The Stakeholder Society

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The Stakeholder Society

Bruce Ackerman
Anne Alstott

Yale University Press

New Haven & London
Copyright © 1999 by Yale University.
All rights reserved.
This book may not be reproduced, in whole
or in part, including illustrations, in any form
(beyond that copying permitted by Sections
107 and 108 of the U.S. Copyright Law and
except by reviewers for the public press),
without written permission from the
publishers.

Ackerman, Bruce A.
The stakeholder society / Bruce
Ackerman, Anne Alstott.
p. cm.
Includes bibliographical references and
index.
ISBN 978-0-300-07826-8 (alk. paper)
1. Income distribution. 2. Social justice.
3. Welfare economics. 4. Taxation. 5. Tax
incidence. 6. Wealth. I. Alstott, Anne,
1963- .II. Title.
HB523.A27 1999
658.4'08-<lc21 98-31559
ISBN 978-0-300-08260-9 (pbk.: alk. paper)
A catalogue record for this book is available
from the British Library.

The paper in this book meets the guidelines

for permanence and durability of the Com-
mittee on Production Guidelines for Book
Longevity of the Council on Library
Resources.
Printed in the United States of America
109 8 7 6 5 4 3 2
For Susan

For Russ
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 Contents

Acknowledgments ix

Introduction
1 Your Stake in America 1

Part I The Basic Proposal

2 Citizen Stakeholding 21
3 The Stake in Context 45
4 Profiles in Freedom 65
5 Payback Time 77
6 Taxing Wealth 94
7 The Limits of Growth—and Other
Objections 113

vii
I viii Contents

Part II Expanding the Stake

8 From Worker to Citizen 129
9 Taxing Privilege 155

Part III Defending the Stake

10 Ideals 181
11 Alternatives 197

Appendix: Funding the Stakeholder Society 219

Notes 231
Bibliography 275
Index 289
 Acknowledgments

This book has grown through countless conversations with colleagues

at Yale University and beyond. For better or worse, we would never
have reached our conclusions without the prod of these (seemingly
endless) challenges.
Looking backward, we find that it is impossible for us to recall
every helpful contribution. But we must mark some high points. After
we finished our first draft, Robert Litan was good enough to invite us
down for a daylong workshop at the Brookings Institution in Wash-
ington, D.C. We are indebted to each of the scholars who prepared a
penetrating commentary on one or another of our early chapters:
Gaiy Burtless, Bill Gale, Kevin Hassett, Ned Phelps, Belle Sawhill,
and Gene Steuerle. This careful and comprehensive critique allowed
us to gain perspective on our project and rethink our argument from
the ground up.
Encouraged by our Brookings experience, we then took our manu-
script on a workshop tour. At Yale, we discussed our ideas at faculty
seminars in the departments of economics and psychology as well as

ix
I x Acknowledgments

in the law school. We took to the highway and presented the manu-
script at law school workshops at Columbia, Georgetown, and Har-
vard. This book has been greatly clarified by these encounters.
And then there were many one-on-one (or one-on-two) conversa-
tions and E-mails. The ones that particularly stick in our minds in-
volved Barry Adler, Matt Adler, Greg Alexander, Ian Ayres, Jack Balkin,
Ben Barber, R. Bhaskar, Boris Bittker, Patrick Crawford, Einer El-
hauge, Bob Ellickson, Heidi Feldman, Owen Fiss, Barbara Fried,
Herbert Cans, Beth Garrett, Michael Graetz, Amy Gutmann, Henry
Hansmann, Dan Kahan, Al Klevorick, Larry Lessig, Jerry Mashaw,
Glaus Offe, Ned Phelps, Andrezj Rapaczynski, Roberta Romano, Susan
Rose-Ackerman, Chuck Sabel, Peter Schuck, Vicki Schultz, Alan
Schwartz, Dan Shaviro, Reva Siegel, Reed Shuldiner, Bill Stuntz, Mark
Tushnet, Amy Wax, Jim Whitman, Allen Wood, Bill Young, Larry Ze-
lenak, and Eric Zolt.
Our students at the Yale Law School have been among our most
astute critics. They took the lead in dissecting The Stakeholder Soci-
ety in our seminar on tax policy and distributive justice. These discus-
sions led to many valuable changes. We are especially indebted to the
students who signed on as research assistants: Stacey Abrams, Liza
Goitein, Jessica Sager, Phil Spector, and Lucy Wood.
We were particularly fortunate in our collaboration with Mark Wil-
helm, then an assistant professor in the economics department at
Pennsylvania State University and now at Indiana University-Purdue
University at Indianapolis. Mark had already done substantial work
with the crucial data sets, and he brought this experience to bear in
simulating the revenue and distributional effects of our wealth tax.
Marks careful empirical work helped us bring our wealth tax proposal
further into the real world. He did an outstanding job, and we are very
grateful to him.
We were also lucky enough to call upon research assistance from
two students formally trained in economics. Sarah Senesky, a Ph.D.
 Acknowledgments xi 1

student in the economics department at Yale, did an admirable job in

producing a very useful study of childhood privilege. And Kristin
Madison, a Ph.D. student in Stanford University's economics depart-
ment as well as at the Yale Law School, prepared a careful study of the
present value of social insurance entitlements.
Special thanks also go to Philippe Van Parijs, who, in the spring of
1998, spent hours reading our drafts, attending our classes, and dis-
cussing the finer points of liberalism over some memorable lunches.
Dean Anthony Kronman of the Yale Law School gave us generous
financial support as well as unflagging intellectual encouragement.
Gene Coakley in the Yale Law Library worked tirelessly to find the
voluminous research materials that we requested. Without his help,
this book would have taken far longer to complete. Jill Tobey and
Diane Hart provided excellent administrative assistance as we con-
ducted research and put together draft after draft.
And last, but never least, John Covell, our editor at Yale University
Press, believed in this book from the beginning. We are deeply grate-
ful for his sustained support.
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Introduction
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 1

Your Stake in America

Americans have always had an uncertain love affair with equal oppor-
tunity. We believe in it, we know it really doesn't exist in today s world,
and yet we have learned to live comfortably in the gap between ideal
and reality. After all, aren't all ideals elusive?
Perhaps unequal opportunity was easier to accept when a booming
economy guaranteed that children from every class did better than
their parents. Even if lower-class kids still ended up near the bottom,
they had a sense of participating in the general upward movement.
But those halcyon days are over.1 Although the economy as a whole
continues to prosper, the last generation s vast increase in wealth has
utterly failed to "trickle down" to the overwhelming majority of Amer-
icans. The indisputable fact is that almost all our newfound abundance
has gone to the top 20 percent.2
The statistics on income and wages are no less grim. Since the early
1970s, the average family's income has grown little, and the typical
male worker has seen his real wages decline. Only the entry of vast
numbers of women into the labor force has produced meager gains in

1
I 2 Your Stake in America

median family income.3 In contrast, real wages for college graduates

have continued to go up.4 By the mid-1990s, the top 5 percent of
American families received 20 percent of total income—a larger share
than at any time since 1947.5
These economic disparities are profoundly shaping the future of
the next generation. Rich kids get a big head start in life—they go to
the best schools, the best colleges, get generous financial help from
Mom and Dad, and eventually receive a tidy inheritance. But things
look different at the bottom, where an increasing proportion of chil-
dren live out their early years. In 1996, children represented 40 per-
cent of all Americans living below the poverty line—but only
one-quarter of the total population.6 We are reaching the point of no
return: it is one thing to tolerate a gap between ideals and reality, quite
another to allow the ideal to disappear from our moral horizon. Do
Americans believe in equal opportunity anymore?
There is only one way to find out, and that is by offering a range
of serious proposals that might revitalize our collective commitment.
In this neoconservative age, it is all too easy to assert that nothing
practical can be done. Isn't increasing inequality the price we pay for
progress?
Our answer is no. If America drifts away from the promise of equal
opportunity, it is not because practical steps are unavailable, but be-
cause we have lost our way.
In developing our vision of the stakeholder society, we also chal-
lenge some familiar platitudes of the Left. Instead of focusing on
the widening economic gap, American liberals have been increasingly
preoccupied with the politics of identity. Insofar as economics has
been important, the focus has been on assuring equal opportunity in
the workplace. This is a fine goal, but it is not enough. Nor is it enough
to redeem the faded promise of Brown v. Board of Education and
seek new ways of providing a more equal education to all. We must
 Your Stake in America 3I

also recognize that increasing inequality of wealth is endangering our

sense of community.
We offer a practical plan for reaffirming the reality of a common
citizenship. As each American reaches maturity, he or she will be guar-
anteed a stake of eighty thousand dollars. Our plan seeks justice by
rooting it in capitalisms preeminent value: the importance of private
property. It points the way to a society that is more democratic, more
productive, and more free. Bear with us, and you will see how
a single innovation once proposed by Tom Paine can achieve what
a thousand lesser policies have failed to accomplish. Through stake-
holding, Americans can win a renewed sense that they do indeed live
in a land of equal opportunity, where all have a fair chance.

Our vision of economic citizenship is rooted in the classical liberal

tradition. It is up to each citizen—not the government—to decide how
she will use her fair share of the nation s patrimony. By putting this
ideal of free and equal citizenship at the center of our political econ-
omy, we challenge two master themes that have dominated discussion
throughout the twentieth century.
The first theme is the maximization of social welfare. This goal pro-
vides a ready argument for progressive taxation. Because a marginal
dollar is worth more to the poor than to the rich, government should
tax the rich at higher rates. The same logic implies a safety net for
those whose incomes fall below a minimally decent floor. But these
progressive tendencies are held in check by a final factor. Excessive re-
distribution reduces incentives for production and growth. The big
tradeoff, then, is between more equality and more wealth to share.7
This familiar conclusion is challenged by a second, and recently
resurgent, theme. It proceeds from a libertarian model of society: the
government does not "own" society's wealth and therefore has no right
to redistribute it. Taxes should be low and welfare spending minimal.
I 4 Your Stake in America

People have an equal right to exploit the opportunities that come their
way. Freedom comes first, and whenever taxes go up, individual free-
dom goes down.
We mean to define a third way. Like libertarians, we emphasize
each person s right to make the most of his or her opportunities. But
we deny that the "invisible hand" distributes these opportunities in a
morally defensible way. Like welfarists, we believe in social responsi-
bility. But for us, the central task of government is to guarantee gen-
uine equality of opportunity. Americans who begin life with greater
opportunities cannot complain when their tax dollars go toward ex-
panding the life-options of the less privileged. Such a program redis-
tributes opportunities more fairly, permitting all citizens to begin life
on a level playing field.
Our proposal for a stakeholder society takes one large step toward
this ideal. The program we describe is very different from the status
quo, yet it is both realistic and politically attractive. Our reforms are
unfamiliar because our goal challenges the existing mix of libertarian
and welfarist policies of American government. We hope to displace
the tired debate between supporters and critics of the welfare state
with a new question: How do we achieve genuinely equal opportunity
for all?
We reject the idea that there is an inexorable tradeoff between lib-
erty and equality. The stakeholder society promises more of both.

The Basic Proposal: Stakeholding and Its Responsibilities

As a citizen of the United States, each American is entitled to a stake

in his country: a one-time grant of eighty thousand dollars as he
reaches early adulthood. This stake will be financed by an annual 2
percent tax levied on all the nation s wealth. The tie between wealth-
holding and Stakeholding expresses a fundamental social responsibil-
 Your Stake in America 5I

ity. Every American has an obligation to contribute to a fair starting

point for all.
Stakeholders are free. They may use their money for any purpose
they choose: to start a business or pay for more education, to buy a house
or raise a family or save for the future. But they must take responsibil-
ity for their choices. Their triumphs and blunders are their own.
At the end of their lives, stakeholders have a special responsibility.
Because the eighty thousand dollars was central in starting them off in
life, it is only fair that they repay it at death if this is financially possi-
ble. The stakeholding fund, in short, is enriched each year by the on-
going contributions of all wealth-holders and by a final payback at
death.
There are many possible variations on the stakeholding theme. But
we have said enough to suggest the broad political appeal of equal op-
portunity. How many young adults start off life with eighty thousand
dollars? How many parents can afford to give their children the head
start that this implies?
Stakeholding liberates college graduates from the burdens of debt,
often with something to spare. It offers unprecedented opportunities
for the tens of millions who don't go to college and have often been
shortchanged by their high school educations. For the first time, they
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.

A Common Bond

Turn back the clock half a century and consider a very different Amer-
ica. For most citizens, World War II had marked a great collective
achievement for the nation. Both on the battlefront and on the home
I 6 Your Stake in America

front, men and women experienced a sense of genuine contribution to

a common enterprise of high moral importance. The military draft
created a strongly democratic ethos which endured in American life
long after the war was over. This sense of common enterprise was sus-
tained during the next era of economic growth—through the 1960s,
most Americans really did share in the growing abundance.8
But these bonds have unraveled over the past quarter-century. Cit-
izenship is now a largely formal exercise. Voting rights are important,
but confer no sense of individual efficacy. Guarantees against dis-
crimination in employment and the like are too thin to generate an
everyday sense of common commitment. With the top 20 percent ap-
propriating the lions share of the nations economic growth, most
Americans no longer share fully in the free enterprise system. If a
deep sense of national community is to endure, the next genera-
tion will require new institutions that express Americas enduring as-
pirations.
Consider the fate of the GI Bill of Rights, the last great initiative
that targeted young adults. First formulated after World War II, it was
designed to provide citizen-soldiers with the funds needed to go to
college, start a small business, or buy a home. While its direct benefits
went mostly to men, it shared the universalistic aspirations of stake-
holding, seeking to redeem America s promise of freedom in concrete
terms. But after half a century, the meaning of the GI Bill has changed
in the context of a professional military. It has become an employee
benefit, not an expression of common citizenship.
Conventional forms of worker protection cannot be expected to fill
this gap. Our current social security system reflects the traditional ideal
of lifelong employment at a decent wage, with a safety net for occa-
sional unemployment, catastrophic disability, and eventual retirement.
That is a pretty picture. But it is no longer a reality for most American
workers. The college-educated workforce is doing better than ever,
but the least-skilled workers face a labor market that promises high
 Your Stake in America 7I

unemployment and poverty-level wages.9 For this group, traditional

social insurance provides very little economic security. And the future
promises more of the same: free trade, global capital markets, and
technological change are likely to hold down blue-collar wages in the
United States.10 While it may be politically popular for pundits on the
Right to deny this fact, it is far more constructive to confront it. How
can we reconcile free trade and open markets with real equality of
opportunity?
Through stakeholding. Our initiative does not seek to reverse world
economic forces. It fully endorses the open economy and the great
wealth made possible by the worldwide division of labor. But it insists
that the American political community is strong enough to shape this
wealth for its own purposes. Is America more than a libertarian mar-
ketplace? Can we preserve a sense of ourselves as a nation of free and
equal citizens?
As young adults receive their stakes, they will have little doubt
about Americas answer to this question. As they come forward to
claim their eighty thousand dollars, each of Americas children will do
more than gain the ability to shape their individual destinies. They will
locate themselves in a much larger national project devoted to the
proposition that all men are created equal. By invoking this American
ideal in their own case, they link themselves not only to all others in
the past who have taken steps to realize this fundamental principle but
also to all those who will do so in the future.
To be sure, there are risks as well as rewards. Are twenty-some-
things really up to the task of responsible stakeholding? Can they be
trusted to invest the money wisely in themselves, their families, their
businesses, and their communities? Won't they fritter away the na-
tions patrimony on drugs and decadence?
We will be discussing ways to structure stakeholding to enhance the
prospect of responsible decision-making. For example, no citizen should
be allowed free use of his eighty thousand dollars without gaining a
I 8 Your Stake in America

high school diploma. Nor should he get all the money at once; the
stakeholding fund should provide payments of twenty thousand dollars
every year or two as citizens move through their early twenties. And so
forth.
But it is better to defer questions of program design for now and
consider more basic issues of principle.

Beyond the Welfare State

We are trying to break the hold of a familiar vision of the welfare state
in America. In this view, modern government has succeeded to the
traditional tasks of the church—tending to the old, the sick, the dis-
abled. Like the church, the welfare state is concerned with providing
the weak with a decent minimum.
Given this statement of the problem, debate centers on how mini-
mal the minimum should be. Even libertarians grudgingly concede
that some vulnerable Americans must be provided with some care
some of the time; welfarists push the minimum higher.
We reject the organizing premise of this unending argument. Our
primary focus is on the young and energetic, not the old and vulnera-
ble. Our primary values are freedom and equal opportunity, not de-
cency and minimum provision. We do not deny that old-fashioned
decency has a role to play, and we will try to define its place later on.11
For now, it is enough to see that stakeholding is intended not as "wel-
fare reform" but as an entirely new enterprise. Our first concern is not
with safety nets but with starting points; not with misfortune, but with
opportunity; not with welfare, but with economic citizenship.
From this vantage, it is hardly news that America only promises its
children the pursuit of happiness and does not guarantee them suc-
cess. But it is one thing to make a mess out of your life, quite another
never to have had a fair chance. The key question, then, is not whether
some stakeholders will fail to make good use of their stake. Some will
 Your Stake in America 9 I

fail, and in ways that they will come to regret bitterly. The question is
whether these predictable failures should serve ds a reason to deprive
tens of millions of others of their fair chance to pursue happiness.
We say no. Each individual citizen has a right to a fair share of the
patrimony left by preceding generations. This right should not be con-
tingent on how others use or misuse their stakes. In a free society, it is
inevitable that different stakeholders will put their resources to differ-
ent uses, with different results. Our goal is to transcend the welfare
state mentality, which sets conditions on the receipt of "aid." In a
stakeholding society, stakes are a matter of right, not a handout. The
diversity of individuals' life choices (and the predictable failure of
some) is no excuse for depriving each American of the wherewithal to
attempt her own pursuit of happiness.
Nor is it a reason to transform stakeholding into yet another exer-
cise in paternalistic social engineering. In our many conversations on
the subject, somebody invariably suggests the wisdom of restricting
the stake to a limited set of praiseworthy purposes—requiring each
citizen to gain bureaucratic approval before spending down his eighty
thousand dollars. Won't this allow us to redistribute wealth and make
sure the money is well spent?
This question bears the mark of the welfarist mindset. The point of
stakeholding is to liberate each citizen from government, not to create
an excuse for a vast new bureaucracy intervening in our lives. If stake-
holders want advice, they can buy it on the market. If people in their
twenties can't be treated as adults, when will they be old enough?
Admittedly, there will always be some Americans who are pro-
foundly unequal to the challenges of freedom. It would be silly to sup-
pose that victims of profound mental disability were capable of
managing their eighty thousand dollars on their own. More controver-
sially, we would also deny full control over their stakes to Americans
who cannot demonstrate the self-discipline needed to graduate from
high school. We agree, alas, that more traditional forms of bureau-
I 10 Your Stake in America

cratic control may be needed to deal sensibly with these tough cases.
But we refuse to allow trendy talk of "underclass" pathologies to divert
our attention from another and equally pressing problem. Quite sim-
ply, there are tens of millions of ordinary Americans who are perfectly
capable of responsible decision-making in a stakeholding society but
are now becoming the forgotten citizens of our globalizing economy.
We are speaking of the ordinary Joe or Jane who graduates from
high school or maybe a two-year college and who then confronts an in-
creasingly harsh labor market. For this enormous group, stakeholding
will provide a priceless buffer against the predictable shocks of the
marketplace. A temporary economic setback will no longer quickly
spiral into a devastating loss of self-confidence or a grim period of de-
privation. The stake will provide a cushion in hard times and a source
of entrepreneurial energy in better ones.
In emphasizing these ordinary Americans, we do not wish to belit-
tle the importance of stakeholding for those at the top and the bottom
of our economic hierarchy. For the top quarter of the population,
those graduating from four-year colleges, stakeholding will not only
eliminate the crushing burden of student loans. It will also inject
much-needed competition among universities for the stakeholding
dollar, generating a more responsive and effective system of higher ed-
ucation. For those growing up in the ghettos of America, stakeholding
will provide a beacon of hope: stay in school and graduate, and you will
not be forgotten. You will get a solid chance to live out the American
dream of economic independence.
But stakeholdings message will have a special salience to the broad
middle group of Americans, who constitute about two-thirds of the
entire population. After all, existing governmental programs already
heap large educational subsidies on those who can successfully nego-
tiate the challenges of four-year college; even in todays conservative
climate, we have not entirely given up on special programs that ad-
dress the needs of ghetto youth. But at present, ordinary Americans
 Your Stake in America 11 1

really are forgotten Americans. After they leave school, they confront
the market without much to fall back on. Whilg stakeholding offers
economic independence for all, its promise will have special meaning
to middle America—which should rally to its support once it has been
persuaded that government can be made to work again for ordinary
people.
This leads us to our larger political objectives. We propose to revi-
talize a very old republican tradition that links property and citizenship
into an indissoluble whole. In earlier times, this linkage was often used
for exclusionary purposes.12 In colonial America, for example, suffrage
and office-holding were often restricted to those with substantial prop-
erty. But during the nineteenth centuiy, a serious effort was made to
reverse the linkage. Most famously, the Homestead Act refused to
offer up Americas vast resources to the highest bidders, but encour-
aged citizens to stake their claims for a fair share of the common
wealth. During Reconstruction, Radical Republicans led a spirited
campaign to couple the Fourteenth Amendments grant of citizenship
to black Americans with a stake cawed out of rebel property.
This campaign failed, and the closing of the frontier heralded an in-
creasing split between property and citizenship in American thought
and practice. Even those genuinely concerned with economic dignity
looked elsewhere: socialists would settle for nothing less than the abo-
lition of private property itself; more moderate reformers aimed to
build a strong state apparatus capable of regulating the capitalist sys-
tem. Now that we have had experience with the limitations of both
these experiments, isn't it time to consider another path?
We do not join those who would cheerfully sweep away the legisla-
tive achievements of the Progressives, the New Deal, and the Great
Society. Many of these reforms have withstood the test of time, and
others merely require adaptations and refinements. But if we are to
confront the emerging problems of our own age, we must once again
attempt a fundamental redefinition of the progressive vision. Rather
I 12 Your Stake in America

than abolishing private property or regulating it more intensely, we

should be redistributing it.
This is the time to make economic citizenship a central part of the
American agenda. The task is to enable all Americans to enjoy the
promise of economic freedom that our existing property system now
offers to an increasingly concentrated elite.

Experiments in Stakeholding

Stakeholding is a simple idea, and one whose time has come. This
seems to be the assessment of some astute politicians who have gained
great followings through initiatives that bear a family resemblance to
our proposal. Margaret Thatcher is a case in point. When she became
prime minister of Great Britain in 1979, 32 percent of all housing was
publicly owned. Although bent on sweeping privatization, Thatcher
refused to sell off these vast properties to big companies. She invited
residents to buy their own homes at bargain rates. With a single stroke,
she created a new property-owning citizenry, and she won vast popu-
larity in the process.13
A more sweeping initiative took place in the Czech Republic in the
aftermath of the Communist overthrow of 1989. The prime minister
elected in 1992, Vaclav Klaus, confronted a much larger task than
Thatchers: the state sector contained seven thousand medium and
large-scale enterprises, twenty-five to thirty-five thousand smaller ones.
How to distribute this legacy of Communism? Klaus saw his problem
as an opportunity to create a vast new property-owning class of Czech
citizens.
The mechanism was the ingenious technique of "voucher privatiza-
tion/* Each Czech citizen could subscribe to a book of vouchers that
he could use to bid for shares in state companies as they were put on
the auction block. An overwhelming majority—8.5 out of 10.5 mil-
lion—took up Klaus's offer and claimed their fair share of the nation's
 Your Stake in America 13 I

wealth as they moved into the new free-market system. Klauss cre-
ative program helped cement his position as the leading politician of
the Republic. More importantly, the broad involvement of citizen-
stakeholders played a central role in legitimating the country's transi-
tion to liberal democracy.14
Thatcher and Klaus conceived of their initiatives as one-shot affairs.
But the citizens of Alaska have made stakeholding a regular part of
their political economy. Once again, the occasion was the distribution
of a major public asset, in this case the revenues from North Slope oil.
Rather than using it all for public expenditures, the Republican lead-
ership designed a stakeholding scheme that is now distributing about
one thousand dollars a year to every Alaskan citizen. Once again, the
system has become broadly popular, with politicians of both parties
regularly pledging that they will not raid the symbolically named Per-
manent Fund.15

Taxing Wealth

The biggest difference between these initiatives and our proposal

should be obvious. Brits, Czechs, and Alaskans funded stakeholding
out of public property. We look to two other sources. Over the short
term—the first forty or fifty years—we rely principally upon an annual
2 percent tax on wealth. Over the longer run, stakeholding will be fi-
nanced increasingly by recipients' payments at death.
These particular choices deserve their own chapters—and then
some. Perhaps you will find yourself unconvinced by our case for
the wealth tax and will conclude that some other short-run source of rev-
enue is more appropriate. If so, we would be happy to marry stakehold-
ing with your alternative taxing scheme. But beyond these (important)
questions of program design lies a deeper point. 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
I 14 Your Stake in America

less material but have even greater value. Most notably, the free enter-
prise system did not drop from thin air. It has emerged only as the result
of a complex and ongoing scheme of social cooperation. The free mar-
ket requires heavy public expenditures on the police and the 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.16 All Americans benefit from this cooperative ac-
tivity—but some much more than others. Those who benefit the most
have a duty to share some of their wealth with fellow citizens whose co-
operation 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 view gives our proposal a different ideological spin from those
pioneered by Margaret Thatcher and Vaclav Klaus. Surely there will
be some on the Right who will blanch at the implications of our pro-
posal. But we do hope that many others will come to see its justice. We
expect a similar split on the Left. Some will be deeply suspicious of our
proposal to liberate stakeholding assets from the grip of the regulatory
state, leaving it to each citizen to spend his eighty thousand in the way
that makes sense to him. Others will be more impressed by the justice
of empowering all Americans to share in the pursuit of happiness.
We expect less resistance to the long-run aspect of our funding pro-
posal, which relies on stakeholders making substantial paybacks at
death. This will require us, however, to put some old questions about
inheritance in a new light.

Expanding the Stake

Our first task will be to explore the many moral and practical questions
presented by the basic stakeholding proposal. But we have a larger
aim as well. We believe that our initiative provides a framework for a
more general reconstruction of the existing welfare state.
 Your Stake in America 15 1

To suggest the possibilities, Part 2 focuses on social security and

how stakeholding allows Americans to rethink some basic decisions
made during the New Deal. In building support for his proposals,
Franklin Roosevelt had one overriding aim. He wanted to entrench
social security so deeply in our institutional life that it would be polit-
ically impossible for his opponents to repeal it. Somehow or other, his
program must express the idea that social security was not charity but
a fundamental right. What image would convey the requisite notion of
entitlement?
Drawing on European traditions, Roosevelt embraced a system
that emphasized the workplace. Social security was not charity be-
cause workers would earn it by contributing to an insurance fund
through payroll taxes. Here as elsewhere, Roosevelt proved himself
the master politician of the age: to the libertarians' despair, social se-
curity remains a bulwark of economic citizenship. Thanks in large part
to social security, the poverty rate among the elderly has plummeted
in the past decades, and many more workers can look forward to re-
tirement with a modicum of dignity.17
But Roosevelt's enduring political triumph has come at a heavy
price. Because "premiums" are paid only at the workplace, nonwork-
ers get nothing in their own right. Of course, many of these people live
productive lives. Millions of women spend years out of the paid work
force, or in low-paid part-time work, while they rear young children.
As a consequence, the insurance metaphor provides them with little or
no independent social security. The system ties their economic fate to
their husbands'—if they have them. As we shall see, this is only the be-
ginning of many other questionable discriminations and taxation deci-
sions encouraged by the Rooseveltian link between retirement income
and the workplace.
Don't get us wrong. Social security is one of the great achievements
of American social policy. But as we look forward to the twenty-first
century, it is time to move on to a more progressive and more inclusive
I 16 Your Stake in America

system. What is required is a new master metaphor to displace the in-

surance analogy—and to symbolize the transition from worker citizen-
ship to universal economic citizenship.
Stakeholding provides this metaphor. It creates a new way of ex-
pressing Roosevelt s idea that a decent retirement is a matter of right,
not a question of charity. And it allows us to restructure this right in a
much fairer way. Under our expanded proposal, each American citizen
not only gets to stake her claim to eighty thousand dollars. She also gets
an entitlement to a basic retirement pension. In contrast to the exist-
ing system, this citizen s pension would not depend on the vagaries of
her work history, her wage rate, or her marital status. Instead, it would
be a fundamental aspect of economic citizenship. Each American
would receive a monthly retirement check that represented the mini-
mum amount needed to live a decent life. Of course, this check would
represent a floor, not a ceiling. People who wanted more money in re-
tirement would remain perfectly free to invest in private pension
plans. But it would be up to each of us to make this decision.
The stakeholding system will also open up a long overdue reconsid-
eration of the methods through which we now pay for a secure retire-
ment. Once we remove pensions from the workplace, it will no longer
seem natural to fund them through payroll taxes. Instead, Americans
will begin to see the payroll tax for what it is—a tax, and one that hits
the working poor hardest. We urge its replacement by a new system
that is more in keeping with the principles of equal opportunity at the
core of the stakeholder society.

Stakeholding as a Catalytic Reform

Most reforms, when they are adopted, don't lead anywhere. They may
fix a problem, and that is a good thing, but they don't precipitate a
larger wave of reconstructive activity.
 Your Stake in America 17 I

Stakeholding, by contrast, is a catalytic reform; It can generate fur-

ther waves of activity that might, over time, lead to the construction of
a more just retirement system for older Americans—and much else
besides.
Or it may not. The case for our basic proposal in no way depends on
anything we say in Part 2. Indeed, we are a bit concerned that the
greater complexity of expanded stakeholding might distract attention
from one of the greatest virtues of our basic proposal.
And that is its direct appeal to ordinary Americans. Everybody un-
derstands eighty thousand dollars and what it might mean in the lives
of young adults. Everybody understands a flat tax of 2 percent on net
wealth. Because our proposal exempts the first eighty thousand dollars
of each citizens wealth from the new tax, the overwhelming share will
be paid by America s upper classes—the very group that has seen its
wealth increase over the past twenty-five years. Our basic proposal,
then, makes it plain to the general public that something effective can
be done about Americas increasing maldistribution of wealth—and
that stakeholding is well within our political reach.
This is, is it not, a democracy where each citizen casts an equal vote,
and the majority rules? If we work together, there is nothing that can
stop us from building a new foundation for economic citizenship. The
effort will require political effort by many, inspired leadership by
some, and a certain sophistication by all in dealing with the advertising
campaigns launched by those who have so much to lose.
But Americans have managed to overcome larger obstacles in the
past. It is past time to begin a new era of reform.
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Parti

The Basic Proposal

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 2

Citizen Stakeholding

Modern policy-talk lives in a time warp. It speaks in languages that

have been the object of thoroughgoing philosophical critique over the
past generation. With few exceptions, libertarians struggle against util-
itarians as if they were the only guys in town. But there are other seri-
ous options, and in the past generation, liberal political philosophy has
sought to rework the basic terms of debate.
Of course, philosophy is not a game with definite winners and losers.
But neither utilitarianism nor libertarianism now dominates the con-
versation. The weaknesses in each position have led philosophers to
define new understandings of "liberalism" and its competitors. This
process of ongoing redefinition is nothing new. Over the past two cen-
turies, liberalism has stood for everything from laissez faire to the wel-
fare state. The philosophical task has been to move beyond partisan
labels and identify core commitments that organize seemingly dis-
parate agendas.
The new liberalisms that have emerged combine a commitment to
individualism with an appreciation of the pervasive impact of economic

21
I 22 The Basic Proposal

inequality. While devoted to limited government, they insist that the

liberal state should be concerned with more than keeping the markets
open for business. It must also assure each citizen a level playing field
when he enters the marketplace as an adult. Without this fair start, in-
dividual freedom for some is oppression for others.1
We do not intend to summarize this complex and ongoing debate.
Our aim is to bring it into the real world of welfare-state politics. In
contrast to the ready-made policy prescriptions of utilitarian econom-
ics and the simple antitax message of the libertarians, the new liber-
alism has not offered a distinct and workable agenda on taxes and
transfers. But we believe that it can and that its promise of greater
equality of opportunity can command wide appeal.
We offer, then, a new kind of policy-talk—one true to liberal ideals
but also thoroughly practical. The challenge is to marry political phi-
losophy with hardheaded methods of policy analysis based on statistics
and social science. Throughout the book, we debate the big questions
in the text, but readers can find more elaboration in the notes. The Ap-
pendix presents data establishing that our proposals are fiscally sound
and well within the nation s budgetary capacities.

From Critique to Construction

The most appealing thing about utilitarianism is its unabashed striving
for a better world. There is so much pain and suffering. Isn't it obvious
that we should all work together to maximize collective well-being?
It is a serious thing to say no—it risks the charge of selfishness and
callousness. But at the same time, there is something wrong with the
utilitarian s picture of society. It makes it seem as though the social
value of each individual is merely a function of his contribution to the
general welfare. But this can't be right. Consider Nazi Germany, in
which Jews numbered 1 percent of the population. Such dispropor-
tion places the utilitarian case against racist laws on shaky ground. Ob-
 Citizen Stakeholding 23 I

viously, each Jew suffered terribly from discrimination, but this is not
enough for a hardheaded utilitarian calculus. After all, the pleasure of
the other 99 percent, the Aryans, must also be taken into account—and
is it so clear that the average Jew suffered ninety-nine times as much
as the average Aryan gained from his feelings of racial superiority?
Thought-experiments like this have led contemporary liberal polit-
ical theory to one of its most fundamental conclusions: utilitarianism,
at its core, does not take individualism seriously enough. Each citizen s
standing in society should not depend on whether he contributes to
others' happiness. We are not just cogs in a collective happiness ma-
chine. We are different people, each with rights of self-determination.
This is, of course, the great truth upon which libertarians insist. But
they combine this insistence with another false picture of society. They
tend to be supremely indifferent to the ways in which social back-
ground shapes cultural and economic starting points. It is as if we all
emerged as fully formed adults, in the manner of Botticelli's Venus, if
only to display a more emphatically commercial disposition.
But this radical anticontextualism is unacceptable. Every individ-
ual s personality is a product of dynamic interaction with the cultural
and educational opportunities made available in early life. For exam-
ple, a woman's sense of herself would be forever warped if her parents
deprived her of a primary education—and if the state did nothing to
make sure that this didn't happen. Thankfully, Americans have recog-
nized such obvious points; a primary education is compulsory in this
country. But the libertarian would have us ignore the more subtle, yet
still pervasive, ways in which educational inequalities shape the future
capacities of children to form and achieve their objectives in later life.
No less important, each person comes to maturity with an economic
endowment he cannot be said to deserve. In our society, starting
points are irrevocably shaped by parental wealth and position. But
nobody deserves his parents. The libertarian picture diverts us from
the morally arbitrary distribution of initial economic endowments. It
I 24 The Basic Proposal

focuses only on the protection of individual freedom to use these enti-

tlements, without too much scrutiny into their moral foundations. At
best, libertarians fill this void with a fanciful picture of a "state of na-
ture" in which free individuals stake their claims in a virgin wilderness.
But real-world citizens can make claims to true economic indepen-
dence only through the deliberate political decision to create a stake-
holder society.
The philosophical challenge, then, is to construct a liberalism that
(a) takes individualism seriously, (b) recognizes that each individ-
uals starting point in life is shaped by a confrontation with his eco-
nomic and educational opportunities, and therefore (c) grants the
state a potentially constructive role in the just distribution of these
opportunities.

Our Focus and Its Limits

We are interested in opportunities, not outcomes. As liberals, we be-

lieve that each citizen should be free to shape her outcomes as she
thinks best. But as activist liberals, we emphasize the failure of the
capitalist system to give each citizen an equal opportunity to exercise
this freedom as she goes about the task of shaping her life. By the time
Americans reach early adulthood, they have encountered vastly un-
equal chances to define themselves, realize their talents, and move
with financial confidence into the marketplace.
Speaking broadly, we can say that each citizen s basic opportunities
in life are shaped by four factors. The first is her inborn capacities—
some come into this world profoundly handicapped, while others have
a rich variety of talents. The second factor is her cultural and educa-
tional opportunities, which depend on a shifting mix of family back-
ground and self-conscious state policies. The third factor is her
command over material resources during childhood and as she starts
out in life as an independent adult. And finally, there is the power of
 Citizen Stakeholding 25 I

prejudice—an American black interacts with others on terms different

from those of her white counterpart, even if her access to other re-
sources is roughly equivalent.
This framework locates our particular initiatives against a broader
background. Begin with the dimensions of the problem that we are
putting to one side. This book does not deal with the special problems
posed by physical or mental handicaps, abusive and inadequate par-
enting, impoverished and segregated education, or pervasive racial
and gender discrimination. Given the compelling importance of all
these conditions, we may seem to be suffering from an extreme case of
tunnel vision. Our only excuse is that these other problems are the
subject of rich literatures, while a vast silence greets our own con-
cern—which is, to put it bluntly, MONEY.
Money matters directly and indirectly. Indirectly, because parental
wealth and income shape opportunities throughout childhood—the
schools you go to, the friends you make, the role models you en-
counter. Directly, as teenagers gain more independent control over
spending money and finally move out on their own, with or without fi-
nancial assets.
It is at this point that Stakeholding intervenes. The grant of eighty
thousand dollars to young adults means something more than the
mere possibility of enhanced consumption. It means economic inde-
pendence. James Meade put the point well: "Extreme inequalities in
the ownership of property are in my view undesirable quite apart from
any inequalities of income which they may imply. A man with much
property has great bargaining strength and a sense of security, inde-
pendence, and freedom. . . . He can snap his fingers at those on whom
he must rely for income, for he can always rely for a time on his capi-
tal. The propertyless man must continuously and without interruption
acquire his income by working for an employer or by qualifying to
receive it from a public authority. An unequal distribution of prop-
erty means an unequal distribution of power and status even if it is
I 26 The Basic Proposal

prevented from causing too unequal distribution of income."2 These

concerns shape our inquiry. How much do disparities in income and
wealth shape the opportunities available to young Americans as they
set out as independent citizens?

Inequality in America

Begin at the beginning. Although the percentage of children in poverty

has fallen over the very long term, it has climbed since the mid-1970s
and was 20.5 percent in 1996.3 In the 1990s, children under six are
poorer than any other age group.4 And just as children's fortunes have
been declining, those of the elderly have been on the rise.5
Changing social patterns also affect children's prospects. Most
married mothers now work outside the home, and their earnings
have helped maintain family-income levels despite the drop in men's
wages.6 We do not believe that this transformation is necessarily bad
for children, but it can exacerbate inequality of opportunity.7 Whereas
upper-class women can choose whether to hire a private nanny or stay
home with their children, poorer families must cobble together a
patchwork of often inadequate arrangements.8 And the growing num-
ber of single mothers of all classes cannot rely on a partner for help
when child-care plans go awry.9 Working-class women and women of
color, who have long worked outside the home, have faced these prob-
lems for years. But recent trends make it an urgent concern for an
ever larger number of Americans.
This grim picture does not change when children enter school.
Free universal public education represents a solemn affirmation of the
ideal of equal opportunity. But despite formal guarantees, there re-
main tremendous disparities. Richer parents have a much greater
range of choice about where to live and whether to send their children
to private schools.10 Among public schools, wealthier school districts
spend more than poorer ones, and money undoubtedly buys a broader
 Citizen Stakeholding 27 I

range of instructional services and better facilities.11 Students from

richer communities consistently outperform those from poorer ones
on standardized tests.12
Among teenagers, SAT scores strongly correlate with parental in-
come,13 and high-income students can more easily afford special coach-
ing, remedial help, and private schools.14 It is no surprise, then, that
students with high socioeconomic status are almost twice as likely to
enroll in higher education as students at the bottom of the socioeco-
nomic scale.15 At the end of the day, 51 percent of students from the
top quarter of the economic hierarchy earn bachelors degrees, com-
pared to 22 percent of middle-status students and only 7.2 percent in
the lowest socioeconomic quartile.16
Unraveling the causes of intergenerational privilege is a notoriously
complicated business.17 Even a society with genuinely equal opportu-
nity would not produce perfect economic mobility or a complete lack
of correlation between childhood economic circumstances and adult
economic success.18 Children inherit innate abilities from their par-
ents, and some of those capacities may affect their ability to earn
income. (But the correlation between inherited abilities and adult in-
comes is much smaller than many think.)19 While parental values and
behavior inevitably influence their children's development, we should
keep in mind that todays parents also grew up under conditions of
significant inequality of opportunity. Even though it is impossible to
know just how much economic mobility would increase in an equal-
opportunity society, it is obvious that current institutions fall far short
of the ideal.

Education Is Not Enough

These facts suggest the existence of a serious problem, a skeptic might
concede, but is it a problem that calls for a solution like Stakeholding?
If we are committed to equality of opportunity, shouldn't our first
I 28 The Basic Proposal

concern be the woeful inequalities in the educational system? Why

not forget about stakeholding and spend the money on earlier stages
of child development?
We certainly favor more money for well-considered initiatives along
these lines.20 For example, only 752,000 low-income children—one-
third of those eligible—were enrolled in Head Start programs in 1996.
As this level of service cost $3.6 billion, an extra $7 billion or so would
allow all poor children to attend—and if we spent $5 billion more,
we might actually have a first-class program.21 Given the stakes, these
are piddling sums. Our society's failure to make such basic invest-
ments in its youngest and most vulnerable citizens is simply scan-
dalous.
This said, Head Start is not enough. Americans should not pat them-
selves on the back were they finally decide to cough up the $16 billion
a year for an enhanced and comprehensive version of Head Start.
A morally serious movement toward real equality of opportunity re-
quires much more. Our basic stakeholding proposal, for example, would
cost taxpayers about $255 billion a year.22 Initiatives of this magnitude
can be attempted only once or twice in a generation. Nonetheless, and
after considering the alternatives, we believe that it makes sense to
prefer stakeholding to more familiar initiatives that would throw vast
sums at primary and secondary education.
After all, Americans have been exploring the egalitarian potential of
education for a century and a half, and the existing shortfall suggests
some sobering lessons. Time after time, we have seen egalitarian ini-
tiatives frustrated by the decentralized structure of local self-govern-
ment.23 As long as suburbs can insulate themselves from central cities,
there is only so much that money alone can accomplish, as the tragic
aftermath of Brown v. Board of Education has established.24 The
American system of federalism is partly to blame: inequalities in
school funding across states are much larger than those within states.25
And the upper classes have proven themselves adept in channeling
 Citizen Stakeholding 29 I

federal aid for the disadvantaged into their own Ideal school systems.26
Worse yet, further decentralization and privatization seem to be the
order of the day, rather than a movement toward metropolitan-wide
school systems and greater national efforts to provide poorer regions
of the country with greater educational resources. We oppose many of
these trends,27 but we see no evidence that the country is ready to re-
verse gears any time soon. In the absence of a fundamental change, we
are skeptical about the egalitarian promise of a massive injection of
money into primary and secondary education.
In the meantime, the existing system will continue to generate
harsh consequences, especially for the 75 percent of young Americans
who do not graduate from four-year colleges.28 Family income for this
enormous group has been stagnating for decades, as college graduates
have skimmed off the nations growth.29 Thanks to unequal schooling,
many of these Americans have failed to reach their full potential. At
the very least, they should be provided with their fair share of the na-
tion s property before confronting the full force of the marketplace.
Although stakeholding is not directly targeted at education, it may
well help ameliorate some of the underlying inequalities. Keep in
mind that each parent will start out adult life with eighty thousand dol-
lars, which can be used to improve children's opportunities. And if the
money were put toward a "rainy-day" fund—amounting to $160,000
in the case of a married couple—it may help provide children with
much-needed stability in their home environment. At present, unem-
ployment of a single wage-earner can lead to immediate household
catastrophe, especially for a family in the bottom half of the popula-
tion.30 Unemployment insurance is an important safeguard, but it is
temporary and not available in all cases.31 All too often, children bear
the brunt of the ensuing anxiety and dislocation.
But this is only the beginning of a long-term assessment of stake-
holdings impact on the socialization of the next generation. From
their earliest years, Americas children will be told of the stake that
I 30 The Basic Proposal

awaits them as adults. Especially for children born at the bottom, the
stake will stand as a symbol of hope. However grim their present situ-
ation, they will know that America has not given up on them. If they
stay in school and work hard, they will receive the wherewithal to pur-
sue the American Dream. It would be a serious mistake to underesti-
mate the motivating power of this message.
Over the long run, this message of hope may gradually erode one of
the principal sources of resistance to more egalitarian initiatives in
public education. Sheer racism is not the only cause of Americas
failure to redeem the promise of Brown v. Board of Education.
Middle-class resistance is also fueled by the fear that schools will be
overwhelmed by lower-class children, who will bring drugs and crime
along with them as well as a general disrespect for the value of educa-
tion.32 As time passes, stakeholding may help ameliorate these class
anxieties. As they prepare to claim their stakes, more poor children
will conform to middle-class values, and the transition to better racial
and economic integration will thereby be eased. This is a distant
prospect, and the case for stakeholding does not depend on it. But we
should not overlook the possibility that a national commitment to
stakeholding may catalyze a broader movement toward educational
equality.
It is much too quick, then, to suggest that stakeholding should await
some remote era in which America has made a great leap forward in
the provision of equal educational opportunity. Stakeholding can im-
mediately improve children's lives by enhancing their parents' free-
dom. And, in the long term, the causal arrow may fly in the opposite
direction: stakeholding may prove a much-needed catalyst for another
round of serious educational initiatives.
This conclusion gains further reinforcement when we turn from
our crystal ball to contemplate present institutional realities. As we
have suggested, there is absolutely no reason to suppose that a massive
movement toward metropolitan government and national revenue-
 Citizen Stakeholding 31 I

sharing is in the offing. And without such changes, a large-scale assault

on educational inequality seems unlikely. Even smaller initiatives like
Head Start and child care assistance, although enormously worthy, are
not simple to design or to implement.
By contrast, it would be relatively easy to realize the goals of a
stakeholder society. To a large degree, the institutional infrastructure
is in place even now. We already have the Internal Revenue Service
and the Social Security Administration. Although it is fashionable to
denigrate these bureaucracies, both agencies are full of competent
people whose tasks might easily be broadened to encompass the jobs
of identifying eligible stakeholders and paying out benefits.33 Unlike a
comparable educational reform, Stakeholding will not require a mas-
sive reorganization of the existing institutional framework. It builds on
what we already have.
Americans could, in relatively short order, actually achieve the mas-
sive step toward equality of opportunity that Stakeholding would make
possible. This breakthrough, in turn, would give the lie to neoconser-
vative banalities about the inevitability of government failure. If it is
established that Americans can succeed in redeeming their funda-
mental ideals by inaugurating Stakeholding, many other seemingly im-
possible initiatives may appear within our grasp.

Stakeholding as an Ideal

We have been presenting Stakeholding as a potentially catalytic reform

within the context of existing political and institutional realities. But
there is more to be said for our initiative as a matter of principle. Even
if the preceding generation had fully respected their children's free
and equal status by providing all of them with a first-class education,
this would not entitle the elders to distribute their accumulated wealth
in morally arbitrary ways.
I 32 The Basic Proposal

This basic point distinguishes our brand of liberal individualism

from the sort offered up by libertarians. In their familiar view, stake-
holding appears as yet another do-good scheme under which the gov-
ernment is taking our hard-earned money and forcing us to make a
"gift" to young strangers who have no claim on our benevolence.
But this objection presupposes a false picture of society. Nobody
makes money simply on the basis of his own efforts. However hard-
earned it may be, the wealth gained by every self-made man depends
on countless acts of cooperation by others. On the most primitive
level, no police force would be big enough to secure private property
against criminal depredation without the support of the overwhelming
majority. More generally, the free market is a complex social and po-
litical creation requiring ongoing acts of self-conscious regulation and
adaptation. Given the continuing dependence of the wealthy on the
cooperation of their fellow citizens, stakeholding does not involve co-
ercive "gifts" to strangers. It represents a suitable act of recognition by
the wealthy of the role played by fellow Americans in creating the con-
ditions for the very system necessary for their own success. Rather
than emerging from the state of nature, private property is legitimate
only when it is rendered compatible with the larger political order cre-
ated by free and equal citizens.
This point should resonate with libertarians, for they also seek to
create a political order in which equal freedom is a reality. Only their
understanding of this ideal is too cramped. As far as they are con-
cerned, people are equally free to make the most of the circumstances
in which they are born. But we believe that the moral equality of
persons requires stricter attention to starting points. No person is
inherently better than any other, and thus everyone has a right to a
fair share of initial resources with which to begin and plan her adult
life, regardless of whether her parents were rich or poor, frugal or
improvident.
 Citizen Stakeholding 33 I

Americans have long recognized this basic point in the design of

our political institutions. We would think it intolerable, for example, to
give rich people more votes than the poor, although this very arrange-
ment seemed entirely acceptable for centuries. We hope that some
future society will endow stakeholding with the same fundamental
character: just as one person-one vote expresses political citizenship,
an equal stake expresses economic citizenship.
Stakeholding enters, moreover, at the precise point at which the ex-
isting distribution of property is most questionable from a moral point
of view: the point at which the rising generation comes to economic
maturity and demands a fair starting point as they begin full participa-
tion in adult society. After all, young adults have not been centrally in-
volved in the market processes through which some of their elders
prospered while others declined. They were busy at school or were not
yet born when the market enriched some and impoverished others.
Why, then, should their economic starting points be entirely shaped by
their parents' successes and failures? Isn't it especially appropriate to
take their standing as equal citizens into account when they are being
dealt their initial economic stakes?
This ideal of free and equal citizenship provides the master key to
stakeholding. As each American assumes his adult role in a stakehold-
ing society, he will appear on the economic stage as an economic citi-
zen whose fate cannot justly be left to an "invisible hand" that conceals
the accidents of family background and the failures of public policy. In
claiming his stake, no citizen will be obliged to justify his particular
plan for the money to some bureaucratic overlord. He is not only
equal but free to pursue the mysteries of life in the way that makes the
most sense to him.
Clearly, the grant of eighty thousand dollars doesn't guarantee any-
body success in life. This will depend upon each individuals personal
ideals and his abilities to achieve them in a competitive marketplace.
I 34 The Basic Proposal

But the fact that a stake does not guarantee happiness is beside the
point. The unconditional grant makes it plain that Americans are will-
ing to put their money where their mouth is—to guarantee each citi-
zen the wherewithal needed to pursue happiness on his or her own
terms.
We do not suppose that our proposal suffices to achieve the ideal of
equal opportunity. Not only educational reform but the special prob-
lems posed by serious physical or mental handicaps are beyond the
scope of our initiative. And even within the limited domain of the mar-
ketplace, our proposal must be structured to take economic incentives
into account.34 For all its limitations, our proposal does represent a se-
rious step forward—and at a time when so many other forces seem to
be pushing us backward.

The False Promise of Maturity

But why is it so important for each American citizen to start off adult
life with a substantial financial stake in the country?
At one level, our point is uncontroversial. Nobody denies that deci-
sions made as a young adult profoundly shape the course of later life.
Nor is it really controversial to state that the movement beyond the
teenage years generally has a sobering effect. The realities of earning
a living, leaving home, and making some initial mistakes cumulate into
an understanding of limits and the recognition that choices have con-
sequences. This is what it means to be an adult.35
To be sure, adulthood is a sometime thing. Everybody falls short, and
lots of people fail to live up to their own standards. Young adults will
often make decisions they will later regret. But this is true throughout
life. It is not as if forty-year-olds were immune from folly and short-
sightedness. Even if a certain wisdom comes with age, there is a coun-
tervailing point: it becomes harder and harder to reshape your life as
time goes on. If a liberal society is to vindicate the value of individual
 Citizen Stakeholding 35 I

autonomy, it must consider carefully the conditions under which

young adults confront basic choices.
This is not true today. Public policy deals with childhood under the
rubric of education and with old age through social security. But we do
not focus upon early adulthood as a distinct phase of life. Some aggre-
gate numbers give a sense of the imbalance. In 1994, Americans spent
$265 billion, or 4 percent of the GDP, on public primary and secondary
education, and $477 billion, or 7 percent, on Social Security and Medi-
care.36 Young adults, on the other hand, are basically on their own
once they leave the classroom. Stakeholding would fill this void by di-
rectly providing them with $255 billion each year, or about 3.4 percent
of 1996 GDP.37
From the liberal point of view, the consequence would be a massive
increase in effective freedom. Our present arrangements impose an
unnecessary moral dilemma: just at the moment we expect young
adults to make responsible life-shaping decisions, we do not afford
them the resources that they need to take a responsible long-term per-
spective. Forced to put bread on the table and pay the rent, almost all
young adults are squeezed into short-term thinking as they confront
an open-ended future. Call this the false promise of maturity.
The problem is less acute for the top 25 percent who are graduat-
ing from four-year colleges.38 Thanks to subsidized loan programs, this
elite can borrow against future earnings to make sensible choices for
the long run. But even they face crushing debt repayments that force
them into short-termism. And the problem for the typical American is
far worse. Banks don't give large loans to twenty-one-year-olds for a
reason—without track records, it is impossible to distinguish good
risks from bad. As a consequence, any serious long-run investment—
from starting a new family to establishing a new business or gaining
more education—wars with the financial imperatives of daily life.
Given the current life-cycle imbalance in resources, it is remarkable
how much future-oriented behavior goes on, especially among the
I 36 The Basic Proposal

upper classes. But innumerable studies recount the enormous amount

of alienation among ordinary working Americans as they confront life
with no prospects for serious self-improvement.39
The problem will only get worse during the next century, and for
two reasons. The first is longevity. When parents regularly live to age
eighty or ninety, the next generation will receive inheritances when
they are no longer young adults.40 Such bequests are not opportunities
to start a business or raise a family. They will come when they are least
significant for life-shaping decisions—at fifty or sixty years of age. Lov-
ing parents recognize this and may sometimes give young adult chil-
dren substantial gifts, particularly for education.41 But this tendency is
checked by a great deal of uncertainty about a parent s own longevity
and an understandable reluctance to play the part of King Lear.42 A
second factor is the decline of the family farm or business. Fewer fam-
ily businesses means that fewer parents can informally transfer re-
sources to their adult children as they "prove themselves/*
In response to these trends, the propertied classes are investing
much more heavily in their children's schooling. Rather than transfer-
ring money, they are counting on high-priced educations to secure
their offspring a solid place in the information society.43 This invest-
ment in human capital will be sociologically central, but it should not
divert attention from the increasingly dysfunctional character of old-
fashioned inheritance. Although inheritances of substantial property
occur only at the top of the socioeconomic pyramid,44 such bequests
will increasingly be divorced from one of their classic functions—to
provide young adults with an initial stake. And of course property in-
heritance never did discharge this function for the great majority of
young adults.
From this angle, stakeholding is a more democratic and more ef-
fective substitute for a declining institution: providing a social inheri-
tance to the rising generation just when it needs it most.
 Citizen Stakeholding 37 I

The Immaturity Objection

But aren't young adults too immature to handle such large sums of
money? Won't they waste it on foolish extravagances or fall victim to
con artists?
Lets break this predictable objection down into bite-sized pieces.
There is an obvious short-term problem. At present, most teenagers
are not educated to undertake serious economic responsibilities. In
countless ways, society sends them the message that the grown-up
world of investment and entrepreneurship is not for them. But this
sharp dichotomy between teenage years and adulthood is not one of
the eternal verities. Coping with sexuality and the moral ambiguities
of modern life will predictably remain principal preoccupations of
teenagers. Yet there is nothing to stop us from building more bridges
between teenage culture and the economic world that awaits.
The advent of Stakeholding will have a revolutionary impact on ed-
ucation in this country. For the first time, high school students will
have an intense and practical interest in fundamentals of economic
planning. Classes named "How to Manage Your Stake" will be as ea-
gerly attended as those in driver s education—a universal rite of pas-
sage into the real world. While the normal motivational problems of
high school instruction will not disappear, even the bored student will
see a compelling need to pay attention. If anything, the practical im-
portance of money management will motivate interest in basic skills
like math and reading, not to mention economics. More broadly, stake-
holding will serve as a reference point for countless conversations from
early childhood, as parents and others impress their charges with the
importance of economic maturity when the time comes to enter the
marketplace as an adult.
At least in part, what we're calling the immaturity objection may
be a classic case of self-fulfilling prophecy. Because most teenagers
don't expect to have stakes in the near future, they have little reason to
 I 38 The Basic Proposal

prepare themselves for serious long-term planning. By taking young

adults seriously, the stakeholding society will encourage teenagers to
take themselves seriously.
This cultural dynamic will not occur overnight. During the first
generation of stakeholding, we will have to rely heavily on more insti-
tutional solutions. Most important, we should require each stake-
holder to graduate from high school before gaining full control over
his eighty thousand dollars. Dropouts would receive an annual market
return of four thousand dollars or so on their stakes.45 But they could
not invade the principal except for a limited set of purposes—buying a
house, going back to school, or paying extraordinary medical expenses.
These limitations would dissolve whenever they obtained the equiva-
lent of a high school diploma.*
We would also structure the stakeholding transaction to encourage
responsibility. Because most Americans graduate from high school at
age eighteen or so, there will typically be a three-year gap before stake-
holding payments begin at the age of twenty-one. We should use this
period to its maximum educational advantage. Within ninety days of
graduation, each American should be required to claim his or her stake
by submitting a diploma and other necessary documents to the stake-
holding office, which will respond by sending the young man or woman
a quarterly statement of account.46 The first statement will explain that
an appropriate sum has been invested in Treasury bonds in the stake-

* There are some obvious corruption possibilities here. Private academies might spring
up to offer watered-down curricula leading to easily earned diplomas sufficient for
stakeholding. Public schools might also abet easy graduation in order to take some
pressure off state welfare rolls. There is also a danger of aggressive students intimidat-
ing individual teachers into giving them passing grades.
If these abuses proved serious, the federal government might be obliged to institute
a national examination for high school graduates before they could qualify for their
stakes or to require the states to come up with satisfactory exams of their own. Because
we favor such an exam on independent grounds, we think that this would be another
happy consequence of our proposal.
 Citizen Stakeholding 39 I

holders name. While the recipient will initially be unable to gain access
to "his" money, he will see it grow, quarter by quarter, at market inter-
est. At the same time, he will doubtless be inundated with advice—
good, bad, and indifferent—on the best way to handle the funds once he
can get his hands on them. For all the noise, one message will emerge
over the din: "This is a key decision in your life. Don't blow it/*47
We would encourage this investment perspective further by giving
a distinctive structure to the transaction as the stakeholder approaches
her moment of truth. Rather than allowing her to cash out her Trea-
sury bonds all at once, she will be allowed to gain control over her in-
vestment portfolio only in twenty-thousand-dollar increments over a
four-year period. When the first quarterly statement arrives after her
twenty-first birthday, the stakeholder will be given a range of options
for her first twenty thousand dollars, ranging from rolling over her
Treasury notes to diversifying into mutual funds to buying individual
stocks to taking the money in cash. After mulling over her choices for
three more months, she will exercise her first option, and she will go
through the same exercise in each of the next three years.48
This will make Stakeholding an ongoing source of conversation and
comparison: "Look at the way Joe Blow is wasting his money! Doesn't
the fool recognize . .." "No, I think you're wrong. Joe knows what he's
doing..." The extended payout will also allow each stakeholder to learn
from her own mistakes and invest subsequent installments more wisely.

