Have the Rich Won?

Maybe not. A new approach to capping income at the top is starting to gain momentum.

By Sam Pizzigati

This article is from the November/December 2009 issue of Dollars & Sense: Real World Economics available at http://www.dollarsandsense.org

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This article is from the November/December 2009 issue of Dollars & Sense magazine.

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Back in 1974, the inaugural year for Dollars & Sense, young economic justice activists—like me—felt we had our hands full. I was working, at the time, in upstate New York, helping mobile home owners organize against trailer park landlord extortion. I had one friend active on a campaign to win bargaining rights for the local university’s food service workers, another pushing for public housing, still another advocating for a badly needed primary health care clinic.

Everywhere we all looked, we saw people hurting, we saw unfairness, we saw economic injustice. Now today, 35 years later, I’ve come to understand what we didn’t see: the big picture.

Yes, back then in 1974, we certainly did face injustice at every turn. But we were living, thanks to years of struggle—and success—by our activist forebears, in a society where politics actually revolved around confronting those injustices and making change that could really help average working people.

And, even better, we had a realistic shot at achieving that change. The reason? Our activist forbears had sliced the single greatest obstacle to social progress—the rich and powerful—down to democratic size. In 1974 we were living in a society with an enfeebled wealthy, and we didn’t know it.

Shame on us. By not understanding—and not appreciating—the equality our progressive predecessors had battled so hard to achieve, we failed to defend it. We let the wealthy come back. We let grand concentrations of private wealth reconstitute themselves across the American economic landscape. We let the super rich regain their power to dictate and distort America’s political discourse.

How rich—and powerful—have today’s rich become? Some numbers can help tell the story. In 1974, the most affluent 1% of Americans averaged, in today’s dollars, $380,000 in income.

Now let’s fast-forward. In 2007, the most recent year with stats, households in America’s top 1% averaged $1.4 million, well over triple what top 1% households averaged back in 1974—and, remember, this tripling came after adjusting for inflation.

Americans in the bottom 90%, meanwhile, saw their average incomes increase a meager $47 a year between 1974 and 2007, not enough to foot the bill for a month’s worth of cable TV.

The bottom line: top-1% households made 12 times more income than bottom-90% households in 1974, 42 times more in 2007.

The numbers become even more striking when we go back a bit further in time and focus not on the top 1%, but on the richest of the rich, the top 400, the living symbol of wealth and power in the United States ever since America’s original Gilded Age in the late 19th century.

In 1955, our 400 highest incomes averaged $12.3 million, in today’s dollars. But the top 400 in 1955 didn’t get to enjoy all those millions. On average, after exploiting every tax loophole they could find, they actually paid over half their incomes, 51.2%, in federal income tax.

Today’s super rich are doing better, fantastically better, both before and after taxes. In 2006, the top 400 averaged an astounding $263 million each in income. These 400 financially fortunate paid, after loopholes, just 17.2% of their incomes in federal tax.

After taxes, as a group, the top 400 of 2006 had $84 billion more in their pockets than 1955’s top 400, $84 billion more they could put to work bankrolling politicians and right-wing think tanks and Swift Boat ad blitzes against progressive candidates and causes.

How could America’s super rich have so little, relatively speaking, back in 1955 and so much today? What has changed between the mid 20th century and the first decade of the 21st? We have lost, simply put, the economic checks and balances that so significantly discouraged grand concentrations of private wealth in the years right after World War II.

Among the most important of these checks and balances: steeply graduated progressive tax rates. Over most of the quarter-century between the early 1940s and the mid 1960s, America’s richest faced at least a 91% federal tax rate on “earned” income over $400,000. By 1974, that top rate had dropped, but only to a still steep 70%. The top rate today: 35%.

Tax rates on income from the sale of stocks, bonds, and other property—capital gains—have traveled the same trend line. In the postwar years, the wealthy paid a 25% tax on capital gains. The current rate: just 15%.

So what should today’s activists for economic justice do about all this? Hit the repeat button and re-fight the struggles of our activist forbears?

That course certainly seems reasonable. Our forbears, after all, pulled off quite a stunner. They faced, a century ago, a super rich every bit as rich and powerful as the super rich we confront today. Over the course of the next half-century, they leveled that super rich.

