Taxes on the Rich Should Be Raised and Income Redistributed

by: Kimball Corson

Les Leopold, author of the book, The Looting of America, has written an interesting article (Why Are We Afraid to Tax the Super-Rich?). His core argument is we need to more heavily tax the rich to equalize the income distribution, a point I have been arguing for on Seeking Alpha for some time, generating considerable controversy, but not much by way of coherent and articulate responses.

As Les Leopold contends:

We are told that we're already living well beyond our means -- that entitlement programs like Medicare and Social Security will bankrupt us. Forget the solar panels, the smaller classes and the new jobs -- we've got to cut back on government programs. . .

This is the favored pitch of the rich and wealthy. The middle and lower classes should tighten their belts as the time is here to shrink the entitlement and benefits programs and thereby make government smaller. This is the big pitch the wealthy and their lobbyists sing as a chorus.

But currently, at their end, the inside song is much different. As Les puts it:

Meanwhile, the super-rich are still having a ball. In his annual shareholder letter, mega-investor Warren Buffett wrote, ‘We've put a lot of money to work during the chaos of the last two years. When it's raining gold, reach for a bucket, not a thimble.’ And Forbes Magazine adds, ‘Many plutocrats did just that. Indeed, last year's wealth wasteland has become a billionaire bonanza. Most of the richest people on the planet have seen their fortunes soar in the past year.’

So what is going on here? The answer in a nutshell is massive income and wealth is being transferred from the middle and lower classes to the wealthy, while government benefit bones are being tossed to the rest of us with the admonition that they will soon be cut off. But lets put the situation in perspective. As Les writes:

In the 1950s the marginal tax rate on those earning more than $3 million a year (in today's dollars) was 91 percent. By 1990 it was 28 percent. The IRS says that the top 400 richest tax filers actually paid a rate of just 16 percent in 2007 (the latest numbers we have). Yep, the richest earners -- people who took in an average of $343 million each -- probably paid a lower rate than you did. Something to consider as you sign your 2009 return. By the way, those 400 people who do so well on tax day have a combined net worth of nearly $1.37 trillion. (According to Forbes Magazine their wealth has gone up on average by more than 16 percent over the past year -- the worst economic year since the Great Depression during which 29 million Americans are without work or forced into part-time jobs.)

The obvious resolution to this problem, in light of these numbers and the increasingly bad distribution of income and wealth, is to raise taxes on the rich and lower them on the poor. As matters stand, 22% of all income goes to the lower 59% and 6% goes just to the top 1/10 of 1% and it is estimated that more than 80% of all wealth is concentrated in the top 10% or so. Too, we are just about to all but do entirely away with the federal estate tax, another crime in the making.

So why are we so hesitant about taxing the super-rich?

First, they have a huge and effective mega group of highly paid lobbyists who would try to block such efforts and, following Bush, contend that even more tax cuts for the rich are needed, to have the economy recover well, of course. Beyond that they have a set of intellectual arguments with which to defend themselves against higher taxes. They are, succinctly put:

1. We've earned it.

The concept of "earned" it here has obviously shifted. This is especially true in light of the low tax rates for the wealthy, the bailout of the big banks, AIG, GM and others, too largely at taxpayer expense, the tax breaks for the wealthy and the million and one ways the rich and wealthy, with their lobbyists, have figured out for looting government. The successful urge most government functions or activities to be outsourced, to their own companies of course and they turn around and charge the government outrageous prices that the GAO cannot stop talking and writing about.

Government subsidies to farmers, often for not growing anything, is another example of how they have “earned it.” In 2009, the Wall Street wizards collected about $150 billion in bonuses – a reward for crashing our economy no doubt, instead of losing their jobs, as they should have. Yeah, they earned it alright, like hell. Or we have Warren Buffett buying options for Goldman Sachs preferred stock big time just before the rest of us learned that Uncle Sam was going to bail out AIG so it could make good on all Goldman’s CDSs and have the company do well. Yeah, Warren earned it alright, the new fashioned way: by looting government, directly or indirectly.

As Les writes, "You'd think we'd be crying out for a windfall profits tax to reclaim our money. But no.” I suggest that we are being sucker punched here. Just like America was sucker punched by Carl Rove into voting against their economic interests big time and in favor of sillier things like no abortions, down with gays, family values, etc. Great distractions to the looting of America at their expense which has been going on.

