Summary: Every day the New America grows on the ruins of the America-that-once-was. Every day our apathy weakens the Republic. Every day powerful people — each wielding wealth greater than millions or tens of millions of other Americans — add new brinks to the new plutocracy that will govern our children and their children. They’re doing so openly. To minimize our fear and guilt we laugh at them. They smile at our folly; the Founders cry silently.
Content
- Telling us about the coming New America
- Tax rates on the wealthy at post-1930s lows. They’re not grateful…
- America’s exceptional inequality
- For More Information
(1) Telling us about the New America
“Tom Perkins’ big idea: The rich should get more votes“, CNN, 14 February 2014 — Tom Perkins speaking at the Commonwealth Club in San Francisco. Everybody has words to live by, that justify their actions. Perkins shared his with us. He’s not joking, and their increasing power brings his vision closer to fruition every day, as the 1%’s command of all levels, all parts of the governing mechanism means that our votes have less effect than his dollars.
Listen, and be afraid. Unless we develop backbones and cohesion, Perkins vision will come true. One way or another.
.
.
(2) Tax rates on the wealthy are at post-1930s lows. They’re ungrateful…
.
… They obsessively worry about a return to the high tax, high-growth, falling inequality years of the post-war era (aristocrats well know that only the peons passivity prevents successful revolts). That they so openly express their feelings, with no fear of public backlash, shows their growing confidence in not just their power but also the righteousness of their views. Rulers always believe themselves to be righteous. They’re surrounded by courtiers and priests who tell them so.
(a) Perkins’ remarks at the Commonwealth Club:
“I wouldn’t say taxation is a form of persecution. But the extreme progressivism of the tax system is.”
Cited statistics about the tax contributions wealthy Americans make, Perkins said the wealthiest 1% is carrying the government. “Government is a giant beast that has to be fed, and it’s fed with taxes. And taxes will go up and up and up.”
… Though Perkins apologized for the use of his Holocaust analogy, he did circle back to the reason for his original thinking at the event. “I think the parallel holds. The typical German had never met a Jew.”
The last question an audience member asked at the end of the event was what the 1% fears. While the Jews of Nazi Germany feared deportation and extermination, what was it that made Perkins afraid of “the war on the 1%?” Perkins said the fear is higher taxes until there is no 1%. “It’s an economic extinction, not a physical one.”
(b) “Progressive Kristallnacht Coming?” Perkins’ op-ed in the Wall Street Journal, 24 January 2014 — “I would call attention to the parallels of Nazi Germany to its war on its ‘one percent,’ namely its Jews, to the progressive war on the American one percent, namely the rich’.” On Kristallnacht, 9-10 November 1938, NAZIs staged riots targeted synagogues and Jewish-owned businesses. They killed 91 Jews and imprisoned 30,000 in concentration camps.
(c) Bloomberg Interview with Sam Zell, 4 February 2014
“I guess my feeling is that he {Tom Pekins} is right. The 1% are being pummeled because it’s politically convenient to do so. The problem is that the world and this country should not talk about envy of the 1%. It should talk about emulating the 1%. The 1% work harder. The 1% are much bigger factors in all forms of our society.”
(d) Stephen Schwarzman (chairman and cofounder of the Blackstone Group), about proposals (defeated) tax income from private-equity firms at the same rate as workers’ incomes. From Newsweek, 15 August 2010:
“It’s a war. It’s like when Hitler invaded Poland in 1939.”
(e) Bud Konheim (co-founder & CEO of Nicole Miller) on CNBC’s “Squawk Box”, 12 February 2014:
We’ve got a country that the poverty level is wealth in 99% of the rest of the world. Money is all over the place and the guy that’s making, oh, my god, he’s making $35,000 a year. So we’re talking about woe is me, woe is us, woe is this. The guy is wealthy.
Why don’t you try that out in India or some countries we can’t even name? That’s the most ignorant thing I heard all month. The standard of living, the cost of living here, is drastically different than it is anywhere else. The comment is nonsense.