By the 1950s, the incomes of America’s richest had been “hacked to pieces,” as best-selling author Frederick Lewis Allen would marvel in a 1952 book. The grand estates of the super rich, jubilant postwar progressives would add, had become housing tracts and college campuses for the first mass middle class nation the world had ever seen.

But this triumph would not stand the test of time. The 20th century would end as it began, with phenomenal wealth and power concentrated at America’s economic summit. By century’s end, the leveling institutions our progressive predecessors had fought so hard to win—progressive tax rates, a vital trade union presence, regulatory restrictions on corporate behavior—had all come unraveled.

Maybe we ought to ask why, before we rush to re-fight the struggles our forbears so nobly waged. Why, for instance, did the single most potent leveling instrument of the mid 20th century, the steeply graduated rates of the progressive income tax, prove unsustainable?

These steep rates, in their time, certainly did work wonders. In the mid 20th century, with these rates in effect, the U.S. economy essentially stopped generating colossal new concentrations of wealth and power. Of the 40 richest individuals in U.S. history, not one made the bulk of his fortune during the years of this progressive tax rate heyday.

The big fortunes that did amass in these years mostly belonged to oil magnates. They enjoyed what the rest of America’s rich did not: a super loophole, the oil depletion allowance, that essentially shielded them from the stiff tax rates that applied to every other deep pocket.

But steeply graduated tax rates have an Achilles heel. The rich hate them with an incredibly intense passion. That wouldn’t matter, of course, if everyone else loved these rates with equal fervor. But they don’t—because high tax rates on high incomes only impact the wealthy directly. The wealthy feel the “pain.” They also see no benefits—because they don’t need or use the public services high taxes on high incomes make possible.

Those who do benefit from these public services, on the other hand, don’t automatically connect the availability of these services to progressive tax rates.

The end result of these political dynamics: Steeply graduated tax rates—as traditionally structured—have never been able to stand the test of time, anywhere. The rich attack these rates with far more single-minded zeal than the general public supports them.

High tax rates on high incomes typically only come into effect during periods of great social upheaval, during wars and severe economic downturns that knock the wealthy off their political stride. But after these upheavals, amid “normalcy,” the wealthy’s fervid and focused opposition to high rates eventually wears down the public political will to maintain these rates. The rates shrink, wealth re-concentrates.

Today’s mainstream policy makers and politicos seem to have concluded, from this history, that any attempt to tax the rich significantly make no sense.

The Obama White House, for instance, wants to up the top income tax rate on the wealthy, but just to the 39.6% rate in effect before the George W. Bush tax cuts. If the top U.S. tax rate does rise to 39.6%, America’s rich would be paying taxes at less than half the rate they faced in the 1950s under President Dwight D. Eisenhower, a Republican.

Even worse: Merely repealing the Bush tax cuts, as current White House economist Lawrence Summers himself acknowledged in a 2007 Brookings Institution paper, would only wipe away one-sixth of the income inequality the nation has experienced since 1979.

Similar tax games are playing out in Britain, where the current government is upping the top tax rate on some high incomes from 40 to 50%. The new rate would still constitute a bargain, by historical standards, for the British rich, who, at one point last century, faced a 97% top rate.

Progressives in the UK, not surprisingly, are challenging their government’s tax-the-rich timidity. But they’re not stopping there. These progressives are also arguing that we need to go well beyond the traditional progressive tax remedies previous progressive generations put in place, beyond taxing the rich to actually capping their income.

And this capping, these British progressives believe, ought to be done in a manner that gives average working families a clear and powerful vested self-interest in keeping the caps in place. How do they propose to accomplish this goal? They’re suggesting we link income ceilings at the top to income floors at the bottom. In effect, they seek a “maximum wage” tied to a minimum.

With a “maximum” set as a multiple of a minimum, society’s richest and most powerful would only be able to increase their incomes if the incomes of society’s poorest and least powerful increased first. These rich, to become richer, have historically sought to depress wages. A maximum coupled to the minimum would instantly create a counter-incentive: the higher the wage at the bottom, the better for the rich—and the better, of course, for the bottom, too.

In this new maximum wage environment, unions and other traditional advocates for higher wages at the bottom might suddenly find quite a few new—and distinctly wealthy—people in their corner.

