Opinion

Edward Hadas

Shhh – don’t talk about higher taxes

By Edward Hadas
May 7, 2014

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Many people assume that tax increases are the only realistic response to excessive income inequality. They are wrong. There is a better way.

The International Monetary Fund first came out in favour of greater “redistribution,” a code word for higher taxes, in February. It joins the Organisation for Economic Co-operation and Development, which issued a big document decrying the privileged position of the richest residents of rich countries in 2011. The OECD has just called for “policies to restore equal opportunities,” another code for higher taxes.

The IMF and OECD certainly are not alone. This year, Thomas Piketty’s “Capital in the 21st Century” has been at the top of best-seller lists. The French economist has helped popularise the idea that an overly privileged “1 percent” needs to be restrained. His main proposal? The elite should pay more in taxes.

Income inequality is worth worrying about. Ethically, pay levels should bear some relation to the worker’s actual economic contribution. Of course, the value of work cannot be measured precisely. But success in the modern economy is too much of a group effort for bosses to be paid massively more than other employees. The rapidly increasing rewards for top executives, identified by Piketty as the main source of increasing inequality in the United States and other rich countries, are unjust.

More pragmatically, greater wage equality is good for the economy. Additional funds collected by the less well-off are more likely to generate spending and jobs than the same money placed in the bank accounts of the rich. And when incomes are more equal, the relatively poor are less tempted to borrow from the rich – a financial tie which often ends in disaster.

These convincing arguments have had little political impact in any country. After a blip following the 2008 financial crisis, the rich have continued to get richer faster than the rest of the population. The Occupy movement and other protesters against the trend have been less successful than campaigners against big government, such as the Tea Party in the United States.

It’s not clear why inequality has struggled to gain political traction. Some people see a conspiracy of deception by the powerful; others an epidemic of ignorance among the weak. Both of those may play a role. In addition, the official income distribution statistics vastly exaggerate the pain of the non-elite. I also think that many people readily accept economic elitism.

There is yet another possibility. Perhaps many of the people who want more equality do not like the main solution on offer: higher taxes. They may think that overly generous pay for some is a lesser evil than an expropriating government.

After all, the widespread reduction of top tax rates, from an average of 66 percent in 1981 in OECD countries to the current 43 percent, was broadly popular. But the support for making the income elite put more into the governments’ coffers is weak. Even after the financial crisis created huge fiscal deficits and spawned widespread resentment of rich bankers, the average top tax rate increased by only 2 percentage points in OECD countries.

The popular reluctance to increase tax rates is not a rejection of the welfare state’s fundamental goals of helping the poor and providing basic services for all. Nor is it a repudiation of the secondary tenet that those who have more should contribute more. Even in a flat tax regime, 20 percent of a $1 million income is a lot more than 20 percent of $50,000.

Rather, the desire for flatter tax rates looks like a rejection of a particularly ambitious claim of the left. People seem to be saying that they do not trust governments to determine what levels of after-tax pay are really fair. If this explanation is right, anti-inequality campaigners should move to a different battleground.

Rather than demand higher taxes as a way of redistributing high incomes, they should follow the advice of the American political scientist Jacob Hacker and argue for a more just “pre-distribution” of incomes through wage cuts for top corporate executives. The loss at the very top could feed into somewhat higher real incomes for everyone else.

There have already been stirrings of this sort of rebellion, for example the sharp criticism of Coca-Cola’s egregious share award scheme. But much more is needed to change the social mood enough for a broader rollback.

Evangelists for greater social equality have three action points. First, take advantage of the mandatory disclosure of the pay packages of top executives at quoted companies. Name and shame campaigns can work. Second, base your arguments on justice or growth, not on anything that sounds like envy. Finally, don’t talk about taxes – people aren’t listening.

Comments
24 comments so far | RSS Comments RSS

The problem is that pay levels in many, or most, cases, do bear a relationship to the workers’ economic contribution. It really is of little use to pine for the days when workers, for example, in the American automobile industry, could be artificially overpaid due to a de facto monopoly and almost no foreign competition in the post- WW II boom. Those days will not return. The income inequality argument is irrelevant – when economic growth is the real issue – and higher taxes will not bring that. If everyone’s income were to be tripled, it would lift millions out of poverty – and at the same time vastly increase income inequality.

