President Obama seeks to reduce the deficit and the national debt by cutting defense costs, lowering spending on Medicaid and Medicare, reducing itemized tax deductions for the rich and eliminating the Bush tax cuts for families earning over $250,000 a year. The Republicans have already defeated him on the last issue during last year's lame duck session when they insisted on keeping the reduced income tax rates for the next two years in exchange for continued unemployment benefits and reducing payroll taxes for middle class workers. The Republicans in control of the House argue that repealing the Bush tax cuts would have an adverse impact on small businesses which are often single proprietorships subject to individual income tax rates. If their taxes were increased, they would not hire or rehire workers in this time of grave unemployment.
The latest Congressional compromise on the federal budget reduces funds for police and fire agencies and cuts $600 million from community health care centers. Is there another way to reduce the deficit, rather than depriving the lower and middle classes of necessary government benefits, such as Medicaid and Medicare or educational grants?
Some recent reports show that those at the top of the income and wealth ladder have done extremely well in the last decades. Hardly a day goes by without some economist discussing and analyzing the huge disparity in wealth between the rich and the rest of society. Joseph Stiglist, the Nobel Prize winning economist, has written an article in the latest Vanity Fair entitled "Of the 1%, By the 1%, For the 1%." The article discusses the enormous and growing inequality in wealth in this country, which has largely been the result of the Reagan tax cuts of the 1980's and the Bush tax cuts of 2001. Stiglitz points out that in the last 25 years, the top 1% have doubled their percentage of yearly income. In the period from 1976 to 2007, while national income has increased by about 60%, the income of the top 1% has increased by 275%. As of 2008, the top 1% received over 20% of the total income earned by all Americans.
When one examines wealth, instead of income, the top 1% do even better. In 1970, the top 1% owned 20% of the nation's wealth. In 2007, they owned 34.6% of the total wealth, according to a study (the Survey of Consumer Finances) prepared by the Federal Reserve Board. A leading scholar on wealth inequality, Professor Edward Wolff of Bard College, has argued that a truer measure of the wealth of the top 1% is their ownership of easily disposable assets, that is, the net worth of a household, minus the equity in owner-occupied housing. If one eliminates the value of a family's owner occupied home (the basic source of wealth for the bottom 50% of the country), the percentage of non-home wealth owned by the top 1% -- stocks, bonds, other real estate, businesses -- increases to about 42.7%. The top 1% own over 60% of financial securities and 62.5% of business equity.
What does this amount to in real dollars? As of December 21, 2010, the total net worth of all Americans was $56.8 trillion. Assuming that the 34.6% figure of the Federal Reserve Board is still valid, that means that the top 1% owned 34.6% of the $56.8 trillion total wealth or $19.65 trillion.
Could that figure be the basis for reducing the federal deficit or our national debt? Suppose we added to Stiglitz' title, "Of the 1%, By the 1%, For the 1%", the idea of "From the 1%."
Instead on increasing income taxes, which might arguably affect single proprietorships and small businesses, we could impose a tax based on wealth. We do consider the total wealth of an individual in determining the estate tax when a person dies. And local government units assess an annual tax based on the value of a person's real property. Many European countries also have a wealth tax -- that is, a tax on the total wealth (net worth) of each individual household, which must be paid annually.
Our federal government could impose such a tax on an emergency basis, to be applied only during the immediate financial crisis, say for the next five years or even ten years.
Suppose such a system were imposed here, a tax of 1% of the net worth of the top 1%, until our financial health improves. Who would be affected? The top 1 percent consists of about 3 million households, each with a net worth over $8 million. If the total net worth of this group was $19.65 trillion, we would raise $196.5 billion each year, six times the amount of the budget cuts that Congress has just agreed to. Over a five year period, it would amount to $982.5 billion in additional revenue, and over ten years it would amount to $1.965 trillion, about half of what President Obama was seeking in his recent speech.
The rich could certainly afford such a modest imposition on their wealth. As the president noted, the richest among us can afford to pay a little more. And taking from the rich is surely more palatable to the nation as a whole instead of cutting Medicaid or Social Security, funds for education and scientific research in clean energy.
There is one potential problem: Article 1, Section 9 of the Constitution states: "No Capitation, or other direct Tax, shall be laid unless in Proportion to the Census or Enumeration herein before directed to be taken." That is, no direct tax on individuals can be made by the federal government unless it is levied in proportion to the total population of each state. (We had to amend the Constitution in 1913 to permit Congress to pass an income tax law). If there was a national real estate property tax, for example, one would have to measure the total value of all land in one state, and then divide that number by the total number of inhabitants of a state to arrive at the tax bill for each land owner, rather than have a larger land owner pay the tax based on the value of his or her holdings.
Constitutional scholars such as Bruce Ackerman at Yale and Roy Ulrich at Berkeley have uncovered the origin of the provision and argue that it would not bar the kind of wealth tax described. The provision was inserted to benefit the Southern states who were concerned about a direct tax on the value of their property. The population of each Southern state was increased by the number of slaves who were counted as 3/5ths of the white population. The slaves owned no land, but their sheer numbers would decrease the proportional share that their white owners would have to pay if a direct tax were imposed.
In the face of the nation's stark financial problems, our richest Americans can afford this modest diminution of their wealth. And they certainly would have no right to complain, since it was previous government actions that enabled them to accumulate it.
Leon Friedman is a professor of constitutional law at Hofstra Law School.