Can we tackle inequality without destroying free-market capitalism? Yes.
Coupon clippers are doing just fine in this pandemic, what with stocks and bonds back to where they were at the start of the year or slightly ahead. Low-paid workers are getting crushed.
Capitalism is a mixed blessing. The system has lifted billions of people out of poverty, but it doesn’t work particularly well for people without capital.
The past four decades have delivered quite a windfall to Americans with capital. Counting from the end of 1981, which is close to the bottoms in financial markets, a dollar put into corporate bonds has grown to $14, in stocks to $24. Those are real returns, beyond inflation.
If you started this episode with a pot of money, or you had a high-paid job that enabled you to put money aside, then you got richer. If you started out poor and spent 38 years in crappy jobs just squeaking by, then you are still poor.
Three things have combined to make the rich richer. One is that globalism has enabled them to marry their capital and their skills to cheap foreign labor. The next is that the Federal Reserve has printed a great deal of money. Its intention was to stimulate the economy, but the effect has been to stimulate millionaires by inflating the prices of their assets.
The third contributing factor to the gains for the upper crust has been an orgy of tax cuts. This began with a capital gain tax cut enacted under Jimmy Carter and climaxed in the 2017 extravaganza under Donald Trump.
We would probably not be doing the less fortunate any favors by undoing the first two elements of wealth creation, by, that is, putting up trade barriers or crimping the money supply. But it is reasonable to take another look at the third item on the list, those tax cuts.
Proponents of tax reduction defend it as an essential element of growth and prosperity. There is some validity to this line of argument. If you punish capital or work effort you get less of it. Productivity is built on capital accumulation.
But it is possible to have too much of a good thing, at least when it contributes to grotesque disparities. The median white family has nine times the wealth of the median black family. That does not have to be a permanent feature of the economy.
Here are seven ways to more evenly distribute capitalism’s bonanza.
1. Give everyone an investment account.
Privilege begets privilege. Via home equity and retirement accounts, the middle and upper classes enroll their families in a virtuous circle of wealth creation. Poor families watch from the sidelines.
Suppose we divert Social Security taxes on the first $10,000 a year of income into a savings account invested in a giant stock and bond index fund. Like Social Security benefits, the account would be inaccessible before retirement age; unlike existing Social Security benefits, it would be an asset that could be handed down to the next generation. It would grow to $100,000 at the end of a long life of labor.
I have in mind that this would supplement, not replace, the monthly benefit. How to cover the $180 billion annual cost? First, by doubling the Social Security wage base (now $137,700) without any upward adjustment in monthly benefits; we would, in other words, be making the already progressive Social Security system even more progressive. Next, via tax hikes on prosperous people (see below).
2. Repeal the 20% business deduction.
This feature of the 2017 Trump tax cut means that a plumber making $100,000 pays income tax on only $80,000, while a teacher making $100,000 pays tax on $100,000. How is this differential an incentive to capital formation or work effort?
The deduction also means that a real estate player making $1 million can get a $200,000 break. So can an investor passively holding a real estate investment trust. These people do not need incentives beyond what they’re already getting from depreciation.
The deduction is set to expire in 2026. It should be ended next year.
3. Raise the top rate.
A 90% rate might chase people out of the country. But 50% won’t cost us a lot of talent. The economy didn’t do so badly under JFK’s 70% top rate.
Let’s say we raise the top federal rate from 37% to 45%, offsetting some of that boost with an elimination of the irksome 3.8% investment tax surcharge. With state taxes layered on top, high-incomers would, on average, be splitting their income 50-50 with tax collectors.
That’s tolerable. How did it go in Rent? “Today for you, tomorrow for me.”
In California, New Jersey and New York, the combined marginal rate would be somewhat worse than 50%. Such locales would retain their existing motivation to get spending under control so that they don’t lose yet more taxpayers to Florida and Texas.
4. Rework the dividend break.
Under a tax law dating to the Bush II era, reduced rates (0% to 20%) apply to dividends from most corporations. The notion is that it is unfair to impose a double tax on business income, once at the corporate level and again, via the individual income tax, as profits are distributed.
Except that some corporations manage to pay little or no corporate tax. I don’t know how they do it. Maybe they assign all their patents to a satellite hovering off Vanuatu. The bottom line is that well-off investors have their cake and eat it, too.
There’s a simple cure. Limit the amount of dividends getting favorable tax rates to the net income on which the corporation has paid federal tax.
5. Increase estate taxes on the very rich.
Suppose we had a confiscatory rate on asset transfers above $50 million, with the same unlimited exclusion now in effect for bequests to charity. Entrepreneurs would not cease to create wealth, but they would be competing on the size of their foundations rather than the length of their yachts.
A lot of billionaires are already planning to leave most of their money to philanthropic endeavors; this tax hike would make such behavior the norm.
6. Repeal the home sale exclusion.
The exclusion of the first $500,000 of capital gain on a residence is a nice benefit for people with $5 million homes in Greenwich. It doesn’t do much good for a family eking out a $15,000 gain on a fixer-upper in Detroit. Couples with low incomes (below $104,800) are already exempt from federal capital gain tax.
7. Tax carbon.
Low fuel prices create a wonderful opportunity to start a tax on fossil fuels. Raise a large sum, like $200 billion a year, and rebate the proceeds to the citizenry on a flat per capita basis. Someone taking the subway to work would be a net winner. Someone heating three homes and jetting to Europe to give climate speeches would be a net loser.
Couple this tax with a repeal of every subsidy, credit and mandate for alternative energy. Henceforth electric vehicles, wind farms, rooftop solar panels, ethanol boondoggles and other playthings of the privileged and crony capitalist classes would have to pay their own way.
We could do it. We could give the disenfranchised a better environment and a bigger stake in the economy. We could do it without uprooting capitalism.
Originally published at Forbes