Bernie Sanders delivered a decisive US Presidential race victory in the New Hampshire primary on a wave of people opting for real change. Surely the perfect time for us to help craft the change agenda with a free extract from Sixteen for ’16: A progressive agenda for a better America by Salvatore Babones. What if we started by increasing taxes on the rich Bernie……?
Back in the good old days, that is to say the mid-1990s, taxpayers with annual incomes over $500,000 paid federal income taxes at an average effective rate of 30.4%. For 2012, the latest year for which data are available, the equivalent figure was 22.0%.
The much-ballyhooed January 1, 2013 tax deal that made the Bush-era tax cuts permanent for all except the very well-off will do little to reverse this trend: The deal that passed Congress only restores pre-Bush rates on the last few dollars of earned income, not on the majority of earned income, on corporate dividends, or on most investment gains.
Someone has had a very big tax cut in recent years, and the chances are that someone is not you. In the 1990s taxes on high incomes were already low by historical standards. Today, they are even lower. The super-rich are able to lower their taxes even further through a multitude of tax minimization and tax avoidance strategies.
The very tax system itself has in many ways been structured to meet the needs of the super-rich, resulting in a wide variety of situations in which people can multiply their fortunes without actually having to pay tax. In general, it is also much easier to hide income when most of your income comes from investments than when your income is reported on regular W-2 statements from your employer direct to the IRS.
Whatever our tax statistics say about the tax rates of the super-rich, we can be sure they are lower in reality. At the same time that their tax rates are going down, the annual incomes of highly paid Americans are going through the roof.
In the 1990s the average income of the top 0.1% of American taxpayers was around $3.6 million. In 2012 it was nearly $6.4 million.6 And yes, these figures have been adjusted for inflation. Thanks to the careful database work of Capital in the Twenty-First Century author Thomas Piketty and his colleagues, it is now relatively easy to track and compare the incomes of the top 1%, 0.1%, and 0.01%. The historical comparisons don’t make for pretty reading.
Forget the merely well-off 1%. In the 21st century the top 0.1% of American households have consistently taken home more than 10% of all the income in the country, up from 3% in the 1970s.7 And these figures only include realized income: that is to say, income booked and reported to the tax authorities. If you own a company that doubles in value but you don’t sell any shares, you don’t have any income. Ditto land, buildings, airplanes, yachts, artwork, coins, stamps, etc.
High inequality plus low taxes equals fiscal crisis. The rich are taking more and more money out of the economy, but they are not returning it in the form of taxes. The result is that the US government no longer has the resources it needs to properly govern the country. The country needs universal preschool, universal healthcare, and a massive government-sponsored jobs program. The country needs a complete renewal of its crumbling human and physical infrastructure. The country needs funds for everything from the cleanup of atomic waste in Hanford, Washington to improvements at the National Zoo in Washington, D.C. And the country needs higher taxes on today’s higher incomes to pay for it all.
In 2010 the United States government collected a smaller proportion of the nation’s total national income in income taxes than at any time since 1950.8 That figure has since rebounded, but it is still well below the average from 1996-2001. Under current law the federal income tax take is projected to rise from the historic low of 6.1% in 2010 to 8.6% of national income in 2016. This is an improvement over recent years, but it is still far below the average of 9.5% for the years 1998-2001, the last time the federal government actually ran a budget surplus.
The top marginal tax rate on the highest incomes is now 39.6%, as it was in the 1990s. This is still a far cry from the 50% top tax bracket of the 1970s or the 70% top tax bracket of the 1960s, never mind the 91-92% top tax brackets of the 1950s.10 The return to 1990s levels is a good start, but the next President should push to go much farther back because the tax system has been moving in the wrong direction for a very long time. High incomes are much higher than they ever were and people with high incomes pay much less tax than at almost any time in our modern history. The result, unsurprisingly, has been the enormous concentration of income among a small, powerful elite documented by Piketty in Capital in the Twenty-First Century but no less obvious for all to see.
The concentration of income among a powerful elite may be very good for members of that elite, but it is bad for our society, bad for our democracy, and even bad for our economy. Socially, highly concentrated incomes undermine our national institutions and warp our way of life. For example, people who can afford to send their children to exclusive private schools cease to care for the health of public education, or they erect barriers to separate “their” public schools from everyone else’s public schools. Similarly, people who can afford the very best private healthcare care little about ensuring high-quality public healthcare. People who fly private jets care little about congestion at public airports. People who drink imported bottled water care little about the poisoning of rivers and underground aquifers. Enormous differences in income inevitably create enormous distances between people. The United States is starting to resemble the fractured societies of Africa and Latin America, where the rich live in ated “communities” with armed guards who enforce the exclusion of the lower classes—except to allow them entry as maids and gardeners.
These nefarious effects of inequality can already be seen in America’s sunbelt cities, where there are fine gradations of gated communities: armed guards for the super-rich, unarmed guards for the merely well- off, keypad security for the middle class, and on down the line to the unprotected poor. We should be ashamed, one and all.
