America has become a three-class society. While more than 25 percent of its children now graduate from four-year colleges, the lowest 20 percent inhabit a world of low wages and dead-end jobs.
And then there is the vast middle. Despite the economic boom, real wages for men have declined, and only the massive entry by women into the workplace has prevented many families from sinking to income levels lower than in the 1970s. Trickle-down economics has failed to trickle. Globalization will only make these divisions worse.
Our politics has not caught up with this three-class reality. While the college-bound elite reap large subsidies, we have done little to aid the vast middle--and we target the underclass with diminishing amounts of assistance.
The result is simmering resentment and a receptive audience for the protectionist nostrums of Ross Perot and Pat Buchanan. The current boom may hold these economic nationalists in check--while it lasts. But it is past time to search for a more constructive response to economic inequality. How can we use the benefits of globalization to ensure that every American gets a fair start in life?
One way is to give every young American adult a stake of $80,000 as a birthright of citizenship. The stake should be financed by an annual wealth tax, equal to 2 percent of every individual's wealth in excess of $180,000. Under this "flat tax," the wealthiest 1 percent of Americans will pay 40 percent of the entire bill. (This proposal, as spelled out in our book The Stakeholder Society, includes an $80,000 exemption for each taxpayer, but this is on the basis of data for 1995 collected by the Federal Reserve Board at a time when the Dow was at 4,500. In January 2000, the Fed released 1998 data, which we have begun to analyze. Preliminary estimates suggest that an exemption of $180,000 will be fiscally responsible.)
Stakeholders should be free to use their money for any purpose they see fit: to start a business or pay for higher education; to buy a house or raise a family or save for the future. Their triumphs and blunders will be their own.
At the end of their lives, stakeholders should repay the $80,000 at death if this is financially possible. The stakeholding fund, in short, will be enriched each year by the ongoing contributions of the wealthy and by a final payback at death.
Stakeholding's broad political appeal should be clear. How many young adults start off life with $80,000? How many parents can afford to give their children that kind of head start?
Stakeholding liberates college graduates from the burden of debt and offers unprecedented opportunities for the tens of millions who don't go to college. For the first time, high school graduates lacking a college degree will confront the labor market with a certain sense of security. The stake will give them the independence to choose where to live, whether to marry, and how to train for economic opportunity. Some will fail, but fewer than today.
We should structure the program to maximize the successes. No stakeholder should be allowed free use of his $80,000 without completing high school and passing a state or national qualifying examination. High school dropouts will have their stakes held in trust, spending only the $4,000 or so in annual interest. Since only three-quarters of Americans have high school degrees by the age of 21, this single requirement will prevent massive "stakeblowing" by those least capable of handling adult responsibilities. It will also provide a beacon of hope to kids locked in rural poverty or urban ghettos. Stay in school and graduate, and you will get a solid chance to live out the American dream of economic independence.
Timing is crucial. High school graduates should get immediate access to their money if they want to spend their $80,000 on college. But those choosing other paths should get some real-world experience before they can obtain their stakes--in $20,000 annual payments between the ages of 21 and 24.
The result will change the way young people think about themselves, their options, and their obligations to society. Begin with the college-bound. Poor kids confront hardships unknown to their better-off peers--juggling schoolwork, jobs, and scholarship applications in ways that overwhelm self-confidence. Students in two-year colleges are even harder-pressed: A much higher percentage live at home, hold a job, and work more hours. It should be no surprise that lower-class kids are much more likely to delay enrollment, and less likely to earn a degree, than their richer peers: 51 percent of students from families in the top income quartile earn bachelor's degrees, compared to 22 percent of middle-status students and only 7 percent in the lowest socioeconomic quartile. Stakeholding will allow all men and women to focus their energies on academic work and compete with their peers on relatively equal terms.
Stakeholding will also inaugurate a new era of healthy competition in higher education. Every student will enter the market with significant resources and an incentive to shop carefully. No longer will state universities or community colleges have a captive pool of in-state or low-income students without other options. These people could now choose a school in another community, or across the country, or even overseas.
