Saturday, June 23, 2007

Taxing the Very Rich--Why, How, and How Much


We are proposing 3 new taxes: (1) Higher personal/family taxes on very high INCOMES, such as we had in WW II up until the 1960s, when the top marginal tax rates reached 91%--but we should even top that on excessive incomes now; (2) a new progressive tax on very high personal/family net worth (WEALTH); and (3) new or increased taxes on the assets and incomes of CORPORATIONS. EACH of these three taxes could yield up to half a trillion dollars a year or more in new revenues, but I would especially note the potential for the personal wealth tax, because it is almost wholly new in this country. It could yield very high revenue in the early years as the great fortunes are whittled down, much of which might be "in-kind"--the overrich could pay by transferring stock, real estate, etc., that they own (rather than having to sell them to pay the tax in cash). In later years, then, the wealth-tax revenues may decline, to be replaced by income from the assets transferred--dividends, rent, etc.

Topics covered in this blog:
Foreword: Economists who support the principle of taxing the rich
A. 5 reasons why we need to tax the rich -- and corporations
B. Why it is fair to do so
C. Countering other arguments
D. How can we tax the rich?
E. How much to tax them
F. Making the taxes fairer
G. International redistribution

Foreword: Economists who support the principle of taxing the rich. Many people are aware that economics is a huge and complicated field of knowledge, in which non-experts can be misled, so they want to know whether economic experts (and not just political activists like me) support the concept of taxing the very rich.
Many do (if not all). For example, Nobel Prize-winning economist Paul Krugman, in his book, "The Conscience of a Liberal" (2007), says on p. 258ff:

"Both historical and international evidence show that there is room for tax increases at the top that go beyond merely rolling back the Bush cuts. Even before the Bush tax cuts, top tax rates in the United States were low by historical standards--the tax rate on the top bracket was only 39.6 percent during the Clinton years, compared with 70 percent in the seventies and 50 percent even after Reagan's 1981 tax cut. . . . [Also] taxing capital gains as ordinary income . . . would yield significantly more revenue, and also limit the range of tax abuses like the hedge fund loophole.
Also, from the New Deal until the 1970s it was considered normal and appropriate to have "super" tax rates on very high- income individuals. Only a few people were subject to the 70 percent top bracket in the 70s, let alone the 90 percent-plus top rates of the Eisenhower years. It used to be argued that a surtax on very high incomes serves no real purpose other than punishing the rich because it wouldn't raise much money, but that's no longer true. Today the top 0.1% of Americans, a class with a minimum income of about $1.3 million and an average income of about $3.5 million, receives more than 7 percent of all income--up from just 2.2 percent in 1979. A surtax on that income would yield a significant amount of revenue, which could be used to help a lot of people. All in all, then, the next step after rolling back the Bush tax cuts and implementing universal health care should be a broader effort to restore the progressivity of U.S. taxes, and use the revenue to pay for more benefits that help lower- and middle-income families."
[To which I would hasten to add, use the revenue to create full employment with more and better JOBS for all, not just welfare, and to build a more dynamic, future-oriented civilization, progressing towards the Space Age, not merely higher living standards.]

Not an economist, yet a respectable Republican president who was expressing what was common knowledge in his time (and which was forgotten and lost under Reagan and following misleaders who have brought us the economic catastrophe we face today), Dwight D. Eisenhower said in 1960:

"[In some countries] a few families are fabulously wealthy, contribute far less than they should in taxes, and are indifferent to the poverty of the great masses of the people." "A country in this situation . . . is fraught with continual instability."
Back then, the U.S. tax code was so progressive that incomes of over $400,000 a year [a bit over $3 million today, adjusting for inflation] were taxed at a 91% rate. Of course, the very rich back then exploited loopholes just as they do today, but they still wound up paying a hefty tax. In 1955, for example, America's 400 highest-income taxpayers averaged about $12 million in income, in today's dollars. They paid, after loopholes, 51% of that in tax. By contrast, in 2005, the 400 richest taxpayers, averaged $214 million in income, and paid taxes at a mere 18.5% rate. . . . Americans prospered in those tax-the-rich years--typical family incomes more than doubled in the quarter-century after WW II, even after adjusting for inflation; over the last tax-cutting few decades, by contrast, wages today are actually lower, adjusted for inflation, than in the early 1970s. [Source: "Ike Wanted to Spread Wealth, Too" by Chuck Collins and Sam Pizzigati, Progressive Media Project--Nov. 3, 2008, Institute for Policy Studies.]

