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Why Tax-On-Millionaires Measure Is a Slam Dunk

Apr4

Vanity Fair, the monthly organ of opulence that chronicles,  celebrates and caters to the self-indulgence of the uber rich, seems a strange place to encounter a learned and astute analysis of wealth inequality in America.

VF’s current issue, however, features just such an insightful piece, by Nobel-winning economist Joseph Stiglitz, who not only  presents the latest evidence that the world’s oldest democracy is morphing rapidly into the biggest oligarchy on the planet, but also dissects the unhappy social implications of this economic and political transformation.

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.

One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.

All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

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The case in California: Since our last discourse on the subject, the massive gap between the wealthiest 1% and everyone else in the population has gained more traction as a political issue in California.

Paradoxically, the recent idiocy of Capitol Republicans, who blocked a popular vote on whether to extend a few modest taxes and fees that would  affect almost all Californians, has now made the GOP’s natural base among the very wealthiest taxpayers a far more narrow, rich and inviting target for pols and interest groups who are looking for Plan B to balance the budget while heading off even more cuts to education and other services; Plan B’s  Exhibit A is last week’s announcement by the California Federation of Teachers that they will push for a 1% income tax hike on the state’ richest 1%, a proposal that a new Ben Tulchin poll shows is backed by nearly three in four voters.

Such a proposal would find fertile political ground, in part because the dramatic national trend of growing wealth inequality is, if anything, more pronounced in California.

The Legislative Analysts’ most recent substantive report on the matter, published in 2000, found that in the previous 15 years, the adjusted gross income of the wealthiest 1% of Californians tripled, from 7% to 20%; while the overall wealth of the top one-fifth of taxpayers increased during the period, from 18 to 33%, it declined for the other 80% of taxpayers, at a time when governments were routinely cutting income and capital gains taxes for the wealthy and for corporations.

Talk about the government picking winners and losers.

Self vs. selfish interest: Beyond the moral queasiness such statistics brings on for social justice types, there are many practical reasons, based upon rudimentary self-interest, why this state of affairs represents a clear and present danger to the country and the state.

For starters, the tax-cut, no-regulation policies that have accelerated income disparity in recent decades also triggered the financial meltdown that set off the worst economic downturn since the Great Depression. Also, the steady, decades-long decline of inflation-adjusted incomes for the middle class shrinks the pool of confident consumers, keeping dollars out of the economy and making recovery more halting and problematic. More broadly, the wealth gap does violence to what Stiglitz recalls Alexis de Tocqueville labeled America’s “self-interest properly understood.”

The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

For much of its recent history, the U.S. has been a place where the government literally provided the concrete underpinning for economic expansion and growth. Now that the no-taxes-ever-again crowd is gaining ascendance and – amazingly – recycling failed economic policies that crashed and burned the economy, the public-private partnership model that underwrote widespread business success for decades has fallen apart:

A modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves.

In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Why it matters: In California, the impact of these “lopsided” policy changes are seen most visibly in public education or, more accurately, in the decline of public education. With the state financing 40% of the cost of public schools, which have seen the real dollar amounts of that support decrease for several years, policy shops from PPIC to UCLA’s Institute for Democracy, Education and Access and the Center for Economic Research and Forecasting at California Lutheran University have described and analyzed the destructive impacts that reductions in education and training programs have on the California economy.

At present, California completely fails its lower class population.  It begins with an educational system that many don’t complete, while many of those who do are often unprepared to participate in a 21st century economy.  It ends with a lack of opportunity and upward mobility.

California’s K-12 program is a failure.  Dropout rates are extraordinary, and those who finish are often unprepared for employment or college.  The failure continues when the few who do manage to prepare for college find that the price has gone up and is now unaffordable for many.  Just as bad, classes are often not offered at times that are convenient for working students.

The arguments against: To be sure, there are policy arguments to be made against increasing the taxes on the rich, as the CFT proposes, starting with the fact that it may create an incentive for them to pick up and leave (although another PPIC study has presented data showing this is not the huge problem the Coupal/Fox axis would have us believe ).

Politically, however, that’s beside the point: if Republicans and conservatives hew unwaveringly to their unserious, I’ve-got-mine refusal to help govern the state, both the pressure on, and the demonization of, their core constituency will only increase.

Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them.

It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling. With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else.

All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

Jerry Brown, meet Bob LaFollette: Having been bitch-slapped on budget negotiations by legislative Republicans, Jerry Brown has belatedly taken our earlier advice and is going on the road to campaign on behalf of his balanced plan to ease the deficit. Given the above, don’t be surprised to see him strike a populist tone, ala his “We the People” winter soldier 1992 campaign for president.

It’s worth recalling that shortly after the 1900 election, in which Robert La Follette was elected governor of Wisconsin, our hero Lincoln Steffens, the native San Franciscan who had become America’s greatest muckraking journalist, visited the “little giant” to write about what he expected to be a corrupt, demagogic, socialist, dictatorial boss, as he had been portrayed by the Establishment Republicans of the day.

After spending some time in Milwaukee and Madison, however, Steffens came to a very different conclusion:

La Follette from the beginning has asked, not the bosses, but the people for what he wanted, and after 1894 he simply broadened his field and redoubled his efforts. He circularized the state, he made speeches every chance he got, and if the test of demagogy is the tone and style of a man’s speeches, La Follette is the opposite of a demagogue.

Capable of fierce invective, his oratory is impersonal; passionate and emotional himself, his speeches are temperate. Some of them are so loaded with facts and such closely knit arguments that they demand careful reading, and their effect is traced to his delivery, which is forceful, emphatic, and fascinating.

