Why the plutocrats will return

By Felix Salmon
December 3, 2009
the return of the plutocrats? Or does it actually, secretly, need the plutocrats to return? Here's Tim Geithner, today:

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Is the US government powerless to prevent the return of the plutocrats? Or does it actually, secretly, need the plutocrats to return? Here’s Tim Geithner, today:

“You cannot address those long-term deficits, you cannot put the government of the United States in a position that we can go back to living within our means, unless you repair the damage done to this economy and to its revenue base.”

Translation: we need to return to our bubble-era levels of income.

It’s worth remembering that income for America is the same thing as income for Americans: 81% of federal revenues come from income and payroll taxes.

Remember too that when you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government’s tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer.

Given the government’s insatiable appetite for cash, it’s only natural that it would prefer to tax plutocrats, spending some of that money on poorer Americans, rather than move to a world where poorer Americans earn more (but still don’t pay that much in taxes), and the plutocrats earn less, depriving the national fisc of untold billions in revenue.

The government’s interests, then, are naturally aligned with those of the plutocrats — and when that happens, the chances of change naturally drop to zero.

Update: Kevin Drum does the math, and concludes that “the federal government doesn’t have much of an incentive to maintain lots of income inequality”.


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“Translation: we need to return to our bubble-era levels of income”exactly, Geithner is well aware that tax receipts are collapsing

I’m not so sure politicians and bankers can be quite so complacent. Market conditions this year have been exceptional thanks to the largesse of central banks and treasury departments. And with unprecedented budget deficits, someone (everyone?) is going to have pay more tax.

Posted by Econoclast | Report as abusive

Our entitlement programs are a big problem and were created as nothing more than attempts to buy votes. And because of this, those entitlement programs, along with corporate welfare are destroying the economy.If our entitlement programs were done away with and replaced with an actual social safety net that gives the money directly to the people, it would cost much less than the cost of corporate bailouts and entitlement programs combined.And that can be said simply because working class American households don’t have the budgetary needs of large corporations or government programs. Those who find themselves out of work must be supported by allowing them to receive unemployment benefits as long as they look for work or further their educations. This allows the citizenry to update their skills or to find work when they come upon hard times. It also helps the economy because out of work people can continue to pay their rent/mortgages and other bills. There must be support for the citizenry. Loosing your job should not mean loosing your house or your ability to feed your family.Also, corporations MUST loose their citizen status. And legislators MUST have term limits assigned. If these things are not done we will only get more of the same mess we have now.This economy cannot be saved by feeding the banks or corporate America. If the money is going to be circulated, it must be circulated among the general citizenry. It is from the citizenry that business and government derive their power. Stop feeding the banks. And stop feeding government programs. Put that money where it truly belongs, which is in the hands of the people. Then we can truly be a nation of independent citizens which is what made us great in the first place.

This goes along with a comment I read somewhere (don’t remember the name).The Democrats are normally seen as the party of the poor. Therefore, it’s in their best interest to make as many people as possible poor.The Republicans are seen as the party of the rich. Therefore, they’ll take all they can and give it to the rich.

it is well said above that the money should not be used to feed the banks. Its is only through the people expenses and income that the business will flourish.

I am reminded of Keynes view that in the early development stages economies needs plutocrats because only the rich save. However, it is not clear that the same argument applies to taxes. It would be an interesting calculation to see what the US tax rate would need to be to raise the same revenue from the US national income if it were equally distributed.

Posted by tomrus | Report as abusive

But Felix, isn’t our effective (not nominal) taxation system LESS progressive than it has been historically (see: Krugman, “Conscience of a Liberal”). I’ve seen a number of graphs showing that total taxation is fairly flat, although the states skew regressive and the Feds progressive. Also, the progressivity of federal taxes is limited to the bottom 90% or so: once you’re making much over 100K, effective tax rates are flat IIRC. Got any numbers to make your point clearer?

Posted by Sam Penrose | Report as abusive

Giving the rich more of the national income does *not* maximize tax revenue, Felix, at least for the country as a whole. The rich evade and minimize taxes; they pay less in sales and property taxes; they pay vastly less toward Social Security, Medicaid, Medicare, etc. Finally, employed people typically don\’t cost much in terms of social services. When they lose their jobs, they do. Over anything but the shortest timeframe, such a policy would be catastrophic.

Posted by David Yaseen | Report as abusive

I have two problems with the analysis:1) It assumes a fixed pie. That is, it assumes that the same amount of income would be earned no matter who is receiving what percent. I am not sure this is the case. A wealthier middle class might do more for long-term growth than a wealthier 1%. And if a wealthier society as a whole more than offsets the lower average tax rate, the government will earn more in taxes. I don’t know if this is true, but it is worth considering.2) It also assumes that the tax rates are fixed, and spending adjusts to the tax rates. I think it is more likely things are the other way around in the long-term; tax rates adjust to spending. Or at least they move together to some sort of equilibrium.Either way, our society is much more dynamic than your analysis suggests.

reminds me of Douglass North’s quote (from) From Poverty to Prosperity – “The natural state is a mixture of mutually interdependent economic and political interests that reinforce each other. The economic interests are the elites that produce economic activity. But they tend to support political groups that in turn will protect them from too much competition. The interplay is the elites in the political world protecting the economic elites from too much competition and giving them monopolies, while on the other hand the economic elites provide the funds that support the political elites.” cf. Mancur Olson

Posted by glory | Report as abusive

This analysis rests on a faulty assumption. That the government acts as an individual agent instead of a collection of politicians responding to political incentives. Change might be slow coming but it’s because politicians respond to populist demands. The situation is analogous to analyzing the incentives for an industry, as opposed to the individual companies involved. Take the acne fighting industry. The industry as a whole has no incentive to cure acne completely (say with a vaccine). It could potentially reduce the entire industry to a fraction of its current size. Individual companies however stand to profit enormously if they find a cure.

Posted by tintin38 | Report as abusive

Its true that the poor should be taken care of rather than just protecting the rich people.

Posted by imrozz | Report as abusive