A. 5 reasons why we need to tax the rich -- and corporations.

1. The world's eleven hundred billionaires own more wealth than half the world's people combined earn in a year. What does this tell you? It tells you that the world's wealth needs to be redistributed on a collossal scale. No good purpose is served by this gigantic inequality; there is no justice or economic efficiency or productive incentive in it. It is wrong to respect it, and it is wrong to tolerate it. It could be remedied through massive taxation of the extremely rich to raise money for creating good jobs for the poor. We must try to accomplish that, because to whatever extent we fall short, the remaining redistribution is likely to be achieved by war (WW III).
The secondary reason that we need to tax the rich (and corporations) is to raise money for solving our national and world problems, making the world a better place, and moving us towards our great human destiny in Space.
The third reason for taxing the rich and corporations is to support our ideals such as democracy and equality of opportunity. Today's severe concentration of wealth destroys democracy because the extremely rich and corporations have too much control over our government; and equality of opportunity requires that everyone have the same access to education, training, experience, networking and mentoring that the rich have, which will obviously require a wholesale restructuring of our system. Yet also, mere equal opportunity as it is often understood doesn't do much good for those who are lacking in native, born ability or qualities such as IQ, good health, talent, or physical energy level, or assets such as friends and relatives, or good luck. Therefore people who are poor due to lacking these must be compensated if not cured, which will be very expensive--and who should pay for that? The poor themselves cannot, so it must be paid for by taxing those who are blest, through no deservingness of their own, with fortunes earned by such abilities, luck, gifts, and qualities.
The fourth reason for massively taxing the extremely rich is that they can easily afford it. Suppose, for example, that a hedge-fund manager making $570 million a year is taxed at a 99.7% rate. This would still leave him with an after-tax income of $1,710,000 a year--enough to buy 4 big new houses every year or to live as grandly and luxuriously as anyone could wish and to do anything he could reasonably want to do. This is by contrast with taxing the poor or middle-class, which decreases their living standards and imposes limits on what they can do and enjoy.
The fifth reason for taxing the very rich is that it is fair (See Section B below).

But as for taxing corporations (and other entities, such as charities, foundations, religions, and units of government), this is problematical, but may be necessary and at any rate will probably become a good auxiliary tool for building a better world. First, there is nothing really new about the concept of taxing corporations; for many years, corporation taxes were higher than personal income taxes. But it is time for a comprehensive new rethinking of the practice. Rather than impose across-the-board taxes, each company needs to be studied individually to determine what it is doing and planning to do with its wealth and income. Assets and income that it uses to create jobs and invest in machinery and supplies to provide goods and services may be taxed only lightly--depending on how vital we believe its goods and services are. But assets and income that it hoards, or uses to pay excessive salaries to its executives, or to pay out fat dividends to the already rich, may be taxed up to 100%. Corporations are publicly chartered and so they have to be completely accountable to the public and serve the public good. Bear in mind that their profits are generally a measure of how much they overcharge for their products and how badly they underpay their workers and vendors.

B. Why it is fair to do so.
The rich do not work any harder than middle-class or poor people, and therefore are no more deserving than they are--and therefore ideally should not make any more money than they do.
We must be prepared for extended debate about this, because the overrich and their apologists will offer many counterarguments, but they can all be defeated.
For example, they will argue that some rich people are rightly rich because they are highly talented.