Posted by SayHey | Report as abusive
 

“I also think that many people readily accept economic elitism.”

Why wouldn’t we? It has been going on ever since there have been people. You’re trying to change the very nature, of nature itself. People can camp out on city hall lawns all they want. It won’t change anything. You could cut every CEO’s pay down by 2/3, and it’s not like that money would magically get put into the pockets of poor people. There still has to be a productive system where that money can be earned by the people who need it, not just given away. People need to be motivated to earn, and that isn’t happening with a lot of people, for many different reasons. There’s people on my street that spend all day walking around the neighborhood, talking on their cell phone, and smoking dope. Is an overpaid CEO making them do that? People can point their finger at rich people all they want, but it’s just oversimplifying the issue. There’s a lot more to the problem, than people getting paid too much. The US barely makes anything anymore, and that’s not just the fault of the rich and corporations. Nobody is putting a gun to people’s heads and forcing them to buy cheap Chinese stuff. Every CEO could work for free and it would still be a drop in the bucket against that problem. People need to decide if they want to actually play an active, realistic role in fixing the problem… or just act like they’re helpless, and whine about rich people all the time.

Posted by dd606 | Report as abusive
 

I think requiring corporations to have a certain number of board members representing the workers interest (like in Germany) would be helpful. They never have a majority share so it’s not like the workers have control of the company but they have a significant role in shaping policy. It’s really the best way to make sure all the stakeholders interests are served (rather than those of investors only). In America we have a cabal of rich guys sitting on each others boards giving each other raises. There is no thought of how to make the company successful in the long term; it is all a focus of maximizing current profit. When the workers have a voice they will have a share in the success of the company.

Posted by anarcurt | Report as abusive
 

”Evangelists” could consider ”dead money” too… that is, it’s not hard to see how loot hoarded by most corporations and individuals is DOA. To lean on what dd606 wrote above, we can see it laying around, seeking little to no return, showing little to no interest… it just piles in some desolate place, loses its reason and fades away.

So when you embark on giving moneys to some, as you’re doing with QE, make sure it actually rains on the rest of the people… after all, imagining bambillions for some isn’t as great of issue as failure to imagine decent basics for most.

imo, as always.

Posted by satori23 | Report as abusive
 

A flat tax of approximately 20% would cover the basic federal budget, ergo fed tax day would no longer be the middle of May but the ides of March – two months extra pay for the average worker.

The federal debt can be reduced to $0.00 in about 3 years with a 1% transaction tax.

Posted by jprose | Report as abusive
 

A flat tax of approximately 20% would cover the basic federal budget, ergo fed tax day would no longer be the middle of May but the ides of March – two months extra pay for the average worker.

The federal debt can be reduced to $0.00 in about 3 years with a 1% transaction tax.

Posted by jprose | Report as abusive
 

dd606, I think about 12% of the unemployed are like what you described at most. You should come back from Tea Party fairytale land to reality. I’m not sure when the entire 99% became stoned slackers, but last I checked, not all people on the bottom were like that. Learn to think before opening your mouth. Most people struggling for money and jobs aren’t like that. Sure, those who are don’t deserve jobs, let alone high paying ones. Financial inequalities should always exist to add incentive to quality work, but there comes a point when they grow excessive. You can cry, shout, and scream all you want from the peak of a mountain of money that “The 99% is lazy *** druggies,” but that will never change the truth. Most of the working class deserves more. An 10-12 buck minimum wage is a good start. From there, executive cash bonus / pay raise restrictions can be imposed to create more jobs. And you know what else? These newly employed people will have worked for that money, so your lazy stoner living off benefits rhetoric will be exposed as the BS hyperbole it is. Get real.

Posted by VincentVer | Report as abusive
 

Agree with Vincentver,
right wing arguements are so vapid and pathetic, straight from AM radio and fox.

Posted by thinker72 | Report as abusive
 

Why can’t we have both. Smaller government and higher taxes. When someone dies they get to choose how their money is deployed – e.g. to their employees, to government, to a particular charity. What they can’t do is pass a billion onto their family. Maximum payment on death to a family member fixed at one million dollars.

Posted by BidnisMan | Report as abusive
 

Mr. Hadas,

Insightful column has sparked unusually valid comments, excepting thinker72. Can’t do much better than that.

