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February 8, 2010 |
| THIS WEEK | |
The budgets that Presidents drop on Congress every February typically mix phony numbers with empty pieties. The budget that the Obama White House dropped on Congress last year broke that mold. The first Obama budget actually gave the American people some candid straight talk about a phenomenon that Presidents had been ignoring for years: our staggeringly deep — and still widening — economic inequality. That inequality, last year’s Obama budget detailed, has created a society where wealth has become “ever more concentrated at the top” while the “ladder into the middle class and beyond has become harder and harder to climb.” Last week, the White House moved a second Obama budget proposal to Congress. This new budget carries no stirring narrative on inequality — or the dangers inequality poses. The wealthy — and their hired hands — ought to be pleased. But they’re fuming. In this week's Too Much, we explore why. |
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| GREED AT A GLANCE | |
CNN commentator Bob Greene has been a man on a mission — ever since he saw a luxury magazine ad for a $27,000 suitcase. Greene at first figured the ad had to some sort of satire on over-the-top consumption. Who would spend, he wondered, $27,000 on a bag that sits “out in the rain and snow on airport runways”? To try to find out, Greene earlier this winter walked into a Hermès luxury outlet on New York’s Madison Avenue and asked to see the $27,000 suitcase. The clerk’s response: “Which bag specifically?” Turns out that Hermès offers a variety of $27,000-and-up luggage pieces, including a diamond-studded model that goes for $200,000. Buyers worried about airport wear-and-tear, the clerk explained, “buy suitcases for their suitcases.” At the World Economic Forum in Davos last month, the CEO of Germany’s biggest bank urged his fellow bankers to practice some “self-regulation” on the bonuses they pocket. His fellow bankers, bonus figures released last week show, aren’t listening. Bank of America’s 10,000 investment banking staff will soon see their pockets stuffed with $4.4 billion in bonus cash and stock, an average of over $400,000 per employee, a tad over the average $378,600 in bonuses announced last month for investment bankers at JPMorgan Chase. These averages can be deceiving. Wall Street is spreading bonus pay, a trade journal for chief financial officers reports, “less evenly than before.” Top earners in Bank of America’s investment banking division are receiving bonus packages worth $5 million . . .
What can be done to slow the banker bonus bingo? Britain has already slapped a one-time 50 percent “supertax” on banks — for bonus outlays over £25,000, or $39,000, per power suit. British officials expected this levy to raise £500 million. The government has already collected that £500 million, the equivalent of $782 million, from just two banks. In the U.S. Congress, two senators — Virginia’s Jim Webb and California’s Barbara Boxer — last week called for a 50 percent tax on 2009 bonuses over $400,000 at firms that have collected at least $5 billion in federal bailout aid. In the House, Rep. Louise Slaughter from New York is urging support for a 50 percent tax on bonuses over $50,000 at “government-supported institutions.” A broader measure, introduced by Rep. Dennis Kucinich from Ohio, would slap a 75 percent windfall bonus tax throughout the financial sector. The House last March actually passed legislation that would have placed a 90 percent tax on bonuses to individuals making over $250,000 who work at major bailed-out firms. That bill never received any Senate consideration . . . In Germany, efforts to recover the tax dollars the super rich are already legally obliged to pay have sparked what one reporter is calling a national “bout of soul-searching.” The brouhaha started when Germany’s finance minister announced that the government had agreed to buy — from an anonymous informant — a CD with a list of 1,500 wealthy Germans who've been stashing dollars in secret Swiss accounts to avoid German taxes. The problem: Switzerland has branded the data on the disk “stolen property.” Spending tax dollars to buy this stolen property, some German lawmakers are charging, would reward criminal behavior. But Germany’s top police union leader is pointing out that “police work with criminals on a daily basis — we have paid informers who help us uncover drug trafficking or other crimes.” Tax evasion is currently costing Germany $40 billion a year. The government stands to collect $140 million of that from the 1,500 deep pockets on the controversial CD. |
Quote of the Week “I offer a legislative proposal that would make everyone wish top executives the best of luck in their quest for untold riches: Limit the compensation of executives of publicly traded companies, companies receiving public aid and companies doing business with the government to no more than 100 times the salary of each company's lowest-paid full-time employee.”