The Misuse Objection

No set of precautions will magically prevent some Americans from
blowing their stakes. But they will help raise a fundamental question
of principle in the public mind. Young adults are now put in the moral
double bind that we have called the false promise of maturity: they are
held fully responsible for their long-range choices without the mater-
ial base needed for responsible long-term planning. With Stakeholding
clearly structured to remedy this problem, millions of young adults
I 40 The Basic Proposal

will prove by their actions that they are indeed capable of redeeming
the promise of maturity. Given this practical demonstration of individ-
ual responsibility, will it seem right to repeal the program merely be-
cause some young adults are misusing their freedom?
Admittedly, the misuse will come in a variety of shapes and sizes.
Some will be duped by out-and-out fraud. This is regrettable, but it
happens to people of all ages. The best response is a serious public
commitment to fighting fraud generally, not the punitive removal of
stakes from the entire population.
Another sort of misuse has its origins in class anxieties. Would the
working class, not to mention the very poor, be particularly susceptible
to short-run temptations? We doubt it. After all, they have been forced
to learn the value of every dollar. In contrast, the children of the upper
middle class have lived a charmed life as teenagers, and some will fail
to appreciate the seriousness of stakeholding. While they will un-
doubtedly receive better financial advice than their lower-class peers
do, they may be less hardheaded and more prone to underestimate
their downside risks.
Of course, some poor Americans do face multiple social prob-
lems—inadequate education, drug or alcohol abuse, a propensity to
violence—that leave them ill equipped for handling the financial re-
sponsibility of their stake. But, despite pervasive media images, the
size of the so-called underclass is actually quite tiny. Although mea-
surement and definition are inevitably imprecise, this group amounts
to less than 4 percent of the population, even at its upper bound.49
And most of these people would be excluded from full control of their
stake by the requirement of high-school graduation.
If anything, our program is likely to be too restrictive rather than
too inclusive. In recent years, the high school graduation rate has
hovered around 75 percent, with an additional 10 percent obtaining
high school equivalency diplomas in their twenties.50 If these numbers
remained constant, 15 percent of the population would fail to gain full
 Citizen Stakeholding 41 I

control of their stakes. But we expect that, as a side benefit of stake-

holding, the high school graduation rate will rise, as capable youths
who now drop out finally discover a good reason to stay in school.
Yet another misuse lies in the eyes of the beholders. Stakeholding
decisions will undoubtedly reflect the plurality of American values.
Some citizens will disdain and condemn the choices of others, who
will respond in kind. But as liberals, we deny that this familiar kind of
mutual recrimination should serve as the basis for sound social policy.
Our liberal instincts are further engaged when we contemplate the
kinds of social judgments that would be required to define "wasteful
spending." If a woman uses her stake to stay at home with her small
children for five years, is she a slacker? If a young man opens up a
beachside concession renting umbrellas and lounge chairs, is he a
beach bum? The possibilities for moral condescension are endless—as
are the possibilities of evasion of any legalistic definitions.
But the rejection of paternalism still leaves us with a serious prob-
lem. Some individuals will undoubtedly use their stake in ways that,
decades later, they will deeply regret. We concede this but emphasize
that the flip side of the problem exists today. Too many forty-year-olds
look back to their twenties with bitter regret at the chances that they
never had but that were readily available to others higher up on the
economic scale.
We propose to shift the balance of regret—it is impossible to abol-
ish it. Or perhaps it is best to distinguish two kinds of regret. One is re-
morse at one s failure to make the most of the chances that one did
have. The other and deeper regret is never having had a fair chance to
engage life as a responsible adult. In a liberal society, everyone should
have at least one chance to seize the brass ring of opportunity.

The Coercion Objection

But perhaps there is a deeper objection here, and we can sum it up in
a single word: coercion. Haven't we merely created a smokescreen of
I 42 The Basic Proposal

supposedly free choices that hides the social and economic coercion
that will overwhelm stakeholders as they consider their options? Con-
sider a twenty-four-old woman whose lover spends her stake on his
own endeavors, all the while assuring her, "Don't worry, honey, I'll
take care of you for the rest of your life." Or the impoverished stake-
holder who has little choice but to use his stake to weather a period of
unemployment or to supplement his meager earnings. In what sense
do these stakeholders have any really meaningful choices?
If this critique suggests that the only freedom worth having is un-
limited freedom, it is impossible to satisfy. There is no such thing as a
coercion-free society. Whatever decisions we make, we must confront
the facts of scarcity and mortality, recognizing that our options are dra-
matically limited by our circumstances. For all of us, the only possible
freedom is the freedom to choose among a restricted set of options.
Once this is recognized, the claim of coercion seems inflated.
Stakeholding vastly increases the choices available to the young and
distributes them more fairly. To be sure, it only takes one large step to-
ward equal opportunity. Some young adults will have markedly supe-
rior educational and other social advantages that will help protect
them from a variety of overreachings. But the answer to this is to take
further steps to realize justice, not to restrict the freedom of the poor
and otherwise disadvantaged.
Perhaps the coercion critique is implicitly grounded in a more pes-
simistic view. Poor people have been so oppressed during early life
that they simply cannot function as free men and women capable of
shaping the larger contours of their lives. They live for the moment
and lack the cultural resources needed to adopt a long-run view and
take responsibility for their decisions.
We reject this view.51 It is based in part on self-fulfilling prophecy:
at present poor people correctly understand that they lack much
control over their futures and so, unsurprisingly, may opt for more
short-term satisfactions within their effective control.52 But because
 Citizen Stakeholding 43 I

stakeholding expands the range of long-term opportunity, the disad-

vantaged will have greater reason to take the longer run seriously.
What is more, eveiyone encounters difficulties in shaping a life
plan, and it is arbitrary to suppose that only poor folk are unequal to
the task.53 Freedom is always a gamble. Nor is it always clear who is
acting foolishly and who wisely.
When all is said and done, we value individual freedom for its own
sake. And so, we think, do most other Americans.

Liberal Community

A later chapter makes these themes more concrete by showing the big
difference that stakeholding might make in the lives of ordinary Amer-
icans. But for now, we shift our focus from the individual to the larger
community and consider what our initiative might mean for America s
sense of itself as a nation.
We intend to question a sharp dichotomy that threatens to become
one of the banalities of the age. Too often we are told that Americans
must choose between a stronger sense of community and a stronger
commitment to individual freedom.54 In this familiar view, our recent
infatuation with individual rights has eroded our sense of association
with the larger group. To restore equilibrium, we must radically change
our political conversation and reaffirm the collective values that bind
us together in concrete communities.
We disagree. Given the diversity of life and creed in todays Amer-
ica, a communitarian politics of virtue will be divisive at best, oppres-
sive at worst. It is simply silly to suppose that elected politicians, of all
people, could lead a sensitive moral dialogue that would invite the re-
ligious and the secular, the gay and the straight, the city slicker and his
country cousin, to a profound and tolerant understanding of each oth-
ers' way of life. Far more likely is the intensification of culture wars
and sporadic efforts to legislate morality and repress deviance. Rather
I 44 The Basic Proposal

than bringing us together as Americans, the politics of virtue will drive

us farther apart.
Stakeholding takes a very different path toward community. It
seeks to foster individual freedom, not smother it. By making free-
doms promise universal and concrete, Stakeholding appeals to all
Americans, regardless of their different aspirations, to join together.
As members of the rising generation come forward to stake their
claims, they will be doing more than affirming their individual right to
shape their own particular destinies. They will also be affirming their
identity as citizens of a great country devoted to freedom and equality.
Throughout the rest of their lives, these Americans will endlessly con-
sider how their stakes contributed to their individual pursuits of hap-
piness—and at the same time reflect on their good fortune in enjoying
the precious rights of American citizenship.
Except for the most hardened cynics, this will lead to a deep and
sustaining loyalty to the country that made Stakeholding a concrete re-
ality. Rather than dismissing the Declaration of Independence as
boastful words on paper, stakeholders will hear in Thomas Jefferson s
proud phrases a description of their own lives and will seek, as best
they can, to repay their own debt by passing on their great heritage to
the future.
This is the land of loyalty that befits the free men and women of
America. It will yield a voluntary sense of obligation, not one that is co-
erced by politicians in the name of virtue. As more and more citizens
enjoy the fruits of Stakeholding, the country will be better and better
prepared for the next crisis.
And make no mistake about it. Our present prosperity and military
hegemony will not last forever. There will come a time when America
will once again call upon its children to sacrifice greatly in support of
its ideals.
How will they respond?
 3

The Stake in Context

It is time to bring stakeholding down to earth—to consider the tough

choices required to transform our idea into an operational reality. For
starters, there are key questions of eligibility. Who precisely should be
allowed to stake a claim? Resident aliens? All citizens? Criminals?
Having drawn the circle around eligible stakeholders, we consider
crucial matters of program design. Instead of forcing everybody to
wait until age twenty-one, we think that high school graduates should
be allowed to spend their stakes immediately on their college educa-
tions. This single step will in turn revolutionize the existing system of
higher education in this country—and for the better, we think. Then
there is the matter of setting the size of the stake: why eighty thousand
dollars and not half or twice that amount? We finally turn to the prob-
lem of transition to the new regime: how gradually should we phase in
the program?
It would be foolish to explore every nook and cranny of program-
matic detail. But a head-on confrontation with key issues will give real-
world substance to stakeholding, allowing a better appreciation of its

45
I 46 The Basic Proposal

strengths and weaknesses. Reasonable people will disagree with our

answers to particular questions. This is all to the good, as long as these
disputes do not defeat the entire project. There is a danger of this hap-
pening, but the only remedy is a sense of perspective—remembering
to keep our eyes on the whole as we argue about each particular part.
After some substance has been put on our proposal, the next chap-
ter provides a more concrete sense of the ways in which stakeholding
will alter the real-life choices confronting a variety of young Ameri-
cans. Eighty thousand dollars will mean different things to different
people—that is its beauty. In providing a kaleidoscopic view of its po-
tential significance, we hope to gain your empathetic understanding of
our ultimate goal—which is to revitalize the liberal ideal of an inde-
pendent, responsible, property-owning citizenry.

Immigrant Stakeholders?
Imagine a twenty-one-year-old English tourist arriving at Kennedy
Airport, hailing a taxi for New York City, and making his way directly
to the closest stakeholding office—only to leave empty-handed. While
nobody will have trouble denying the tourist a stake, it is easy to think
of harder cases. How strong a connection to America should be re-
quired?
Begin with longtime resident aliens. As long as they decline to take
the oath of citizenship, we should exclude them from stakeholding.
We see no reason to extend them rights of economic citizenship if they
do not voluntarily assume obligations of political loyalty.1
A harder question is whether all American citizens should qualify.
There are two problem cases. The first involves people who make
their claim based on the accidents of birth. Suppose that a French
graduate student gives birth to a baby boy while studying at Yale in
New Haven and shortly afterward returns with her child to Paris,
where they live for the next twenty years. A day before the boy turns
 The Stake in Context 47 I

twenty-one, he takes the plane from Paris to New York to make his
claim at the stakeholding office. Under the Fourteenth Amendment,
he qualifies as a citizen by birthright. Should he be entitled to take his
eighty thousand dollars and return immediately to Paris?2
A second case involves citizens by naturalization. Our hypothetical
immigrant arrives in this countiy as a teenager and takes his oath of
citizenship the day before he turns twenty-one. He immediately pro-
ceeds to the stakeholding office to make his claim. Should it be
accepted?
It is tempting to err on the side of generosity, but we urge restraint.
Lets start with the naturalization case. In 1996, of the more than 1
million immigrants who took the oath of citizenship, 10 percent were
under the age of twenty-five.3 If extending a stake to all of them would
lead a majority of American voters to support a more restrictive immi-
gration policy, we confront a hard choice: is it better to admit a smaller
number of immigrants and grant them eighty thousand dollars apiece,
or admit a larger number and deny them stakes?
Like it or not, political realities force us to take this tradeoff seri-
ously. We believe that it is much more important to keep the door
open than to provide stakes to the few who might manage to squeeze
in. American citizenship is a priceless boon for millions living in op-
pressive or impoverished circumstances around the world, and it is
imperative that as many as possible find a place of hope in this coun-
try. As a consequence, we would not allow a twenty-one-year-old to
naturalize and claim a stake on the same day. We would restrict this
right to those with deeper roots in this country.
Our line would track an important psychological distinction. When
teenagers arrive in America, they come with vivid memories of life in
the old country. While they will naturally resent their failure to qualify
for a stake, they will be in a psychological position to reflect on the
many other advantages that they have acquired from citizenship, con-
trasting their old lives in Russia or India or Mexico with the great
I 48 The Basic Proposal

possibilities opened up by their new situation. In contrast, when im-

migrants arrive as small children, America is the only land that they re-
ally know, and they will be unable to console themselves by making
similar comparisons. For them, exclusion from stakeholding will seem
an utterly invidious act of discrimination by the only country that they
can call their own.
This seems an important difference, and one that should count in a
world where America s commitment to the open door cannot be taken
for granted. As an interim measure, a citizen should be required to live
for at least eleven of his twenty-one years in this country before quali-
fying for his eighty thousand dollars.4 Once stakeholding is firmly in
place, this distinction might one day be overcome. But we fear that too
generous an embrace of immigrants at too early a stage would be
counterproductive: either the open door would swing closed or the
prospect of showering riches on newcomers would be used as a politi-
cal weapon to destroy the general appeal of stakeholding.
Our restrictive approach also has implications for the treatment of
birthright citizens. Surely the young immigrant taking the citizenship
oath is a much more attractive candidate for stakeholding than the guy
with a round-trip ticket to Paris. Probably the Parisian himself would
agree that he is cynically manipulating a legal loophole—although this
may not stop him from taking the money and bragging about it. This is
the sort of abuse that can easily discredit the entire program.
It is also much more likely that birthright citizens with few links to
this country will spend their stakes beyond Americas borders. This
factor is particularly important in a liberty-affirming initiative like
stakeholding. One crucial feature of the stake is that it comes with no
strings attached: once a stakeholder gets the eighty thousand dollars,
he can do anything he wants with the money—including taking off
for some remote corner of the world far away from the sight of the
American flag. Within this structure, the only feasible way to save the
Treasury from the most cynical abuses is by imposing a residency re-
 The Stake in Context 49 I

quirement on birthright citizens: it is one thing for somebody with

deep roots in the country to decide to take his stake and head off for
parts unknown, quite another for somebody with deep roots else-
where to take his eighty thousand and spend a small part of it on a one-
way ticket back home.
We have, then, come to the same place via two different paths. For
naturalizing citizens, a residency requirement makes sense as part of
a realistic effort to keep the doors open for future generations of im-
migrants. For birthright citizens, it makes sense to prevent cynical
raids on the Treasury. It would be invidious—and probably unconsti-
tutional—to impose different residency requirements for different
classes of citizens.5 If an eleven-year residency is demanded of natu-
ralized Americans, it should apply to the rest of us as well.6

The Stake as a Deterrent: Carrots and the Criminal Law

Traditionally, criminal law has treated young wrongdoers as if incar-
ceration were the only alternative to less oppressive forms of control.
But stakeholding provides another tool, with distinctive advantages
and dangers.
First, the advantages. Once stakeholding begins, youngsters will
suddenly have something to lose other than their freedom. The crimi-
nal law of a stakeholding society can threaten them with the loss of
some or all of their eighty thousand dollars. To be sure, this threat will
influence the actions of only those youngsters who can look ahead.
And the younger they are, the less responsive they'll be to the threat.
Even with foresight, younger criminals might impose a heavy discount
rate on the relatively distant prospect of losing funds at the ripe old
age of twenty-one. Thus it would be silly to "punish" a twelve-year-old
by declaring his stake forfeit. But this sanction would carry greater
force for an eighteen-year-old.
I 50 The Basic Proposal

It would also have a more general educative effect. Impoverished

communities would be full of stories about good guys who stayed hon-
est and were now claiming their eighty thousand, while others tossed
away their stakes by dealing drugs.
But there are dangers in an overly enthusiastic embrace. It would
be all too easy for politicians to brandish their new tool as a blunder-
buss. Rather than using the withholding of stakes as a substitute for in-
carceration, demagogues might simply add forfeiture as an automatic
consequence of every conviction. Worse yet, they might expand the
list of felonies in order to deprive minors of their eighty thousand
when they would not think of imposing a comparable fine on older
wrongdoers. The dangers of abuse are magnified by the notorious
racial disparities in the administration of the criminal law. It would be
tragic to allow stakeholding to become another monument to racial
injustice.
Nonetheless, both stakeholding and the criminal law share a com-
mon foundation in liberal notions of individual responsibility. As a
stakeholder, you are responsible for shaping your life plan, and if it
involves criminality, you are justly held to account. There is nothing
categorically wrong in using the stake to support the principles of re-
sponsibility at the core of the criminal law.
At the same time, we should not allow the criminal law to cheapen
the meaning of stakeholding. It would be all too easy to treat the stake
as if it weren't "really" the property of the young wrongdoer and to
take away thirty or forty thousand dollars for a trivial offense, explain-
ing that a stake is a privilege, not a right. But the entire point of stake-
holding is to move beyond the rhetoric of the welfare state.
A great deal of thought will be required for a sensible integration of
stakeholding into the criminal law. Here are a few guidelines. First,
stakeholding sanctions should be reserved for serious offenses and
those where an economic deterrent seems particularly appropriate—
trafficking in drugs, for example. Second, these penalties should gen-
 The Stake in Context 51 I

erally serve as an alternative to prison. The aim should be a more hu-

mane, cheaper, and more effective system of deterrence: why throw a
twenty-year-old into jail when you can hurt him just as much by de-
priving him of his first stakeholding payment of twenty thousand dol-
lars? Third, stakeholding sanctions should come in graduated doses.
Except in the most heinous cases, nobody should lose all of his stake
for a single offense. Once a convict has lost all hope of getting any of
his eighty thousand, the deterrent value of stakeholding has been ex-
hausted. Finally, and in the same spirit, stakeholding should be used
for rehabilitation. Generally speaking, youthful offenders should be
given a second chance to reclaim their stakes by keeping clear of crime
for a substantial period. Although they may have forfeited some or all
of their eighty thousand as teenagers, they should be able to reestab-
lish themselves as stakeworthy citizens through years of law-abiding
conduct.

The Stake and Higher Education

Having defined the outer bounds of eligibility, we turn to consider
more carefully the conditions under which stakeholders should gain
access to their money. Up to now, we have been speaking as if the nor-
mal American will be claiming his stake in twenty-thousand-dollar
payments between the ages of twenty-one and twenty-four. But any
sensible proposal should carve out a large exception to enable Ameri-
cans to use their stakes to finance their higher educations. Nowadays,
about 60 percent of high school graduates go on to more formal train-
ing.7 Almost 10 percent earn two-year associate s degrees and about 25
percent finally graduate from a four-year college.8
We believe that stakeholding can yield a vast improvement in the
status quo—when judged both in terms of justice and the likely qual-
ity of the educational experience. But this can happen only if we de-
sign the program appropriately: rather than insisting that stakeholders
I 52 The Basic Proposal

wait until the age of twenty-one for their first twenty thousand dollars,
we should allow them to draw down their accounts before then to
pay for higher education. More precisely, college-bound stakeholders
should be able to withdraw up to twenty thousand per year for four
years, as soon as they graduate from high school. In contrast, other
Americans will not be able to pledge their stakes to pay for purchases
made before they reach twenty-one.9
Consider some basic facts. Students, parents, and federal and state
governments spend more than $130 billion per year on higher educa-
tion.10 States pay 31 percent of the total, largely by funding public col-
leges.11 The federal government provides another $13 billion or so,
largely in the form of student grants and loans.12
These subsidies have indeed helped more and more Americans
make it to college.13 But there remain huge disparities in effective ac-
cess.14 Nearly 40 percent of low-income high school graduates do not
move on to postsecondary education, but only 21 percent of their mid-
dle-income peers stop at this stage; the number dwindles to 7 percent
among high-income families.15 Even when low-income students do
make it to college, they are much more likely to delay enrollment and
much less likely to earn a degree in the end as compared to their
richer peers.16 Poorer students also are more likely to attend two-year,
rather than four-year, institutions.17 These numbers become espe-
cially poignant when one recognizes that poor children, once they
have graduated from a four-year college, earn, on average, as much as
those from wealthier backgrounds.18
Stakeholding cannot directly compensate for differentials in early
education and childhood experiences. But it can guarantee access for
all college-ready students regardless of their parents' income and
wealth. Federal grants to lower-class students have not kept pace with
tuition inflation, and much aid now takes the form of loans rather than
grants. As a result, the financial burden on students and their parents
has grown, not shrunk, over the past fifteen years.19
 The Stake in Context 53 1

Lower-class students confront hardships unknown to their better-

off peers. College kids from the upper middle class take generous
parental support for granted, but those from below are constantly re-
quired to juggle schoolwork and jobs in ways that can easily over-
whelm self-confidence. Indeed, the endless rounds of scholarship
applications and intermittent failures to pay tuition take a toll by
themselves. Statistics confirm that students in two-year colleges are
even more hard-pressed: a much higher percentage live at home, hold
a job, and work more hours.20
For this large group, stakeholding would work a genuine revolu-
tion. It would allow college-bound students to focus their energies on
academic work and compete with their peers on more equal terms. By
enabling these students to gain early access to their stakes, the pro-
gram would also signal the importance of advanced schooling in the
emerging information society.
No less important, it would inaugurate a new era of healthy competi-
tion in higher education. Every student would enter the market with sig-
nificant resources and an incentive to shop carefully. No longer would
state universities or community colleges have a captive pool of in-state
or low-income students who are without other options. These people
could now choose a school in another community or across the country
or even overseas. In contrast, the bulk of government money now goes
to institutions rather than to students, which is exactly backward. The
current system limits individual choice, but stakeholding will promote it.
Of course, the transition to a new system could not happen over-
night, and there are many important details to work out. But as com-
petition takes hold, the price of a college education will change as
two effects begin to operate. Prospective students will have much
more money than before, encouraging all colleges to raise tuition or
cut financial aid. But this tendency will be checked by an opposing
dynamic: colleges will be competing for the stakeholding dollar much
more intensively, both with one another and with other lands of
I 54 The Basic Proposal

enterprises. This last point is particularly important. In contrast to tra-

ditional education programs, stakeholders can spend their money
elsewhere if the price of college rises too much.21
We cannot predict how the market will shake out—how many old in-
stitutions will survive, how many new ones will be created, or what the
competitive tuition for different types of schools will be. But one vari-
able will be crucial: the extent to which American governments respond
to stakeholding by restructuring more traditional forms of subsidy.
Looking backward, Americans can justly take pride in the creation
of a vast system of public universities and the complex network of fed-
eral programs that have provided grants and loans to tens of millions
over the years. These initiatives have opened the door of opportunity
for millions of middle- and lower-income students.
But stakeholding dramatically changes this traditional equation.
With college-bound students already guaranteed eighty thousand dol-
lars, even the most hallowed programs will undergo a period of ago-
nizing reappraisal. This is all to the good, for there is every reason to
believe that the outcome will be leaner, but more sharply focused, ed-
ucational initiatives.
Begin with the $40 billion a year currently spent by the states on
public colleges.22 A lot of this money could be replaced by stakehold-
ing funds, but there are still some reasons for states to continue direct
institutional support. Most obviously, students may balk at funding
academic research that does not directly pay off in classroom instruc-
tion. Yet this research can yield large dividends to the region, the na-
tion, and the world. Students may also respond to an overly narrow
understanding of the job market and fail to appreciate the importance
of areas of instruction—most notably, the liberal arts—that deserve
sustained public support.
Apart from these special areas of enduring need, the appropriate
level of general support for public universities will remain an open and
 The Stake in Context 55 1

politically contested question. In 1996-1997, four-year public colleges

charged an average tuition of only $6,534—too big a bargain when
prospective students come to the table with eighty thousand dollars.23
But this hardly implies that public universities should inflate their
tuition levels to the $18,071 now charged by the average private col-
lege.24 Citizens can reasonably disagree about appropriate tuition lev-
els in the new world of stakeholding, and different states will answer
this question differently. This is what federalism is for.
National policy should take its cue from the emerging pattern of
subsidy decisions in the states and heightened competition in the mar-
ketplace: in spite of the great increase in funds made available through
stakeholding, have any legitimate interests been left out in the cold?
We can think of a few serious candidates for continued aid, although
their claims will certainly add up to a lot less than the $13 billion cur-
rently charged to the federal budget. Most obviously, recently natural-
ized citizens could make a compelling case for a special scholarship
program, because they would face much higher tuition levels without
receiving stakes. So too would older students, who had already passed
the age of eligibility before stakeholding was enacted into law. We
would also support a program for specially gifted students going on to
graduate school, who might have already exhausted their eighty thou-
sand dollars on college and its related expenses. And surely private
scholarship programs will be required to keep admission to elite col-
leges open to all.
But the overall tendency of educational policy should be clear:
more freedom for young adults to choose their colleges and com-
plete their educations without constant and debilitating financial has-
sles; more competitive pressure on colleges to provide quality teaching
and a supportive environment for learning; more narrowly focused
government and private support for programs and students whose in-
terests are not adequately served by the emerging system.
I 56 The Basic Proposal

Leveling Up

Stakeholding will mean a lot to graduates of four-year colleges. But it

will mean more to the much larger group who don't want to go that far
in their educations. At present, the nations two-year community col-
leges provide much smaller subsidies to their students than do more
traditional universities.25 But under the new system, students at two-
year colleges will have the same buying power as their more academi-
cally inclined contemporaries. To be sure, these stakeholders will be
utterly unwilling to spend their entire eighty thousand on a couple of
years of post-high school education. But their stakes will create new
incentives for serious programs directed at their distinctive concerns.
Over time, two-year colleges will emerge from the shadow of their
bigger brothers and build their students' skills and self-confidence
with increasing imagination and vigor.
We have left the best for last. Consider the millions who decide that
college—even a two-year college—isn't for them. These are todays
forgotten Americans. Many of them have already been denied the de-
cent high school education that should be every citizens birthright.
Now they are tossed gently into the marketplace unaided, while their
upwardly mobile peers are given federal scholarships and state-subsi-
dized tuitions.
This is wrong. Joe Six-Pack is every bit as much of an American as
Joe College. And for the first time, his claim to equal citizenship will
be treated with genuine respect. Because these high school graduates
are not going to college, they will have to wait until their twenties to
gain access to their stakes. But we do not think that this delay will
prove very controversial. Most high school graduates would them-
selves concede that they need some seasoning in the school of hard
knocks before they can be trusted with eighty thousand dollars.
Some of our readers may want to require young adults to wait until
age twenty-five or so before they get any of their money. We would be
happy to compromise as long as our basic principle remains intact: the
 The Stake in Context 57 I

decision to go to college should not be required for an American to

gain his country's support for the pursuit of happiness. All Americans
have a fundamental right to a fair share of the nation s resources as
they accept the full responsibilities of adult life.
This principle suggests one more refinement in the stakeholding
program. To ensure that the noncollege group does not lose out finan-
cially because of the three-year delay, their stakes should earn interest
in the meantime. Instead of four payments of twenty thousand dollars
beginning at eighteen, they should get four payments of $21,225, be-
ginning at age twenty-one. The difference is three years' interest on
each delayed payment.26
This is also the point to anticipate an obvious danger. While high
school graduates must wait until their twenties to claim their stakes of-
ficially, won't aggressive merchants figure out ways to get them to sign
away their rights before they reach twenty-one? "Get your Mercedes
Tor free'! Just sign this contract containing mumbo-jumbo and we will
seize your money at the stakeholding office."
It is tough to imagine an easier way of casting doubt on the pro-
gram. But it would be too draconian to respond by making it legally
impossible for underage stakeholders to obtain any credit at all. Many
teenagers are workers, parents, entrepreneurs with assets and income
that currently allow them to borrow a good deal of money. They
should continue to be eligible for as much credit as they would have
gotten in the absence of stakeholding.
To implement this principle, the stakeholding statute should segre-
gate stakeholding dollars in a special account. Creditors could not or-
dinarily reach these assets to satisfy debts incurred by stakeholders
before they came of age.27 But after that age, stakeholders would be
free to write checks from their account for purchases as well as invest-
ments. This would allow underage stakeholders to continue borrowing
against other earnings and assets but would notify creditors that they
could not count on the stake for repayment.28
I 58 The Basic Proposal

Why Eighty Thousand Dollars?

We have thus far been speaking of the false promise of maturity that
confronts the typical young adult in modern society: on the one hand,
she is held responsible for life-shaping decisions, but on the other, she
lacks the economic resources to make them in a responsible way. In
setting the size of the stake, we should keep this basic moral dilemma
in mind. The stake should be big enough to provide each citizen with
a cushion against market shocks and to enable her to take a long-term
perspective as she determines the most sensible ways of investing in
herself, her family, her career, and her community. This logic suggests
that small sums—say, ten thousand dollars per person—are inade-
quate, but how high should we go?
The comparison between Joe College and Joe Six-Pack helps us
set the standard. As we have seen, eighty thousand dollars is enough
to pay for four years of tuition at the average private college in the
United States.29 While colleges may raise tuition a bit in response to
stakeholding, market forces will tend to keep these increases in
check.30 This means that typical college-bound youngsters will be in a
position to graduate debt-free (more or less) if they get good summer
jobs or can rely on some parental support.31 Liberated from the crush-
ing burden of debt, they will confront the future with a precious inde-
pendence.
Four years at college will not magically eliminate the need for hard
choices about career, family, and the meaning of life. Nonetheless, the
skills and self-understandings that these students will gain will place
them in a fair position to take responsibility for these choices. At the
very least, they will not be locked into dead-end jobs or locked out of
the vast range of cultural opportunities open to them as citizens of the
twenty-first century. In a rough-and-ready way, a college education
serves to redeem the promise of maturity in contemporary society.
But if this is so, eighty thousand dollars should also set the standard
for the three out of four Americans who don't earn bachelors degrees.
 The Stake in Context 59 I

As equal citizens, they too are entitled to confront their adult years
with their heads held high while preparing themselves for the future
as they see fit. We will shortly be considering the concrete ways that
stakeholding will allow ordinary Americans to gain control over their
lives. But for now, the moral challenge is plain: if eighty thousand dol-
lars suffices to provide the top quarter of the population with effective
economic independence, shouldn't all other Americans obtain equiva-
lent resources?
Perhaps not, detractors may say. Perhaps the costs of financing such
a generous stake would cripple the economy. Or perhaps it will force
us to starve other social programs that promise a more effective assault
on unequal opportunity. We believe that these predictable responses
lack substance, and we will soon be describing a funding system that is
well within our economic means as a society.
But for now, we will take up a single concern that does not require
lengthy economic analysis and that has cropped up with surprising fre-
quency when we have presented our ideas before audiences: won't the
prospect of an eighty-thousand-dollar grant lead to a vast increase in
the birthrate, which will break the bank in the long run?
We strongly doubt it. Certainly the promise of eighty thousand
dollars at maturity ensures every child a good start in life—and this
prospect may encourage some parents, previously worried about the
financial burdens of raising their families, to consider going ahead and
having another child. But this positive point has to be placed in a
larger context. Most obviously, child-rearing will remain very expen-
sive, in both money and time. Even a moderate-income family will
spend $200,000 or more to raise that extra child—not to mention all
the extra years of diaper-changing.32 Parents must weigh these imme-
diate costs against the discounted value of eighty thousand dollars
twenty-one years hence.33 Then there is the fact that when the child
finally reaches maturity, the stake goes to her directly, not to the par-
ent—and the child may not spend the money as the parent would like.
I 60 The Basic Proposal

This independence effect is an integral part of the case for stakehold-

ing, and many farseeing and altruistic parents will see its value. But it
will also prevent greedy parents from casually treating their children's
stake as if it were their own.
Finally, there is suggestive evidence from Western Europe, which
has responded to declining birthrates by adopting aggressively pro-na-
talist policies. In contrast to our proposal, Western European govern-
ments do not require parents to wait a generation before seeing their
children get some money. Instead, the European system of family al-
lowances pays large sums directly to young parents with large families.
Nonetheless, these policies have failed to raise the birthrate.34
We agree that our initiative might well change the moral climate
over time in ways that may subtly encourage higher birthrates. Parents
will know that, even if the worst befalls them, their children will have
a shot at the American dream. And this new confidence might well en-
courage them to take the plunge into the unknown that comes with
starting a family. But it would be a mistake to overestimate the impor-
tance of this point when so many other cultural and economic factors
are at work.

Women and Minorities

By itself, stakeholding will not automatically lead husbands to share

child care equally, persuade bosses and coworkers that women can be
welders, or dissolve harmful stereotypes about African Americans.
Nonetheless, it will make a difference in the short run and contribute
to the erosion of pervasive cultural vulnerabilities in the long run.
As a matter of dollars and cents, minority group members will be
the big winners from stakeholding. A recent study found that one-
third of all households, but 61 percent of black ones, have absolutely
no net financial wealth.35 While middle-class blacks earn about 70
percent of middle-class white wages, they own only 15 percent of
 The Stake in Context 61 I

white middle-class wealth.36 As a consequence* blacks will not pay

much of the wealth tax that we shall propose to fund our initiative.
The effect on women will be subtler but cumulative. For the fore-
seeable future, they are likely to continue to bear the primary burden
of child care and to confront a labor market poorly adapted to the de-
mands of child rearing.37 When women respond by opting for part-
time work, they are now often consigned to a second-class "mommy
track" with limited prospects of advancement.38 While stakeholding
will not bring this system to an end, it will provide women with new
tools. Even though eighty thousand dollars is "only money," it will give
women more real independence in everyday life, allowing them to ne-
gotiate better deals for themselves at the workplace and at home.
But perhaps this rosy scenario masks hidden dangers, critics may
object. Women may think that they re better off if, say, they use their
stake to take extra maternity leave or cut back their work hours while
their children are young. But wouldn't such decisions suggest that they
are victims of "false consciousness"?
By retreating from the workforce to tend to their kids, these skep-
tics would continue, women may be forfeiting long-run earnings po-
tential.39 In the end, they may wind up even more dependent on a
husband or boyfriend for support. If so, the independence that stake-
holding promises is a cruel illusion. A better program would devote
the same resources to subsidized day care, work-training programs,
and other initiatives to help women get into the workforce and stay
there for the long term.
We don't buy this argument. We recognize that deep-seated gen-
der-role expectations have irrevocably shaped women's (and men's)
ideas about what women should want from life. We certainly support
educational efforts to challenge these stereotypes. But we refuse to
dismiss the genuinely felt aspirations of todays women as false con-
sciousness. No less than men, they deserve nothing less than the real
freedom that stakeholding offers. Traditional gender expectations may
I 62 The Basic Proposal

limit women's bargaining power, both within and outside the family.40
But over time, the clear message of equality embodied in the univer-
sal eighty-thousand-dollar grant may also begin to affect men s per-
ceptions of women and women s perceptions of themselves.
Despite these very real advantages, we do not suggest that our ini-
tiative can serve as the be all and end all of the struggle for real equal-
ity of opportunity. It is only one tool among many, and we would be
happy to embrace other programs that targeted vulnerable groups
more specifically for special assistance. Nonetheless, we think it would
be a serious mistake to bring concerns about affirmative action to the
design of our proposal—adding twenty thousand dollars, say, to the
stakes of minority members.
Such a step would deflect stakeholding from one of its great aims.
Especially at this time of deep cultural division, Americans require
some contexts reminding them of the commitments they share. Stake-
holding fills this desperate civic need. When each citizen comes for-
ward to make her claim, it ought to be enough for her to say that she
too is an American, involved in the common enterprise of redeeming
the great words of the Declaration of Independence. This is a time for
women and men, blacks and whites, to join in a mutual recognition of
their standing as free and equal citizens, without distracting refer-
ences to the differences and injustices that still tear them apart.

The First Stakeholders

And then there is the matter of transition. How to get from here to
there?
We favor a gradualist approach that targets a particular cohort of
eighteen-year-olds to serve as Americas first stakeholders. On his or
her eighteenth birthday and once a year thereafter, every stakeholder
would be sent a statement of account showing eighty thousand dollars
to be paid over four years, provided that the stakeholder graduates
 The Stake in Context 63 I

from high school and stays out of trouble. The college-bound could
draw on their stakes immediately to pay tuition and living expenses,
but the others would have to wait for three years before receiving their
first payment.
This delayed phase-in would help respond to an obvious transition
problem of the first magnitude. At present, most teenagers have little
reason to prepare themselves for the responsibilities of managing
eighty thousand dollars. This will change over time as parents, teach-
ers, and friends spend endless hours telling them of the perils of blow-
ing their stakes. We believe that, after hearing years of such talk, most
young Americans will surprise the skeptics and make responsible use
of their new-found freedom. But there is a very real danger that the
first stakeholders will treat their money as a gift from out of the blue
and discredit the program by wasting it on a splurge or frittering it
away through mindless consumption. A three-year delay will give the
first stakeholders a chance to internalize their new prospects and to
weigh their new opportunities carefully. At the same time, the three-
year lag will give the IRS a chance to phase in and fine-tune the tax
measures needed to fund the stake.
There is something to be said for an even more gradual approach.
Rather than targeting a single group of eighteen-year-olds, it might be
wiser to begin by providing "fractional stakes" to a broader cohort of
teenagers ranging between, say, fourteen and seventeen. Under this
approach, kids of fourteen would eventually claim eighty thousand
dollars, whereas fifteen-year-olds would get sixty thousand dollars,
and so on, leaving eighteen-year-olds empty-handed. This fractionalist
phase-in avoids the arbitrariness in granting a full eighty thousand to
the first crop of stakeholders while their slightly older brothers and sis-
ters get nothing.
Another way to respond to the problem would be through the cre-
ation of a large "transitional fund" for the needs of those born a little
too early. This special fund should award training grants and scholar-
I 64 The Basic Proposal

ships that compare favorably to those available under the preceding

regime. That way, those who just missed out on stakeholding might
console themselves with the thought that they had nevertheless done
better than had their immediate predecessors.41
Undoubtedly, many other transitional problems will arise. But
there is no reason to think that they will prove unmanageable or so
costly as to overwhelm the long-run benefits of life in a stakeholder
society.
 4

Profiles in Freedom

We have been telling our story with statistics, but there is another
way of putting stakeholding in context. We invite you to imagine what
eighty thousand dollars might mean in the real lives of real people you
know. Then try to move beyond your own friends and neighbors to
imagine other lives at greater distance. To help in this, we offer a few
American profiles of our own devising. Bill and Brenda represent mil-
lions of hard-pressed young couples in the twentieth through fortieth
percentile of Americans.1 Mike and Mary Ann come from the better-
off group in the fiftieth to seventieth percentile. Then we consider
people both higher and lower in the economic order. Bill, Brenda, and
the others are fictional, but their life situations represent reality for
many Americans.
For all of them, stakeholding will have revolutionary implications.
At present, the average young family has a net worth of about $11,400,
cars included.2 Fewer than half own a home, usually a heavily mort-
gaged one.3 In the bottom half of the income distribution, the typi-
cal young household has a net worth of only a couple of thousand

65
I 66 The Basic Proposal

dollars—or less.4 Although an overwhelming percentage of these fam-

ilies call themselves "middle class/' they are at a terribly vulnerable
moment in their lives. A small economic misstep can have large con-
sequences. The anxieties of everyday life generate enormous tensions.
The stake will not work magic. It will not make it easy to confront
crucial life decisions about marriage, children, education, and career—
nor will it guarantee happiness. But it can transform the character of
these crucial decisions. Too many now seem as if they are almost in-
evitable responses to the forces of economic necessity. In a stakehold-
ing society, they will be hard choices among real alternatives.
Our profiles are constructed in a simple way using today s statistics
on education, income distribution, marriage, child-bearing, and so on.
Although stakeholding may change these numbers over time, we have
not tried to predict such shifts. We simply sketch currently realistic
portraits and then ask what difference stakeholding would make.

Bill and Brenda

Bill and Brenda are a young married couple in their mid-twenties.5
Like 32 percent of their contemporaries, they graduated from high
school but did not go on to college.6 Their working-class high school
wasn't particularly inspiring, and they weren't inclined to see college
as the key to their dreams. Instead, they found work similar to that of
other young high school graduates.
Bill has had a series of jobs as a construction laborer. When con-
struction slows during the winter, he often works as a clerk in a hard-
ware or auto-parts store.7 Bill's income varies, since he sometimes
spends months unemployed.8 In a good year, he can make as much as
twenty thousand dollars, but in a bad year he earns very little.9
Brenda works as a home health aide.10 She receives assignments
through an agency and serves as a companion to mostly elderly clients.
She helps them with the tasks of daily living they can no longer handle
 Profiles in Freedom 67 I

themselves. A typical assignment might last from a few weeks to six

months, and although the work is exhausting and sometimes depressing,
she earns eight dollars an hour—better than the five dollars or so that
she might make as a grocery cashier or fast-food worker. The work is
pretty steady, although there are occasional periods of down time be-
tween assignments. She routinely earns fifteen thousand dollars a year.11
When they are not working, Bill and Brenda spend their time in
church activities, hobbies (Bill is a talented amateur auto mechanic
and has a collection of old cars that he is fixing up), and taking care of
their son, Peter, who is four.12 Until now, Bill's mother has been mind-
ing Peter while his parents are at work, but Grandmas arthritis is
worsening, and she is having a hard time keeping up with an active
grandson. Bill and Brenda are worried about how they will afford the
tuition at a day care center.
Bill and Brenda save money by living in a rented apartment in a
run-down neighborhood. But their family is quickly outgrowing the
two-bedroom unit, and they would like to buy a house, although they
haven't saved much for a down payment and they fear that their in-
come is too irregular to qualify them for a mortgage.
They are also worried about Peter s education. They can tell that he
is enormously bright, and they want him to have the best opportuni-
ties. They would like to put Peter in an excellent preschool this year,
but the tuition is expensive.13 Over the longer term, the best local op-
tion is parochial school, which also costs something. Or they could
move to a better neighborhood with better public schools—but the
catch is that most "good" neighborhoods have few apartments.
Although Bill and Brenda try hard to be frugal, money is a constant
problem. In lean times, it is sometimes a challenge to meet the rent
and to pay for heat, food, and doctors visits for Peter. (Brenda has
health insurance for herself through her agency, but the monthly cost
of family coverage is too high.) Even in good times, they clip coupons,
drive old cars, and buy clothes at the discount store.14
I 68 The Basic Proposal

To this point we have said nothing about the stake, in order to

sketch Bills and Brendas concerns today. But now assume that stake-
holding became a reality and that Bill and Brenda each received eighty
thousand dollars (plus interest, since neither went to college). How
would their choices change?
Let s assume that Bill and Brenda choose a conservative investment
strategy for their money, one that yields a 5 percent nominal return
each year (much less in real terms, given an inflation rate of 3 percent
or so).15 By their mid-twenties, they have a principal balance of nearly
$170,000 and are getting about $8,500 a year in interest from their
stakeholding account, which they are spending for furniture, car re-
pairs, and living expenses during hard times.16 Just this year, they in-
vaded their stake and spent an extra ten thousand dollars to cover costs
during one of Bills longer lay-offs.17 The decision caused them great
anxiety. They know that their remaining $160,000 offers a lifetime op-
portunity—but what to make of it?
Bill would like to get out of construction and into a more secure and
better-paying job. He has tried to get work as an auto mechanic, but
employers tell him that he needs some formal training in the latest
high-tech methods. So one option is for Bill to enroll in a training
course and apprenticeship for a year or two. Another is for Brenda to
go back to school. In two years at the community college, she could
earn an associate s degree in nursing and qualify for a higher-status job
with better pay. Their stakes would allow Bill and Brenda to pay tu-
ition and living expenses while one of them is in school and out of
work. And over the long term, a better job for Bill or Brenda would
mean extra security for the family.
There are other options. Unemployment is a frequent reality for
Bill. Just this year, when the construction industry slumped, the stake
was a godsend. Without it, the family would have had to make ends
meet solely on Brendas income and a modest—and distressingly short-
term—unemployment check. Having that cushion may also allow
 Profiles in Freedom 69 I

Brenda and Bill to take some time for their family, too. They would
very much like to have a second child, and the stake makes it possible
for Brenda to take a few months' unpaid maternity leave.
Buying a small house is another possibility. Their stakes would
allow them to put a sizable down payment on a modest house, with a
remaining mortgage that they could afford.18 And moving to a better
neighborhood would ensure Peter a higher-quality education. Peter s
care is another issue. Their stakes could help them buy day care for
their son and send him to a decent preschool.
Brenda s father is urging the young couple to take another route: to
save all their money and avoid spending any even during hard times.
He warns, "You never know what life holds," and reminds the pair that
they have many long years to go until retirement.
Of course, Bill and Brenda cannot do all of these things at once—
even $160,000 will go only so far. They have some hard choices to
make. They could take Brendas dad s advice and bank their money as
a rainy-day fund. They could continue to spend a couple of thousand
here and there—some maternity leave for Brenda, preschool and
parochial school for Peter, extra money when Bill is out of work. Or
they could take the leap and make a bigger investment—a house or a
training program that might have a major long-term impact on their
security, but at the cost of depleting their one-time stake.
We cannot predict which choices they will make, much less how
their decisions turn out. We do believe that the vast majority of Bren-
das and Bills—and their children—will have more self-confidence and
more real security. But even if they fail, they have had the taste of real
freedom to make their own decisions about how best to live their lives.

Mary Ann and Mike

Mary Ann s and Mike s choices are not so different, even though they
are several steps up the economic scale. These twenty-five-year-olds
I 70 The Basic Proposal

are also struggling with foundational questions about marriage, chil-

dren, and career that will shape their adult lives.
Mary Ann graduated from high school and went on to the local
community college, where she earned an associate's degree.19 She
would like to finish college and become a teacher. But she didn't like
the idea of taking out big loans, which she would then have to repay on
a teachers salary. She now works as an executive secretary at a local
bank, earning twenty thousand dollars a year plus health insurance.20
Mike graduated from high school but decided not to go to college.
He's doing pretty well, though. As a unionized truck driver for a na-
tional supermarket chain, he earns as much as thirty-five thousand
dollars a year, including some extra pay for overtime.21 He would love
to buy a truck of his own, work as an independent contractor, and
build a bigger business over the long term.
Mike and Mary Ann have two children.22 Cathy is three, and Jenny
is just six months old. Both are in family day care with a neighbor down
the street. Mary Ann went back to work when Jenny was ten weeks
old, but she's exhausted these days from juggling work and family.
Mike helps out with the children, but his hours are unpredictable, so
Mary Ann bears most child care responsibilities—getting the lads to
and from day care, taking them to the doctor, and so on. The baby has
been sick this winter, and Mary Ann has already missed more than a
week of work. Her boss has warned her that she can't take any more
time off. Like a lot of young mothers, Mary Ann is feeling over-
whelmed.23 She would like to stay home with the children at least
part-time, but she and Mike worry that they can't keep up their stan-
dard of living without her income.24
They are currently living in a rented townhouse but would like to
buy a home. They have saved about ten thousand dollars toward the
down payment, but that isn't enough, and neither set of parents can
afford to help them out. In fact, Mike's parents have very little money
and are approaching retirement without much except a modest social
 Profiles in Freedom 71 I

security check. Mike and Mary Ann anticipate that they will end up
helping to support his parents after they retire.
The stresses of life have left their marriage more than a little shaky.
Mary Ann s mother, who has gone through a divorce herself, is urging
Mary Ann to go back to college now so that she will have a solid career
if the marriage fails. She doesn't want her daughter to have to choose
between a bad marriage and life on her own with two small children on
a secretary's income. Teachers don't make much more at first, but they
have job security, their incomes grow over time, and they have their
summers free. Mike opposes the idea of college, saying that Mary Ann
would be foolish to go back to school with two little children at home.
Suppose now that stakeholding has been introduced. In contrast
to Bill and Brenda, Mike and Mary Ann have already spent a substan-
tial part of their stakes. Mary Ann spent thirty thousand dollars on
community-college tuition and living expenses. Mike spent fifteen
thousand of his stake on their dream wedding and honeymoon trip to
Asia. (His parents warned him against this "extravagance," but Mike
knew that it was the trip of a lifetime.) Since then, though, they have
reinvested their money without touching the principal. Today, Mary
Ann has accumulated nearly $58,000, and Mike has about $78,000, for
a total of $136,000 that earns $6,800 a year for them in the conserva-
tive version of the stakeholding account that they selected for them-
selves.25
What are their choices? Mike wants to use the money to pursue his
dream of starting his own trucking business. The $136,000 would be
enough to get a bank interested in providing enough capital for a two-
or three-truck operation. He is tired of working for someone else, and
he is sure that he can run his business efficiently and undercut the
competition. But to do that, he would need Mary Ann s stake as well as
his own.
Mary Ann is torn. Her mother warns her to keep her stake for her-
self. Mike says, "Honey, lets invest in our future together. If you don't
I 72 The Basic Proposal

want to help me start a business, let s at least use our money for a down
payment on a house/' Mary Ann might go along or choose to keep
what's left of her stake. If she keeps her own money, she might spend
it on college, save it in case they get divorced, or use some of it now to
allow her to cut back her work hours. Not an easy choice.
For Mike and Mary Ann, too, the stake means real freedom—of a
kind beyond their reach in todays America. Freedom brings hard
choices, with real consequences. But isn't that what life is all about?

Looking Ahead: Judy and Debbie

Judy and Debbie are young sisters, only two years apart. They live with
their divorced mother, Meg, in a high-crime, low-income area. Meg
wants the best for her children, but she knows that she is struggling
against the odds. The local schools are little more than warehouses.
The neighborhoods unemployment rate is in double digits, particu-
larly among the young. Some turn to dealing or using drugs, and oth-
ers drop out of school to have babies. Judy and Debbie might be white
or black or Latina; they might live in an inner city or in a poor rural
area.26
To this point, we have been telling our stories as if the stake has
simply dropped from heaven unannounced. But now lets consider
what the promise of stakeholding might mean for Judy and Debbie as
they grow up. As we have emphasized, stakeholding cannot solve the
multiple problems that confront the most disadvantaged. Nonethe-
less, Judy and Debbie will grow up hearing about stakeholding and
what it means to their older peers. Those who stay in school and keep
away from drug dealers and gangs will claim their stakes proudly at age
twenty-one—and their friends and neighbors will hear about it. Oth-
ers will falter. They will lose their stakes to repeated criminal convic-
tions or drop out of high school and settle for a modest annuity instead
of full control over their money.
 Profiles in Freedom 73 I

When Judy and Debbie are youngsters, Meg uses the promise of a
stake and the experience of her friends' children to reinforce her ex-
hortations that her girls stay on the right path. Debbie, the elder, suc-
ceeds with flying colors. She graduates from high school at eighteen
and heads to college. Nowadays, a talented but poor student like Deb-
bie often ends up in a community college.27 The tuition is low, and she
can save money by living at home. To be sure, a better school with
higher tuition may offer a package of grants, loans, and work-study
jobs to get her through.28 But Debbie might be wary of taking on big
debts and working her way through school, simply in order to get bet-
ter credentials.29 In contrast, the stake will let Debbie choose a college
based on its programs, not on its location and degree of state funding.
Aiming for a career in business, Debbie chooses to go to an out-of-
state college that offers low tuition and a solid business school. Four
years later, she emerges at age twenty-two with a bachelors degree,
several good job offers, and no college debt. She is on her way up.
Judy, the younger sister, hasn't done so well by age twenty-two. She
was always impressed by Debbie's example, but she got pregnant at
sixteen and dropped out of school to keep the baby, whom she named
Joey.30 Her boyfriend, Stan, is still around but can't pay much in child
support, even when he has a job.31 For the past six years, Judy has
been living with her mother and working at a series of minimum-wage
food-service jobs.32 Even when Judy has a job, she faces constant
money problems. Her annual earnings of about ten thousand dollars
are stretched thin by paying for food, clothing, and medical care for
herself and her son, and if it weren't for Meg's help, she and Joey
would be facing even tougher times.
Just this year, Judy has started to rethink her life. For one thing, she
received her first dividend check from the stakeholding fund.33 The
money is a welcome addition to her meager budget, but it is also a re-
minder that if she were to finish high school she could take control of
her own stake. The other triggering event is that Joey is about to start
I 74 The Basic Proposal

school—in the very same crumbling first-grade classroom that Judy

once sat in. Judy wants better opportunities for herself and her son.
The first hurdle is earning her high school equivalency diploma.
Judy studies at night while Meg watches Joey, and by age twenty-four
the diploma is hers. She walks proudly into the stakeholding office
to document her achievement. The next decision, though, is equally
tough. Meg warns her to invest the money: "Don't throw away this sec-
ond chance youVe worked so hard for." Her sister Debbie urges her to
go to college. Joey wants a house with a swing set. Stan, who didn't
graduate from high school, is suddenly more attentive and mumbles
something about getting married. Judy is not so sure: it is her stake.
We leave Judy facing a multitude of possibilities: if she marries
Stan, he might waste her money; if she gives him the cold shoulder,
she faces the hard life of a single mother. If she goes to college or to
vocational school, she must choose her studies carefully and budget
well, because the eighty thousand dollars (plus interest) will buy only
one chance, and she already has family responsibilities. If she spends
the money on private school for Joey, she cannot use it for herself. And
so on. Our basic point remains. For Judy as for the others, stakehold-
ing means recognition as a real citizen, whose pursuit of happiness is
entitled to respect. Her choices, successes, and failures are her own.

These profiles are representative of a broad spectrum of Ameri-

cans. But they do not begin to do justice to the complexities of life in
this vast country. Consider three young women each putting forty
thousand dollars of their money into a Meals on Wheels operation. Or
a young man going to work in an older fellows garage and buying him
out five years later. Or a group of skilled craftsmen going out on their
own in a new partnership. Or a GI who gets through college on today s
GI Bill and still has his stake to get him started in civilian life.
Or the son from an upper-middle-class family who bitterly breaks
with his parents, perhaps because he is gay when they are straight or
 Profiles in Freedom 75 I

he is a born-again Christian when they are not. Or a young woman, ha-

rassed at work by an overbearing boss, who gains the financial means
to quit her job and run the risk of a few months' unemployment before
finding a better one.
But we are not writing the great American novel. We leave the next
stoiy up to you.

The Culture of Stakeholding

Now take the next step and consider how all these stories will inter-
act with one another over time. Soon enough, everybody will be tell-
ing everybody about somebody he knows who . . . New words and
phrases—"What a stakeblower!"—will gain currency and influence.
A new culture will emerge—one that will seriously challenge exist-
ing patterns of self-understanding. The stories surrounding stakehold-
ing will provide a dramatic alternative to the icons of teenage culture
that so dominate at present. Rather than glorifying instant gratifica-
tion, the new stories will champion the longer view: its heroes will
be young men and women who understood the life-shaping possibili-
ties provided by the stake and made the best of them; its dunces will
be the kids who refused to grow up and blew their stakes on childish
stupidities.
At the same time, the emerging culture will greatly enrich the stock
of stories that we now tell ourselves about young adulthood. These are
presently dominated by tales of yuppies' success on Wall Street or in
Silicon Valley—and for good reason, since the lives of the great mass
of Americans have been stagnating over the past quarter century. With
yuppiedom so obviously out of reach for most people, millions grimly
resign themselves to decades of quiet desperation. To be sure, there
are exceptions: some twenty-somethings find meaning in volunteer
service for their community or church, but most are so hard-pressed
I 76 The Basic Proposal

by work and family that they can do little more than turn on the tele-
vision for glimpses at a never-never land of sports stars and sex sym-
bols. Apart from the occasional TV sitcom, there is little in pop culture
that remotely displays their own lives in a sympathetic way.
This will not be true of a stakeholding society. The world will come
alive with real-world stories starring people like themselves—making
hard choices and taking the consequences. Rather than grim resigna-
tion, the order of the day will be responsible decision.
Our repeated invocations of the Declaration of Independence are
more than rhetorical gestures. We are taking up Thomas Jefferson s
deeper challenge: can we reconstruct his vision of an America as a
property-owning democracy full of freedom-loving individualists?
Stakeholding cannot end poverty, cure cancer, or make life easy.
But it can promise more real freedom for all, and this promise will it-
self help create a new generation of Americans more equal to free-
dom s challenges. There is undoubtedly something Utopian about this
aspiration, but it is a dream worth fighting for.
 5

Payback Time

Real freedom and equal opportunity don't come cheap. Using conser-
vative assumptions, we estimate that the cost of our initiative in 1997
would have been about $255 billion—a little less than what we spent
on national defense.1 This is a big number, but as a nation we have
made comparable commitments in the past. Would America have
been a better place after World War II without the GI Bill of Rights?
At that time, 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.2
To be sure, 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. Day
after day, our society demands countless small acts of voluntary coop-
eration as well as many larger personal sacrifices. If the younger gen-
eration is denied a fair start, how can the rest of us expect them to
reciprocate as the need requires?

77
I 78 The Basic Proposal

We begin with moral fundamentals: what obligations, if any, do we

owe succeeding generations of Americans? After defining some prin-
ciples, we consider how they might govern a stakeholding society.
Over the long run, stakeholders themselves should play an increas-
ingly central role in financing the system. As the first recipients begin
to die out, they should be expected to pay back their initial eighty
thousand dollars, with interest, into the stakeholding fund. Family
members should be allowed to claim large inheritances only after the
stakeholder has paid back the eighty thousand that helped give him a
start in life.
If any young adult finds this future obligation too onerous, he can
escape it by waiving his claim to the stake. But once he stakes his claim
as a citizen, fairness requires him to pay back his debt to his fellow
Americans before making other substantial bequests. Working out this
position will require us to consider lots of fascinating themes and vari-
ations. But we do not expect our general approach to be too contro-
versial.
More controversial, perhaps, will be our views on the crucial ques-
tion of the short term: because very few stakeholders will be dying any
time soon, how are we going to finance the initiative over the next half
century? Chapter 6 proposes a 2 percent annual wealth tax to fill the
fiscal gap. Wealth taxes, especially on real estate, serve as the founda-
tion of local public finance in this country, and they are quite familiar
in Europe.3 But American government on the national level has relied
on income and payroll taxes to finance redistribution. Our suggestion
of a wealth tax may seem, then, more novel than it really is.4
Even so, it is novel, and so it suffers under a special burden of jus-
tification. We begin by emphasizing that one could reject a wealth tax
but still embrace stakeholding. All this requires is some other plan for
coming up with the money. Most obviously, one might increase in-
come taxes or cut expenditures—or both. Or one might consider a fis-
cal favorite of conservatives, who have been agitating for a national
 Payback Time 791

sales tax to replace the income tax.5 Taken by itself, this last proposal
strikes us as a bad idea, as a sales tax hits the poor harder than it does
the rich.6 But as a possible source of new revenue for stakeholding,
the idea has greater promise, for the progressive character of our pro-
gram would outweigh the regressive character of the sales tax, leaving
poorer citizens far better off in the aggregate.7 We are not purists and
would be happy with half a loaf. Nonetheless, we think that a wealth
tax is the best available option.
Chapter 7 concludes the fiscal side of our argument by considering
predictable objections. Every new tax generates the same old cry: it
will kill the economy. Rich people are always happy to remind you of
the story about killing the goose that lays the golden eggs. But is it just
a fairy tale?
Not only has our economy boomed, and busted, under very differ-
ent levels of taxation; recent empirical research also suggests that the
link between tax rates and economic growth is far weaker than the pre-
vailing political rhetoric implies. We conclude, then, by exposing the
emphatic certainties of antitax rhetoric to the indeterminacies and
complexities revealed by serious economic analysis.