I did a web piece on this. It is just blown up on the web with people saying look, if you make $35,000 a year, you are not paying the same for cost of living. He is right, we should point out, to get the top 1% globally all you need is $35,000 a year. So globally, he’s right. But wealth is all relative. It depends on where you live and what everything else costs. $35,000 a year, you couldn’t afford grey poupon. That’s right.
(3) America’s exceptional inequality
By the late 1920’s decades of growing inequality had brought the Republic’s institutions to the brink, although economic growth had maintained social stability. The Great Depression and WW2 forced our ruling elites to reverse this process. Generations of external and domestic stability allowed them to restart the engines of inequality. We are again at the levels of the late 1920s by most metrics. What happens next?
(a) “It’s the Inequality, Stupid“, Dave Gilson and Carolyn Perot, Mother Jones, March/April 2011 — “Eleven charts that explain what’s wrong with America”
(b) Presentation by Kate Pickett at the Inaugural Conference at King’s College, Institute for New Economic Thinking, 8 ‐ 11 April 2010
.
(4) For More Information
(a) Other articles about this great and growing problem:
- Recommended: Presentation by Kate Pickett at the Inaugural Conference at King’s College, Institute for New Economic Thinking, 8 ‐ 11 April 2010
- Recommended: “It’s the Inequality, Stupid“, Dave Gilson and Carolyn Perot, Mother Jones, March/April 2011 — “Eleven charts that explain what’s wrong with America”
- “Charts: Who Are the 1 Percent?“, Dave Gilson, Mother Jones, 10 October 2011
- “The End of Loser Liberalism: Making Markets Progressive“, Dean Baker, Center for Economic and Policy Research (2011)
- “CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners“, Lawrence Mishel and Natalie Sabadish, Economic Policy Institute, 26 June 2013
- “The Money-Empathy Gap“, Lisa Miller, The New Yorker, 1 July 2012 — “New research suggests that more money makes people act less human. Or at least less humane.”
- “Money makes people right-wing and inegalitarian“, Andrew J Oswald (Prof Econ, Warwick U) and Nattavudh Powdthavee (Fellow, London School of Economics), VOX, 13 February 2014 — “Rich people typically lean right politically. Are they motivated by deeply moral views or self-interest? This column argues that money makes you right-wing. It shows that lottery winners in the UK are more likely to switch their allegiance from left to right.”
- Recommended: “Inequality By Design: It’s Not Just Talent and Hard Work“, Dean Baker, Center for Economic and Policy Research, 15 February 2014 — “the 1% are able to extract vast sums from the economy … because we have structured the economy for this purpose. It could easily be structured differently, but the 1% and its defenders aren’t interested in changing things. And the 1% and its defenders have a great deal of influence on the direction of economic policy.”
(b) Articles by Martin Gilens (Prof of Politics, Princeton) about inequality of wealth and income driving inequality of power:
- “Inequality and Democratic Responsiveness“, Russell Sage Foundation, 27 July 2012
- Economic Inequality and Political Power by Martin Gilens — Part one, part two, part three
(c) Posts about inequality:
- A sad picture of America, important for us to understand, 3 November 2008 — About social mobility
- An opportunity to look in the mirror, to more clearly see America, 10 November 2009
- Graph of the decade, a hidden fracture in the American political regime, 7 March 2010
- America, the land of limited opportunity. We must open our eyes to the truth., 31 March 2010
- Modern America seen in pictures. Graphs, not photos. Facts, not impressions., 13 June 2010
- Jared Bernstein examines the economic impact of raising taxes on high-income households, 30 April 2012
- How clearly do we see the rising inequality in America? How do we feel about it? Much depends on these answers., 27 September 2012
- Ugly truths about income inequality in America, which no politician dares to say, 2 October 2012
- Glimpses of the New America being born now, 18 June 2013
- Why Elizabeth Bennet could not marry Mr. Darcy. Nor could your daughter., 12 July 2013
- For Thanksgiving, Walmart shows us the New America, 19 November 2013
- Back to the future in New America: our new class structure, 27 November 2013
- Learning not to trust each other in America, and not to trust America, 4 December 2013
- The state of the American middle class: are we thriving or sinking?, 15 January 2014
.