As a political matter, it’s time for Jerry Brown to reach for his inner La Follette and start sounding some good, old fashioned, Wisconsin style populism. Instead of going after the railroads, as La Follete did, however, Brown should aim at the ultra-wealthy, the oil companies and other greedy corporate interests who have a) allowed the California Republican Party to gridlock the budget process and b) fought to keep special corporate loopholes, including outrageously low property tax rates from Prop. 13.

Sic temper tyrannis.


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There are 12 comments for this post

  1. avatar stevie flyer says:

    Great article, long overdue. The massive redistribution of wealth in the U.S. has been going on for 30 years. It started with the “trickle down” economics. The theory has worked just like it creators intended. They simply told everyone the wrong direction.

  2. avatar OC Progressive says:

    Time to go after renewing an estate tax in California while we are at it.

  3. avatar JTF says:

    Is this part of the Incline Village, NV economic development plan?

    • avatar JTF says:

      Just read this article in the NYT today, “Prominent Start-Ups in San Francisco Resist a Payroll Tax”

      Crux -But two of the city’s hottest technology start-ups, Twitter and Zynga, are threatening to leave San Francisco unless they get a break from a city payroll tax…the only one of its kind in the state. Companies with more than $250,000 in payroll are required to pay the city the equivalent of 1.5 percent of total employee compensation each year.

      http://www.nytimes.com/2011/04/04/technology/04tax.html?partner=rss&emc=rss

  4. avatar patwater says:

    I think the situation requires a bit more nuance than you make it out to be. For example, consider the fact that the US has an ostensibly high corporate tax rate yet GE last year paid no taxes. In fact they recieved I believe roughly $3 B back from the federal government. Makes all that money they spend on tax attorneys, accountants and high powered lobbyists seem like a good investment, no? Except of course when you consider that this does next to zero to advance the public good.

    Political rentseeking has increasing returns to scale, and this unfortunate consequence of human nature cannot be simply wiped away with some “let’s soak the rich rhetoric” and a bump in the top tax bracket. Right now I just see your proposal leading to a windfall profit for H & R block and some high powered tax lobbyists.

    Anyway, for a more detailed explication, check out Tyler Cowen’s thoughtful piece on inequality: http://www.the-american-interest.com/article-bd.cfm?piece=907

  5. avatar chrisfinnie says:

    Cowen clearly has a lot of insight into how finance markets work. But I wonder if the meme he repeats over and over again–that people really aren’t bothered by growing inequality–is really true. It isn’t true in the mid-East or Northern Africa. Almost a quarter of a million people in the UK seem pretty steamed about it. And, if hundreds of thousands of Americans turn out at rallies today, I think we can fairly assume a lot of people here have become aware of it too.

    It is true that the discussion deserves more nuance. For example, ProPublica has a piece today (linked under Business at HuffPo) about GE’s taxes. Turns out they didn’t get a refund. It was a credit–which is different in ways most of us don’t understand.

    What we do understand is that Detroit is razing whole neighborhoods of empty homes because they can’t afford police and fire protection for them. That friends and neighbors are out of work and losing everything they worked for their whole lives. That the bankers who created this whole mess are getting big bonuses at the same time working families are struggling to make ends meet.

    I think people understand that very well. That Stiglitz laid the problems out very well–especially the underinvestment in our future. And that Calbuzz did an outstanding job of bring the argument home to California. I thank you for the piece.

    If these greedheads want to leave California, let them. The rest of us can no longer afford to support their lavish lifestyle.

  6. avatar Sac_Native says:

    The notion that the richest Americans have somehow “stolen” wealth from the lower 80th percentile is ridiculous–a notion torn right out of the pages of the Liberal Democrat play book. One never sees an attempt at analytical thinking in these stories. For example, the loss of American manufacturing jobs to developing countries with lower labor costs has tremendous negative financial ramifications for middle-class Americans. Industrialization created the middle class. Take a look at America before the Industrial Revolution and the numerical relationship between the richest Americans and the rest of the country was just as startling as it is becoming today. In the first half of the 2000-10 decade, the average annual income for jobs lost or leaving California as $60,000 compared to the average annual income for jobs created, which was $40,000. This trend, if it continues, does not portend well for the middle class. One cannot simply blame this on the wealthiest among us.

    • avatar SezMe says:

      Why not? It was those very wealthy people who bought the politicians who instituted the many “fair trade” practices that have gutted the industrial base of the USA and that have, in turn, lead to immense corporate profits in a period of stagnant unemployment.

      In short, I DO blame the very people you want to give a pass to.

    • avatar Donald from Pasadena says:

      So do I. Who does Sac Native think facilitated, and profited from, “the loss of American manufacturing jobs to developing countries with lower labor costs”?

    • avatar GeoHagop says:

      And as do I. These beau coup trop riche need a life line to reality or their narcissism will destroy us all. A nice 20% tax on their income, especially from derivative income, etc, will help to remind them that there are other people on the planet besides them.

  7. avatar Philip says:

    Envy is never a pretty sight. What have these evil rich people ever done to the whiners here, except perhaps hire them? State spending has nearly doubled in ten years. Of course, the level of services we have received has improved so dramatically nobody should complain, should they?
    The problem with an income tax hike of this nature is that the people who pay it (entertainers, VCs, etc.) have very volatile incomes. One good year comes along, and the geniuses who spend *our* money figure that the milch-cow will give forever, and plan accordingly.

  8. avatar Rob says:

    This article states “A modern economy requires “collective action” But wants the rich to pay more. So what is this “Collective Action”? The rich pay more, and the others enjoy more? Why not simplify the tax structure and make it a flat tax for all. Maybe one % for those under $250K and a slightly higher % for those making more. No deductions. Or one percentage for everyone. Make the tax structure for corporations the same way. Then it is truly collectve action. And everyone is vested. Right now, 45% of the folks don’t pay any tax.

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