THE BLOG
08/08/2013 12:40 pm ET Updated Oct 08, 2013

What if Detroit Had Been the U.S.?

On July 18, 2013, two diametrically opposed events occurred around the same time. The city of Detroit filed for bankruptcy and the Dow Jones Industrial Average and S&P 500 closed at record highs, up 19 percent this year. The irony of this should not escape us. While corporate profits soar and our biggest corporations increase in value by billions, the people of the city of Detroit, some of whom are also the customers and employees who keep those corporations in business, are insolvent.

It is easy to caricature Detroit's bankruptcy as the sole result of ballooning debt driven by reckless government spending, bureaucratic mismanagement and corruption, and greedy unions, but that does not capture the entire story. All those things certainly contributed to Detroit's demise, but the blame must also be shared by the business community, which abandoned their former home and starved it of much-needed tax revenues.

It is also easy to write off a city like Detroit, whose population has shrunk to a relatively irrelevant 702,000 and is no longer an important hub of anything, unlike a New York or Los Angeles. The impact to businesses of leaving Detroit has probably been minimal.

But what if Detroit had been the United States?

The problems faced by Detroit are unfortunately not endemic to the city. As a nation, our debt too is ballooning, public spending has exploded, our bureaucracy is vast and inefficient, corruption in Washington (although sanitized as lobbying) is widespread, social safety net programs face liquidity problems, unions are intractable, and tax revenues are insufficient to meet our needs -- in no small part due to the tax loopholes that enable corporations and wealthy individuals to shield the majority of their income from taxes. It is entirely conceivable, then, that Detroit's fate could one day befall the U.S.

A crucial distinction, however, is that the fallout from a national bankruptcy will not just impact one declining city or 20,000 government employees, or a limited set of municipal bondholders -- it will impact everyone, including those same corporations and rich Americans who have such an aversion to paying taxes.

Successful commerce requires public infrastructure, and not just for employees. Public roads, subways, utilities, and other services enable businesses to function. Everything from employee commutes and transport of goods to trash collection and emergency response by police and fire departments are critical to industry. In addition, businesses require consumers who can afford to buy their products and services. Not only would a national bankruptcy hinder the public services mentioned above and lead to economic chaos, but it would also put millions of government employees out of work, not to mention millions of private sector workers as businesses retrench due to an inability to conduct commerce.

And these are the same millions who keep businesses afloat, either through their labor or their dollars.

Such a vicious cycle should be of extreme concern to business owners, and especially to our largest corporations, who dodge taxes at a very high level by moving money offshore and taking advantage of a myriad of credits and other loopholes, for if our nation goes bankrupt, it will take those businesses down with it. To turn an idiom on its head -- a falling tide will sink all boats.

While it is the responsibility of our government to rein in spending, it is also the responsibility of the wealthiest participants in our economy to shoulder their true tax obligations, without which the U.S. will never be able to balance its books. Loopholes that enable companies to shield their money from the IRS by moving it to offshore havens alone cost our nation $150 billion in lost revenues every year. Other tax breaks that disproportionately benefit the wealthy include the mortgage interest rate deduction, the preferential tax treatment of capital gains and dividends, and the estate tax loophole, which collectively cost Uncle Sam about $200 billion every year.

Not to mention that the rich continue to save an increasingly larger share of their income (37 percent according to a recent study, up 3 percent from 2012, and three times that in 2007) instead of spending or investing it, thus starving our economy even further.

With this year's budget deficit projected at $759 billion, these lost tax revenues are meaningful and could well mean the difference between moving closer to sanity or plunging further down an abyss; and with the market at record highs and the rich hoarding a substantial amount of their cash, some of the tax breaks mentioned above could safely be eliminated or forsaken by the private sector affordably.

Asking businesses or people to pay higher taxes may sound like a losing argument but it is really not if you consider the alternative for those same players: a national bankruptcy that will wipe out even more value for them and turn the United States into Detroit.

SANJAY SANGHOEE is an active political and business commentator. He has worked at leading investment banks and hedge funds, has appeared on CNBC's 'Closing Bell' and HuffPost Live on business topics, and is the author of two thriller novels, including "Killing Wall Street". For more information, please visit www.sanghoee.com