.
Astonishingly good post. Congrats FM.
This post really goes to the bottom line, where we all, whole world, are heading to. And there is not much that an individual can do about it.
Except educate and keep educating your friends, familly, anyone in waiting rooms, if people do not get the courage to keep educating anyone they meet, people will continue to be pulled into inaction or to fight for 1% against themselves.
Not knowing the reality leads to confusion and passivity. Educate….
Do you think inequality will become a major issue for the Democratic party, or will they let it slide like they did Occupy?
I believe both political parties are servants of the one percent. Hence neither will or even can take any substantial action against the 1%.
That might change. However, more likely IMO is that something might impell a change of policy by the 1%. As did the a Great Depression, WW2, and the Cold War — during which social cohesion and the need to mobilize resources overweighed their pursuit of power and wealth.
There are no signs of that today.
True.
I’ve been reexamining the progressive era in US history, and detecting some echoes: growing concern over inequality and powerful businesses, among other things. Perhaps that approach is one available to us now: middle-class outrage, some legal and policy steps.
Bryan,
You might be correct. But the 1% owns the system! and IMO nothing can be done — until some fraction of the citizenry are mobilized to act.
I have written dozens of posts about this, and the comments show the nature and magnitude of the problem: total disinterest in action of any kind.
The 1% ownership is quite well entrenched; on this we agree.
I fear you’re correct about the popular lassitude.
I do think there’s some hopeful trends in terms of awareness of income inequity amongst the populace, but I don’t think it’s really possible anymore for the Democratic party to tackle this issue, they are way too wedded to the 1% and more or less support their economic interests with very very few exceptions. Still, young millennials (my generation) are getting increasingly restless (http://money.cnn.com/2014/01/06/news/economy/millennial-low-wages-protests/), and there has been a growing socialist movement (yes, actual socialist movement) with the election of an open socialist in Seattle (http://www.nytimes.com/2013/12/29/us/a-rare-elected-voice-for-socialism-pledges-to-be-heard-in-seattle.html?_r=0) and the same party almost had a win in Minneapolis (http://blogs.citypages.com/blotter/2013/11/top_contenders.php), along with plans to emulate this in Chicago (https://inthesetimes.com/ittlist/entry/16171/victory_in_seattle_inspires_chicago_socialist_campaign/). Sawant’s victory as well has moved the discussion in Seattle to upping the Minimum wage to 15/hr, rather than just say, 10/hr or 11/hr. All peanuts on the national level, but if things like these spread, could add up.
Another great post, FM. The only things I’d add are outside of the scope of your work.
The population is still slowly growing but the employed percentage of the population is slowly dropping. Advances in automation ensure that this will continue or accelerate.
The hourly work week and wages per hour have not increased faster than the inflation rate. This means that total wages (especially after inflation) are at best staying even or perhaps very slowly declining.
The percentage of people who own their own house dropped from an all-time high in 2008 to slightly below the historic average. This was normal, necessary, and logical but the change from the past is that the 1% noticed this and started buying historic amounts of real estate at depressed rates and have raised rental rates substantially.
This forces people to either reduce their discretionary income or live with their parents, which imposes its own costs.
Auto sales have boomed in the last few years. Autos are typically purchased using credit, which depresses discretionary income until the loan is paid off.
In the face of these extremely large but very quiet forces, why does Wall Street expect the economy to boom this year?
Pluto,
Economists’ forecasts for US GDP in 2014 are high (~3% plus) because they believe the rate of GDP growth in 2H 2013 was that high — excluding the effect of Federal government’s contractionary effect, and other special factors.
They believe the slowing in December and January was a temporary weather effect.
