The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [97]
The upshot of these considerations is that local governments are often the most effective providers of public goods such as schooling, public health, and local infrastructure (roads, water and sewerage, and other systems), since these programs are best tailored to local needs. At the same time, the federal government should supplement local financing by collecting federal taxes and transferring them to state and local governments for local implementation. The famous subsidiarity principle should in general determine the level of government best suited for implementation. The subsidiarity principle holds that the public good should be provided by the lowest level of government that is competent to provide it, for example, schools at the local level, major roads at the state level, national highways and national defense at the federal level. Americans, quite rightly, strongly endorse subsidiarity. A robust 70 percent of Americans endorse the view that “the federal government should run only those things that cannot be run at the local level.”23
Here’s the bottom line. Currently the United States collects around 18 percent of GDP in tax revenues at the federal level and another 12 percent of GDP at the state and local levels. Washington currently returns around 4 percent of GDP in tax revenues to the states to implement health, education, and infrastructure programs at the state and local levels.24 To close the budget deficit and implement needed new spending programs, the United States will have to raise overall tax revenues by several additional percentage points of GDP. I am suggesting that, to the maximum extent feasible, the new spending programs—for education, early childhood development, infrastructure, and so forth—should be implemented at the state and local levels using increased taxes collected by Washington but then returned to the individual states for program design and implementation.
Time for the Rich to Pay Their Due
With a chronic budget deficit of around 6 percent of GDP, tax revenues will have to rise. It is high time that super-rich taxpayers picked up much of this cost. The top 1 percent of American households now collects around 21 percent of household income, which amounts to around 15 percent of GDP. These households pay roughly 31 percent of their income in federal taxes, so that their net-of-federal-tax income is around 10 percent of GDP. In 1970, the top 1 percent collected around 9 percent of household income, or 6 percent of GDP, and paid roughly 47 percent of that in federal taxes, for a net-of-federal-tax income of around 3.3 percent of GDP. The post-tax income of the richest 1 percent of the population has therefore increased by more than 6 percentage points of GDP since 1970.25 Most of the population has been squeezed, while the rich have enjoyed a bonanza. It’s time once again for those at the top to contribute more to solving the nation’s problems.
The first step of the solution would be to end the Bush tax cuts for households above $250,000. The top tax rate would rise from 35 to 39.6 percent. This would collect an additional 0.5 percent of GDP. That’s a necessary start but by far not sufficient to close the budget deficit. To collect even more revenue, the top rate could be lifted above 39.6 percent, as it is in many European countries.
Even without raising the top rate above 39.6 percent, however, another 0.5 percent of GDP or so could be collected by closing a series of tax loopholes that now benefit the rich. For example, capital gains are currently taxed far below regular income, and the deficit commission called for capital gains taxes to be raised to the level of regular income (albeit with a drop in the tax rate of regular income). Mortgage interest is tax-deductible even for mansions and second homes. This deduction could be restricted to a single residence, with a cap on the size of the tax-deductible