Leading UK progressives have opened a campaign to inject these notions into Britain’s mainstream political discourse. This past August, 100 British progressive luminaries—all-stars who included three dozen members of Parliament, veteran activists and economists, and the UK’s most important labor leader, Trades Union Congress general secretary Brendan Barber—called on their government to establish a “High Pay Commission” and “launch a wide-ranging review of pay at the top.”

This High Pay Commission, the progressive luminaries urged, “should consider proposals to restrict excessive remuneration such as maximum wage ratios.”

Thousands of British grassroots activists have since signed on to the High Pay Commission call. And one party in the British parliament, based in Wales, has already made advocacy for a UK-wide “maximum wage” part of its official platform.

How exactly could a “maximum wage ratio” principle be implemented? Top-bottom ratios could be tied directly to the expenditure of tax dollars. A government could, for example, insist that all publicly owned enterprises limit the pay between their top executives and their workers.

Late in 2007, delegates to Ecuador’s Constituent Assembly enacted legislation along this line. They created a remuneración máxima—a “maximum wage”—for all agencies and enterprises that take in over half their financing from tax dollars. The cap limits the pay of top executives in Ecuador’s publicly subsidized sector to 25 times the Ecuadorian minimum wage.

Executives at Ecuador’s Banco del Pacifico, a huge bank nationalized after a 1999 financial crisis, have been able to exploit and expand exceptions in the original legislation. But the principle still stands.

Governments could also apply that principle much more broadly, by mandating top-bottom pay ratios for any enterprises that seek government contracts or subsidies or tax breaks. The British government, as campaigners for a High Pay Commission note, could insist on “reasonable pay structures” within private enterprises that gain “public procurement contracts.”

Under current law, in both Britain and the United States, private enterprises that win government contracts can pay their top executives as much as they please. The CEO at Lockheed Martin, a company that feeds almost exclusively off government contracts, last year took home $26.5 million. That’s over 700 times the take-home of the average American worker.

Lockheed, of course, only represents the tip of the taxpayer-subsidized iceberg. Almost every major corporation and bank in the United States is currently raking in big-time taxpayer dollars, either through government contracts, economic development subsidies and tax breaks, or, most recently, outright billion-dollar bailouts.

These taxpayer dollars are making rich people richer. Since the beginning of 2008, the Institute for Policy Studies recently reported, the 20 U.S. banks that have received the most bailout dollars have laid off 160,000 workers. The 100 top executives at these 20 banks, in 2008 alone, collected a combined $791.5 million in personal compensation.

Our tax dollars, in short, are increasing economic inequality in the United States. They are growing the gap between our richest and everyone else. That need not be. If we leveraged the power of the public purse—as we already do in the struggle against gender and racial inequality—our tax dollars could be helping us narrow, not expand, the economic gaps that divide us.

Under existing U.S. law, companies that discriminate against women and minorities in their employment practices cannot gain government contracts. As a society, we’ve decided that we don’t want our tax dollars subsidizing companies that increase gender or racial inequality. So why should we let our tax dollars subsidize companies that increase economic inequality—by compensating top executives at levels that dwarf the pay that goes to average workers?

Rep. Jan Schakowsky, a progressive Democrat from Illinois, doesn’t think we should. Schakowsky has introduced legislation, the Patriot Corporations Act, that would give tax breaks and a preference in the government contract bidding process to companies that pay their executives less than 100 times what they compensate their lowest-paid workers.

That standard, suitably expanded and strengthened, could become a progressive principle worth rallying around: No tax dollars, in any way, shape, or form, for any companies or banks that pay their executives at over 25 times what their workers receive.

Why 25 times? The President of the United States currently makes just under 25 times the annual pay of the lowest-paid federal worker. Why then should we let our tax dollars go to executives who demand—and get—hundreds of times more than their own workers?

Back in 1974, in a far more equal United States, we never needed to ponder questions like these. Now we do.

Sam Pizzigati is a labor journalist and an associate fellow at the Institute for Policy Studies, in Washington, D.C. He edits Too Much (www.toomuchonline.org), an online weekly on excess and inequality.

Sources: For more on progressive tax rates in the United States, see the April 2009 Institute for Policy Studies report, Reversing the Great Tax Shift, available at the website of the Institute for Policy Studies. Detail on the UK campaign for a High Pay Commission can be found at compassonline.org.uk. For other references, email the author at editor--at--toomuchonline.org.

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