Stat of the Week Wealthy investors looking for places to park their excess cash are sending the market for fine art to record heights. A phone bidder, identity still unreleased, has just bought the most costly piece of art ever to change hands at auction. The winning bid for Alberto Giacometti’s 1960 Walking Man I bronze sculpture: $104.3 million, a tiny sliver over the $104.2 million previous record, set six years ago in bidding for a 1906 Picasso portrait. Cash-rich connoisseurs, overall, shelled out $350 million at last week’s London fine art sales at Sotheby’s and Christie’s.
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| IN FOCUS | |
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Not Soak the Rich, Just a Little Sprinkle President Obama’s new federal budget plan won’t end plutocracy. But this second Obama budget, if adopted, might actually inconvenience it.The Heritage Foundation, the right wing’s most lavishly funded think tank, doesn't much like the federal budget plan the Obama White House released last week. Heritage hired guns are blasting the Obama blueprint for fiscal 2011 as perhaps the “most irresponsible budget ever.” What has the wealthy and their biggest fans so upset? Certainly not the deficit, the cause for concern they profess so earnestly. Growing budget deficits, as economist Polly Cleveland pointed out last week, can actually work to rich people’s advantage, in part because the rich hold so much of the government’s debt. The interest payments the rich collect on that debt “tips” America’s top-heavy distribution of wealth even more their way. The rich can live — quite well — with budget deficits. But taxes drive them crazy, and President Obama’s second budget is proposing, over the next decade, $970 billion in new taxes on America’s most affluent. But do these tax hikes, as critics charge, “soak the rich”? Not hardly. Obama’s budget, if adopted, will inconvenience the rich, not soak them. For the rich, that may be almost as bad. Rich people simply detest inconveniences. Unlike people of modest means, they can afford to avoid them — and the U.S. tax code, for years now, has made that affording ever easier. Just how easy becomes painfully clear upon perusing the fine print of the tax changes the Obama White House is proposing. One example: Under current law, corporate CEOs can classify their workers as “independent contractors,” a neat maneuver that denies workers the benefits normal employees receive and saves corporations vast sums that end up inflating executive paychecks. The Obama budget proposes new rules that would make these corporate misclassifications more difficult to cook up.
Another convenience the rich enjoy and exploit: Current law gives the IRS only three years to discover whether wealthy tax filers are neglecting to report income from foreign assets on their tax returns. After three years, the IRS can’t levy any penalties on the wealthy tax avoiders they catch. The Obama budget proposes to double this statute of limitations to six years. The income the wealthy do already report, meanwhile, will face higher tax rates under the Obama budget plan. In the 2011 federal fiscal year, couples making over $250,000 a year — and individuals over $200,000 — will pay taxes at a 39.6 percent rate on ordinary income over $373,650. These taxpayers, under the Obama plan, would also pay higher taxes on dividends and “capital gain” income from the sale of stocks and other assets. The current 15 percent tax rate on these income streams would jump to 20 percent. Some super-rich taxpayers — the top guns at hedge funds, venture capital firms, and other investment partnerships — would pay even more under the Obama budget plan. These power suits have been claiming the bulk of their income as “capital gains.” The Obama budget, if Congress goes along, would nix that claim. In 2008, 25 hedge fund managers took home at least $75 million. In 2011, under the new Obama budget, the top 25 would pay taxes on most of their millions at a 39.6 percent rate, over double the current 15 percent capital gains rate. But these hedgies and their awesomely affluent friends really have little reason to angst about these new rates. By any reasonable historical yardstick, they’ll be doing just fine if the new Obama budget gets through Congress as is. A half-century ago, in 1961, income over $400,000 — around $3 million today — faced a 91 percent tax. In 2011, if the Obama budget plan goes into effect, the top rate on income over $3 million would sit at 39.6 percent, less than half the top tax rate on America’s richest back in the mid-20th century. Politicos and pundits ignored this historical perspective last week. Debate in and around Congress instead revolved almost totally around hand wringing over the size of the federal budget deficit. Lawmakers and commentators worried about the deficit, in a