Obligations to the Future?

Each generation has the next in its power. We can lay waste to the
planet or scrimp and save in order to transform our grandchildren's
world into a technological cornucopia. The decision is up to us. But it
doesn't necessarily follow that we should consider ourselves morally
free to make any decision we like. Are there principles of public
morality to which America should be committed in making this funda-
mental decision?
Perhaps not. We can well imagine some hardheaded libertarian
consigning the entire question to the "invisible hand." It is up to each
I 80 The Basic Proposal

American to decide on her own what she should do with "her prop-
erty," both during life and after death. If most property owners choose
to mark their passage into the beyond by committing all their earthly
possessions to the flames, the next generation would have no just
cause for complaint. It would simply be tough luck.
To be sure, this is not an aspect of libertarianism that even fierce
partisans take pains to emphasize. They are prone to praise the market
system as a machine for growth without reflecting on the deeper im-
plications of their philosophy. But the truth is that the market does not
guarantee growth by itself. The market depends on the prevailing
preferences of property owners. And if the rich ones don't give a damn
about the future, libertarians have few conceptual resources enabling
them to argue that the rich have done a grievous wrong.8
So much the worse for these callous folk, or so goes the dominant
utilitarian response. Rather than taking the narrow view of an individ-
ual property owner, the utilitarians say, we should adopt the position of
a concerned citizen attempting a truly impartial view of the situation.9
From this vantage, the interests of young Americans of the year 2050
should count equally with those of us who happen to be around right
now. In Jeremy Bentham s famous formulation: each should count for
one, and none should count for more than one. As a consequence, util-
itarians would have no trouble with the "bonfire" method of estate
planning that exposed the callous indifference of the hardheaded lib-
ertarian. They would strongly support legislation banning such utility-
minimizing activities: while the older generation might well experience
some frustration in foregoing their bonfires, this pain is readily out-
weighed by the satisfactions gained by keeping the property around
for use by their successors.
When we turn to harder cases, the utilitarian calculus depends on a
complex balancing operation. Speaking broadly, it begins by compar-
ing the relative wealth of earlier and later generations. Because the
marginal utility of money generally declines as people grow richer, a
 Payback Time 81 I

relatively poor generation shouldn't scrimp to enable its relatively rich

successors to get even richer.
But other things aren't necessarily equal. If, for example, great
technological miracles are just around the corner, extra savings might
generate massive returns. Under this scenario, the enormous extra
gains in welfare accruing to the rich generation in 2050 might morally
offset the extra welfare losses suffered by poorer folks in the year
2000.10 The nature of our collective obligations depends quite heavily
on predictions about the future that are difficult to subject to serious
empirical critique.
This is a significant disadvantage, the utilitarians must ruefully con-
cede, but consider the alternative: isn't it better to make guesses about
the future than to blind oneself to the problem, as the libertarians do?

Liberal Trusteeship
We find something lacking in both sides of this debate. Like the liber-
tarians, we reject the idea that justice is a matter of designing an
enduring happiness machine. Each of us is a free and equal citizen
whose rights should not depend on social engineering, however benev-
olent the engineer may be. At the same time, we reject the libertari-
ans' nonchalance toward the future. While it falls to us to determine
the collective fate of our grandchildren, we may not look upon their
claims with indifference or disdain. Temporal priority does not imply
moral superiority. We should, instead, be prepared to explain to them
how we have taken their status as fellow citizens into account in our
deliberations.
We propose a principle of trusteeship that speaks in terms of indi-
vidual rights, not aggregate welfare. We must take the claims of equal
citizenship for tomorrows Americans seriously—as seriously as we
take our own. If we wish to sustain a civic bond with our successors, we
have no right to arrange the future for our convenience and let our
I 82 The Basic Proposal

successors fend for themselves. At the very least, we have an obliga-

tion to provide them with the same fundamental rights that we have
provided for ourselves. Call this the principle of liberal trusteeship.11
To consider its long-term implications, begin with a thought-exper-
iment. The year is 2010, and America has just adopted stakeholding as
its response to growing economic inequality. As the debate moves to
basic questions of program design, the status of future generations
comes into view. After all, the country is not engaging in a one-shot ex-
ercise in benevolence. Stakeholding is not only for the year 2010 but
for as long as Americans continue to find inspiration in the Declara-
tion of Independence. Shouldn't this commitment to the future be in-
scribed into the very terms of the stake itself? Each stakeholder should
take her eighty thousand dollars under conditions of trusteeship.
While the stake is her property during her lifetime, her control should
not extend beyond the grave. If a stakeholder is successful and dies
with millions in the bank, she should not be allowed to forget the
eighty thousand dollars that helped give her a start. Instead, she must
first repay it into the stakeholding fund, with interest, before she may
give large bequests to her children or to charities.
Here as elsewhere, we are insisting upon the priority of citizenship
over the claims of other relationships. Success in the marketplace does
not trump the stakeholders obligations to future citizens. Nor does
her desire to perpetuate the economic dominion of her family for gen-
erations to come. Dynastic ambition is not a good reason for forgetting
one s debt to one s country and refusing to do a fair share to provide fu-
ture citizens with an equal start in life.
This principle of stakeholding trusteeship will, we think, prove to
be one of the least controversial aspects of our program. Even liber-
tarians will have a hard time rejecting it. After all, nobody is forcing
anyone to take the eighty thousand dollars. If someone finds the trust
too offensive, he can simply refuse to claim his stake. But for the rest
of us, this payback obligation will seem an obvious implication of our
 Payback Time 83 I

membership in a republic that existed long before we came onto the

scene and will endure long after.
When cashed out in monetary terms, trusteeship will carry a big
price tag. Thanks to the wonders of compound interest and increasing
longevity, a stake of $80,000 received in 2010 implies a payback oblig-
ation of about $250,000 (in real dollars, after inflation is taken into ac-
count) when the typical American dies sixty years later in 2070.12 And
if human nature remains the same, stakeholders will respond with a
characteristic ambiguity. On one hand, most will appreciate the justice
of repaying this large sum to the stakeholding fund. But on the other
hand, many will try to weasel out of their debt. Rather than dying with
substantial estates, they will be sorely tempted to make an end run
around the stakeholding fund by giving large gifts to their children and
others before they die. If nothing were done to prevent this, the in-
tegrity of the program would be threatened. It will not be enough,
then, to apply trusteeship principles to bequests; it will also be neces-
sary to regulate large gifts made before death.
This must be done sensitively to take account of the realities and
values of family life. Parents, both rich and poor, have a fundamental
right to share their lives with their children. While this means that
children of the rich will enjoy the material fruits of their parents* suc-
cess while growing up, this is perfectly fine—provided, of course, that
the state takes an active role in providing a genuinely rich set of edu-
cational opportunities for others less advantaged. Liberalism has al-
ways favored leveling up, not leveling down.
Trickier problems arise when children become grown-ups. By the
time they claim their stake, young adults will have typically left home
to establish a certain independence from their parents—indeed, the
eighty thousand dollar stake will undoubtedly encourage this. On the
parents' side, stakeholding will also serve as a marker. Even today,
most parents believe that their financial obligations to their children
end when their children leave school.13 Stakeholding will reinforce
I 84 The Basic Proposal

this belief. For the overwhelming majority of parents, it will seem ab-
surd for their children to call upon them for more money when they
have eighty thousand dollars apiece at their command. Except for the
top 1 or 2 percent, intrafamily exchanges will become limited to holi-
day or birthday presents and the like. Only those at the very top are
likely to consider eighty thousand dollars too little for a suitable start
in life.
This is the point at which the principle of liberal trusteeship be-
comes important. If equality of opportunity means anything, it means
that the rich must restrain themselves. At the very least, parents
should be taxed substantially if they wish to shower their adult off-
spring with large financial advantages. While these gift taxes will pre-
dictably affect only a small minority at the very top, serious regulation
is required in order to avoid a more general demoralization with the
system.
We will return to the practicalities of translating these principles
into workable estate and gift taxes. But for now, consider the next
question of principle: how should we deal with the problem of stake-
holders who die without sufficient funds for paying back their stakes?

The Trusteeship Tax

As the first generation of stakeholders passes away, their successors
will confront one of three fiscal possibilities. Depending on the first
generation s response to the payback obligation, their aggregate con-
tributions to the stakeholding fund may match the stakeholding re-
quirements of the coming generation, they may generate a surplus, or
they may leave the fund with a shortfall. The first possibility marks a
steady-state solution. Each generation claims its stake and recognizes
its trusteeship responsibility to its successors, leaving enough for the
next generation to begin the process again. The second, or surplus,
 Payback Time 85 I

scenario would allow either an increase in the average stake or a mod-

ification of estate and gift taxes to allow for more bequests to children
and charities.
The third possibility raises more serious problems. It is most likely
to arise if the first generation responds to the payback obligation by in-
creasing consumption during their lives, leaving less to their children
and less to the stakeholding fund. Under this scenario, the payback re-
quirement will not allow the first generation to fulfill its trusteeship
obligations, and so further steps must be taken to assure the fiscal
soundness of the stakeholding fund.
This is the function of the second prong of our long-range program.
Call it the trusteeship tax. Rather than waiting until stakeholders die
before calling upon them to replenish the stakeholding fund, why not
require them to pay a supplementary tax during their lifetimes so as to
guarantee the fund s solvency?
At this point, we expect, libertarians will begin squirming: "It was
one thing to impress a trust on the original eighty thousand dollars that
I received from the government. But now you're proposing to take the
real money that I have accumulated from other sources. I always knew
that, once you stakeholding guys got into power, you'd begin to use
your pet program to squeeze more money out of me. But it's up to me
to decide whether I give my money to the Americans of the future or
not. If I choose to spend it on something else, that's what freedom is
all about. You guys are nothing better than thieves!"
We have reached a moment of genuine moral disagreement. We
agree with our libertarian friends that each citizen, after paying her
taxes and fulfilling her other obligations, should generally be free to
spend her money as she sees fit. It is up to her, and not the community,
to determine the meaning of her life and the proper use of her re-
sources.
But we deny that any of us can treat the interests of future citi-
zens as if they did not raise authentic civic obligations. Our hypotheti-
I 86 The Basic Proposal

cal libertarian has cried "thief one time too often in condemning
the trusteeship tax. Just as the polity rightfully intervenes against the
garden-variety thief, so too may it rightfully intervene to prevent the
present generation from robbing the future. After all, the rising gen-
eration did not participate in the process through which our hypothet-
ical libertarian gained her wealth in the marketplace. Many had not
been born at the time of her greatest market triumphs. Even though
she might have fairly gained her property in competition with others
of her generation, this does not mean that she can escape her fair
share of trusteeship taxes.
Rather than telling future Americans to fend for themselves, she
should recognize them for what they are—fellow citizens of an endur-
ing republic. Each American is a link in a chain that extends beyond
her own lifetime; the first link was fashioned by the opening words of
Jefferson's Declaration, and each of has an obligation to give these
words real meaning for our successors. Like it or not, our libertarian
friends cannot expect their fellow citizens to allow them a special ex-
emption from this collective obligation.*

Beyond the Wealth Tax?

But this conclusion only gets us to the really interesting questions. It is
not yet clear what land of trusteeship tax is best suited to serve the
backup function that we have identified. To see the problem, return to

Taking this libertarian objection to its extreme, childless stakeholders might also claim
a special exemption from the trusteeship tax. After all, they do not have any children,
so why should they pay for stakes for other peoples' progeny? This question dramatizes
the libertarians peculiar blindness to the reality of civic obligations. A childless Amer-
ican remains an American—a citizen who enjoys the priceless legacy of legitimate gov-
ernment handed down by his predecessors and has an obligation to reciprocate by
handing down this legacy to the future in a revitalized condition.
 Payback Time 87 I

the likely scenarios that will greet Americans in the year 2060. As the
first generation passes from the scene, some citizens will have more
than enough money to pay back their quarter of a million dollars, but
many will go to their graves penniless, leaving the fund uncompen-
sated for their initial eighty thousand dollars.14 Ideally, shouldn't our
trusteeship tax be structured to encourage these people to save, thus
minimizing the fiscal consequences of their final shortfall?
The problem raises a relatively unexplored issue of public morality:
how should more successful citizens respond to the predictable fail-
ures by others to fulfill their obligations? After all, the Thirteenth
Amendment does impose some limits, and we do not urge the resur-
rection of debtors' prisons. All in all, it is better to view payback fail-
ures in the same way that we have learned to look at bankruptcies.
Obviously, bankrupts have not done something commendable; de-
pending on the facts of their cases, many may be worthy of moral cen-
sure; but it is not as if they were ax murderers.
So, too, in the case of men or women who die penniless. It is hard
to condemn their failures to fulfill their trusteeship obligations with-
out knowing a lot more about their lives. Perhaps some of them never
had a decent education—remember, our basic stakeholding proposal
focuses only on young adults and does not seek to remedy the injus-
tices of earlier life. Perhaps somebody trained hard to become a key-
punch operator, only to see demand for her services plummet. Or
perhaps she blew the money in Las Vegas.
Given the rough justice that is inevitably tax law s fate, it is too quick
to raise the banner of "double taxation" in objecting to the fact that
the economically successful will invariably pay more. As we have em-
phasized, it is better to view them as participating in a collective ven-
ture, in which the entire generation has an obligation to discharge its
trusteeship obligations to its successors. And because the failure of
some to live up to this obligation is so predictable, it seems fair to ask
for more from the more successful.
I 88 The Basic Proposal

Whatever form the trusteeship tax takes, it marks a decisive break

with libertarian understandings. Stakeholding is not simply a govern-
mental loan program with a favorable rate of interest. If it were, we
might want to limit participation to those citizens who can demon-
strate good prospects for making the money to pay back the loan. But
we reject any such exclusionary notion in favor of a collective commit-
ment to equality and freedom for all, not just for some. As long as
stakeholding serves as a mark of citizenship, we cannot allow the most
privileged to avoid the trusteeship tax merely because they have paid
back their stakes. They must share in the citizenry s collective respon-
sibility as well.
But how to measure this share? Depending on your answer, you
can choose among three tax bases. The advantage of a sales tax—also
called a consumption tax—is that it would squeeze the most out of
those who will ultimately die penniless. Even the poor have to buy
food, shelter, and clothing. And a consumption tax is a particularly
good way to target the improvident, who, by definition, have con-
sumed a lot and saved very little over their lifetimes.
The second possibility is an income tax. The appeal here lies in its
more progressive base. It exempts the poorest citizens, who are just
getting by at a subsistence level. And it also collects more from
wealthy savers, for the tax must be paid whether citizens spend or save
their incomes.15 The corollary, though, is that the income tax takes less
from spendthrifts and more from savers.
The third option is a wealth tax, which would place the burden en-
tirely on savers. Because wealth is more concentrated than consump-
tion or income, the wealth tax would be the most progressive of the
three.16 But the rich savers who pay the wealth tax are also the very
people who will fulfill their payback obligations. Why should these
people pay even more?
Our own choice among these tax bases would depend on the extent
to which America moves toward social justice during the next half cen-
 Payback Time 89 I

tury. Begin with an optimistic scenario: not only does the next genera-
tion go for stakeholding, but it also redeems its commitment to a first-
rate education for all of Americas children—from Head Start to high
school. Under this scenario, a diminishing number of failed paybacks
could be fairly attributable to systemic injustice. Dying with a bank-
rupt estate would increasingly suggest a self-conscious effort to take a
free ride on others* conscientious efforts to fulfill their trusteeship
obligations at payback time. Within this evolving context, we might
well favor a trusteeship tax based on income or consumption.
But for the foreseeable future, we are likely to remain far away
from real equality of opportunity. And under these conditions, the
best form of trusteeship tax is a wealth tax.
Or so the next chapter will argue.

From Principles to Practicalities

Before turning to the case for wealth taxation, we consider the practi-
cal problems involved in making the payback principle into a workable
system. Fortunately, we can build on our existing tax system, which al-
ready contains the basic tools.17 It imposes heavy gift taxes on rich par-
ents who seek to provide their offspring with overwhelming financial
advantages. It also recognizes that there is something special about in-
heritance. While Bill Gates is free to spend millions on a futuristic
mansion during his lifetime, his effort to pass on the same amount to
his children is subject to special and onerous estate taxation,
A particularly valuable feature of present law is the way that it inte-
grates gifts during life and bequests at death. Individuals cannot avoid
estate taxes by making lifetime transfers. Instead, they are permitted a
lifetime exemption of $650,000 against both the estate and the gift tax.18
Any gifts and bequests above that amount are taxed at rates of up to 55
percent. In addition, each parent can give each child an annual gift often
thousand dollars before he begins to use up the $650,000 exemption.
 90 The Basic Proposal

The payback obligation can fit comfortably within this basic frame-
work, although it would require revision of key policy decisions. Most
obviously, stakeholding requires rethinking the $650,000 exemption.
Citizens should not be allowed to give so much money away tax-free
before they begin to repay their stakes. We would not insist, however,
that they begin paying back with the very first dollar. Most people have
a few heirlooms of high sentimental value but relatively low market
value. They should be allowed to pass them on during life or at death
without much trouble. A lifetime exemption of fifty thousand dollars
should be more than enough to satisfy this need.19
At this point, the claims of stakeholding rightly come to the fore.
The initial grant of eighty thousand dollars, after all, represented a col-
lective commitment to equal opportunity. It would be bizarre to allow
individual stakeholders to destroy this commitment as their dying act.
After the fifty-thousand-dollar exemption, we would impose a payback
obligation. If we use an interest rate of 2 percent to reflect the real rate
of productivity growth in the economy, an eighty-year-old would then
owe about $250,000 in 1997 dollars.20
Here we come to a fundamental design question. We could simply
require that all estates pay back the stake before we allow any other
bequests. Or we could design a more complicated payback schedule to
take account of the legitimate role of nonprofit charities in American
life. At present, these charities compete for bequests with children
and other loved ones. For most people, the new system would cap be-
quests to family members at fifty thousand dollars. Above this level,
they will confront a new choice. On the one hand, they will recognize
a moral obligation to pay back the stake that gave them such an im-
portant start in life. On the other hand, they will feel the pull of other
moral claims, including those exercised by churches, educational insti-
tutions, and other worthy organizations. How should tax law structure
this choice?
 Payback Time 91 I

We propose a balance: for every dollar that the citizen pays into the
stakeholding fund, she may give a dollar to charity. This dollar-for-
dollar ratio is not sacrosanct. The appropriate ratio would depend on
many factors—most notably, the condition of the stakeholding fund. If
the fund were flush and capable of paying out adequate stakes to the
next generation, we would be more generous. If not, the question
would be much more difficult: to what extent should we allow elderly
Americans to give to charities and turn to other taxes to make up the
shortfall in the stakeholding fund?
We leave this question to the day that it arises. For now, it is enough
to consider how allowing charities into the picture reshapes the estate
and gift tax. At present, donors can make large gifts to charity without
paying any tax,21 All the charities need to do is to convince them to ig-
nore the competing pleas of family members. Our revised tax system
modifies this choice, whether made during life or exercised at death.
Family demands are capped at fifty thousand dollars. Thereafter, gifts
or bequests to charities must compete with the stakeholder s moral re-
sponsibility to the next generation of citizens, and any charitable trans-
fer must be matched dollar for dollar with a payment to the
stakeholding fund.
To minimize bureaucratic hassles, we would provide an annual ex-
emption allowing each taxpayer to make small charitable gifts total-
ing up to two thousand dollars. After that, the dollar-for-dollar ratio
would apply. Similarly, within the family, each parent would be al-
lowed to give each child up to one thousand dollars a year in holiday
and birthday presents and the like. Present law already recognizes this
escape hatch but makes it absurdly large, allowing each parent a ten-
thousand-dollar annual exemption for each child. Savvy tax lawyers
advise their wealthy clients to take full advantage of this loophole in
order to pass large sums tax-free to their children. This would be in-
tolerable in a stakeholding society, where the rich, no less than the
I 92 The Basic Proposal

poor, are assured their eighty thousand dollars. The rich have birth-
days like the rest of us, but one thousand dollars a year should be more
than enough to allow moms and dads to show familial affection. Any-
thing more should be subject to significant taxation under the trustee-
ship principle.22
Under our basic structure, then, each taxpayer will have an annual
exemption of two thousand dollars for gifts to charity and one thousand
dollars for gifts to each child, and a lifetime exemption of fifty thou-
sand dollars in either gifts or bequests. After that, the next big chunk
at death either goes entirely to the stakeholding fund or is shared with
charities. The same rules apply to gifts made during life. This leaves us
with just two problems: how to provide for surviving dependents, and
what to do with the superrich—those who have something left after
paying back the stake.
With regard to the first problem, the trusteeship principle limiting
gifts to the next generation obviously does not apply to spouses.23
Here the principle of intragenerational freedom commands respect. If
one spouse has worked at home and reared the children in reliance on
a promise of lifetime support from the other, this deal is entitled to full
respect by a liberal state. In contrast to transfers to children, this trans-
fer does not endanger initial equality in starting points. Nonetheless, a
problem remains. We have presented stakeholding as a strictly indi-
vidualistic affair. When Citizen Single dies, his estate would immedi-
ately go toward paying back the stake. Why should Citizen Married get
a better deal?
We think that this question is unanswerable. The liberal state should
be neutral in its treatment of married and unmarried, gay and straight.
At the same time, it would be intolerable to evict surviving elderly
partners from their homes in order to satisfy the next generation s de-
mand for stakeholding revenue. The sensible solution is to defer col-
lection until the second partner dies before claiming assets to fulfill
the first partner s payback obligation, placing a lien on the property in
 Payback Time 93 I

the meantime. When the second partner dies, the estate is liable for
paying back two stakes with interest, not just one.24
This leaves us in the economic stratosphere—with the tiny minor-
ity who can leave more.25 For present purposes, we are happy to ac-
cept the existing rates of estate and gift taxation—ranging from 37 to
55 percent—on all bequests made after the payback obligation has
been satisfied.26 An adequate treatment of the superrich would take
us far afield. The case for stakeholding does not depend on whether
you think that the superrich serve as an essential engine of innovation
or as a corrupting force in democratic life. Stakeholding is built on a
broader foundation: the imperative need to redeem the liberal promise,
made to each citizen, of genuine freedom to shape his or her life.
 6

Taxing Wealth

The previous chapter invited you to consider stakeholding in long-run

equilibrium. As each generation dies, it repays its initial stake into the
fund, and if there is an anticipated shortfall, it also pays a trusteeship
tax during its lifetime. By replenishing the fund, each generation passes
on stakeholding intact to the next, which seeks to fulfill its trusteeship
obligations in turn, and so on until the end of the Republic.
But this long-run view will not get stakeholding off the ground. If
we are ever to begin, a substantial sacrifice will be required from
Americans who never receive a stake. This simple fact raises two ques-
tions. Is it fair to require such a sacrifice? Is it politically feasible?
We leave the second question to a later chapter,1 focusing here on
fairness. We hope to persuade you that rich Americans should recog-
nize a fundamental obligation to share their wealth with the rising
generation. We begin with our arguments for wealth-sharing, seeking
to integrate basic principles into a contextual understanding of the
crucial facts. We then proceed to a concrete proposal for an annual
wealth tax.

94
 Taxing Wealth 951

We challenge the self-serving view that taxes on the upper classes

can't raise large revenues. To the contrary, an aiinual wealth tax of 2
percent should suffice to fund stakeholding completely. This is true
even with an eighty-thousand-dollar exemption for every American,
which would exempt the bottom 59 percent of households from any
tax.2 This single statistic emphasizes the dramatic inequality of the ex-
isting situation. The wealth of America is distributed so unequally that
stakeholding can be financed by a tax that hits only the top 41 percent,
with the top 20 percent contributing 93 percent of the total revenue.3
Like any other method of public finance, the wealth tax has its
share of difficulties and complexities. These are very real, but there is
no reason that they could not be mastered—as long as Americans
found the political will to act decisively.

The Wealth Gap

The basic facts on wealth distribution are stunning. In terms of net
worth, a conventional measure of wealth, the richest 1 percent of Amer-
icans owned 38.5 percent of wealth in 1995.4 Even a broader measure
of wealth, which includes all pension and Social Security entitlements,
reveals that the richest 1 percent of the population owned 21.2 percent
of total wealth in 1989.5 By any measure, the current concentration is
extreme. Contrary to Americans' egalitarian self-perceptions, wealth is
more concentrated in the hands of the superrich in the United States
than it is in England or France—a sharp turnaround from 1900, when
Americans could still contrast their traditions of economic democracy
with the royalist legacies of Europe,6
And the trend is moving in the wrong direction. From the 1930s to
the late 1970s, the share of American wealth held by the top 1 percent
declined, from more than 40 percent to about 13 percent. But since
then the trend has reversed.7 Although average wealth grew between
1983 and 1995, only the top 5 percent experienced an increase in net
I 96 The Basic Proposal

worth.8 Wealth declined in every other group, with the bottom 40 per-
cent experiencing the sharpest drop.9 Social science methods are
never certain, but even conservative critics acknowledge an increase
in wealth concentration since the 1970s to its present stratospheric
levels.10

Sharing the Wealth

For some of our readers, these numbers will speak louder than words:
something must be wrong with a society in which the top 1 percent
manages to get its hands on more than one-fifth of the wealth.
We respect this intuition but do not share it. To the contrary: if our
country ever came close to achieving genuinely equal opportunity, we
would take a very different view of the wealth gap. Putting to one side
the continuing need for special assistance to those with serious physi-
cal or mental disabilities, we would then find ourselves switching sides
in this great debate. If each American received a first-rate education
and began adult life with a roughly equal stake, it should be up to him
or her to decide what to do next. Subject to fulfilling his trusteeship
obligations to the next generation, he should be free to make his own
decisions on the right mix of work and leisure, spending and saving. If
it then turned out that the top 1 percent gained 20 percent of the
wealth, we would accept the legitimacy of the resulting gap. It is up to
each of us to determine, on his own responsibility, the highest and best
use of his initial resources.11 If starting points were fair and some of us
decided to work, innovate, and accumulate while others spent more
on leisure and consumption, we would not challenge the ensuing dis-
tribution of wealth merely because the innovative savers had accumu-
lated much more than the leisurely consumers. To the contrary, the
ensuing distribution would simply be testimony to the diversity of
ideals that motivate free men and women in a just society.
 Taxing Wealth 97 [

Our case for a wealth tax, then, is necessarily more complex than a
simple appeal to the facts detailing disproportionate ownership. It is
based on an additional and, to our mind, inarguable point: nothing like
genuine equality of opportunity exists in America. As we have seen, priv-
ileged children begin life with overwhelming advantages—inherited
wealth, social connections, and an educational head start—which we will
call the unequal opportunity surplus.12 To a certain extent, this surplus
can be measured in dollars and cents. Even among the youngest wage
earners between the ages of 19 and 30, there is roughly a ten-thousand-
dollar difference in average annual earnings when we compare men who
grew up in the most affluent 20 percent of households with those who
grew up in the poorest 20 percent.13 If the extra earnings were set aside
each year in a modest savings account earning a real rate of interest of
just 2 percent per year, the account would have a balance of more than
$600,000 (in 1997 dollars) by the end of a forty-year career.14
But, of course, the value of early privilege should also be cashed out
in more ineffable terms: the general sense of efficacy resulting from a
childhood sheltered from the frustrations of material deprivation, the
enhanced self-confidence born of years of deferential service in the
marketplace, and the basic trust that your parents (and their check-
books) will act as the ultimate barrier between you and your follies.
Even wealthy citizens who emerge from humbler backgrounds can-
not rightfully claim that their wealth is fairly earned. These people
may think of themselves as modern-day Horatio Algers, but they too
have enjoyed an unequal opportunity surplus. At the very least, they
would have encountered much stronger competition had their fellow
citizens not been disadvantaged by the existing system. How can they
tell how they would have fared in a truly fair race?
There is simply no way to know what would have happened. And
certainly there is no practical way for the government to distinguish
between justly and unjustly earned wealth and make that distinction
the basis for taxation. Only one thing is clear: rich Americans cannot
I 98 The Basic Proposal

pretend that their gains are entirely the result of a fair system of equal
opportunity. Just because it is hard to measure their advantage in indi-
vidual cases does not make that advantage any less real Given this
fact, it strikes us as entirely appropriate to ask those who have accu-
mulated the most to share the most.
To be sure, a progressive income tax also helps reduce the unequal
opportunity surplus. But we have deliberately chosen a new wealth tax
for reasons both principled and pragmatic. On the principled side, the
opportunities that wealth confers are simply different from those that
high income brings. The possession of wealth today buys personal se-
curity and a host of opportunities: to move in higher social circles, to
bequeath assets to children, and to gain an effective voice in politics.
High income can help, but the rich who spend all they make will
forego the peace of mind and real power that accumulation alone can
confer. Under conditions of unequal opportunity, the distinct advan-
tages of wealth—as well as those of income—may fairly be taxed. On
the pragmatic side, the income tax and estate taxes today are riddled
with loopholes that benefit the wealthy.15 An annual wealth tax en-
sures that the rich contribute a bit more to the workings of justice.
The case for the wealth tax is particularly compelling now, for the
current generation has gained its wealth at an especially lucky moment
in the history of the Republic. Because wealth is correlated with age,
Americans over the age of fifty or sixty will bear the brunt of our tax.16
But it is precisely these people who have participated most fully in the
great postwar economic boom. The wealthy man or woman who is
sixty in the year 2000 was born in 1940—just in time to avoid the ago-
nies of the Great Depression and World War II, but just in time to
reap the harvest. Having graduated from college around 1960, the typ-
ical up-and-comer was in a perfect position to take advantage of the
rich array of opportunities made possible by America s rise to world
power. The best universities, the most advanced companies, the biggest
pool of capital—all of these were available for Americans who seized
 Taxing Wealth 991

the moment. Admittedly, nobody could have become wealthy without

one or another combination of effort, insight, and luck. But it would
be blind for any sixty-year-old to ignore the role played by the simple
fact that he was an American in an American age—and that he thereby
gained enormous advantages created at great sacrifice by his parents*
generation. Given the existing balance of generational advantage, it is
especially appropriate to ask this group of elderly Americans to sacri-
fice to sustain the Republics political and economic equilibrium.
Nobody can say for sure whether the recent wave of inequality will
continue unabated for another quarter century. While explanations
vary, most emphasize technological changes that have increased the
relative productivity of skilled workers. Other important structural
factors include the shift from manufacturing to service industries, the
declining strength of unions, and increasing job mobility and global
competition.17 It seems unlikely that these trends will disappear any
time soon; they may well accelerate in the increasingly globalized in-
formation economy of the future. All in all, the warning signs are seri-
ous enough to warrant serious measures like stakeholding to stop the
cycle of inequality before it spins out of control. The question is
whether wealthy Americans, who have profited so much from the
American century, should recognize a special responsibility to respond
to the clear and present dangers of deep economic division that lie
ahead.
To put the same point within a different temporal frame: we are
calling upon older Americans to remember that they themselves were
the beneficiaries of similar acts of statesmanship by earlier genera-
tions. During the New Deal and Great Society, Americans recognized
the elderly as a group that was particularly threatened by the inegali-
tarian operation of market forces. By responding with Social Security
and Medicare, our predecessors ensured a decent life for millions of
elderly Americans today. Without these programs, the distribution of
wealth today would be even more unequal than it already is.18 Is it not
I 100 The Basic Proposal

time, then, for the elder generation to reciprocate when the market
threatens to undermine the promise of economic opportunity for mil-
lions of younger Americans?
This commitment should not come at the expense of retirees who
depend on their monthly Social Security checks. We do not question
the basic legitimacy of government pensions; to the contrary, the next
part of this book defends them against fashionable libertarian critiques
and tries to put them on a firmer basis for the future. So we reject the
idea of funding stakeholding by raiding Social Security revenues. We
simply urge prosperous older Americans to recognize the moral claim
of younger Americans who will otherwise suffer lives of quiet despair.
Or not-so-quiet despair. After all, the prison population has soared
over the past quarter century. In 1975 about one hundred of every
100,000 Americans were in the nation s prisons; now that number is
about four hundred—and more than six hundred when the short-term
jail population is included.19 Young men, and increasingly women, are
the prime candidates for prison—men and women who might find it
within themselves to take a different path in a stakeholding society.20
If inequality increases during the next century, are we really prepared
to lock up more and more young Americans who react with rage at a
system that has never delivered on its promises? If those with the
greatest stake in the system do not take heed, who is supposed to?
It is time for the wealthy to accept stakeholding as part of the social
compact.

The Wealth Tax as a Trusteeship Tax

We emphasize, however, that our case for the wealth tax is based on
the continuing existence of pervasive and substantial unequal oppor-
tunity surpluses. Ideally, we should be aiming for a society that simply
eliminated these gross disparities and therefore no longer thought it
appropriate to tax wealth. But as long as these disparities persist, we
 Taxing Wealth 1011

cannot ignore them in deciding how to fund stakeholding.

To be sure, the wealth tax will sometimes irtipose an illiberal bur-
den. It will weigh more heavily on frugal savers than on their high-
living counterparts, imposing a greater obligation on the Ants than on
the Grasshoppers, as it were.21 But there are very few taxes that do not
have some distortionary features. Although wealth is an imperfect
proxy for inequality of opportunity, it is still a good one, and the com-
bination of a wealth tax and stakeholding can strike directly at the
source of unequal opportunity in the next generation.
During the first half century of its operation, the tax will also serve
to guarantee the trusteeship obligations of the first generation of
stakeholders, operating as a "backstop" to the payback obligation. The
annual collection of a wealth tax ensures that rich citizens cannot de-
feat their payback obligation by accumulating wealth and power over
a lifetime but then dissipating it quickly just before death. As we sug-
gested in the last chapter, the balance of argument may shift away
from wealth taxation if stakeholding succeeds in catalyzing a new
round of opportunity-equalizing reforms. In the year 2050 or 3000, a
more equal America may decide that wealth taxation has served its
purpose. In that far-off world, citizens may rightly decide to rely en-
tirely on other forms of public finance. But for the present, we turn to
considering how wealth taxation might actually operate in the real
world of unequal opportunity.

Designing the Wealth Tax

Although the wealth tax is unfamiliar to Americans, it has been a long-

standing feature of European systems. No fewer than twelve countries
in the Organisation for Economic Cooperation and Development
(OECD) tax wealth annually, although only Denmark and Sweden have
imposed rates as high as those we recommend and our proposed tax
I 102 The Basic Proposal

base is broader than the European standard.22 We turn to consider

some key issues involved in defining and administering the tax.
But before we begin, perhaps a bit of perspective is in order. Politi-
cians too often talk as if "tax simplification*' were the Holy Grail, and
lawyers especially delight in pointing out every legal wrinkle. But
"simplicity" is too often a smokescreen for schemes that shift tax bur-
dens to the lower classes.23 Of course it is more complicated to tax the
rich, because they have the resources to exploit every possible loop-
hole (and create even more). But we should not give up on the effort
to use taxation to achieve social justice.
It is undeniable that a wealth tax will impose some extra adminis-
trative costs, particularly at first, as the system gets up to speed. This is
a legitimate source of concern, and we will be on the lookout for ways
to streamline administration. But it is important to recognize that
these costs are incurred in the pursuit of a larger goal—equal oppor-
tunity for all.

Setting the Rate

As in all matters of taxation, there is an inevitable arbitrariness involved
in fixing precise rates. Given the indeterminacy, it seems fair to turn
the question around and ask, What does it take to fund a stakeholding
system that will provide each American with a "substantial" starting
point in life, one that does not make a mockery of the promise of equal
opportunity? If eighty thousand dollars is in the right ballpark, it
makes sense to work backward from this judgment to its wealth-tax
implications. The 2 percent figure falls out of this calculus.24
There is nothing special about eighty thousand dollars and 2 per-
cent.25 The key point is moral: it ill behooves the beneficiaries of the
current distribution to entertain us with hypothetical cases "proving"
thaj: they would have done just as well in a truly fair competition. We
call upon them instead to look at the facts of injustice and recognize
that they have a special responsibility to take steps to end them. After
 Taxing Wealth 1031

all, our basic proposal only represents a step in the right direction.
Even if stakeholding were adopted, we would be far from an America
in which all children began adult life with first-rate educations and
roughly equal resources, regardless of their parents' success or failure
in the marketplace.

The Base of Taxation

To fund the stake at a reasonable tax rate requires a comprehensive
definition of wealth. We propose to tax individuals' wealth in whatever
form it is held including not only stocks, bonds, and bank accounts but
also houses and cars, family firms, and pensions.26 To ensure that only
the assets' net value is taxed, taxpayers could subtract the amount of
any outstanding debt.27 And we would allow each individual to claim
an exemption. It is simply not worth the hassle to tax small wealth
holdings—this, by itself, would justify an exemption of the first forty
thousand dollars or so. But we would go further and exempt eighty
thousand dollars, thereby allowing stakeholders to keep their initial
stake without paying any wealth tax.28
This exemption level is generous. In 1995, only 41 percent of
households would have had to pay any tax after taking the appropriate
exemptions.29 In that year, the median household owned property
worth $73,600.30 Stakeholding will change these figures over time, but
the tax will continue to fall heavily on the richest stratum of society. In
1995, the median net wealth of the top 1 percent of households was
$4.6 million, and the typical household in that group would pay an an-
nual tax of about $90,000.31 In the same year, the median net wealth
of the top 20 percent of American households was about $555,000, im-
plying an annual tax of about $8,300.32 By the time we get to the sec-
ond-wealthiest quintile, the median tax burden goes down to $1,100.33
Given this steep falloff, there is only one reason to consider further
exemptions: to deprive opponents of cheap political arguments. They
will predictably point to elderly couples who have paid off their mort-
I 104 The Basic Proposal

gages and ask how the old folks will raise the money to pay Uncle
Sam. We believe that, as a practical matter, the private market would
quickly adapt, with banks offering elderly homeowners limited "re-
verse mortgages" that would provide the cash they needed to pay their
annual wealth tax. (Indeed, this product is already on the market.)
But perhaps you think that a tax that might require some elderly
people to mortgage their homes is unduly harsh. One way to reduce
this burden would be to allow cash-poor retirees to comply by giving
the government a first lien on their houses, exercisable upon their
deaths. The unpaid wealth tax would accrue in the meantime at a mar-
ket rate of interest, just like any outstanding tax debt. This plan would
allow the elderly to continue living in their homes and let the govern-
ment collect their tax, with interest, before others can share in their
estates. We prefer to save the enforcement costs associated with this
plan, but offer it as an example of the kind of accommodation that
might be made.
We are even less impressed with other predictable objections.
Family farmers and other small business owners invariably claim spe-
cial hardship because so much of their wealth is illiquid. But if they
somehow manage to obtain bank loans for inventories and expansion,
they can also raise money to pay their public obligations. After all, we
are talking about some of the most successful people in America.34
As long as we keep the base broad, a 2 percent rate should get us to
our revenue target, using conservative assumptions that provide a re-
alistic cushion for tax evasion.35 If a shortfall nevertheless arises, we
would support additional progressivity. Undoubtedly, Steve Forbes
and other children of great wealth should pay at a higher rate than a
hardworking dentist from the inner city who has managed to put away
a quarter of a million dollars. And if we need more of Forbes s money
for full funding, we would be prepared to bear the added administra-
tive complexities that a progressive rate structure would entail.
 Taxing Wealth 1051

The Tax Treatment of Families

We must also take account of the realities of family life. One likely
problem is that family members will shift wealth among themselves to
take maximum advantage of each individuals eighty-thousand-dollar
exemption. Parents and grandparents in particular may decide to shift
wealth to young children, much as they used to do under the income
tax. The gift-tax regime outlined in Chapter 4 should discourage this.
But we propose as an additional measure that the eighty-thousand-
dollar exemption be denied to minor children.36 Because they will be
getting their eighty-thousand-dollar stakes upon maturity, it would be
wrong to allow their parents to manipulate their tax status to under-
mine the financing of the program.
The married or cohabiting couple poses another wealth-shifting
problem. Recall that our proposal would impose the wealth tax on in-
dividuals, not couples. Taxing partners as individuals does give them
some flexibility in minimizing taxes, for they can thereby split their
wealth in order to take advantage of each partners full exemption. This
is not a big issue in todays U.S. income tax, as married couples gener-
ally file joint returns.37 But it is a familiar problem in other countries
that require individual filing, and there is a short list of potential solu-
tions, from respecting formal title to property to simply dividing each
couple s total wealth equally between them.38 We think it best to re-
spect individuals* legal title; if spouses are willing to hold their wealth
in common, they should be entitled to corresponding tax treatment.

Problems of Administration
The wealth tax raises two basic problems—evasion and valuation.
They are linked. The wealth tax gives taxpayers an incentive to hide as-
sets when they can and undervalue them when they can't. With read-
ily marketable assets—many stocks, bonds, and bank accounts—the
temptation will be to stash the assets in secret accounts in Switzerland
and other countries.39 But we have much the same problem with the
 106 The Basic Proposal

income tax today, and efforts to catch tax cheats range from familiar in-
formation-reporting requirements by banks and brokerages to eso-
teric information-sharing agreements with foreign countries. A wealth
tax would make these efforts even more important—and more fiscally
productive.
A more distinctive challenge is posed by wealth that is not readily
marketable—about two-thirds of the total.40 By far the biggest items
are homes and privately held businesses.41 As far as real estate is con-
cerned, European precedents suggest a range of options, from piggy-
backing on state and local property tax valuations to various formulary
methods.42 In dealing with closely held businesses, the Europeans
tend to adopt a pragmatic approach, taxing the value of the assets used
in the business without estimating goodwill and other intangibles.43
And our wealth tax poses more novel challenges as well. Many Eu-
ropean countries allow unlimited exemptions for homes, household
furnishings, and pension rights.44 That rule loses revenue and also in-
vites people to avoid the wealth tax by "investing" large sums in houses
and the like. We have included these items in the tax base, subject to
the eighty-thousand-dollar exemption, which already eliminates 59
percent of taxpayers.45 For the remainder, home equity will usually be
the biggest item and can be dealt with under the usual rules for real
estate. Pension rights will be easier to assess: the cash value of most
pensions is readily determined, though some will also pose prob-
lems.46 Valuing household furnishings, art, jewelry, and the like will be
more difficult, but some creativity may once again come in handy. Tax-
payers with valuable assets of these types usually insure them, and it
may help keep taxpayers honest if the declared tax value of the items
must match their insurance value.
No regime will be perfect, and the transition poses particular chal-
lenges. A significant fraction of America s assets will undoubtedly es-
cape, and our calculations have been conservative on that score. The
2 percent wealth tax will be sufficient to fund stakeholding even if the
 Taxing Wealth 107 [

authorities can reach only 79 percent of total taxable wealth.47 This

revenue cushion provides room for refinement of procedures over
time as the IRS capitalizes on potential synergies with the administra-
tion of the income tax.48

Coordinating the Wealth Tax and the Income Tax

Our initiative will also help fill some of the yawning gaps in the income
tax, which is full of breaks for many kinds of capital income, including
municipal bond interest, capital gains, income on pension savings, and
the economic return to homeowners.49 As a result, effective income tax
rates vary significantly depending on the type of investment and how
long it is held.50 In contrast, the wealth tax would be broad-based to en-
sure that all wealth-holders would contribute to the stakeholding fund.
But the gaps in the income tax pose a serious issue for the wealth
tax: is it fair to impose the full wealth tax on types of capital that are al-
ready subject to disproportionately high rates of income tax?
Although a wealth tax is not economically identical to an income
tax, both fall on capital investments.51 And in some cases, the com-
bined rate could be high, particularly once state and local taxes are
taken into account.52 Consider a New York City resident who invests
in a one-thousand-dollar taxable bond that yields 5 percent. The com-
bination of federal income tax, state and local income tax, and the
wealth tax would add up to a total tax of forty-three dollars, or 86 per-
cent of the fifty dollars that she earns each year.53 In the case of very
low-yielding assets, the combined tax rate could exceed 100 percent of
the income that the asset produces.
The central problem is that the wealth tax could compound the
laws existing preferences for some kinds of investments over others.54
As long as we persist in exempting income from owner-occupied hous-
ing while taxing income from corporate bonds at almost 40 percent, a
wealth tax that places an equal burden on both assets maintains the in-
come tax's relative imbalances.
I 108 The Basic Proposal

One response would be to leave the solution to the drafters of

the income tax. The root of the problem lies there, and income-tax
law has in fact adopted measures to limit the most egregious prefer-
ences.55 But we prefer an integrated approach that reduces the wealth
tax for assets already subject to significant income taxation.56 In effect,
the taxpayer would pay an amount equal to the higher of the income
tax or the wealth tax.57 For lower-yielding assets, the taxpayers total
tax would be the wealth tax. For higher-yielding assets, it would be
the income tax.58 Such a hybrid system would narrow, but not elimi-
nate, the "tax gap" between taxable and tax-preferred assets that now
prevails.59
How much would this kind of integration cost? Although we do not
have precise figures, we estimate the cost at roughly $55 billion per
year.60 As our Appendix explains, our wealth tax raises sufficient rev-
enues to fund this additional cost.

Foreigners
In a global economy, an increasing proportion of Americans' wealth
will be held abroad, and the same is true for foreigners' wealth held in
the United States. As far as American residents are concerned, we see
no problem in taxing all their wealth, wherever it is located, much as
we do under the current income tax.61 Obviously, the same approach
should not be followed with foreigners. As long as they keep their
wealth outside the United States, we have no legitimate claim.
If, however, they want to take advantage of the American market,
they should pay the tax and remain on a parity with U.S. investors.
American tax law has only imperfectly followed this principle in the
past. If a foreign company builds a plant in the United States, it is
taxed as if it were an American venture. If a foreigner buys stock in a
U.S. firm, he pays U.S. tax on dividends but not capital gains. And if he
buys a bond, he escapes tax-free.62 This patchwork reflects political
pressure more than principle.
 Taxing Wealth 109 J

But for purposes of program design, we adopt the conventional ap-

proach.63 Nonresident foreigners would be subject to a U.S. wealth
tax only on U.S. real estate, U.S. corporate equities, and directly held
business assets that are physically located in the United States.64 The
revenue impact is not trivial. Today, foreigners own nearly $900 billion
of net U.S. assets in these categories—which would raise roughly $18
billion annually in wealth-tax revenue.65
It is true, of course, that foreigners will not gain the benefit of
stakeholding, just as they do not now have the right to vote, to cross
the U.S. border freely, or to claim other benefits of citizenship. But
this should not be decisive. One of Americas great attractions as an
investment venue is its political stability, but this prospect is at risk
without the ongoing effort to realize our nation s fundamental com-
mitment to equality of opportunity. Foreigners should not be allowed
to take advantage of our vaunted stability without paying their fair
share of the price. More generally, the United States is something
more than the richest free market in the world. It is a sovereign state
devoted to the pursuit of justice. While we are emphatically in favor of
opening our markets to the world, we reject the notion that any trader
has the right to insulate himself from the efforts of the political com-
munity to anchor the market in its larger vision of legitimate order.66
Perhaps we should take note of a final problem. Won't some super-
rich Americans respond to the wealth tax by renouncing their citi-
zenship? If so, they should be barred from the country for life. If
they wish to renounce America, let them do so. But they should really
mean it.67

Rewriting the Economic Constitution

Most of the taxes that we pay to the federal government flow into a
vast fund of general revenue. This fund in turn provides our elected
representatives with the resources they need to shift priorities over
I 110 The Basic Proposal

time—from defense to environmental protection, from welfare to job-

training, and so on. We favor this kind of fiscal flexibility. Indeed, it
would be downright undemocratic to take these inevitably contestable
and constantly evolving matters of budgetary priority out of the hands
of elected politicians. What else is Congress for?
But this presumption in favor of fiscal flexibility creates special
difficulties at this stage in our argument. After all, we are not simply
arguing for a new wealth tax. We want its massive new revenues ex-
plicitly dedicated to the special purpose of stakeholding. Why, then,
do we propose to override our own presumption in favor of flexibility
and make it especially difficult for Congress to raid the stakeholding
fund for other worthy objectives?
We have precedents for our strategy. Social Security taxes are fa-
mously dedicated to old-age pensions, and gasoline taxes go into a
trust fund earmarked for highways and mass transportation. But these
are recognized exceptions to the general rule, and they have often
been criticized. (Indeed, we will soon be questioning the particular
land of linkage that the Social Security system creates.) If we are to
justify a new exception, we had better establish that stakeholding re-
ally does present an exceptional case.
Begin, then, with stakeholdings distinctively long-term perspec-
tive. Unlike many experiments in democratic lawmaking, here it
would make no sense to enact the program in 2010 and then repeal it
a couple of years later. Such a reversal would retroactively destroy the
meaning of the initiative. When the first generation of stakeholders
comes forward to make their claims in, say, the year 2011, they will do
so as proud citizens inaugurating a new national commitment to social
justice in America; a quick repeal would transform them into lucky
winners of a national lottery. Stakeholding is an enduring social com-
pact between young and old, between this generation and the next and
the next. In short, it is a commitment of constitutional magnitude.
 Taxing Wealth 1 1 1 1

And one that can be readily expressed within the existing language
of constitutional law. When the Founders sat down to write our en-
during compact, the existence of slavery paralyzed their efforts to de-
fine American citizenship. Instead of endorsing white supremacy or
directly challenging black slavery, the Founders utterly refused to de-
fine the sort of person who qualified as a citizen. Only after the Civil
War were Americans in a position to define the concept in an explicit
and affirmative fashion. The Fourteenth Amendment grants national
citizenship to all "persons born or naturalized in the United States,"
and it protects their newly established "privileges" and "immunities"
against impairment. The amendment did not take the next step, how-
ever, and enumerate the content of these privileges and immunities at
greater length, leaving to subsequent generations the permanent chal-
lenge of making sense of its open-ended language. Some have been so
intimidated by this task that they would have us ignore it entirely;68
many have trivialized the privileges of citizenship by reducing them to
a small number of relatively unimportant rights.69 But neither ap-
proach captures the grandeur of the Framers' vision as revealed by the
historical record.70 While the amendments Framers were confident
about the fundamental principles of freedom and equality that they
were adding to the text, they wisely left it to future generations to give
concrete content to the privileges of citizenship as economic and so-
cial conditions changed over time.71
This is the point of stakeholding. By giving new meaning to the
economic privileges of citizenship, it seeks to revitalize traditional con-
stitutional commitments within the context of twenty-first-century re-
alities. This aspiration in turn allows us to explain why we refuse to
accept the presumption in favor of fiscal flexibility that normally ac-
companies tax policy. Quite simply, Congress should not be given
great flexibility when it comes to protecting the fundamental privi-
leges of citizens of the United States. Once a stakeholding fund is
 112 The Basic Proposal

established, only specially exigent circumstances would serve as a po-

litically acceptable reason for raiding the dedicated revenues. And this
is as it should be.
This structural requirement diminishes the institutional gap that
now separates the privileges of economic citizenship from privileges
of other kinds. For example, when Congress passes a law repressing
free speech, a citizen can readily go to court and ask it to strike down
the statute. We would not go this far in protecting each citizen s right
to a stake—because economic rights depend more on the vagaries
of economic conditions, we would not put courts in the position of
reviewing the legitimacy of future congressional modifications. But
given the stake s likely centrality to the vitality of economic citizenship
in the twenty-first century, we think it entirely appropriate to place a
special burden of fiscal justification on future Congresses, lest they too
lightly conclude that stakeholding is a luxury Americans can no longer
afford.
Especially when the stake s tie to the wealth tax will graphically il-
lustrate the nature of the problem that we collectively confront at the
present moment. We are writing at a time when there is almost no
public recognition of the deep injustices that the prevailing inequality
of wealth threatens to perpetuate in the America of the twenty-first
century. Under these conditions of heedless neglect, it is not enough
to think about raising revenue technocratically. It is vital to use the
funding mechanism to mobilize public support and convey that some-
thing can be done to respond to the market forces that are driving us
apart.
The link between wealth taxation and stakeholding fulfills this
need. The simple fact that a 2 percent wealth tax can fund such an im-
mense improvement in the lives of ordinary Americans makes it plain
how concentrated wealth has already become. It poses the issue fairly
and squarely: are Americans still capable of using the democratic tools
at their disposal to regain some modicum of equality of opportunity?
 7

The Limits of Growth—and Other

Objections

We can now put our short-run and long-run perspectives together into
an integrated proposal. Stakeholding comes onto the scene tied to an
annual wealth tax of 2 percent, paid by all Americans whose individual
wealth exceeds eighty thousand dollars at tax time. This form of fi-
nancing continues unchanged for forty years or so until the first gen-
eration of stakeholders begins to die in large numbers. As financially
successful stakeholders discharge their payback obligations at death,
the wealth tax declines substantially—possibly, but not necessarily,
reaching zero as the program matures into a second full generation.
On the other hand, if trusteeship taxes are needed to sustain the pro-
gram further, our successors should be invited to reconsider the form
that these taxes take. Should subsequent generations continue to rely
on a wealth tax? Or, if society has sufficiently advanced toward genuine
equality of opportunity, would an income or consumption tax be more
appropriate?
In developing this proposal, we have anticipated and confronted
many objections, especially those likely to be raised by the libertarian

113
1114 The Basic Proposal

camp. It is time to shift gears and confront more utilitarian critiques—

those focusing on our initiative s impact on future growth rates. Do the
new taxes and paybacks impose unacceptable burdens on economic
growth?
We take this problem much more seriously than we do objections
challenging the constitutional basis of our proposal. It will be news to
most readers that there is any ground at all for constitutional doubt.
But it is better to err on the side of caution and to briefly address po-
tential legal concerns.