Now, where people get super-rich due to great talent, whether as athlete, entertainer, inventor, entrepeneur, executive, or financier, etc., this talent is due to both inborn native "gift" and much hard work to develop that talent.
While you may admire the gift that some people are born with, it is also proper to envy and resent them, because they did not deserve their gift, this is just part of nature's own injustice, that you and I may have been born talentless, though we are as deserving of being gifted as anyone.
Since such people did nothing to deserve their born talents, it is wrong for them to reap huge economic benefits from them while the est of us get nothing.
Where the very rich and talented worked hard to develop those talents, they deserve to be rewarded for that hard work. But since they didn't work any harder at that than the rest of us, the untalented who have had to spend our lives slogging along in our often dreary, tiresome jobs, they do not deserve any more riches than ordinary people do.
NOTE, however, that we are not proposing to eliminate all or even most of the rewards to talent. The gifted can still make two or three or five or ten times as much as average. Our proposed taxation of the very rich doesn't even begin until a person's income is at least 5-10 times the average; and if a person is so talented as to earn a hundred to a thousand times the average income, they can still have 10-20 times the average income even after the taxes we propose.
Another thing you always want to keep in mind, when the overrich argue that our taxes are "robbing the successful of the fruits of their labors" is that one person's success is always at others' expense, and that it's not their own labors but other people's labors that they are exploiting and enjoying the fruits of. For example, success in business comes from paying workers low wages and charging customers high prices. The overrich will argue that there is nothing wrong with this, because the workers are glad to have their jobs and the customers are willing to pay those prices. But there most certainly is something wrong with it! This businessperson is exploiting people--taking advantage of their desperate need for work to pay them low wages, and taking advantage of the lack of competition to charge high prices. This is why the biggest profits go to companies that operate "sweatshops" or near-sweatshops in desperately poor countries. And you have to ask, why has this business no competition, that it is able to charge its customers so much? It is usually because the businesspeople have superior financing, knowledge, or managerial ability or something, which gives them an edge that enables them to destroy the competition. For example, a homebuilder might make $50,000 profit (in addition to, say, $20,000 salary) from building a house, while you or I or any poor person would be happy to make even say a $1,000 profit from building the same home (along with the same $20,000 salary, for example). And, of course, the homebuyer would much prefer to buy the house built by the poor, in order to save $49,000. But, instead, the buyer is forced to pay the homebuilder's fat profit, because poor people cannot compete with him or her, because they cannot get into the homebuilding business under the current system.
By taxing the excessive profits of such businesses, the government will raise money by which it can make it possible for everyone who wants to to go into homebuilding or any kind of business they want, thus eliminating excess profits and reducing the costs of housing and everything else.
If you still think that the overrich somehow deserve their excess riches, you should study about the richest billionaires of the world until you begin to understand why they are not in fact any more deserving than anyone else, so where we propose to tax them at 99%-plus rates down to being only ten to maybe fifty times as rich as the average hard-working person, we are in fact being exceedingly lenient towards them. Ask yourself, for example, why Bill Gates (whom I admire for his generous charity but) has been over a $50-billionaire while just-as-good computer programs were available for free from Linux, and all or most computer-users are worse off for this. How many mom-and-pop stores has Wal-Mart destroyed and how many American jobs were undermined by outsourcing to China tomake Sam Walton the third richest man on Earth? Etc, etc.

C. Countering other arguments. The overrich and their running-dogs will claim that they should not be heavily taxed because it will reduce their incentive to perform their vital economic role. Nothing could be further from the truth. Anything that they are doing that is beneficial to society could better be done by government bureaucrats or entrepeneurs being paid $50,000 a year--ten thousand times less than what top hedge fund managers extract from the economy.

