Taxing the Rich Makes Economic Sense

Even as President Obama addressed the nation today with a deficit-cutting plan, which included the call for cuts in defense spending and higher taxes on the rich, some wealthy Americans have joined a campaign to "tax wealth like work."

The campaign, part of United for a Fair Economy's "Responsible Wealth" program, noted this week that massive cuts to taxes on capital gains and dividends in recent decades did little more than to promote economic inequality and reduce revenue to balance the federal budget.

Capital gains – income through labor of others related to property ownership in real estate, stocks, and other holdings – is taxed at a top rate of 15 percent. Income from actual work, however, is taxed at a top rate of 35 percent.

The disparity between the taxes on the two types of income costs the government $84 billion annually. Mike Lapham, director of the Responsible Worth network, notes that eliminating this disparity "would easily cover the federal budget cuts being hammered out this week, with funds left over to help cash-strapped states.”

Support for eliminating this disparity has come from diverse ideological sources, including the U.S. Deficit Commission and Congressional Progressive Caucus, which released its "People's Budget" this week.

Also, investor Eric Schoenberg, who has joined the "Tax Wealth Like Work Campaign," said that, “I know full well how our tax system is tilted to benefit Americans who live off of accumulated capital rather than labor income."

"The vast majority of my income," he explained, "comes from my investment portfolio. Last year my income was just over $200,000 and my taxes were only $2,000 – a mere one percent! Somebody making that in salary would have paid at least $30,000 more. Equalizing the tax rates paid by rich investors like me and working Americans would be an excellent start.”

According to analysis by the campaign, wealth inequality requires action. Capital gains and dividend income is heavily concentrated at the top of the income spectrum.

For example, a typical middle-income household earning $58,000 takes in only about 0.5 percent of its income from capital gains. This means that the vast majority of working family incomes are automatically taxed at higher rates than the richest Americans.

By contrast, the top 0.01 percent of  households, who earn an average of $35 million, typically receive more than 44 percent of their income from capital gains. Adding dividends pushes it well over 50 percent. Simply put, the richest Americans receive the special privilege of having half of  their income taxed at a much lower rate than working families.

Seattle-based Judy Pigott has also joined the campaign for tax parity. She is one of the heirs to her grandfather’s company that builds Peterbilt trucks and other heavy equipment. She explained, “If we even kept what was in place from the end of the Reagan years and into those of Bush I, I suspect we’d not be in a budget crisis now. Let’s do what it takes to support all of us, since it takes all of us to keep this nation going.”

The Congressional Progressive Caucus' "People's Budget" includes a progressive estate tax, increasing income taxes on those with incomes over one million a year, and restoring taxes on capital gains and dividend income to the same level as ordinary income. (Learn more about it here.)

Class war or economic sense?

These aren't just "class war" policies, as some conservative ideologues will insist. They make economic sense, according to Cambridge economist Ha-Joon Chang, author of 23 Things They Don't Tell You About Capitalism.

As Chang explains, "pro-rich" policies like cuts to capital gains taxes began under Reagan in the late 1980s. Conservative ideologues insisted that they were needed to spark economic growth because making the rich richer supposedly makes everyone richer.

The reality is, however, that "pro-rich policies have failed to accelerate growth in the last three decades." "Trickle down" policies simply don't work. Take one of the largest tax cuts in U.S. history (under Bush and the Republicans) followed by the sencond largest economic collapse in the past 100 years as a prime example.

Chang traces this poorly conceived economic theory to David Ricardo, Marx's frequent whipping boy. Ricardo argued that wealth should be concentrated in the hands of the rich in order to promote economic growth (142).

On this point, Chang also makes a comparison between this form of accumulation, and that of the economic and social policies advocated by the left-wing of the Soviet leadership around Trotsky in the early 1920s and put into effect by Stalin in the late 1920s.

Both had/have disastrous affects on most people, though in capitalist societies such accumulation benefits the capitalists above all, while in the Soviet Union the planning authority came to control the social surplus produced.

Chang adds that while the consequences of the Soviet policy was famine, mass imprisonment for political dissent, upended lives of both workers and farmers, and the destruction of huge quantities of food and productive tools, ultimately the command economy succeeded in developing Soviet industry on a mass scale (138-140). Chang writes, in the Soviet system, for all of its problems, "there was a least a guarantee that the concentrated income would be turned into investment" (145).

(Of course, any democratic-minded person of any ideological orientation cannot accept the unfortunate proposition that is still being made by some today that the outcomes of the Stalin policies justified the upheaval, hardship, and crimes involved in its achievement.)

By comparison, these policies in the capitalist U.S. alone expanded income and wealth inequality to their highest levels ever, "comparable to that of some Latin American countries" (144). Similarly, countries that restored capitalism after the collapse of the Soviet Union have seen massive levels of social inequality.

Chang does not document how increased inequality in capitalist countries like the U.S. have produced higher rates of poverty, hunger, homelessness, lack of access to healthcare, higher rates of incarceration, urban decay, rural decline, capital flight, racism, a decline in the quality of public services, intensified economic crises, growth in the mental health crisis, and so on.

He adds that by giving the rich a larger share of the pie, pro-rich policies were supposed to also increase the size of the pie – so the conservative, "free market" capitalist claim went. The reality, however, is that these policies have "reduced the pace at which the pie is growing."

For Chang, the alternative to pro-rich, free market capitalism (or, for that matter, the command economy) is a progressive tax system that supports a strong welfare state. Such a mechanism ensures reduced inequality, a minimum social safety net, and a minimum of social investment like education and healthcare – on a democratic basis and with sustained economic growth.

To this basic system, we could add the need for a strong labor movement (both economically and politically) with collective bargaining power to build the  social income of working families. Also, public investment in and (at least partial) public ownership of basic, strategic, or "too big to fail" sectors of the economy are needed.

On this point, Chang makes the interesting case that public ownership and worker stakeholders may produce a greater likelihood for the long-term health of large-scale companies (and by logical extension a greater degree of economic and community stability) that corporate profit maximizing policies in the interest of paying off disinterested shareholders cannot (21). (More on that later.)

In the end, immediate gratification of the desire for wealth accumulation and profits for the rich is not only unfair, immoral and harmful to working families, it is a disastrous economic policy and should be stopped.

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