Over the last half-century, we have seen a very successful propaganda campaign. The right wing of the country (not just Republicans) has portrayed the government as a bad thing. They also convinced Americans that taxation is a form of theft. It is so bad, that it is now a de rigueur campaign plank that the candidate will cut taxes. This is independent of yes, political party.
So Democrats are also promising to expand the safety net. Fun fact, that takes money and unicorn farts will not work for long. I know we have tried this theory in the past, like the last forty years or so. Remember prop Thirteen in California? Well, guess what? Now there is talk that we need to reform it because schools and roads don’t pay for themselves. The Golden State might be leading a return to sanity. I suppose all those bad roads finally impressed on Californians that a slightly higher gas tax was needed to fix them, but I digress.
Tax the rich! Representative Alexandria Ocasió-Cortez got the chattering (and very wealthy) classes nervous. Seventy percent marginal tax rate? What kind of insanity is that? As Peter Dell asked at Davos, show me a country that has ever succeeded with such a tax scheme! The horror! Well Sir, as you were told, that would be the United States of America. Granted, likely school failed him and never told him of this horrible era of American history, when marginal rates reached all the way to the nineties. Fun fact, in modern-day dollars, that tax rate started above $3.5 million. And yes, I am rounding up, it is actually less. In 1950 Dollars, that was $350,000. Ocasio-Cortez is talking $10 million as her starting point. What a steal!
However, the elites are not happy. They have funded museums, drinking water and vaccines in the developing world. That is much cheaper than paying their fair share of taxes. What we have now is a scheme that is transferring vast amounts of money to the top one percent. They are using all kinds of schemes to keep the good times going. These range from neoliberal economics that favors them to tax shelters. Their objective is to hoard as much wealth as possible. This is why taxes, especially progressive taxes, are so horrible to them. Incidentally, neoliberalism is a new take on the Manchester school that became the rage in the first gilded age and is almost the same economic system.
We are back in the mood to tax the rich because we find ourselves in a similar situation as 1929. This is actually bad for the general economy. There are just so many pairs of shoes or pants a person needs, Imelda Marcos notwithstanding. It does not matter if your last name is Schultz, or Dell, or Gates. They truly will not be able to spend that much more than Joe Six Pack, proportional to their income. In fact, they may be spending substantially less. They will be able to buy a private plane. Sure, how many do they need? Perhaps they will pay for a high-end vehicle. How many do they need? Let’s be realistic. Some of them may own a few, and in some cases collect them as if they were stamps. But all that traveling, and fancy collecting will not make for the purchasing power of a stressed working class. And at this point, the Middle Class is truly aspirational given the stresses on it.
But, but…job creators!
We know the argument well. If you tax the top one percent, how will they be encouraged to… gasp…invest and create jobs? Well, the last forty years, just like the first gilded age, proved this canard to be false. If you do not tax people when they make millions, they will hoard the money and invest it. This is not necessarily a bad thing. If you want to build wealth, some of your assets should be in what specialist call passive assets. You know, like oh Wall Street. But when a taxing system prioritizes this form of investment with low tax rates on interests, that be dividends, people will not build factories. It is far more profitable to put your money into accounts that will give you interest than it is to build a business from scratch. And if you have a lot of money, let’s say your last name is Buffett, investing the markets will be far more attractive than other forms of wealth management.
And these dividend tax rates tend to be lower than regular taxes, why people like Warren Buffett have pointed out how crazy this is. Proportionally, he pays fewer taxes than his secretary. And at 15 percent, versus oh 37 percent for his income level, you can clearly see how this is very profitable. However, this type of investment does not create a lot of jobs. How many Wall Street bankers do you need, versus I don’t know, bakers?
Here is where top marginal rates of 70 percent would start to make a very real difference in income inequality. Let’s assume for a second that everything else remains the same. And assume for a second you are in the top one percent. It does not matter how you make that money after you make your first ten million, you will have to pay 70 percent of income tax above that. So if you made that income in the stock exchange or any other way, this applies. However, if you are a small investor and made oh, $50,000 in the stock exchange, it was a good year, you will still only pay the 15 percent rate. If you own a 401K this matters.
And this is where marginal tax rates made a difference in oh, that ugly era of American history when they were taxed at 91 percent. One of the strategies that people used to hide that income and make it into non-income was by investing that money in building factories and businesses. Why? A well-designed tax system will allow you to deduct what you invest in a business. Incidentally, the new tax system is skewed to very large business when it comes to that. And it truly punishes startups, so that would have to change as well.
In other words, a top marginal rate encourages money to actually circulate in the economy, and by doing that, we see some income redistribution through the form of jobs. This, in turn, creates demand, and in time a far better business environment for all.
This tax policy should come with a living wage system, where people can pay for housing, food and other necessities with one paycheck. Depending on the number you see, a living wage will vary from $24.00 an hour to $37.00 an hour. It also most come with the end of tax heavens, like oh Panama. Because those tax heavens translate to trillions of dollars hidden from governments by people who are trying to avoid paying taxes. This is a global problem.
Few Americans, including Mr. Dell, realize that the original tax system only taxed the very rich. They also do not realize that until World War Two most Americans did not pay income taxes. But with the war, and the growth of the National Security State those taxes became permanent. They do not know either, that until 1980 the very wealthy paid higher marginal tax rates than they do today. They should go ask their elders, it is not that long ago.
This conservative revolution that took place in the United States and Europe, was part of the backlash against the welfare state, and while that era was not utopia, a larger percentage of Americans had savings, did not live paycheck to paycheck, and could save. These days, as the shutdown proved, most Americans do not have that ability, even in two-income households. If we do not have that reform, sooner or later those who are growing increasingly angry will have nothing more to lose. The pitchforks will come out, and Dell and his social class will learn a nasty lesson in what happens when people are desperate. Income redistribution through progressive taxation is not just about soaking the rich, which they remind us off often. It is part of the social contract and a way to keep the peace.