by Ted Wachtel
The Redistribution of Wealth in America
In 1969, I gave my capitalist father my copy of Ferdinand Lundberg’s “The Rich and the Super Rich” book. To his credit, he was always remarkably willing to change his mind if you presented him with good arguments and evidence. He came away from reading the book with a realization that America was in trouble. Unlike the foreign threat he encountered as a soldier in the Pacific in World War II, this threat to America comes from within.
In my discussions with my dad and many others since, I have pondered a number of conflicting questions:
- Is it in the best interest of maintaining a competitive economy and a healthy democracy that we redistribute wealth by heavily taxing the aristocracy?
- Is the redistribution of wealth a legitimate function of government, or a dangerous violation of fundamental economic rights?
- Would breaking up huge concentrations of wealth harm free market capitalism, or increase the opportunities for everyone to participate more fully in a democratic capitalist economy?
It’s not just radicals who are concerned about the growing inequality of wealth, but the wealthy capitalists themselves are concerned as well.
Melinda Gates, the billionaire wife of Microsoft co-founder Bill Gates, feels strongly. “No, it’s not fair that we have so much wealth when billions of others have so little. And it’s not fair that our wealth opens doors that are closed to most people.” She added that she and her husband will “use whatever influence we have, to help as many people as possible and to advance equity around the world.”
Bill Gates’ late father, who comes from a family of business people, spearheaded a Washington state tax initiative, which would require the highest earners—including himself and his son—to pay a state income tax. “Poor people and middle-income people are paying too much to support the state, and rich people aren’t paying enough.” He also testified before the U.S. Senate Finance Committee, to warn that without the estate tax on personal inheritance, the U.S. would eventually see “an aristocracy of wealth that has nothing to do with merit.”
Lundberg’s books make the case that the aristocracy is a long-established fact.
Billionaire Warren Buffet says that “the real problem” with the U.S. economy is people like himself. He pointed out that he currently pays less U.S. income tax than his secretary. Along with other billionaires, he and the Gates family founded “The Giving Pledge,” to donate more than half their wealth to worthy causes. However, the vast majority of the ultra-rich, in the United States and abroad, have declined to participate.
Bill Gates has responded to the question, “Why don’t we give it all to the government?” He answered that he thinks “there’s always going to be a unique role for foundations…They’re able to take a global view to find the greatest needs, take a long-term approach to solving problems, and manage high-risk projects that governments can’t take on and corporations won’t.”
Billionaire generosity, of course, does not justify the manipulation of the tax system in favor of the wealthy. One of the most conspicuous advantages is that when the wealthy sell their stocks, for example, they usually pay capital gains tax of only 15 or 20 percent — while wage earners in the top five of seven income tax brackets pay higher rates: 22%, 24%, 32%, 35% and 37%.
Why is it that income earned from a job is taxed more heavily than income earned from an investment?
Conservative politicians have long claimed the benefit of tax cuts to the wealthy “trickle down” to the middle class, creating jobs and boosting the economy from the “supply side.” These arguments, often called “Reaganomics,” were once characterized by American president Ronald Reagan‘s own Vice President, George H. W. Bush, as “voodoo economics.” They were later discredited by Reagan’s own budget director, David Stockman.
The argument that tax cuts will always stimulate the economy, and thus generate more taxes, relies on an economic model called the “Laffer Curve.” Arthur Laffer argued that tax cuts—but not just for the wealthy—can provide a multiplication effect, creating enough growth to offset the loss in taxes. But he advised that this effect works best when taxes are in a prohibitively high range, from 50 to 100%, not when they are in a moderate range. Disregarding Laffer, recent U.S. corporate and personal tax cuts enacted in November, 2017 have produced massive federal deficits.
The Congressional decision to cut taxes was not made based on thoughtful analysis of economic data. Rather, it was based on wealthy donor demands for tax cuts, no matter the consequences.
“My donors are basically saying, ‘Get it done or don’t ever call me again,’ ” said Representative Chris Collins. Senator Lindsey Graham admitted that if the GOP didn’t pass the bill, “contributions will stop.”
In the hours before the bill passed, Doug Deason, a Texas financier and major Republican donor, said, “It’s just disappointing when you help put people in office, and they don’t do anything.” (Please rest assured that donors can be just as influential with Democrats.)
It’s the Consumer, Stupid.
The fundamental flaw in “supply side” thinking is its disregard for the “demand side.” Without demand, nothing sells. No matter how many jobs the wealthy claim they create with their investments, there still need to be enough people earning enough money to buy what is produced.
“It’s the consumer, stupid,” should be the updated version of Bill Clinton’s famous 1992 presidential campaign mantra, “It’s the economy, stupid.”
In a consumer economy, working people spend their money quickly, while the investor class tucks most of it away until an opportunity arises. By the time the wealthy get around to spending their money, the money that went to working people will have changed hands many times. This greater “velocity of money” among consumers magnifies demand, but is overlooked by “supply siders” who exaggerate the role of the investor class in stimulating the economy.
The growing concentration of wealth in fewer hands is doing the opposite of stimulating the economy: It’s strangling consumer demand, and undermining the equitable balance of resources critical to successful democratic capitalism.
“I’m the one percent. Yes. Tax Me.” Eli Broad, philanthropist and the only person to have founded two Fortune 500 corporations (KB Homes and SunAmerica), wrote recently, “Let’s admit out loud what we all know to be true: A wealth tax can start to address the economic inequality eroding the soul of our country’s strength. I can afford to pay more, and I know others can, too. What we can’t afford are more shortsighted policies that skirt big ideas, avoid tough issues and do little to alleviate the poverty faced by millions of Americans. There’s no time to waste.”
Although Ray Dalio, the founder and manager of the largest hedge fund in the world, built a fortune thanks to capitalism, he’s keenly aware that it is a deeply flawed system. “Capitalism basically is not working for the majority of people. That’s just the reality.”
Dalio predicts the income gap will only get worse.
We in the Building A New Reality movement advocate economic policies that embrace a more equitable, sustainable form of capitalism that supports a quality future for all Americans, and people everywhere.