Posted by OneOfTheSheep | Report as abusive
 

@VincentVer – I looked back at dd606′s comments and I do not see any reference to 99% being stoned slackers and lazy druggies.

Posted by SayHey | Report as abusive
 

One of the huge drivers of executive compensation is stock options. Perhaps we could eliminate the perverse incentives for these pay packages. Corporations could pay executives in real money and at least then compensation would be out in the open, and perhaps more reasonable.

Posted by 2hard2choose | Report as abusive
 

@SayHey – dd606 didn’t say that 99% were stoned slackers, but he did seem to imply that stoned slackers make up a much larger percentage than those who are struggling to make ends meet at low paying jobs.

To continue with your auto industry example, the auto executives are much better off financially today than their employees–they’ve seen gains over the past few decades that auto workers haven’t.

In the past, some have commented that people in poor-paying jobs need to better themselves, maybe get a degree to get a better paying job. One problem with that thinking is, the jobs they are doing now are necessary–I’ve never seen employers hire people they don’t need–but don’t pay enough for the employee to provide for themselves and their families. The issue isn’t envy of CEO pay, it’s that CEOs don’t see a problem with that situation.

Posted by Curtmeister | Report as abusive
 

@SayHey – dd606′s comments seemed to say that stoned slackers are a significant part of the problem, rather than the fact that there are plenty of people who work at low paying jobs.

To continue with your auto industry example, at the same time that auto workers have seen poorer pay and fewer jobs, the auto execs have been doing much better. Their pay has increased at a much higher rate.

It has been said by some that people who are in poor paying jobs should better themselves; maybe get a degree to get a better paying job. But the jobs they are doing now are necessary–I’ve never seen an employer hire someone they don’t need–but the employees don’t make enough to provide for their families. The issue isn’t income envy, it’s that CEOs don’t see a problem with that situation.

Posted by Curtmeister | Report as abusive
 

@SayHey – dd606′s comments takes away from the issue of the increasing number of jobs that don’t pay a decent wage.

To continue with your auto industry example, at the same time that auto workers have seen poorer pay and fewer jobs, the auto execs have been doing much better. Their pay has increased at a much higher rate, even when the companies haven’t done well.

It has been said by some that people who are in poor paying jobs should better themselves; maybe get a degree to get a better paying job. But the jobs they are doing are necessary–I’ve never seen an employer hire someone they don’t need–but the employees don’t make enough to provide for their families. The issue isn’t income envy, it’s that CEOs don’t seem to see a problem with that situation. Maybe part of that is because CEOs rarely know who works for them anymore.

Posted by Curtmeister | Report as abusive
 

@SayHey – dd606′s comments takes away from the issue of the increasing number of jobs that don’t pay a decent wage.

To continue with your auto industry example, at the same time that auto workers have seen poorer pay and fewer jobs, the auto execs have been doing much better. Their pay has increased at a much higher rate, even when the companies haven’t done well.

It has been said by some that people who are in poor paying jobs should better themselves; maybe get a degree to get a better paying job. But the jobs they are doing are necessary–I’ve never seen an employer hire someone they don’t need–but the employees don’t make enough to provide for their families. The issue isn’t income envy, it’s that CEOs don’t seem to see a problem with that situation. Maybe part of that is because CEOs rarely know who works for them anymore.

Posted by Curtmeister | Report as abusive
 

@SayHey – dd606′s comments takes away from the issue of the increasing number of jobs that don’t pay a decent wage.

To continue with your auto industry example, at the same time that auto workers have seen poorer pay and fewer jobs, the auto execs have been doing much better. Their pay has increased at a much higher rate, even when the companies haven’t done well.

It has been said by some that people who are in poor paying jobs should better themselves; maybe get a degree to get a better paying job. But the jobs they are doing are necessary–I’ve never seen an employer hire someone they don’t need–but the employees don’t make enough to provide for their families. The issue isn’t income envy, it’s that CEOs don’t seem to see a problem with that situation. Maybe part of that is because CEOs rarely know who works for them anymore.

Posted by Curtmeister | Report as abusive
 

@SeyHey, re-read dd606′s post. He/she references “smoking dope” and implies that people are poor because they want to be. dd606 blames the poor for being poor. It’s a common argument.