Liberal Trusteeship Reconsidered

We cannot begin to grapple with the growth objection without placing
it within a moral framework. Many politicians talk as if "growing the
economy" were the answer to all the nation s problems. In contrast to
someone beset with this growth fetish, the garden-variety utilitarian
seems downright thoughtful. As we have already suggested, he does
recognize that it may be counterproductive to require a relatively poor
generation to scrimp and save in order to allow greater consumption
by some future generation of richer Americans.1 We share this skepti-
cism. But we refuse to measure our obligations to the future in terms
of aggregate welfare.
Our touchstone, instead, is the principle of liberal trusteeship.2 Pri-
ority in time does not imply priority of right. Future citizens are our
moral equals. When embarking on important decisions affecting their
fate, we should test their legitimacy by imagining ourselves in dialogue
with representative Americans of the future. By holding ourselves ac-
countable in dialogue, we can build the foundations of a liberal com-
munity that endures over time. The challenge is to explain to our
descendants how our basic decisions are compatible with their claims
to equal citizenship.
 The Limits of Growth 115 |

This commitment to dialogic accountability generates a double-

edged response to the problem of growth. On the one hand, it morally
requires us to leave to Americans of the next generation at least the
same endowment of resources, per person, that we have today. On the
other hand, it does not require us to leave them more resources than
we have had. We can, of course, choose to make a gift of growth. But
we have no trusteeship obligation to do so.
To see why, imagine yourself in political dialogue with a represen-
tative citizen from the year 2060. Suppose that stakeholding had been
adopted in the year 2010, along with the taxes and paybacks that make
it possible. Suppose further that this package has had a modest nega-
tive impact on the economy: while the stakeholder society has contin-
ued to grow at a significant rate, it would have grown more rapidly had
Americans remained content with the old inequalities. As a conse-
quence, citizens of the year 2060 are not, on average, as rich as they
might have been otherwise. But they remain a lot richer than we are
today. Despite their greater per capita wealth, a hypothetical repre-
sentative from 2060 insists that the taxes and paybacks required by
stakeholding have done her generation an injustice: "You people of the
year 2010 could have provided us with a bigger growth dividend had
you not adopted this silly stakeholding idea," she asserts. "What gave
you the right to deprive me of the extra resources?
This is not, we think, a very tough question. It suffices for us to re-
spond: "We do not deny that, as fellow citizens, you are at least as good
as we are. But you aren't any better for having been born later. You
have no right, then, to insist on a larger share than the one we got. Be-
cause you remain better off than we were, we deny that our stake-
holding decision has violated your claims to equal citizenship."3
To bring the implications of this conversation down to earth, we
need to invoke a few empirical assumptions—but ones that seem plau-
sible to adopt in setting real-world policy. Realistically, our generation
I 116 The Basic Proposal

runs the risk of failing to fulfill its trusteeship obligation in only two
ways. First, we might blunder into a massive war. Second, we might
ruin the planet through heedless exploitation of the environment.
These risks shouldn't be minimized, but there is little that our funding
proposals could do to control them. The best way to fulfill our trustee-
ship obligations is by adopting sane military and environmental poli-
cies, not by depriving millions of Americans of real equality of
opportunity. As a consequence, we adopt a stance of technological op-
timism in addressing the growth objection. We assume that, barring
military or environmental catastrophe, technological progress will
generate real and steady improvement in living standards throughout
the twenty-first century.
This assumption allows us to turn the tables on critics who con-
demn our wealth tax as antigrowth. The next section shows that these
claims not only lack a convincing empirical basis but also fail to appre-
ciate how different parts of our initiative interact with one another.
But even if growth rates were to decline a bit, this fact would hardly be
enough to condemn our initiative on trusteeship grounds. As long as
the economy continues to grow, Americans at midcentury will still be
far richer than we are today.4 At worst, stakeholding will deprive them
of some portion of the gift of growth that we will be giving them
anyway.
But we deny that Americans of today have any obligation to make
such a gift. In contrast, we do have a compelling moral obligation to do
justice to fellow citizens rising to maturity in the next decade. Many of
these men and women are among the poorest citizens who will ever
exist in the future of the Republic. It would be wrong to deny them
their fundamental right of equal opportunity merely to make rich
Americans of the future even richer. We should not be giving gifts be-
fore we do our duty—and, as Americans, our duty is to do our part in
sustaining the nation s fundamental ideals.
 The Limits of Growth 117 I

Consider the Consequences

The utilitarian has not quite run out of objections. "Lets put aside the
claims of the future. Won't our generation be worse off if stakeholding
slows the economy? Thanks to the power of compound interest, even
a reduction in the growth rate of, say, 0.5 percent per year adds up
over thirty or forty years to a very hefty sum. Are you quite sure that
young stakeholders would accept this long-run diminution in total
welfare?"5
But even this more modest objection begs a big question. The prob-
lem is its focus on the welfare of society as a whole. The typical utilitar-
ian is more than happy to reduce the resources available to the worst-
off, provided that the utility gained by the better-off is even bigger.
We disagree. We focus instead on the position of the tens of mil-
lions of Americans who have been deprived of fair equality of oppor-
tunity. Their right to a stake should not be sacrificed simply to increase
the growth dividend of those who began life in a privileged position.
This basic moral point has decisive practical significance. Even
though the economy has grown mightily over the past quarter cen-
tury, this great increase has not "trickled down" to every citizen. The
growth dividend has instead been appropriated almost entirely by the
top 20 percent, with the lion s share going to the very top.6 Prospects
look even worse in the future. There is every reason to believe that vast
sections of the population will be increasingly left out.7 Given this clear
and present danger, it is simply wrong to deny Americans stakes merely
to improve yet further the fortunes of those who make it to the top.
We do not deny that growth is good. Nor do we deny that an ex-
panding pie does help ease social tensions and may inspire a more
generous response from the upper classes (though this certainly hasn't
happened recently). But because the growth dividend has not been
widely shared, it is inadequate for efficiency-minded critics to talk
vaguely about stakeholdings potential impact on aggregate growth
I 118 The Basic Proposal

rates. Instead, they should focus on ordinary Americans, not the elite,
and explain why stakeholding will be counterproductive for this large
group once its long-term impact on growth is taken into account.
But such a showing is not remotely plausible—at least if we keep
within the parameters of serious economic argument and substantial
economic data. Indeed, it is even possible that our initiative will en-
courage work, increase savings, and enhance growth. We do not pre-
tend to certainty in this assessment; nor should our critics. Despite
innovative work by many economists, we still know remarkably little
about the effects of taxation on economic activity. Statistical models,
methods, and data are often imperfect and incomplete, and results
vary widely.8 The research has produced no consensus on whether
taxes reduce work and savings, and if so, by how much.
Before probing these mysteries further, let us begin with some cer-
tainties. The stake will serve as an unceasing engine of economic ac-
tivity, as generations of young adults put their new resources to work
in education and entrepreneurship. The program will also provide
nest eggs for them to tap into during hard times, thereby encouraging
citizen-stakeholders to take judicious business risks that they would
otherwise have to avoid. Of course, lots of people will make mistakes.
Many new ventures will fail, and some investments in specialized ed-
ucation will not pan out. But the ongoing empowerment of the most
energetic Americans is sure to pay off over time in millions of innova-
tions large and small, with a positive effect on economic and social life.
This pervasive "entrepreneurial effect" must be weighed against the
more familiar "income effect": because many people will have more
money, some may take advantage of the fact that they don't need to
work as hard to support themselves and will therefore simply work
less.9 The likely magnitude of this factor is highly uncertain. For one
thing, the stake provides a one-time grant, not a guaranteed lifetime
income, and it is paid at a time when people are making choices about
the course of their entire lives. Within this context, we doubt that many
 The Limits of Growth 119 I

people will buy annuities so that they can reliably reduce their work
hours.10 Undoubtedly, there will be some who myopically exaggerate
their "riches" and forgo useful education, training, and other produc-
tive investments in their future. While the newspapers will predictably
linger over the plight of the no-goods who blow their stake in, say, a sin-
gle night at Las Vegas, many more people will use it to get a start in an
economically productive life. We should also be skeptical of standard
economic notions of "work." If a woman spends extra time at home with
her children, it is question-begging to suppose that she has dropped
out of "productive activity." Taking the matter as a whole, we believe
that the gains to education, entrepreneurship, and strong, stable fam-
ilies will far outweigh the foolishness that stakeholding makes possible.
Turning to taxes, we have a more complicated story. Despite end-
less political rhetoric about the "economic damage" caused by "high
taxes," serious empirical work tells a more cautious tale. European ex-
perience provides one example. It is fashionable to claim that "big Eu-
ropean welfare states" have been economically discredited.11 But as
recent work by Geoffrey Garrett suggests, the causes of slow Euro-
pean economic growth are complex and may mask a positive associa-
tion between growth and generous welfare provision.12
In any event, we are in a very different position in the United States.
Even after the adoption of stakeholding, the total tax burden as a per-
centage of gross domestic product would remain well below the aver-
age for OECD countries.13 While international tax-rate comparisons are
always tricky, this simple statistic should allay concerns that stakehold-
ing would propel the United States into the tax stratosphere. And,
once again, the destination of the tax revenue matters quite a bit.
Stakeholding is an investment in youthful energy, not a cradle-to-grave
safety net, and the program should help fend off, rather than promote,
European-style interventions in the labor markets.
Turning to the home front, recent research suggests that people are
less responsive to tax rules than was supposed by an earlier generation
I 120 The Basic Proposal

of economists.14 Consider one widely studied issue: how responsive

are savings to changes in tax rates? Early estimates suggested that sav-
ings were relatively elastic, but more recent studies conclude that sav-
ings are hardly responsive at all.15 The emerging consensus regards
savings as relatively inelastic.
The responsiveness of labor supply to taxation is also relevant. Al-
though our wealth tax is imposed on capital, not wages, labor decisions
may be influenced by workers' savings plans. A person who is inclined
to be a saver may work less if he knows that his accumulation will be
diminished by a wealth tax—or he may work harder to ensure that he
continues to save enough to meet his goals. How does the tradeoff
work out in reality?
Studies consistently suggest that the labor supply of working-age
men is rather insensitive to changes in the net wage.16 But there is
more controversy about the labor supply of married women, single
mothers, and teenagers.17 Speaking broadly, the data are at least ten-
tatively on our side: the modern trend is toward a certain skepticism
about the effect of taxes on work and savings decisions.18
The wealth tax will undoubtedly add to the cost of doing business
for foreign investors. But this is hardly the only cost relevant to their
decisions. At present the country manages to compete very well de-
spite its wage rates, environmental regulations, and so on.19 Not only
does its enormous wealth and talent serve as a magnet, but so does its
political stability. Because stakeholding will vastly enhance this last at-
traction, it is very hard to guess what or how large the marginal impact
of the wealth tax would be.
Over the longer term, wealth-tax rates will decline, as the first gen-
eration of stakeholders begin to die and repay their eighty-thousand-
dollar stakes, with interest, to the fund. This mandatory payback
generates a new set of incentive problems: won't it discourage work
and savings by donors, particularly if the desire to leave bequests is an
important motive for saving?20
 The Limits of Growth 121 I

Even if these anxieties prove to have empirical substance, they will

not be on a scale that raises large normative problems. As we have
suggested, Americans of the year 2060 are likely to be far richer, per
capita, than those living today—and are almost certain to remain so
even if the payback requirement reduces the growth rate a bit. As a
matter of public morality, it is far more important to provide the next
generation with a fair system of stakeholding than to tolerate increas-
ing inequality in the name of greater growth.
What is more, economists continue to disagree about the crucial
empirical issues, including the effect of the estate tax on donors' work,
savings, and consumption; the importance of bequest motives for sav-
ing; and the significance of inherited wealth in the total capital stock.21
To take just one example: even if strong dynastic ambitions drive peo-
ple to accumulate large estates for their heirs—a simplistic picture of
intergenerational relationships—the higher tax could encourage them
to save more, not less, in order to realize this goal.
The payback requirement should also be understood as part of an
intergenerational compact: those who started out in life with help
from the liberal community have an obligation to pay it back if they
succeed. Although skeptics will undoubtedly grumble, we do not be-
lieve that most Americans will look upon the payback as just another
tax to be evaded if possible. Many may even come to look with pride
on contributing their fair share to a polity in which inheritance is a uni-
versal right of citizenship rather than an accident of family ties and for-
tunes. No econometric model can account for the effects of such
moral incentives.

Is It Constitutional?

This is America, and undoubtedly some brave soul will take stake-
holding into court, raising the cry of unconstitutionality. But we do
not think that the prospect of a lawsuit should scare anybody—if
I 122 The Basic Proposal

stakeholding wins political support, the courts will readily recognize

its legitimacy.22
The Founding Fathers' campaign for a new constitution was moti-
vated in large part by the fiscal anemia of the old government, which
was operating under the Articles of Confederation. Under the Arti-
cles, the Continental Congress could "requisition" the states for rev-
enue, but it was powerless when these demands were ignored. The
Founders proposed to put things right and were not content with half-
measures. They began their enumeration of congressional powers
with the broad grant "to lay and collect Taxes, Duties, Imposts, and
Excises." Over the course of the next two centuries, the courts consis-
tently upheld this power against taxpayers' efforts to whittle it down.
With one great exception. In 1895, at a time of economic depres-
sion and rising class war, the Supreme Court struck down an income
tax by a vote of five to four in Pollock v. Farmers' Loan and Trust Com-
pany. The verdict did grievous institutional damage to the Court. It
also led to a successful generation-long campaign to reverse the deci-
sion, which culminated in the Sixteenth Amendment in 1913. Even
Pollock did not challenge the plenary power of Congress to impose
those taxes that it believed furthered the cause of distributive justice.
Instead, it struck down the income tax by distorting the meaning of a
narrow constitutional provision that had been a part of the Founders'
original compromise with slavery in 1787.
At that time, North and South struggled over slavery's implications
for taxation and representation. In an obscene reversal of roles, each
side took the others moral position for bargaining purposes. The
North wanted to maximize its political power by taking the South at its
word: if slaves were property, they should no more be counted for pur-
poses of representation in the House than cows or bank accounts
were. The South protested that blacks were humans, too, and should
count no less than white women or children for purposes of reckoning
the number of House seats that the slave states received. The result
 The Limits of Growth 123 I

was the notorious "three-fifths compromise." The southerners would

get to count three-fifths of their slaves to enhance their representation
in the House, but only at the cost of using the same ratio when it came
to raising revenue—in the language of the time, representation and
taxation would be linked by the "federal formula." To seal the bargain,
Section 9 of Article 1 forbade any "Capitation, or other direct, Tax" to
be levied "unless in proportion" to the federal formula that treated
black slaves as if each were three-fifths of a human being.
Against all precedents, the Pollock majority ripped this clause out of
its originating context and declared that an income tax amounted to a
"direct" tax that required apportionment by the federal formula. To be
sure, the formula had been changed as a result of the Civil War—
blacks now counted as full citizens. Nevertheless, the decision led to
bizarre results. Suppose that two states had equal populations but un-
equal wealth, State X containing a single millionaire, State Y contain-
ing a thousand. If income-tax liability were apportioned by population,
both states would have to come up with the same amount of money.
This, in turn, would require the single millionaire from State X to pay
at a vastly higher rate than did the thousand millionaires from State Y.
Given this absurdity, courts consistently construed the "direct tax"
clause very narrowly during the nation s first century, self-consciously
treating it as an anomaly generated by the slavery compromise. Pol-
lock, in contrast, transformed this relic of slavery into an engine of
class war. In the words of the great dissent by Justice John Marshall
Harlan, the decision "cannot be regarded otherwise than as a disaster
to the country. . . . It so interprets constitutional provisions, originally
designed to protect the slave property against oppressive taxation, as
to give privileges and immunities never contemplated by the founders
of the government."23 In view of twentieth-century Americans' popu-
lar rejection of the decision, in the form of passage of the Sixteenth
Amendment, we cannot imagine any future court walking down this
road again.
I 124 The Basic Proposal

It is quite true that in recent years the Supreme Court of Chief

Justice William H. Rehnquist has begun to challenge modern consti-
tutional ideas that give the federal government virtually plenary leg-
islative powers. For example, the Court has struck down a federal
statute banning guns in and around public schools, finding that this
local matter was not embraced under Congress's constitutional power
to regulate "commerce."24 But in building a five-to-four majority for
this conclusion, Chief Justice Rehnquist was careful to write an opin-
ion that effectively conceded the national government s powers to reg-
ulate the economy. As far as taxing and spending are concerned, the
Court has been even more cautious. There is every reason, then, to
suppose that the Court will respond to our taxation initiatives as courts
have traditionally responded through the centuries—by upholding the
federal government s power to use the tools of taxation to further the
majority s vision of social justice.

The Next Step

We are under no illusions about this opening volley in the debate over
stakeholding. While we would be surprised if critiques from the con-
stitutional experts get off the ground, we will frankly be disappointed
if we do not hear a lot more from our other critics—libertarians, utili-
tarians, and others too numerous to mention. Silence would signify
only that we have failed to place our proposal on the public agenda for
serious debate.
This is, of course, a very real possibility. It is beyond the power of
any single book to determine whether our children or our children's
children look back to the turn of the twenty-first century as a time
when Americans revitalized their traditional commitments to equal
opportunity for all. The best that we can do is to pose the question and
make the case for a positive answer—if not to stakeholding, then to
some better idea.
 The Limits of Growth 125 I

But it is not too soon to sound a more hopeful note. If the debate
over stakeholding does take off, it can invigorate a much broader dis-
cussion over the direction of progressive reform. We have already
seen, for example, how our basic proposal opens up new vistas in areas
of public policy ranging from the criminal law to higher education.
The next part of this book proposes to expand the range of potential
reform yet further.
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Part 2

Expanding the Stake

This page intentionally left blank
 8

From Worker to Citizen

Stakeholding challenges the basic priorities of the welfare state. Tradi-

tionally, the main concern has been with the provision of safety nets,
most notably to the elderly. Our focus has been on the provision of
equal opportunity, most notably to young adults. This new emphasis
raises new concerns. Does our emphasis on younger Americans sug-
gest a shift in the traditional treatment of the elderly? Does our stress
on opportunities require a revised understanding of safety nets?
Our short answer is yes. Some safety nets ought to survive in the
stakeholder society, but they should be reshaped in ways that better
express Americas evolving commitments to equal freedom for all. To
suggest the needed reorientation, we focus on the system of retire-
ment pensions bequeathed to us by Franklin Roosevelt. Although the
New Deal system represents a great social achievement, it falls far
short of the standards of justice made possible through an expanded
version of Stakeholding.
We will be contesting two New Deal decisions. The first keyed pen-
sions to Americans* histories as workers rather than their status as

129
I 130 Expanding the Stake

citizens. This rule has had an especially devastating impact on women

whose principal contributions occurred at home and in the commu-
nity. Unless they qualify as spouses of "real" workers, they continue to
be excluded. And many of the women who have moved into the mar-
ketplace continue to be shortchanged.1
In a second decision, Roosevelt sold Social Security a$ an insurance
policy, with payroll taxes serving as the "premiums."2 This metaphor
has helped sustain the program s political appeal, but it has embedded
in Social Security a host of morally questionable class distinctions that
split Americans apart when they turn to collect their pensions.
Stakeholding points the way to a fairer system by liberating Social
Security from the workplace. In contrast to the New Deal, which
emphasized worker citizenship, our proposal would guarantee each
American a citizen s pension, one that does not depend on her history
as a wageworker. Under the reformed system, each American will be
free to choose a mix of market and nonmarket work without endan-
gering her basic economic security in old age. Nor will her pension de-
pend on her marital choices or the economic fortunes of her partners.3
It will assure her basic dignity in old age regardless of her decision to
stay in the home and volunteer in the community rather than work for
pay. The change from Social Security to citizens' pensions will not
have quite the same revolutionary consequences for wageworkers. But
it will vastly increase the fairness of the system for them, too—or so we
will argue.
The experience of other countries establishes the practicality of cit-
izens' pensions. Although they are unfamiliar to Americans, they play
prominent roles in Canada, Denmark, Finland, New Zealand, Ice-
land, Norway, and other countries.4 Admittedly, such a large change in
American practice could take place only gradually, for the present
generation has relied on the present system while planning for their
own retirement. But for illustrative purposes, we will be speaking as
if our citizens pension program guaranteed each American $670 a
 From Worker to Citizen 131 I

month, or $8,040 a year, at the age of sixty-seven—the amount that is

compatible with present levels of tax payments itito the Social Security
fund.5
Our initiative will not only deepen and broaden each citizen s claim
to a dignified retirement. It will also open up a much-needed debate
on how we finance public pensions now. As long as payroll taxes are
treated as premiums for an insurance policy, they are tied into the sa-
cred guarantee of Social Security for the elderly. Despite the growing
tax burden, ordinary workers believe that they must pay into the trust
fund if they hope to get anything back during their times of need.
But once retirement is secured to each citizen independently of the
workplace, payroll taxes will no longer seem an inextricable part of the
social insurance bargain. Rather than seeming like premiums, payroll
taxes will begin to look like taxes—and regressive ones, at that. For the
first time since the 1930s, the public will be prepared for a serious
search for a better funding system.
There are many options here, but Chapter 9 presents a novel pro-
posal that seeks to further our underlying commitment to genuine
equal opportunity. As always, we do not wish to present our readers
with an all-or-nothing reform. If our plan for financing citizens' pen-
sions is found wanting, more traditional financing alternatives would
work, too.

Why Social Insurance?

To begin, let s be clear about the kinds of safety nets we are and are
not talking about. A liberal state should take a different stance with re-
spect to economic protections for adults than it does with respect to
those for children. Adults are entitled to a stake, but thereafter they
should generally be held responsible, within certain principled limita-
tions described below, for their own well-being. Children are an entirely
different matter. Because they haven't reached maturity, a liberal state
I 132 Expanding the Stake

has much greater obligations to them, including the responsibility

to provide special care if they are disabled or in need of medical at-
tention. Protections for children must also consider the parents or
guardians who care for them. But these are subjects for another book.
We do not suppose that they can be handled within the stakeholding
framework.
We deal here only with the extent to which the liberal state may
justly require adults to insure for their own future support. To set the
stage, imagine that a hopeful Joan Doe, age twenty-one, arrives at the
Stakeholding Office to claim the first installment of her eighty thou-
sand dollars. Much to her chagrin, there is a final catch: she has to en-
dure a discussion of the rich variety of social safety nets that the
welfare state provides throughout life and especially in old age. To her
surprise, these latter-day benefits are worth quite a substantial sum.6
As this fact sinks in, Joan asks: "Why can't I simply cash out all these
benefits? I'd much rather have a bigger stake now and take care of
myself later." What to make of Joans demand? Can a liberal state le-
gitimately require its citizens to wait for these payments until they en-
counter a special need later on in life?
No, says the libertarian. Perhaps he would seek to assure himself
that Joan has soberly considered her options. He might even require a
compulsory interview with a team of smiling representatives from pri-
vate insurance companies. But in the end, it is up to Joan to make her
choices and live with them. Fifty years onward, Joan may bitterly de-
nounce the shortsighted and unfeeling decisions of her youthful self,
but the libertarian will remain unmoved. Her plight is her own doing,
and she is free to throw herself on the charity market for relief.
This unhappy scene can only confirm the utilitarian s worst suspi-
cions about his dogmatic opponent. This is what happens when one
focuses myopically on freedom of choice and fails to construct a so-
cial policy that maximizes Joans happiness over her entire lifetime.
After all, the young Joan s myopia is entirely predictable. When she is
 From Worker to Citizen 133 I

twenty-one years old, she cannot reasonably be expected to sympa-

thize with or even fully comprehend the pain and suffering of old age.
Yet, whatever the young Joan might think, that little old lady she sees
on the street will be her one day. Rather than deferring to the youth-
ful Joan, policy-makers should study the plight of the elderly, as they
exist today, and then design a sensible benefit package that will protect
the next generation as it ages. This package will soberly and impartially
weigh the welfare gains of the old against the costs of insurance suf-
fered by the younger generation of taxpayers. Once this difficult bal-
ance has been struck by the political process, the youthful Joan has no
right to complain. She will be grateful when the time comes to collect
her benefits.
We are approaching a familiar impasse: individual freedom versus
collective welfare. Is there a way out? Or should we simply grit our
teeth and take sides in this classic debate, ignoring the pull of the com-
peting arguments?

A Third Way
Our effort to define a third way begins with the libertarian s focus
on the individual. The concrete decisions made by young adults are
much more morally significant than the utilitarian recognizes. When
we choose marriage partners and careers, we are constituting our very
identities in ways that we cannot subsequently eradicate. It seems
odd, then, to discount altogether the moral significance of Joans early
decisions as to the proper shape of her life. If she thinks that it makes
more sense to sink her capital into a small business now rather than to
save it for old age, surely this decision is entitled to some independent
weight. Once again, the utilitarian s single-minded concern for maxi-
mizing welfare stands in the way of an appropriate respect for individ-
ual freedom.
I 134 Expanding the Stake

But at the same time, we challenge a fundamental assumption of

the libertarian position, which makes the youthful Joan the absolute
tyrant over her future. For us, she is best viewed as a trustee for her
future self and is not entitled to discount the predictable objections
that she will raise at a later point. Against the forward-looking Joan of
twenty-one, we place the backward-looking Joan of seventy-five: how
certain can we be that she will bitterly regret her youthful choices?
Obviously, a lot of guesswork will be required to generate sensitive
answers. But this is no reason to reject the enterprise, as the trustee-
ship failures of the youthful Joan may be too blatant to ignore. From
the liberal perspective, these failures in intrapersonal trusteeship pro-
vide the moral foundation for mandatory insurance.

Two Forms of Myopia

As she enters her stakeholder interview, Joan will suffer from two
kinds of shortsightedness. The first involves a failure of sympathetic
understanding. Perhaps a twenty-one-year-old has a good grasp of the
way her attitudes will evolve through the age of thirty. Perhaps she has
a rough image of herself at the age of forty. But things get fuzzy after
that. Can she really imagine how she will feel at the age of fifty if she
is "downsized" by her firm and cannot find a market for the skills that
she has spent her lifetime developing? Can she really appreciate the
indignities of old age?
Of course not. We should distinguish a range of relevant temporal
horizons.7 When dealing with the near term, we tend to the libertarian
extreme: it is up to Joan, and not the state, to decide how much insur-
ance she needs. We would make exceptions only for insurance that
covers dire calamities beyond the normal range of experience. No-
body really has the capacity to comprehend sympathetically the plight
of the paraplegic victim of an auto accident. If Joan refuses to insure
against the consequences of such events, we would be prepared to
 From Worker to Citizen 135 1

doubt her capacities as a good trustee. But we would second-guess

Joan s judgments very cautiously and sparingly.
As we move forward in the life cycle, we are more skeptical of the
youthful Joan s exercise of her powers of trusteeship. When it comes to
her interests as a seventy-five-year-old, we must compare her guesses
about her uncertain future with the real lives of today s elderly. There
is a tradeoff here. On the one hand, Joan might have a better sense
of the idiosyncratic ways in which she may differ from the average
seventy-five-year-old. On the other hand, social scientists will have a
more informed sense of the standard set of complaints and disabilities
suffered by the old.
We can generalize this point to the life cycle as a whole. Within ear-
lier time horizons, Joans sense of her particularities makes her the
more reliable trustee. But because the structure of her life experience
will inevitably change, perhaps dramatically, over the years, her pres-
ent guesses become increasingly unreliable with each decade s re-
move, and collective experience becomes a superior guide for later
time horizons. The switch may come at different times for different
decisions. Joan s guesses about her needs for health insurance may be
better than her guesses about her future demands for retraining. In
the design of a nonnegotiable package of minimum insurance, a lot of
this nuance will be lost in the bureaucratic search for broadly applica-
ble standards. The important point is that a liberal state can retain a
focus on the individual without adopting the indefensible libertarian
notion that the youthful decision-maker is always the best judge of her
future interests.
We have introduced the problem of myopia by emphasizing its psy-
chological dimension—young people may not meaningfully appreci-
ate the different life circumstances that they will encounter as they
age. But there is a second form that deserves distinct treatment. It
would remain if psychological failure did not exist. Even if Joan could
I 136 Expanding the Stake

vividly picture her future condition as a seventy-five-year-old, she may

deliberately discount these interests in favor of those appearing at an
early stage in the life cycle: "I know that I will be miserable at seventy-
five, but it s more important to cash out some of my insurance so that
I have a shot at running my own business. Overall, this is the best life
for me."
Is this myopia, or a sober recognition of life's limitations? It begs a
big question to treat "moral myopia" as if it were analogous to the psy-
chological variety. As liberals, we do not believe it is the state s job to
second-guess Joan on the best shape of her life. Of course, when Joan
does reach seventy-five, she might bitterly reject her younger self s
tradeoffs. But it is also possible that she will take great pride in her
past decisions: "Even though I might not have much today, Fm glad I
was my own boss during all of my working years." We reject, then, the
claim that this second form of myopia is necessarily bad. Liberal citi-
zens have the right to shape their lives in a variety of ways over time,
and liberal policy-makers should take this right into account.
This point complicates, but does not undermine, our case for com-
pulsory social insurance based on the first form of myopia. Practically
speaking, youthful adults haven't the foggiest idea of the problems
they will encounter fifty years down the line. This justifies us in re-
jecting Joan s demand at the stakeholding interview for the cash value
of all her future social insurance benefits. Instead, we should craft
her compulsory insurance package in light of her predictable myopia
regarding her own life cycle. While the state should not force Joan
to insure against most short-term risks, it should be willing to impose
a more substantial package insuring against predictable problems
arising in her remote future. Even here a certain caution is justified.
The more money we put into the insurance package, the less flexibil-
ity we are affording youthful Joans in shaping the overall pattern of
their lives.
 From Worker to Citizen 137 I

Moral Hazard and Adverse Selection

Although we have given pride of place to the principle of intrapersonal
trusteeship, it would be a mistake to slight more familiar rationales for
compulsory insurance. These seek to define contexts in which the pri-
vate insurance industry cannot be relied upon to deliver adequate
protection. One important market failure is defined by the theory of
"moral hazard," which points to the disconcerting way in which private
insurance may sometimes encourage the very behavior that the in-
sured would otherwise reject.
To develop this point in the context of retirement pensions, con-
sider the status of a means-tested pension in the stakeholder society.
Thus far, our argument seems to endorse means-testing: given the
youthful Joan s psychological myopia, the state should not allow her to
cash in all of her retirement insurance. Instead, it should hold some
money back so as to provide her with a citizen s pension of $670 a
month at age sixty-seven if she ends up completely destitute. But if she
wants more than this, she will have to buy private insurance, either out
of her stake or out of subsequent earnings.
All this seems sensible until the "moral hazard" factor enters. The
problem is that the means test itself may cause Joan to behave differ-
ently. Assume, for example, that Joan is willing to save enough during
her working years to supplement her state pension and enjoy a secure
retirement at $1,300 a month. But once the citizen s pension of $670 is
means-tested, she may begin to think strategically—and act myopi-
cally. Should she forget about saving, spend all her money during her
working life, and rely on the $670 provided by the state?
This is not her first-best choice—she would prefer to have $1,300 a
month instead. But because she would lose all claim to the means-
tested pension if she saved for this larger sum, her original life plan is
now less attractive. The fundamental problem is that the government
cannot readily detect Joan s strategic behavior. At age sixty-seven, Joan
I 138 Expanding the Stake

will have no assets and no income—and will demand her pension on

the same basis as impoverished people who were never in a position to
save for retirement.
The moral hazard problem will raise the overall cost of means-
tested pensions. But more fundamentally, it imposes another burden
on Joan—one measured not in dollars and cents but in individual free-
dom. The means test increases the same myopic behavior that it is in-
tended to relieve. The relatively prudent Joan will begin to act as her
more shortsighted peers do, reshaping her life plan in second-best
ways that she would otherwise reject.
This is a serious problem for liberals. Can we ameliorate it through
program design? The obvious answer is to abolish the means test. By
telling Joan that she will receive $670, regardless of her other assets,
we eliminate the moral hazard problem because she no longer must
impoverish herself to get her state pension.
But only at the cost of creating another problem. In order to elimi-
nate the means test, we will have to impose higher taxes or reduce
Joans initial stake. In short, we must strike a balance between two
kinds of burdens on Joan s life-shaping capacities. With the means test,
Joan will have more resources for her younger years but will have a
strong incentive to dissipate them. Without the means test, she will
have fewer initial resources but more freedom to shape her later years.
There is no mechanical way of resolving such tradeoffs. Speaking
for ourselves, we resolve them against the means test. Experience with
means-testing demonstrates that the moral hazard problem can be se-
vere. In Australia, for example, means testing had a devastating impact
on citizens7 planning for their later years. As many as 75 percent of the
elderly received the means-tested old-age pension, and most spent
down their assets to obtain the full benefit.8 Even more troubling is
the stigma that means-testing has traditionally carried in our culture.
This response is altogether inappropriate given the underlying reason
 From Worker to Citizen 139 I

for the program, which is not to provide welfare for charity cases but
to ameliorate the predictable myopias that almost all of us experience
when young.
A second form of market failure—adverse selection—is also impor-
tant. The problem is generated by another asymmetry of information:
Joan knows more about her present plans than anybody else does, and
she may exploit this advantage in dealing with private insurance com-
panies. This point is particularly relevant in the assessment of near-term
risks. On moral grounds, we have urged extraordinary caution in the
provision of near-term guarantees. But once adverse selection is taken
into account, a somewhat more expansive approach may be justified.
Consider the case of unemployment insurance. Private companies
will have great trouble determining whether Joan is about to launch
herself into a career as an actress or as an accountant. Worse yet, if
Joan can convince the company to sell her the low-cost unemployment
insurance it reserves for would-be accountants, this may encourage
her to try acting.
As a consequence, most private insurance companies will steer
clear of these kinds of policies. At best, they will offer unemployment
insurance at very high rates, encouraging only the worst risks to sign
up, which in turn will lead to higher rates and lower coverages, in a
destabilizing cycle.
Given this grim alternative, mandatory unemployment insurance
looks more attractive. Granted, it diminishes the resources available to
stakeholders, arid it cannot solve the moral hazard problem. But there
is a compensation in enhanced life-planning capacity. It may be the
only feasible way of providing unemployment insurance for the many
Joans who would want to buy it if it were available on the free market.
These market failures provide a second liberal rationale for manda-
tory social insurance. Similar problems of adverse selection plague
private markets for disability and health insurance, providing a poten-
I 140 Expanding the Stake

tial empirical argument—though not necessarily a definitive case—for

mandatory provision.9 Once again, there is no simple algorithm for
weighing the enhanced freedom of some against the diminished free-
dom of others. However we design these programs, there will be some
Joans who could have done better.
We should keep in mind the moral distinction between the two jus-
tifications for social insurance programs—market failures and trustee-
ship failure. Programs that respond to life-cycle myopia should be
universal rights of citizenship, financed by broad-based taxes—just as
stakeholding and citizens' pensions are. But market-correcting pro-
grams may legitimately have a narrower compass, in both their cover-
age and the taxes that finance them. By definition, market-correcting
programs are simply substitutes for insurance that significant numbers
of private citizens would like to buy, and so their terms can be tailored
accordingly. Unemployment insurance, for example, might provide
coverage only for unemployed wageworkers (and not homemakers).10
In that case it ought to be funded by a payroll tax on covered work-
ers—with premiums matching coverage—and not by a broader-based
income tax.

The Liberal Case for Old-Age Pensions

Working out the practical implications of these two principles is a long,
complex, and contestable business. The responsible management of
each important risk—unemployment, disability, illness, accident, en-
trenched poverty—requires separate and sustained analysis. Each pro-
posed solution has consequences for the control of other risks. Rather
than losing ourselves in this forest of complexity, we focus on the sin-
gle issue of retirement pensions. Not only has Social Security, as "old-
age insurance," served as the cornerstone of the New Deal legacy, but
our liberal principles suggest that it thoroughly deserves this central
position. As we have seen, it is naive to suppose, with the libertarian,
 From Worker to Citizen 141 I

that the young stakeholder is an adequate trustee for the basic inter-
ests of her seventy-five-year-old self.
At the same time, our principles suggest a more tightfisted ap-
proach than that offered by standard utilitarianism. The level of old-age
pensions should not be determined on the basis of some freewheeling
comparison of the pleasures of youth against the pains of old age. It
should be set with a deep appreciation of each American s right to be
different. These differences extend to disagreements about the shape
of life as a whole and which periods of life are most important. For
some, it will be crucial to arrange their affairs to assure a very com-
fortable old age; for others, it will make sense to stint on retirement
and invest more heavily in earlier stages in life. The aim of liberal
policy is not to second-guess these choices by supposing that every-
body "ought" to save a lot for retirement if they are to maximize their
happiness over their lifetimes. Its mission is more modest but more
fundamental. It is to protect elderly citizens against the worst con-
sequences of their earlier psychological myopia. The watchword is
not utility maximization but the assurance of dignified existence in
old age.
"Dignity" sounds nice, but what precisely does it mean? Old people
will predictably need a minimum level of resources in order to avoid a
constant stream of stigmatizing social encounters. Of course, deter-
mining this minimum will be an endlessly con testable matter, for it de-
pends more on social meaning than biological necessity. The kinds of
clothing, food, transportation, and shelter that lead to endless and pro-
found embarrassment in one society might be perfectly compatible
with a dignified, if spartan, existence in another. This line cannot be
drawn technocratically. Its proper definition, we shall argue, should
be at the center of ongoing democratic debate. But for now, it will suf-
fice to advance our basic standard: although younger stakeholders
should be given broad freedom to shift resources from one life stage to
I 142 Expanding the Stake

another, they should not be allowed to put this dignity-stripping mini-

mum at risk. Despite the youthful Joans bright plans for her next
twenty years, the liberal state should intervene when there is a serious
risk that Joan herself will bitterly condemn her own foolishness when
she reaches old age.

Rethinking Social Security

How does our proposed citizens pension compare with existing ar-
rangements?
There are many important divergences, but all have their root in a
single difference. While the New Dealers took the ideal of economic
citizenship quite seriously, they did not use it as the basic criterion or-
ganizing their emerging Social Security system. Under the New Deal
regime, it is not enough to be a citizen to qualify for a retirement pen-
sion. You must also be a worker in the cash economy and must work
long enough to make a substantial contribution to the pension fund
through your payment of Social Security taxes. Only then can you and
your spouse qualify for a retirement pension.
By linking payroll taxes to pensions, the New Dealers created a
powerful rhetoric of economic entitlement. As far as the ordinary
American is concerned, Social Security pensions are not public hand-
outs because workers have earned them by paying their payroll taxes.
This simple intuition is based on something that we will call the pri-
vate insurance analogy, because it supposes that each worker is paying
for his own retirement pension as if he were paying premiums into a
private pension plan.
We do not deny the rhetorical power of this analogy. To the con-
trary, its public appeal was demonstrated recently when President Bill
Clinton simultaneously led an attack on "welfare as we know it" while
posing as the champion of Social Security. Progressives should think
long and hard before abandoning Roosevelt's evocative symbol, given
 From Worker to Citizen 143 I

its proven power to resist libertarian critique in the rough-and-tumble

of political combat. Nonetheless, we believe that stakeholding pro-
vides an organizing metaphor that will prove equally robust against
political attack—and at the same time provide a fairer basis for digni-
fied retirement in the future.
It is true, of course, that in our brave new world, Americans will no
longer believe that they have earned their pensions by paying "premi-
ums" in the form of payroll taxes. But the stakeholding analogy has
the power to create the same sense of fundamental entitlement that
the insurance analogy creates today. Henceforth each American will
receive his vested right to a retirement pension at the same moment
when he receives his cash stake. Just as he will expect the state to keep
its hands off "his" eighty thousand dollars, he will respond with similar
outrage to any threat against "his" basic pension rights. By bundling
vested pension rights into the cash transaction, expanded stakeholding
will stand as a vivid symbol for the proposition that Americans do have
a right to a dignified retirement. But rather than rooting this right in
the insurance analogy, our new metaphor makes it part of a vibrant
sense of American citizenship in a stakeholding society.
More than symbols are involved. After a half century's experience
with the insurance analogy, we are in a position to see that it fuels a
cascading series of morally questionable distinctions. At present, pro-
gressives are so impressed by the rhetorical advantages of the insur-
ance analogy that they blind themselves to its darker side. We hope
that a systematic contrast with stakeholding will shine some light.

What's Wrong with the Insurance Analogy

For starters, the insurance analogy is false. The payroll taxes paid by
individual workers are not actually a market price for the benefits they
get. Although the patterns of redistribution are complex, high earners
generally get a lower return on their contributions than low earners.11
There is also a generational redistribution at work: Americans who
I 144 Expanding the Stake

retired during the first fifty years of the program have received much
more than they "bought," and future generations will receive less.12
All this is, by and large, OK with us. Saying that high earners have a
lower "rate of return" is just another way of expressing the progressive
redistribution that Social Security accomplishes. There is also a rea-
sonable case to be made for pay-as-you-go financing, which essentially
makes Social Security a current expense of government.13 Although
Congress has been too eager in recent decades to buy elderly votes
with fiscally unsustainable benefit increases, reasonable reforms can
put the system back on a sound footing.14
The larger problem is that voters do not realize that the insurance
analogy is myth from top to bottom. Taxpayers have been taught from
an early age to think of "their" contributions as buying "their" pension
payments. As a result, critics from the right can invoke the insurance
analogy in support of "privatization" and other reforms that would gut
the progressive redistribution achieved by the current system. If So-
cial Security is just like private insurance, why shouldn't rich and poor
alike get their moneys worth?15
In contrast, expanded stakeholding places the right to a dignified
old age on a different moral foundation. Rather than accepting liber-
tarians' efforts to present Social Security as if it were a defective
form of private insurance, we challenge the basic premise behind the
analogy. We reject the libertarian view that each American s fate in old
age ought to be exclusively a function of insurance decisions made at
earlier stages of life. Instead of authorizing this tyranny of the younger
self, a liberal state legitimately seeks to correct the predictable psy-
chological myopias involved in these private insurance decisions.
In short, it is a mistake to base the case for public pensions on
any analogy with the private pensions that Americans obtain through
the insurance market. A stakeholding society guarantees a dignified
old age precisely because a decent minimum will not be invariably
achieved in an insurance marketplace controlled by myopic young-
 From Worker to Citizen 145 I

sters. Instead of allowing elderly Americans to reap the bitter harvest

of their myopia, it is far better to intervene on behalf of these later
selves beforehand and protect their fundamental interest in avoiding
an old age of want and shame.

Holes in the Safety Net

Because this interest is universal, it should be protected universally—
and it should not depend upon the contingencies of each citizens con-
nection with the labor market. This does not happen under the New
Deal system, which consigns large numbers of Americans to second-
class citizenship. The overwhelming majority are women, who often
spend many years out of the paid workforce or in low-paid part-time
work while they raise their children. The insurance model provides
them with little or no independent Social Security coverage. In 1996,
for example, 65 percent of elderly female Social Security recipients re-
ceived benefits based at least in part on their husbands' work histo-
ries.16 To be sure, wives' and widows* benefits are a major source of
economic security for elderly women.17 But the insurance analogy ties
their economic fate to their husbands'—provided they have them.
Even during the New Deal, the original designers were wrong to
ignore the problem of family instability. But in an era of high divorce
and declining marriage rates, the economic security of many women
hangs on a complex and arbitrary set of rules.18 An elderly wife with no
earnings history can claim a "spousal benefit" based on her husband s
work history.19 But a divorcee can claim the same benefit only if her
marriage lasted at least ten years. Otherwise, she is treated as if she
had never been married and will receive a pension only if she has a
long-term work history.20 And because women's wages remain a frac-
tion of men's, these pensions are often very low.21
All this would change in a stakeholding society. Instead of claiming
derivatively through their husbands, all women will stake their own
claims to a citizen's pension. Many may have worked in their families
I 146 Expanding the Stake

and communities without receiving much in the way of market wages.

But this does not make their contributions to society any less fun-
damental.* Converting Social Security into citizens' pensions would
grant equal respect to every American, without privileging some life
plans over others.

The Arbitrariness of "Wage Replacement"

The insurance analogy also authorizes gross forms of class discrimi-
nation among the elderly. Because different workers earn different
wages, they pay different amounts of payroll tax each month. As long
as these taxes are considered premiums, it seems "natural" that work-
ers who pay more into the fund should take more out in retirement.
And this is precisely what happens under the existing system. In 1996,

Although citizens' pensions entitle every man and woman to an individual benefit, they
would change the relative position of married and single retirees, leaving some widows
worse off than under*the current system. Today, a married couple often receives 150
percent of the retired worker's basic pension, while a widow succeeds to 100 percent.
In our system, the couple receives 200 percent of the basic citizen s pension, and the
widow receives 100 percent. For example, the widow of an average earner who retired
in 1996 at age sixty-five would receive at least his benefit of $886 per month. Under
our program, both he and she would receive $670 per month during life. After his
death, she would continue to receive her own benefit, but nothing more. The citizen s
pension is also less than what the average elderly widow received in 1996 ($711 per
month), although this average conceals the wide disparities discussed in the text,
whereas our reform establishes a uniform floor. See Social Security Administration
(1997), table 5.A16.
Is the treatment of the widow under citizens' pensions harsh? We think not. During
her husband s life and after his death, she receives the same pension as any other citi-
zen, man or woman, single or married. If there is any harshness here, it is in the size
of the pension; but if $670 is too low, then it should be raised for all, and not just for
widows.
The underlying issue here is life insurance. If the couple did not buy insurance for
the surviving spouse, why should the government provide it? Intrapersonal trusteeship
is not at issue. Unless there are pervasive market failures that would prevent the life in-
surance market from working appropriately, it should be up to each citizen-stake-
holder to determine her and her family's needs for life insurance.
 From Worker to Citizen 147 I

for example, high earners typically collected around $1,250 per month
at age sixty-five, while low earners collected an average of $537.22 And
many of the elderly received even less than that.23
A shift to a uniform citizen s pension of $670 a month, or $8,040 a
year, would provide a dramatic increase to pensioners at the bottom
and a perceptible lift to a broader group. Thirty-nine percent of el-
derly Social Security recipients—nearly 11 million in all—received less
than $650 a month in 1996.24 Fifty-six percent of all elderly women,
and 41 percent of widows, would receive more than they did in 1996.25
It is true that some women, especially wives and widows of high-
earning men, would receive less than they do today. And some married
couples would see their benefits fall. But benefits would be just as
large or larger for about 51 percent of retired couples who now collect
Social Security.26
These contrasts frame a basic moral question: why should a Wall
Street lawyer—or his wife—get so much more out of Social Security
than a factory worker does?27
The italics are crucial. We do not deny each citizen the right to en-
hance his public pension by buying private annuities. To the contrary,
private pension planning is a fundamental tool enabling each citizen to
shape the overall contours of his life. But it is one thing to say that
everybody should be free to invest as heavily as he wants in a comfort-
able retirement, quite another to say that the public treasury owes
skilled workers and their spouses more than it owes unskilled workers.
Defenders of the status quo will be quick to point out that Social
Security's benefits are distributed progressively—the higher-paid re-
ceive a smaller return on their contributions than their lower-paid age-
mates do. But once we abandon the insurance analogy, this land of
progressivity is no longer enough. Measured by the yardstick of a uni-
versal, flat-rate citizen s pension, the insurance analogy is authorizing
everybody in the solid middle class and above to double-dip into the
pension funds.
I 148 Expanding the Stake

This is precisely backward if, as we have argued, the point of public

pensions is to provide a minimally dignified old age for all. While we
oppose means-testing,28 we certainly do not see why the public trea-
sury should be more generous to those who are least likely to be living
on the edge.
Perhaps there was greater justification for such largesse when the
system was established during the 1930s. At that time, the private
market had not yet developed the plethora of pension options avail-
able today. Many members of the middle class might have encoun-
tered substantial transaction costs in buying extra annuities from
private insurance companies. Given this market failure, it might have
made sense for the government to step in and give richer workers the
opportunity to obtain higher pensions. After all, the more you earn,
the more likely it is that you will want to save for a comfortable retire-
ment. And if private companies weren't ready to step in to provide you
with what you want, shouldn't the government step in to fill the gap?
Whatever the validity of this market-failure rationale in the 1930s,
it is a nonstarter today.29 And yet standard discussions of Social Secu-
rity regularly miss this point. The buzzword among experts is "wage
replacement"—the notion that a public pension system should replace
a certain percentage of a worker s wages before his retirement.30 De-
fenders of Social Security argue that wage replacement helps cushion
workers against the "shock" of retirement, when their accustomed liv-
ing standard might otherwise drop dramatically.31
This is a worthy objective. But in a world of well-developed private
markets, an individual worker should be allowed to decide for himself
how much of his wages he wants his private pension to replace. As
long as the state has provided a minimum that assures against dignity-
stripping poverty, each citizen should be given freedom to make basic
life-shaping choices on his own responsibility; if he decides to save less
in middle age in order to pursue other life objectives, the government
has no right to second-guess this choice.
 From Worker to Citizen 149 I

The Incentive Question

How will the adoption of citizens' pensions affect the economy?
By breaking the link to employment, citizens' pensions reduce the
lifetime payoff to market work for many workers. If they currently
think their wage includes extra Social Security benefits in old age,
some will work less under our system.32 But for other workers, our sys-
tem will be an outright boon. Many wives pay Social Security payroll
taxes for decades only to find that they receive no more than the stan-
dard spousal pension available to those who have never worked for
wages in their lives.33 The new system improves the situation for this
large group, making work more attractive. Because women's work ef-
fort tends to be more responsive to tax changes, this effect will help
cancel out any work reduction for men.
All in all, there is nothing in the economics of the proposal for citi-
zens' pensions that provides a reason for agonizing reappraisal.34 If
anything, the elimination of heavy existing penalties on women's work
is a large plus, which will help offset any potential disincentive effect
caused by breaking the link to employment for male workers.

The Dark Side

But there is a dark side. While stakeholding will abolish a complex set
of discriminations based on family structure and economic class, it will
create something new in its place. Suddenly citizenship will become
important in defining pension rights, potentially leaving a new group
out in the cold. At present, noncitizens qualify for Social Security pen-
sions if they have put in their time in an American workplace. What
should their status be under the new system?
We would include them. Although noncitizens would not qualify
for the cash portion of the stake, those who spend a substantial period
of time in America should be allowed to take advantage of the mini-
mum established for pension rights. The length of the required period
of residence is a matter for good-faith judgment. But the basic principle
I 150 Expanding the Stake

seems clear enough: by contributing substantially to America for a

substantial part of their lives, these people have earned a reciprocating
gesture in their old age.
This is, of course, a value judgment, and one that might not be en-
dorsed by the majority when the political process plays itself out. Sup-
pose Congress shortchanges the noncitizens or cuts them out entirely.
What then?
This would be a serious blight on our initiative. Nonetheless, we do
not think that it would be as invidious as the set of family and class dis-
tinctions authorized by the existing program.

Asking the Right Question

We have not yet reached the end of our indictment of the insurance
analogy that currently shapes Social Security. Apart from its substan-
tive deficiencies, it grievously damages the quality of our deliberative
process. As we have seen, the effort to define a public pension re-
quires a collective engagement with a seemingly simple, but actually
quite perplexing, question: how big a cash pension is big enough, if the
goal is to provide retirees with a dignified old age in our society?35
A thoughtful answer requires a collective confrontation with in-
commensurables. A dignified old age is not merely a matter of eating
enough calories and staying out of the cold. It is a question of receiv-
ing enough income to live in a way that avoids ongoing social embar-
rassment and affront. But how much is enough? To make matters
harder, it is quite possible to be too generous—the higher the mini-
mum deemed necessary for a dignified old age, the less life-shaping
freedom is allowed the young. How, then, to make the tough choices?
By an appeal to the democratic process. A technocratic solution
seems impossible, as does an answer achieved by reason alone. All one
can properly say is that defining this minimum requires an informed
and sympathetic understanding of the plight of the elderly, a sober
 From Worker to Citizen 151 1

recognition of the counterbalancing importance of saving most re-

sources for more youthful projects, and a great deal of democratic
debate.
To be sure, each generation of stakeholders has a right to know, well
in advance, the dollar amount of their citizens' pensions, for only then
will they be in a position to determine how much more they may want
to save for retirement. But over time, it is reasonable to expect that the
minimum will shift as the democratic debate proceeds.
The worst thing about the existing system is its distortion of the cru-
cial terms of this debate. The insurance metaphor tells the middle and
working classes that they have earned their benefits. Under the influ-
ence of this image, public debate has focused, not on the question of
minimum entitlement, but on whether workers are getting their
moneys worth in exchange for the "premiums" that they have paid in
the form of payroll taxes.
Of course, facts have a way of creeping into the conversation—in
this case, the fact that Social Security utterly fails to provide an ade-
quate pension to millions of elderly Americans.36 Unsurprisingly, these
gaps have proven socially unacceptable, leading to the gradual cre-
ation of a patchwork of second-class protections. These allow destitute
retirees to claim minimal relief from the public treasury.37 Theoreti-
cally, a focus on a fair minimum should be central in the design of this
lower rung of our two-tier system. But because this tier is occupied by
the most powerless people, the debate has an overwhelmingly pater-
nalistic tone: "normal" people don't need to worry about a minimum;
this is a problem only for the "failures" in life.
Consider how the entire question would be reframed under our
initiative. Every five years or so, the stakeholding office should be
required to prepare a report outlining a series of pension options to
Congress. For purposes of illustration, assume that our expanded
stakeholding system began with a citizens pension of $670 a month, to
begin at age sixty-seven, which is the sum implied by redistributing
I 152 Expanding the Stake

existing Social Security revenues along the universalistic lines we have

been advocating.38 Once this baseline has been established, the stake-
holding office should be required to compute high and low options.
For example, instead of remaining content with the baseline of an
eighty-thousand-dollar stake and $670 a month in old age, should
Congress change the mix of stakeholding rights so that the next gener-
ation would receive a ninety-thousand-dollar stake and a smaller old-
age pension of $670 minus x dollars a month? Or should it cut the cash
stake to seventy thousand dollars and increase the pension component
to $670 plus x dollars a month?
These questions turn the definition of the minimum amount needed
for a decent life into a problem for everybody, not just the "failures" in
life. As a consequence, the painful inadequacy of existing definitions
of minimal entitlement would become immediately apparent. At pre-
sent, the standard starting point for public discussion is the official
"poverty line/' Despite its prominence, it is based on mechanical ad-
justments to an arbitrary benchmark.
It is downright embarrassing to reflect on the origins of this statis-
tic. In the mid-1960s, Social Security Administration economist Mol-
lie Orshansky cobbled together a rough poverty measure based on just
two facts: the cost of a basic subsistence diet (the "economy food
plan"), and the percentage of the average American family's budget
spent on food in 1955 (one-third). Putting these together, Orshansky
calculated a basic subsistence budget, equal to the cost of the econ-
omy food plan times three. She then counted as "poor" any family with
a cash income less than this basic budget. Since then, the only attempt
to add sophistication to this crucial benchmark has been a periodic ad-
justment for inflation.39
Contrast this malign neglect with the constant debate over the
benchmarks central to Social Security and Medicare. Politicians have
not been able to evade the necessity of addressing controversial issues,
despite their legendary status as political hot potatoes. Do cost-of-
 From Worker to Citizen 153 I

living adjustments adequately reflect changed conditions? Are Medi-

care Part B premiums fair to different groups of beneficiaries? And on
and on.
It is only the legacy of the New Deal that accounts for this two-
tiered debate. Within the stakeholding framework, all classes will share
a common interest in defining the floor for social insurance. A higher
citizens pension means a lower stake for everybody, and vice versa.
Everybody will be confronting the same problem: how to trade off ex
post insurance against ex ante stakes?
Not everyone will give the same answer,40 but one thing is clear.
The poverty line as currently constructed would be completely unac-
ceptable to all. To be fair, Orshansky did describe her calculations as
"quasi-scientific," and she never intended them to be used as the ex-
clusive benchmark for public debate.41 Most fundamentally, "poverty"
is not merely a matter of "economical food plans" or other measures of
"preference satisfaction." The relevant inquiry is better framed in so-
cial and psychological terms. Will the typical American be able to hold
her head up high when she retires? Will every appearance in public be
an occasion for embarrassment? The challenge is to provide graphic
information about the resources required for different forms of life in
old age, and thereby enable informed discussion and ultimately dem-
ocratic decision. While American researchers have begun fieldwork
that will allow public policy to move beyond Orshansky-style mea-
sures,42 we are calling for something more than a few isolated efforts.
In a stakeholding society, there would be a real interest in funding on-
going research that sought to link different life patterns in retirement
with different pension levels.
Suppose, after listening to a broad base of testimony, Congress
votes for the package of a stake of eighty thousand dollars and a
monthly pension of $670. In casting their ballots, our representatives
would be doing something more than choosing some numbers. They
would be linking equal opportunity, market freedom, and dignity into
I 154 Expanding the Stake

an organized set of public values. Not only would the vote for eighty
thousand dollars express a deep commitment to the ideal of equal op-
portunity; by giving each stakeholder full sovereignty over the money,
Congress would be affirming the fundamental value of market free-
dom. Not only would the vote for the $670 pension express a deep
commitment to the ideal of a dignified old age; it would make it plain
that our public commitment to market freedom has its limits. This in-
tegrated affirmation of equal opportunity, market freedom, and
human dignity would occur, moreover, within a larger framework that
links an enhanced conception of economic rights to a renascent un-
derstanding of the importance of citizenship.
Equal opportunity, market freedom, human dignity, individual
rights, economic citizenship: that's a lot for a couple of numbers to say.
 9

Taxing Privilege

Now suppose that America has expanded stakeholding to include old-

age pensions. Citizenship, not the workplace, has become the center-
piece of a universal right to a dignified old age.
This large step forward will serve as a catalytic reform, pushing yet
another big question onto the public agenda. Having lifted retirement
benefits out of the workplace, one of the great pillars of the existing
system of public finance suddenly loses its function. We are speaking
of the payroll tax, whose status would immediately become a bone of
contention.
Most Americans don't realize that this tax has revolutionized public
finance in the past generation. In 1960, payroll taxes contributed only
15.9 percent of federal revenue; now they contribute 35.6 percent, as
rates have more than doubled.1 During the same period, the share
raised by the income tax has declined from 67 percent to 56 percent.2
Our fastest-growing tax is one of our most regressive.3 Even in
these days of Republican ascendancy, the income tax takes more from
the marginal dollar of rich people than from that of poorer people. But

155
I 156 Expanding the Stake

the payroll tax ostentatiously gives the rich an exemption. Poor work-
ers pay tax on every dollar, but the richest workers pay at a vastly re-
duced rate once their wages go beyond $65,400.4 Below this point, all
workers pay a flat 7.65 percent, and employers kick in an equal share.
It is generally recognized, moreover, that this "employers share" is
passed on to workers as well.5 In sum, the tax reduces the pay of ordi-
nary Americans by more than 15 percent but reduces the pay of a pro-
fessional manager making $200,000 a year by only 6.95 percent.6
Payroll taxes are now more onerous than the income tax for most
ordinary Americans. A two-earner family with two children must earn
more than $80,000 before its income tax exceeds its payroll tax of
$12,357.7 Why, then, have protesters and politicians chosen to hurl
their abuse at other targets: property taxes on the local level, taxes on
income and capital gains, and even on estates, on the national?
It is too easy, although not entirely wrong, to see this as a triumph
of public relations by the rich. After all, not only do they pay reduced
rates for high wages, but the payroll tax entirely exempts their capital
income. What could be better than to divert populist protesters in
other directions?
And yet it would be a mistake to underestimate the importance of
our old enemy: the insurance analogy. As long as payroll taxes are
treated as premiums, they are inextricably joined in the public mind to
the fate of Social Security. This means that any effort to cut or re-
structure payroll taxes is readily framed as an assault on cherished
principles of social solidarity. Ordinary workers understandably refuse
to rebel at payroll taxes, which promise their only guarantee of secu-
rity in old age.
But once stakeholding removes old-age pensions from the work-
place, it will become painfully clear that the payroll tax has served as a
primary vehicle by which the rich have shifted their fiscal burden onto
the middle and lower classes over the past generation.8 Of course,
some tax is required to continue to fund the social insurance system.
 Taxing Privilege 157 I

But once the insurance analogy has been exploded, we must return to
first principles and ask how this sum might best be raised.
An obvious choice would be the income tax, but we prefer to think
more broadly. Is it wise to jack up income-tax rates whenever progres-
sives need more money? Or are there other, no less progressive, ways
of proceeding?
We have already pursued a diversifying strategy by promoting a
wealth tax, rather than an income tax, as the primary source of revenue
for our basic stakeholding proposal. We follow a similar approach
here, broadening the traditional mix to include something we will call
the privilege tax.
Our case for the tax begins with some sobering reflections on the
ultimate limits of stakeholding. Even if our initiative were fully real-
ized, America would have a lot more work to do before achieving a
rough approximation of equality of opportunity.
To some extent, the problem is rooted in the dynamics of a free so-
ciety. After all, free choice in the marriage market hardly guarantees
family stability—and children will often bear the brunt of the ensu-
ing breakdowns. Even if all families were loving and stable, different
parents would gain vastly different rewards in the marketplace and
offer their children very different arrays of educational and social op-
portunities.
This much may be the inevitable consequence of life in a free soci-
ety, but the current social response to inequality of fortune is not.
When a child is shunted into a series of foster homes and fifth-rate
schools, this is not the inexorable consequence of freedom but the
avoidable failure of public institutions. It is here, of course, where
stakeholding's limitations become plain: while our program for young
adults will have constructive long-term consequences on child rear-
ing,9 the major role in equalizing opportunity at earlier stages of life
must be discharged by other programs, ranging from Head Start
through foster care and primary and secondary education. As long as
I 158 Expanding the Stake

we have not achieved breakthroughs on these fronts, stakeholding will

not be enough to inaugurate a regime of fair and roughly equal oppor-
tunity.
We have not let these points distract us from making our propos-
als. Only fools look for panaceas—no single initiative will suffice to
achieve an ideal as complex and demanding as genuine equality of op-
portunity. For this book at least, we cannot take on the larger task of
addressing the problem of inequality during early childhood. Instead,
we limit ourselves to a single and pessimistic question, which supposes
that America continues to allow many of its children to grow up with-
out first-rate educations and other essential support systems and that,
as a consequence, young adults will continue to emerge from disparate
backgrounds with vastly unequal advantages. The mere fact that they
each receive eighty thousand dollars is hardly enough to afford them
genuinely equal opportunity. Can tax law take any further steps to
ameliorate, if not to eliminate, the consequences of these gnawing ini-
tial injustices?
If this is the question, our new privilege tax is the answer. We pro-
pose to fund our program of citizens' pensions by requiring each
American to pay a tax based on the degree of privilege that she en-
joyed during childhood. Our measures of unequal privilege will in-
evitably be crude, and this is one of the reasons that the privilege tax
will be relatively modest. But it will have a progressive feature. A child
born to unusual privilege will pay a higher tax than one born into se-
vere disadvantage.10
Our privilege tax reflects the liberal life cycle. Until citizens reach
the stakeholding age, at twenty-one, they pay no privilege tax. But pay-
ment is due every year from age twenty-one to age sixty-seven—until
they qualify for their citizens* pensions.11
Everybody should pay something. It is a privilege to be an Ameri-
can citizen, as millions of would-be immigrants attest. Even those in
the lowest privilege class will make a modest annual payment of, say,
 Taxing Privilege 159 I

$380.12 Adults coming from the most privileged backgrounds will pay
a multiple of this, say, $3,800 a year. If the average American pays a
privilege tax of $2,090 a year, this will completely replace those payroll
taxes presently funding retirement benefits. If the privilege tax
catches on, we would go further. A tax of $6,300 on the most privi-
leged, $3,465 on the average American, and $630 on the least privi-
leged would allow us to eliminate all payroll taxes for Social Security
and Medicare—payments that cost the average worker $3,935 per
year in 1996 (Table I).13
Politically speaking, it is hard to assess the long-run future of the
progressive privilege tax. The idea is so novel that it may take a while
to sink in. While everyone realizes the reality of unequal opportunity,
it may seem discriminatory to take this fact into account in setting
taxes. But any tax falls more heavily on some than on others, and the
unique strength of the privilege tax is that its burden falls squarely on
the recipients of unjust privilege. Empirical work also suggests that
the privilege tax will be progressive in the more familiar sense—mea-
sured either by income or by educational achievement.14

Table 1. Three Options for the Privilege Tax

Option Tax liability ($)

1. Replace current payroll taxes that fund High 3,800

Social Security benefits to those over age 65 Middle 2.090
Low 380
2. Replace payroll taxes needed to fund current High 4,500
Social Security benefits on an actuarially Middle 2,475
sound basis, without benefits reduction Low 450
3. Replace current payroll taxes that fund High 6,300
Social Security and Medicare Middle 3,465
Low 630
Source: 1996 data. See detailed discussion of methods and data in the Appendix.
I 160 Expanding the Stake

In any event, people will have plenty of time to get used to the idea.
Our initiative will emerge with full force only after a generation-long
transitional period. When all is said and done, the privilege tax lacks
the immediate political appeal of other elements in our program. It re-
mains a tax, and who can get very excited about replacing one tax with
another?
Nonetheless, there is a surprising amount to be said on its behalf.

