THE BLOG
03/26/2013 06:10 pm ET | Updated May 26, 2013

The Politics of Neglected Public Investment

The flood of money that has engulfed our political system means that special interests prevail at the expense of the country as a whole. This is nowhere so graphically illustrated as it is with regard to the neglect of public sector investment in both education and infrastructure. Big future increases in both are required for the United States to successfully compete in the global economy. But the private funding of election campaigns means that few Democrats and virtually no Republicans are willing to advocate the increase in taxes that are required to meet the country's future needs. Members of both parties, beholden to wealthy donors, are unwilling to risk offending their patrons by asking them to give up more of their income for the good of the country.

Republican members of Congress know they are putting their careers at risk if they dissent from the hard Right political agenda of reduced government expenditures and no new taxes. If they fail to adhere to conservative ideological discipline, they can be certain to face a well-financed, career-threatening, primary election opponent. But Democrats too are culpable. They also are unwilling to place their campaign war chests at risk by declaring that their rich campaign contributors should bear an increased tax burden.

Higher education's problems center on the fact that average student debt increased by more than 50 percent between 2001 and 2010 -- from $17,562 in the earlier year to $26,682 in the later, according to a Pew research report. What caused this increase was that during roughly these same years (2002-2012), state and local support for higher education declined by 11.2 percent. In response to those cut-backs, college raised tuition by 43.7 percent (1). Since household incomes were stagnating, remaining in school meant students had to take on more debt.

The potential threat that comes from increased indebtedness is that young people will turn away from higher education. Already there is some evidence that the debt burden is causing an increase in students dropping out of college. (2) If this trend continues to accelerate, it will be damaging for the country as a whole -- not just the individuals involved. In an international economy that is increasingly knowledge-driven, a decline in college completion rates is a prescription for national failure.

The situation is similar with regard to the country's infrastructure. These are public sector investments that represent the base upon which private production rests. But over a long period of time, that base has been allowed to crumble. Lack of funding has resulted in a failure to maintain the country's transportation systems, waterways, power supplies, schools and waste disposal facilities. The American Society for Civil Engineering estimates that between now and 2020 an additional investment of $1.6 billion over and beyond the current projected funding levels will be required in order to "maintain a status of good repair" of those facilities. (3)

To rehabilitate our infrastructure, the federal government will have to provide increased revenue to state and local governments. To reverse the trend toward increased student debt, greater public assistance to universities and students is essential.

To pay for these necessary public investments, tax revenues will have to increase. In this, wealthy individuals can and should shoulder most of the burden. They can afford to. Though in recent years the median household income has not grown, at the top of the distribution incomes have increased substantially. (4) Furthermore, these very wealthy individuals are taxed at relatively low levels. As the table below shows, individuals with incomes of $300,000 pay a lower effective tax rate in this country than in any other comparable country for which data are available. Our government needs increased revenue, and it is the wealthy who should contribute disproportionately to those funds.

Table 1
Effective Income Tax and Social Security Rates on $300,000 of Gross Income

Belgium - 53.8,

Denmark - 51.4,

Sweden - 50.6,

Italy - 50.1,

Netherlands - 47.9,

Finland - 47.8,

Portugal - 47.7,

Israel - 46.6,

Greece - 44.6,

Ireland - 43.9,

Austria - 43.6,

Norway - 42.3,

United Kingdom - 41.7,

Canada - 41.0,

Germany - 40.6,

France - 40.0,

Spain - 39.2,

Australia - 38.8,

Japan - 36.5,

United States - 31.6

Source: KPMG, "KPMG's Individual Income Tax and Social Security Rate Survey, 2010," p. 12-13

But it is obvious that our political system as presently constituted is unlikely in the extreme to produce such an outcome. For that to occur, the donors who pay for political campaigns would have to be willing to underwrite the common good at the expense of their personal interests. That is a commitment they have shown no inclination to take on.

In short, our privately financed political system serves the country poorly. It is far better at advancing private interests of the wealthy than those of the society as a whole. To achieve the latter we need a public financing system. Only that will allow office-seekers to legislate on behalf of their constituents rather than their funders.

References:
(1) State Higher Education Office, "State Higher Education Finance: FY 2012," Table 3, p. 24; Figure 3, p. 21.
(2) Ylan Q. Mul and Suzy Khimm, "College Dropouts Have Debt But No Degree," Washington Post, May 5, 2012.
(3) The American Society of Civil Engineers, "2013 Grade Sheet: America's Infrastructure Investment Needs".
(4) Emmanuel Saez, "Striking it Richer: The Evolution of Top Incomes in the United States (Updated with 2011 Estimates)."

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