2. Redistribution of Income is Un-American.

I catch this one all the time. I am a communist. I’m a Marxist. I don’t know what I am talking about. I have never earned big money (not true). I don’t understand. The rich will quit work if their taxes go up. Raising their taxes is unfair because they have earned it. But the interesting things is no one opposing me ever addresses the facts or arguments I raise, especially this one which I have repeated several times:

The US economy is being damaged by the maldistribution of income because the rich have a lower average propensity to consume goods and services and a higher average propensity to buy financial assets, especially on secondary markets. Therefore, aggregate demand and GDP is relatively depressed and financial asset prices are relatively inflated. This is injurious to the national economy because GDP is lowered permanently relative to where it would have been with a more optimal distribution of income.

After WWII, our economy boomed. At the time, we had one of the fairest income distributions in the world. Our economy did real well. Not anymore. Today the gap between rich and poor is wider than at any time in U.S. history. A key sign of the times is this: in 1970, the compensation ratio of the top 100 CEOs compared to the average worker was 45 to one. In 2008 it was 1,071 to one. What did those CEOs do to be compensated so much more highly: give us the Great Recession with their shenanigans? Are we daft or what?

Silence is all I ever hear regarding the economic arguments. Instead, I am just called a Marxist and told the government should not take the money of the rich, because they have earned it.

Yet the fact is, while the naysayers say no to income redistribution, income redistribution is going on right under their very noses and they have no problem with that. I guess it depends on whose ox is getting gored. As Les explains:

Just think of all the scams corporations and the rich are running: ever-rising credit card fees, predatory mortgages, usurious interest rates, check cashing ripoffs, monopoly pricing. They turn income into lower taxed capital gains, find offshore tax shelters, collect subsidies for their runaway shops. And then they netted the big one: Wall Street bailouts. Post-bailout, these too-big-to fail companies are getting even bigger. It all adds up to a major redistribution plan -- from the many to the few.

3. If we tax the wealthy, we'll hinder investment and kill jobs.

This is nonsense. The rich have worked much more honestly and harder under higher taxes in the past than they are now, acting to loot America and get something for nothing or too little. As Warren Buffett has said repeatedly, if you tax the rich more, from all he has seen and knows, they will simply work harder. Being at or near the top is not just about compensation as any idiot knows. Too many other factors, prerogatives and social aspects attend such positions. Indeed, studies show it is relative income that matters most: how is your compensation relative to your nominal peers? But this foolish goes on and we daft believe that if the rich are taxed more they will quit work.

Indeed, look what has happened after we cut taxes on the rich under the Bush administration. As Les explains it:

When we cut taxes on the super-rich, we got a different kind of investment boom than the politicians and economists had promised. The wealthy literally ran out of investments in factories, equipment and even services. So they flocked to financial investments -- which were supposedly safer and more profitable anyway. The super-rich laid their money down in the Wall Street casino, and helped puff up bubble after bubble. Profits in the financial sector soared. In 1960, the sector accounted for about 15 per cent of all corporate profits. By 2008 (before the crash, that is), it was almost 40 percent. The financial sector crashed as the direct result of tax cuts for the super-rich and Wall Street deregulation.

4. Government's too big already. We should be cutting the public sector, not raising taxes to expand it.

This is disingenuous. What is in fact being said is we want entitlements and benefits cut, but never the defense budget. That is one of the key ways we can we sell government overpriced products and services and get rich. No one rich ever mentions cutting the defense budget of $663 billion this year.

No, they attack the senate Health Care bill which puts everyone under coverage for a relatively cheap $87 billion a year and which the CBO estimates will actually reduce the deficit in time. Again, are we daft or what? We believe these foolish arguments, just like Rove persuaded the American public apple pie, Mom and family values were more important than their own economic interests. America was induced to actually vote against its own economic interest. Not too smart, I say.

Government has largely expanded in response to the efforts of the well-to-do and their lobbyists to add government programs and enlarge certain budgets so as to enable them to better loot our government in more and different ways. We need to understand that. It has been going on since Eisenhower warned of us the military and industrial complex and yet, somehow, we seem too daft to see or understand it. In that sense, we are getting just what we deserve. But we should understand better and fair better too, I believe.

America needs to wake up, understand well what is going on and demand in a loud and clear voice that the taxes on the rich be raised to sensible historical levels and that income in America must be more equally and fairly distributed, again, so the economy and middle class can revive.

Disclosure: No positions