Redistribution and Taxation in America

The Tax Foundation recently summarized a report by the Organization of Economic Cooperation and Development (OECD). The report points out that the U.S. has the most "progressive" tax systems in the economically developed world. Progressive taxation is simply defined as the more you make, the more you pay. The left in this country often admires the social welfare states of Europe as models for America.

Why, then, is the left not satisfied if America taxes its rich people more than Europe? Is it because our unemployment rate is lower than France? Germany? the EU overall? Is it because, despite our government having the largest budget of any nation on Earth, one that exceeds the record profits ExxonMobil made by more than 200 times, it still isn't big enough? Is it because we are not as politically correct, or that our electorate is center-right instead of center-left or far left? Is it because our government's level of social and economic control isn't enough? One can only wonder.

I happen to like capitalism--not unfettered, not utterly unregulated, but not owned or controlled by the government. Governments exist to spread resources more or less equally to soothe a restless populace. Capitalism exists to allow individuals to compete and produce new goods and services at the lowest costs and highest profits possible. Simple supply and demand determine what those costs and profits will be. In the realm of government, costs and profits can be and are regulated, not according to supply and demand, but according a nebulous definition of fairness, with that definition changing constantly, depending on the political priorities of the ruling party. When government gets too involved in capitalism, you end up with crony capitalism, as happened at Fannie Mae and Freddie Mac. Once government starts trying to pick winners and losers, either through political favors or "fairness," it inevitably becomes less "fair," more expensive, and much more intrusive.

What bothers me about the two presidential candidates (Obama more directly than McCain, but McCain is just as willing to interfere with the market) is that neither of them has my full confidence that they will restore some sense of rationality, independence, or competition to the market. Everything is becoming "too big to be allowed to fail," from banks to insurance companies to car makers and airlines, so government "must" step in to "save" these businesses. This salvation comes in the form of a government bailout, which must be paid for somehow out of the public treasury, which in turn must come from the taxpayers.

If businesses fail due to bad management and the government partially bails them out, their employees become unemployed, and they might or might not find jobs. The unemployed who remain unemployed do not pay taxes and collect unemployment insurance from the government, becoming a double "cost" to the government. So then one must ask: where is all the money supposed to come from to save future businesses and all the other stuff the two candidates want to do?

It has been suggested to me that we could cut the military. Swell. As long as we go bipartisan on this issue and start cutting Social Security and Medicare benefits. Or maybe cut the Department of Education, which spends more and more for worse and worse results. Or we could be seriously suicidal with our nation's future and cut federal infrastructure spending--roads, basic science research, and space.

Another suggestion I've heard is to cut the capital gains and corporate tax rates--America has some of the highest tax rates in those two categories, too. Might as well try it at this point; if the Fed lowers the interest rate any more, they're going to start reaching negative numbers. And I love it when I hear that "tax cuts for the rich" line. Having already established that we tax the rich more than anybody and (in a previous posting) that 50% or more of the American public invests in the stock market, why should the American people be offended by efforts to help businesses? Where do they think the value of their pension funds or 401(k)s was coming from? If the health of businesses improves due to tax cuts, and millions of Americans' retirement accounts immediately increase in value, that's not just "trickle down" economics--that's a direct benefit to 50% of the American public!

Never mind. I can just wait for Obama to allow the Bush tax cuts to expire, sink the economy further, and watch the government take over even more of the private sector so I can wearily say, "I told you so." But don't think I'll do it with any sort of pleasure. It's my country, too.

The Current Financial Mess and What It Means for Space

As if space advocates don't have enough to worry about, now we've got a shaky economy as well as a federal government willing to spend five times NASA's budget at the stroke of a pen to rescue one company (AIG) and one and a half times NASA's budget to rescue Fannie Mae and Freddie Mac. And if my discussions with liberal friends are any indications, we can expect more nationalizing of large businesses if there's a perception that not doing so would crash the economy.

Where are those strident voices asking, "Where is the money going to come from?" or "Shouldn't we be spending our money on more important things?" But of course what could be more important than "saving" the economy from individual and corporate bad decision making?

Back in college I had a history teacher who insisted that the Great Depression lasted as long as it did because "the government wasn't doing enough." Another theory suggests that the government was doing too much, and that the nationalization of banks and other activities, combined with a lot of make-work government jobs in fact extended the Depression. It is safe to say that both Marxist and Austrian economists agree that World War II got the U.S. out of the Depression, though they would pick different reasons--Marxists would focus on government spending (which was already going on under the New Deal), while classical economists would focus on the need for American goods overseas. In both cases, it was the private sector creating the jobs and employing people, regardless of who was in charge.

The next major economic crisis of the 20th century was the extended period of "Stagflation" in the 1970s and early 1980s under Nixon-Ford-Carter. Ronald Reagan's economic advisers took the dramatic step of reducing the top marginal tax rates. Using the so-called Laffer Curve, Reagan simultaneously increased economic activity and, counterintuitively, increased federal taxes. The deficits of the 1980s can be attributed partly to Reagan's defense buildup, but economic and political historians tend to ignore the simultaneous increases domestic, non-defense spending that were made possible by the tax cuts. Congressional lawmakers saw all the money flowing in, and couldn't resist feeding their own pet projects. Nevertheless, the Reagan tax rates held for ten years, and the U.S. has continued to benefit from them, even though the Clinton Administration raised the top marginal tax rate to 39.5% in 1993.

Now we're in another potentially ugly economic crisis, worse than the "Dot-com" mess of 2000 if some folks have their way, and the big choices will be there for the next president to make: increase taxes and direct handouts to citizens to pump more government money into the economy or decrease taxes ("make the Bush tax cuts permanent") and allow the productive classes to use their increased incomes to invest in more economic activity.

The economic history above is rather high-level, but it provides some of the context for spending on space. In 1990, the Cold War was ending, and the savings and loan industry was undergoing its own bailout. At approximately the same time, the Bush 41 Administration was proposing its Space Exploration Initiative to go to the Moon, Mars, and beyond. We know the decisions of that time: citizens were rightly outraged at the amount of money being spent to rescue other people's bad decisions ($175 billion), but defenders of the action said it was necessary to stabilize the economy. Domestic spending was made a priority, and human space exploration was allowed to languish.

The lessons for the Constellation Program and for space advocates in general should be obvious. The S&L bailout did not stop people from making bad decisions, nor did it stop the government from bailing out businesses. However, it should be obvious which economic policies will allow the United States to continue spending money on space: only a rich nation can afford space travel. It is complex and expensive.

Taxing the rich even more will not increase or improve economic activity. The top 10% of income earners pay nearly 80% of the taxes. The bottom 50% of wage earners pay 3% of federal income taxes. And the odds are pretty good that folks in the bottom 50% are employed by folks in the upper 50%. So: the money that the top 10% pay for taxes does not go toward new investments, new businesses, or new jobs for others. Tax the rich, and you squeeze the poor, who find themselves unemployed and subjects of the welfare state, which only grows and grows, squeezing out all other forms of federal spending--including investments in science, technology, and space, which could actually create wealth.

We've got a big problem here, people: if the federal government's primary spending is on supporting individual consumption and medical care, that is money that will not be spent on basic infrastructure (bridges, roads, etc.), homeland defense and security, or critical investments in science and technology, never mind local pet projects and bridges to nowhere. And that is where we are heading. Therefore, it is not enough for space advocates to be single-issue voters and focus solely on which "space architecture" is going to best create a spacefaring civilization. We need to consider the economic and political environments in which those space architectures are being built. And lastly, we need to take a good, hard look--as citizens and taxpayers concerned about our common future--at what we can and cannot afford to do.