They believe the economy will accelerate from growth in construction (esp housing), consumer durables (e.g., autos), business capex, and exports. Growth in consumer spending, jobs, and wages will power much of this in a virtuous cycle.
It’s not illogical. I don’t see it, but then economic forecasting is difficult. Don’t assume they’re wrong, because they are usually correct (more or less).
I understand what you are saying, FM but I do beg to differ slightly with you.
Spending needs to come either from savings or by reducing future discretionary income. The vast majority of Americans have very little in savings and not much discretionary income and although the wealthy DO spend, they do not do so at the same rate that the middle and lower class do.
Businesses will only spend money on cap-ex if they foresee a benefit (either increased sales or reduced costs). They have been spending on the latter category for the last 5 years and have probably reached the point of diminishing returns until technology finds new ways to improve productivity. As you can see from the above paragraph, only companies that cater to the rich are expanding their footprint. Sears, K-Wart, Macy’s, and Penny’s are all shrinking their stores and employee counts.
Exports is pretty small peg on which to hang all your hopes.
The one contradiction to my concerns will occur if the economy picks up in a dramatic and sustained fashion after the weather changes. As you say, the experts do usually get it approximately right.
Pluto,
I was stating the consensus viewpoint of US economists.
Although no economists, as I said I don’t see how this can work.
I don’t understand ANY of the growth drivers. Exports seem likely to slow from turmoil in the emerging nations. There is ample data suggesting a slowing in housing. Auto sales have risen, as I have posted upon, on extending credit to subprime borrowers on absurd term. Wages and jobs look stagnant. Capex is a laggard (except for that which increases productivity), and not likely to increase in a slow economy.
I could try giving an idea how this growth can continue, growth of less then 2%. This will happen if rest of the world doesn’t affect it negatively, or if there is no change in the rest of the world.
There are two drivers of growth, i) savings from efficiency in healthcare and ii) inflation of the economy for the top 5%
i) efficiency in healthcare system started two years ago with first implementations of ACA and especially since implementation of 20% limit on administrative costs not used for health care against insurance companies. This slowed the growth in costs of insurance and allowed for more spending on care itself, marginally applied on both sides.
The efficiency in health care system will increase with enrolment these past months giving even more health to working people.
Another efficiency is from moving savings from upper wealthy by tax on cadilac insurance onto non insured. This ammounts to using unused savings, by employing it.
ii) There is inflation in top 5% of the economy that makes real GDP numbers higher and which deflation on the bottom doesn’t counteract sufficiently due to the imperfect way of calculating inflation and real numbers.
As there is also slowly deminishing security in the rest of the world, flow of capital is returning to USA toward the same rate as before the fall in 2008. This is going toward top 5% of economy.
Also there is international preassure against tax heavens which slowed outflow of capital.
You state: “Tax rates on the wealthy are at post-1930s lows.” I was wondering what you think is a fair overall income tax rate for the 1%? To be precise, this percentage tax rate would be calculated as (a) the sum of all federal, state and local income taxes, divided by (b) total income from all sources. Thanks in advance for your reply.
Now that’s a question designed to start a firefight!
Since I’ve got no official standing, I’ll throw out the first thought.
I personally like the rate imposed in 1939 at 75%, the 91% tax rate imposed during WWII was probably too high but a large number of people became very wealthy under that tax rate.
I’d be willing to lower the rate to 60% if we fixed the capital gains tax loophole.
JDM,
That’s a great question, to which I don’t have a good answer. A few thoughts.
(a) The far lower taxes on capital gains than income is a large distortion to the tax code, especially when combined with no estate tax (de facto has not been one for decades).
(b) The massive loopholes and exemptions for the 1% are insane in terms of equity. Such as the carried interest rate, so that income of hedge fund managers is taxed as capital gains instead of — as it is — earned income.
(c) Tax rates were much higher when this nation was growing AND had lower rates of inequality AND higher social mobility.
(d) As I and others have shown, including all government taxes the US has a flat tax. It is not prgressive, at all. Some analysis shows a dip in rates for those making over $10 million.
