Global Policy Forum

The wealthiest one per cent today has more than twenty per cent of the global income. One way to balance this inequality is to tax the rich. Steeply graduated income taxes would make public debt manageable. Instead of deep cuts in the public sector, the additional public revenues could help to improve education, healthcare and public transit - something that benefits all society. Transnational corporate profit might decline and local production for local consumption would expand. The taxation of the richest means investing in the livelihood of the poorest.

By Allan Engler

It is also not a surprise that unions and students in Europe have mobilized millions against these cuts. Unions, public sector workers, pensioners, immigrants and the poor are not to blame. Government deficits are a direct result of tax cuts, capitalist speculation, the 2008 financial crash, government bailouts, and the resulting loss of employment, income and government revenues.

If public deficits were the real problem-not just a pretext-military spending particularly in the U.S. would be drastically cut. Taxes would be raised. Of course, tax increases have consequences. Higher sales and value-added taxes reduce consumer purchasing power, further weakening markets in times of recession. Taxes on enterprise revenues can reduce expenditures for plant and equipment and lead to the failure of more businesses.

Steeply graduated income taxes would upset the super-rich but are otherwise benign. Taxing income over $200,000 a year at rates of 75 per cent, and over $500,000 at 90 per cent would substantially increase government revenues without reducing markets for most goods and services. Taxing profits on the buying and selling of stocks, bonds, real estate, and currencies could raise additional revenues. International agreement to raise tariffs to 15 to 25 per cent from the current average of five to ten per cent would raise more. Although the profits of transnational corporations would be squeezed, the resulting growth in local production for local consumption would expand employment, income, and public revenues everywhere.

Increasing taxes on capitalist income is anathema to the supply-side economists who have dominated government policy for thirty years. They claim that increasing taxes on the wealthy reduces the supply of funds available for private investment, causing job loss, reduced real incomes, and economic decline. Supply-side economics was a wealth-holders' reaction to Keynesian demand-side policies.

The Keynesian period-from World War II through the 1970s-had been a response to destructive twentieth century wars, financial crashes, prolonged economic declines, and rising support for militant unionism, socialism, and communism. To counter growing opposition to capitalism, to stimulate consumer demand and to revive opportunities for profitable investments, governments increased spending on pensions, unemployment insurance, education, healthcare and income support. Laws were changed to make it easier for unions to organize and to bargain collectively.

Much of the cost of stimulating demand was covered by steeply graduated income taxes. In Canada, the U.S., and the U.K. the highest incomes were taxed at marginal rates up to 90 per cent during the war and after. Although lowered in the 1960s, income taxes remained steeply graduated through the 1970s. The share of total income going to capital as profits, dividends, interest payments, and rent did decline. Nonetheless, investments in machinery, equipment, buildings, infrastructure (bridges, roads, schools, hospitals, public transit), and housing stock rose steadily.

By the 1970s many of the very rich and corporate oligarchs had concluded that the welfare state was not in their interests. Unions were in decline. Communism was clearly not outperforming capitalism economically or militarily. At the end of the decade, neoconservatives like Margaret Thatcher and Ronald Reagan were winning political office claiming that Keynesian policies had increased demand at the expense of the supply of capital for investments. The result, they said, was not growth, but inflation and stagnation.

In fact, the Keynesian period was a time of steady, impressive growth in investment and consumer income. Inflation rates did reach double digits in the 1970s. Neoconservatives blamed this on rising social spending and government deficits. A more obvious explanation was the combination of rising oil prices and massive inflows of capital from abroad. Oil prices had risen from under $3 to over $30 a barrel, increasing the price of nearly all goods and services. Suddenly awash in revenues, the rulers of oil exporting countries invested billions in the U.S., U.K, Europe and Canada. Governments that were already cutting taxes paid by the rich and accumulating deficits, responded by borrowing more. U.S. government decisions to finance war in Indochina with borrowed money, not tax increases, compounded the problem.

In the 1980s, after supply-side policies became the economic orthodoxy, taxes on corporations and upper incomes were methodically lowered. Industries were deregulated. Laws were changed to make it more difficult for unions to organize and to engage in effective collective bargaining. Public utilities and services were privatized.

The rich did get richer-the super-rich substantially richer-but economies did not flourish as supply-siders had predicted. The quality of public services declined. Social infrastructure was allowed to decay. Employment in manufacturing and service industries fell. The real income of wage and salary workers stopped growing. Markets for consumer goods stagnated.

