would not take long until the economies scientific and technological output would be taken to a more desired level. Along with various environmental tax incentives and programs, the possibility of maintaining a pristine and safe environment for the US and the rest of the world would greatly increase. On the purchasing end, the federal, state, and even local governments could enact an Environmental Fair Tax. For states and local governments this would simply mean that they would structure their sales taxes such that products with a great environmental rating would receive a very low to no sales tax, while products with low environmental ratings would make up for this cost by having much higher sales tax rates. This tax would be revenue neutral. A federal Environmental Fair Tax would piggy back on the state and local sales tax system, lowering sales taxes even further for products with great environmental ratings while raising sales taxes even further on those with poor ratings.

Our other environmental tax proposal would reward tax credits for the production of products using best practices. Just like with an Environmental Fair Tax on the federal level, the EPA could designate, and then Congress and the president could OK, best, standard, and poor practices, and then award a lower income tax rate via this designation. Also just like with an EFT, these practices could be judged for what is generated for the production of a product, when a product is in use, and when a product is discarded. Another very positive proposal for the environment is to have the federal government announce that the first some odd amount of the production of a certain best practice could be produced tax free. All of these tax incentives would slowly but inevitably create a cleaner environment as new best practices are invented and old best practices becomes standard practices and so on. With these tax policies understood as being permanent, given multiple potential technologies being even close to equal, engineers will always default to employing the more environmentally friendly technology. Furthermore, given that the overall output of environmentally friendly technologies will increase under qualityism, if the free market with these tax incentives alone is not enough for a given sector to move away from certain less environmentally friendly products and procedures, it will then be easier for governments to mandate the use of cleaner technologies without adversely affecting the economy.

But what qualityism would best achieve over time is a more egalitarian society! Our tax plan would raise far more government revenues than any other currently proposed tax plan. Much of these new revenues could be used to improve education. Greater educational opportunities are liberating for both individuals and the overall economy. Until the last few years, greater educational outputs have been virtually the only policy initiatives of Endogenous Growth Economists. A more highly educated work force will entice capital and job growth, along with raising productivity and incomes. Meanwhile the tax incentives in qualityism also increase the demand for labor in the jurisdiction of the government that employs them. In the end, given that government can never be larger than the private sector that creates it and keeps it alive, it is only the demand for labor in the private sector and increases in productivity that can overtime raise real incomes for workers. These tax incentives, along with the NNMI and our proposed incentives for their associates to employ domestically, would ensure that the demand for labor in the domestic private sector is at its optimum, along with ensuring that desired scientific and technological outputs are at their optimum.

With a greatly increased demand for labor and better technologies that will increase productivity, clean the environment, and deliver better products, workers will be able to demand more of better products, and/or more time off and vacations if they so chose. A great demand for labor will put workers in greater control. Moreover, free market entrepreneurs will have more opportunities than ever before to rise and become wealthy, while everyone will have a more prosperous life even if they chose to do less, all while creating a more environmentally sustainable economy. The economy will be of a higher quality, and this will give all individuals more of an opportunity to do what they dream. Such is the essence of anything that is liberating.

Qualityism liberates us from the failed philosophies of both Keynesianism and Supply-side economics. Keynesians, especially in a competitive global economy, adversely constrain and shun the private sector while far too often they spend through the government in ways where economic efficiency is inadequately measured. Meanwhile, Classical economists or Supply-siders fail to live in the real industrial economy where, without government or union intervention, consumer demand by the masses is never able to keep pace with the rest of the economy, leading to an ever slower and less prosperous economy. Unfortunately today in our global economy, the only redeeming value of either economic philosophy, and therefore most of the beliefs of either political party, is that their advocates block the other party from completely running, and therefore completely destroying, our economy!

Unfortunately for Democrats in our global economy, it would take Keynesians less time to destroy our economic prosperity than it would for Supply-siders to do so. Certain destruction would come with Supply-side policies, but a slower certain destruction. The American people sense this, and this is why since the global economy really began with the end of the Kennedy GATT trade round in 1967 Democrats have only had one two term president while the Republicans have had three. Further, every exit poll showed that without Ross Perot running, Bill Clinton never would have won in 1992, so the Republicans would have had a fourth two term president and the Democrats zero. In order to win in 1996 Clinton had to “triangulate” and become a “New Democrat.” Without Watergate, the financial crash in the fall of 2008, and Ross Perot, it could have been a complete wipe-out for the Democrats since 1967. No president has ever been reelected with such a poor approval rating this close to an election as President Obama now has. Democrats can pretend that this is not a problem and continue to lose, as the American people continue to lose. Or they can face reality and adopt Endogenous Growth, qualityist policies, thereby improving their lot and more importantly the lot of the American people.