All this, and more, suggests that we could return the system to a more progressive basis. In fact changes at the State levels are going the other way, as the 1% use their increasing political power to shift the tax burden.
None of this should surprise anyone who has more than a slight knowledge of world history.
Questions over the best tax rate for the 1% are actually irrelevant, because their wealth is derived from rent seeking and speculation, there is nothing real, to tax.
For example, if NYC were to tax the five mafia families that use to run New York, then all of its financial problems could be solved. I Don’t Think So. The only solution NYC had was to crush the Mob, which effectively a 100% tax rate, which translated into an effective tax cut for all its citizens.
John,
“because their wealth is derived from rent seeking and speculation, there is nothing real, to tax.”
That makes no sense to me. Their wealth is real, and can be taxed. Their income is real, and can be taxed. The Mafia could be taxed. In fact, many organized crime groups pay taxes, albeit partial, to reduce the danger from the IRS — who got Al Capone.
@Pluto
I believe that the size of the crisis today is similar of the WWII as USA is concerned, not on the global level. So that 90% tax is as needed today as then since we are starting to feel the problem of automatization.
Tax of 90% is a major driver of good economic outcome. It reduces Gresham dynamics as the most important one. It is a dynamic in which bad behaviour drives out good behaviour.
With hight tax rate there is no incentive for bonuses “earned” by giving out bad mortgages,
there is no bonuses for driving wages lower so that managers can claim more of profit,
There is no drive to play margins trough more debt leverage, there is less drive to raise tuition fees once administration gets all it can from it
and very important, there will be less drive/ money to lobby politicians for more profit.
And also there would be more money available for R&D if CEO’s did not take all they can.
90% tax have given the major driver of good economic outcome to most, not just to small percentage.
FM — In paragraph (d) of your reply to me you make the broad assertion that “including all government taxes the US has a flat tax. It is not prgressive, at all.” I’m not clear how you get to that conclusion.
Aren’t Federal taxes the biggest part of “all government taxes”? The following is quoted from the CBO report “The Distribution of Household Income and Federal Taxes, 2010” published Dec 4, 2013.
>>> How Were Federal Taxes Distributed in 2010?
The average federal tax rate for all households in 2010—that is, tax liabilities divided by income (including government transfer payments) before taxes—was 18.1 percent. To examine the effect of taxes on households with different amounts of income, CBO divided the nation’s households into five groups of equal size, arrayed by before-tax income. In 2010, the federal tax rate for the bottom quintile of the income distribution was 1.5 percent and that for the top quintile was 24.0 percent (see the figure below). The top 1 percent of all households in the United States had an average federal tax rate of 29.4 percent in 2010.
Higher-income households pay much more in federal taxes than do their lower-income counterparts: They have a much greater share of the nation’s before-tax income, and they pay a much larger proportion of that income in taxes. Households in the top quintile (including the top percentile) paid 68.8 percent of all federal taxes, households in the middle quintile paid 9.1 percent, and those in the bottom quintile paid 0.4 percent of federal taxes. <<<
That sounds quite progressive to me. How much more progressive do you think the tax system ought to be?
It is a fact. I have written about it quite a bit and can find links when I have time. There are also hundreds of similar analysis out there.
For starters, the CBO analysis does not appear to include FICA, which is a 6 — or more properly 13% — flat tax on wages, but not capital gains.
