In 2015 I attended a workshop on political polarization with an eclectic group of scholars and activists. We swapped ideas on resolving battles over climate change, inequality, abortion and gay rights. One obstacle to compromise, a psychologist said, is that many Americans have a visceral, emotional reaction to issues like homosexuality.
I have a visceral, emotion reaction to inequality, I replied. It sickens me that some Americans have billions while others barely have enough to eat. An economist derided my attitude as typical left-wing irrationality. Inequality isn’t the problem, he said, poverty is the problem, and we shouldn’t try to solve it by taking more from the rich.
I felt chastened. But a flurry of recent articles—with headlines like “Abolish Billionaires” and “The Economics of Soaking the Rich”—argues that we should be appalled by the immense gap between the poor and rich. The proliferation of billionaires shows that capitalism is malfunctioning and in need of reforms, including higher taxes on the ultra-wealthy.
One vocal billionaire-basher is Alexandria Ocasio-Cortez, a newly elected Congresswoman from New York and self-identified democratic socialist. “I’m not saying that Bill Gates or Warren Buffet are immoral,” she said recently, “but a system that allows billionaires to exist when there are parts of Alabama where people are still getting ringworm because they don’t have access to public health is wrong.”
A report from the anti-poverty organization Oxfam provides a global, historical perspective on inequality. Maximum tax rates in the richest countries fell from an average of 62 percent in 1970 to 38 percent in 2013, and inequality has surged. The number of billionaires has doubled over the past decade to 2,208. The collective wealth of the 26 richest people now equals that of the 3.8 billion poorest, whose total wealth fell last year by 11 percent.
In short, the rich are getting richer and the poor, at least lately, poorer. “We need to transform our economies to deliver universal health, education and other public services,” Oxfam states. “To make this possible, the richest people and corporations should pay their fair share of tax.”
Ocasio-Cortez has proposed raising the federal tax rate for ultra-wealthy Americans to 70 percent, almost double the current maximum federal tax on income. The so-called marginal tax would apply to annual income above $10 million. Presidential candidates Elizabeth Warren and Bernie Sanders have called for higher taxes on assets as well as income of the ultra-rich.
Paul Krugman, a Nobel laureate in economics, agrees on the need for such taxes. The 70-percent tax proposal of Ocasio-Cortez, he writes in his New York Times column, is based on analyses by economist Peter Diamond, a Nobel laureate, and Christina Romer, former head of President Obama’s Council of Economic Advisers.
The analyses, Krugman explains, are based on “the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it.”
This is the reasoning behind progressive tax rates, which rise along with income. Raising tax rates too high might discourage some people from being more productive, resulting in a net loss of tax revenue. Balancing these factors, Diamond and Romer recommend maximum marginal tax rates of 73 and 80 percent, respectively.
Krugman rejects the claim that high taxes hurt the economy. Maximum tax rates reached 90 percent in the late 1950s, and they remained at 70 percent as recently as the early 1980s before plummeting during the Reagan administration. The U.S. economy “did just fine” during these periods, Krugman says. “Since then tax rates have come way down, and if anything the economy has done less well.”
Another Nobel-winning economist, Joseph Stiglitz, argues that inequality is socially corrosive. In “A Rigged Economy,” published in Scientific American in November, Stiglitz notes that “economies with greater equality perform better, with higher growth, better average standards of living and greater stability. Inequality in the extremes observed in the U.S. and in the manner generated there actually damages the economy.”
Over the past four decades inequality in America “has reached new heights,” Stiglitz says. “Whereas the income share of the top 0.1 percent has more than quadrupled and that of the top 1 percent has almost doubled, that of the bottom 90 percent has declined.” The wealthiest Americans “pay a smaller fraction of their income in taxes than those who are much poorer—a form of largesse that the Trump administration has just worsened with the 2017 tax bill.”
Rising inequality leads to a “vicious spiral,” Stiglitz contends, that subverts democracy. Economic inequality “translates into political inequality, which leads to rules that favor the wealthy, which in turn reinforces economic inequality.” Stiglitz recommends countering inequality with campaign-finance reform, cheaper education and, yes, higher taxes on the rich.
In The Atlantic, economics writer Derek Thompson rejects the claim that raising taxes on the wealthy will stifle economy-fueling innovation. New York City and San Francisco, which have two of the highest income-tax rates in the U.S., are “hubs of innovation.” Countries with higher tax rates than the U.S. also have higher rates of entrepreneurship.
Conservatives contend that entrepreneurs like Bill Gates, Jeff Bezos, Steve Jobs and Elon Musk deserve their riches, because they created products that improve our lives and spur economic growth. The government, in contrast, wastes tax dollars. Actually, economist Mariana Mazzucato points out in Harvard Business Review, government-funded research underpins the modern tech boom.
The Internet and ”nearly all the technologies in the iPhone (including GPS, Siri, and touchscreen)” stemmed from federal research, Mazzucato says. “And in the energy sector, solar, nuclear, wind, and even shale gas were primed by public finance. Elon Musk’s three companies Solar City, Tesla, and Space X have received over $4.9 billion in public support.”
Making the case for higher taxes, New York Times tech columnist Farhad Manjoo writes that “technology is creating a world where a few billionaires control an unprecedented share of global wealth.” Extreme wealth “buys political power, it silences dissent, it serves primarily to perpetuate ever-greater wealth, often unrelated to any reciprocal social good.”
Last month historian Rutger Bregman caused a stir at the World Economic Forum in Davos when he accused rich participants of avoiding higher taxes. Yes, some billionaires, notably Bill Gates, have done good works with their wealth, Bregman acknowledges, but societies should not rely on the generosity of the rich. “Philanthropy is not a substitute for democracy or proper taxation or a good welfare state,” he says.
Some rich people agree. Venture capitalist Nick Hanauer contends in The Prospect that “taxing the rich is the only plan that would increase investment, boost productivity, grow the economy, and create more and better jobs.” He dismisses the conservative claim that raising taxes on the wealthy and corporations will decrease investment and increase unemployment as a “con job.”
“When President Bill Clinton hiked taxes, the economy boomed,” Hanauer states. “When President George W. Bush slashed taxes, the economy ultimately collapsed.” Since Trump and his fellow Republicans cut taxes in 2017, “corporate America has announced more than 140,000 job cuts… while sharing just 9 percent of its $76 billion tax windfall in the form of wage hikes and one-time bonuses.”
I appreciate capitalism. Over the last few centuries free-market forces have helped humanity escape millennia of crushing poverty, ignorance and early death. Economist Deirdre McCloskey, whom I interviewed in 2016, calls this period, during which per-capita incomes surged by a factor of 10, “the Great Enrichment.” Wealth-distribution schemes like those proposed by economist Thomas Picketty are more likely to trap people in poverty than lift them out of it, according to McCloskey.
To help my students appreciate humanity’s progress, I assign them an essay in which McCloskey extols the Great Enrichment. I show them charts, compiled by economist Max Roser, that track the surge in humanity’s health and wealth.
But as anthropologist Jason Hickel points out, the Great Enrichment encompassed slavery, colonization and the violent displacement of indigenous people. Today, more than half of humanity still lives on $7.40/day or less, barely adequate for a decent life. From this perspective, Hickel says, the “grand story of progress seems tepid, mediocre, and–in a world that’s as fabulously rich as ours–completely obscene.”
Neither I nor any of the critics cited above wants capitalism abolished. We simply want the wealthy to contribute their fair share. Many people have a visceral, emotional aversion to higher taxes on the rich, but that reaction, even for the rich, is irrational.