Just the other day President Obama denounced $18 billion in Wall Street bonuses as "shameful" and "the height of irresponsibility." Wednesday Treasury proposed a $500,000 pay cap for a select few executives of bailout-enriched companies. But these are essentially symbolic responses. Why not instead follow through on a theme heard during the campaign -- when the country is in need, it is time for all to pay their fair share?
During the run up to the mortgage crash, hundreds of billions of dollars in record bonuses and other compensation were paid out to the architects and builders of the financial house that has since collapsed. Mortgage brokers, investment bankers, and investors who collectively flooded the market with subprime loans profited handsomely. Average Wall Street bonuses tripled from 2002 to 2007, driven significantly by the explosion in these new pools of largely unregulated loans.
Better still for those on the receiving end, record compensation flowed with the benefit of reduced taxes - the 2001 Bush Administration tax cuts dropped marginal rates at the high end from 39.6% down to the current 36%. What's more, often astronomical bonuses were structured to take advantage of still lower 15% capital gains rates, or even to defer any taxes until well into the future.
Think of it this way - if all those who were the winners from several years of very lucrative peddling of the junk loans had merely continued paying taxes at the pre-Bush rates, our national Treasury would now at least be holding billions more, a good downpayment towards rebuilding our fiscal house.
The market, not temporary salary caps, ultimately sets compensation levels. Alongside the rise and fall of incomes, higher marginal tax rates would be a tangible way to embody a return to shared responsibility and fair allocation of the burdens of responding to national challenges.
This insight was articulated the day before the election, when former Treasury Secretary Robert Rubin and progressive economist (now Vice Presidential adviser) Jared Bernstein teamed up to declare common ground: "We both agree that individual income tax rates and other taxes for those at the very top could be moved back to the rates of the Clinton era. It's worth remembering that rates at this level helped finance deficit reduction and public investment that contributed to the longest economic expansion in our history."
Yet now we are on the verge of needing to borrow massively to try to turn around the faltering economy, what has happened to the tax fairness part of the agenda? The winners are about to get a pass again.
Not raising taxes in a recession on the vast majority of Americans is sensible, as tax increases would cut into shrinking incomes and stifle buying power. Instead, a temporary payroll tax cut for most Americans should be one part of a multi-pronged stimulus effort.
But this argument crumbles when we look to the highest few percent of earners. Will that CEO, top tier lawyer, investment banker, Washington lobbyist, entertainer or other high roller really put off buying a tv or eating dinner out because an additional $3,000 tax is due on the next $100,000 earned?
During the election campaign, I imagined what John McCain could have said had he chosen to emphasize the good of the nation over the "me first" views attributed to that now famous plumber. Of course, he never delivered that version of the speech.
In light of today's situation, perhaps President Obama should consider delivering a similar appeal to those Americans who are still doing well in these difficult times, something like:
"Fellow citizens, every generation of Americans faces a challenge. When that challenge arrives, some serve, and some look out for themselves. Service comes in many forms -- not just joining the military, or working in a factory, but also offering America whatever is needed, whatever serves the common cause.
In World War II, high income earners paid high tax rates. Everyone saved and recycled essential materials, had ration cards, and pitched in. Families rich and poor sent their sons and daughters off to war. From Korea through Vietnam, America's elites not only paid high taxes, their children again served their country. In the all-male Princeton University class of 1956, 450 out of 750 graduating seniors (60%) joined or were drafted into military service. At Princeton today, only 9 students out of 1,108 graduating seniors in 2006 (under 1%) joined the military.
In 2009, America is still militarily committed in Iraq and Afghanistan, where our challenges grow daily. Foreclosures are rampant, unemployment has soared. Those with jobs are afraid that next week will bring a pink slip. Consumer confidence is down, we have run up enormous debt, and we are facing the worst national economic situation since the Great Depression. To respond and restore our fortunes, we have committed billions, and are on the verge of releasing additional billions to create a massive stimulus to our economy.
Where will we find the money for this plan? Millions of American families are totally strapped, not able to pay all the bills. They need a tax break just to make it through. We can and will have to borrow to jumpstart the economy, but it is also our responsibility to minimize the debt burden we leave to our children.
Our history has shown that when we all take to heart the words of the Declaration of Independence and "mutually pledge to each other our lives, our fortunes and our sacred honor", we prosper. And when we each retreat to a narrow view of self interest, of "mine" before "ours", our nation suffers.
So I am just asking those of you earning the highest incomes to pay the same tax rate that every other American earning $250,000 and up paid on January 20, 2001 -- the day my predecessor took office. Will you help us?"
Vice President Biden while a candidate called a willingness to pay higher taxes in a time of need "patriotic." Such a similar call to service by President Obama is not merely an appeal to patriotism, however. It is a necessary first step towards changing a culture of entitlement and dependency at the high end.
For too long we have been irresponsibly led to believe that individually, and as a country, we can have more for less. Many have come to hold as an article of faith that the winners in boom times can enjoy a bigger share without sharing the winnings. And now that we are in a bust, many still don't see any extra responsibility to help out.
Now is exactly the time, however, to reverse that thinking. If we don't, the next time around we go through boom and bust, we will again be lamenting that all those big winners took their chips home from the party and left everyone else to clean up the mess.