The prospect of stakeholding might initially tempt colleges to raise tuition, but competition among schools should keep increases down. And because colleges must compete with other uses of the stakeholding dollar--like home buying and entrepreneurship--the academic sector as a whole cannot hope to capture the stakeholding program as it might a more conventional education subsidy.
At present, two-year junior colleges provide much smaller subsidies to their students than do more traditional universities. But under the new system, students at two-year colleges will have the same buying power as their more academically inclined age-mates. To be sure, they won't spend their entire $80,000 on a couple of years of post-high school education. But their stakes will create new incentives for serious two-year colleges to craft programs that will appeal to these students' distinctive concerns. Over time, two-year colleges will emerge from the shadow of their bigger brothers and build their students' skills and selfconfidence with increasing imagination and vigor.
Finally, consider the millions of Americans who decide that even a two-year college isn't for them. These are today's forgotten Americans. Many of them have been denied the decent high school education that should be a fundamental right. They are then tossed unaided into the marketplace, while their upwardly mobile peers win federal scholarships and state-subsidized tuitions.
This is just plain wrong. Jane Worker is every bit as much of an American as Joe College. Under the stakeholding system, her claim to equal citizenship will be treated with genuine respect. High school graduates not going to college will have to wait until their early 20s before staking their claim to $80,000. Indeed, some may want to require these young adults to wait until they are 25. We would be happy to compromise, so long as the basic principle remains intact. All Americans have a fundamental right to start off as adults with a fair chance at making a decent life for themselves.
Of course, some people face multiple social problems--inadequate education, drug or alcohol abuse, a propensity to violence--that will leave them ill-equipped to handle financial responsibility for their stake. But by any reasonable estimate, this constitutes less than 1 percent of the population, almost all of whom will be excluded from full control of their stake by the requirement of high school graduation.
We also propose a cautious use of stakeholding as a sanction in the criminal-justice system. Instead of sentencing 19-year-old drug traffickers to lengthy prison terms, we could threaten them with the loss of $20,000 (or more) of their stakes. No longer will high school dropouts taunt their age-mates with luxury cars and expensive clothes. Kids will learn fast that civil behavior and a high school degree provide the sure track to a real stake in America.
To a very large degree, the institutional infrastructure for a stakeholder society is already in place. Despite efforts to demonize them, both the IRS and the Social Security Administration are full of competent professionals whose tasks might readily be broadened to encompass the jobs of identifying eligible stakeholders and paying out benefits. Unlike a comparable reform of, say, education, stakeholding builds on institutions we already have.
Equal opportunity doesn't come cheap. Using conservative assumptions, the annual cost of stakeholding today would be about $255 billion--a little less than we spend on national defense. This is a big number, but we have made comparable commitments in the past: After World War II, wealthy taxpayers were a lot poorer than they are today, and they were paying far heavier taxes--yet they did not seek to evade their obligation to give the rising generation a fair start in adult life in the form of the GI Bill of Rights.
The GI Bill represented the payment of a debt for the sacrifices that our soldiers made during the war. Today the ties that bind older to younger are less obvious--but no less important. If the younger generation is denied a fair start, how can the rest of us expect its members to reciprocate as the need requires?
For the rest of their lives, stakeholders will know that their $80,000 contributed to their individual pursuits of happiness. This will prompt a deeper loyalty to the country. The Declaration of Independence's promise of equality and freedom will take on a new meaning, encouraging stakeholders to take their responsibilities as citizens more seriously and make America a better place for their successors.
But isn't stakeholding a political pipe dream? If we can't even expand medical coverage to embrace the tens of millions of the uninsured, can we possibly enact a program that carries a quarter-trillion-dollar annual price tag?
Yes, because stakeholding strikes at the heart of the problem that has pushed progressives to the margin of American politics. Republicans have for years succeeded in portraying liberal Democrats as concerned only with the fate of the bottom 20 percent, and not with the large number of folks who have graduated from high school but have failed to share in the great prosperity gained by successful college graduates. Unless and until we come up with a big policy initiative that speaks to middle America, Reagan Democrats will continue to react skeptically to liberal initiatives. Why should economically pressed middle-class families fork over their hard-earned tax dollars to help those below them?