more rational world, wouldn't be ignoring America's tax-the-rich history, since higher taxes on the wealthy — and the corporations that manufacture them — offer one obvious route to deficit reduction. But mainstream policy wonks in Washington have essentially written off higher taxes on the rich as a viable deficit-reduction strategy. The latest evidence of that write-off: The mainstream wonks at Washington’s Brookings Institution Tax Policy Center last week promoted a new paper said to prove that “raising taxes only on the rich won't close our budget deficits.” This paper, condescendingly entitled Desperately Seeking Revenue, argues that tax increases on the rich would have to be “huge” to bring the federal budget deficit down to manageable levels by 2019, so huge that these rates would imperil national “economic efficiency.” How high, under this mainstream Brookings Tax Policy Center analysis, would taxes on the rich have to go to significantly narrow the deficit in 2019? If taxes rose only on couples making over $250,000 and individuals over $200,000, the analysis notes, the top tax rate would have to rise to 77 percent to bring the deficit down to 3 percent of GDP in 2019, the target Obama budget director Peter Orszag has set. To meet the 2 percent target the Tax Policy Center prefers, that top rate would have to rise “to nearly 91 percent.” That the United States had a 91 percent top tax rate in effect for most of the quarter century after World War II — and survived quite nicely — goes unmentioned in this mainstream analysis. A curious omission. In the 1950s and early 1960s, with a 91 percent top rate in effect, the annual federal deficit never once hit as high as 3 percent of GDP and only once hit as high as 2 percent. These same years saw the greatest increases ever in U.S. middle class prosperity. Tax rates on the rich, a closer look at the Tax Policy Center analysis makes clear, wouldn’t even have to go all the way to 91 percent to work some serious deficit-reduction magic. The Tax Policy Center experts, in their analysis, have made a series of assumptions that, taken together, overstate the actual tax rate on the rich needed to get the deficit, a decade from now, down significantly. These assumptions dramatically reveal just how incredibly stunted — on taxing the rich and powerful — the mainstream political imagination has become. The Tax Policy Center analysts assume, first, that top tax rates between now and 2015 cannot possibly be raised beyond the 39.6 percent the Obama White House has proposed. Second, they assume no increase in corporate taxes. But if corporate tax rates were hiked — to the point where the federal government received as much of its income from corporate taxes as the government regularly received before the 1980s — and if tax rates on top-bracket income rose over 39.6 percent before 2015, taxes on the rich wouldn’t have to hit 91 percent a decade from now to significantly reduce the deficit. The new Obama budget actually does include a variety of tax increases on corporations, particularly on those that use their foreign operations to avoid U.S. taxes. But the White House has, notes tax analyst Linda Beale, “scaled back its proposals aimed at companies that shift profits offshore” since last year. What happened? General Electric, Microsoft, Caterpillar, and other corporate giants have been complaining. The White House listened. The White House now needs to listen to the rest of us. And we need to raise our voices loud enough to be heard. |
New Wisdom John Waggoner, Julia Schmalz, Joshua Hatch and William Couch, Where Your Money Goes, USA Today, February 3, 2010. Ever wonder how the tax burden on average Americans — and rich ones — has changed over recent years? This USA Today interactive info graphic lets you compare how much you now pay in taxes to how much deep pockets pay. Even better, you can compare tax burdens all the way back to 1940. Corey Pein, Born Poor? Santa Fe economist Samuel Bowles says you better get used to it, Santa Fe Reporter, February 3, 2010. A look at a veteran economist who believes the U.S. economy will continue to fail until we “share the wealth.” Jon Levene, The Spirit Level — in three minutes, with puppets! February 3, 2010. A brilliant — and entertaining — short film that sums up the best new book on inequality. Tula Connell, Danger: Falling Middle Class, AFL-CIO Now, February 5, 2010. A survey of the literature that examines the collapse of middle class living standards amid concentrating wealth at America's summit. Ramón López, World Economic Crises in Times of Environmental Scarcity and Wealth Concentration. A University of Maryland economist examines how growing inequality and
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| In Review | |
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Does Good Fortune Explain Big Fortunes?
