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OpinionColumnistsPeter Goldmark

Goldmark: Tweak tax code for high earners to help middle class

"One way to get some of that money back for those whose share of the pie is shrinking is to tax higher incomes more and reduce the relative tax burden on the middle class proportionately," writes Peter Goldmark. Photo Credit: Jennifer Kohnke / Tribune Media Services

The airwaves are filled with election posturing about taxes, who's carrying their fair share and who's not, who's better off and who's not. The vice presidential candidates gave their standard lines about it all on Thursday night.

Campaign broadsides churn up some waves on the surface, but they don't cut down to where the powerful, longer-term currents operate. So let's dive a little deeper and look at some of the less visible forces determining who wins and loses in our economy today.

There's a big word that's used to describe the transformation of traditional economic activity into financial instruments and transactions: financialization.

Three trends in financialization affect us all: The first is growth in the size and profits of the financial sector; the second is the proliferation of complex financial instruments, many of which simply represent side bets on how someone else's investment will perform; and the third is the increase in salaries and bonuses for business executives generally, and financial sector executives in particular, and the impact this has on the holdings and retirement savings of average Americans.

First, the growth of the financial sector: In the United States, its size as a percentage of gross domestic product has grown from around 2 percent in 1950 to about 8 percent today, exceeding its proportional size the last time it mushroomed, just before the crash in 1929, when it reached around 6 percent.

Second, consider the headlong growth in complex financial instruments. Over the past 35 years, when nominal global GDP grew about seven times, the volume of foreign exchange trading went up more than 200 times, a lot of it in hedges and derivatives. During that period, oil futures soared from roughly the value of the actual oil traded, to 10 times that amount. In other words, for every dollar of "real" oil that's traded, $10 are now bet on how oil prices -- or bets made by others on oil prices -- will perform.

Critics say the spread of sophisticated instruments, which even most investors and regulators don't fully understand, amounts to dangerous speculation, even manipulation. They're more akin to what goes on in a casino than to a market based on products and services. And the small shareholder rarely wins.

The third issue -- whether all this has been good for the modest shareholder or retirement plan -- begins with a look at how corporate profits are derived. As they say in whodunits, follow the cash. Once a company's operating costs, including debt service and taxes, are covered, there are three main buckets for the remaining earnings: dividends to shareholders, bonuses to executives, and profit that stays in the company.

Executive pay, particularly bonuses, has gone up sharply over the past two decades, especially in the financial sector. And the more money that a company pays out in bonuses, the less it has available for shareholders. This means that the average working American with a retirement or 401(k) plan is getting a smaller share of the pie, while corporate executives get more. The trend contributes to the rich getting richer, accelerates the growing inequality gap, and makes it harder to finance retirement -- whether through a pension plan or an individual savings plan.

One way to get some of that money back for those whose share of the pie is shrinking is to tax higher incomes more and reduce the relative tax burden on the middle class proportionately. An interesting variation on that would be capping the corporate tax deduction for executive bonuses at, say, five times the salary of the average employee -- thus at least treating exorbitant executive bonuses the same as dividends to shareholders, which are not deductible.

But to do all this, of course, we'll first have to get over our mad delusion that taxing millionaires fairly and giving the little guy a break is somehow bad for the economy.

Peter Goldmark, a former budget director of New York State and former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund.