(Note: Since this was written, an article (http://www.huffingtonpost.com/2010/07/11/worlds-wealthy-sitting-on_n_641012.html) appeared here indicating $10Trillion was held by wealthy individuals, doing nothing. Wealth-hoarding by the wealthy was one of the causes of the Great Depression. This proposal ought to tease some of that from them.)
According to Republicans and rightwing mythology, tax-cuts solve all economic problems. The government does not know how to, and should not in any case, spend your money. You should. With enough tax cuts, you will. [Although one wonders how the worst economic calamity since the Great Depression occurred with the Bush tax cuts firmly in place???]
According to Democrats and most economic theory, massive government spending in times of economic contraction is a necessary, countercyclical antidote to the absence of private demand. It is hard to crowd out non-existing private demand.
The political result of this argument has been stalemate. The two sides are dug-in, and those few honestly seeking non-ideological solutions are ignored as insufficiently exciting.
Rather than arguing economic history and ideology, therefore, let us test both premises, so that regardless of the outcome of the debate, the economy flourishes.
I call it the "Put Up or Shut Up" Investment Tax.
It is guided by a single principle: somehow, the nation has to increase investments in job-producing enterprises in the United States. The existing private sector, with excess capacity and inadequate demand, is not doing it. The government has done so, but with insufficient amounts (given the size of the problem) and mostly indirectly. After years of arguing that "deficits do not matter", the debt/GDP ratio has now become the talk of the town. (For a history and analysis of the debt/GDP ratio, see "Reagan and Two Bushes: The Only Growth of Debt/GDP Ratio in Postwar History", July 1, 2010).
So, to indulge the Republicans and rightwing theory: allow direct investments (where the money goes to the company, not another investor, so that, for example, trading stock on public markets does not qualify) to be deducted from an individual's taxable income. In addition, to spur a rapid influx of investment capital, set a ZERO percent capital gains tax rate for any qualifying investment made in the next 12 months, regardless of when such an investment is sold, and a 6 percent rate for the following 12 months.
To indulge Democrats and most economic theory: increase revenues by increasing the tax rate on the wealthiest to 50%, exactly where it was for most of Reagan's Presidency that the rightwing touts as economic nirvana. This will bring in more money that can then be invested in infrastructure projects, clean energy, and so forth, without increasing the deficit. The 50% rate should probably kick in at around $750,000 for a couple filing jointly.
For example, a couple with $1.25million in taxable income that puts $500,000 into one or more qualifying investments, does not pay the 50% tax rate on anything. In addition, if the investment is made in the next 12 months, when they sell that investment a year or more later, they pay ZERO percent on the gain. Not a bad deal, eh? (As cash-for-clunkers and first-time buyers' mortgage credit policies showed, Americans like "good deals", a psychological and cultural observation that ought not be ignored).
A word about "qualifying" investments. The simple definition would be in newly-issued equity of a company. But, the company would need to be an "operating" company, not just a vehicle to park income, or an investment company, although, if the investment company then made a qualifying investment, that money would count. And, the company would need to be one whose entire workforce is American. There is no rationale for providing tax incentives if they do not create American jobs. All these criteria would apply both to the deduction from taxable income and the zero and 6% capital gains tax rate.
If the government took in not a single additional penny, because wealthy investors put all their money in qualifying investments so that new companies were spawned or companies in need of cash received it, then an economic recovery would be triggered.
If, on the other hand, the government reaped additional revenue because wealthy investors did not make qualifying investments, then that money could be spent directly by government on infrastructure and new technology jobs without raising the deficit.
Put-Up-Or-Shut-Up.
Either way, the economy wins and more jobs are created--a far more important outcome than scoring debating points.