Privilege in America

Americans don't like to talk about class. But the facts speak for them-
selves. Millions of Americans get a head start simply because they are
born into privileged circumstances. Many others are disadvantaged
during childhood and stay that way for life.
The statistics are strikingly consistent. Children who grow up in
poor households are more likely to become teen mothers, to drop out
of high school, to accumulate fewer years of education, and to perform
worse on cognitive tests.15 Children whose parents did not complete
high school are much more likely to become dropouts themselves.16
The adult children of the poor are more likely to be unemployed as
young adults and more likely to be on welfare.17 Although there is sig-
nificant controversy over the role of money in causing these divergent
outcomes, the correlation is strong and widely acknowledged.18
When we turn to the high side of the social scale, the link between
money and prospects is obvious. SAT scores are strongly correlated
with parental income.19 High-income students can more easily afford
special coaching, remedial help, and private schools.20 And because
they are more likely to attend prestigious private colleges, they have
better odds of being admitted to graduate and professional schools.21
All these advantages are particularly valuable at a time when the eco-
nomic returns to higher education are high and rising.22
 Taxing Privilege 161 j

We are, of course, dealing with averages, and many deviate from

the typical profile of economic attainment. We can all think of suc-
cessful people from humble backgrounds, and privileged people who
fail to make good use of their advantages. But class background still
matters, especially for the 75 percent of Americans who do not gradu-
ate from college.23 For example, a son whose fathers income was in
the bottom quarter of the income distribution has only a 39 percent
chance of earning more than the median income himself. But a son
whose fathers income was in the top 5 percent has a 76 percent
chance of earning more than the median and a 42 percent chance of
being in the top 20 percent.24 Over all, even the youngest men from
the richest fifth of Americas families earn significantly more ($26,168
per year) than those from the poorest fifth ($16,772 per year).25
None of this, we repeat, is really controversial. Liberals and conser-
vatives disagree only about the causes of these yawning disparities.
The present debate focuses on the causal role of low income in gener-
ating bad outcomes for children. In the classic view, poverty itself is an
important cause of failure. Revisionists argue that the personalities
and cultural deficiencies of parents cause both their low incomes and
harmful child-rearing practices. In this view, parental income is
merely correlated with the child's later performance, but the causes go
deeper.26
This is an important debate for anybody trying to design a respon-
sible program that seeks to confront the root causes of unequal oppor-
tunity. But this is not, alas, our present concern. Rather than attempting
to root out inequality, we are merely asking how tax law might seek to
ameliorate some of its morally indefensible consequences. It would be
far better if Americans had both the knowledge and the political will
required to launch a deep-cutting initiative. But at the very least, we
believe that tax law should take into account the overwhelming data
documenting a significant correlation between childhood privilege
and adult advantage.
I 162 Expanding the Stake

To be sure, we would not see "perfect" economic mobility even in a

stakeholding society that went beyond the guarantee of eighty thou-
sand dollars to secure each child a first-class education and a stable
home environment while he was growing up. Once all Americans had
been assured a level playing field, inequalities would still result from
differences in inherited cognitive abilities (though recent studies find
that "no more than 10 to 15 percent" of income differentials are asso-
ciated with such factors).27 But it would be cruel, as well as intel-
lectually suspect, to attribute the existing correlation between class
background and economic success principally to the workings of indi-
vidual choice and inherited talent.28

The Case for a Privilege Tax

In assessing a higher privilege tax on the children of the rich, we do
not need to inquire too deeply into the causes of their enhanced self-
esteem, social connections, and economic opportunities. It is enough
that they have them, that other citizens don't, and that these differ-
ences are attributed not to random misfortunes but to the systematic
distribution of advantage from the earliest days of childhood.
Of course, it is conceptually possible to tax all these advantages
away, leaving the scions of privilege to rue the day that they were born
on Park Avenue. But our proposed schedule falls far short of this.
Granted, a taxpayer in our top bracket will pay about $1,700 a year
more than most Americans. But few would say that this cancels out the
enormous social advantages of speaking fluent and standard English,
going to an elite private high school or to a prosperous high school in
the suburbs, and being surrounded with eager guides to the skills of
social advancement and the mysteries of college selection. Taxing priv-
ilege instead of payrolls is simply a way of bringing the principle of
equal opportunity in touch with the facts of American life.
 Taxing Privilege 163 I

To put the point another way, contrast the situation of two success-
ful American families, each with two professional parents earning
$100,000 a year as lawyers. One couple reaches the yuppie heights
after negotiating the challenges of a privileged childhood in America s
suburbs, moving on to Harvard, and then marrying each other while
they were students at Columbia Law School. The other two come out
of the slums of Americas big cities, work their way through state uni-
versities and law schools, and then scramble their way to success. As
far as income and payroll taxes are concerned, each family's $200,000
is treated equally. But is this really right? Wouldn't replacing the pay-
roll tax with a privilege tax add a useful dimension of fairness?
These questions seem especially worth asking in the present con-
text, where we are trying to find a suitable funding source for retire-
ment pensions. As we have seen, the liberal case for these pensions
depends on each young adult s obligation to see his current circum-
stances as belonging to only one phase in a larger life cycle and to take
the interests of his future self into account. But if we push this life-
cycle point further, it leads to a distinctive argument for privilege
taxation.
A simple chart can illustrate our point. Contrast the lifelong situa-
tions of three representative American citizens who enjoy very differ-
ent levels of privilege during childhood (Table 2). The plus signs, zeros,
and minus signs represent differential privilege while growing up.
This, in turn, is capped by the egalitarian gesture of stakeholding—

Table 2. Privilege and the Liberal Life Cycle

Privilege Stage 1: Stage 2: Stage 3: Stage 4:

level childhood ages 21-24 maturity old age
High + $80,000 + ? ? $670 per month + ?
Standard 0 $80,000 + ? ? $670 per month + ?
Low $80,000 + ? p $670 per month + ?
I 164 Expanding the Stake

marked by the entry for eighty thousand dollars in all three columns.
Then come the question marks signifying the manifold ways in which
free men and women combine their early backgrounds with their
stakes to live a bewildering multiplicity of lives, yielding very different
results. After this long period of freedom, a fixed and equal quantity
enters once again into each citizen s profile. Under expanded stake-
holding, each citizen receives a minimum pension for his or her old
age, here denoted by $670 per month, although each is free to increase
it by any amount he or she chooses, here denoted by question marks
representing private pension savings during earlier stages of life.
Within this framework, we are proposing to link the first and last
phases of a citizen s life. Because the government will have to raise the
money for citizens' pensions from somebody, isn't it fair to ask the
most privileged to put more money into the kitty?
America would be a much better place if the government had ef-
fectively intervened to provide a first-class learning environment to all
children, regardless of the wealth of their parents. If all three repre-
sentative citizens in our table had begun adult life from roughly equal
points, we would be the first to reject the privilege tax. But we will be
far, far away from this ideal condition for a long time to come. And in
the meantime, it is only fair to tax those who have profited from un-
equal opportunity.
So far, we have been talking the language of justice. But a second
range of arguments becomes available once we shift our terms to
questions of efficiency and tax neutrality. As any economist will tell
you, the payroll tax imposes a "deadweight" loss on our economy.
Because workers fork over 15 percent of hourly wages to the social in-
surance fund, they can't take into account their full marginal contribu-
tion to the production process.29 If, for example, a worker generates
$10 an hour, he gets to take home only $8.50 after the payroll tax has
done its work. This in turn distorts each person s decision about how
much and how hard to work.
 Taxing Privilege 165 1

Different people respond to lower effective wages in different ways.

Some may work fewer hours, retire early, or remain unemployed. Oth-
ers may work harder to achieve their aims in life. But our objection to
the payroll tax does not stand or fall on predictions about its overall
impact.30 Regardless of how each worker responds, there is a larger
principle of political legitimacy at stake: the state offends liberal com-
mitments to neutrality among ways of life when it singles out wages for
specially detrimental tax treatment, penalizing work relative to other
life choices.31
The privilege tax lifts these distortionary burdens. Each taxpayers
payment will now be keyed to the level of his privilege as a youngster
and will not affect marginal incentives at the workplace. Generally
speaking, workers will take home more of the marginal revenue that
they produce and hence will more efficiently make the inevitable
tradeoffs between work and other aspects of life. A deadweight loss
will be removed from this inevitably difficult decision.
Some efficiency-minded critics may respond skeptically to this
basic point. Although they may concede that our new tax removes a
distortion from the choices made by the younger generation, they may
argue that the tax simply displaces the burden onto their parents.
Once high-income parents realize that their economic success comes
at the cost of imposing a heavier privilege tax on their children, they
may respond by working and saving less.
This is possible, but not very likely. Under our proposal, parents will
have to sacrifice nine or more years of high income during their chil-
dren's early years in order to reduce their adult children's future tax
bracket.32 Within this structure, even very altruistic parents would be
silly to cut back on their family s present income to create tax benefits
for their children in the remote future.33
In short, the privilege tax looks like the sort of neutral tax that
economists dream about. As we shall see, the rigidity of the tax—its
persistent focus on the enduring consequences of early childhood ad-
I 166 Expanding the Stake

vantages—has vices as well as virtues. Indeed, it will sometimes seem

unfair to impose the tax on adults who have utterly failed to make
income-producing use of their early childhood advantages. For this
reason, we will support the creation of an "escape hatch" from high-
privilege tax brackets under special conditions. But as long as we make
it tough to use the escape hatch, our efficiency and neutrality argu-
ments will remain largely intact.
All things considered, there seems a lot going for our basic idea.
After all, in matters of taxation, it isn't too often that justice and effi-
ciency point in the same direction.

Designing a Privilege Tax

How might privilege taxation actually work in practice?

The most obvious problems involve the measure of "privilege/'
There are plenty of rich kids who have miserable childhoods; many
poor children grow up with admirable discipline provided by loving
families. Don't these complexities preclude any attempt at determin-
ing a fair basis for the privilege tax?
No, but they do motivate a two-pronged approach. The first prong
is based on the well-documented truth that wealth generally has its
privileges. The second prong is more finely tuned to the particularities
of individual cases. Under a suitable showing of hardship, high-privi-
lege taxpayers should be given an opportunity to escape into a lower
bracket. There is nothing particularly original about this two-part
structure—the law uses it to manage innumerable problems in all
areas of life. Nonetheless, each part deserves extended discussion.

Defining Privilege
We propose to measure privilege by looking at one, and only one,
feature of each child's environment; the amount of money that his par-
ents earn while he is growing up. Not only is money the most measur-
 Taxing Privilege 167 I

able unit of social power, but it also correlates with enduring advan-
tage. Perhaps poor parents provide their children with poor opportu-
nities because they have absorbed deep "cultural pathologies" that
disable them from adult achievement. But it is not necessary for the
tax authorities to probe into such contestable realms of cultural cri-
tique. It is enough for them to know that poor children, for whatever
reason, systematically underperform on a wide range of economic and
social skills that are useful in a vast array of life patterns.34 Although
other factors—like parental education—may be even more strongly
correlated with a child's relative disadvantage, there is no readily ad-
ministrable way to measure them.35
The same points hold when we seek to assess superprivilege. Tax
authorities need not consider whether the advantages of growing up
with rich parents are caused by the superior role models that they pro-
vide, by the first-rate education that their money buys, by direct trans-
fers of cash, or by social connections. It is enough that parental income
is roughly correlated with all of these things.
This said, the crucial first step in calculating a privilege tax is well
within the existing bureaucratic capacities of the Internal Revenue
Service—at least for the children of the 150 million Americans who
file income-tax forms each year.36 Since 1987, parents have had to re-
port their children's Social Security numbers in order to claim the tax
exemption for dependents.37 This should be enough to establish a
sound basis for a two-bracket privilege-tax system. Stakeholders com-
ing from high-income families will be assigned to a higher tax bracket
than the bulk of Americans. Our own calculations indicate that the top
bracket will include about 20 percent of American taxpayers—repre-
senting adults who spent nine or more years of their childhood in the
very highest income group.38
Tougher problems arise in implementing a lower bracket for disad-
vantaged taxpayers. About 20 percent of the total population spends
seven or more years of their childhood in the lowest-income group.39
I 168 Expanding the Stake

The question is how to identify them. Many have never filed income-
tax returns, many have never been on welfare, and in any event, cur-
rent welfare records are a mess.40
The solution is to cast a broad informational net. Taxpayers should
be invited to proffer several kinds of proof. Evidence of a prolonged
stay in foster care or a long-term spell on public assistance should
serve as reliable indicators. More difficulty enters when the taxpayer
seeks to infer disadvantage from a negative. For example, the Social
Security Administration has extremely good records of earnings and
payroll-tax payments that stretch over decades. It should be quite easy,
then, to prove that one s parents reported low or nonexistent earnings.
But what if they earned lots of money off the books?
Happily, the system will have plenty of time to grapple with these
difficulties. A complete transition from the payroll tax to the privilege
tax will take a full generation. For the first decade or two, the privilege
tax, if used at all, would be of quite modest dimensions and could be
readily handled by a two-bracket system—dividing the top 20 percent
from the remaining 80 percent.41 By the time privilege taxes become
substantial, we should have a better informational base for a three-
bracket system.

Policy Questions
Once the basis of privilege has been defined, a series of policy deci-
sions will be required to assign each taxpayer to an appropriate bracket.
Computers would be used to calculate parental income during each of
a taxpayers first eighteen years of childhood. The highest—or low-
est—seven to nine years would determine whether the taxpayer would
be in the high, medium, or low bracket.42 The use of a longer period,
and not a single-year snapshot, will generate a better indicator of over-
all advantage and reduce incentives for tax gamesmanship.
We also think that a certain sophistication is called for in designing
an appropriate rate schedule. Instead of hitting twenty-one-year-olds
 Taxing Privilege 169 I

with the full privilege tax, the rate should increase gradually until it
reaches full strength at, say, age thirty-five, by which time most people
will have settled into their solid earning years.43 At this point, we
would leave the rate unchanged until the taxpayer qualified for a citi-
zen s pension, at which point the tax would drop to zero. Of course, we
have no stake in the precise schedule. Should a twenty-one-year-old
pay 40 or 60 percent of the privilege tax paid by a thirty-five-year-old?
Should payments begin to decline when the taxpayer reaches fifty-
five?
We take a similar approach to other key policy questions. Most ob-
viously, how should a child in a five-child family earning $200,000 be
compared to an only child with the same family income?44 What about
children of divorced and remarried parents?45 How can we ensure
that high-earning parents do not report artificially low incomes through
the use of nontaxable fringe benefits, deferred compensation, tax-
exempt bonds, and the like?46
While we explore a range of options in the endnotes, it makes no
sense to search for a single "right" answer. As in many other areas of
tax law, the best we can do is to design a sensible compromise. These
exercises in drawing lines should not divert us from the big picture: we
all know that a significant percentage of children do indeed enjoy sys-
tematic privilege, and we should not allow quibbles on the margins to
obscure this central fact. The ruling categories of tax law have never
captured the nuances of life. The question is whether these new tax
brackets will create a system that is a lot fairer than the regressive pay-
roll-tax categories they will displace.

Escape Hatches
The rough-and-ready character of the privilege brackets suggest the
wisdom of allowing "hardship cases" to take advantage of an escape
hatch. Because high parental income is only statistically correlated
with enduring economic and social advantage, taxpayers should be
I 170 Expanding the Stake

allowed to establish that they are exceptions to the general rule. An

overriding aim should be to avoid bureaucratic intrusion into highly
personal and contestable matters. The IRS should obviously not be in-
terested in the subtle emotional abuses visited upon a taxpayer by her
rich parents. It should focus only on the taxpayers revealed economic
behavior. If a superprivileged person fails to make much income year
after year, this is the best evidence that the statistical correlation does
not accurately reflect the facts of her upbringing. A similar escape
hatch should be available for a person in the average privilege bracket
whose consistently low earnings suggest that she too may be suffering
from hidden disadvantage. But in either case, a person should be able
to move down a notch (or two) on the privilege scale only by showing
very significant economic hardship.47
We should also design the escape hatch to prevent predictable
abuses. Law and medical students, for example, go through long peri-
ods of low pay as a preliminary to a lifetime of high earnings. It would
discredit the system if John D. Rockefeller IX could escape his high-
privilege bracket by demonstrating low income during his years at Ox-
ford and the Yale Law School. University students, then, should not be
allowed to use their years of "poverty" as evidence that their upbring-
ing was less privileged than it seems.48
A second problem arises when a taxpayer s reported income fails to
convey her effective command over resources. Given our individualis-
tic bent, we envision each citizen filing her own privilege-tax return.
But this will lead to trouble whenever a taxpayer can reliably depend
on others for support in ways that do not show up on her tax return.
Consider the married couple whose income is earned almost entirely
by one spouse. Because the IRS does not require the nonearning
spouse to report half the family income as her own, she will mistakenly
appear to be poor and potentially eligible for a tax-bracket down-
grade.49 But the answer here is better bookkeeping: for purposes of
 Taxing Privilege 171 I

the escape hatch, each spouse should report half the couple s total in-
come. Income will also be a poor measure of economic status in a few
cases because wealth is invested in low-earning or tax-exempt assets.
But the new wealth tax will provide a useful alternative measure of tax-
paying capacity.50
As a third safeguard, we would make the income (and wealth) thresh-
old for tax relief quite significant. Simply because a child of privilege
chooses to become an elementary-school teacher rather than a busi-
nessman, he should not be allowed to escape paying his fair share.
After all, many fellow citizens were never given the effective opportu-
nity to make such choices. It is only if a privileged person consistently
earns less than, say, 175 percent of the poverty threshold that the IRS
should take his claim seriously.51 And the income threshold for mov-
ing into the lowest privilege bracket should be even stricter, requiring
a below-poverty-level income for an even longer period.
Opinions will differ as to the best place to draw the line. Some may
even conclude that the bureaucratic complexity involved in creating
escape hatches outweighs the potential for individualized justice—es-
pecially once the risks of bureaucratic arbitrariness and corruption are
entered into the scales.
We do not agree.

Problems of Enforcement
With the escape hatch put aside, a final question of administration
arises: how can we ensure that people pay their privilege taxes? And
what should be the penalty for nonpayment?
For most people, enforcement will simply piggyback on the in-
come- and wealth-tax systems. When you file your income- or wealth-
tax return, you will have to declare and pay your privilege tax too.
Wage withholding during the year could be increased to reflect tax-
payers' privilege-tax brackets. And tax evaders would be subject to the
I 172 Expanding the Stake

usual penalties: seizure of assets and income. Because the amount of

the privilege tax will be fixed and known in advance, the IRS s only en-
forcement task would be to find individuals and, if they don't comply,
their assets.
But things will be harder at the bottom. Because poor people are
exempt from income taxes, it may be tough to find them if they fail to
pay their privilege tax. Without the payroll tax, the IRS could no longer
use these computerized records as a cross-check—although we might
want to maintain them for just this purpose. And welfare records, kept
by the states, may be inadequate to the task.
Finally, there is the enforcement problem posed by people who
keep their activities off the books. Although this is a real problem
under the existing income-tax system, it will be harder to evade the
privilege tax. To see why, consider that only people who entirely avoid
the notice of the IRS can hope to escape privilege taxation. In contrast,
people can cut their income taxes by working partly off the books. In-
stead of underreporting sales a bit here and taking an exaggerated de-
duction there, as income-tax evaders do, privilege-tax evaders must
make the leap into clearly fraudulent, intentional tax evasion and must
stay well out of sight if they're not to get caught. This will not trouble
the hardiest tax evaders, but it will be more difficult and risky for mid-
dle- and upper-class doctors, lawyers, and businesspeople.
Undoubtedly, some people will manage to escape making payments
for years before they are detected. What should we do when they
are finally caught? Suppose that a disadvantaged person has scraped
through life, working off and on at odd jobs, never paying her minimal
privilege tax. At age sixty-seven, she turns up at the stakeholding of-
fice, expecting to collect a citizen s pension. It would be useless to con-
fiscate her assets, since she has none, other than the promised
pension. Should we turn her away?
There is no easy answer. Giving her a full pension would reward
scofflaws. But denying her everything seems draconian: it would leave
 Taxing Privilege 173 I

a disproportionate number of the least-advantaged citizens out in

the cold at the end of life as well as at the beginning. The answer lies
somewhere in the middle: penalizing evaders without completely deny-
ing them pensions.

Class Warfare?
Suppose we have convinced you that privilege taxation is well within
the administrative capacities of the computer-assisted governments of
the twenty-first century. This hardly suffices to respond to the ques-
tions of principle that may be raised against it. Most obviously, doesn't
the tax signal the rise of explicit class warfare?
No more than our present taxes do. The progressive income tax
is expressly justified on the ground that the rich should pay more.
Even more conspicuous is the payroll tax, which is explicitly and egre-
giously pro-rich. In urging its elimination, we are not the ones who
are introducing class into the debate. We are simply trying to put on
a sounder footing the question of what different classes owe to one
another.
At present, our tax categories reflect an older, Marxist understand-
ing of the class struggle. The capital-gains tax burdens "capitalists/*
and the payroll tax burdens "the working class." In contrast, the privi-
lege tax proceeds from the fundamental concerns of liberal individual-
ism. It is not ones relationship to the means of production that should
shape tax status but the extent to which liberal society has honored its
promise of equal opportunity.
It is no disgrace for tax law to recognize the unfulfilled character of
this promise. To the contrary: our sense of political community is in
greater danger if America refuses to confront its failures and pretends
that Utopia has arrived. One of the greatest advantages of the privilege
tax is its continuing reminder of the imperative need to build a world
I 174 Expanding the Stake

of genuine equality of opportunity, a world where a privilege tax would

no longer be necessary.
But this is not our America. We live in a place where the reality of
privilege is hidden by the mythology of classlessness. And in such a
world, privilege taxation is simply a way of bringing truth to the every-
day life of dollars and cents.

More Criticisms

As professors at Yale, we have been overexposed to one complaint

about our proposal. Won't the children of the rich be deterred from
devoting their lives to low-paying public service jobs by the need to
pay an extra $1,700 year in privilege tax? Won't this reduction in the
supply of Ivy Leaguers with noblesse oblige impoverish the public
good in innumerable ways?52
We think that any shortfall will be smaller than our critics predict.
Most public service jobs don't pay that badly. And there is nothing to
stop a proud mom or dad from offering to pay all or part of the privi-
lege tax for children bent on public service in schools or churches or
politics. It is hard to believe that a prospective tax of $1,700 a year will
deter many from lucrative careers in business or law. Keep in mind,
too, that the privileged person is also getting an eighty-thousand-
dollar stake. Converting the stake into an annuity of four thousand
dollars per year would more than cover liability for the privilege tax.
And the tax will also have the highly salutary effect of enabling less-
privileged people to devote their time to public interest jobs without
paying a commensurate payroll tax.53
Suppose, however, that we are wrong about this, and the new tax
does substantially depress the flow of young idealists into the public
service sector. Even in this scenario, basic economics suggests that the
affected job sectors will respond to the diminished supply by increas-
 Taxing Privilege 175 I

ing salaries to make up part or all of the difference. All in all, this ob-
jection is minor at best.
A second problem is more serious. It focuses on our proposals
likely impact on women. After all, a woman will have to pay her tax
even if she spends all her time raising children. Won't the tax force her
into the labor market or into further dependence on a wage-earning
partner?
Yes, but we think that this objection is misplaced. For one thing,
women will also have their eighty-thousand-dollar stakes to serve as a
buffer. For another, the real problem is not the privilege tax but how
our society presently pays for child-rearing. Although this book is not
about the early years of life and we cannot fully argue the case, we sup-
port the basic idea of family allowances. Given the concerns of the lib-
eral state with equal opportunity, it only makes sense to compensate
caregivers for their crucial work at the moment of each youngster s
greatest vulnerability.
If this were done, the liberal state should maintain tax neutrality be-
tween competing ideals of motherhood. Once a woman is provided
with a child allowance, it should be up to her to decide whether to pay
herself and stay at home or to pay someone else to care for her child
while she worked. Similarly, she should not be told that she can escape
the privilege tax by pursuing one option rather than another.
Granted, the United States does not presently have a European-
style universal family allowance. But we resist eroding the simplicity
and moral force of the privilege tax by creating exemptions keyed to
other pervasive injustices. Given their number, the tax would soon be
riddled with exceptions. Moreover, a privilege-tax exemption would
have perverse consequences. A mother from a poor background
would gain only $380, whereas one from the right side of the tracks
would gain $3,800—for the same work. It is better to channel reform
energies into more constructive paths.
I 176 Expanding the Stake

Getting from Here to There

We turn finally to the distinctive problems raised by the transition

from the old system to the new. Americans count on their retirement
pensions long before they receive their first check. As they chart their
lives over time, their prospective claim on the government shapes all
their other savings decisions—as well as the pension plans provided by
(some of) their employers. By the time most people turn, say, fifty,
they have already significantly relied on the prospect of receiving So-
cial Security, and it would be unfair to change the rules after they have
made most of their basic life-shaping decisions.
This means that there should be a long period of peaceful coexis-
tence between the old and new systems. The first stakeholders will
emerge from their interviews with eighty thousand dollars and a guar-
anteed citizen s pension, but those older than fifty will keep their So-
cial Security entitlements. As for the generation in between, we have
more room for policy discretion. To avoid unnecessary political up-
heaval, it is probably wise to retain the old system for everybody over
twenty-four. This would protect the interests of those who have relied
on the promise of Social Security in making life plans, while also per-
mitting a clean integration of the basic proposal and its expanded ver-
sion. But we wouldn't object if the virtues of the new system were so
clear that the middle-aged began a campaign to join in.
As for taxes, the principal issue is the future of the payroll tax dur-
ing the period when Social Security and citizens' pensions coexist.
Under one approach, older workers who will retire under Social Secu-
rity should continue to pay payroll taxes at the rates that would have
applied had the program continued indefinitely. Doomsters to the
contrary, the Social Security fund is in pretty good shape, requiring
only incremental adjustments to ensure it stays that way.54
But what of the stakeholding generation? As long as the citizens'
pension fund is maintained on a pay-as-you-go basis, there is no need
to begin assessing a privilege tax until the first group of stakeholders is
 Taxing Privilege 177 I

just about ready to retire—in about fifty-five years. At that point, the
payroll tax would phase out as the Social Security system expires, and
the privilege tax would be phased in, as more and more citizens claim
a citizen s pension.55

Citizens' pensions and the privilege tax mark a first effort to expand
stakeholding beyond our basic proposal. If our initiative catches on, it
can provide a framework for many more efforts to rethink other as-
pects of the existing welfare state. But for now it is more important to
stand back from the trees and take a final look at the forest.
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PartS

Defending the Stake

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 10

Ideals

Two hundred years ago, Tom Paine surveyed the revolutionary world
that he helped create and saw that something was missing: "A revolu-
tion in the state of civilization is the necessary companion of revolu-
tions in the system of government/'1 This could be accomplished, he
was convinced, only through stakeholding. Every citizen, Paine in-
sisted, had a right to a stake of fifteen pounds sterling "when arrived at
the age of twenty-one years . . . and also the sum of ten Pounds per
annum, during life, to every person now living of the age of fifty years,
and to all others as they shall arrive at that age."2 In a remarkable ges-
ture for the year 1797, Paine provided that this expanded stake should
go to every man and woman. Regardless of his or her claims on private
wealth, each should be accorded an economic stake in the common-
wealth.
Paine directed his essay to the revolutionary government of France,
but he plainly intended it for a much broader audience: "Already the
conviction that government, by representation, is the true system of
government is spreading itself fast in the world. The reasonableness of

181
I 182 Defending the Stake

it can be seen by all. The justness of it makes itself felt even by its op-
posers. But when a system of civilization, growing out of that system of
government, shall be so organized, that not a man or woman born in
the republic, but shall inherit some means of beginning the world, and
see before them the certainty of escaping the miseries, that under
other governments accompany old age, the revolution of France will
have an advocate and an ally in the heart of all nations."3
Paine s thoughts on revenue-raising were a bit more primitive, but
once again there are striking parallels to our proposal. He urged the
creation of a "National Fund" from a special tax levied on all inheri-
tances: "The subtraction will be made at a time that best admits it,
which is, at the moment that property is passing by the death of one
person to the possession of another. . . . The monopoly of natural in-
heritance, to which there never was a right, begins to cease. . . . A gen-
erous man would not wish it to continue, and a just man will rejoice to
see it abolished/'4 Unfortunately, Paine failed to recognize that his ini-
tiative could never be effective without being supplemented by a sys-
tem of gift and wealth taxes. Nonetheless, the similarity between
Paine s National Fund and our payback requirement is clear enough,
despite the distance of two centuries.
Paine was the greatest but not the only visionary who has glimpsed
the promise of stakeholding over the years.5 While we are encouraged
by these examples—Paine s essay Common Sense helped spark the
American Revolution—there is, as always, a darker side. After all,
Paine and the others utterly failed to catalyze a strong popular re-
sponse for stakeholding. If they failed, why should we succeed?

Two Mistakes About Redistribution

Perhaps because two centuries of experience have exposed the limits
of other solutions to the systematic injustices of the market economy.
 Ideals 183

Paine s brand of stakeholding was first overwhelmed in the nineteenth

century by other, more Utopian projects of social reform—most no-
tably (but not exclusively) Marxism. In its familiar diagnosis, the real
enemy was the capitalist system itself, and the only serious response
was an all-out assault on private property. For Marxists, radical reform-
ers like Paine appeared to be self-deluding "petit bourgeois intellectu-
als" who failed to confront the irreversibly oppressive character of
capitalism. Rather than wasting time designing Band-Aids, serious re-
formers should join the revolutionary struggle for a brave new world.
Many thoughtful people resisted this temptation even during Marx-
ism's heyday. Nonetheless, its massive attraction served to place pro-
gressive liberalism on the intellectual and political defensive. Even in
the United States, New Deal Democrats did not look to radical liber-
als like Paine for inspiration and adopted workplace systems of social
security as a result. But we think that the intellectual climate really is
changing today.
Nationalization of industry is on nobody s agenda anymore. People
are slowly recognizing that "capitalism" is a Marxist label concealing a
wide range of systems built on the foundation of private property and
competitive markets—some bitterly unjust, others striving for a world
worthy of a free and equal citizenry. It is time to stop dreaming about
the abolition of private property and get to work creating a common-
wealth in which all citizens are property owners.
Nor should we be deflected by a second set of priorities—those fo-
cusing on the construction of safety nets. We refuse to look upon the
modern welfare state as if it were simply doling out a secularized ver-
sion of Christian charity. We are certainly in favor of charity, but its
primary pursuit is best left to churches, unions, and community orga-
nizations. While we have carved out a constructive role for social in-
surance and citizens' pensions in the stakeholding society, we have
followed Paine in linking these programs to the republican ideal of
free and equal citizenship.
I 184 Defending the Stake

The Political Case for Stakeholding

Tom Paine was not alone. In America at least, our leading Founders
also acknowledged a deep relationship between property and citizen-
ship. When James Madison viewed "the merits alone," it was clear
to him that "the freeholders of the Country would be the safest de-
positories of Republican liberty" and that the properryiess should be
excluded from suffrage.6 Standing before the Constitutional Conven-
tion, he did not conceal his anxiety as he glimpsed a future day when
the "great majority of the people will not only be without landed, but
any other sort of, property."7
But in 1787, this grim prospect could be deferred to the remote fu-
ture. The Founders treated the problem of propertylessness just as
they dealt with the curse of slavery. They did not seek a definitive so-
lution, leaving it to some later generation to confront the crisis when it
became acute.
This seemed sensible enough. A vast frontier beckoned to genera-
tions of yeomen farmers. As long as the government could sell virgin
land at low prices, the link between property and citizenship could be
more or less preserved for the foreseeable future. As the nineteenth
century progressed, this Jeffersonian vision of a republic of farmers
became increasingly obsolete. By the time of the great Homestead Act
of 1863, the statute s provision of free land on the frontier was already
out of sync with the needs of the rising urban masses of the East. If the
link between property and citizenship were to be sustained, provision
of free land would no longer suffice. With the closing of the frontier,
something like Tom Pained vision of Stakeholding was required to
guarantee each citizen a property interest in America.
But by then Paines voice had become a muffled memory. The
mainstream of reform was flowing in other directions: Populists, Pro-
gressives, New Dealers, and the partisans of the Great Society sought
to regain control over the market economy, but none moved in the
direction of citizen Stakeholding. Their overriding aim was not to
 Ideals 185 |

broaden the property-owning base but to regulate property more in-

tensely in the public interest. As we have emphasized, we do not seek
to jettison the legacy of legislative achievement left by these great
waves of twentieth-century reform.8 But the time is ripe to reassert
the enduring insights of an earlier age and reconstruct a direct linkage
between property and citizenship along the inclusionary lines that
Paine envisioned.
The political case for stakeholding begins with certain classical re-
publican themes. We do not imagine that a stake of eighty thousand
dollars will enable Americans to don their togas in the manner of the
patricians of ancient Greece or Rome. The citizens of these classical
republics had slaves do the work while they blabbed in the agora and
fought on the battlefields. But we do believe that modern stakehold-
ing will create a certain space for civic reflection in millions of lives
now dominated by economic anxiety. Fewer Americans will be living
on the economic edge; stakeholders will have more energy left to turn
their attention to larger things, including the fate of the nation. Prop-
erty will also breed sobriety, a resistance to the charismatic appeals of
the demagogue, a willingness to consider the longer term. Broadening
the property base enhances the stability and the quality of political life
of the republic. These points were made by Aristotle in classical
Athens and James Harrington in Commonwealth England.9 They are
no less true today.
But times do change, and there is something more to be said about
the special circumstances of twenty-first century America, For classi-
cal writers of Greece and Rome, a solid republic was built not only on
a broad economic base but also on a pervasive uniformity of moral val-
ues. Different republics might affirm different values, but none could
survive without a repressive uniformity. Throughout the classical texts,
there is enormous admiration for Sparta and its remorseless efforts to
root out any hint of nonconformity. Yet these ancient aspirations for
republican virtue seem absurdly totalitarian today. We cannot build
I 186 Defending the Stake

political solidarity by forcing all Americans to worship together, let

alone engage in the fierce military exercises at the core of classical
republican life. Recognizing this, most modern-day communitarians
display a disturbing vagueness in their impassioned calls for a reinvig-
oration of political community. In too many cases, there lurks in the
background a Norman Rockwell picture of the 1950s, in which Amer-
icans have somehow returned to their traditional values of family,
church, hard work, and sexual abstinence, without the old-time racism,
sexism, and hierarchy that accompanied them.10 But modern commu-
nitarians are curiously weak in explaining how this moral revival is to
occur without trampling on the rights of millions who persist in living
lives that break one or another traditional mold; are these people to be
denounced as un-American?
Stakeholding, by contrast, builds a common sense of citizenship
without the constant threat of moralistic repression. Each American
will use his eighty thousand dollars in the way that makes the most
sense to him. But each will tell a story that weaves his American citi-
zenship into the fabric of his personal life: "Without the eighty thou-
sand dollars, I never would have had the guts to try this, or avoid that."
However different their life experiences and moral ideals, Americans
will share something in common in the practice of citizen stakehold-
ing—something that penetrates each life more deeply than existing
rituals like voting or civic possessions like a passport.
By creating a public foundation for private life, stakeholding will
also encourage a purer form of patriotism. It will not demand adhesion
to one or another narrow version of the American creed. It will
emerge instead out of simple gratitude to the nation for an expansive
conception of economic citizenship that enables each citizen to enter
adult life with a certain independence and resiliency against the re-
curring economic shocks of the competitive marketplace. As she re-
flects on her life, each stakeholder will be well aware of the very
personal debt that she owes to her country, and most citizens will be
 Ideals 187 I

silently on the lookout for opportunities to repay it, This accumulating

fund of goodwill will sustain our political and social institutions during
normal times and provide a precious resource for the unknowable
crises that lie ahead.
When we turn from the stake to the means of financing it, the same
republican themes emerge from our more particular proposals. Most
discussions of tax policy take up the perspective of the central author-
ity. How much does the government require? How can that amount be
raised cheaply and fairly? These are important questions, but they are
inadequate without a second perspective on the problem—that of the
citizen. To be sure, nobody likes to pay taxes. But it makes a big differ-
ence how citizens understand the taxes that they are called upon to pay.
We have returned to this symbolic point repeatedly. In dedicating
the wealth tax for the exclusive use of stakeholding, we are doing more
than raising money. We are creating a new bond between haves and
have-nots, between the old and the young. In paying the wealth tax,
each citizen will be recognizing that he does have a concrete responsi-
bility to assist his fellow Americans who are starting out in life in
search of the American dream.
So, too, for the privilege tax. We favor it not only because it is fairer
than the payroll tax but because it carries a better message. Every time
a citizen pays her privilege tax, she will be acknowledging the extent to
which America still fails to redeem the promise of equal opportu-
nity—and the need for further measures in the years ahead.
The symbolic side of taxation is generally given short shrift in policy
discussion. But it is a serious mistake to get caught up in the dollars
and cents of revenue collection. Now that we have abolished the draft,
taxation is the most onerous sacrifice that the nation demands of its
citizens. The forms that taxation takes and the messages that it carries
are fundamental in the ongoing dialogue that constitutes the polity.
Against the cynicism of the age, we are not embarrassed to an-
nounce our message: by the taxes they pay as well as the stakes they
I 188 Defending the Stake

receive, Americans should be prepared to reaffirm their common

commitment to economic citizenship as an enduring aspect of a revi-
talized political identity.
Stakeholding promises to revitalize our politics in a more immedi-
ate way. If we ever hope to move beyond the present politics of drift
and scandal, political leaders will have to begin again to speak about
serious issues in a language that is directly accessible to ordinary
Americans. In contrast to the stream of technotalk coming out of think
tanks inside the Beltway, Stakeholding puts on the table a practical
proposal that every American can understand.
Nobody weVe met has the slightest problem grasping the idea of
eighty thousand dollars—or the possibility of funding the program by
requiring a payback and taxing wealth. Lots of people don't like our
initiative, but at least they know what they are disagreeing with—and
this kind of clarity is absolutely essential if we are to have a rebirth of
democratic politics. Unless progressives come up with substantive
projects that are transparent to the common understanding, the poli-
tics of scandal will have no real competitor in this country. The general
public has no patience for a policy debate that speaks a technocratic
language accessible only to people with advanced degrees. If Beltway
babble is the alternative, ordinary Americans will turn with relief to
news of the latest personal indiscretion by leading politicos. Only a
program like Stakeholding can focus the public mind on the prospects
for real change. It raises, in a singularly straightforward and concrete
way, one of the leading questions of our age: should Americans take a
serious step to assure more equality of opportunity, or should we fol-
low our present course of trickle-down economics?
We do not know how most citizens will answer this question. Like
all serious political proposals, Stakeholding will be divisive. For many
of our friends, the pressing need to redeem the promise of equal op-
portunity is one of those self-evident truths that Jefferson talked
 Ideals 189 [

about; for others, stakeholding only seems to be the latest in a long line
of crackpot schemes that fail to improve upon the invisible hand.
There can be no hope of ending this great debate between progres-
sives and conservatives. Nonetheless, the doubts of conservatives did
not stop previous generations from embarking on great reforms that
most Americans now take for granted. Why should they stop us now?
Our proposal will generate other lines of conflict. Most obviously, it
will divide haves and have-nots. The fact that 59 percent of Americans
will pay nothing in wealth taxes will force politicians to think twice be-
fore opposing stakeholding, but it is easy to predict emphatic opposi-
tion from many rich Americans. The initiative will also intensify the
clash between generations that increasingly marks our politics. Be-
cause wealth is heavily correlated with age, successful men and women
who are over sixty will bear the brunt of our new tax. While many may
be persuaded by the justice of our proposal—and the prospect of their
grandchildren gaining a solid start in life—it is only natural to expect
much skepticism as well.
Stakeholding will look very different farther down the age distribu-
tion. Consider the situation of a married couple of forty blessed with
two children often and twelve: will they vote to give their kids a stake
of eighty thousand dollars apiece in a decade or so, or will they be de-
terred by the prospect of heavy wealth taxes as they grow older and
richer?
This answer will be pretty easy for most forty-something parents,
who will be paying absolutely no wealth tax because their total assets
won't exceed the eighty-thousand-dollar exemption.11 Many may hope
that, in twenty more years, they will have accumulated a lot more. But
if they are like most parents and care deeply about their children's fu-
ture, they may be perfectly willing to exchange the uncertain prospect
of higher taxes later for a rock-solid eighty-thousand-dollar stake ac-
cruing to each child in the nearer term.
I 190 Defending the Stake

The same is even truer for the vast majority of Americans in their
twenties and thirties who either have very young children or are think-
ing about becoming parents. They may regret that stakeholding has
come too late for them, but they will have every interest in seeing that
their children gain this precious advantage when their time comes.
Obviously, the calculus will look much different for the substan-
tial number of childless adults and for the relatively small group of
younger and middle-aged Americans with large assets.12 But we have
never suggested that our proposal is to everybody's advantage. Nor do
we suppose that everybody's position will be determined by a narrow
economic calculus focusing on self and family. As in all political exer-
cises, each voter will come to judgment after filtering self-interest
through a sense of civic obligation and the substantive merits. Some
will vote against stakeholding even though it might profit their kids
mightily, simply because they think it s an awful idea. And vice versa.
Nevertheless, we have said enough to suggest that the political po-
tential of stakeholding is considerable. Although the idea might be un-
familiar, it is not Utopian. The first politician who seriously takes it up
will find herself appealing to the very concrete interests of a massive
majority of Americans. Of course, the fate of the initiative will depend
on the political skill of the leadership that emerges on both sides of the
debate. But it will also depend on how ordinary men and women an-
swer a simple question: do Americans believe in equal opportunity any
more?
Maybe not. Only time will tell. But it is far too early to dismiss
stakeholding as a pipe dream that could not command the attention of
ordinary people.
In making the political case for stakeholding, we envision a two-
stage process. For the next generation, the initiative can inspire a seri-
ous politics of mass engagement, which would give renewed meaning
to American citizenship in this time of drift. Over the longer run, the
political success of stakeholding will generate an ongoing system of
 Ideals 191

taxation and entitlement that revitalizes our social contract and serves
as an enduring source of civic identity for our children and our chil-
dren's children.

The Individualist's Case for Stakeholding

One of the great banalities of our time sets "the individual" against
"the community," as if the two were locked in inexorable combat:
what's good for one is bad for the other. But stakeholding suggests the
contrary, and at several levels.
Begin with the most obvious. In contrast to most public programs,
this one does not restrict the rights of private property on behalf of
some collective good. It is based on the opposite premise: property
is so important to the free development of individual personality
that everybody ought to have some. Without stakeholding, formal
freedom easily degenerates into farce—as Anatole France once jested,
the equal right to sleep under the bridges of Paris.
The most frequent response to France s famous quip is an ironic
shrug rather than an embrace of the obvious solution—make every cit-
izen a property owner. In proposing stakeholding, we do not mean to
exaggerate the link between property and personhood. Having mil-
lions in the bank hardly guarantees a fruitful or secure life; personal
growth requires an understanding of the limits of what money can
buy.13
Nonetheless, a propertyless person lacks crucial resources needed
for self-definition. He can never taste the joys and sorrows of real free-
dom—and the possibilities of learning from his own successes and
mistakes. He is condemned to a life on the margin, where the smallest
shocks can send him into a tailspin. He can never enjoy the luxury of
asking himself what he really wants out of life, but is constantly re-
sponding to the exigent demands of the marketplace.
I 192 Defending the Stake

It will be easy for culture critics to sneer as Joe American uses his
stake to agonize over the car he should buy or the clothes he should
wear. But these mundane decisions are profoundly expressive of our
ordinary identities and offer continual opportunities for personal re-
definition and development. Their human importance should not be
dismissed by fashionable talk about "commodification" as the root
cause of alienation in modern life.
We do not deny that something important has been lost in the shift
to the modern marketplace of mass production and consumer choice.
There was a dignity in growing your own food and having long-lasting
relationships with your neighbors. Indeed, some brave souls will un-
doubtedly use their stakes to reestablish more authentic communal re-
lationships or seek to live in greater harmony with nature. We respect
these efforts, but refuse to privilege them: it is up to each American to
decide on his own responsibility whether modern life is worth its
moral costs. The glory of stakeholding lies not in any individuals par-
ticular answer but in the new space it opens for each citizen to con-
front such questions.
Stakeholding, in short, takes individualism seriously by enabling
each of us to take himself seriously. The economic independence af-
forded by eighty thousand dollars hardly provides insulation against all
the hazards of life But it would be silly for mere mortals to aspire to so
absolute an independence. It is even possible to have too much inde-
pendence from the market, rather than too little. Imagine, for exam-
ple, that America were magically placed in a position to add a couple
of zeros to each stake, pushing the number from $80,000 to $8 million
for every young adult: would it really be good to transform the average
American into a spoiled brat living in New York on an overly large trust
fund?
There is no danger of that. The question is not whether Americans
will become spoiled brats, but whether they should enjoy the land of
 Ideals 193 I

relative economic independence that many children of the upper mid-

dle class take for granted today.
In making the case for stakeholding, we also wish to confront
squarely another standard anxiety expressed by individualists. Accord-
ing to their familiar critique, an unacceptably collectivist idea of human
nature haunts the standard arguments for economic redistribution.
Perhaps, these individualists grudgingly concede, such grand egalitar-
ian projects would be justified if each individuals talents were prop-
erly conceived of as collective assets of the community. But we should
reject such collectivist imagery and, with it, the redistributive impulse.
The community doesn't own your talents. You do. And it is profoundly
mistaken for the community to suppose that it can redistribute the
fruits of your talents in the way that best serves the collective wel-
fare.14
In framing our own response, we do not deny that many standard
arguments for redistribution proceed from the "talent-pooling" premise
that critics have identified. But we have made every effort to distance
ourselves from any such notion. To be perfectly clear, we do not view
each citizens talents as a form of community property. We understand
them as emerging from an ongoing process of self-definition begin-
ning at birth. As we mature, each of us explores our native abilities by
assessing them in action, revising our assessments after initial rounds
of experience, and developing our talents further in light of the op-
portunities that the world presents. By the time a citizen reaches
adulthood, it is perfectly appropriate for her to view her talents as
constitutive of her identity—and to protest when policy-makers treat
her hard work in developing them as if they were merely community
assets.15
But this point does not have the powerful anti-redistributionist im-
plications so often attributed to it. To the contrary: it is precisely be-
cause each individual is profoundly constituted by her ongoing effort
I 194 Defending the Stake

during childhood to define and develop her talents that she should be
given an equal stake to develop them further as a young adult. Our
case for redistribution, in short, is not based on the notion that the
community owns each individual s abilities. It is based on the commu-
nity s obligation to give each person equal respect by providing her
with equal resources to develop her unique talents.
Here, as elsewhere, our vision of the stakeholding society invites
you to transcend easy dichotomies between individualism and collec-
tivism in order to glimpse a life that reinforces both aspects of our
identities. When our children or grandchildren come forward to claim
their stakes, they are doing it for themselves and for America; they are
recognizing their common citizenship and gaining the effective free-
dom to take their own projects of self-definition seriously.
They are building a liberal community.

The Dark Side

A pretty picture, but there is a dark side. On the collective level, our
initiative indubitably draws a sharper line between "us" and "them"—
between longtime resident Americans, who will enjoy the economic
advantages of stakeholding, and everybody else. On the individual
level, what will be the fate of those Americans—and there will be
some—who blow their stakes and then turn to the community for fur-
ther assistance? Having thrown away their eighty thousand dollars,
these people may fare even worse under the new regime. Won't stake-
holding, in short, inaugurate an ugly new era of chauvinism and harsh-
ness in America?
There are dangers here—but we think that they should not be par-
alyzing. On the collective level, the fear of chauvinism is in part a com-
plaint about the very idea of the nation-state. Unless and until we
move to a scheme of world federalism, the inhabitants of the earth will
be sorted out into different countries. Whenever any one of these
 Ideals 195 [

countries makes a step toward justice among its own citizens, this cre-
ates a greater disparity between it and other countries. If this increas-
ing disparity were enough to condemn the initiative, no country
should ever make any moves toward justice for fear of disparaging the
rest of the world. But this can't be right.
Turning from morals to politics, we think that stakeholding is more
likely to diminish xenophobia than encourage it. Unless some serious
steps are taken to assure a broader distribution of the benefits of our
globalizing economy, it is only a matter of time before we will see a
powerful backlash from the majority who are left behind. In contrast,
the sort of politics that will yield stakeholding may turn out to be quite
benign for those who do not share directly in its advantages. When all
is said and done, the fate of our initiative depends on a politics of in-
clusion—stakeholding will become a reality only if tens of millions of
Americans can be persuaded to transcend their deep skepticism about
government and work together for a common goal. When this has hap-
pened in the past—during Reconstruction, the New Deal, and the
civil rights revolution—the politics of inclusion had sufficient momen-
tum to embrace others far beyond its original concerns. This could
happen once again: though resident aliens might not share in stake-
holding, they might well gain from the larger concern with social jus-
tice that a more democratic and inclusionaiy politics reflects.
Only one thing seems clear: the possible danger of an ugly chauvin-
ism is too speculative to serve as a decisive reason for rejecting stake-
holding. To the contrary, we think it much more likely that the ultimate
outcome will be benign. Given Americas influence in the world, its
success in moving forward with stakeholding may encourage other
countries to make similar experiments. And wouldn't that be a good
thing?
We can be less Panglossian when it comes to the problem posed by
citizens who blow their stakes on a BMW and a wild fling in Las Vegas.
These people will not encounter a very sympathetic audience when
I 196 Defending the Stake

they plead for further assistance from their fellow citizens. Nor should
they. Freedom and responsibility are deeply linked in a liberal state. If
a person uses his freedom unwisely, he cannot expect to avoid ac-
countability for his actions.
There may be extenuating circumstances. In many cases, but not in
all, the stakeblowers will have come from disadvantaged childhoods
and so may justly claim that they have still been deprived of their full
measure of equality of opportunity. Nonetheless, we are not inclined
to move too eagerly or too far down this path of extenuation. The best
way to respond to these other injustices is to eradicate them, not to
declare that their victims should be treated as something less than re-
sponsible adults.
But all adults make painful mistakes, and there certainly should be
room for compassion in any good society. While churches and other
institutions of civil society should play a leading part in helping people
in trouble, the state should play a backup role—even though the level
of assistance to stakeblowers will seem low in comparison, say, to the
levels prevailing in European welfare states. It is a hard call, but one
that must be made: it is more important to ensure that all Americans
enjoy more equal freedom to shape their lives than to give more gen-
erous relief to those who fail the test of freedom.
We console ourselves with one bitter fact. America is so ungenerous
in its welfare policies at present that it is hard to imagine it getting
much stingier. Nonetheless, the plight of the stakeblower does em-
phasize the divide between our proposal and those emerging from the
utilitarian philosophies that have inspired the welfare state over the
past century. At the end of the day, there is a choice to be made, and
we make it on behalf of the right of each and every individual to real
freedom to shape his own life and take responsibility for his own fate.
 11

Alternatives

All this prepares the ground for a response to a criticism that we have
frequently encountered: "Stakeholding sounds nice, but aren't there
better and cheaper ways of fighting poverty?"
We will consider concrete alternatives shortly, but first we want to
challenge the question. Stakeholding is not a poverty program. It is a
citizenship program. It is not concerned simply with raising the bot-
tom. It aims to realize our commitment as Americans to freedom and
equality for all. Our initiative will succeed whenever a young man or
woman from the suburbs gains the freedom to start a family or small
business, as it will whenever a child of the inner city grows up know-
ing that there is a pot of gold at the end of the rainbow if he graduates
from high school and keeps clear of crime.
Some will fail the test of freedom. But even failure will cut across
class lines. Some spoiled brats from the suburbs will blow their stakes,
while millions of poor kids from the center city will make the most of
their one big chance. For all the frightened talk of an American "un-
derclass," the number of seriously troubled young adults is relatively

197
I 198 Defending the Stake

small, and we have taken steps to place their stakes in trust.1 As a mat-
ter of principle, we reject the notion that the predictable failure of
some should deprive all of the opportunity to give reality to the
promise of freedom.
It is from this vantage that we turn to consider a broad range of al-
ternatives to stakeholding. We begin with the existing agenda, from
traditional tinkerings with the tax code to newer proposals to privatize
Social Security. After this brief survey, we turn to more visionary pro-
posals. Compared to the present mix of moral drift and symbolic poli-
tics, all of them seem quite promising. Each has advantages and
disadvantages when compared to stakeholding. It is up to you to tote
up the balance sheet and determine how we might best move beyond
the status quo.

The Existing Agenda

Republicans and Democrats worked together on taxes in the 1980s

and 1990s, but their efforts at bipartisanship have had very different
consequences. In 1986, Ronald Reagan and Dan Rostenkowski pre-
sided over a much-needed cleanup of the tax code.2 More recently,
and especially in 1997, President Bill Clinton and House Speaker
Newt Gingrich have joined together to fill the code with symbolic ges-
tures, proliferating loopholes, and scandalously generous handouts to
the rich.3

The Politics of Symbolism

Recent "tax reforms" consist of symbolic gestures whose principal rec-
ommendation is that they don't cost much.4 Individual Retirement
Accounts do little for the bottom half of the population, and exempt-
ing home sales from capital gains taxes is political pandering at its
worst.5 Even those tax breaks that cost more—like the tax credit of
five hundred dollars per child—are mere Band-Aids.6 It is ludicrous to
 Alternatives 199 I

suppose that five hundred dollars a year will improve parents' child
care options or allow them to take time off from work to care for their
kids. Worse yet, this gimmick cannot be used by the parents of 30 per-
cent of America's children—these families don't earn enough to qual-
ify for the credit.7
We are also skeptical of another emerging boomlet: enterprise zones,
which use tax incentives to encourage businesses to reenter the inner
city. Jack Kemp, a Republican, has been the most vocal cheerleader,
but Democratic president Bill Clinton endorsed a cheap version of the
initiative—with the grand name "empowerment zones"—as part of
the tax package of 1993.
Inner cities are in bad shape, and we agree that there is a powerful
case for well-coordinated government action.8 Individual entrepre-
neurs are understandably reluctant to be the first to reenter a blighted
zone, and a coordinated program of development might persuade firms
that an area is ripe for recovery.
But this kind of coordination requires more than the handful of
modest tax breaks that the program offers to firms that operate in em-
powerment zones.9 While the federal tax breaks are too new for em-
pirical evaluation, the experiences of states with similar programs has
not been very positive.10 The cost per job created has been extremely
high, and the economic benefits to communities have been minimal.
As symbolic politics goes, empowerment zones don't do too much
harm. But it would be silly to take them seriously as an alternative to
stakeholding or as a meaningful strategy to help the inner cities.

Education
The 1997 tax law takes a small step toward making college more af-
fordable for more families. Middle-class parents can now claim an
array of new tax credits to help pay for their children's college tuition
and can save for future college costs in tax-favored accounts.11 These
are nice gestures, but they are worth only fifteen hundred dollars a
I 200 Defending the Stake

year at most.12 And the new rules are so complicated that most par-
ents will need a tax accountant to figure them out. By comparison,
stakeholding takes a giant step toward expanding access to higher
education.13
Even with the most generous education subsidies imaginable, the
majority of Americans will never earn four-year college diplomas—nor
should they. Expanding opportunity is a good thing. But college is not
for everyone, and it should not be the sole avenue for young men and
women to gain the resources they need to shape their lives as free and
equal citizens. Higher-education subsidies only serve to strengthen
the current two-class system, divided between those with college de-
grees and those without. Stakeholding is different. To all Americans,
and not just to the college-bound, it gives the economic independence
that they need to gain training in ways that make sense for them and
design their own path to a meaningful life.

Welfare Reform
While the middle class is being treated to child tax credits and the
upper classes are enjoying a sizable cut in taxes on capital gains and
bequests, America is turning its back on the poor.14 Recent welfare re-
forms impose strict new work requirements and a time limit on cash
benefits.15 The new approach promises to "end welfare as we know it,"
but it comes at the expense of millions of vulnerable people. When
they can find jobs, most welfare recipients earn wages too low to sup-
port their families, even at the poverty level.16 And barriers ranging
from inadequate or no child care to limited transportation often make
it difficult for them to get and keep a job.17 Although the current eco-
nomic boom is cushioning the transition to the new rules, the next
business downturn will throw millions out of work.18 Welfare time
limits make for good sound bites, but they cannot alter the business
cycle. The only certainty is that another generation of children will be
denied their claims to equal opportunity.
 Alternatives 201 I

As we have emphasized, stakeholding is not an alternative to wel-

fare reform. A thoroughgoing antipoverty program would begin with
the failures of early-childhood education and continue on through
high school.19 It would also address the market failures and misguided
public policies that have left the inner-city and rural poor to suffer in
geographic and economic isolation.20
There is no quick fix. Todays welfare reforms have opted for the
cheap and punitive approach. A comprehensive antipoverty program
would be more costly and more complicated.21 Stakeholding can help,
even at the bottom, by giving poor parents better options for them-
selves and their children. But it is not a panacea. Indeed, we would be
advocating an even larger stakeholding program were it not for the
need to hold resources in reserve in order to fund serious efforts to
improve opportunities for those at the bottom. Americans could afford
to fund a bigger stake.22 But we have contented ourselves with an
eighty-thousand-dollar target so that stakeholding might become the
catalyst for further reforms in the name of genuine equality of oppor-
tunity.