Supply-side theorists ignored the evidence. Instead, they turned phrases from Adam Smith into a mantra. More income for capitalists, they intoned, meant more savings, more investment, more economic growth. But Smith was not talking of twentieth century corporate oligarchs when he equated capitalist income with savings and investment. He was describing a middle class of prosperous farmers, shopkeepers, and merchants, whose frugality he contrasted with the aristocracy's fondness for luxury. The middle class, he said, turned their surplus income into savings for investment in the future; aristocrats spent and borrowed for their current pleasure.

Today's super-rich are more like eighteenth-century aristocrats than the middle classes of Smith's day. They are mega and giga-consumers who transform revenues from productive assets and social labour into personal wealth-into mansions, yachts, beachfront condos, and winter retreats. As a class, they are obsessed with maximizing returns on their wealth, but they have little interest in productive investment. For them, innovation means new more profitable investment instruments: futures, derivatives, dubious mortgages packaged as collatoralized debt obligations, and credit default swaps (bankruptcy insurance).
Even when pyramid scams and outright fraud are not involved, nothing is added to means of livelihood when one capitalist buys and another sells stocks. Financial entitlements are merely shuffled from one to another. When the rich do invest in actual plant and equipment this is likely to be abroad where labour is cheaper and profits are higher.

The economic argument

Steeply graduated income taxes would make public debt manageable. Unlike taxes on consumption, taxes on the highest incomes would not dampen markets for consumer goods. Additional public revenues could be used to improve education, healthcare, social housing, income support, public transit. As employment and markets expand, enterprises would be encouraged to invest more.

Undistributed corporate profits are the main source of investment in research, development, plant, and equipment. By discouraging the distribution of profits as dividends, executive salaries, and bonuses, confiscatory tax rates on the highest incomes would give enterprises more reason to retain earnings, increasing the funds available for investment in real means of livelihood.

With far higher taxes on capitalist income, the super-rich will have to make do with less sumptuous homes, fewer and less luxurious automobiles, yachts, and vacation spots. For everyone else, the cost of keeping up with the Joneses will be less. People in all income groups are likely to save more, making more funds available for investment in housing and local enterprises.

The democratic argument

Capitalism claims to be a system of individual opportunities. Increasing the revenues for education, healthcare, pensions, and income-support would expand opportunities. Steeply graduated income taxes would transfer control of social surpluses from a corporate oligarchy to elected national, regional, and local governments.

Can governments and elected representatives be trusted to act in the common interest? With steeply graduated income tax, a small self-serving minority would have less money to influence legislation and corrupt politicians. Billionaires, like the Koch brothers-two of the wealthiest men in the U.S. who have bankrolled the U.S. Tea Party-would have less spare cash to dominate and manipulate political agendas in their narrow class interests.

Steeply graduated income taxes alone would not end capitalist entitlement, but as elected governments gain more revenues to expand social entitlements and public employment, people will demand to have a voice in economic decisions. The right of wealth-holding minorities to impose their immediate interests will be replaced with the transparent, democratic right of people to direct economic life in the common interest, in the interests of human and environmental well-being.

The environmental argument

The wealthiest one per cent presently claim twenty per cent and more of total income. If their share were reduced to five per cent, extravagant consumption and the accompanying waste of resources would be greatly reduced.

Governments would have the funds needed to replace dependence on private automobiles with fast, accessible public transportation. Federal, regional, and local governments could be provided with the funds to construct public heating and cooling systems that require less fossil fuels. Investments could be made in local agriculture for local markets. Environmental protection agencies could employ enough inspectors to investigate complaints and to act against corporate damage to ecosystems.

As control of social surpluses passes from the hands of wealth-holding minorities to elected governments, people will mobilize to demand that national, regional, and local communities provide more employment and goods and services as human rights. Fewer people will come to depend on the profitability of capital in general and of transnational corporations in particular. More people will be free to oppose environmentally destructive industrial activity.

As communities replace private corporations as the institutions making economic decisions, industrial and service workers, professionals, the retired, homemakers, students, farmers, mushroom pickers, loggers, and ecologists will all have the right to a voice and equal vote. The interests of major shareholders and top corporate executives will no longer take precedence over the income and employment of common people, or over the carrying capacity of environments.