The new lending way

The new lending way
By Robert Reich
Marketplace, Wednesday, May 18, 2011

Understanding the U.S budget means taking a look at a change in the way the government is financed

Robert Reich: Forty years ago, wealthy Americans financed the U.S. government mainly through their tax payments. Today wealthy Americans finance the government mainly by lending it money. While foreigners own most of our national debt, more than 40 percent is owned by Americans -- mostly the very wealthy.

This huge structural change in how America's rich finance government -- from paying taxes to lending money -- has gone almost unnoticed. But it's critical for understanding the budget predicament we're now in.

Over that four decades, tax rates on the very rich have dropped. Between the end of World War II and 1980, the top tax rate remained more than 70 percent -- and even after deductions and credits was well over 50 percent. Capital gains rates were also higher than today.

Not only are rates lower now, but loopholes are bigger. Eighteen thousand households earning more than a half-million dollars last year paid no income taxes at all. In recent years, according to the IRS, the richest 400 Americans have paid only 18 percent of their total incomes in federal income taxes.

Meanwhile, more and more of the nation's income and wealth have gone to the top. We haven't had such a concentration of money at the top since the Gilded Age of the late 19th century.

America's super rich invest their savings all over the world, wherever they can get the best return for any given level of risk. Treasury bills -- essentially loans to the U.S. government -- have proven good and safe investments, particularly during these last few tumultuous years.

You hear a lot of worries about foreigners dumping Treasuries if they lose confidence in the dollar because of our future budget deficits. What you hear less about are these super-rich Americans, who are just as likely to abandon Treasuries if spooked by future budget deficits.

The great irony is if America's super rich financed the U.S. government the way they used to -- by paying taxes rather than lending the government money -- that long-term budget deficit would be far lower.