Social Security "Privatization"

Turning from the tax code and welfare reform to Social Security, we
encounter the rage today for "privatization." This buzzword can mean
many things, but all the permutations draw their strength from the in-
surance analogy. If payroll taxes are "premiums," shouldn't the ac-
count of each premium-payer reflect his own "contribution" to the
fund?23
The most radical plans enable each individual to manage his "ac-
count"—making retirement benefits depend on investment skill and
market luck. Worse yet, the new accounts could provide many women
with even less than they now receive under Social Security.24
These plans push a bad metaphor to the point of moral bankruptcy.
Even if you manage your retirement account poorly in your youth, you
I 202 Defending the Stake

should not be stripped of a decent citizen s pension in old age. With-

out any serious moral discussion, privatizers are promoting programs
that would render the elderly hostage to investment decisions made
many decades previously. We have sought to expose this position as
morally unacceptable.25
The challenge for Social Security reform lies in a very different di-
rection. Rather than driving the insurance analogy to its logical absur-
dity, we should challenge its hold on the collective imagination. Your
right to a dignified retirement should not depend on the money that
you or your spouse earned at work. It should instead be understood as
an inalienable right of American citizenship. We can and should come
up with a much better solution than privatization to the problems left
behind by Franklin Roosevelt's New Deal.

The New Agenda

The current agenda for "reform" is grim and getting grimmer. The
challenge is to look beyond this dark period and collect our intellectual
forces for the time—and it will come—when the injustices of the sta-
tus quo become intolerable. Stakeholding is our effort to keep this
conversation going. We are glad to see that others are similarly in-
clined.

National Service?
Like us, Mickey Kaus aims for a rebirth in civic commitment.26 But he
does not seek to rekindle the flame by giving new economic reality to
Americas promise of equal opportunity. His book The End of Equality
treats increasing economic inequality as an inexorable feature of mod-
ern capitalism and urges progressives to resign themselves to the
yawning gap between the rich and the poor. Rather than reasserting
the moral importance of distributive justice, we should aim to make
 Alternatives 203 I

these grinding inequalities more tolerable. If Americans were con-

stantly rubbing elbows with one another in a hbst of public settings,
perhaps we could preserve our democratic heritage despite the strik-
ing differences in our economic resources. Kaus s goal, in short, is to
revitalize democratic life in public spaces, not to redistribute private
wealth.
But this is not so easy, as Kaus would be the first to admit. He pro-
vides a sober survey of the ways in which many of our public spaces
have been hollowed out over the past half century. The decline and fall
of the citizen army is paradigmatic. In his effort to recapture the sense
of genuine citizenship won by those who fought in World War II, Kaus
comes up with an obvious solution: why not reintroduce a universal
draft for all young Americans?
Kaus recognizes, of course, that the modern military can use only a
tiny fraction of the nation s 3 to 4 million eighteen-year-olds—10 per-
cent or less under post-Cold War conditions.27 But he responds by
proposing to draft the other 90 percent to serve together for a year in
a giant civilian corps dedicated to projects of national improvement.
This massive operation would work to relieve a host of pressing prob-
lems, but for Kaus the overriding aim of the civilian corps would be "to
mix the classes in a common endeavor."28 For a year of their lives at
least, all of America s children would encounter one another on rela-
tively equal terms—just as they did when fighting the Germans and
Japanese. And these democratic experiences would cement a common
bond throughout life.
Kaus recognizes that his civilian corps would be "almost surely in-
efficient."29 But this is too gentle a way of describing the incredible
logistical problems involved in processing more than 3 million Ameri-
cans each year, let alone mixing the classes together for construc-
tive social work. While this task would be daunting in itself, three
groups would make it overwhelming: politicians seeking to control
the new bureaucracy for partisan advantage, labor unions struggling
I 204 Defending the Stake

to protect their members against low-price competition, and parents

using all their influence to obtain advantageous placements for their
children.
This is a recipe for a corrupt and politicized boondoggle. Rather
than recreating the civic spirit of the citizen armies of World War II,
we would construct a parody of the failed community-action programs
of the 1960s, writ large.30
Compulsory national service won't work. But even if it could, we
would object in principle. Quite simply, we hate compulsion. A draft is
appropriate when the nation is facing a life-and-death threat to its ex-
istence. But we dishonor our principles of liberty by forcing millions of
unwilling eighteen-year-olds "to do their duty" despite their stubborn
conviction that they are wasting their time.
The stakeholder society travels a different path to patriotism and
public service: treat Americans fairly as economic citizens, and you
will be surprised by how many will "pay back" their stakes by giving
generously of themselves in the social and political realm. In contrast
to the forced service of an army of unwilling draftees, these countless
acts of voluntary citizenship would serve as a true marker that Amer-
ica has reconnected with its civic roots.

Rewarding Work
In contrast to Mickey Kaus, Edmund Phelps is a kindred spirit.31 Like
us, he is a liberal who wants to rethink the foundations of the welfare
state; like us, he rejects the classic libertarian phobia against redistrib-
ution; like us, he wishes to take advantage of the last generation of
liberal philosophy—he explicitly draws on the work of John Rawls—as
the inspiration for a practical program of reform; and like us, he is in-
terested not in Band-Aids but in something that would make a real dif-
ference to tens of millions of Americans.
But Phelps s book Rewarding Work takes a direction different from
stakeholding. His centerpiece is job creation at the bottom, not equal
 Alternatives 205 I

opportunity for all. In taking this step, he rightly rejects the device
presently favored by politicians: raising the minimum wage.32 While
modest hikes might not be too harmful, the big increase needed to
make a real difference—say, a raise of three dollars an hour—could
have catastrophic consequences on the demand for low-skilled labor,
throwing out of work the very people whom the policy is supposed to
help.33 We also join Phelps in questioning massive job programs in
which government serves as the employer of last resort. In America at
least, there is simply too great a danger that a jobs program would pro-
mote corruption and political patronage without in fact delivering
meaningful work to those who need it. Such a fiasco would only serve
to further discredit the claim that activist government can deliver on
social justice.
Phelps has a better idea. He proposes to subsidize private employers
for hiring low-skilled workers. If a firm were willing to pay a worker
four dollars an hour, the government would kick in an extra three dol-
lars. The subsidy schedule would phase out for higher wage rates: for
example, for workers earning five dollars an hour, the grant would be
only $2.30.34 Phelps predicts that competition would lead employers
to pass on the full subsidy to their workers.35
Under this program, a four-dollar-an-hour worker would take home
seven dollars per hour. For full-time work, that amounts to a subsidy
of six thousand dollars per year and a total wage of fourteen thousand
dollars—just over the 1996 poverty line for a family of three.36 More-
over, the higher wages—funded by the government subsidies, at no
cost to the employer—would induce more low-wage workers to get
jobs. All this would not come cheap. Phelps estimates that it would
cost $125 billion a year, although he thinks that much or all of it would
be offset by savings from other government welfare programs.37
We applaud Phelps s ambition. We hope that his book heralds a new
round of liberal dialogue. We mean to continue this dialogue by con-
sidering the salient differences—both philosophical and practical—
I 206 Defending the Stake

that distinguish our alternative proposals. What accounts for the fact
that our broadly similar projects yield different bottom lines?
Begin with our contrasting definitions of the basic problem. For us,
it is inequality of opportunity. Phelps is more outcome-oriented. He is
concerned with the fact that working-class wages are falling farther
and farther behind middle-class salaries.38 Given his focus, his pro-
posal—to close the gap by subsidizing wages at the bottom—makes
sense. For us, these outcomes are important as a signal of increasing
inequality of opportunity for the working class. The challenge is to go
to the source of these inequalities by providing resources through
which each citizen may invest in his skills and otherwise enhance his
opportunities.
A second disagreement involves the scope of liberal community.
Phelps locates the sense of justice in the workplace. In his view, high-
wage earners have a responsibility—which they already intuit—to their
low-wage collaborators. They recognize that their own high salaries
are due in part—albeit in ways that are difficult to measure—to their
less well paid coworkers. And they understand that justice requires
them to share these collaborative gains fairly. Phelpss government
subsidy implements this workplace intuition.39
We invoke a different community. Our appeal is to our fellow citi-
zens, not our fellow workers. This difference shapes the structure of
our entire proposal: it is as Americans, not as workers, that stakehold-
ers claim eighty thousand dollars, as Americans that they accept their
citizens' pensions, and as Americans that they make their contribu-
tions through the wealth tax, the payback, and the privilege tax.
We could well imagine a world in which Phelps s choice made more
sense. In such a world, people would primarily think of themselves not
as citizens of a nation but as workers in an industry. When they wished
to organize for social justice, their first instinct would be to join their
fellow workers in a union, not agitate among their fellow citizens for
economic reform. This was, indeed, precisely the aspiration of the So-
 Alternatives 207 I

cialist International, the worldwide federation of socialist parties and

labor unions that was shattered by political hostilities at the onset of
World War I.
More important, this kind of appeal does not work with Americans,
who are notoriously skeptical of worker solidarity. If—a big "if*—the
next generation is to witness a reaffirmation of social justice in this
country, it will be by an appeal to the conscience and enlightened self-
interest of its citizens. It is high time to renew and deepen our nations
founding commitments to liberty and equality.
These principles motivate a third crucial difference between our
program and Phelps s. We propose to devote $255 billion to providing
every American with a taste of real freedom. Phelps proposes that the
country spend $125 billion and aim most of it at the bottom 30 percent
of the population.40 Our program proceeds within the framework of
liberal citizenship, equality, and freedom; Phelpss continues in the
tradition of secularized charity to those at the bottom of the socioeco-
nomic scale.
Which brings us to a fourth basic difference. Phelps places an over-
riding weight on the value of work. For us, the overriding value is free-
dom. The two values are intertwined: by raising wages from four
dollars to seven dollars an hour, Phelps rightly thinks that low-wage
workers are also getting more real freedom. Similarly, we hardly sup-
pose that stakeholders will be indifferent to the value of work. But it
will be up to each of them to decide how much, and what kind of, work
to do. In making this choice, they will each have eighty thousand dol-
lars in their pockets, and this fact may make them either more or less
willing to accept low-wage jobs. But the final judgment will be their
own.
This freedom will be especially precious to women. With their
eighty-thousand-dollar stakes in hand, they will be in a much better
position to balance the real rewards of market work against family
commitments. As they choose how best to combine the demands of
I 208 Defending the Stake

work and family life, they will confront wages that reflect the marginal
product of their market work. If this is low, perhaps they are right to
think that they should be spending more time with their children.
While it is unfair to expect women alone to bear most of the dual bur-
den of family duties and work, this is precisely the situation of most
working mothers today. In the short term, stakeholding will enhance
the power of women to make the most sensible accommodation to an
unjust reality. In the longer term, it will not only convey a symbolic
message of support for gender equality but will also give enterprising
women the real resources they need to challenge traditional expecta-
tions and make their own way in the world.
In contrast, Phelps wants to reinforce men's connection to the
workplace and women's economic reliance on men. For him, market
work has intrinsic benefits that trump the value of freedom. While he
slights the distinctive situation of women, he views the situation of
low-skilled males, especially minorities, with alarm.41 Phelps empha-
sizes the precipitous drop in participation in the labor market, the
explosive growth in prison populations, and other signs of social disin-
tegration among members of this group.42 Within this context, work
has therapeutic value, providing a lost generation with the structure
and discipline that they need to gain a sense of their human dignity. By
engineering a massive increase in the effective wage rate, Phelps
hopes to lure these lost workers away from the competing attractions
of crime and welfare. With higher wages, he claims, these men can
once again take on the role of breadwinners, with benefits for their
wives, their children, and their communities.43
Stakeholding also extends new hope to the disadvantaged—but
without invoking outdated gender roles. From their early years, un-
derprivileged children of all races will be looking forward to the stake
as their key to upward mobility. The promise of a citizen s stake of
eighty thousand dollars, moreover, is far more compelling than the dif-
ference between four dollars and seven dollars an hour.44 Parents and
 Alternatives 209 I

teachers can be counted upon to stress to every child that he won't get
his eighty thousand dollars unless he graduates from high school and
that he will fritter it away unless he prepares himself for the hard work
ahead. No less important, stakeholding allows the child to dream.
While it can supplement low-wage work, it can also provide the re-
sources for fueling bigger ambitions. Instead of subsidizing people
to stay in low-skill jobs, stakeholding gives them the wherewithal to
move up.
We do not deny that some stakeholders will eventually end up
worse off under our initiative. They will waste their stake on frivolous
joyrides and face the prospect of endless low-wage labor or a life of
crime and dissolution. But given the powerful educational impact of
the stake, these losers may turn out to be less numerous in a stake-
holding society.
It is here that our philosophical differences with Phelps become
most apparent. The case for stakeholding does not ultimately rest on
its effects on employment, marriage, or crime. It rests on each Amer-
ican s claim to respect as a free and equal citizen. This claim carries
with it an acceptance of personal responsibility—for failure no less
than success. Although our plan would continue to provide some
safety nets, these will be less generous than those offered by Phelps s
plan, at least for those who can take up his offer of subsidized low-
wage work.
A fifth difference is more practical. Despite Phelps s criticism of the
old-fashioned welfare state, his initiative suffers from familiar bureau-
cratic pathologies. Employers will have powerful incentives to pad
their payrolls, understate wage rates, and inflate hours worked. Every
lie can earn them as much as three dollars an hour. Moreover, the
wage subsidy will go to workers with very different needs and family
incomes—teenage children of the middle class will be making seven
dollars an hour flipping hamburgers at McDonalds. Indeed, only 22
percent of workers earning the minimum wage live in families with
I 210 Defending the Stake

incomes under the poverty line.45 Phelps s program is neither a truly

universalist effort like stakeholding nor a narrowly targeted antipoverty
effort.46
In contrast, stakeholding comes with minimal bureaucracy. Each
citizen gets the same amount, and given the size of the payments, it
will be worthwhile to set up an airtight system against fraud.
Finally, stakeholding provides a superior platform for engaging in a
more thoroughgoing reform of the welfare state. While Phelps is crit-
ical of existing social insurance programs, his proposal does not pro-
vide an easy way of accommodating his critique. Indeed, his emphasis
on the workplace may reinforce the existing system of social insurance
based on payroll taxes.47 In contrast, stakeholding builds a framework
for a fundamental critique of the New Deal system and a demystifica-
tion of insurance arrangements.
Don't get us wrong. Although we think we have a better idea, we
would run to the polls to support any politician who hired Phelps as a
principal policy adviser. Compared to the status quo, a large subsidy
for low-wage workers would make America a more decent place. But
we should set our sights higher.

Basic Income
This brings us to a bold initiative that is even closer in spirit to stake-
holding. Proposals for a basic income call for guaranteeing an uncon-
ditional cash payment each year to each adult. Everyone would get the
basic income, regardless of their other income or wealth. Although de-
tails vary, the typical plan provides a substantial sum, but one far below
a subsistence-level income.48 For rough comparability with stakehold-
ing, let s set the sum at four thousand dollars per year.
The basic income is not an entirely new idea.49 In the United States,
George McGovern proposed a one-thousand-dollar "demogrant" in
the 1972 presidential election. Although McGoverns proposal encoun-
 Alternatives 211 I

tered political skepticism, the basic income has lived on in the schol-
arly literature in economics and philosophy.50 Most recently, the idea
has begun to make a good deal of headway among progressive acade-
mics and politicians in Europe.51
We urge its serious consideration in the United States. Like stake-
holding, the basic income puts the emphasis on freedom. With a basic
income, everyone could count on at least four thousand dollars a year.
This sum hardly opens up a life of leisure, but it would grant most
Americans greater freedom to shape their lives. Some people would
continue to work just as hard and use their extra money to buy some-
thing: a better car, a better house, or perhaps private or parochial
school for their child. Others would use the extra money to buy time:
to go to school, to take care of young children, or just to take a month
off. And others might use the extra income to take a risk on changing
jobs or moving to a new community.
This extra freedom would have the greatest value for those in the
bottom half of the income distribution. Some people at the top would
have to pay higher taxes that would more than offset their four-
thousand-dollar basic income.52 But even many of them might gain a
real benefit over the course of their lives. Anyone who falls on hard
times or decides to make a hard change in life—getting a divorce,
leaving home, venturing to find a new job—could count on the annual
payment. Only a very privileged few at the very top can confidently
predict that they would never, under any circumstance, find comfort
or real aid in a basic income.
Like stakeholding, the basic income grants this freedom and secu-
rity without strings attached. It automatically supplements low wages
without bureaucracy or complex wage subsidies. And with a basic in-
come, more people can choose for themselves whether to work full-
time or part-time, making their own tradeoffs between more money
and more leisure.53
I 212 Defending the Stake

On the whole, we are even more positive about this plan than
Phelps s important initiative. But it diverges from stakeholding in a
way that we believe tips the balance in our direction.
The basic contrast is simple enough. Under stakeholding, each cit-
izen receives a stake of eighty thousand dollars one time in her life, but
under a basic-income program, she would receive four thousand dol-
lars every year. Of course, any lump sum can be converted into an
equivalent stream of annuity payments, and vice versa. But basic-
income proposals typically do not allow recipients to "cash out" their
stream of payments by pledging them to a bank in exchange for a big
cash payment.
The question, then, is whether this restriction on each individuals
freedom to plan the shape of her life is legitimate. Shouldn't we leave
it up to each young adult to decide on her own whether it is better to
buy a four-thousand-dollar annuity or to use her eighty thousand dol-
lars in other ways that make more sense of her life prospects? We can
think of two reasons for imposing such a severe restraint on personal
liberty—but, in the end, find neither persuasive.
The first rationale invites us to think deeply about the very meaning
of personal identity: is Joan at age twenty-one really the same person
as Joan at forty? If not, this supports the case for basic income over
stakeholding. If the forty-year-old Joan is really a completely different
person, or so the argument goes, the older Joan would take cold com-
fort in the fact that somebody else called Joan received eighty thou-
sand dollars long ago—especially if that somebody else had spent the
money on activities that the forty-year-old found valueless. Rather, she
would treat the stake received by Joan-at-twenty-one as morally equiv-
alent to the eighty thousand dollars received by some other person—
lets call him Jim. The fact that Jim and Joan-at-twenty-one received
stakes only makes it less fair that Joan-at-forty isn't receiving any
money.
 Alternatives 213 I

For anyone who holds this discontinuous view of the self, the basic
income looks much fairer: Joan-at-forty receives precisely the same
four thousand dollars received by Joan-at-twenty-one and by Jim~at-
fifty-five. All discontinuous selves are treated equally.
No conclusion, however, is better than its premises. Although we
concede that the discontinuous view has a surprisingly large number
of philosophical adherents in these postmodern times, we ourselves
remained profoundly unconvinced.54 We do not deny, of course, that
life contains many surprising changes and that Joan at forty may be en-
gaged in projects radically different from those that she thought sensi-
ble twenty years before. Nonetheless, when she tells the story of her
life, she will not suppose that it began yesterday. She will recognize
that the configuration of her present life is inextricably connected to
the decisions made by Joan-at-twenty-one. While she may profoundly
regret some of these decisions, she will recognize them as her own.
Each of us has only one life, despite the fact that our experiences,
desires, and ideals change a lot over time. This life begins at birth and
ends at death, and there is no evading the challenge of giving it mean-
ing. Indeed, one of the big differences between children and grown-
ups is the way in which they deal with this challenge. Children may
imagine that their choices have no consequences for the meaning of
their life as a whole, but adults know better. To be sure, nobody sup-
poses that he can successfully micromanage his life or evade its many
surprises. Nonetheless, there comes a point where each competent
citizen should be deemed responsible for shaping the larger contours
of his existence—for better or for worse. To treat him otherwise is to
treat him as an eternal child.
This is the train of thought that leads us to prefer stakeholding over
the basic income. Granted, we have embraced certain limitations on
the young adult s right to take charge of his life. Although we are firmly
committed to a continuous view of the self, we also agree that young
I 214 Defending the Stake

adults may not always understand or empathize with their future cir-
cumstances, especially when there is a fifty- or seventy-five-year gap
between them and their successor-selves. Given these predictable
failures in empathetic understanding, even a liberal state may justly
intervene on behalf of the elderly self, forbidding the youthful stake-
holder to cash out the citizen s pension that guarantees him a dignified
retirement. To this extent, we do prefer a basic income over stake-
holding, for our citizen s pension is, in effect, a basic income under an-
other name. But it is one thing to authorize a limited incursion on the
right of adults to take responsibility for the shape of their lives, quite
another to allow the state to deny that we are ever grown up enough to
use a large chunk of resources to give our lives an enduring shape.
At this point, the first rationale for the basic income merges into a
second, more frankly paternalistic line of thought. As far as the pater-
nalist is concerned, the basic income is better because we are more
likely to prevent people from "wasting" their stake if we pay it out in
dribs and drabs over time. Even if people dissipate one years pay-
ment, they cannot prespend next years—and by then, we hope, they
will act more wisely.
We have taken a few steps to accommodate these anxieties. We
have denied high school dropouts control over their eighty thousand
dollars; instead, they receive what amounts to a basic income of four
thousand dollars' interest on their principal. And we recommend that
the stake be paid in four installments, rather than all at once, to give
people a chance to learn from their own and others' mistakes. Even if
someone were to waste his first twenty thousand dollars, he would re-
ceive a second chance, and a third, and a fourth. The difference, of
course, is that the basic income would give him a new chance every
year.
At the same time, the small amounts dribbled out annually never
really encourage the kind of sober reflection that stakeholding invites.
It is just too easy to spend four thousand dollars a year on incidentals
 Alternatives 215 1

without ever confronting how the extra resources could help you re-
shape the larger contours of your life. One year, the four thousand dol-
lars may go for a slightly better car, the next year for a nicer vacation,
but there will never be an occasion for more fundamental reappraisals
and restructurings. If we judge from the anecdotal evidence, this has
been the experience of Alaska's mini-basic-income program, which
grants each citizen about one thousand dollars a year. Most Alaskans
seem to be using their money on consumerist binges; the grants are
just too small to encourage more fundamental reassessments.55
In contrast, eighty thousand dollars does provide the framework for
a period of basic appraisal, and at an age when such questioning may
make a real difference. You have a chance, once in your life, to step up
to the plate. If you plan ahead and act sensibly, you may win big. But
if you mess up, you live with the consequences. The basic income
cushions failure; stakeholding is a launching pad for success.
But perhaps we could have it both ways. A number of leading com-
mentators, ranging from James Tobin to Roberto linger, have suggested
a variation on stakeholding: give eveiy young person a "human capital
account," which she could draw on for certain prescribed purposes,
among them higher education, vocational training, and medical ex-
penses.56 The rationale, of course, is freedom-within-boundaries. Give
the young people the capital they need to lead productive lives, but
make sure that they spend it responsibly.
This approach has undeniable appeal. And if these restrictions were
the political price for enacting stakeholding, we would be willing to
pay it. But as a matter of principle, we reject this notion of freedom-
within-boundaries. Of course, the boundaries may be so wide that
many will hardly notice them. The college-bound, for example, might
fare almost as well under the restricted plan.57 But a large middle
group will be denied real freedom. For them, building "human capi-
tal" may not be the best life plan. Like Bill and Brenda, they may want
to use the money to move out of a dangerous neighborhood.58 Like
I 216 Defending the Stake

Mike and Mary Ann, they may put a premium on some seemingly friv-
olous, but to them important, item like foreign travel or an unforget-
table wedding. We believe that these young men and women should
be no less free than their college-bound peers or the richer kids across
town who are making similar decisions with their parents' money. We
are repelled by programs that require kids from the wrong side of the
tracks to justify their lives to a government bureaucrat.

What Kind of America?

This returns us to the nub of the matter: the fate of the vast majority
of ordinary Americans in our globalizing economy. These men and
women are perfectly competent people, despite their lack of college
degrees and the professional skills that earn big rewards today As
stakeholders in American society, they will confront the future with
the confidence befitting a free people. The wrenching economic
changes of the twenty-first century will not send them reeling with the
first shock from the marketplace. They will have the resources to stand
up to economic challenges with their heads held high and to make the
best of the emerging opportunities. Some will succeed and others fail,
but all will have had a real chance at the pursuit of happiness.
And even those who fail will know that they have not deprived their
children of a fair opportunity to start again. They too will be citizens,
with their own stake in the country.
But another America awaits. Unless we take the future into our
hands, our country may travel yet farther down the road of social divi-
sion. Despite the wave of political advertising that will greet the new
millennium, the real world of the twenty-first century will harden into
a brittle three-class structure: a lower class condemned to dead-end
jobs and frequent unemployment, an upper class of professionals en-
joying fabulous prosperity, and a vast middle class increasingly embit-
tered by continuing economic stagnation. As the ideal of equal
 Alternatives 217 I

opportunity recedes and the rich retreat into their gated communities,
America will become a very ugly place. How long will democracy itself
survive under such grim conditions?
Our political thinking has not caught up with this emerging three-
class reality. On the one hand, we heap large subsidies on the college-
bound. On the other, we offer modest help to the underclass. But
we have done remarkably little to enhance real opportunity for the
vast middle class, who are by now understandably skeptical that gov-
ernment will ever do anything serious for ordinary people like them-
selves.
Stakeholding can break this impasse by adding a crucial term to
Americas social contract. At the same time, it marks a radical break
with the elitist tradition of social engineering. Give ordinary citizens
their stake in America, and let them inaugurate a new age of freedom.
The Stakeholding society is no Utopia. But it does provide a genuine
alternative to social division and moral drift. Rather than entrusting
our fate to the invisible hand, this generation of Americans has work to
do if it is to be equal to our political ideals. Perhaps we will never com-
pletely realize the American dream of equal opportunity. But if we
abandon that dream, we will surely lose our way.
This page intentionally left blank
 Appendix

Funding the Stakeholder Society

This Appendix provides more detail on the expected effect of stake-

holding on federal government revenues. These projections are nec-
essarily approximate, but they provide enough solid information to
show that our proposals are fiscally realistic.

The Stake
If implemented today the stake would cost the United States about
$255 billion per year.
We arrive at this conclusion via several steps. The first estimates the
number of eligible stakeholders. The data are surprisingly imprecise,
but in 1997 there were about 3.1 million twenty-one-year-old U.S. cit-
izens.1 One must then subtract the small number of citizens who will
fail the residency test for stakeholding and the larger group who will
forfeit their stakes due to criminal convictions.2 At the same time, the
base should be increased to include longtime resident aliens with a

219
I 220 Appendix

new and powerful incentive to naturalize. As a rough cut, we have

treated these competing effects as a wash.
We assume, then, that approximately 3.1 million Americans would
have come forward, at age twenty-one, to claim their stakes in 1997.
Recall, however, that stakeholders who enroll in higher education can
claim up to twenty thousand dollars per year as soon as they have
graduated from high school (which is assumed to occur at age eigh-
teen). This difference in timing affects the overall cost of the pro-
gram. Because college-bound stakeholders will receive their eighty
thousand dollars sooner, we want to maintain financial equivalence by
paying interest to other stakeholders for the three more years that
they must wait. In making this calculation, we use the same 2 percent
real rate of interest employed to determine payback obligations.3
Stakeholders in the non-college-bound group would collect $21,225
every year between the ages of twenty-one and twenty-four, for a
nominal total of $84,900, which has a present value (at age twenty-
one) of $82,435.4
Our cost estimates take these timing differences into account, using
a couple of rough but reasonable assumptions. We assume, first, that
27 percent of all stakeholders will attend four-year colleges from the
ages of eighteen to twenty-one,5 and, second, that they will spend
their entire stake on college tuition and related costs. (In 1996-1997,
the average four-year institution cost $18,476 for tuition, room, and
board).6
Within this framework, the cost of stakeholding in 1997 would have
been $255 billion.7 Annual costs will vary with demographic trends.
We are now experiencing a "baby boomlet" in the United States—
four-year-olds numbered 4 million in 1997. Paying stakes to those kids
beginning in 2011 would cost about $320 billion.8 But national wealth
will also be higher then.9
Two statistics will help to put this flurry of numbers in perspective.
The federal governments budget in 1998 was about $1.7 trillion.
 Appendix 221 I

Stakeholding would have raised the total to about $2 trillion, an in-

crease of 15 percent.10
The cost of stakeholding is lower once we take into account collat-
eral benefits. Chapter 3 describes how the program will replace a
significant chunk of current federal and state spending on higher edu-
cation, which now amounts to about $55 billion.11 We estimate that
stakeholding would cut this amount in half, to $28 billion, although
this is a speculative calculation. If we had wished to engage in some
creative accounting, we could have banked on these estimated savings
in government spending and reduced our estimate of the total rev-
enue cost of stakeholding from $255 billion to $227 billion. But we
choose instead to view these savings as a rebate to the states, one that
would help them offset the reduction in real property revenues that
the introduction of a federal wealth tax could engender.12
Stakeholding could also reduce crime and welfare spending, and
increase tax revenues, as newly trained young adults take better-
paying jobs. We think that these effects would be substantial, but be-
cause they are also speculative, we have not included them in our
calculations.

The Wealth Tax

Estimating the revenue effects of a new tax is tricky, because one is

never sure how the tax may change the behavior of taxpayers. We can
measure total wealth today, but the new tax may lead people to hide
assets or work and save less in order to avoid the tax. These effects are
uncertain, and we have not attempted to model them directly.13 In-
stead, we have constructed a static revenue estimate that includes a
large revenue "cushion" for behavioral changes. We estimate that,
under ideal compliance conditions, our 2 percent wealth tax would
raise $378 billion each year.14 Subtracting the roughly $55 billion that
it would cost to coordinate the wealth tax with the income tax (ex-
I 222 Appendix

plained below), the wealth tax raises $323 billion. The cost of stake-
holding is much less—$255 billion. Thus, even if behavioral changes
reduced wealth-tax revenue by as much as 21 percent, a 2 percent
wealth tax would suffice to fund the stake. Although we do not antici-
pate economic effects of this magnitude, we have chosen to err on the
conservative side, and what follows describes our methodology and as-
sumptions in more detail.
Our wealth-tax revenue estimates were constructed by Mark Wil-
helm, formerly an assistant professor in the Department of Econom-
ics at Pennsylvania State University and now at Indiana University-
Purdue University at Indianapolis. He used data from the Federal Re-
serve s 1995 Survey of Consumer Finances (SCF), the most recent and
most comprehensive data on individual wealth available.15 His rev-
enue estimates assume that the wealth tax would be imposed on net
wealth (assets minus liabilities) and that it would include an exemption
of eighty thousand dollars per individual.16
Our methodology is conservative in several respects. First, the SCF
generally does not include the value of consumer durables other than
homes, cars, and other vehicles.17 With few exceptions, the survey
omits household effects, jewelry, antiques, and so on, as well as ordi-
nary furnishings. In contrast, such items as these are included in the
wealth-tax base.18
Second, we have chosen to value private pensions in a way that un-
derstates their probable worth. Wilhelm s estimates use the "current
legal value" of pension rights, meaning the value of defined-benefit or
defined-contribution benefits to which a worker would be entitled if
she left her job today.19 The estimate thus ignores future benefit ac-
cruals—even if the taxpayer intends to remain in her job. As we ex-
plain in Chapter 6, we have not included Social Security pensions in
the base for wealth taxation.20 It would be hard to do so in any event,
as their present value is highly sensitive to each recipient s future work
history and marital status.
 Appendix 223 I

Third, we have apportioned wealth between members of married

couples and long-term partners in a way that minimizes tax revenue.
In our one departure from the static method, we have assumed that all
couples will shift assets to maximize the advantage of their eighty-
thousand-dollar exemptions.21 Thus we have divided all wealth (other
than pensions) equally between members of married and cohabiting
couples.22 This is a highly conservative move on our part, because it
adopts as the benchmark the outer bound of possible behavioral re-
sponse.
Fourth, the 1995 SCF data necessarily omit the extra financial wealth
created by the stock market boom of the mid- and late 1990s. We have
not attempted to estimate the additional revenue, but it may be sub-
stantial. For example, in June 1995, the Dow Jones Industrial Average
hovered around 4,500; by June 1998, the index stood at nearly 9,000,
for a gain of about 100 percent.23 Although stock ownership among
middle-class families has increased rapidly in recent years, it is still
concentrated in the richest families, and so stock gains accrue dispro-
portionately to wealthy taxpayers.24
A fifth conservative move was to omit from the estimate the revenue
potentially derived from taxing U.S. wealth held by foreigners.25 This
omission reflects data limitations: the SCF includes only U.S. house-
holds. The Federal Reserve Boards Flow of Funds accounts provide
one measure of foreign financial wealth in the United States, includ-
ing government and private debt and equity holdings in U.S. compa-
nies as well as foreign direct investment. For the fourth quarter of
1997, foreign assets were $4.654 trillion, and liabilities were 2.267 tril-
lion, for net assets of $2.387 trillion.26
The difficulty lies in determining how much of this wealth would be
subject to U.S. tax and would exceed the exemption level (once im-
puted to individual foreign holders). As Chapter 6 suggests, the only
categories of foreign-owned U.S. wealth that would be taxable are eq-
uity in a U.S. business or U.S. real estate. In 1997, foreigners' U.S. cor-
I 224 Appendix

porate equities and foreign direct investment were $881.7 billion and
$837 billion, for a total of $1.719 trillion, or 37 percent of total foreign
assets. Netting out a proportionate share of total foreign debt,27 for-
eigners' taxable wealth was $882 billion, which would yield $17.64 bil-
lion in wealth-tax revenue.
This figure does not impute eighty-thousand-dollar exemptions to
each ultimate individual owner. We model our approach on the cur-
rent income-tax rules, which tax nonresident foreigners at a flat rate of
30 percent and deny them certain deductions received by U.S. taxpay-
ers.28 This approach also facilitates an entity-level collection mecha-
nism for the wealth tax, which is crucial because foreign individuals
cannot be expected to file wealth-tax returns.29 Thus the $17.64 billion
estimate is another rough but reasonable approximation.30
Taken together, these conservative moves increase the revenue
cushion for stakeholding to quite generous proportions. These extra
resources give us the option of including a final modification of the
wealth tax that will cost a bit of revenue—coordinating the wealth tax
with the income tax. Data are limited, so we provide a range of esti-
mates. In 1994 (the most recent year for which data are available), in-
dividual taxpayers reported a total of $220 billion in net income from
taxable interest, dividends, rents, and royalties.31 Assuming that these
items were taxed at an average effective rate of 20 to 30 percent,32 the
income tax paid was $44 to $66 billion. Taking the midpoint of the
range, the annual cost of $55 billion would reduce the net (static) rev-
enue raised by the wealth tax from $378 billion to $323 billion.
Wilhelms estimates of the distribution of wealth and of the effects
of the wealth tax appear in Table 3. (The figures in the table represent
households, not individuals.) We recognize that stakeholding and the
wealth tax may gradually change the allocation of wealth in society,
which will in turn affect the revenue and distributional effects of the
wealth tax. But a static distributional estimate is nevertheless useful—
and a striking illustration of wealth concentration.
 Appendix 225

Table 3. Distribution of Wealth and Wealth-Tax Liability, by Household

Ownership Liability
Wealth Median Median tax of total for total
class wealth payment U.S. wealth wealth tax
($) ($) (%) (%)
Bottom quintile 450 0 -0.08 0
Second quintile 21,710 0 1.8 0
Middle quintile 73,600 0 5.7 0.3
Fourth quintile 172,990 1,110 14.0 6.9
Top quintile 554,820 8,344 78.6 92.9
Top 1 percent 4,611,750 90,140 29.0 38.9
Source: Wilhelm (1998), pp. 15-17,19. Percentages do not add to 100 due to rounding.

Payback of the Stake

Over time, stakeholders will begin to make substantial contributions

to the fund by paying back their initial eighty thousand dollars with
interest. But estimating the magnitude of this effect is extremely
speculative because substantial sums won't be forthcoming for a half
century.
Existing data are also woefully inadequate for our purposes. Inter-
nal Revenue Service estate tax records are radically incomplete for our
purposes, because current law applies only to estates and bequests
that exceed the exemption amount ($650,000 in 1999).33 But the pay-
back requirement will generally apply to all estates (or lifetime gifts) in
excess of fifty thousand dollars.34
For what its worth, the IRS reports that, in 1995, almost seventy
thousand decedents left gross estates of $600,000 or more (the ex-
emption level in that year).35 Assuming that each taxpayer died owing
a payback of $250,000, this group would have contributed more than
$17 billion to the stakeholding fund, in addition to actual estate tax
revenue in 1995 of $11.841 billion.36 But these estate tax returns cover
less than 4 percent of 1995 deaths,37 and we have no way of estimating
I 226 Appendix

how much revenue would have been raised from the other 96 percent.
Nevertheless, the wealth data presented in Table 3 suggest that the
revenue yield would be substantial.38 If just 10 percent of decedents
paid back their stakes in full, the stakeholding fund would collect $48
billion each year.39
We also have limited data on annual inter vivos gifts. Although the
SCF reports gifts made and received, the data are internally inconsis-
tent and difficult to interpret; a recent study suggests that the plausi-
ble range of annual gifts ranges from $18.9 billion to $62.3 billion.40
Without knowing the distribution of these gifts-, we cannot estimate
the payback revenue that they imply.

Citizens' Pensions and the Privilege Tax

To calculate the value of our proposed citizens' pensions, we have
used the existing outlays for Social Security pensions as our base. Our
illustrative numbers assume that our initiative was immediately effec-
tive—even though, in our transition proposal, the first citizens' pen-
sions would not be paid for another generation.41 For consistency, we
use 1996 data throughout, and we take no credit for the potential re-
ductions in Supplemental Security Income (ssi) benefits.
This allows us to avoid the tricky project of projecting Social Secu-
rity expenditures and demographic changes into the future. But we
are not able to avoid entirely some problems of translation. The first
centers on the retirement age. Now sixty-five, it is scheduled to rise to
sixty-seven in 2027.42 Citizens' pensions, if eventually adopted, would
also be payable at age sixty-seven. But to make the present-day calcu-
lation as comparable as possible, we simulate citizens' pensions payable
at age sixty-five. (This is a conservative move on our part, because the
monthly citizens' pensions would be bigger if funds paid today to the
sixty-five-and-older set were payable only to those sixty-seven and
older.)
 Appendix 227 I

In 1996, the Social Security Administration paid total retirement

and survivors' benefits of $273 billion to 32 million elderly Americans,
for an average benefit of $718 per month.43 In the same year, 34 mil-
lion Americans were sixty-five and older.44 A citizen s pension today
could be set at a universal benefit of $8,040 per year, or $670 per
month.45
Calculating the privilege tax raises another issue in translation. The
simplest method—and most favorable to us—calculates the privilege
tax needed to fund citizens' pensions on a purely pay-as-you-go basis.
On that approach, we would have to raise only $273 billion. But this
method doesn't take into account the portion of the current payroll tax
that is now accumulating in the Social Security trust funds in order to
build a surplus for the baby boomers retiring early next century.46 To
complicate matters further, actuarial projections show that current
revenues are inadequate to meet Social Security obligations over the
long run and that therefore benefits must be cut or taxes raised.47
Given these problems, we have presented three privilege-tax esti-
mates. The first replaces those payroll taxes dedicated to old-age
pensions. This comparison takes current law as the baseline, without
attempting to achieve solvency in the Social Security trust fund.
Today, payroll tax revenues devoted to the old-age and survivors' pro-
gram (OASI) are 104 percent of benefits paid.48 Accordingly, the first
version of the privilege tax must raise $284 billion, or 104 percent of
the $273 billion annual cost of citizens' pensions.49
Recall that the privilege tax will apply to residents who are older
than twenty-one and younger than sixty-five (rising to sixty-seven in
the next century) and that we expect about 20 percent of the popula-
tion to fall in the highest bracket, 60 percent in the middle bracket,
and 20 percent in the lowest bracket. In 1996, 151 million Americans
were over twenty-one and under sixty-five.50 Some will default on
their payment obligations: we have arbitrarily assumed 10 percent,
equally distributed among the brackets, leaving a taxpayer population
I 228 Appendix

of 136 million.51 We have also assumed that the top-bracket group will
pay an annual amount ten times the tax for the low-bracket group and
that the middle group will pay the average privilege tax.52 Using these
parameters, we calculate an annual privilege tax of about $3,800 for
the high-bracket group, $2,090 for the middle group, and $380 for the
low-bracket group.53
The second simulation assumes that the retirement pension fund
will be put on a fiscally sound footing only through raising taxes, al-
though cutting benefits is also a possibility. Thus, this estimate sets an
upper bound on the cost of funding citizens' pensions. The best pro-
jections suggest that an immediate 2.17 percentage-point increase in
the payroll tax would ensure long-term solvency for Social Security as
a whole.54
In 1996, taxable payroll was $3.05 trillion, so this increase would
have yielded an additional $66 billion.55 But we do not need to raise
this entire sum, for 20 percent of it is paid to the nonelderly (that is,
the disabled and survivors).56 Thus, if imposed today in an actuarially
sound system, the privilege tax should raise about $337 billion per year
($284 billion, calculated above, plus 80 percent of the $66 billion in-
crease needed, or $53 billion).57 Using this method, we calculate an
annual privilege tax of $4,500 for the high-bracket group, $2,475 for
the middle group, and $450 for the low-bracket group.58
Both of these methods rely on the privilege tax to replace only the
portion of the 1996 payroll tax needed to fund citizens' pensions. They
leave in place payroll taxes needed to fund disability and survivors'
benefits for the under-sixty-five group as well as Medicare. Under our
first method, this leaves in place payroll taxes of $189 billion.59 Under
our second, $202 billion.60
Our third calculation considers the level of the privilege tax needed
to replace all Social Security and Medicare payroll tax revenues of
$472 billion in 1996.61 This book does not otherwise consider the dis-
tinctive problems of Medicare, but we provide these estimates merely
 Appendix 229 I

to give the reader a sense of the extent to which privilege taxation may
serve as a revenue raiser. (In making these calculations, however, we
have not considered any tax increases that might be required in order
to guarantee the actuarial soundness of Social Security or Medicare.)
The resulting privilege tax would be $6,300 for the high bracket,
$3,465 for the middle bracket, and $630 for the low bracket.62
This page intentionally left blank
 Notes

Chapter 1: Your Stake in America

1. See McMurrer, Condon, and Sawhill (1997), pp. 8-9 (in past years, children
were more likely to do better than their parents because of economic growth or
changes in the occupational structure); for more detail, see Chaps. 2 and 9.
2. See Wolff (1998), pp. 136-137 (from 1983 to 1995, only the top 5 percent ex-
perienced an increase in net worth; in every other group, wealth declined, with
the bottom 40 percent experiencing the sharpest decline); for more detail, see
Chap. 6.
3. See Gottschalk (1997), pp. 21-40; Blank (1997), pp. 60-64.
4. Gottschalk (1997), p. 30 (between 1979 and 1994, real wages for college gradu-
ates increased by 5 percent, while real wages for high school graduates fell by 20
percent).
5. See U.S. Bureau of the Census (1997b), p. 470, table 725 (showing that in 1993,
1994, and 1995, the top 5 percent received 20.0 to 20.3 percent of total income);
and Danziger and Gottschalk (1995), p. 42, table 3.1 (in 1947, the richest 5 per-
cent of U.S. families received 17.5 percent of aggregate income; in 1989,17.9
percent; in 1991,17.1 percent).
6. U.S. Bureau of the Census (1997a), p. vi.
7. See, e.g., Okun (1975).
8. See Levy (1987), p. 17.
9. See Blank (1997), pp. 57-72.
10. See Wilson (1996), pp. 150-153; Blank (1997), pp. 66-67.

231
232 Notes to Pages 8-26

11. See Chap. 8.

12. See Smith (1997).
13. See Silver (1990), pp. 163-195. In contrast to stakeholding, Thatchers program
lacked evenhandedness and was justly criticized for it. Not only were poor people
living in private housing excluded, but the value of the "Right to Buy" depended
on the quality of each tenants house. Moreover, despite the substantial discounts,
many tenants found it difficult to come up with the money needed to exercise
their option. As a consequence, Thatchers program tended to leave the least ad-
vantaged as tenants in worsening accommodations. See Flynn (1990).
14. See Rapaczynski and Frydman (1994); Shafik (1995). Unfortunately, Klaus did
not combine his support of voucher privatization with a regulatory regime—like
the American Securities and Exchange Commission—that would have protected
the interests of citizen-stakeholders from predictable abuse by insiders. This fail-
ure has led to increasing public dissatisfaction with Klaus, but it would be a mis-
take to allow it to cast a shadow upon his earlier successes as a policy innovator.
15. See Brown and Thomas (1994), p. 43. The popularity of the program is so great
that some believe that it prevents the use of the funds for more important pur-
poses. Compare Brown and Thomas (1994) with O'Brien and Olson (1990). While
this may be correct in the Alaska case, we will argue that the value of stakehold-
ing is sufficiently great to justify a priority over most other competing programs.
16. See Holmes and Sunstein (1998).
17. See Moon (1997), pp. 67-68; Kingson and Schulz (1997), pp. 51-52.

Chapter 2: Citizen Stakeholding

1. This basic commitment is central to a great deal of philosophical work, though
theorists differ on a host of important matters. See, e.g., Ackerman (1980); Okin
(1989); Rawls (1971); Sen (1992); Van Parijs (1995); Dworkin (1981a, 1981b). For
obvious reasons, we will be relying on the framework developed in the first of
these volumes, though most of our concrete proposals are compatible with a
much broader range of contemporary liberal theories.
2. Meade (1964), pp. 38-39.
3. The poverty rate for children in 1996 was lower than in 1959 (27.3 percent) but
higher than in the late 1960s to mid-1970s, when it hovered around 15 percent.
U.S. Bureau of the Census (1997a), pp. vii, C-5. Official poverty rates may un-
derstate the extent of material hardship among families with children. Mayer and
Jencks (1989), pp. 99-100, 111.
4. Scarbrough (1993), pp. 64-67; U.S. Bureau of the Census (1997a), p. 24, table 5.
5. Id.; see also Danziger and Gottschalk (1995), pp. 74-76.
6. In 1960, only 31.9 percent of married women participated in the labor force; by
1992, 59.4 percent did. U.S. Department of Labor (1993), p. 40. By 1996, 70 per-
cent of wives with children under age eighteen were in the workforce, as were
62.7 percent of wives with children under the age of six. U.S. Bureau of the Cen-
sus (1997b), p. 404, table 632.
 Notes to Pages 26-28 233 I

For the importance of women's earnings to their families' incomes, see

Danziger and Gottschalk (1995), pp. 80-81 (from 1973 to 1991, mothers' rising
earnings were especially important for children's standard of living).
7. Although methodologies and findings differ, most studies have not found that
mothers' working outside the home has significant, long-term adverse effects on
their children. See, e.g., J. R. Smith et al. (1997); Blau and Grossberg (1992);
Haveman and Wolfe (1995).
8. NICHD Early Child Care Research Network (1997).
9. In 1980,19 percent of families with children were headed by single mothers (22
percent by single parents); by 1996, 27 percent were headed by single mothers
(and 32 percent by single parents). U.S. Bureau of the Census (1997b), p. 63,
table 75.
10. Choy( 1997), pp. 22-23.
11. Parrish et al. (1995), pp. 17, 30-32; McMurrer and Sawhill (1998), p. 64. Al-
though the impact of dollars spent on educational quality is debated, data show
that students at more affluent schools have greater access to programs for gifted
students, diagnostic and prescriptive services, and extended day programs. Young
et al. (1997), p. 9.
12. Mullins et al. (1994), pp. 42-45, 86-87,142-143, 200-201, and 315-316.
13. See Sturm and Guinier (1996), pp. 988-992.
14. See id. for a discussion of coaching and its effects on SAT scores.
15. Cuccaro-Alamin (1997), pp. 34-36 (within ten years of high school graduation,
88.3 percent of students of high socioeconomic status [SES], 48 percent of IOW-SES
students, and 69 percent of middle-SES students had enrolled in postsecondary
education).
16. Id., p. 36.
17. For a review of theories and empirical evidence on the causal role of income, see
Duncan and Brooks-Gunn (1997), pp. 601-605. Susan Mayer has recently argued
that the causal role of income has been exaggerated and that other factors, in-
cluding parental personality, educational background, and cultural practices,
may explain both low income and bad outcomes for children. See Mayer (1997),
pp. 8-15, 79-142. For more detail on this debate, see Chap. 9, p. 161.
18. See Ackerman (1980), especially chaps. 4 and 5.
19. See McMurrer and Sawhill (1998), p. 76 (summarizing recent studies finding that
no more than 10 to 15 percent of differences in earnings or income is associated
with differences in cognitive ability); Fischer et al. (1996), pp. 84-86 (concluding
that parents' socioeconomic status is significantly more important than test scores
in explaining differences in income).
20. For an excellent discussion of early-childhood education initiatives, see McMur-
rer and Sawhill (1998), pp. 88-89.
21. U.S. House of Representatives (1998), p. 1010, table 15-37 (number of children
enrolled in 1996). As Head Start serves one-third of eligible low-income children
(Glazer [1993], p. 291), full funding would cost about $10.8 billion per year.
 234 Notes to Pages 28-36

Currently, Head Start spends about $4,600 per child. A more expensive pro-
gram, like the Perry Preschool model, would cost $7,000 per child. McMurrer
and Sawhill (1998), pp. 88-89. The total cost for 2.2 million children would be
$15.75 billion.
22. See the Appendix.
23. For an especially sensitive treatment of the problem, see Hochschild (1984).
24. See Orfield and Eaton (1996).
25. See McMurrer and Sawhill (1998), p. 64.
26. Kelman and Lester (1997), pp. 71-82,118-124,138-152,158-160.
27. Ackerman (1980), chap. 5.
28. U.S. Bureau of the Census (1997b), p. 160, table 245 (26.5 percent of adults ages
twenty-five to thirty-four had a bachelors degree or more).
29. See Chap. 1, n. 4, supra.
30. See Wolff (1998), pp. 144-145 (in 1995, households in the fortieth to sixtieth per-
centile had financial reserves sufficient to sustain only 1.2 months of current con-
sumption or 1.8 months of near-poverty-level consumption; poorer households
had even fewer financial reserves).
31. To qualify for benefits under the Federal-State Unemployment Compensation
Program, an unemployed worker must meet several requirements. These vary
across states, but in general the worker must have worked at least two calendar
quarters during a recent one-year period, have earned a minimum amount during
that period, have been fired or laid off or have quit for "good cause," and be cur-
rently available and willing to accept suitable work. U.S. House of Representa-
tives (1998), pp. 327-339.
32. See Orfield and Eaton (1996).
33. We recognize that the revenue side of our proposal is more complex, but we pro-
pose to build on current U.S. tax law and administration and to draw on the expe-
rience of European countries. See Chaps. 5 and 6.
34. See Chaps. 5 and 7.
35. A good deal of evidence points to late adolescence as the crucial period for the
successful forging of adult identity. See Marcia (1997), pp. 99-104.
36. For spending on public primary and secondary education in 1994, see U.S. Bu-
reau of the Census (1997b), pp. 156, 447 (tables 237, 692) (total federal, state,
and local spending on public primary and secondary education was $265.3 billion;
GDP in 1994 was $6.9357 trillion).
Also in 1994, total OASDI benefits were $332.58 billion. U.S. House of Repre-
sentatives (1996), p. 17, table l-7b; in the same year, Medicare cost the federal
government (net of premiums paid) $144.747 billion. Id., p. 134, table 3-1. The
total expenditure, $477.327 billion, is 6.9 percent of 1994 GDP of $6.9357 trillion.
37. GDP in 1996 was $7.5761 trillion. U.S. Bureau of the Census (1997b), p. 447,
table 692.
38. See n. 28, supra.
39. See, e.g., Newman (1993), pp. 1-27 (describing the demoralizing effects of de-
creased opportunity on the current generation of working Americans).
 Notes to Pages 36-40 235

40. The average life expectancy was 49.24 years in 1900 and 75.8 years in 1992. U.S.
Department of Health and Human Services (1996). Life expectancy is projected
to increase. A boy and girl born in 1995 can expect to live to 72.5 and 79.3, re-
spectively. A boy and girl born in 2010 can expect to live to 74.1 and 80.6, respec-
tively. U.S. Bureau of the Census (1997b), p. 88, table 117.
41. See Langbein (1988), p. 732.
42. Data on inter vivos gifts are sparse, but recent work suggests that the wealthy give
away far less to their children during life than a rational tax-minimization strategy
would suggest. Poterba (1997a), p. 26.
43. Langbein (1988), pp. 730-736.
44. Id., p. 746.
45. At a 5 percent (nominal) interest rate, an eighty-thousand-dollar stake would earn
four thousand dollars per year. This is approximately the rate of total return on
long-term government bonds. Ibbotson Associates (1997), p. 33.
46. See Chap. 3.
47. See Zelizer (1994), who perceptively describes the ways in which social context
can encourage people to earmark different sums of money for very different
purposes.
48. As Chap. 3 will explain, each stakeholders account may have more or less than
eighty thousand dollars in it by the time she reaches her early twenties. But for
purposes of illustrating clearly how the stake might be disbursed, these details
can be deferred for now.
49. Studies that measure the "underclass" confront two key issues. First, does the
term describe individuals or neighborhoods? The neighborhood concept uncon-
scionably lumps together very different people—poor and not poor, jobless and
employed, criminal and law-abiding—simply because they live together. We re-
ject this approach. Individuals should be evaluated on their own merits and not
by the habits of their neighbors. Second, what exactly does the term "underclass"
mean? For some, it simply means poor people; others say that the key criterion
is joblessness. We reject both these criteria as far too broad: in an era of extreme
inequality of opportunity, we refuse to treat the jobless poor as per se "irrespon-
sible."
We focus instead on estimates that attempt to identify individuals with "multi-
ple social problems," as evidenced by a combination of single parenthood, welfare
receipt, dropping out of high school, and unemployment. These ways of identify-
ing the underclass are by no means perfect but at least offer more subtlety and
flexibility.
Mincy (1994) provides a useful summary. Among the more nuanced attempts,
the upper bound is Reischauers (1987) estimate that, in 1982, 8.1 million people
lived in persistently poor families with a head of household who had little educa-
tion and had worked less than three-fourths of the year. The lower bound is Rick-
etts and Sawhills (1988) estimate that, in 1979,1.1 million people were poor
residents of neighborhoods with high numbers of single parents, high school
dropouts, welfare recipients, and unemployed males. (Note that the figure in
 236 Notes to Pages 40-49

Mincy describing Kasarda [1992] is a misprint; that study found 1.25 million indi-
viduals, not "5.3 million households.") Using figures on total population for 1979
and 1982 (U.S. Bureau of the Census [1997], p. 15, table 14), Reischauers esti-
mate represented 3.5 percent of the population; Ricketts and Sawhill s estimate
represented less than .5 of 1 percent.
50. See Jencks (1992), p. 171; U.S. Department of Education (1997b), p. 17, table 8
(in 1996, 87 percent of twenty-five- to twenty-nine-year-olds had completed high
school).
51. For a review and critique of "culture of poverty" claims, see Katz (1989), pp. 16-^52.
52. Consider Edin and Lein (1997), chap. 3 (facing dismal job prospects and signifi-
cant child care responsibilities, welfare mothers chose to stay on welfare, despite
its indignities and hardships; most, though, planned to return to work eventually).
53. To be sure, different young adults have different resources and expectations, but
it is hard to predict how individual self-interest will shape the tradeoff. Consider
a typical blue-collar workers calculus. While he has good reason to save his stake
for a future rainy day, spending the stake now may mean buying a decent house
for his family. At the other end of the economic spectrum, a young Wall Street
lawyer might also lack clear priorities. She accurately supposes that her chances
of destitution in later life are low, but she also may not need the eighty thousand
dollars for a pressing current need—leaving her more likely, perhaps, to blow the
money on a fancy car and Armani suits. There is, in short, no particular reason to
suppose that stakeholding decisions will divide easily along class lines.
54. See, e.g., Glendon (1991); Sandel (1996).

