On fiscal policy, USC professor’s viewpoint is moral and farsighted

“The left sees me as a Wall Street Journal Satanist, and the right as a stealth Marxian bent on destroying free enterprise,� Edward D. Kleinbard was saying.

The USC law professor was referring to the reactions elicited by his recent op-ed in the New York Times, in which he asserted that the solution to economic inequality in the U.S. was not to make the tax system more progressive — it’s already “the most progressive in the developed world,� he wrote — but to make it bigger.

As he explained when we met last week at USC’s Gould School of Law, where he has taught tax law since 2009, that would render the entire fiscal system more progressive, because it would fund more spending. Government spending is always progressive, benefiting middle- and lower-income people more than the wealthy. So: If you want to reduce inequality, expanding government is more effective than merely increasing the relative burden on the rich.

One can see why left and right alike felt that their shibboleths were being skewered.

But Kleinbard’s viewpoint is both moral and farsighted. It’s also an important theme of his newly published book, “We Are Better Than This: How Government Should Spend Our Money.�

“Fiscal policy is an exercise in applied moral philosophy as well as economics,� he says. “The economics of taxation is quite straightforward. What’s difficult is figuring out what values we are trying to articulate; spending is how we articulate those shared values.�

Because our national fiscal debate focuses on taxation rather than spending, Kleinbard says, we’re debating the wrong question. “We ask how much pain we want to inflict on ourselves, and the answer is always ‘not very much.’ The question should be what useful things can we do together by way of investment and insurance to enhance our lives — and how much of that can we afford?�

His answer is that we can afford much more than we spend today. That’s because the return from government outlay is excellent, yet almost always ignored when the dollars and cents of fiscal policy are under discussion. That’s a victory for anti-spending conservatives, who have managed to define almost all government outlays as “spending� rather than “investment.�

Kleinbard, 62, is intimately knowledgeable about all these issues. After three decades in private law practice, he became chief of staff to the Congressional Joint Committee on Taxation in 2007. Since moving to USC, he has appeared frequently before government committees and in news columns, including this one, as an expert on tax shelters (like Mitt Romney’s), the contemptible corporate tax dodge known as inversions, and inequality.

Kleinbard’s ability to make the complexities of fiscal policy comprehensible permeates “We Are Better Than This.� So does his impatience, even anger, with the partisan sophistry that passes for much of fiscal and economic discussion in Washington. That’s clear from the very title of his book, as well as chapter headings identifying inequality apologists as “Defenders, Deniers, and Dissemblers,� or providing “A Field Guide to False Fiscal Crises.�

Kleinbard devotes many pages in the book to dismantling the work of inequality apologists among economics and law professors, such as Harvard’s N. Gregory Mankiw and NYU’s Richard Epstein.

Epstein adheres to the view that the wealth of the top 1% is irrelevant to the fortunes of everyone else. “We should be pleased by increases in income at the top,� he has written, as long as they’re not “taking from individuals at the bottom.�

Kleinbard responds that in a real sense the 1% are taking from the working and middle classes. “Housing, education, and medical care are all instances where the buying habits of the most affluent Americans crowd out those on the next rung down, and so forth,� he writes. “That’s why homes in the best school districts are priced out of reach of the middle class, just as college tuition has soared beyond their capacity to pay.�

Kleinbard likens inequality apologists to courtiers telling their rich patrons what they want to hear. His years of serving affluent clients in private practice taught him that they genuinely believe they deserve their wealth.

“They thought that money was naturally attracted to them because of their special qualities,� he told me. “They would take better care of it and nurture it, and you would no more turn a baby out on a snowy slope than you would let these poor dollars into the hands of the unwashed masses.�

Reliance on the tax code to remedy economic imbalance has become the acid test of progressivism, Kleinbard observes, accurately. The top marginal rate has plummeted over the last 30 years from 50% to 39.6%. But restoring top rates to, say, 70%, as is suggested by some academics, “would be, well, a wholly academic exercise,� he wrote in his op-ed. As fiscal policy battles of the recent past demonstrate, political resistance from the influential class would be ferocious.

Instead of this politically untenable solution, Kleinbard recommends two alternatives. One is to increase the income tax, in part by restoring all pre-2001 tax rates and restoring the estate tax, which is now 40% with an inflation-indexed exemption of nearly $11 million per couple, to the 2009 rate of 45% after a couple’s exemption of an inflation-indexed $7 million.

Kleinbard also recommends capping the standard and itemized deductions, to wipe out the advantages captured by wealthier taxpayers through such breaks as the mortgage interest deduction, which he calls inefficient, inequitable and poorly targeted. (He would keep well-targeted tax expenditures such as the earned income tax credit aimed at low-income workers with families.)

But what really levels the economic playing field, he argues, is government investment. Leaving infrastructure spending to the private sector eliminates the broad social returns of such spending, Kleinbard says. Public investment, he writes in his book, provides “remunerative and dignified work for large numbers of Americans who are not destined to be software engineers.� It’s a triple benefit: investment in roads, bridges, dams, and air- and seaports yields long-term economic efficiencies; workers earn income; and their spending that income reverberates through the economy.

The private sector can’t provide substitutes for those second-order benefits. “Which is better for both the wealth and the happiness of our nation,� Kleinbard asks: “A small number of immensely wealthy Americans employing the underclass as dog walkers and topiary trimmers, or a larger commitment to publicly financed infrastructure that yields both productivity enhancements and a more robust middle class?�

The question is rhetorical, because the answer is inescapable. Yet the U.S. has lost its grasp on this logic. “Wherever one looks at current mega-projects around the world,� Kleinbard writes, “what is most striking is the absence of American undertakings. The richest large country in the world is beggaring its own future by decades of systematic underinvestment.... The investment opportunities are all around all of us, wherever in the United States we live.�

Ed Kleinbard’s book presents a challenge and a reproach to the America of recent decades; it’s time the challenge was met.

Michael Hiltzik’s column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at [email protected], check out facebook.com/hiltzik and follow @hiltzikm on Twitter.