Exactly 100 years ago, as the most developed economies of the world experienced an equally pronounced and profound economic transformation as our sudden movement into a global economy, the Democratic Party took up the mantel of the progressive income tax and other progressive legislation as a way of adapting to the sudden movement from a primarily agricultural economy to a primarily industrial economy. This economic transformation was primarily due to the recent development of electricity, mechanized farm equipment, and railroad expansion. In an agricultural economy during a recession, people can remain or move back to family farms and live off of them. In an industrial economy this is much less so. Plus, industrial economies have to deal with non-reinvested profits that disallow workers to be able to keep their consumer spending at pace with the rest of the economy, thereby helping to bring on recessions. Only progressive income and capital gains taxes can increase consumer spending by the poor and middle class because all other forms of taxation are regressive so they cannot increase moneys to the poor and middle class. These are the reasons why between 1910 and 1915 virtually all of the economically developed nations of the world enacted for the first time, with a few short exceptions in Britain and the US in order to pay for 19th century wars, progressive income taxes, along with other progressive legislation. All of these nations, and soon after most of the nations of the world, have had progressive income taxes ever since.

Today we still live in an industrial economy, and hopefully with vigor want to remain in one. Therefore, we still must redistribute income in order to keep consumer demand up, and we must do it through progressive income taxes. However, given our now highly competitive and employment mobile global economy we must contour our progressive income and capital gains taxes in a much more sophisticated manor that does not damage domestic job growth but actually incentivizes it. Income and capital gains taxes make up about 55% of our federal revenues and the top 5% of income earners pay about 70% of these taxes. The top 5% or higher of income earners is where the money is, and this is where we must acquire it. However, and very importantly, our qualityist income and capital gains tax plans increase taxes only on the moneys in the economy that are LEAST responsible for domestic economic growth while incentivizing domestic economic growth!

No major nation of the world in going to champion communism or socialism and take this world back to the pre-global economy days. The lesson that has been learned by effectively all the world that came out of the grand struggle of communism and socialism against the free market is that a private economy with a profit margin is much more efficient and liberating then is a government controlled economy without a profit margin. Communism and socialism have been permanently discredited and there is no going back. The global, industrial, free market economy is here to stay, until sometime long after we are dead it transforms into something different. If the US were to now champion qualityism, it would not take long until the rest of the world had more democratic, free market, qualityist governments which would therefore have higher labor and environmental standards. This would in turn allow the US and the other economically developed nations of the world to have ever higher labor and environmental standards. Our government’s much better fiscal position under qualityism, along with similar governments and fiscal positions in Europe and Japan, would also give these democratic nations much greater influence upon the world and upon all undemocratic nations both large and small.

Just like with what was done 100 years ago, the Democratic Party must lead the way in applying new policies to a new economic reality. Being the “conservative” party, or in other words the “slow to little change” party, we cannot rely on the Republicans to champion these new policies. The Democratic Party also led the way during its inception during the Second Great Awakening of the early 1800’s by championing very important democratic reforms that made our democracy much more representative. The early part of each century, following a cycle of four roughly 25 year long generations, or a cycle of roughly every 100 years, has always experienced a profound and very substantial redefinition of what people considered to be politically and socially liberating. This occurred during the Progressive Era of the early 1900’s, the Second Great Awakening of the early 1800’s, the Great Awakening of the early 1700’s, the Puritan Awakening of the early 1600’s, and the Protestant Reformation of the early 1500’s. This 100 year cycle in this manifestation appears to have begun with the great period of sovereign state building that occurred in Europe in the late 1400’s that was primarily a result of the invention of the canon and the printing press during that century. However, a paralleling sequenced 100 year cycle of new and profound societal changing ideas appears to have followed this same pattern as far back as into the ancient world. But most importantly for us, an Awakening of more modern magnitude is, and must, now be upon us. The sooner we accomplish what past generations have and rise to the challenge of history, the better off we and all future generations will be!

1. Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
2. The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
3. US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
4. US Senate Committee on Finance: Full Committee Hearing 9/20/11

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