January 30, 2019 / 2:12 PM / 3 months ago

Breakingviews - Hadas: An ultra-tax on the ultra-rich makes sense

LONDON (Reuters Breakingviews) - Ultra-taxes for the ultra-rich. It’s an idea that might be catching on, to judge from the attention being paid to two related proposals from two left-wing American politicians.

Democratic Representative-elect Alexandria Ocasio-Cortez of New York (L) arrives for a class photo with incoming newly elected members of the U.S. House of Representatives on Capitol Hill in Washington, U.S., November 14, 2018. REUTERS/Carlos Barria

Tax their excessive incomes, says Alexandria Ocasio-Cortez, newly elected to the House of Representatives from New York City. She has given few details, but her headline number is big – a 70 percent rate on taxable earnings above $10 million. That is a large increase over the current 37 percent, which kicks in at $500,000 for a single earner.

Or tax their accumulated wealth, as Massachusetts Senator Elizabeth Warren proposes, through an annual payment of 2 percent of the value of net assets between $50 million and $1 billion and a 3 percent rate above that. Her economic advisers, Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley, estimate that 0.1 percent of U.S. households would have to pay.

This is not your usual tax reform. The goal is not to “pluck the goose as to procure the largest quantity of feathers with the least possible amount of hissing”, in the words attributed to French King Louis XIV’s Finance Minister Jean-Baptiste Colbert. On the contrary, Ocasio-Cortez and Warren want to hear a lot of hissing from the fattest geese, the most affluent sliver of the American people.

Only libertarians reject the basic principle that the rich should pay more in taxes than the poor. It makes sense that people who received more income from society should pay more taxes back to ensure its flourishing. This so-called progressive taxation is found in all tax systems in developed countries.

What is new, or at least revived, by these progressive politicians is very progressive taxation for those at the tippy-top of the income and wealth pyramids. Their moral case is strong. The economic elite are receiving more than they used to, but deserving less.

On the receiving side, American bearers of economic privilege have been capturing a greater proportion of the income and controlling an ever-higher portion of the wealth created by society. Average tax incomes for the top 1 percent of U.S. earners increased by 242 percent between 1979 and 2015, the Congressional Budget Office calculated. For the middle 60 percent of the population, the gain was only 46 percent. As for wealth, Saez and Zucman calculated that the share owned by the top 0.1 percent in the United States rose from 7 percent in 1978 to 20 percent currently.

The trend in the big corporate sector is especially clear. In 1989, the compensation of the average chief executive at the largest 350 U.S. companies was 58 times larger than the median employee’s wage. In 2017, the boss’s $18.9 million average pay was 312 times the median, according to the Economic Policy Institute. With that kind of pay cheque, it’s no wonder that capital builds up fast.

On the deserving side, individual contributions necessarily become less special as the economy becomes more complex and interdependent. For example, corporate bosses rely ever more on shared knowledge and culture, outside experts, and established systems of production. Large differentials in pay do not make sense when everyone’s productivity is derived from making use of the same integrated economic infrastructure.

The increasing disconnect between pay and contribution looks like a wrong that a more progressive tax system can help set right. And if the argument about justice is not persuasive, there is also a political side to tax justice for the rich. Taxes are like a contract which keeps taxpayers connected with the whole nation. Too-low taxes for the rich elite can break this social contract.

You could almost hear that contract unravelling at last week’s elite Davos conference of the World Economic Forum. When computer entrepreneur Michael Dell was asked his view of a 70 percent marginal tax rate, he answered that he does not trust the government to spend his money effectively. The instinctive unwillingness to give up control is almost antisocial.

Dell also said he was worried that higher tax rates would discourage enterprise and economic growth. No one really knows, but common sense suggests this is nonsense. Technical and business geniuses are unlikely to slack off thinking that their old $11 million after-tax income will fall to $10.6 million. Besides, greater economic and social justice is worth some loss of GDP growth.

On their own, the tax reform proposals will not have a huge effect. Ocasio-Cortez’s tax rates would only reduce American income inequality modestly, while the Warren capital tax would only slow down the pace of increase in wealth inequality.

However, such changes cannot come on their own. After four decades of decreasingly progressive taxes, a change in direction requires a major shift in the national political mood.

Could it happen? When Dell was asked about a 70 percent tax rate, the Davos audience laughed. Maybe the idea simply seemed absurd to them. But there may have been a nervous fear that demands for higher taxes on the rich could be the next manifestation of the widespread fundamental political discontent in developed countries.

If so, the very rich might not want to dedicate much of their ample financial resources to opposing this change. The most likely alternative to a stronger social contract is more social discord – even violence. Better to pay a bit more now than to face a bloody revolution later.

Breakingviews

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