D. HOW can we tax the rich? Above all, we need to hit the streets in massive demonstrations. We need to explain to the public why such taxes are necessary, beneficial, and fair. Hold sit-ins, teach-ins, and public forums. Still, the government and most of the rich are going to oppose us. We should use ballot initiatives to demonstrate that we have majority support. This will not be simple, because what we need is a national tax, while initiatives are merely state and local. Nevertheless, we can do it by using "advisory" initiatives, which state that the voters in a particular city, county, or state believe that the national government should enact our proposed taxes and spending budgets. As more and more such states and local areas pass such initiatives, the government will face increasing democratic pressure to act. Yet, I expect that they will continue to resist until we at last march upon the capitol by the millions and engulf them.
AND ALL THAT is merely to get good tax laws on the books! We will then have to force the rich to pay up, while we can expect some of them to engage in every form of tax evasion, legal and illegal. Of course, the first thing that many of them will think of is sending their money to some offshore tax haven. We have to prevent that by making the tax laws uniform worldwide. By and large, that won't be any trouble--by the time the US is taxing its rich, all of the world's other major countries will be starting to do so too. But there may still be some faraway little island that will try to get rich by catering to (undertaxing) billionaires. They'll have to be stopped. Then it will occur to some billionaires that if they distribute their wealth among a large number of countries, they will only have to pay each country taxes at the much lower rates that apply to hundred-millionaires. To stop that, we must establish the principle that each person has to be taxed at a rate that depends on his or her total wealth worldwide, even if they only have a small amount of wealth in a particular country. Meanwhile, the plutocrats will be paying millions to lawyers and accountants to scour the laws for loopholes, and they'll never give up trying to talk and bribe Congress into writing new loopholes into the laws. The price of liberty is eternal vigilance!

E. How much to tax them.
Our immediate goals for the near-term future, let us say for the next several decades, should determine how much we should tax the rich. Refer back to the blog on "How much will progress cost?" In Northamerica, chiefly the US and Canada, we need over a trillion dollars a year in new national tax revenues.
We should aim to get about half of that from increasing the progressivity of the existing income tax, and about half from a new progressive tax on wealth.
It is important to distinguish income from wealth. Income is a stream of money that comes to a person from their salary, interest on bank accounts, capital gains from the sale of stock or real estate, etc. Wealth is net worth, assets, all that a person owns--stocks,bonds, real property, furniture, vehicles, jewelry, objects of art, etc. Income and wealth are related,but they are two different things. Most very rich people have both high incomes and large net worth, but some have all income and no wealth, while others have all wealth and no income--and they escape taxation therefore in our present system even though they may be extremely rich.
It may be that when a wealth tax is first instituted, it could all by itself raise over a trillion dollars a year--but that amount could dwindle in later years as the great fortunes are gradually whittled down. People must be allowed to pay their wealth tax in kind--that is, by transferring stocks, bonds, and real property to the government, instead of having to cash them out. This means that if the wealth tax yields say $500 billion cash and $500 billion in valuables the first year, we might spend only the cash that year, while the stocks, bonds, rental properties, etc., that we get should be managed to produce a continuing income stream of perhaps $50 billion a year that we can use to supplement the dwindling wealth-tax revenues of later years.
I have talked of taxing individuals, but it may be better to make families the unit for wealth taxation, as they are for the income tax, in general.
Some will advocate taxing the wealth of corporations instead of, or in addition to, the wealth of people.
My view on that is that all corporate wealth has to be publicly accountable. The corporation has to explain to the public what it is going to use its hoard of wealth for. If it is going to use it in order to maintain and upgrade its productive machinery, or expand its factories to keep up with rising demand for its products, or do research and development for improving or creating new products, this is fine and I would not advocate taxing it. But if it's going to use its wealth to pay its top execs huge bonuses, then it should all be taken from the corporation instead. Actually, in such cases, the government should force them to lower their prices or raise the pay of their workers, or hire more workers, etc., so as to eliminate such wealth.
Therefore, I don't know or can't predict whether very much revenue would be raised from corporations in general. Similar considerations apply to wealth--and, indeed, income as well-- owned by philanthropic foundations, colleges, churches, city and county as well as state and national governments, etc.
But, at any rate, in order to reduce the excessive inequalities between people, between the very rich and the very poor, we have to tax the wealth of people.

