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July 21, 2009

Should We Bring Back The 90% Top Tax Rate?

-- by Dave Johnson

This post originally appeared at Open Left

How many stories have we heard in recent years of CEO’s and other executives looting, stealing, polluting and wreaking general havoc? The incentive to loot a company’s pension funds is money. The incentive to outsource our jobs is money. The incentive to deny needed treatments to an insured patient is money. The incentive to pollute our rivers and air is money.

Generally the incentive to lie, cheat and steal is money. This is especially true in the corporate world where the reason for … well, everything … is money. This is normal, and can be kept in check. But the temptation that pushes many over the line is not just money, it is the possibility of the big, humungous jackpot. And that is what we have today.

It used to be that you could make, why, millions of dollars if you worked hard, built a company, invented something important, or had amazing talent. But today mere millions is for chumps. Today you can loot a fund, rig an energy market, forward-run stocks or threaten to bring down an economy and end up with a quick payoff of billions.

When excessive, massive paydays are possible, it opens the door to overwhelming greed and a resulting compromising of principles.

There is a way to prevent the destructive behavior we have been seeing from the top. People won’t have an incentive to cheat and steal if they can’t get the huge jackpot from the proceeds. Let's limit the possibility of collecting a vast and fast return. The vast and fast return is the motivator, so take it out of the equation.

The way to do this is with a very steep progressive income tax with a very high tax rate on income above a certain level. So suppose we set the top tax rate back to 90% for people making over, say $3 million. $3 million a year is nothing to sneeze at, so there is still plenty of reason to do what you do to make a lot of money. And if you pass $3 million you still take home $100K for every million more you make, which is also nothing to sneeze at. But there is no longer a reason to engage in quick-buck schemes. Instead there is plenty of reason to build a solid business over time, and hopefully eventually build a fortune of hundreds of millions. As I said, nothing to sneeze at.

People could still become vastly wealthy, except it would take ten or twenty years to become vastly wealthy. You would have to actually do a good job, consistently, instead of looking for fast-buck schemes to cash out in a year. And for those who still need to make a billion or two a year, We, the People are the beneficiaries while they still take home hundreds of millions. It's a win-win.

Again, if we limit the income that can be realized from such behavior we reduce the incentive to engage in it. We as a society used to understand this. We used to tax high incomes at very high rates. We used to see that this provided all of us with a benefit.

An additional bonus from this idea: by limiting the amount that can be made in a single year we provide an incentive to stay involved and work hard and over a longer period of time build up a respectable fortune. Just not a vast and fast fortune.

Another benefit from increasing the top tax rates is that we need the money. Because of the huge tax cuts that were given to the wealthiest we neglected maintaining our infrastructure, we have run massive deficits, we cut services to citizens and now we are reaching a limit of our ability to borrow. So it is time to ask the beneficiaries of the policies that got us into this jam to pitch in again and help us get back out of it again.

Until the late 1970s the United States had a very, very high top income tax rate. From the time of FDR until the 1960s the top rate was 90% plus on very high incomes. From the 60s until the Reagan years it was in the 70%s. Under Reagan it ramped down to 28%. (See the numbers here.)

The periods of highest taxation of the highest incomes coincides with periods of the most investment in the country’s infrastructure, the period of building the middle class and American leadership in areas of education, science, technology and manufacturing. Perhaps this is because we, as a country, had the financial resources available to invest for the public good rather than tied up by a few at the top as we see today. Perhaps this is because in a consumer economy more regular people with more money keeps things going, and moving the taxes up to the prime beneficiaries increases the amount of money that regular people have to spend.

There were multiple historical justifications for these tax rates. Among these, we understood that the purpose of our economic system was for OUR benefit. So while we encourage people to produce we also understand that once the production is stimulated we all want to benefit from it. So after a certain point a tax kicks in and increases and we all share in the returns from the enterprise.

Another justification was that we needed the money to pay for WWII, and to invest in the things that pulled us out of the depression. Yes, we got out of the depression by raising taxes at the top.

But beginning in the 70s the malefactors of great wealth started a well-funded drumbeat of marketing messages to convince people that government and regulation are bad, the richest should not be taxed, the rich “create jobs,” cutting taxes increases government revenue, etc.

This huge propaganda campaign succeeded and turned the public against taxes and government. They convinced the people that the people should have no power. (Marketing can convince people to smoke -- it can convince people of anything.)

Look at the changes in the nature of our economy since tax rates were lowered. We have financialized the economy. We have been shipping manufacturing and jobs out of the country. We have been eliminating pensions. Wages have stagnated. We have massively increased debt. And a very few at the top have been able to use financial power to consolidate to themselves much of the income and benefits of the economy that We, the People built.

Reasonable returns that build up over time are boring. They require work. So when you can make out like a bandit you act like a bandit. Since the tax rates were lowered the nature of our economy has changed from building solid companies that treated their customers well and provided well-built products, to quick-buck schemes designed for fast cash out.

Corporate conservatives will argue that we just want to “punish success” by asking the wealthiest to pitch in. Actually we want people to make lots of money. In fact, we want more people to make more money. That’s the point of our economy – so that we all are prosperous. And with ever higher tax rates, when those at the top make more money we all make more money. So in fact with high top tax rates there is an additional societal incentive for the rest of us to encourage those at the top to make even more.

What we don’t want is people gaming the system so they can reap vast personal returns for themselves at the expense of the rest of us. We want the system functioning smoothly. A very high top tax rate helps fight this problem. In the recent financial collapse it was vast and fast returns that provided the incentive for the gaming, for taking huge risks and not worrying enough about the downside.

Some other points, off the top of my head: (This is a blog post not a Ph.D. thesis.)

- High tax rates at the top encourage work.

- High top tax rates limit the concentration of wealth.

- High top tax rates distribute the benefits of our economy to all of us, paying a dividend for participating in a democracy.

We can also use high top tax rates to increase investment incentives. A top rate of 90% provides a lot of room to set a favorable capital gains rate. If you only tax, say, 60% of the income from capital gains this would provide a huge incentive for the very rich to invest. This way a person in the 90% tax rate would only pay $54 in taxes and a person in a 20% tax rate would only pay $12 on capital gains.

We used to believe as a society in democracy and sharing the wealth. We used to believe in not letting a few get wealthy enough that they can use the resulting power to skew the country's policies in their favor. We used to believe that windfalls should be shared. This idea helps return us to a functioning democracy with the resources to act for our mutual benefit.

This idea retains the profit incentive while reducing the greed/bad-behavior incentive by capping the potential gains. These potential gains can be great enough that anyone can strive for them, without being high enough to drive massive greed.

So, what do you think? Should we set the top tax rate back to 90% or higher?

Posted by Dave Johnson at July 21, 2009 10:50 AM


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