FM — Thanks for your reply but sorry, you are not correct about the CBO. The CBO analysis includes FICA as well as excise taxes and an allocation of corporate income taxes to households. Here is the definition of “Federal tax liabilities” from page 2 of the CBO report:
>>> Federal tax liabilities are the amount a household owes on the basis of income received in a year, regardless of when taxes are paid. Individual income taxes are allocated directly to the households that pay those taxes. Social insurance, or payroll, taxes are allocated to the households that pay those taxes either directly or indirectly through employers. Excise taxes are allocated to households according to their consumption of the taxed goods or services. Corporate income taxes are allocated to households according to their shares of capital and labor income. Specifically, 75 percent of corporate income taxes is allocated to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. (Capital gains are scaled to a long-term historical amount, given the size of the economy and the applicable tax rate, so as to smooth out large year-to-year variations in the total amount of gains realized.) The remaining 25 percent of corporate income taxes is allocated to workers in proportion to their labor income. <<<
The Federal tax regime is nowhere near a flat tax and is far more progressive than you think. So my question (again) is "How much more progressive do you think the tax system ought to be?" Thanks in advance for your opinion.
Please read more casefully. I said “all government”, not “Federal”.
FM – I am well aware that you said “all government taxes” and I was equally careful to distinguish that Federal income taxes are the biggest part of “all government taxes”. Beyond Federal taxes, you can’t make a reliable apples-to-apples analysis of the overall tax burden because of wide variations between 50 states and thousands of local governments with respect to income tax rates, sales tax rates, property tax rates, etc. That said, I doubt it is mathematically possible for the steeply progressive Federal tax burden to be converted to a “flat tax” regime by adding in all other non-Federal taxes. If you have reputable 3rd party analyses of your “flat tax” assertion, I would be happy to read them. Cheers!
Good points, QueenMya . And I’m writing you from the state represented by Bernie Sanders.
Still, the Dems carefully quashed Occupy, and remain tight with their 1% paymasters.
Perhaps la Clinton will be the right Dems’ last gasp.
Excellent post, FM. It’s astonishing how little coverage there has been in the major media of Perkins’ proclamations. Also startling how easily he was able to commandeer 3 active-duty police officers into patrolling his lecture.
What next? Will a SWAT team guard Perkins during his next outing at a swanky restaurant? This is reaching the level of the Renaissance princes…
JDM45 asserts: “Higher-income households pay much more in federal taxes than do their lower-income counterparts…”
This is clearly and obviously not true. As Warren Buffett has pointed out, he has a lower tax rate than his secretary. The reason is obvious. Low-income people pay a FICA tax, they must pay a state income tax (high-income individuals can choose to establish a legal residence in states without an income tax, like Texas), they must pay sales taxes (high-income individuals can choose to purchase goods from states without a sales tax and have them shipped in), and most of all low-income people must pay state taxes and the regular tax rates on salaried income. High-income individuals often avoid paying state taxes entirely by getting most or all of their income from instruments like federal treasury bills, which are exempt from state tax — and high-income individuals pay a lower tax rate on capital gains, which is not subject to the same rate of taxation as regular income.
Most of all, high-income individuals can take enormous reductions in their taxable income. High-income people often gain a significant amount of money from renting properties like shopping malls. Rental properties are subject to depreciation, so every year the landlord can tax a whopping depreciation off their property value, reducing their taxable income — yet every year, such properties become more valuable, not less. High-income people can take reductions in taxable income for reinvestment, for 501c(3) tax dodges, and if they choose, high-income people can structure their income so that they pay little or no tax at all, by incorporating themselves and then playing games with various shell corporations to reduce their tax using foreign subsidiaries etc.
To give just one well-known example, in 2012 Mitt Romney paid a cumulative tax rate of 13%. The average minimum wage worker pays a typical 10% state tax rate + 15% federal tax + 5% FICA tax + various municipal fees and property taxes which add up to at least another 4%. That’s a grand total of 34% — compared to the 13% Romney and his ilk must pay.
Thomas More — Thanks for your comment, although I should point out a factual error you made. You say JDM45 asserts: “Higher-income households pay much more in federal taxes than do their lower-income counterparts…” I did not say the words you attribute to me. The Congressional Budget Office (CBO) wrote that sentence. I was quoting from the CBO report “The Distribution of Household Income and Federal Taxes, 2010” that was published Dec 4, 2013. Here is a link to the complete CBO report in the event you would like to read it and obtain a better understanding of the facts — http://www.cbo.gov/publication/44604