The general rule for both the new progressive tax on very high incomes and the new progressive tax on wealth, is that the tax should be proportional to the square of the after-tax income or wealth, minus some amount to spare the not-extremely-rich from having to pay the tax.
This rule may sound a little bit tricky--it sounds as if in order to compute the tax, you would have to know what the after-tax income or wealth is--but how can you know that until you have calculated the tax? Nevertheless, a formula can be derived for this. Here is a description of how it would work over a wide range if net worths:
1. If the basic wealth tax on $1,001,000 is $1,000, it leaves $1,000,000 after taxes (about a 0.1% tax rate).
2. Therefore, if the after-tax wealth were TEN times that, or $10,000,000, then the tax would be ONE-HUNDRED (ten squared) times the above tax, or $100,000. Therefore, the tax on $10,100,000 would be $100,000 (about a 1% tax rate).
3. And, therefore, if the after-tax wealth were ten times THAT, or $100 million, then the tax would be 100 times that above, or $10 million. Therefore, the tax on $110 million would be $10 million (about 9%).
4. And so, if the after-tax wealth were ten times that above, or $1 billion, then the tax would be 100 times that above, or $1 billion. Therefore, the tax on $2 billion would be $1 billion (about 50%).
5. And so, if the after-tax wealth were ten times that above, or $10 billion, then the tax would be 100 times that above, or $100 billion. Therefore, the tax on $110 billion would be $100 billion (about 91%).
6. From these basic taxes, we will subtract an amount, for example, $25,000, in order to spare the non-extremely rich from having to pay the tax. In this case, no one with a wealth of less than $5 million would have to pay.
Here is a table showing these results:

------WEALTH----BASIC TAX-------RATE---minus $25,000----AFTER-TAX
1. ---$1,001,000---- $ 1,000---- about 0.1%------ 0------------ $ 1,001,000
2. ---10,100,000---- 100,000------- " 1%------- $75,000------- 10,025,000
3. ---110 million---- 10 million------- " 9%------$9,975,000-- about 100 million
4. -----2 billion------- 1 billion------- " 50%---- about $1 b'n-------- " 1 billion
5. ---110 billion---- 100 billion------- " 91%------ " 100 b'n--------- " 10 billion

The exact amounts of tax ( the parameters of the constant of proportionality and the tax threshhold [amount subtracted]) will need to be adjusted according to how much tax revenue is needed and how progressive the voters think the tax should be. Also, for example, in the future, if the need for more equality becomes salient, that consideration, rather than the need for revenues, could become the most determining factor for setting the tax rates.

However, over a long period of time, it may be desirable to hold tax rates steady, and this could be accomplished by indexing them, such as adjusting the wealth and income figures for inflation, in order to avoid the problem of applying high taxes to incomes that might be in the many millions but perhaps due to inflation might actually represent only middle-class living standards. Indeed, indexing to inflation would be a very conservative move, because the indexing really ought to be to the general level of income and wealth, so that a person whose income was rising more slowly than average, for example, would see his tax rate decline, even if his living standard were rising due to rapid economic growth in the society as a whole, which he might be missing out on to some extent, for whatever reason..
For indexing purposes, let me introduce the basis, AMPERC-IW ("amperk-yu"), which is the average/median-per-capita-income/wealth. In an egalitarian society, the median income and wealth are near the average, but in highly unequal societies, the medians (which half the population is above and half below) are far below the average (which is far above the median in such societies, because it includes the extremely high incomes or wealths of the very rich). Ideally, tax rates should be indexed to the medians, while welfare benefits should be indexed to the averages, but I shall use this combined index (the average of the average and the median) here, along with a combined income/wealth figure that is half of the total of: the (average of the average and median) annual income plus 1/3 the (average of the average and median) wealth. In societies where personal wealth tends to be about 3 times typical personal annual incomes, the resulting figure, AMPERC-IW tends to be near the average innual income.
Let us write the above table in terms of AMPERC-IW. The wealth-tax table would then look like this, assuming a mean wealth of $100,000--represented as 1.0:
---WEALTH------$WEALTH--------TAX--------$TAX-----TAX- RATE
------------10--------$1 million----------0-------------0--------------0%
----------101-------10.1 million----------0.75------75,000--------0.74%
--------1,100------110 millio-----------100------10 million--------9%
------20,000-------2 billion---------10,000------1 billion------50%
--1,100,000-------110 billion----1,000,000--100 billion-----91%
(Taxes and rates approximate.)
This kind of tax rate schedule, (the bold columns, expressed in units of AMPERC-IW instead of dollars), could hold constant through decades of inflation and growth.
Here is an example of a similar table for the high-progressive income tax (the new tax on very high incomes needed in combination with the wealth tax to raise the total tax on the very rich to $1-2 trillion in the US). Here, I am going to let the percentage to be subtracted decline as income rises [since the purpose of this subtraction is merely to keep the non-very-rich from having to pay the tax] according to the formula 540/(I + 60), where I is the income index, or AMPERC-IW).