Chapter 3: The Stake in Context

1. There are no serious constitutional problems raised by denying stakes to nonciti-
zens. See Mathews v. Diaz, 426 U.S. 67 (1976).
2. An identical problem is raised by citizens who are born abroad of American par-
ents and who do not spend a significant period of their childhood in the United
States. We would treat them exactly as we do native-born citizens.
3. U.S. Department of Justice (1996), pp. 136,164 (in fiscal year 1996,1,044,689
people were naturalized; 104,134 were under age twenty-five).
4. This rule will allow native-born citizens who lived out their earliest years in
America to qualify, even if they then spent their last ten abroad. We do not think
that this problem is big enough to worry about.
5. Schneider v. Rusk, 377 U.S. 163 (1964), is the leading case establishing a princi-
ple of equal treatment between native-born and naturalized citizens. A congres-
sional provision had stripped naturalized Americans of their citizenship if they
returned to their country of origin and took up long-term residence. A divided
Court struck the provision down as discriminatory: "A native-born citizen is free
to reside abroad indefinitely without suffering loss of citizenship. The discrimina-
tion aimed at naturalized citizens drastically limits their rights to live and work
abroad in a way that other citizens may." Id. at 168-169. There is a big difference
between the facts posed in Schneider and the present problem. Whereas the
 Notes to Pages 49-52 237 j

plaintiff in that case was threatened with the total obliteration of the classic rights
of citizenship, our present initiative leaves all these rights intact. We are simply
imposing a residency requirement for an economic benefit that has never previ-
ously been associated with citizenship status.
Nonetheless, invidious discrimination among classes of citizens is rightly a
source of constitutional concern even when it merely involves the distribution of
economic benefits. Indeed, when individual American states discriminate against
citizens of other American states by imposing residency requirements, the Court
has often struck them down. Zobel v. Alaska, 457 U.S. 55 (1982), is the decision
that most closely resembles our present problem. It involved Alaska's initial effort
to establish a stakeholding program out of its North Slope oil income. In its origi-
nal scheme, not all citizens of Alaska received the same annual payment from the
state s fund of oil revenue. Instead, the dollar amount was keyed to the number of
years of residence, so that newcomers received much less than old-timers did.
The Court held that Alaska could not discriminate against newly arrived citizens
from other states of the Union. Because these newcomers were American citi-
zens, with the right to travel freely anywhere in the Union, Alaska violated the
equal protection clause when it discriminated against them for exercising this
right by setting up residence in Alaska.
But these concerns about federalism are not relevant to our present problem.
We are not dealing with the efforts of one state to lock out Americans living in
the other forty-nine. We are concerned with the power of Congress to extend a
new economic benefit to all citizens as long as they live somewhere within the
country. As far as we can tell, this issue has never been squarely considered by the
Supreme Court. Cf. Rogers v. Bellei, 401 U.S. 815 (1971) (upholding a require-
ment, imposed on children of American parents who were born abroad, to reside
for a sustained period in the United States during their years of early adulthood).
Nonetheless, we are reasonably confident that the Court would uphold such a re-
striction, as long as it did not trench upon the classic rights of citizenship.
6. Special treatment should, of course, be given to children of American diplomats
and soldiers on long-term assignment abroad.
7. Cuccaro-Alamin (1997), p. 34.
8. U.S. Bureau of the Census (1997b), table 245.
9. For purposes of our calculations, we assume that everyone graduates from high
school at age eighteen.
10. Gladieux and Hauptman (1995), p. 3, table 2 ($132.297 billion in 1990-1991).
11. Id. (state and local governments pay $41.27 billion, including $39.058 billion of
appropriations for public institutions).
12. Id. (showing $13.481 billion in 1990-1991); U.S. Department of Education
(1998); U.S. Department of Education (1998) (fiscal year 1997 appropriations for
Office of Postsecondary Education totalled $12.7 billion).
13. Cuccaro-Alamin (1997), p. 34 (in 1972,42 percent of high school graduates
were enrolled in college in the year after graduation; in 1995, the figure was 62
percent).
j 238 Notes to Pages 52-57

14. See pp. 26-27, supra.

15. U.S. Department of Education (1997a), table 2 (in 1994,36.5 percent of low-
income students had not enrolled in postsecondary education, compared to 20.7
percent of middle-income students and 6.9 percent of high-income students).
The figures targeting enrollment in colleges only show an even greater bias in
favor of upper-income students. See Clotfelter (1991), p. 40 (in 1988,17.9 per-
cent of students from families with incomes under ten thousand dollars were
enrolled in college, compared to 58.7 percent of students from families with in-
comes of fifty thousand or more).
16. Cuccaro-Alamin (1997), pp. 38-39 (57 percent of students in the lowest quartile
of socioeconomic status [SES], but only 10 percent of students in the highest SES
quartile, delay enrollment in postsecondary education; those who delay are twice
as likely to attain no degree). These correlations do not necessarily imply causa-
tion; enrollment delays reflect disparities in ability and educational opportunities
as well as financial resources, Nonetheless, the orders of magnitude are so large
as to justify grave concern.
17. U.S. Department of Education (1997a), table 2; U.S. Department of Education
(1990), p. 44.
18. See Hout (1988); McMurrer, Condon, and Sawhill (1998).
19. Gladieux and Hauptman (1995), pp. 34-46.
20. U.S. Department of Education (1997a), table 7 (69.6 percent of students at pub-
lic two-year colleges live at home, and 79.5 percent of them work an average of
twenty-seven hours per week).
21. We have been unable to find sound empirical research exploring the extent to
which colleges responded to the GI Bill by simply raising tuition. For a discussion
of the issues raised by the most recent tax subsidies for education, see Cronin
(1997).
22. See n. 11, supra.
23. U.S. Department of Education (1997b), p. 175.
24. Id.
25. In 1983, a typical public four-year university received $3,843 per student in pub-
lic subsidies, compared to $1,846 for a typical public two-year college. Clotfelter
(1991), p. 116.
26. For our calculations, we have used the same 2 percent real rate of interest that
we have employed to determine payback obligations; see Chap. 5. The four-year
total is $84,900, which has a present value (at age twenty-one) of $82,435.
27. The segregation of stakeholding dollars raises other interesting questions. For ex-
ample, should a tort victim be allowed to seek damages from a defendant's stake?
Should the IRS be allowed to collect from the stakes of delinquent taxpayers ? We
leave these and other important details to a later stage in the stakeholding debate.
28. Of course, no legal shield will protect all underage borrowers. Loan sharks will
rely on illegal means of enforcing their claims, and legal but superaggressive
creditors may attempt to pressure stakeholders into "voluntarily" paying out their
 Notes to Pages 58-65 239

stakes in order to avoid the stigma of bankruptcy. But it is Utopian to suppose that
all problems can be eliminated.
29. See n. 24, supra. Because we expect tuition at public universities to rise substan-
tially, and for the reasons just discussed, tuition at the average private college is
the appropriate benchmark.
30. See pp. 53-54.
31. Poor students at the most expensive colleges will continue to graduate with more
substantial debts if private scholarship funds don't take up the slack. But these
students will also receive the benefits of better credentials and greater social ac-
cess that elite schools can provide.
32. A middle-income family will spend $300,000 to raise an only child, about
$225,000 to raise a second child, and so on. Longman and Graham (1998). That
figure omits foregone wages, college costs, and other added expenses, which to-
gether raise the cost of one child to a whopping $1.5 million. Id.
33. At a 2 percent interest rate, the present value of eighty thousand dollars to be re-
ceived in twenty-one years is $52,782. At a 5 percent rate, the present value is
$28,715.
34. See Folbre (1994), p. 115; Mclntosh (1987), p. 323. The exception is former East
Germany. See Buttner and Lutz (1990).
35. Oliver and Shapiro (1995), p. 7 (1987 data); compare Wolff (1996), p. 73 (in 1992,
the median black household had a financial net worth of zero, and 30 percent had
no positive net worth whatever).
36. Oliver and Shapiro (1995), p. 7.
37. Fuchs (1988), pp. 60-61; Goldscheider and Waite (1991), pp. 110-111; McCaf-
fery(1993).
38. Williams (1994), p. 2242; Apter (1993), pp. 69-74.
39. See Hadfield (1993).
40. For studies of intrafamily bargaining and financial power, see Zelizer (1994),
pp. 37-70; Pahl (1989).
41. The creation of such a fund would require additional revenue, which might be
raised by phasing in the wealth tax more quickly than the transition to stakehold-
ing would otherwise require. The cost would depend on the terms of the pro-
gram, and we have not attempted to delineate those terms or to make a separate
revenue estimate.

Chapter 4: Profiles in Freedom

1. This estimate is based on the 1995 distribution of income among families headed
by people aged twenty-five to thirty-four. Bill and Brenda earn between $15,000
and $30,000, while Mike and Maiy Ann earn between $35,000 and $55,000. U.S.
Bureau of the Census (1997b), p. 471, table 728.
2. Kennickell, Starr-McCluer, and Sunden (1997), p. 6, table 3. This measure ex-
cludes Social Security wealth but includes some private pension wealth. Id.,
p. 11, n. 12.
 240 Notes to Pages 65-68

3. Id., p. 15, table 8 (37.9 percent of families headed by a person under age thirty-
five own a primary residence).
4. U.S. Bureau of the Census (1993a), table D (1993 data).
5. In 1996, 53.1 percent of men and 62.9 percent of women aged twenty-five to
thirty-four were married. U.S. Bureau of the Census (1997b), p. 56, table 59.
6. Id., p. 160, table 245.
7. In 1996, the most common occupational category for male high school graduates
aged twenty-five to thirty-four was operator/fabricators. The second most com-
mon category was precision production, and third was technical, sales, and ad-
ministrative work. Id., p. 415, table 648.
8. In 1996, the unemployment rate for men aged twenty-five to thirty-four was 4.9
percent. If Bill were black, his chances of being unemployed would have been
even higher (10.1 percent). Id., p. 405, table 633. Unemployment among con-
struction laborers was also relatively high (16.3 percent). Id., p. 419, table 661.
9. In 1996, the median weekly earnings of a man working as a handler, equipment
cleaner, helper, or laborer were $343. The median weekly earnings of a man in
sales were $589, but that figure includes the earnings of both highly paid commis-
sion salesmen and comparatively poorly paid store clerks. Id., p. 431, table 671.
If Bill averages four hundred dollars a week for fifty weeks of work, he will earn
twenty thousand dollars in a year.
10. In 1996, the most common occupational category for female high school gradu-
ates aged twenty-five to thirty-four was technical, sales, or administrative work;
the second was the service industry, including health care. Id., p. 415, table 648.
Home health care is one of the fastest-growing job categories. Id., p. 414, table
647.
11. In 1996, the median weekly earnings of a female service worker (in other than
private household or protective services) were $272. Id., p. 431, table 671. But
that category includes both minimum-wage workers and better-paid workers. If
Brenda earns eight dollars an hour ($320 for a forty-hour week), she will make
fifteen thousand dollars if she works forty-seven weeks a year.
12. In 1995,29.2 percent of women aged twenty-five to twenty-nine had one child,
42 percent had two children, and 28.8 percent had none. Id., p. 82, table 105.
13. Even in a bad year, Bill and Brendas income is likely to be too high to allow Peter
to enroll in Head Start. See Washington and Bailey (1995), p. 36; Head Start Sta-
tistical Fact Sheet, http://www.acf.dhhs.gov/programs/hsb/factsheet.html.
14. See Edin and Lein (1997), pp. 88-119.
15. See pp. 38-39.
16. Bill and Brenda each received $21,225 on their twenty-first through twenty-
fourth birthdays. (See Chap. 3.) If they have never spent any principal but have
always withdrawn the investment income each year, they would have a combined
principal amount of $169,800, which would generate $8,490 at 5 percent interest.
17. The remaining principal amount of $159,800 would generate interest income of
$7,990 at 5 percent.
 Notes to Pages 69-73 241

18. In 1993, only 14 percent of white renter families and 3 percent of black renter
families could afford a modestly priced home (valued at between the twenty-fifth
and seventy-fifth percentile) in their area. U.S. Bureau of the Census (1993b),
p. 2. But with a down-payment subsidy often thousand dollars, 36.4 percent of all
renters, and 27.2 percent of black renters, could afford to buy a house. Id., p. 4.
19. In 1996, 28.4 percent of all twenty-five- to thirty-four-year-olds had some college
or an associate's degree. U.S. Bureau of the Census (1997b), p. 160, table 245.
20. For women with some college education, the most common occupational cate-
gory in 1996 was technical, sales, or administrative work. Id,, p. 415, table 648.
The median weekly earnings of women in clerical work was $391 in 1996, or
$19,550 per year. Id., p. 431, table 671.
21. In 1996, the median weekly earnings of men employed in transportation was
$486 per week. Id., p. 431, table 671. Mike, who belongs to a union and earns
overtime pay, makes more than that—about seven hundred dollars a week.
22. In 1995,42 percent of women aged twenty-five to twenty-nine had two children.
Id., p. 82, table 105.
23. See Mahony (1995), pp. 85-100; Apter (1993), pp. 197-198.
24. See Cancian, Danziger, and Gottschalk (1993), pp. 196, 205 (importance of
women's contributions to family income in the 1970s and 1980s).
25. Assume that Mary Ann spent twenty thousand dollars at age eighteen and ten
thousand dollars at age nineteen. Having spent her entire first stake payment
ahead of time, she received no payment at age twenty-one, $10,612 at twenty-
two, and $21,225 at both twenty-three and twenty-four. Assume that Mike
spent fifteen thousand dollars of his first stake payment at age twenty-one. Both
have invested the remainder at 5 percent. At age twenty-five, Mary Ann has prin-
cipal plus accumulated interest of $57,972, and Mike has $77,825. The total of
$135,797 would earn annual interest of $6,790 at 5 percent.
26. In 1996, the poverty rate for non-Hispanic white children was 16.3 percent; for
black children, 39.9 percent; and for Hispanic children, 40.3 percent. U.S. Bu-
reau of the Census (1997a), pp. 24-26. According to the 1990 Census, 84.5 per-
cent of high-poverty census tracts were in cities and the remainder were in
smaller towns and rural areas. Jargowsky (1997), pp. 11,16.
27. See p. 52, supra; see also McMurrer and Sawhill (1998), p. 67 (even among stu-
dents with equally high achievement-test scores, students of high socioeconomic
status [SES] are more likely than low-SES students to enroll in college).
28. U.S. Department of Education (1997a), table 6 (taking into account living ex-
penses and subtracting loans and work-study aid, the average annual net cost of
attending a public two-year college is $4,864, the cost of attending a public four-
year college is $4,922, and the cost of attending a private four-year college is
$5,704; but significantly, four-year colleges, particularly private ones, require the
student to take out larger annual loans).
29. Orfield (1992) (financial constraints on poor students and limited impact of finan-
cial aid).
 242 Notes to Pages 73-79

30. In 1992, the pregnancy rate among fifteen- to seventeen-year-olds was 71 per
1,000 and the birthrate was 38 per 1,000. Henshaw (1997), p. 119.
In 1996,13.1 percent of adults aged twenty-five to thirty-four had not gradu-
ated from high school. U.S. Bureau of the Census (1997b), p. 160, table 245, By
age thirty, 61 percent of former teen mothers had either a high school diploma or
a GED. Hotz, McElroy, and Sanders (1997), p. 61.
31. About 36 percent of young noncustodial fathers are so poor that they cannot pay
child support. Mincy and Pouncy (1997), p. 136.
32. The biggest occupational category for female high school dropouts is service
work. U.S. Bureau of the Census (1997b), p. 415, table 648.
33. Judys first stake payment at age twenty-one would be $21,225. Although she can-
not claim the principal, she is entitled, at age twenty-two, to one years interest at
5 percent, or $1,061.25. By age twenty-five (and thereafter), Judy's annual inter-
est would rise to $4,245, because all four payments of $21,225 would have been
deposited into her account.

Chapter 5: Payback Time

1. See the Appendix; OMB (1997), p. 49, table 3.1 (fiscal year 1998 defense expendi-
tures of $261 billion).
2. The GI Bill ultimately cost $14.5 billion between 1945 and 1956, with per capita
expenditures of $1,858. Skocpol (1997), p. 96; Bennett (1996), p. 171. That ex-
penditure represented nearly 5 percent of 1950 GDP of $295 billion. See BEA
(1998). In 1997 dollars, the total cost would be about $84 billion (prorating the
cost over the period 1945-1956) and $12,374 per person (from 1950), using infla-
tion data from the U.S. Department of Labor (1998).
When the GI Bill was enacted in 1944, wartime expenditures and the federal
deficit were at record highs, but the debate primarily centered on America's
moral debt to its young—and not on the tax cost. See Bennett (1996), p. 186;
Skocpol, p. 102.
3. See OECD (1988), pp. 30-75.
4. Indeed, the Founding Fathers experimented with wealth taxes, which were im-
posed sporadically to finance war efforts until 1861. Ratner (1942), pp. 19,34, 72.
While an income tax was levied during the Civil War, it became a fixture of public
finance only in the twentieth century with the the passage of the Sixteenth
Amendment.
5. For popular plans, including the flat tax, the USA Tax, and various national sales
and value-added taxes, see Hall and Rabushka (1995); Boskin (1996).
6. See, e.g., CBO (1992). But a broad-based VAT tends to be proportional to lifetime
income, and the tax design can be modified to mitigate the annual regressivity.
See Metcalf (1994), pp. 57-61; Fullerton and Rogers (1993), pp. 228-232.
7. A universal grant financed by a regressive tax can be progressive on net. Social
Security is a good example: although the payroll tax is regressive and higher earn-
ers get larger benefits, the system as a whole is progressive, because the lowest
 Notes to Pages 80-89 243

earners receive more relative to the taxes they pay in. Similarly, if stakeholding
were financed by a sales tax, the combination of a large universal benefit and a re-
gressive tax would be progressive on a lifetime basis for a large group of poorer
citizens, because the stake would represent a larger percentage of lifetime in-
come than the tax.
8. See, e.g., Nozick (1974). In Nozick's view, succeeding generations can legiti-
mately complain only if their predecessors made them worse off than they would
have been in a world without private property and free markets. Moreover, he in-
terprets this baseline in quite a minimalist fashion. See id., pp. 174-182.
9. In Hemy Sidgwicks memorable phrase, the challenge is to adopt "the point of
view (if I may so) of the Universe." Sidgwick (1906), p. 382.
10. For variations on these themes, see Parfit (1984), part 4.
11. Chap. 7 will elaborate the principles of trusteeship in connection with the prob-
lem of economic growth. For an exploration of the philosophical foundations, see
Ackerman (1980), chap. 7.
12. If the stake were paid in four installments from ages eighteen to twenty-one
and the real interest rate were 2 percent, the payback at age eighty would be
$265,160. Recall that every stakeholder is treated as if she would receive her
stake beginning at age eighteen, as the college-bound group would, but the non-
college-bound group would receive interest to age twenty-one. See Chap. 3.
13. Researchers have found that financial links among extended families are modest
at best. See, e.g., Altonji, Hayashi, and Kotlikoff (1995).
14. In 1992, the number of individuals leaving gross estates worth more than $600,000
was 60,082, or 2.76 percent of the 2.2 million U.S. deaths that year. See Eller
(1996-1997), p. 9. For a discussion of the possible revenue potential of the pay-
back requirement, see the Appendix.
15. A flat-rate consumption tax exempts from tax the yield on savings; it imposes, in
effect, a zero rate of tax on income from (new) capital, under certain assump-
tions. See Warren (1996).
16. See Chap. 6.
17. We do so as a matter of convenience. In fact, the different system prevailing in
Europe seems superior. While the Anglo-American tradition of estate taxation fo-
cuses on the donor, the Europeans commonly tax the donees of bequests, thereby
avoiding a peculiarity of our system—the imposition of the same estate tax re-
gardless of the number of children who inherit. See OECD (1988), p. 78 (in 1986,
sixteen OECD countries taxed inheritance, not estates).
18. In 1999, the first $650,000 of a decedents estate or lifetime gifts is exempt from
tax. I.R.C. § 2010(c). The exclusion amount will rise to $1 million by 2006. Id.
Despite the unified credit, there remains one significant advantage to giving life-
time gifts rather than bequests: tax rates in the estate tax are "tax-inclusive,"
meaning that the estate tax base includes the funds used to pay the tax. In con-
trast, gift tax rates are "tax-exclusive," meaning that gifts are in effect taxed at a
lower rate. Bittker, Clark, and McCouch (1996), pp. 24-25. We would unify these
two rate schedules for purposes of the payback.
 244 Notes to Pages 90-92

19. Current law also exempts from tax gifts that are used for the payment of tuition
and medical expenses. I.R.C. § 2503(e). We would maintain the status quo for the
foreseeable future. In todays society, neither rich parents nor their children con-
sider tuition payments to be "gifts"; rather, they see them as the fulfilment of an
obligation akin to parents* duty to financially support their children through high
school. It would cut against the grain of this perceived moral obligation to impose
a hefty tax on those parents who paid college tuitions in excess of their fifty-
thousand-dollar exemption.
To be sure, this will result in a stakeholding pattern at odds with the principle
of equal opportunity: if children from wealthy families have their college educa-
tions paid for by their parents, they can use all of their eighty thousand dollars for
other purposes; in contrast, college-bound children from the bottom 90 percent
may find that much of their stake has already been exhausted by the time they
reach their early twenties.
This is an injustice, but not one that seems important enough to confront at
this early stage in the struggle for equal opportunity. If a generation or two of
stakeholding leads to a change in expectations that release parents from a sense
of social obligation as far as tuition payments are concerned, a change in the rule
would be entirely appropriate. But such is not the case now.
20. See OECD (1995), p. 39 (from 1913 to 1989, U.S. labor productivity grew at an
annual rate of 2.5 percent; but in recent years, annual productivity growth has
slowed, to just 0.7 percent in the period 1986-1991, for example). If these recent
numbers signal a long-term change in productivity growth, we would obviously
change the basis of our calculations.
21. I.R.C. § 2055.
22. As under current law, the reasonable costs of supporting spouses and minor chil-
dren would be exempt. Bittker, Clark, and McCouch (1997), p. 136. See also
Beck and Elman (1965).
23. Two additional exceptions deserve mention. First, consider a parent who dies
leaving a minor child. If the parent had lived, she could have spent almost unlim-
ited amounts of wealth to support her young child. See n. 22, supra. To avoid
treating orphans more harshly, we would defer the parental payback until the
child is twenty-one. The payback obligation, with interest, would be imposed as if
the parent had died then. (This exception would apply only if the parent leaves all
her wealth to her child: any bequests to others, including to charity, would trigger
the payback obligation under the usual rules.) In the meantime, the trustee of the
parent's wealth should have the usual obligation not to dissipate funds. Current
estate tax law allows the estate simply to deduct reasonable amounts for the sup-
port of minor children. IRC § 2053(a)(3); Comr. v. Weiser, 113 F.2d 486 (10th
Cir. 1940). Second is the (rarer) case of an adult who dies leaving a dependent
parent. An analogous rule would defer the payback obligation until the parent
dies, provided that the parent was economically dependent on the deceased
child's support.
 Notes to Pages 93-97 245 I

24. Both partners' stakes would accrue interest from each person's birthdate to the
death of the partner who dies last. If a husband dies at age eighty and his younger
wife lives twenty years after that, to age ninety, her estate would be obliged to pay
back both his stake, with one hundred years' interest, and her own stake, with
ninety years' interest.
25. See n. 14, supra.
26. In effect, we would lower the exemption amount. The current-law exemption level
will rise to $1 million by 2006.1.R.C. § 2010(c). Our tax, in contrast, would begin
to apply to bequests over $300,000 if the taxpayer left nothing to charity and died
at the age of eighty ($250,000 payback plus the $50,000 lifetime exemption).

Chapter 6: Taxing Wealth

1. See Chap. 10.
2. SeeWilhelm(1998),p. 15.
3. Id., p. 16.
4. Wolff (1998), pp. 133,136 (net worth omits Social Security entitlements, con-
sumer durables, and retirement wealth in excess of the cash surrender value of
defined-contribution plans).
5. Wolff (1996), pp. 78-79, table A-l (augmented wealth). Augmented wealth data
are not available for more recent years.
6. Wolff (1996), pp. 23-24.
7. Id., pp. 78-79, table A-l (augmented wealth). See also Wolff (1998), p. 135 (net
worth inequality rose "steeply" in the 1980s and leveled off between 1989 and
1995). Wolff suggests that the rise in the value of stocks relative to housing in the
1990s increased wealth inequality, but that trend was offset by a decline in in-
come concentration. Id., pp. 147-148.
Recent studies have questioned Wolff s finding of increasing inequality during
the 1980s, arguing that some technical specifications produce a flat trend instead.
See Kennickell and Woodburn (1997); Weicher (1996), pp. 10-18. These revi-
sions are also controversial, and do not suggest that wealth became less concen-
trated in the 1980s.
8. From 1983 to 1995, the average net worth for the population as a whole grew
from $198,770 to $204,529. Wolff (1998), p. 135. For the definition of net worth,
see n. 4, supra.
9. Id., pp. 136-137. During the 1980s, 95 percent of the growth in total net worth
accrued to the top 20 percent of wealth-holders; over the same period, the bot-
tom 60 percent saw their net worth shrink in real terms. Wolff (1996), p. 72.
10. See Weicher (1996), pp. 11-13 (treating the reduction in wealth concentration in
the late 1970s as "exceptional," but finding that in 1989 the richest 1 percent
owned 35 percent of total net worth and that the top 20 percent received 80 per-
cent of the aggregate increase in net worth from 1983 to 1989).
11. See Ackerman (1980), chap. 5, and esp. pp. 180-186.
12. See Chap. 2.
 246 Notes to Pages 97-103

13. For men aged nineteen to thirty, the difference is $26,168 versus $16,772. Mayer
(1997), p. 42, table 3.1; see also Corcoran and Adams (1997), p. 19 (young men
from middle-income families earn 41-63 percent more per year and 29 percent
more per hour than young men from poor families). We do not have data on the
earnings gap for older men or for women of any age.
14. Ten thousand dollars a year for forty years at 2 percent is $616,100.
15. High-income people can defer tax on income from capital simply by holding ap-
preciated assets or by engaging in more sophisticated financial transactions. See
I.R.C. § 1014; Graetz and Schenk (1995), pp. 159-161; Graetz and Schenk
(1997), pp. 30-35. For effective tax rates on income from capital, see Gravelle
(1994), pp. 131, 294, table B.I. And the tax code allows generous income tax de-
ferrals for significant amounts of pension savings. See I.R.C. §§ 402(a), 415.
16. See Kennickell, Starr-McCluer, and Sunden (1997), p. 7, table 3.
17. For a review of the empirical evidence in support of different causal hypotheses,
see Danziger and Gottschalk (1995), pp. 127-150.
18. See nn. 4-5, supra (data on wealth distribution in the absence of Social Security).
These data measure the actual distribution of wealth today, not the distribution of
wealth that might have occurred had Social Security never existed. The effects of
Social Security on aggregate private savings and on the distribution of the fore-
gone accumulation are controversial, and it is impossible to measure with cer-
tainty precisely how much more unequal the distribution would be had Social
Security never been enacted.
19. See Caplow and Simon (1998).
20. Id.
21. Recall Aesop's classic fable: the Ants work and save while the Grasshopper plays.
When winter comes, guess who is left out in the cold?
22. For the OECD countries that tax wealth, see OECD (1994), pp. 210-257; compare
OECD (1988), p. 30 (eleven countries).
In 1986, the Danish wealth tax rate was 2.2 percent of wealth in excess of
the exemption level (approximately $155,000 for a married couple with two
children); the Swedish wealth tax rates ranged from 1.5 to 3 percent, on wealth
above $28,000. OECD (1988), pp. 34-36, tables 1.2a and 1.2b. In 1993, the Danish
wealth tax rate was 1 percent. OECD (1994), pp. 218-219.
European wealth taxes typically exempt large classes of assets and cap the
wealth tax as a percentage of total income. See infra nn. 44 and 56.
23. Many politicians advocate replacement of the income tax with a "flat tax," a value-
added tax, or some other kind of consumption tax—but all these "simplifications"
lower taxes on the rich. See Slemrod and Bakija (1996), pp. 219-226.
24. See the Appendix.
25. See Chap. 3, pp. 58-60, for an argument that eighty thousand dollars is at least in
the ballpark.
26. Individuals' wealth includes debt and equity interests in for-profit businesses. We
do not propose to tax wealth held by the nonprofit sector. Churches, private uni-
versities, and other charities play crucial roles in American society; they deserve
 Notes to Pages 103-106 247 I

special treatment and are worth the $9 billion in forgone revenue. See Board of
Governors of the Federal Reserve System (1998), p. 109, table LlOOa (in 1994,
nonprofit organizations had net assets of $429 billion).
Our calculations in the Appendix include the value of private pensions in
which taxpayers are currently vested—i.e., the amount to which a taxpayer would
legally be entitled if she were to quit her job immediately. The estimate thus ex-
cludes the value of future pension accruals. See the Appendix. The wealth tax
also excludes the value of Social Security entitlements. Taking the insurance anal-
ogy seriously means treating Social Security as if it were a private pension. But
for the reasons given in Chap. 8, we reject the notion that old-age benefits are
merely the equivalent of private savings.
27. For example, a taxpayer who owned a $200,000 home with a $125,000 mortgage
would report net wealth of $75,000.
28. Stakeholders would not be subject to income tax on their receipt of the stake, but
they would be taxed on any investment income they receive.
29. Wilhelm (1998), p. 15.
30. Id., p. 18, table 2; compare Kennickell, Starr-McCluer, and Sunden (1997), p. 6
(median family wealth in 1995 of $56,400, using a narrower measure of wealth).
The average household wealth is much greater: $261,187. Wilhelm (1998),
p. 19. The average household size in each quintile is 2.6 people. Id., p. 16.
31. Wilhelm (1998), p. 19, table 2.
32. Id.
33. Id.
34. Similar claims are legion in estate-tax debates, although the tax in fact affects only
a small percentage of small businesses, and most have liquid assets sufficient to
pay the tax, often through life insurance. See Burman (1997).
35. See the Appendix.
36. The income tax takes similar measures. See IRC § 151(d)(2) (no personal exemp-
tion for dependent children).
37. Continued joint filing in the income tax raises questions of transition or long-term
coordination. The income tax might adopt individual filing as well, as many com-
mentators have urged. See, e.g., Zelenak (1994); McCaffery (1997). But income-
tax reform is not essential: without it, a couple would file three returns instead of
two (i.e., two separate wealth tax returns and one joint income tax return, rather
than two integrated income-and-wealth-tax returns).
38. According to the OECD, member countries with a net wealth tax aggregate spouses'
wealth for purposes of the tax. OECD (1988), p. 39. Some countries, however, im-
pose income taxation on individuals, and their experience provides some guide to
analogous issues in wealth taxation. See generally Gann (1980); Munnell (1980),
39. In a more sophisticated scam, they might borrow heavily in the United States,
thus reducing their taxable net wealth, and then hide the proceeds abroad.
40. Kennickell, Starr-McCluer, and Sunden (1997), p. 12, table 7 (in 1995, 65.9 per-
cent of assets owned by U.S. families were nonfinancial assets, including vehicles,
homes, investment real estate, and non-publicly-traded business assets).
 248 Notes to Pages 106-107

41. Id.
42. See OECD (1988), pp. 61-74.
43. See id., pp. 71-73. There are clear advantages to collecting wealth taxes on busi-
ness assets (whether privately or publicly held) at the entity level. The corpora-
tion (or partnership) would determine the value of owners' interests and remit
the wealth tax on their behalf. Individuals would then report the value of their
holdings on their own wealth-tax returns, claiming a credit for tax "withheld" at
the corporate level. This model would help ensure that individual taxpayers pay
their taxes and would, in the end, collect only one level of tax on business assets.
For analogous proposals and other variations in the income-tax context, see War-
ren (1993); U.S. Department of the Treasury (1992).
44. OECD (1988), pp. 44-61. All countries give some exemption for household and
personal effects and pension rights, while some also exempt small savings, life in-
surance, works of art and collections, and homes. Id., p. 45.
45. Wilhelm(1998),p. 15.
46. The growing trend toward defined contribution pensions assists valuation, since,
in general, the value of a defined contribution plan is the current account bal-
ance. Defined benefit (DB) plans pose greater challenges, because benefits
change with length of tenure and salary and employers sometimes underfund
their DB plans. Entity-level taxation is one possible, albeit imperfect, solution: it
has the advantage of taxing directly only the assets in the plan, but it would indi-
rectly overtax some individuals by not allowing a personal exemption. Another
option would require plan sponsors (companies and unions) to disclose to the IRS
and to individuals the accrued value of individuals' pension rights. This method
could provide useful information to employees as well as to the tax authorities.
47. See the Appendix. The revenue estimate is static; the 21 percent "cushion" also
leaves room for behavioral responses to the tax, as discussed in Chap. 7.
48. The consensus view in Europe is that net wealth taxes aid in income tax adminis-
tration. See OECD (1988), p. 163. In the United States, potential gains from coor-
dinated administration include enhanced information reporting for both the
wealth tax and the income tax. The adoption of a U.S. wealth tax might also en-
courage greater cooperation among national tax authorities. Expanded reporting
systems may help prevent income-tax evasion, as taxpayers would find it more dif-
ficult to escape a dual system and the ms could begin to use wealth data to cross-
check for unreported income.
49. Interest on state and local bonds is excluded from tax. I.R.C. § 103. Long-term
capital gains are taxed at reduced rates (I.R.C. § l[h]), and the "realization re-
quirement" permits taxpayers to defer tax on a variety of gains until the asset is
sold. See generally Eisner v. Macomber, 252 U.S. 189 (1920). Imputed income on
owner-occupied housing is excluded. See Chirelstein (1997), pp. 22-25.
50. Jane Gravelle estimates that in 1989, when the top statutory individual rate was
28 percent, the effective marginal tax rate was 22 percent on noncorporate capital
and only 4 percent on owner-occupied housing. Gravelle (1994), p. 294, table
B.I. The effective marginal tax rate on capital gains depends on the holding pe-
 Notes to Pages 107-108 249 I

riod and the rate of inflation, with the rate dropping to zero for assets held until
death. Id., p. 131. In contrast, the effective marginal tax rate was 43 percent on
corporate capital. Id., p. 294. But that is a product of the "two-tier" corporate tax
system. Although our system would preserve the corporate income tax, it would
tax wealth only once. See n. 43, supra,
51. Like a comparable income tax, an annual wealth tax reduces the (after-tax) return
on savings. But a wealth tax is not identical to an income tax, since its net impact
depends on the taxpayer's overall rate of return. If an investor earns 10 percent
on her capital, our wealth tax is equivalent to a 20 percent income tax; for a tax-
payer earning a 5 percent return, it is equivalent to a 40 percent income tax.
52. State and local real property taxes also create the potential for multiple taxation
of the same asset. While the states may fear that the federal tax will limit their
ability to tax wealth, they should consider that their treasuries will also gain bil-
lions each year as stakeholding allows them to cut their subsidies to higher educa-
tion. See the Appendix.
53. The calculation in the text assumes that the state tax is 12 percent, or $6. The fed-
eral income tax is 39.6 percent of $44 ($50, less the deductible state tax), or $17.
The wealth tax is 2 percent of $1,000 (assume that all income is spent), or $20.
The total ($6 plus $17 plus $20) is $43.
54. High marginal rates also exacerbate concerns as to the impact of our tax on sav-
ings and investment. We consider this problem at length in Chap. 7.
55. See Bittker and Lokken (1992), 111-88 to 111-92 (the alternative minimum tax).
56. Many European countries take just the opposite approach. They set a ceiling on
the combined rate of income and wealth taxation, expressed as a maximum in-
come tax rate. See OECD (1988), pp. 40-43. If, for example, a taxpayer has taxable
wealth of one thousand dollars and income of one hundred dollars, her combined
income and wealth tax could not exceed (say) 70 percent of her income, or sev-
enty dollars. We reject this approach as precisely backward: it extends, rather
than offsets, many of the income tax's special preferences. When the ceiling is a
percentage of income, taxpayers with excludable income pay less income and
wealth tax than those with fully taxable income.
57. Table 4 provides a simple example, in which the 2 percent wealth tax happens to
offset the effect of a tax preference in a 40 percent income tax, assuming a 5 per-
cent rate of return.

Table 4. Coordinating the Income Tax and the Wealth Tax

Asset type Income tax (40%) Wealth tax (2%) Total tax

Taxable $1,000 bond,

yielding 5% (pretax) $20 $0($20-$20) $20
Tax-free $1,000 bond,
yielding 5% (pretax) 0 $20 $20
I 250 Notes to Page 108

58. Tables 5 and 6 illustrate the tax treatment prevailing under an integrated system.

Table 5. An Integrated Income and Wealth Tax, at Various Rates of

Return

Combined tax, if
Combined income tax is
Bond yield income plus subtracted from
(pre-tax), Income tax Wealth tax wealth tax, wealth tax
on a $1,000 alone alone with no (with wealth tax
bond (40%) (20%) integration not less than zero)

$20 (2%) $ 8 $20 $28 $20

$40 (4%) $16 $20 $36 $20
$80 (8%) $32 $20 $52 $32
$100 (10%) $40 $20 $60 $40
Note: For a taxable investment, the integrated income-wealth tax imposes the wealth tax on low-
yielding assets and the income tax on high-yielding assets.

Table 6. Tax-Preferred Assets in an Integrated System

Asset type Unintegrated Integrated

(subject to Pretax wealth and wealth and
income tax yield income tax income tax
or not) (%) ($) ($)
Tax-exempt 4 20 20
Taxable 4 28 20
Tax-exempt 10 20 20
Taxable 10 60 40
Note: The integrated income-wealth tax closes but does not always eliminate the gap between
income-tax preferred assets and highly taxed assets.

59. Any practical integration system would make some simplifying adjustments. For
example, the system might allow a credit only for categories of income that are
generally taxed at relatively high rates, including taxable interest and dividends
and those rents and royalties subject to current taxation at the statutory rate. In
contrast, the system should not allow a credit for those items of income, like capi-
tal gains, that are taxed at substantially reduced rates.
 Notes to Pages 108-109 251

Even this streamlined system would also have to associate deductions with
items of income, to prevent taxpayers with large deductions from being awarded
excessive credits. Some simplifying presumptions might be adopted to help out av-
erage taxpayers, who generally do not have significant amounts of deductible inter-
est expense (other than on home mortgages), percentage depletion, and so on. The
goal, at least for typical wealth-holders, would be a rough equity, not precision.
These income categories are an imprecise way of identifying tax-preferred in-
come, with the result that some kinds of income (e.g., capital gains resulting from
very short-term holding periods) would still be subject to high rates of tax. But
the coordination rules can still provide rough justice, which is all that can be ex-
pected given the complex pattern of tax preferences established by the existing
income tax.
One downside is that the coordination rule—like many other partial limita-
tions on tax preferences—could encourage sophisticated taxpayers to play games.
One early strategy would be to cross boundaiy lines: by recharacterizing ineligi-
ble income (say, rent) as interest or dividends, the taxpayer could claim an unde-
served credit. Another potential abuse would be the manipulative apportionment
of total income taxes paid between creditable and noncreditable items in order to
maximize the wealth-tax credit. Both of these games are already wearily familiar
in the income tax, which fights an unending battle against taxpayers' ingenuity.
60. See the Appendix.
61. Just as in the income tax, this approach requires some method of avoiding double
taxation in instances where other countries also impose a wealth tax on assets lo-
cated abroad. The current solution in the U.S. income tax is a foreign income tax
credit; a foreign wealth tax credit would be the analogue.
62. I.R.C. §§ 871, 881. Just as in the domestic context, a corporate-level collection
mechanism would help ensure compliance. See n. 43, supra.
63. European countries typically tax the wealth of nonresidents located in their coun-
try; a majority limit the wealth tax on foreigners to real property and businesses
physically located in the country. See OECD (1988), pp. 38-39.
64. The income-tax analogue is the "effectively connected" or "permanent establish-
ment" standard. See I.R.C. §§.871(b), 882; United States Model Income Tax
Convention of 1996, Article 5, reprinted in Gustafson, Peroni, and Pugh (1996).
65. See the Appendix.
66. We discuss this point further in Chap. 10.
67. To be sure, every expatriate should be given an opportunity to establish, by con-
vincing evidence, that his decision was not motivated by tax considerations.
In any event, expatriation should not be tax-free. First, expatriate stakeholders
should be required to pay back their stakes, with interest, under the same rules
that apply to decedents, and regardless of their motives for expatriation. Second,
all expatriates should be required to continue paying U.S. wealth taxes for ten
years on wealth remaining in the country, including stocks and bonds in U.S.
companies. This regime might be patterned on current I.R.C. § 877, which ex-
tends the U.S. income tax for ten years to expatriates. Like § 877, the ten-year tax
 252 Notes to Pages 111-117

might apply only to expatriates who fail to establish that they have a good nontax
reason for leaving.
The § 877 tax is sometimes portrayed as an antiabuse rule responding to de-
ferral possibilities in the income tax. The rationale for the ten-year wealth tax is
slightly different: when people have benefited from living as citizens in a stake-
holder society (even if they are not stakeholders themselves), on the understand-
ing that a lifelong wealth tax is an intrinsic part of the justice of that society, a
ten-year antiabuse rule discourages them from evading their obligations by expa-
triating, say, just before their peak wealth-holding years.
68. Robert Bork, for example, likens it to a "provision that is written in Sanskrit or is
obliterated past deciphering by an ink blot," which "has, quite properly, remained
a dead letter." See Bork (1990), p. 166.
69. This has been the approach traditionally taken by the Supreme Court when it has
construed the meaning of the clause. See the Slaughterhouse Cases, 83 U.S. 36
(1873). But the Court would undoubtedly uphold Congress's authority to take a
much broader view of the matter in the exercise of its power to tax and spend for
the "general welfare." See Chap. 7.
70. See Amar (1998), chap. 9.
71. See Black (1997).

Chapter 7: The Limits of Growth—and Other Objections

1. See Chap. 5.
2. See Chap. 5.
3. For further elaboration, see Ackerman (1980), chap. 7.
4. From 1973 to 1997, the average annual growth in real GDP was 2.728 percent.
See Council of Economic Advisors (1998), p. 285, table B-4; compare id., pp. 78,
86-87 (predicting future real GDP growth of 2.4 percent per year).
With a real growth rate of 2 percent, GDP would grow from its 1996 level of
$7.576 trillion to about $27 trillion in 2060 (in 1997 dollars). See U.S. Bureau of
the Census (1997b), p. 447, table 692. Even if the growth rate falls to just 1 per-
cent, real GDP in 2060 would be about $14 trillion.
The U.S. population in 2050 (the latest date for which we could find a stan-
dard projection) is estimated to be 393.931 million, compared to the 1996 popu-
lation of 265.284 million. Statistical Abstract (1997), p. 16, table 16; p. 17, table
17 (middle series).
In 1996, real GDP per capita was $28,558. Despite the population growth over
time, real GDP per capita will be higher in 2060 whether we assume a 2 percent
growth rate ($68,301 in 1997 dollars) or a 1 percent growth rate ($36,357).
5. For example, if the rate of return on an eighty-thousand-dollar investment made
for forty years fell from 2 percent to 1.5 percent, the accumulated sum would
drop from $176,643 to $145,121—or a 41 percent reduction in the total return.
6. See Wolff (1998), pp. 136-137 (from 1983 to 1995, wealth increased only for the
richest 5 percent of U.S. households); Blank (1997), pp. 53-56 (noting that the
 Notes to Pages 117-120 253 I

economic expansions of the 1980s and 1990s failed to produce substantial de-
clines in poverty).
7. See Chap. 6, p. 99.
8. See, e.g., Sandmo (1985), pp. 281-283; Boadway and Wildasin (1994), pp. 33-35;
Randolph and Rogers (1995), pp. 432-434.
9. Because the stake is universally available, it is essentially a lump-sum transfer and
so should have virtually no substitution effects, other than to encourage young
people to become U.S. citizens and to graduate from high school.
10. For evidence on the income (and substitution) effects of current income trans-
fers, see Moffitt (1992) (finding "nontrivial" work disincentives in Aid to Families
with Dependent Children). But these studies are unlikely to tell us much about
stakeholding, for they examine only poor people and their response to small,
income-tested, annual transfers.
11. See, e.g., Cowell (1997); Whitney (1997).
12. See Garrett (1998). See also Atkinson (1995b) (conventional economic com-
plaints about the welfare state are often undertheorized and unsupported by
empirics).
13. In 1994, U.S. taxes at all levels were $1.885 trillion, or 27 percent of GDP of
$6.936 trillion. U.S. Bureau of the Census (1997b), pp. 447, 844, tables 692,
1358. Adding $255 billion in new revenues for stakeholding (see Appendix) would
mean a total tax burden of $2.14 trillion, or 31 percent of GDP. In 1995, the OECD
average tax burden was 37.4 percent of GDP, and several nations—including Swe-
den (49.7 percent), France (44.5 percent), Italy (41.3 percent), and the Nether-
lands (44.0 percent)—were well above that level. OECD (1997), p. 74.
14. See Slemrod and Bakija (1996), pp. 103-112; Rosen (1992), pp. 431-432.
15. Rosen (1992), p. 432; Gravelle (1994), pp. 27-28, 40-41. Compare Boskin (1978)
with Hall (1988). Feldstein (1995), pp. 405-408, acknowledges the emerging con-
sensus but argues on methodological grounds that we should disregard most of
the evidence and rely instead on studies that show greater responsiveness to Indi-
vidual Retirement Account rules.
16. See Rosen (1992), p. 418; MacCurdy, (1992), pp. 243, 248. Even high-income
labor supply appears to be quite inelastic. See Moffitt and Wilhelm (1998). For
divergent views, compare Feldstein and Feenberg (1993) with Gravelle (1993).
17. In general, married women's labor supply is more elastic; see Eissa (1996).
18. Even if we had uncontested studies measuring the effects of existing taxes on sav-
ings and the labor supply, we could not jump to any conclusions about the overall
effects of the wealth tax. The wealth tax is not a straightforward reduction in the
rate of return on capital or the wage, and its effects vary by taxpayer, by invest-
ment, and with changes in market interest rates. Because the wealth tax would be
so complex and large a change, it would be simpleminded to predict its effects on
savings, for example, by assuming a standard rate of return and multiplying the
change by the chosen elasticity.
19. In 1995, foreign investment in the United States exceeded U.S. investment
abroad by $774 billion. U.S. Bureau of the Census (1997b), p. 791, table 1295
I 254 Notes to Pages 120-132

(market value of assets). In 1994, U.S. affiliates of foreign companies had assets
worth $2.2 trillion in the United States. Id., p. 792, table 1298. In 1996, the
United States had a significantly larger stock of foreign direct and portfolio in-
vestment (in absolute dollars) than did other industrialized countries, including
the United Kingdom, Canada, Australia, France, Germany, and Japan. Interna-
tional Monetary Fund (1997), pp. 48,143, 285, 301-302,403, 845-846, 853.
20. For the latest round in this debate, see McCaffery (1994), Alstott (1996), and
Holtz-Eakin (1996).
21. See Holtz-Eakin (1996); Alstott (1996), pp. 383-394; Graetz (1983), pp. 278-283.
For debate on the importance of inherited wealth in the U.S. capital stock, see
Kotlikoff (1988); Modigliani (1988); Kessler and Masson (1989).
22. For a more elaborate analysis of the constitutional issues, see Ackerman (1999).
Calvin Johnson (1998) has reached similar conclusions through different argu-
ments. An opposing view is presented by Jensen (1997).
23. 158 U.S. 601, 684 (1895).
24. 514 U.S. 549 (1995).

Chapter 8: From Worker to Citizen

1. For critiques of Social Security's treatment of women, see Pateman (1988),
Becker (1989). For a dramatic illustration of the very contingent benefits a
woman will receive, depending on her marital status, her earnings, and the earn-
ings of her partner, see Holden (1997), p. 97, table 6.3.
2. See Kingson and Schulz (1997), p. 43.
3. See infra pp. 145-149.
4. World Bank (1994), p. 357, table A.4. Some of these countries also include a
means-tested benefit and / or a contribution-related benefit. Canada, Denmark,
Iceland, and Norway provide all three types; Finland provides a universal, flat
benefit and a contribution-related benefit.
5. For the calculation of the benefit level, see the Appendix.
The citizen s pension, like current Social Security benefits, would be tax-free
for the great majority of recipients. See U.S. House of Representatives (1998),
pp. 851-852.
6. We estimate that the present value of current social insurance ranges from
$21,000 to $77,000 for a twenty-one-year-old man and from $32,000 to $112,000
for a twenty-one-year-old woman. These estimates include Social Security,
Medicare, and a number of welfare programs. The lower end of the range re-
flects a discount rate of 6 percent, while the high end reflects a discount rate of 2
percent. See Madison (1997).
These findings are roughly compatible with other estimates. Compare
Steuerle and Bakija (1994), pp. 99, 278,282 (discounting to age twenty-one at 2
percent, the present value of Social Security and Medicare benefits is $162,497 to
a twenty-one-year-old wife in a two-earner couple); Kotlikoff (1993), pp. 116-119
(using a discount rate of 6 percent, in 1989, total Social Security, Medicare, and
 Notes to Pages 134-145 255 I

certain welfare benefits had a present value of $21,600 to a twenty-year-old man.

and $33,600 to a twenty-year-old woman).
7. See Ackerman( 1997).
8. Kingson and Schulz (1997), pp. 59-60, n. 6.
9. On the problems of adverse selection in private markets for health insurance, see,
e.g., Cutler and Zeckhauser (1997). On mandatory social insurance, see Rosen
(1992), pp. 204-205.
10. But perhaps significant numbers of women would also like to buy "divorce insur-
ance" in order to protect themselves against becoming displaced homemakers—
raising similar questions and perhaps the prospect of a separate insurance scheme.
11. Higher-wage workers get higher absolute benefits but a smaller benefit per dollar
of contribution. See U.S. House of Representatives (1998), pp. 25-27, table 1-17;
for empirical studies, see Chen and Goss (1997), pp. 82-83.
The system also redistributes from two-earner to single-earner couples and
from shorter- to longer-lived people. These redistributions partly counteract the
progressive income redistribution, since single-earner couples cluster at the top
and bottom, and richer people are healthier. See Rosen (1992), pp. 210-214.
12. See Steuerle and Bakija (1994), pp. 106-112.
13. We do not address the question of whether citizens' pensions ought to be fi-
nanced on a pay-as-you go basis or through advance funding; the system that we
describe could be funded either way.
14. See Mashaw and Marmor (1996).
15. See Chen and Goss (1997).
16. For the exact figures from the Social Security Administration (1997), tables 5.A1
and 5.A7, see Table 7.

Table 7. Social Security Benefits Status of Elderly Women in 1996

Number Percentage
of women of total

Received benefit based solely on own

work history 7.369 million 36
Had own work history, but received
a higher spousal benefit 5.518 million 27
Received retirement benefit solely as
a spouse 2.877 million 14
Received survivor s benefit based on
husbands work history 4.980 million 24

Total 20.734 million 100

Note: Percentages do not add to 100 due to rounding.

 256 Notes to Pages 145-148

17. See Ferber (1993), pp. 43-44.

18. For a vivid illustration, see Holden (1997), p. 97, table 6.3.
19. 42 U.S.C. § 401(b).
20. 42 U.S.C. § 416(d).
21. See Ferber (1993), pp. 38-40,43 (even women who work full-time, and continu-
ously, have lower lifetime earnings than men; and noting women's lower average
Social Security benefit).
22. U.S. House of Representatives (1996), p. 4 (1996 retirees). Todays retirees are el-
igible for full benefits at age sixty-five, but the retirement age is scheduled to rise
to age sixty-seven by 2027. See the Appendix, n. 42. Our program would adopt
the same approach.
23. In 1996, almost 30 percent of all retirees, and 44 percent of elderly women, re-
ceived less than $550 per month. Social Security Administration (1997), p. 212,
table 5.B9; see also id., p. 202, table 5.A16 (average benefit for wives of retired
workers in 1996 was $385).
24. Social Security Administration (1997), p. 212, table 5.B9 (39.4 percent). The per-
centages may be even greater, as we have not counted people who receive more
than $650 but less than $670 per month.
25. Id., p. 212, table 5.B9, and p. 228, table 5.F11 (40.5 percent). This figure is nec-
essarily imprecise, given the limitations of available data. It is slightly overstated,
since not all wives are sixty-five or older; it is also understated, since it shows the
percentage of retired workers and wives who jointly receive less than $1,300,
rather than the higher $1,340 that two citizens' pensions would provide.
26. See id., p. 236, table 5.H3 (51.4 percent). The enactment of citizens' pensions
would allow a significant reorganization of the Supplemental Security Income
(ssi) program, which pays maximum benefits of $470 per individual ($705 per
couple) to elderly beneficiaries with low incomes, at an annual cost of more than
$4 billion. House of Representatives (1996), pp. 263, 291-292, tables 4-11 and
4-12 (in 1995,1.455 million elderly ssi recipients received an average annualized
ssi benefit of $3,002, or $250.21 per month). Total annualized expenditures were
thus $4.369 billion.
27. A wife is automatically entitled to a spousal benefit equal to 50 percent of her
husband s basic pension; she receives that benefit unless her own work history en-
titles her to a larger one. 42 U.S.C. § 401(b). The same spousal benefit is avail-
able to husbands, too, but in practice it has usually been claimed by wives.
28. See pp. 137-138, supra.
29. For evidence on the availability of and economic returns on private life annuities,
see Mitchell, Poterba, and Warshawsky (1997) (finding that life annuities offer a
below-market rate of return, reflecting transactions costs and adverse selection,
but that returns have improved since the 1980s). See also Poterba (1997b) (on
long-term growth in the private annuity market).
30. For a discussion of the partial wage-replacement that Social Security provides,
see Moon (1997), pp. 63-65.
 Notes to Pages 148-151 257

31. See Graetz (1987), pp. 855-856 ("Replacement of some significant portion of
preretirement wages must be the fundamental goal of retirement security policy.
. . . The replacement of preretirement labor income will generally ensure against
an abrupt decline in a retirees lifestyle").
32. It is not clear whether workers view the payroll tax as a "payment" for future ben-
efits or as a "tax" that reduces current earnings. The smaller the psychological
linkage between current taxes and benefits, the smaller the impact of our plan.
Many young workers today doubt that the Social Security system will deliver on
its promises to them. See Reno (1997), pp. 184-186.
33. This situation occurs when the wife's own benefit is less than 50 percent of her
husbands benefit. 42 U.S.C. § 401(b). Although today more wives have longer
work histories, many working wives will still receive only a spousal benefit after
retirement because they will have earned significantly less and worked fewer
years than their husbands did. In 1996, for example, 43 percent of female retired
workers entitled to their own Social Security benefits were also entitled to a
higher spousal benefit. See Social Security Administration, Social Security Bul-
letin, Annual Statistical Supplement (1997), table 5.G2.
For an extended discussion with many examples, see Ross and Upp (1993).
Unless a wife earns at least one-third of the couple's total lifetime income, she
will receive a higher benefit as a spouse than she would as an earner. Id., p. 59.
By 2015, 60 percent of retired wives will claim earned benefits rather than
spousal benefits, but even for this group, the marginal gain over the spousal ben-
efit may be small. Fierst (1996).
34. For ease of comparison, we have assumed that citizens' pensions would be fi-
nanced on a pay-as-you-go basis, just as the current Social Security system is.
There is currently much controversy over whether this system should be replaced
by one that funds pensions in advance. It suffices to say that our program could
be easily adapted to accommodate advanced funding. This change would impose
some hardship on the transition generation, who would have to fund their par-
ents' retirement and their own. But reforming the existing Social Security system
would raise precisely the same issue.
35. We have been confining our discussion to the cash income necessary for a
dignified old age. The design of an appropriate health insurance package raises
empirical and normative questions beyond the scope of this book. The following
discussion assumes the continuation of current Medicare, without critical scrutiny
of this premise.
36. Although poverty rates among the elderly have fallen dramatically over the long
term, they remain significant. See Moon (1997), p. 69.
37. In 1995,1.446 million elderly people received ssi (described in n. 26, supra).
Thirty-eight percent of these also received Social Security, but in such small
amounts that they remained eligible for ssi. U.S. House of Representatives
(1998), pp. 264-265, table 3-1. The number of elderly ssi recipients has fallen
since 1974. Id.
 258 Notes to Pages 152-156

38. Our calculations assume the same retirement age as that currently required by
the Social Security program—age sixty-five, rising to age sixty-seven for those
born after 1959. Id., p. 17. For the calculations that support the $670 monthly
benefit, see the Appendix.
39. See Ruggles (1990) pp. 3-6, 33-62; see also Mayer and Jencks (1989).
40. Consider how a blue-collar worker might view the problem: on one hand, he will
sympathize with the plight of the next generation of low-skilled workers as they
face the uncertainties of old age; but on the other, a large stake may provide his
best chance to buy a decent house. At the other end of the economic spectrum,
the Wall Street lawyer might also lack clear priorities: on one hand, he may not
share others' anxieties about having a dignified retirement, but he may not place
such a compelling value on a high stake for young adults. There is, in short, no
particular reason to suppose that this new choice will divide Americans neatly
along class lines.
41. The Orshansky measure was never intended to support judgments about individ-
ual families' eligibility for assistance. See Orshansky (1988).
42. See, e.g., Edin and Lein (1997).

