Naked Capitalism on Our Failed Tax System

Joe Stiglitz Blasts Our Wealthy-Coddling Tax System for Increasing the Returns on Rent-Seeking

Posted: 15 Apr 2013 12:11 AM PDT

It’s a sign of how well relentless propagandizing works that Joe Stiglitz has to devote a lengthy op-ed in the New York Times to debunking the idea that our income tax system, whose salient characteristic is low tax burdens for the rich, is good for anyone other than the rich. Economists have increasingly taken note of the fact that the US experiment in lowering taxes produced the opposite of the outcomes that were claimed for it, namely, spurring growth and increasing incomes in all cohorts (the barmy “trickle down” theory). Cross-country comparisons show that advanced economies with higher growth rates, like Germany, typically tax their wealthy more, showing that high taxes on the rich are not a negative for growth. Instead, giving tax breaks to the rich has turbo-charged rentier capitalism:

Remember, the low tax rates at the top were supposed to spur savings and hard work, and thus economic growth. They didn’t. Indeed, the household savings rate fell to a record level of near zero after President George W. Bush’s two rounds of cuts, in 2001 and 2003, on taxes on dividends and capital gains. What low tax rates at the top did do was increase the return on rent-seeking. It flourished, which meant that growth slowed and inequality grew. This is a pattern that has now been observed across countries. Contrary to the warnings of those who want to preserve their privileges, countries that have increased their top tax bracket have not grown more slowly. Another piece of evidence is here at home: if the efforts at the top were resulting in our entire economic engine’s doing better, we would expect everyone to benefit. If they were engaged in rent-seeking, as their incomes increased, we’d expect that of others to decrease. And that’s exactly what’s been happening. Incomes in the middle, and even the bottom, have been stagnating or falling.

Stiglitz provides a compelling summary of how the rich get favored treatment:

The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes….

With such low effective tax rates — and, importantly, the low tax rate of 20 percent on income from capital gains — it’s not a huge surprise that the share of income going to the top 1 percent has doubled since 1979, and that the share going to the top 0.1 percent has almost tripled, according to the economists Thomas Piketty and Emmanuel Saez. Recall that the wealthiest 1 percent of Americans own about 40 percent of the nation’s wealth, and the picture becomes even more disturbing.

Stiglitz points out that not only are our tax rates on top earners strikingly low by OECD standards, but the income level at which they kick in are also higher than in most other advanced economies. And that is before you factor in that the rich for the most part don’t make their money through income but capital gains, which are taxed at lower rates. That preferable treatment has been exploited flagrantly by the hedge fund and private equity industries, which have been able to structure their funds so that the overwhelming majority of the income they get from managing the funds, which is labor income, is taxed at capital gains rates. And the worst is that the Masters of the Universe act as if that is perfectly reasonable. Stiglitz objects:

Some Wall Street financiers are able to pay taxes at lower capital gains tax rates on income that comes from managing assets for private equity funds or hedge funds. But why should managing financial assets be treated any differently from managing people, or making discoveries? Of course, those in finance say they are essential. But so are doctors, lawyers, teachers and everyone else who contributes to making our complex society work. They say they are necessary for job creation. But in fact, many of the private equity firms that have excelled in exploiting the carried interest loophole are actually job destroyers; they excel in restructuring firms to “save” on labor costs, often by moving jobs abroad.

And then the good professor turns to corporate tax breaks, citing poster child GE, which has paid on average less than 2% of its income in taxes since 2002. The picture is likely even worse than these figures suggest since corporations and wealthy individuals can hide income tax havens.

I do have a minor quibble with Stiglitz catering to the deficit scare-mongers by pointing out that a fairer system would collect more taxes and reduce budget squabbles. He closes by reminding us:

It doesn’t have to be this way. We could have a much simpler tax system without all the distortions — a society where those who clip coupons for a living pay the same taxes as someone with the same income who works in a factory; where someone who earns his income from saving companies pays the same tax as a doctor who makes the income by saving lives; where someone who earns his income from financial innovations pays the same taxes as a someone who does research to create real innovations that transform our economy and society. We could have a tax system that encourages good things like hard work and thrift and discourages bad things, like rent-seeking, gambling, financial speculation and pollution.

Of course, some people will object, and they are the ones who benefit from complexity, either by being loophole creators and users, or part of the service industry that caters to them. It’s time ordinary citizens look hard at who is peddling “go easy on the rich” advice and discount the source.

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3 responses to “Naked Capitalism on Our Failed Tax System

  1. The wealthy have never actually “paid” a share of taxes equal to their share of income. Their tax rates have always been, before RayGun, a way to direct their investment. High marginal rates on top earners with deductions and exemptions for “real” job creation kept capital dynamic, flowing thru the economic strata as wages and materials feeding industry.

    As that capital changed hands many times before returning to investors (with profits) the tax man got many bites of the apple. Concentrating and stagnating that flow via paper shuffling for profit has denied government the multi tiered collections that are critical to maintain a modern society. This is simply part of the attack on our government masterminded by the powers behind RayGun in an attempt to “starve the beast”.

    The wealthy will spend many times their tax burden to disable the government’s ability to regulate and direct the capital of our economy. This leaves them, where they are today, as the ultimate decision makers in the largest economy with the largest military in the world. As soon as one makes more than can possibly be spent in a lifetime the goals change and power becomes the brass ring. We’ve fought wars against the results of this several times in history, but who’s going to oppose it when we are the source of the world’s misery?

  2. So what do we do????????

  3. In many countries the wealthy and firms are liberated to pay their share of taxes equal to their share of income to contribute to the welfare of the country.
    The idea is that they would invest more, but it gives them more opportunities to profit of the state where they have their ‘administrative base’.

    All private persons and all institutions should contribute evenly or some extra on the above average incomes to pay for all the common utilities (streets, public facilities like schools and libraries, etc.)

    Creating tax shelters or heavens of free deposit places is not going to help the economy, but will undermine the system and create facilities to fraud.

    The greed makes wolfs from the sheep.

    In the 21°century we should not allow it any more that someone can earn three hundred times more than some body who does the (actual or hard) work.

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