Assuming that typical incomes run to $33,000 and are about 1/3 the typical wealth, the dollar figures for this table would be:
-----$INCOME--------------$TAX-----AFTER-TAX $INCOME
---13.2 million--------11.86 million---------------1.35 million
--726 million--------717 million------------------9 million.

F. Making the taxes fairer.
There are many factors that must be taken into consideration in order to make these taxes fair. These will unfortunately complicate the taxcode,which will alas make it easier for the schemers and tax-evaders to find or stick loopholes into the laws, so we must be ever on the alert.
One factor is the taxes previously and otherwise paid on the assets. For example, if the person has paid property taxes on their real estate, then that may lessen their liability under the new wealth-tax. If their wealth came to them from salaries, inheritance, or any other type of income, then any income or estate taxes paid in the past may reduce their current wealth-tax liability, and so on.
Another factor is the variability of income and wealth from year to year. Ideally, if two people have the same total income over their lives, they should pay the same total amount of income tax over their lives. But a peculiarity of progressive taxation has often been that people with highly variable incomes will pay more taxes than people with constant incomes. For example, if two people earn $700,000 over a ten-year period, but one makes $70,000 each year while the other makes $700,000 in one year and nothing in any other year, then the first person, according to the above table, would probably pay less than $300 a year, or $3,000 over the decade, while the second person would pay about $300,000 in the one year, which would be around 100 times as much taxes as the first person. All incomes should be automatically averaged over each person's whole lives to determine their lifetime-to-date average annual income, and that should be the amount of income that they pay taxes on. For this purpose, their incomes must be measured in AMPERC-IW units.
Surprisingly, the same principle probably holds for wealths! An example would be a person who buys stock in some hi-tech dot-com start-up enterprise IPO, whose value skyrockets to billions of dollars for a year or two then collapses. Such a person's wealth should be averaged over their whole lives in order to avoid excessive taxation.
Another, similar relevant application of measuring incomes in the AMPERC-IW units would be for capital gains. If a person buys an investment in one year and sells it in a later year, both the buying price and the sale price should be expressed in AMPERC-IW units (that is, typically, roughly the averge incomes for the respective years).
Another factor is the person's family size, especially if we make the family, rather than the individual, the unit for tax purposes. We cannot just go by marriage licenses, adoption papers, etc., in determining how many members there are in the family--by and large, any group of people who claim to be a family must be considered one, the main criterion being whether each adult member has full individual rights to write checks on and withdraw cash from the combined bank account (for children, the main criterion is living at the same address; but of course there are always going to be exceptions). Also a person may claim (partial) membership in two or more families so this will be a little bit complex, but that is essential in order to make it fair.
Another factor we may consider is how deserving the person is, like did they make their fortune by contributing to human progress and societal improvement, or did they make it competitively, by outsmarting others, or by merely inheriting it or winning the lottery, etc. Those deemed better citizens might be rewarded with tax cuts accordingly. (Yet if the person has already won other prizes for their goodness, or been otherwise punished for their badness, then there is less point in adjusting their taxes accordingly).

G. Finally, there is the question of to which country the taxes collected truly belong. In the first instance,each country will be presumed to be entitled to the wealth tax revenues from all the assets that are located in their country. However, this will be called into question, for example, if an American's wealth is based on exploiting the workers or natural resources of another country, or selling to consumers or reaping interest income from lending to people of other countries. Get prepared for considerable, lengthy research projects and negotiations! Fortunately, as I've said, the fact that all countries will be dedicated to fairness, justice, and equality, will enable the discussions to proceed in a friendly and cooperative manner. I mean, the issue of which countries should get which tax revenues, though worth much study and debate, is of secondary importance to the much greater objective of equality.

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