Chapter 9: Taxing Privilege

1. In 1960, workers and employers each paid 3 percent of the first $4,800 of wages;
in 1997, the tax rate was 7.65 percent on the first $65,400 of wages. U.S. House
of Representatives (1998), p. 59, table 1-35.
2. OMB (1997), pp. 29-30, table 2.2.
3. Only federal excise taxes are more regressive. See U.S. House of Representatives
(1993), pp. 1516-1518, table 26 (1994 estimates). Although payroll tax rates are
proportional, the tax burden is mildly progressive at the very lowest income levels
because of low rates of labor-force participation. If we treat the earned income
tax credit (EITC) as part of the payroll tax system, it would be even more progres-
sive at low income levels. But the EITC is not formally integrated into the payroll
tax and does not reduce payroll tax revenues. And the expanded EITC of the 1990s
has been promoted as serving so many functions—as an earnings subsidy, as a
child care subsidy, and so on—that its progressivity cannot be claimed solely for
the payroll tax.
As far as the top earners are concerned, the regressive character of the Social
Security payroll tax is indisputable. In 1994, 5.4 percent of workers had earnings
above the cap, and 13.9 percent of wages were above the cap. Social Security Ad-
ministration (1997), tables 4.B1,4.B4. In 1994, the tax cap was eliminated for the
Hospital Insurance (HI) portion of the payroll tax, which funds Medicare. I.R.C.
§§ 3101, 3111. While the distributional tables described above do not reflect that
change, the unlimited HI tax is only 2.9 percent of the total 15.3 percent com-
bined payroll tax.
4. Workers and their employers each pay the Social Security payroll tax of 7.65 per-
cent on wages up to $65,400, but wages above that amount are subject only to the
 Notes to Pages 156-159 259 I

HI tax of 1.45 percent. For an explanation of terms and the law, see the preced-
ing note.
5. See Pechman (1989), p. 181; JCT (1993), pp. 41-43.
6. On wages of $200,000, and counting both the worker s and the employer's share,
the total Social Security and Medicare (OASDHI) tax is $13,909.60, or 6.95 per-
cent. The Social Security (OASDI) portion of the tax is $8,109.60 (12.4 percent of
$65,400), and the HI tax is $5,800 (2.9 percent of $200,000).
7. If the couple earns $80,760, their income tax of $12,357 will just exceed their
payroll tax (OASDHI) of $12,356. This 1997 calculation includes the employers and
workers share of the payroll tax and assumes that neither the husband nor the
wife individually earns more than the Social Security wage base of $65,400. It as-
sumes that the couple takes the standard deduction of $10,600 and four personal
exemptions of $2,650, and it treats the earned income tax credit as a reduction in
the income tax, not in the payroll tax. At an income of $80,000, this couple is well
above the median family income of $38,782. U.S. Bureau of the Census (1997b),
p. 471, table 727. At current rates, even a one-earner couple would have to earn
more than $75,000 before their income tax exceeded their payroll tax.
8. See, e.g., Pechman (1989), p. 37 (the tax system—federal, state, and local—be-
came less progressive from 1966 to 1985 because of increasing reliance on the
payroll tax and decreasing reliance on corporate and property taxes).
9. See Chap. 2.
10. Our proposal is distantly related to the idea of "endowments taxation" in the eco-
nomics literature (see Mirrlees [1971], pp. 202-208), but it differs in two signifi-
cant respects. First, an endowments tax attempts to measure an individuals
market earnings capacity, without considering whether these capacities are based
on differences in genetics, parental or individual values, or social privilege. Our
proposal aims only at differences rooted in social privilege. Second, endowments
taxation focuses on the market value of an individual s earning power. We are in-
terested in the market advantages that privilege confecs but also, more broadly, in
its intangible social and psychological advantages.
11. To be sure, the value of childhood privilege does not disappear with the onset of
old age. But here the principle of intrapersonal trusteeship comes into play. (See
Chap. 8.) Assessing the privilege tax against the elderly could deprive some of
them of their minimum guaranteed pension—leaving them, once again, at the
mercy of their younger selves.
12. See the Appendix.
13. U.S. House of Representatives (1998), p. 24, table 1-15 (average earnings of
$25,724 multipled by 15.3 percent employer and employee OASDHI payroll tax
rate). Our calculation does not replace the FUTA tax that is used to fund unem-
ployment insurance. As Chap. 8 explains, the rationale for UI is different from
the rationale for citizens' pensions, and payroll taxation may be appropriate.
Because the distribution of earnings is unequal, the median taxpayer earns
less (and pays less tax) than the average. But any median based on actual earnings
would also be skewed downward because of the significant number of part-time
 260 Notes to Pages 159-161

workers: part of the goal of the privilege tax is to shift the base of taxation away
from work choices of this kind.
14. See Senesky (1998) (distributing privilege tax burdens by income and educational
achievement; showing that low-privilege-bracket taxpayers are concentrated in
low-income and low-educational-achievement groups and that the same holds
true for high-privilege taxpayers in high-income and high-achievement groups).
15. See, e.g., Mayer (1997), p. 42, table 3.1; Haveman and Wolfe (1994), pp. 106-107
(correlation between childhood poverty and lower educational achievement as
adults). For a careful review of a large number of studies, see Haveman and
Wolfe (1995). According to Mayers data, the high school dropout rate is 34.1 per-
cent for children from the poorest 20 percent of households but only 6.5 percent
for children from the richest 20 percent. The percentage of girls who become
teen mothers is 40 percent in the lowest childhood-income quintile but only 4.9
percent in the top quintile.
16. Jencks (1992), pp. 175-177 (in 1970-1982, the rate of high school dropout for
children of dropouts was 17.4 percent for whites and 18.9 percent for blacks,
while in contrast, the dropout rate among children whose parents attended col-
lege was 2.6 percent among whites and 6.3 percent among blacks; but over time,
family background has had a declining impact on black educational attainment);
Haveman and Wolfe (1994), pp. 246-251 (finding a strong and statistically signifi-
cant correlation between parental education and children's rates of high school
graduation, years of schooling, likelihood of a teen birth, and economic inactivity
in young adulthood).
17. Mayer (1997), p. 42, table 3.1.
18. We discuss the causation issue infra at p. 161. A variety of studies confirm that
parental income—or, in some cases, poverty—is correlated with impaired physi-
cal health and cognitive development during childhood and with lower economic
success in adulthood. See Brooks-Gunn, Duncan, and Maritato (1997), pp. 9-13;
Korenman and Miller (1997).
19. See Sturm and Guinier (1996), pp. 988-992.
20. See id. for a discussion of coaching and the effects of coaching on SAT scores.
21. Id., p. 990 ( graduate admissions policies that discount grades from community
colleges and state schools); U.S. Department of Education (1990), pp. 44-^5 (en-
rollment patterns by income and parental education).
22. See pp. 1-2.
23. For studies of occupational mobility, see McMurrer, Condon, and Sawhill (1997),
pp. 9-19; Hout (1988), pp. 1381-1389; Biblarz, Bengtson, and Bucur (1996),
pp. 197-198. These studies find that, although circulation mobility (the lack of
correlation between family background and sons' occupational status) increased
from the mid-1960s to the mid-1980s, circulation mobility is greatest for college
graduates and decreases at lower educational levels. This trend in circulation mo-
bility has not been sufficiently well explained for us to know whether non-college
graduates are benefiting or whether the trend will continue in the future. Hout s
analysis suggests that a significant part of the positive trend may be attributable to
 Notes to Pages 161-165 261

the rising percentage of college graduates in the population, but data from the
1960s and 1970s raise the possibility that circulation mobility may be increasing
due to other unspecified factors as well. Hout (1988), pp. 1384-1386. Others hy-
pothesize that factors like increasing rates of family disruption may have helped
weaken the link between class origins and eventual success. Biblarz, Bengtson,
and Bucur (1996), p. 197.
Studies of intergenerational income mobility find that there is a significant
correlation between fathers' and sons' earnings. See, e.g., McMurrer, Condon,
and Sawhill (1997), pp. 19-21; Solon (1992). For one study of intergenerational
wealth mobility, see Menchik (1979), p. 360 (finding significant wealth immobil-
ity but noting, once again, that imputing causation is difficult because children
may inherit earnings capacity as well as material wealth).
24. McMurrer, Condon, and Sawhill (1997), p. 20.
25. Mayer (1997), p. 42, table 3.1; see also Chap. 6, n. 13. See also Haveman and
Wolfe (1995), pp. 1855-1856 (evidence on the correlation between parental in-
come and children's labor-market outcomes).
26. See Duncan and Brooks-Gunn (1997), pp. 601-605; Mayer (1997), pp. 55-78,
143. Others dispute these revisionist claims. See Brooks-Gunn and Duncan
(1997); see also Corcoran and Adams (1997), p. 17.
27. See McMurrer and Sawhill (1998), pp. 75-76.
28. In The Bell Curve, Herrnstein and Murray (1994) attribute poverty to low inher-
ited intelligence. But, as many critics have pointed out, this thesis is based on bi-
ased data and unscientific methods. See, e.g., Gould (1994). While few would
deny that inherited intelligence plays some role in economic outcomes, Herrn-
stein and Murray's argument contains at least three glaring errors. First, they use
a single measure of general intelligence, ignoring a significant academic contro-
versy over the nature and measurement of intelligence. Gardner (1994). Second,
they treat intelligence as strongly the product of heredity, underestimating the
contribution of environment and overlooking a substantial body of contrary evi-
dence. See Kaus (1995); Sowell (1995). Finally, they argue that intelligence is a
major predictor of economic success, without examining carefully the causal role
of social and economic background and public policies. See Fischer et al. (1996),
pp. 70-93.
29. See supra, n. 5 (on the incidence of the "employers" share of the tax). For con-
cern about increasing payroll taxes in the context of Social Security reform, see
Sass and Triest (1997), pp. 38-39; for an argument that repealing the payroll tax
would spur economic growth, see Drayton (1997).
30. Recent empirical evidence suggests that the net disincentive effect may not be
large. See Chap. 7.
31. To be sure, strict neutrality must sometimes give way to higher purposes. Our
wealth tax, for example, tolerates nonneutralities between spenders and savers as
a means to a fairer distribution of initial opportunity for all. But—without relying
on a misleading insurance analogy—no one has yet made a convincing case for
the fairness of a regressive wage tax.
 262 Notes to Pages 165-168

32. See infra, p. 167.

33. Consider, for example, how parents of a five-year-old might assess the dollars and
cents of the problem. On one hand, if they seek to maintain their high salaries,
their child will be pushed into the high-privilege tax bracket, obliging him to pay
seventeen hundred dollars more a year throughout his lifetime. Assume, more-
over, that our hypothetical parents are perfectly altruistic and treat this cost as if
they themselves were paying it. Even then, the total cost of the extra privilege tax
is only about thirty-seven thousand dollars once the stream of payments is dis-
counted to present value. But to escape the tax, they will have to sacrifice lots of
immediate income for seven or more years to keep the family out of the top privi-
lege bracket while the child is growing up. These parents will most likely decide
that these cuts in family income won't be in the child's overall self-interest, espe-
cially since the privilege-tax laws might change radically over the child's long life-
time, making the sacrifice utterly pointless.
The system should also be designed to make it hard for parents to predict the
precise dollar cutoff points for privilege tax brackets, making their tax-gaming
possibilities especially risky. If they fail to cut back their income enough, they
may still fall within the top bracket, despite their efforts to save their children
from the extra tax bite.
34. See supra, pp. 160-161.
35. See Haveman and Wolfe (1994), pp. 76-79, 251.
36. In 1994,107 million federal income tax returns were filed. See Keenan and Curry
(1995), p. 21, table 1. Of these, 44 million were joint returns, which represent
two adults, for a total of 151 million individuals. Although some portion of total
returns are filed on behalf of minor children, the number cannot be determined
from the available data.
37. Parents with very high incomes lose the value of the personal exemption. See
LR.C. § 151(d)(3). It might be wise to revisit this policy, for the opportunity for a
full, current deduction might discourage evasion of the privilege tax; enforcing
the privilege tax may also require other measures, already begun under current
law, to encourage early matching of parents and children by taxpayer identifica-
tion number. See, e.g., LR.C. § 32(c).
38. We used data from the Panel Study of Income Dynamics to derive this result. See
Senesky(1998).
39. See id.
40. Welfare records are kept by states and sometimes by localities; their degree of
computerization and compatibility varies. One bright spot is that a large number
of low-income workers (18 million in 1996) file income-tax returns to claim the
earned income tax credit. See U.S. House of Representatives (1998), p. 871.
41. See supra, p. 167.
42. A tiebreaker of some kind would be needed for the very rare child who spends
nine or more years in the high-income group and seven or more in the low-
income group. Not a single child fell into this category in a study based on a large,
representative sample. See Senesky (1998), p. 6.
 Notes to Pages 169-170 263

43. The following list (derived from U.S. Bureau of the Census [1997b], p. 471, table
728) shows median family income by age in 1995.
Fifteen to twenty-four: $18,756
Twenty-five to thirty-four: $36,020
Thirty-five to forty-four: $46,527
Forty-five to fifty-four: $55,029
Fifty-five to sixty-four: $45,265
Over sixty-five: $28,301
44. One approach would be to include no adjustments at all for family size, on the
ground that parental income serves as a proxy for benefits that children receive
(including social status and economic security) that are largely independent of
family size. We have chosen this approach in simulating the privilege tax. See
Senesky (1998). But it would also be plausible to incoiporate some modest ad-
justment for family size, as very large differences in family size could well affect a
family's class status and economic security. Senesky (1998) provides data using
such an adjustment patterned after the official poverty measure. An extreme
form of adjustment (for example, dividing total income by number of family
members, ignoring economies of scale) would be inappropriate. For a general
discussion of the issues involved in constructing equivalence scales, see Ruggles
(1990), pp. 63-88.
Another classic question: should families with a stay-at-home parent—usually
the mother—be deemed to have extra "imputed income" from her valuable, but
usually untaxed, services? See generally Chirelstein (1997), pp. 22-25. For one
proposal, see Staudt (1996). For our part, we doubt that the extra precision is
worth the effort.
45. Under one approach, the child would be credited with the income of the custo-
dial household (custodial parent plus stepparent, if there is one) plus child
support received from the noncustodial parent. This approach could be under-
inclusive, as it ignores time spent in the noncustodial parents home. A second al-
ternative takes this point into account by treating the child as if he or she were
living in a household with the average income of the custodial and noncustodial
parents. But this approach is likely to be dramatically overinclusive, because the
noncustodial parent may not in fact be sharing resources with the child. In 1991,
for example, 25 percent of noncustodial parents ignored their child support oblig-
ations entirely, and nearly 50 percent paid less than the full amount due. See U.S.
Bureau of the Census (1997b), p. 389, table 609. All in all, we favor the first ap-
proach, particularly if "child support" is construed broadly to include cash "gifts"
used to pay for school tuition, expensive travel, and so on.
46. Some of these items (e.g., deferred compensation) are now reported by employ-
ers though not taxed. I.R.C. $ 6051.
47. The unpaid tax would be forgiven once the conditions of the escape hatch were
satisfied. In the interim, we would be inclined to allow the tax authorities to pur-
sue the usual remedies for collecting unpaid taxes—putting liens on assets, and so
on. An alternative rule would allow the unpaid tax to accrue, with interest, for
I 264 Notes to Pages 170-177

some period. This would give people some time either to get back on their feet or
to drop down a bracket, but at the cost of creating an accruing debt that might
unduly discourage them from going back to work.
48. Some students will have trouble paying their privilege tax during their school
years. Although the life-cycle adjustment described above would minimize the
problem, we might also permit elective deferral—with interest accruing at a mar-
ket rate—for students.
49. The Supreme Court has ruled that couples residing in community-property states
must report half of their joint income on each individual return. In contrast,
couples who live in common-law states must report each individual s separate in-
come on his or her return. Poe v. Seaborn, 282 U.S. 101 (1930); Gann (1980),
pp. 62-65. The solution suggested in the text would override Poe (for purposes of
the escape hatch) and treat all married couples, regardless of their state of resi-
dence, as if they each earned half the joint income.
50. Even if a wealth tax were not enacted, we might require reporting of municipal-
bond interest, which is already used for purposes of some tax rules. See, e.g., $$
32(i), 86(b)(2) (including tax-exempt interest in income for purposes of determin-
ing EITC eligibility and the taxable portion of Social Security benefits).
51. In 1996, the poverty line for an individual without children was $7,995; 175 per-
cent of that amount is $13,991. U.S. Bureau of the Census (1997a), p. 1. In 1991,
a 1.75 threshold would have encompassed families in the first and second income
deciles (mean income of 0.47 and 1.14 of the poverty line, respectively) and part
of the third (mean income of 1.72). Danziger and Gottschalk (1995), p. 53, table
3.3. This is a single-year snapshot; a multiyear threshold would include fewer
people. As Chap. 8 explains, the official poverty thresholds are deeply flawed, but
they are our best measures at present.
52. A related objection asserts that the privilege tax interferes with the liberty of priv-
ileged children to pursue low-paying careers. But this gets the point precisely
backward: the obligation to contribute to society in accordance with privilege is
prior to one s liberty to choose careers.
53. The low-bracket privilege tax of $360 equals a 15.3 percent payroll tax on just
$2,353 of salary; anyone in the low-privilege bracket who earns more than that
will pay less than he or she would today.
54. Mashaw and Marmor (1996).
55. Our discussion assumes the current practice of requiring each generation to pay
for the retirement of its successor. The first stakeholders continue to pay payroll
taxes to support their parents' Social Security benefits; the second generation of
stakeholders will pay privilege taxes to fund their predecessors' citizens' pensions;
and so on. Depending on the actuarial tables, the transition may bite a bit harder
on the second generation of stakeholders, who will continue to labor under a
gradually diminishing payroll tax and a gradually increasing privilege tax after re-
tirement. But if this imbalance proves to be a political stumbling block, one alter-
native would be to shift some of the burden to the first generation of stakeholders
by introducing the privilege tax at an earlier point.
 Notes to Pages 181-198 265 I

Chapter 10: Ideals

1. Paine (1797), in Foner (1995), p. 410.
2. Id., p. 400. (We have eliminated the erratic italics and capitalizations of eighteenth-
century typography.)
3. Id., p. 410. As a token of his universalistic aspirations, Paine made the following
offer: "I have no property in France to become subject to the plan I propose.
What I have, which is not much, is in the United States of America. But I will pay
one hundred pounds sterling towards this fund in France, the instant it shall be
established, and I will pay the same sum in England, whenever a similar estab-
lishment shall take place in that country" (id.).
4. Id., p. 402.
5. For a useful survey of historical antecedents, see Van Parijs (1992).
6. 2 Farrand, The Records of the Federal Convention of 1787 203 (August 7,1787)
(1911).
7. Id., p. 204.
8. See Chap. 1 and Ackerman (1984).
9. Aristotle's Politics, edited by McKeon (1941); Harrington (1992). Martin Dia-
mond (1986) has written a particularly fine essay on the relationship between
property and virtue in American constitutionalism.
10. See, e.g., Glendon (1991). This tendency is by no means universal in communi-
tarian thought. For a notable exception, see Barber (1984).
11. In 1995, the median household headed by a thirty-five- to forty-five-year-old had
net wealth of $66,500. Wilhelm (1998), p. 15.
12. Parents from the upper middle classes might already be intending to spend
eighty thousand dollars of their own money on each child's higher education.
While these people might also pay hefty wealth taxes, the sting might be amelio-
rated by the consideration that stakeholding will allow them to reduce their own
expenditures on their college-age children.
13. See Walzer (1983); Radin (1996).
14. See, e.g., Rawls (1971), whose talent-pooling premises have been attacked by a
long line of critics, including Nozick (1974), Sandel (1982), and Kronman (1981).
Utilitarian theories of redistribution have proved even more vulnerable to criti-
cism. For the best critique of the ideal of self-ownership, see Cohen (1995).
15. See Ackerman (1980), chaps. 4-6.

Chapter 11: Alternatives

1. See Chaps. 2 and 3, pp. 38-39, 49-51.
2. See Graetz (1997), p. 48. As Graetz points out, the 1986 reforms were a political
compromise that fell well short of perfection, but they did accomplish some sig-
nificant changes. Id., pp. 130-139.
3. The Taxpayer Relief Act of 1997 included a cut in the capital gains tax, an in-
crease in the estate and gift tax unified credit, and new tax credits for education
 266 Notes to Pages 198-203

and children. See Chirelstein (1997) (Supplement). The top 1 percent of taxpay-
ers will gain about 32 percent of the tax cuts in the legislation. See CBPP (1997).
4. See JCT (1997), p. 205 (during a ten-year period, IRA expansion cost $20 billion,
and capital gains tax relief, including the homeowner provision, cost $21 billion).
5. There are no official, published estimates of the separate distributional effects of
these programs. But an analysis by the Center on Budget and Policy Priorities
suggests that the expanded IRAS provided benefits primarily to people well within
the top half of the income distribution. See Greenstein (1997).
6. See JCT (1997), p. 38 ($183 billion over five years).
7. See Lav (1997). The only serious redistributive initiative in recent years has been
the earned income tax credit. See Alstott (1995). We discuss it further at n. 46
infra.
8. For a thorough analysis of the cumulative impact of government policies and
business flight that lie at the source of present pathologies, see Wilson (1996).
9. The tax breaks include access to tax-exempt financing, a tax credit for firms that
hire zone residents, and quicker tax deductions for business investment. I.R.C.
§§ 1391-1397D.
10. Ladd (1994).
11. See Chirelstein (1997) (Supplement), pp. 19-26.
12. A parent with two children in college may be able to take a fifteen-hundred-
dollar credit for one child and a one-thousand-dollar credit for the other. Id.,
pp. 22-23.
13. See Chap. 3.
14. See I.R.C. § l(h) (maximum rate of 20 percent on long-term capital gains); § 2010
(raising to $1 million by 2006 the exemption level for the estate and gift tax).
15. See 42 U.S.C. § 601 et seq.
16. Blank (1997), pp. 80-81; Burtless (1997), p. 44.
17. Hershey and Pavetti (1997), pp. 78-81; Edin and Lein (1997), pp. 65-69.
18. Recent studies confirm that the economic recovery is largely responsible for the
drop in welfare caseloads. See CEA (1997); Ziliak et al. (1997).
19. See McMurrer and Sawhill (1998), pp. 85-89.
20. See Wilson (1996), pp. 25-50.
21. See Blank (1997); Handler and Hasenfeld (1997).
22. See the Appendix.
23. See Report of the 1994-1996 Advisory Council on Social Security (1996),
1:28-34.
24. Ball et al. (1996), pp. 69-72; Fierst (1996), p. 150.
25. See Chap. 8.
26. Kaus (1992).
27. In 1996, there were 1,471,700 active-duty military personnel. U.S. Bureau of the
Census (1997b), p. 363, table 564. Of these, 69,300 were recruits. In that year,
the military also employed 732,000 civilians and 1,464,000 reserve and National
Guard positions. Id., p. 355, table 548. Assuming (optimistically) that untrained
civilians could fill all the positions for recruits and replace 10 percent of the civil-
 Notes to Pages 203-211 267

ian workforce and the reserve and National Guard positions, that would create
288,900 jobs—enough to employ 8 percent of the 3,570,000 eighteen-year-olds in
1996. Compare Kaus (1992), p. 80 (estimating that, in 1995, the military could
employ 11 percent of Americas draft-age men).
28. Kaus (1992), p. 81.
29. Id., p. 83.
30. See Moynihan (1969).
31. Phelps(1997).
32. Id., pp. 145-146.
33. Compare Card and Krueger (1995) with Shaviro (1997), pp. 407, 414-419.
34. Phelps (1997), pp. 113-114.
35. Id., pp. 110,115-116.
36. U.S. Bureau of the Census (1997a), p. 1.
37. Phelps (1997), p. 116.
38. Id., pp. 16-26.
39. Id., pp. 134-143.
40. Id., p. 24 (in the late 1980s, the bottom 30 percent of male workers earned seven
dollars an hour or less).
41. For example, in Phelps s plan, the subsidy could be received only by full-time
workers. Phelps (1997), p. 108. He does not discuss the child care needs and
other difficulties that working mothers face.
42. Id., pp. 38-50.
43. Id., pp. 126-128.
44. In purely financial terms, Phelps s subsidy can be worth more than stakeholding
under certain stringent conditions. This is true if a worker qualifies for the maxi-
mum annual subsidy of six thousand dollars (three dollars an hour multiplied by
two thousand work hours), receives no raise during his or her entire working life,
and works full-time, year-round, from age eighteen until age sixty-five. At a 5 per-
cent (nominal) interest rate, an eighty-thousand-dollar stake could buy an annu-
ity, payable from ages twenty-one to sixty-five, of $4,314—less than the $6,000
per year for forty-seven years payable under Phelps s plan. But, of course, these
are special conditions indeed; the majority are likely to gain much more from
stakeholding.
45. Burkhauser, Couch, and Glenn (1995).
46. Like Phelps s more ambitious plan, the earned income tax credit (EITC) is not
properly viewed as an alternative to stakeholding, While the EITC has some com-
parative advantages over Phelps s plan as an incrementalist means of raising
wages at the bottom, stakeholding, as we have emphasized, has a different aim.
47. Phelps would finance the wage subsidy with an increase in the payroll tax. Phelps
. (1997), pp. 116-118.
48. See Van Parijs (1995).
49. See Van Parijs (1992), p. 3.
50. For the economists take on the basic income, see, e.g., Atkinson (1995a);
Bankman and Griffith (1987). For a philosopher's take, see Van Parijs (1995).
 268 Notes to Pages 211-219

51. See Van Parijs (1995); Offe (1997).

52. The distribution of net benefits would depend on the tax base and rate structure
used to finance the program.
53. Some economists will be tempted to say that the initiative "distorts" the money-
leisure tradeoff for those at the top who have to pay higher taxes to fund the pro-
gram. But no one has an unconditional right to her pretax income stream or to
her pretax labor-leisure tradeoff. In a liberal regime, everyone's legitimate claims
are limited by background conditions of justice—including the basic income and
the tax structure that finances it. Put another way, the obligation to contribute to
a just system for sharing resources trumps the "rights" of rich people to spend
"their" income.
54. To make our basic point, we have presented an extremely simple and stark ver-
sion of the discontinuous view of the self. Because serious philosophers of discon-
tinuity have more nuanced views, their assessment of the case for a basic income
would be more nuanced. This intersection has yet to be explored, and we leave
the task to others more persuaded of discontinuity's fundamental value. For pre-
sent purposes, it is enough to refer the reader to representative works from dif-
ferent traditions that have recently been tending toward discontinuity: see Butler
(1990); Lyotard (1984); Parfit (1984).
This is hardly the place to defend at length our own view of the self. For fur-
ther elaboration, see Ackerman (1997). For the historical and philosophical roots,
see Taylor (1989).
55. See Lehman (1997); Rich (1997); Stranahan (1997).
56. Unger (1996), pp. 14-15 ("social-endowment accounts"); Tobin (1968), pp. 92-93
(national youth endowment of five thousand dollars); Haveman (1988), pp. 168-
171; (a universal personal capital account for youth of twenty thousand dollars
each); Klein (1977) (universal personal capital accounts).
57. They may, however, be disadvantaged by the fact that colleges would be more
likely to raise tuition under the restricted plan, since stakeholders could not re-
spond by using their money on competitive activities. See Chap. 3.
58. See Chap. 4.

Appendix: Funding the Stakeholder Society

1. This number is based on Census Bureau data for the 1994 election. We esti-
mated the number of eighteen-year-old citizens in 1994 (and thus twenty-one-
year-old citizens in 1997) by subtracting the number of eighteen-year-olds who
reported that they were not citizens (245,000) from the total number of eighteen-
year-olds surveyed (3.437 million). This yields an estimate of 3.192 million. See
http://www.census.gov/population/socdemo/voting/work/tab01.txt. The true num-
ber of citizens is probably smaller, since the survey reports that a large number
of respondents did not answer or said "don't know." If these are all counted as
noncitizens, we get a lower-bound estimate of 2.884 million. The estimate of 3.1
million used in the text is thus a conservative figure close to the upper bound.
 Notes to Pages 219-220 269 I

2. See Chap. 3.
3. See Chap. 5. Thus every stakeholder notionally receives an account into which
the government makes four annual payments of twenty thousand dollars begin-
ning at age eighteen. If the stakeholder doesn't draw down the funds (because,
say, she has chosen not to go to college and therefore doesn't use the money for
tuition), the funds earn interest. But every stakeholder has a payback obligation
that begins at age eighteen (for the first payment of twenty thousand dollars), is
increased at nineteen (for the second payment), and so on.
4. To put the point another way, $82,435 is also the value, with accrued interest, of
what a twenty-one-year-old would have if he or she had deposited twenty thou-
sand dollars in a bank account each year beginning at age eighteen.
5. This is the proportion of twenty-five- to twenty-nine-year-olds in 1997 with four-
year college degrees. U.S. Department of Education (1997b), table 8 (27.1 per-
cent). This overstates the number of eighteen- to twenty-one-year-olds in college,
since some graduates start or finish school at earlier or later ages. See id,, table
176. But the estimate also understates the number of early stake claimants, since
it does not take into account the eighteen- to twenty-one-year-olds who will
withdraw funds in order to enroll in two-year colleges or vocational educational
programs.
6. Id., table 312.
7. Table 8 illustrates the calculations behind our estimate that the cost of stakehold-
ing in 1997 would have been $255 billion. Population numbers are taken from
U.S. Bureau of the Census (1997b), p. 16, table 16, with each age cohort in 1996

Table 8. Estimated Revenue Cost of Stakeholding for 1997

Number of Number of Number of Payment Total cost

Age residents citizens stake claimants per person ($,in
group (millions) (millions) (millions) ($) billions)

18 3.729 3.237 0.877 20,000 17.540

19 3.570 3.099 0.840 20,000 16.800
20 3.752 3.257 0.883 20,000 17.660
21 3.571 3.100 0.840 20,000 16.800
(college) (college)
2.260 21,225 47.969
(noncollege) (noncollege)
22 3.545 3.077 2.243 21,225 47.608
23 3.369 2.925 2.132 21,225 45.252
24 3.403 2.954 2.153 21,225 45.697
Total n/a n/a 12.229 n/a 255.348
I 270 Notes to Pages 220-223

treated as one year older in 1997. Numbers of citizens are estimated by applying
to each age cohort the population ratio derived from the data in n. 1 supra. In
1997, there were 3.1 million citizens and 3.571 million residents, for a ratio of
86.81 percent. (Because the citizenship data are based on voting in 1994, we can-
not directly measure the citizenship ratio for groups younger than twenty-one in
1997.)
8. For this group of stakeholders, a fund of $320 billion represents eighty thousand
dollars per person. But once again, the real costs will be a bit more because of the
interest paid to non-college-bound stakeholders, with the precise cost depending
on the proportion of college-bound and non-college-bound stakeholders.
9. The current baby boomlet raises the question of how to adjust the size of the
stake so that blips in demographics do not dramatically increase the cost burden
or reduce the size of the stake. This is actuarially possible and probably desirable.
Like the Social Security trust funds, the stakeholding fund could periodically ac-
cumulate surpluses or deficits according to projected taxes and benefits.
10. OMB (1997), p. 20, table 1.1.
11. See Chap. 3, nn. 10-12 (1990-1991 and 1998 data).
12. In 1994, state and local property taxes raised $197 billion. Statistical Abstract
(1997), p. 304, table 484. The extent to which a federal wealth tax would reduce
property-tax revenues is unknowable and would depend on taxpayers' behavioral
adjustments as well as political dynamics.
13. See Chap. 7, pp. 119-120.
14. Wilhelm (1998), p. 18.
15. The SCF, a survey of U.S. households, contains detailed information about finan-
cial and nonfinancial wealth. The SCF sample is nationally representative but also
oversamples high-income households, permitting an accurate analysis of the top 5
and 1 percent. Wilhelm (1998), p. 2.
16. An additional wrinkle is that non-college-bound stakeholders will receive interest
on their stakes and will ultimately collect four payments of $21,225, or $84,900
(see Chap. 3). The wealth-tax exemption could be raised to eighty-five thousand
dollars with only a trivial revenue loss. See Wilhelm (1998), p. 20 (total revenue
of $372.4 billion).
17. In another conservative move, we subtract all debt from net assets, even though
some of it may finance consumer durables that are not in the SCF wealth base. Id.,
p. 5.
18. See Chap. 6, p. 106.
19. Wilhelm (1998), pp. 6-9. Because this amount includes future payouts (discounted
at 2 percent and deflated at 3 percent per year), it is greater than the "cash sur-
render value," or the amount of cash into which the pension could be converted
immediately. But the wealth tax is not restricted to liquid assets, and so we re-
jected the cash-surrender approach.
20. See Chap. 6, n. 26.
21. See Chap. 6, p. 105.
22. See Wilhelm (1998), p. 10.
 Notes to Pages 223-226 271

23. Data are taken from http://www.dowjones.com/, the website for Dow Jones and
Company.
24. From 1989 to 1995, the percentage of families owning stock (either directly, or
indirectly through a pension plan or mutual fund) grew from 31.7 percent to 41.1
percent. But even so, in 1995, 83.9 percent of families earning $100,000 or more
owned stock (either directly, or indirectly through a pension plan), whereas only
47.7 percent of families in the $24,000-$49,000 range held stock. And the me-
dian value of the high-income group s stock holdings was $90,800, compared to
only $8,000 for the middle-income group. Kennickell, Starr-McCluer, and Sun-
den (1997), pp. 11-12,
25. See Chap. 6, pp. 108-109.
26. Board of Governors of the Federal Reserve System (1998), p. 69, table L.107.
27. In other words, $1.719 trillion (foreigners' U.S. corporate equities and foreign di-
rect investment) divided by $4.654 trillion (total foreign assets) yields .3694, or
about 37 percent of total foreign assets. Multiplying that ratio by the total liabili-
ties of $2.267 billion yields deductible debt of $837 billion.
28. I.R.C. §§ 871, 881.
29. See Chap. 6, n. 43.
30. This calculation may also understate foreigners' U.S. wealth, because the Flow of
Funds table appears to omit investments in U.S. real estate that are not part of
foreign direct investment. See Board of Governors of the Federal Reserve Sys-
tem (1998), p. 69, table L107.
31. Internal Revenue Service (1997), p. 136, table 1. The calculation omits net in-
come from estates and trusts, because there is no breakdown by income type.
The calculations treat income from partnerships and S corporations as earnings
rather than capital income, although there is no clear way of separating them in
this context.
32. In 1994, the average tax rate for all taxpayers was 14.3 percent. Cruciano (1997),
pp. 7—8, figure A. But because owners of capital income tend to be somewhat
richer than average, we have chosen 20-25 percent as an approximate effective
rate.
33. See Chap. 5, n. 18.
34. See Chap. 5, pp. 89-93.
35. Eller (1996-1997), p. 42, table Id (69,772).
36. In estimating what this group would have paid back into the stakeholding fund,
we have ignored the possibility of charitable gifts, debts exceeding $300,000
(the amount necessary to leave an estate of $600,000 or more with less than the
$250,000 payback plus the $50,000 exemption), and deductible bequests to sur-
viving spouses. See Chap 5, pp. 89-93. On actual estate tax revenue in 1995, see
Eller (1996-1997), p. 46, table Id.
37. U.S. Bureau of the Census (1997b) (1.926 million deaths in 1995).
38. One might begin with the much more detailed SCF wealth data and then simu-
late annual death rates, but we have not done so. Compare Poterba (1997a),
pp. 14-19.
 272 Notes to Pages 226-228

39. Ten percent of 1995 deaths would be 192,600 people; if each owed (and paid)
$250,000, the total would be $48.15 billion.
40. Poterba(1997a),p.25.
41. See Chap. 9, p. 176.
42. The retirement age will be sixty-seven for people born after 1959. U.S. House of
Representatives (1998), p. 16. Those born in 1960 will be sixty-seven in 2027.
43. In calculating the total retirement and survivors' benefits paid in 1996, we have
omitted the benefits paid to early retirees. For the average monthly benefit, see
Social Security Administration (1997), table 5.A16 (31,667,000 recipients, ages
sixty-five or older, in all categories, received an average benefit of $717.67
monthly, or $8,612 per year). The total expenditure is the number of beneficiaries
multiplied by the average annual benefit, or $272.717 billion.
44. U.S. Bureau of the Census (1997b), p. 16, table 16 (33.861 million). This is the
number of U.S. residents, not the number of U.S. citizens, because citizens' pen-
sions (despite their name) would be payable to all permanent residents. See
Chap. 8, pp. 149-150.
45. $272.717 billion divided by 33.861 million is $8,054.01.
46. See OMB (1997), p. 252, table 13.1.
47. Report of the 1994-1996 Advisory Council on Social Security (1996), 1:11.
48. In 1996, OASI payroll taxes raised $311.869 billion, while benefits cost $299.985
billion. OMB (1997), p. 252, table 13.1. The ratio is $311.869 divided by $299.985,
or 1.0396.
49. Multiplying the 1996 cost of citizens' pensions by the ratio of 1996 benefits to
taxes implicitly includes a proportionate share of administrative costs and other
trust-fund expenses, as well as the excess amounts left to accumulate in the trust
fund.
50. U.S. Bureau of the Census (1997b), p. 16, table 16 (151.481 million).
51. Though arbitrary, the assumption of proportional default seems pretty reason-
able. While taxpayers in the low-privilege bracket may be least able to pay, they
also owe the least. High-bracket taxpayers and mid-bracket taxpayers may have,
on average, greater ability to pay, but their tax liability is significantly greater.
52. If % is the highest privilege tax, we have assumed that the low-privilege group
pays 0.1* and that the middle group pays yx - (.lx + x + y) 13, or y = .5494*.
53. The total revenue is ($3,800 x 27.267 million = $103.615 billion) + ($2,090 x
81.8 million = $170.962 billion) + ($380 x 27.267 million = $10.362 billion) =
$284.939 billion.
54. Report of the 1994-1996 Advisory Council on Social Security (1996), 1:11. While
these calculations assume that the OASDI system has been placed on an actuarially
sound foundation, they do not address the predictable fiscal gap in Medicare or
how it should be filled.
55. For the taxable payroll in 1996, see U.S. House of Representatives (1996), p. 68.
To estimate the additional revenue, we multiplied the 1996 taxable payroll ($3.05
trillion) by 2.17 percent (the percentage-point increase in the payroll tax) for a
total of $66.185 billion.
 Notes to Pages 228-229 273 I

56. In December 1996, total (annualized) OASDI outlays for all beneficiaries were
$340.632 billion (40.631 million beneficiaries x [$698.63 x 12) annualized aver-
age benefit). Social Security Administration (1997), table 5.A16. Of that amount,
80.06 percent, or $272.717 billion (see supra, n. 43), was paid to recipients age
sixty-five or older.
57. More precisely: 80.06 percent of $66.2 billion is $53 billion. Added to the current
tax cost of $283.517 billion (see supra, nn. 48-49), the total is $336.517 billion.
58. The total revenue is ($4,500 x 27.267 million = $122.702 billion) + ($2,475 x
81.8 million = $202.455 billion) + ($450 x 27.267 million = $12.270 billion) =
$337.427 billion. We have rounded numbers for ease of presentation in the text.
59. In 1996, OASDHI payroll tax revenues were $472.489 billion. OMB (1997), pp. 252-
253, table 13.1. (OASI taxes of $311.869 billion plus DI taxes of $55.623 billion
plus HI taxes of $104.997 billion.) $472.489 billion current revenues - $283.517
billion replaced by the privilege tax = $188.972 billion.
60. As in the preceding note, in 1996, OASDHI payroll tax revenues were $472.489 bil-
lion. As described in n. 55, the total payroll-tax increase needed to put the Social
Security system on an actuarially sound footing is $66.185 billion, for a total of
$538.674 billion. The privilege tax would replace $336.517 billion, leaving
$202.184 billion.
61. See supra, n. 59.
62. The total revenue is: ($6,300 x 27.267 million = $171.782 billion) + ($3,465 x
81.8 million = $283.437 billion) + ($630 x 27.267 million = $17.178 billion) =
$472.397 billion.
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 Index

Adults, young, 234n35; alienation of, Social Security, 201-202; tax reform,
35-36, 234n39; college-bound high 198-199; wage subsidies for low-skilled
school graduates, 51-55, 237n9; college workers, 204-210, 267n44, 267n46,
debts of, 35; false promise of maturity of, 267n47; welfare reform, 200-201,
35, 58; myopia among, 134-136; non- 266nl8
college-bound high school graduates, Aristotle, 185
56-57, 58-59, 66-72; responsible deci- Articles of Confederation, 122
sion-making by, 7, 37-41, 235n47; waiver
of stakes by, 78, 82. See also Stakeholders Basic income, 210-216, 267n50,
Affirmative action, 62 268nn52-54
African Americans: impact of stakeholding Bentham, Jeremy, 80
on,60-62 Bequests, 36, 81-84, 89-93,121, 235n42
Age requirements for stakeholding, 52, Birthrate: stakeholdings impact on, 59-60,
56-57 239n34
Alaska Permanent Fund, 13, 232nl5 Brown v. Board of Education, 2, 28, 30
Aliens, resident: as eligible for citizens'
pension plans, 149-150; as ineligible for Charities, 90-92,183
stakeholding, 46; liability for the wealth Chauvinism, 194-195
tax, 108-109 Child care: stakeholdings impact on, 26,
Alternatives to stakeholding, 198; basic in- 59-60, 61
come, 210-216, 267n50, 268nn52~54; Childhood privilege: effects of, 160-161,
education subsidies, 199-200, 266nl2; 260nl5, 260nl6, 260nl8, 260n21,
national service, 202-204; privatizing 260n23; tax based on, 158, 259nll

289
 290 Index

Children: early childhood initiatives for, misuse of stakes objection, 40; Social
28-29, 31, 233n20, 233n21; hope of eco- Security's discrimination by, 146-148,
nomic improvement over parents, 1, 256nn23-25
231nl; impact of parents' wealth on, Clinton, Bill, 142,198,199
23-24, 25, 27,33,160-161; motivating Colleges: community colleges, 56, 68, 70,
power of stakeholding on, 30, 72-74; 73, 238n25; debts incurred in, 35; eco-
poverty rate for, 26, 232n3; safety nets nomic success of graduates, 29, 234n28;
for, 131-132 effect of stakes on tuition, 53, 58,
Citizenship: classical republican view of, 239n29; financing of with stakes, 45,
185; economic citizenship, 3, 8,16, 33, 51-55, 237n9, 237nl2; interim scholar-
186,188; and eligibility for stakeholding, ship programs for, 55; low-income
46-49, 236n2, 236n4; as formal exercise, students in, 52-53, 238nl5, 238nl6,
6; founding fathers' idea of, 181-185; 239n31; matriculation rates, 51; price
private property linked with, 11-12; priv- competition among, 53-55, 58, 238n21;
ileges and immunities of, 111, 252n68, state and federal support for, 52, 54-55
252n69; renewed sense of from stake- Communitarianism, 43-44,186, 265nlO
holding, 186, 197; sense of common en- Community colleges, 56, 68, 70, 73, 238n25
terprise in, 5-6; social insurance linked Congress: citizens' pension rate debates in,
to, 130; worker citizenship model of, 151-154; oversight of stakeholding fund
15-16 by, 111-112
Citizens' pensions, 16, 130-131, 254n5; Constitution of the United States: Four-
aliens' eligibility for, 149-150; benefit teenth Amendment to, 11, 47, 111,
levels, 130-131,150-154, 226-229, 252n68, 252n69; and the residency re-
254n5; dignified old age as benchmark quirement, 49, 236n5; and stakeholding,
for payments, 130,141-142,143, 121-124, 254n22; Thirteenth Amend-
150-154,155, 202, 257n35, 258rc40; ment, 87; and wealth taxation, 121-124
economic impact of, 149; employment Consumption taxes, 88,113, 243nl5,
status as distinct from, 130-131, 155; as 246n23
equitable to all classes, 147; liberal case Continental Congress, 122
for, 140-142; means testing rejected for, Cooperation in the economy, 14, 32
138; pay-as-you-go program for, 144, Cost of stakeholding, 28, 77, 219-221
176-177, 257n34; privilege tax as rev- Creditors' claims to stakes, 57, 238n28
enue source for, 157-160,163, 226-229, Criminals: loss of stakeholding rights by,
259nl3; and a renewed sense of citizen- 49-51
ship, 143; retirement age for, 256n22, Culture wars, 43
258n38; revenue cost, 226-229; Social Czech Republic: voucher privatization in,
Security compared to, 142-150,152- 12-13, 232nl4
153; Social Security's temporary coexis-
tence with, 176; and the Supplemental Debts incurred by underage stakeholders,
Security Income program, 256n26, 57, 238n28
257n37 Decision-making, responsibility in, 7,
Civilian corps, 203-204 37-41, 196, 235n47
Class: conflict, 30,173-174; and education Declaration of Independence, 44, 62, 76,
policy, 30; influence of, 160-161; in the 82,86
 Index 291

Disparities: in income, 1-2, 6-7, 231n2, the new liberalism, 22; for non-college-
231n4, 231n5; in wealth, 95-96,117, bound high school graduates, 56-57,
245wn7-10, 252n6 58-59; and taxing wealth, 97-100. See
also Unequal opportunity
Early childhood initiatives, 28-29, 31, Estate taxes, 89-93, 243nl8, 244nl9,
233n20, 233n21 244n23, 245n24, 245n26
Economic citizenship, 3, 8, 33,186,188; Europe: wealth taxes in, 101-102,106,119,
and the citizens pension, 16; transition 243nl7, 246n22, 248n44, 249n56,
from worker citizenship to, 16 251n63
Economic effects, 59,114-121; of citizens'
pensions, 149; entrepreneurial effect, Family businesses, decline of, 36
118; on foreign investors, 120, 253nl9; Federalism, 28-29
income effect, 118-119, 253nlO; on the Financing stakeholding, 4,13-14, 78-79,
labor supply, 120, 253nl6, 253nl8; of 113,187, 221-226; economic growth ob-
proposed new taxes, 119-120, 253nl3; of jection to. See also Payback obligation;
stakeholding on growth, 114-119; of tax- Wealth tax
ation on savings, 120, 253nl5, 253nl8 Foreign investors, taxation of, 108-109,
Economy: globalization of, 7, 14,195, 216; 120,251n61, 253nl9
social cooperation in, 14,32 Fourteenth Amendment, 11, 47; privileges
Education: class anxiety in, 30; correlations and immunities clause, 111, 252n68,
of test scores and parental wealth, 27; 252n69
disparities in public education, 26-27, France, Anatole, 191
233nll, 233nl5; limits of early child- Freedom: and citizens' pensions, 133-136;
hood initiatives, 28-29, 31, 233n20, and privilege taxation, 157-158,
233n21; public spending on, 35, 234n36; 160-162,175-175; profiles in, 65-76;
requirements for stakeholding, 7-8,38, and stakeholding, 3-4, 8-10, 24-26,
45; subsidies for, 199-200, 238n21, 31-34
266nl2. See also Higher education Free enterprise: system of social coopera-
Elderly: obligations of, 98-100; rights to a tion in, 14, 32
citizen s pension, 129-131,133-142 Future citizens: dialogic accountability to,
Eligibility for stakes, 45; age requirements 114-116; society's obligations toward,
for, 52, 56-57; of birthright citizens, 79-84
46-49, 236n2; disqualifying effect of
criminal convictions, 49-51; education GI Bill of Rights, 6, 77,238n21, 242n2
requirements for, 7-8, 38, 45; of natural- Gifts: regulation of inter vivos gifts, 83-84.
ized citizens, 47-49, 236n4; residency re- See also Bequests
quirement for citizens, 48-49, 236n4, Gift taxes, 84, 89-93, 244nl9, 244n23,
236n5; resident aliens excluded from, 46 245n24, 245n26
Employment subsidies, 204-210 Gingrich, Newt, 198
Enterprise zones, 199 Globalizing economy, 7,14,195, 216
Entrepreneurial effect of stakeholding, 118 Great Britain: privatization of public hous-
Equality of opportunity, 1; conditions for, ing in, 12, 232nl3
24-25; in a global economy, 7,14; gov- Great Society, 11, 99,184
ernment s role in guaranteeing, 4; and Growth. See Economic effects
 292 Index

Harlan, John Marshall, 123 Inheritances, 36, 235n42. See also Be-
Harrington, James, 185 quests; Gifts
Head Start programs, 28, 31, 233n21, Insurance, private, 139
240nl3 Intelligence: and economic outcomes, 162,
Higher education: competition in resulting 261n28
from stakes, 53-55, 238n21; effect of Interest earned on stakes, 57, 68, 71, 73,
childhood privilege on, 160, 260n21; fi- 220, 238n26
nanced with stakes, 45, 51-55, 237nl2; Investment of stakes, 68, 71, 73, 240nl6,
subsidies for, 199-200, 266nl2. See also 241n25
Colleges
High school graduates: college-bound, Jefferson, Thomas, 44, 86,188-189
51-55, 237n9; non-college-bound,
56-57,58-59, 66-72 Kaus, Mickey, 202-204
High school graduation: national examina- Kemp, Jack, 199
tion for, 38; rate of, 40-41, 236rc50; as Klaus, Vaclav, 12-13, 232nl4
stakeholding requirement, 7-8,38, 45
Homestead Act, 11, 184 Labor supply, 120, 253nl6, 253nl8
Human capital accounts, 215, 268n56 Liberalism, 2-4, 21-26, 31, 36, 43-44,
81-86,96-101,114-116,133-142,
Identity, politics of, 2 150-154,157-158,162-164,191-194,
Immigrants: and stakeholding, 46-49, 204, 232nl
236n4. See also Aliens, resident Liberal trusteeship, 81-84, 96,114-116
Incentives. See Economic effects Libertarianism, 3-4,21; anticontextualism
Income: basic income rights initiative, in, 23-24; ideal of equal freedom in, 32;
210-216, 267n50, 268nn52-54; dispari- on obligations to the future, 79-80; and
ties increasing in, 1-2, 6-7, 231n2, social insurance, 132; and the trusteeship
231n4,231n5 tax, 85-86
Income effect, 118-119, 253nlO
Income tax, 98,155; constitutionality of, Madison, James, 184
122-123; loopholes in, 98, 246nl5; pay- Marxism, 183
roll taxes compared to, 156, 259n7; as McGovern, George, 210-211
possible form for trusteeship tax, 88,113; Meade, James, 25
wealth tax integrated into, 107-108, Means testing, 138-139,148
248n48, 248nn50-54, 248nn57-59 Medicare, 99,152-153,259n6
Individualism: anticontextualism in the lib- Military, 6, 203, 266n27
ertarian view of, 23-24; balanced with Minimum wage, 205
economic equality, 21-22, 232nl; and Minority groups: impact of stakeholding
social insurance, 133; stakeholding and, on, 60-62; poverty rate for, 241n26
191-194; and trusteeship, 81; and utili- Mortgage payments, 69, 241nl8
tarianism, 22-23
Individual Retirement Accounts, 198,266n5 National sales tax, 78-79, 88, 243nl5. See
Inequality. See Disparities; Unequal also Consumption taxes
opportunity National service programs, 202-204
 Index 293

Naturalized citizens: eligibility of for stake- Phelps, Edmund, 204-210, 267n44,

holding, 47-49, 236n4; scholarship pro- 267n46, 267n47
gram for, 55 Political case for stakeholding, 184-191
New Deal, 11,15, 99,129-130,140,142, Pollock v. Farmers' Loan and Trust Com-
145,153 pany, 122-123
Poverty, 2,161; children in, 26, 232n3;
Obligations to future generations, 79,94; minorities in, 241n26; Orshansky's mea-
liberal trusteeship view of, 81-84, 96, surement of, 152-153, 258n41; privi-
114-116; libertarian criticism of, 79-80; leged persons in, 171
utilitarian view of, 80-81 Prison population, 100
OECD (Organisation for Economic Coop- Privatization: of British public housing, 12,
eration and Development), 101,119, 232nl3; in the Czech Republic, 12-13,
247n38, 249n56 232nl4; of Social Security, 144,147-148,
Orshansky, Mollie, 152-153, 258n41 201-202,156n29
Privilege tax, 157-160, 226-229, 259nl3,
Paine, Thomas, 3,181-184, 265n3(l) 260nl4; calculating, 167-169, 262n37,
Parents: bequests from, 36, 235n42; impact 263n44, 263n45; case for, 162-166; class
of status on children, 23-24, 25, 27, 33, warfare as objection to, 173-174; design-
160-161; working mothers, 26, 232n6, ing, 166-169, 262n33; deterred public
232n7, 233n9 service as objection to, 174-175; endow-
Patriotism, 44,186-187 ments taxation compared to, 259^10; en-
Payback obligation, 14, 78, 204, 225-226; forcement of, 171-173; "escape hatches"
and charitable donations, 90-92; coun- from, 166,169-171, 263n47, 264n48; im-
tering avoidance of, 83, 121; in the cur- pact on women, 175; initial two-bracket
rent estate and gift tax framework, 90-93, system for, 167-168; as a neutral tax,
244nl9, 244n23, 245n24, 245n26; eco- 165; political case for, 187; privilege de-
nomic impact of, 114,120-121; shortfall fined in, 166-168; three-bracket system
scenario for, 84, 85, 91,104; stakehold- for, 168-169, 262n42; unequal opportu-
ers' failure to meet, 84, 87, 89; steady- nity ameliorated by, 158,161-162
state scenario for, 84; supplemented with Profiles of typical stakeholders, 65-66; "Bill
a trusteeship tax, 85-89,100-101, 113; and Brenda," 66-69, 239nl; "Judy and
surplus scenario for, 84-85; and surviving Debbie," 72-74, 242n33; "Mary Ann and
dependents, 92, 244n23, 245n24; trus- Mike," 69-72, 239nl
teeship model for, 82-84 Property, private, 3, 32; citizenship linked
Payroll tax, 16,131,155, 257n32, 258nl; as with, 11-12,184-185
"deadweight" loss on the economy, 164;
as regressive, 156, 258n3, 258n4, 259n7, Racism, 24-25; 30
259n8; replaced by a privilege tax, Reagan, Ronald, 198
158-166,176-177, 259nl3, 261n29, Real estate: wealth taxes on, 78,106
264n55; Social Security funding from, Redistribution, mistakes about, 182-184
142, 258n4, 259n6; unemployment insur- Rehnquist, William H., 124
ance funding from, 140 Residency requirement for stakeholding,
Pensions. See Citizens' pensions 48, 236n4; constitutionality of, 49, 236n5
 294 Index

Rogers t>. Bellei, 237n5 145-147,149, 254nl, 255nl6, 255n20,

Roosevelt, Franklin, 15,129-130 256n21
Rostenkowski, Dan, 198 Stakeholders: African American, 60-62;
age requirements for, 52, 56-57; aliens
Safety nets, 3,129,183; adverse selection excluded, 46; birthright citizens as,
problem of, 137,139-140, 255n9; liber- 46-49, 236n2; coercion of, 41-43; crimi-
tarian and utilitarian views of, 131-133; nals' ineligibility as, 49-51; debts in-
moral hazard problem of, 137—138; and curred by underage stakeholders, 57,
myopia among young adults, 134—136. 238n28; financial management responsi-
See also Citizens' pensions bility of, 7, 37-41, 235n47; high school
Savings: impact of taxes on, 120, 253nl5, graduation requirement for, 7-8, 38, 45;
253nl8; motivations for, 121 immaturity of, 37-39; irresponsible use
Schneider v. Rusk 236n5 of stakes by, 8-9, 39-41,194-196,197,
Sixteenth Amendment, 122-123 209; myopia of, 134-136; naturalized cit-
Social insurance systems, 6-7; adverse izens as, 47-49, 236n4; payback obliga-
selection problems of, 137,139-140, tions of at death, 14, 78, 82-85, 90-93;
255n9; case for mandatory programs of, profiles of typical stakeholders, 66-76;
133-140; as currently tied to the work- residency requirement for, 48-49,
place rather than to citizenship, 129- 236n4, 236n5; women stakeholders,
130; libertarian and utilitarian views of, 61-62, 207-208
131-133; means testing of, 138-139,148; Stakeholding: in Alaska, 13, 232nl5; alter-
moral hazard problem of, 137-138; and natives to, 197-216; as beneficial for all
myopia among young adults, 134-136; economic classes, 10-11, 30; and the
payroll taxes for, 156; present value birthrate, 59-60, 239n34; as a catalyst for
of, 254n6; privilege tax for, 157, 159, reform, 17, 30-31; and child care, 26,
259nl3. See also Citizens' pensions; 59-60; and childhood socialization, 29; as
Payroll tax; Social Security a citizenship program, 197; conditions
Social Security, 6,99-100,140; benchmarks for, 9-10, 82-84; constitutionality of,
used for, 152-153; citizens' pensions 121-124, 254n22; cost to taxpayers of,
compared to, 142-150,152-153; class 28, 77, 219-221, 269n7; as a crime deter-
discrimination in, 146-148, 256nn23-25; rent, 49-51; debate over, 124-125; eco-
dedicated tax revenues for, 110; employ- nomic impact of, 59,114-121; economic
ment as basis for coverage by, 15, 130, independence through, 25-26; economic
145-146, 255n20, 256n21; insurance inequalities ameliorated by, 29,117-118,
analogy for, 15-16,130,142-145,147, 234n30; education as alternative to,
150-151,156, 202; pay-as-you-go financ- 27-31; financing of, 4,13-14, 78-79,
ing of, 144; privatization proposals for, 88-89,101-109,113,187; GI Bill of
144, 147-148, 201-202,156n29; progres- Rights compared to, 6, 77, 242n2; higher
sive aspects of, 242n7; spousal benefits, education impact of, 51-55; as an ideal,
149, 256n27, 257n33; transition to 31-34; individualists case for, 191-194;
citizens' pensions from, 176; wage re- as liberation from government, 9; as mo-
placement proposal for, 148, 256n30, tivating power for children, 30; Paine s
257n31; and wealth distribution, 143- proposal for, 3,181-184, 265n3(l); patri-
144, 246^18, 255nll; and women, 130, otism in, 44,186-187; political case for,
 Index 295

184-191; responsible decision-making tures, 198-199, 265n3(2); trusteeship

engendered by, 7, 38-41,196, 235n47; tax, 85-89. See also Income tax; Payback
societal cooperation recognized in, obligation; Payroll tax; Privilege tax;
32; trusteeship tax to guarantee for Wealth tax
solvency of, 85-89,100-101. See also Thatcher, Margaret, 12, 232nl3
Wealth tax Thirteenth Amendment, 87
Stakeholding society: community in, 44; Tobin, James, 215
culture of stakeholding in, 75-76; econ- Transition to stakeholding, 45,62-64,
omy of, 114-121; institutional infrastruc- 176-177; decline of wealth taxes, 113;
ture in, 31; libertarian model for, 3-4; delayed phase-in, 62-63; fractional
safety nets in, 129; stakes as a matter of stakes for teens, 63; interim scholarship
right in, 9,143; transition to, 45, 62-64, programs, 55; transitional funds for
113,176-177 young adults who are too old for stakes,
Stakes: blowing of, 8-9, 39-41,194-196, 63-64, 239n41
197, 209; college financed with, 45, Treasury bonds, 38-39
51-55, 237nl2; creditors' claims to, 57, Trusteeship, 81-82,96,114-116; as frame-
238n28; early payments of for higher ed- work for payback obligation, 82-84; in-
ucation, 51-52, 220; of eighty thousand trapersonal, 134-137
dollars, 3, 4-5,45, 58-60; fractional Trusteeship tax, 85-89,100-101; alterna-
stakes for teens as a transitional device, tive forms for, 88, 113; economic impact
63; interest added for non-college-bound of, 114, 116, 119-120, 253nl3; wealth tax
adults, 57, 220, 238n26; investment as preferred form for, 88-89,100-101.
strategies for, 68,71-72, 240nl6, 241n25; See also Wealth tax
mortgage financing with, 69, 241nl8;
quarterly account statements for, 38-39, Unemployment: insurance, 29,139-140,
235n48; in a "rainy-day" fund, 29, 234n30; 234n31; stakes as cushion for, 68
setting the size of, 45, 58-60; special Unequal opportunity, 1-3; in child care
accounts for, 57, 238n27, 238n28; struc- arrangements, 26; and economic growth,
tured payments of, 8,38-39, 52, 57, 220; 117-118; in education, 26-27, 233nll,
from Treasury bonds, 38-39; waiver of, 233nl5; privilege tax as amelioration for,
78, 82 158, 161-162; surplus of, 97, 246nl3
Unger, Roberto, 215
Taxes, 3; capital gains tax cuts, 200, 266nl4; Utilitarianism, 21; and individualism,
constitutionality of, 122-123; consump- 22-23; obligations to the future in,
tion taxes, 88,113, 243nl5; earned 80-81; and social insurance, 132,141
income tax credit, 266n7, 267n46;
economic impact of tax burdens, 79, Virtue, politics of, 43-44
119-120, 253nl3; estate and gift taxes, Voucher privatization, 12-13, 232nl4
84, 85, 89-90, 243nl8, 244nl9, 244n23,
245n24> 245n26; dedicated vs. general Wage replacement, 148, 256n30, 257n31
funds from, 109-112; impact on savings, Wages: disparities in growth of, 1-2, 7,
120, 253nl5, 253nl8; reforms of 1986, 231n4; raising minimum wage criticized,
198, 265n2(2); symbolic meaning of tax 205
policies, 187; symbolic "reform" ges- Waiver of stakes, 78,82
 296 Index

Wealth: as correlated with age, 98-100; as 98-100; political case for, 187; revenue
dependent upon cooperation, 14, 32; dis- yield of, 221-225; setting the 2% rate,
parities in, 1-2, 6-7, 95-96,117, 231n2, 102-103; status of families under, 105,
231n4, 231n5, 245nn7-10, 252n6; distri- 247n37; as a trusteeship tax, 88-89,
bution of, 143-144, 246nl8, 255nll; for- 100-101; valuation methods for,
eign, 108; significance of inherited 105-107, 247n40, 248n43,248n46
wealth, 25, 27, 33,121, 254n21 Welfare reform, 8, 200-201, 266wl8
Wealth tax, 4,13-14, 78-79, 94-95, Welfare state, 8,129,183,209, 253nl2; in
101-109, 221-225, 242n4, 261n31;ad- Europe, 119. See also Social insurance
ministration of, 102,105-107, 248n48; systems
base of taxation for, 103-104,106, Women: citizens' pensions' impact on, 130,
246^26, 246n27, 246rc28; decline of, 113; 145,147,148; privilege tax's impact on,
dedicated funds for stakeholding from, 175; Social Security's impact on, 130,
110-112; distribution of burden of, 145-146, 254nl, 255nl6, 255n20,
224-225; economic impact of, 114,116, 256w21; stakeholding s impact on, 61-62,
119-120, 253nl3; and equality of oppor- 207-208; working mothers, 26, 232n6,
tunity, 97-100; European models of, 232n7
101-102,106,119, 246n22, 248n44, Work: citizenship and, 15-16; Social Secu-
249n56; evasion of, 105-106,109, rity linked to, 15,129-130,145-146,
247n39, 251n67; exemptions for, 103- 255n20, 256n21
104, 189, 246n26, 248n49; on foreign in- World War II, 5-6
vestors, 108-109,120, 251n61, 253«19;
integration with the income tax, 107- Young adults. See Adults, young
108, 248n48, 248nn50~54, 248nn57-59;
and the obligations of older Americans, Zobel v, Alaska, 237n5