The unnerving spiraling of inequality over recent decades has had at least one consequence of redeeming social value. Philosophers are now thinking and talking, perhaps more than ever before, about “distributive justice.” Some fascinating new strains of distributive justice thought are emerging from all this contemplating. One of the most intriguing is exploring the role of luck in determining who ends up richly rewarded — and who doesn’t. Simple “brute” luck, one band of hardy philosophers is maintaining, often defines who “succeeds.” The successful, of course, like to point to their own individual talents. But don't they owe those talents to the luck of being born to parents with good genes? Indeed, many of us may owe our very lives to the luck of where we live. A girl born in Japan will now live to an average 86 years. A girl born in Malawi will beat her country’s average if she makes it to 36. Philosophers who talk about this role of luck — they call themselves “luck egalitarians” — generally believe that society ought to endeavor to compensate for all inequalities that reflect conditions that we can’t reasonably attribute to individuals themselves. Sometimes this luck egalitarianism spills over into our public discourse. Billionaire investor Warren Buffett and Bill Gates Sr., the father of the world’s richest individual, have invoked the spirit of luck egalitarianism, for instance, to rally support for the federal estate tax. Wealthy Americans, Gates has argued, would not be wealthy if they had been born in “a country of society-wide abject poverty.” These wealthy need to give back, via the estate tax, to the society that made their good fortune possible. Substantial inequalities that reflect brute luck, luck egalitarians believe, simply do not measure up as just. We ought to do whatever we can, as a society, to mitigate these inequalities. Stiff estate taxes on grand fortunes represent just one example of what we could —and ought to — be doing. But if a just society has a responsibility to mitigate inequalities that reflect circumstances individuals can’t control, what responsibility does a just society have to individuals in dire circumstances who have created their own fate? A motorist drives recklessly into an accident. A smoker puffs away into cancer. Does society owe these people medical treatment if they can’t afford it on their own? Critics of luck egalitarianism have pounced on this question. They have, they believe, the luck egalitarians hoisted on their own petards. How can we take seriously, these critics argue, a philosophy that would deny treatment to an accident victim? The luck egalitarian case for moving aggressively against inequality, this attack suggests, rests on a shaky and suspect philosophical foundation. Do the critics have a point? Should we disregard the luck egalitarians? Not so fast, says Hebrew University of Jerusalem philosopher Shlomi Segall in Health, Luck, and Justice, his carefully — and clearly — argued rejoinder to the critics who would have us dismiss the luck egalitarian case against inequality. In this just-published new volume, Segall answers the reckless driver challenge head-on. He walks us through a logic train that both upholds the basic core assumptions of luck egalitarianism and honors the common-sense necessity of helping all those who need care. We won’t track that logic train here, in this limited space. But we will urge anyone interested in thinking deep about distribution and justice to pick up this fine new offering from Shlomi Segall and take a ride with him. |
Inequality Links Working Group
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| About Too Much | |
Too Much is published by the Institute for Policy Studies: Ideas into action for peace, justice, and the environment. 1112 16th St. NW, Suite 600, Washington, DC 20036. (202) 234-9382. E-mail: editor@toomuchonline.org. Unsubscribe. |
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Wall Street’s top banker, Goldman Sachs CEO Lloyd Blankfein, will be getting just a bit more than that $5 million. The bank 
Current law also lets corporate execs who get nailed cheating consumers deduct off their taxes the punitive damages courts order them to pay. How convenient. The new White House budget would make executives and their companies much more likely to eat these damages, on their own.