Monday, October 5, 2009

Soak the Rich

From 1980 to 2005, more than four-fifths of the increase in the nation's income went to the highest-income 1%. Share of total income going to the highest-income 0.1% rose from less than 4% in 1981 to more than 12% in 2007. Why? Top tax rates plunged. In 1981 the top marginal tax rate was 69%. In 1982 it dropped to 50%, permitting the income share of the top 0.1% to more than double in just the first five years of lower taxes on the rich. From 2003 to 2007 the top rate was down to 35%--and the highest-income 0.1% were absorbing 12% of the nation's wealth.
This is clearly too low to prevent the ever-increasing concentration of wealth. The natural progression continues until the only people who can spend money don't need to, and the economy collapses.
Piketty and Saez (pp. 79-81) show that under the high-tax regime of the 1940s through 1970s, share of income to those at the highest income remained quite constant for decades. (About 33% to 35% going to the highest-income 10%; about 10% to the highest-income 1%; about 3-4% to the highest-income 0.1%.) It's only since 1981 that the lid has blown off the ability of the rich to amass ever greater amounts of the nation's wealth.
Confiscatory taxation is one of the most important functions of government. Progressive taxation is uniquely effective at combating the natural tendency of the rich to get richer and everybody else to descend into serfdom.

individual income tax rate = 1 - (income/poverty level)^-.2

for 0 tax at poverty level, 25% tax rate at about 4x poverty, 50% tax rate at about 30x poverty level, 75% tax at about 1000x poverty level.

For a graph, see^-.2++from+1+to+1000
where the vertical axis is the tax rate and the horizontal axis is the ratio of your income to the poverty level. The marginal tax rate would be 0.2 just above the poverty level and 0.8 at 1000 times the poverty level:^.8%29++from+1+to+1000  

"Income" includes all income, including capital gains (which should be indexed to inflation), and including inheritance. "Income" should exclude income taxes owed to state and local governments on the current year's income. (It's important to exclude state income tax, to prevent the total tax from exceeding 100% for absurdly high income.)

The rich would still be rich. But the rate of widening of the gap would slow. And we would slow the rise in federal debt.

It's also crucial to institute progressive corporate tax. Corporations become ever larger, wealthier, more able to dictate market prices, supplier prices, wages and working conditions, and able to buy political influence to rewrite laws in their favor. They can increasingly soak us, their customers, squeeze their suppliers, keep their workers down--driving us all into serfdom except the business barons.


Corporate tax = profit * [.44 + .1*ln(profit ÷ household poverty rate)/ln(1000)]

So that each doubling of corporate profit causes a rise of about 1% in tax rate (both total and marginal. Each 1000-fold increase in profit raises tax rate by 10%. A trillionfold increase in profit would increase tax rate by 40%.)

On the graph, 

the vertical axis is corporate tax rate and the horizontal axis is the ratio of corporate income to household poverty level.

A progressive tax on business profit would counter the corporate desire for mergers and acquisitions, creating ever more monopolistic conditions.

Of course, we also have to restore all the Progressive Era reforms begun in the Teddy Roosevelt administration and dismantled in and since the Reagan administration. Restore antitrust regulations, financial market regulations, food safety regulations. Repeal the anti-union changes to the Labor Act since 1935. Pass the Employee Free Choice Act.

We must stop subsidizing U.S. agribusiness overproduction of corn, soybeans, cotton, and wheat--which are then dumped below cost on Mexican and Central and South American markets, destroying agricultural economies and forcing millions of people to come to the U.S. seeking unauthorized work. These people are abused with impunity by their employers, because they are afraid of being deported. The availability of millions of zero-status workers drives down wages and working conditions for native U.S. workers.

Political policies have overwhelming effects on economic conditions for ordinary people.

Natural processes, left unchecked, yield a world of a few owners and the rest of us serfs.

Only aggressive, vigilant government action can keep these forces at bay.

Only aggressive, vigilant citizen involvement in the political process can ensure the government does what we vote for, rather than what the moneyed interests pay for.



    On Business Insider
    Paul Krugman calls for a regressive “Value-Added Tax” (national sales tax), a top income tax rate of “maybe over 50%” (well below Prof. Peter Diamond’s plunder-incentive optimizing 73%), and no wealth tax. He says it works for Sweden.

    Meanwhile in the real world, the difference is that Sweden never did let a very few people acquire the vast bulk of the nation’s wealth. In the U.S., to get wealth back in the hands of those who spend it in the real economy, rather than gamble it in the financial-market casino, we need a wealth tax, as France has. And for obscenely high incomes, an income tax rate very nearly 100% is appropriate. We *want* to discourage robber baroncy.

    With "liberal" pundits like this, we need no right-wingers.

  2. The other difference is that in the U.S., the tax will *not* be used for progressive social programs. It will be used to further exempt the rich and corporations from paying their share. It will be used for military adventurism. For subsidies to agribusiness and other multinationals.

  3. The elephant in the room is tax giveaways to the rich and to corporations. This NY Times editorial puts them at $1.1 trillion per year:

  4. Joseph Stiglitz
    says, "tax the rich:"
    by closing their loopholes and replacing regressive taxation with progressive. Ours is a government of the 1 percent, for the 1 percent, and by the 1 percent.

    James Livingston
    says, "tax companies as people:"
    In the 1950s, big companies paid 52% tax rates and contributed a third of federal government revenue. Now, GE pays nothing; corporations contribute 9% of federal government revenue--regressive payroll taxes are now 35%.