Most of us on the Left aren’t advocating for the rich people handing over all their money to the poor people (there are a few, but we try to distance ourselves from them). What most of us advocate to help the middle-class and the poor is a level playing field which includes several factors:

1) Get big money out of politics. Especially hard to do know with the new SC ruling for campaign contributions, but that is our #1 complaint. My vote means nothing anymore. The Koch brothers have proven that.

2) Fair taxation. The super-rich hide their money from taxes. Unfair tax legislation allows them to do that. As a middle-class, hard-working American, I don’t have that option. Seems like you gotta have a lot of money to hide a lot of money.

3) Crack down on Globalization. Encourage corporations to create jobs in the U.S. by offering them – - you got it – - TAX BREAKS. Right now, there is nothing but profit to be had in Emerging Markets. How about encouraging corporations to invest in the U.S. and discourage them from investing in Third World economies.

4) Increase the minimum wage. First, it’s simply overdue. Secondly, that money is going to go straight back into the economy in the form of food, clothing, cars, medical care and yes, TVs and phones. I might have to pay .29 cents more for a Big Mac. Big Deal.

There’s more, but I gotta go outside and walk down the street yakking on the phone while smoking my doobie.

Posted by JL4 | Report as abusive
 

@SeyHey, re-read dd606′s post. He/she references “smoking dope” and implies that people are poor because they want to be. dd606 blames the poor for being poor. It’s a common argument.

Most of us on the Left aren’t advocating for the rich people handing over all their money to the poor people (there are a few, but we try to distance ourselves from them). What most of us advocate to help the middle-class and the poor is a level playing field which includes several factors:

1) Get big money out of politics. Especially hard to do now with the new SC ruling for campaign contributions, but that is our #1 complaint. My vote means nothing anymore. The Koch brothers have proven that.

2) Fair taxation. The super-rich hide their money from taxes. Unfair tax legislation allows them to do that. As a middle-class, hard-working American, I don’t have that option. Seems like you gotta have a lot of money to hide a lot of money.

3) Crack down on Globalization. Encourage corporations to create jobs in the U.S. by offering them – - you got it – - TAX BREAKS. Right now, there is nothing but profit to be had in Emerging Markets. How about encouraging corporations to invest in the U.S. and discourage them from investing in Third World economies.

4) Increase the minimum wage. First, it’s simply overdue. Secondly, that money is going to go straight back into the economy in the form of food, clothing, cars, medical care and yes, TVs and phones. I might have to pay .29 cents more for a Big Mac. Big Deal.

There’s more, but I gotta go outside and walk down the street yakking on the phone while smoking my doobie.

Posted by JL4 | Report as abusive
 

Sorry about the double entry…

Posted by JL4 | Report as abusive
 

The author states, “The rapidly increasing rewards for top executives, identified by Piketty as the main source of increasing inequality in the United States and other rich countries, are unjust.”

The rewards should be going to the shareholders, not excessive salaries for management. The essence of capitalism is capital and that means adequately rewarding the investor for the success of the company. Dividends should always go up faster than CEO compensation. I do favor giving CEOs, and all employees, stock options, but those should all be very long term 10-20 year options to encourage long term thinking not quarterly gimmicks.

Posted by QuietThinker | Report as abusive
 

So, are the people with the money going to stop lowering the wages of the skilled, and removing jobs from countries that require more money to afford to maintain their standard of living. The economic disaster for most people seem to still be making the rich richer, and also seems to only facilitate this as it is now supposed to be our dream as well. Unfortunately for the greedy, I’m not stupid, and neither are the majority of the humans on this earth. If it’s a matter of looking down on those you have fooled, even the bullies can be fooled into making the wrong decisions. Oh yeah, and my life is not yours.

Posted by epockismet | Report as abusive
 

So, are the people with the money going to stop lowering the wages of the skilled, and removing jobs from countries that require more money to afford to maintain their standard of living? The economic disaster for most people seem to still be making the rich richer, and also seems to only facilitate this as it is now supposed to be our dream as well. Unfortunately for the greedy, I’m not stupid, and neither are the majority of the humans on this earth. If it’s a matter of looking down on those you have fooled, even the bullies can be fooled into making the wrong decisions. Oh yeah, and my life is not yours.

Posted by epockismet | Report as abusive
 

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Posted by bergmeijer | Report as abusive
 

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