Stakeholding decisively changes this political equation in a way that makes sense to average voters. Most people quickly turn off the tube when earnest liberal politicians sing the praises of the EITC (Earned Income Tax Credit) or some other technocratic acronym; the average voter assumes that he or she is about to be taken for a chump. But $80,000 for each kid--that would make voters sit up and take notice!
The average couple of 40-year-olds, blessed with two children of 10 and 12, know realistically that they won't likely be able to give their kids a stake of $80,000 apiece for college in a decade or so. But if a national stakeholding policy were to be implemented, they wouldn't have to; their kids would be able to pay for college on their own. Yes, these two 40-year-olds may retire in 30 years with more than $360,000, in which case they would have to pay a small wealth tax. But wouldn't most parents consider this future tax worth the chance to give their kids a solid start in life?
Obviously, the calculus will look a lot different to older Americans. Though we have exempted all Social Security payments from our wealth tax, the economically successful will be facing a new tax bill. But we hope that not everybody's position will be determined by a narrow economic calculus focusing on self and family. As in all political exercises, each voter will come to judgment after filtering self-interest through a sense of civic obligation. Some will vote against stakeholding even though their kids might profit mightily--simply because they think it's an awful idea. And vice versa.
But, you may ask, won't the wealth tax be an alien concept to most citizens? While the idea may be new to Americans, they already pay taxes on capital gains and real estate. It is only one step further to a wealth tax, which has been a long-standing feature of European systems. Taking a broader perspective, our overall proposal falls squarely within the American tradition that gave us the Homestead Act in the nineteenth century and the GI Bill in the twentieth.
It also builds on recent initiatives throughout the world. When Margaret Thatcher became prime minister of England, 32 percent of all English housing was publicly owned. Though bent on sweeping privatization, Thatcher refused to sell these vast properties to big companies. Instead, she invited residents to buy their own homes at bargain rates. With a single stroke, she created a new property-owning citizenry and won vast popularity in the process.
In the aftermath of 1989 in the Czech Republic, former Prime Minister Vaclav Klaus confronted a state sector containing 7,000 medium- and large-scale enterprises, and 25,000 to 35,000 smaller ones. How to distribute this legacy of communism?
Klaus saw his problem as an opportunity to create a vast new property-owning class. Through "voucher privatization," each Czech citizen was encouraged to subscribe to a book of vouchers that could be used to bid for shares in state companies as they were put on the auction block. An overwhelming majority--8.5 out of 10.5 million--took up Klaus's offer and claimed their fair share of the nation's wealth as they moved into the new free market system.
The citizens of Alaska have made stakeholding a regular part of their political economy. The original occasion, as in England and the Czech Republic, was the distribution of a major public asset, the revenues from North Slope oil. Rather than using it all for public expenditures, the Republican leadership in the state designed a stakeholding scheme that is now distributing about a $1,000 a year to every Alaskan citizen. The system has become broadly popular, with politicians of both parties regularly pledging that they will not raid the symbolically named Permanent Fund.
In our view, there is no good reason to limit stakeholding to cases involving physical assets like housing or factories or oil. Americans have created other assets that are less material but have even greater value. Most notably, the "free market" requires heavy public expenditures on police, courts, and much else besides. Without billions of voluntary decisions by Americans to respect the rights of property in their daily lives, the system would collapse overnight.
All Americans benefit from this cooperative activity--but some much more than others. Those who benefit the most have a duty to share some of their wealth with fellow citizens whose cooperation they require to sustain the market system. This obligation is all the more exigent when the operation of the global market threatens to split the country more sharply into haves and have-nots.
This moral judgment gives our proposal a different ideological coloration than that of the more conservative initiatives pioneered by Margaret Thatcher and Vaclav Klaus. Nonetheless, their example suggests that the first progressive politician who takes up stakeholding would find herself appealing to the very concrete interests of a massive majority of Americans. Stakeholding would also give the lie to neoconservative banalities about the inevitability of government failure and help re-establish a faith in our collective capacity to redeem our fundamental ideals. Of course, the fate of our proposal will depend not only on the vision of the political leader who seizes the moment, but on how ordinary men and women answer some basic questions: Is America more than a libertarian marketplace? Can we make this a place where all citizens have a fair shot at the pursuit of happiness? ¤