Politically, highly concentrated incomes threaten the integrity of American democracy by fostering corruption of all kinds. When the income differences between regulators and the industries they regulate are small, we can count on regulators to look after our interests.
But when industry executives make two or three (or ten) times as much as regulators, it is almost impossible to prevent corruption. Even where there is no outright corruption, it is impossible for regulators to retain talented staff. People will take modest income cuts to work in secure public sector employment. They will not take massive income cuts. Those who do are often just doing a few years on the inside so they can better evade regulation when they go back to the private sector. When doing a few years on the inside includes serving in Congress merely as way to get a high-paying job as a lobbyist, we are in serious trouble.
Along with highly concentrated incomes come vote buying and voter suppression. When the stakes are so high, people will play dirty. No one knows how many local boards of one kind or another around the country have been captured by local economic interests, but the number must be very large.
Economically, highly concentrated incomes ensconce economic privilege, suppress intergenerational mobility, and can ultimately lead to the total breakdown of the free market as a system for effi driving production and consumption decisions. Privilege is perpetuated by excessive incomes because with enough money the advantages of wealth overpower any amount of talent and effort on the part of those who are born poor.
Nineteenth-century English novels were obsessed with inheritance and marriage because in that incredibly unequal society birth trumped everything else. Twenty-first-century America has now reached similar levels of income concentration among a powerful elite. To make this point graphically clear, a family with a billion-dollar fortune that does absolutely no planning to avoid the 40% tax on large estates and no paid work whatsoever can comfortably take out $15 million a year to live on (after taxes, adjusted for inflation) in perpetuity until the end of history—while still growing the estate. That’s how mind-bogglingly large a billion-dollar fortune is.
But probably the least recognized impact of high inequality on our economy is that it severely impairs the efficient operation of the free market itself. Market pricing is at its core a mechanism for rationing. The market directs limited resources to the places where they command the highest prices. The basic idea of rationing by price is that prices encourage people to carefully weigh their purchases against each other—in other words, to economize.
In an economy where everyone earns roughly the same income, rationing by price works just fine for most goods. People take care of their necessities first. Then they can choose whether to spend their extra money on eating out, taking vacations, renovating their homes, or saving up to buy something big like a boat. Because all of these goods are priced in the same currency, people can directly compare their values against each other. And if everyone has roughly the same amount of money to spend, market prices represent roughly the same values for different people. If you and I have the same income, a $20 restaurant meal means as much to me as it does to you.
Problems set in when incomes are very unequal. For people with extraordinarily high incomes, prices become meaningless. What does a $20 restaurant meal mean to someone who makes $20 million a year? Nothing.
The result is incredible waste as the market economy no longer forces people to economize. When rich people accumulate dozens of cars, maintain yachts they only use once a year, or have servants order fresh-cut flowers every day for houses they rarely visit, they are wasting resources that could be put to much better use by other people. Waste like this invalidates the foundational principle of modern economics: that the market maximizes the total utility of society.
That principle only holds if a dollar has the same meaning for you as it does for me. Highly concentrated incomes undermine the whole idea of the market as an economy—that is, as something that economizes. And that is the strongest argument for much higher taxes on higher incomes. There are many ways to reduce inequality, but the simplest and most efficient way is through taxation. The goal of income taxes should be to tilt the field so that earning an after-tax dollar means just as much to a CEO as to a fast food worker. That’s why a 90% marginal tax on incomes over a million dollars is entirely appropriate.
For a poor person who pays no income tax, a $20 restaurant meal costs $20. That person must make a real sacrifice to eat out. For a CEO with a 90% marginal tax rate, a $20 restaurant meal costs $200 in before-tax income. That may not be a huge sacrifice for someone who makes several million dollars a year, but it does change the equation. A CEO may not hesitate to eat out, but may hesitate to buy a private jet when flying business class will suffice.
To be sure, we need higher taxes on higher incomes to raise money for government. But we also need higher taxes on higher incomes just to make the economy work properly. That’s why the economy worked so much better in the high-tax 1950s and 1960s than it has since.
The ultimate goal of income taxes should be to make money as meaningful to a millionaire as it is to you or me. If we can’t quite get there in the next few years, we can certainly get closer than we are. One of President Obama’s most important accomplishments has been to set us on the path toward economic sanity by raising taxes on the highest incomes. The next President should build on this legacy—and in a big way.
#FeelTheBern #NHPrimary2016 #socialism
Salvatore Babones is Associate Professor of Sociology & Social Policy at The University of Sydney. His new book Sixteen for ’16: A Progressive Agenda for a Better America is the first book in the Policy Press Shorts series. For more information about the policies proposed in Sixteen for ’16 see the book website at 16for16.com.
Sixteen for ’16 is available to purchase here from the Policy Press website. Remember that Policy Press newsletter subscribers receive a 35% discount – if you’re not a member of our community why not sign up here today?
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