“Yes, there's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.” Few have articulated shortcomings of today’s economy better and with more credibility than Warren Buffett, a financial genius and one of the world’s richest men. By way of shrewdness and cunning, wealth and income inequality have reached staggering proportions. Mr. Buffett’s side is clearly winning, but the stakes are not always clear.
What is at stake is not merely a life of luxury for some. What is at stake is our way of life. Democracy and our form of government is at risk. With inequality left unchecked, the ability to demand justice is lost. Self-rule is in jeopardy. For some, the peculiarities of human nature will not stop at garnering most of the wealth. Victory will be won with total control. We face this threat not simply because there are evil men and women but because it is in the nature of some to win at all cost.
Wealth and income inequality, of course, is not new. One form of class struggle or another has existed throughout history and will continue to exist far into the future. What is different now is that the threat to our well-being is more pernicious. The danger is not found in the divine right of kings or the autocratic rule of dictators. The danger is found in the influence excessively large concentrations of wealth have in the hands of the unknown few. The influence this wealth brings to bear within the walls of Congress will rob us all of our well-being if not challenged.
Publicly funded electoral campaigns would help to mitigate the effects of money in politics, but this must not be relied upon as it only addresses electoral politics. We must address the more systemic issue of buying influence. The accumulation of excessive wealth itself must be dealt with directly.
Almost all developed countries in the Western world incorporate a progressive income tax. A progressive income tax, where the greater one’s income, the higher the rate of taxation, addresses the issue of wealth accumulation and is deemed to be the most-fair. Unfortunately, a simple progressive income tax code fails in two important areas. Firstly, it consistently has failed to prevent the accumulation of excessively large concentrations of wealth on the part of a few. Every week there are more and more billionaires created worldwide. Secondly, concentrated wealth in the hands of a few, stifles economic performance. Wealthy individuals alone cannot sustain an economy.
Safeguarding Democracy
The current progressive tax code has failed miserably. In the U. S., the top 1% of all wage earners account for about 20% of all income. The bottom 25% account for less than 4%. Currently, in the U. S. the top 400 individuals own more wealth than the bottom half of the population, all of this with, ostensibly, a progressive income tax code in place.
As has been stated by others, when it comes to wealth accumulation, the tax code has been the weapon of choice. Through mismanagement and neglect we have abandoned our right to provide for the common good. We have failed to to reclaim the economic, cultural, and ethical investments we make daily. Perhaps we have failed to understand the nature of the problem.
To fully grasp the issue, however, one needs to look no further than human nature. There is a point in the accumulation of wealth at which safeguarding one’s financial future turns into ensuring one’s status. The objective pivots away from survival and comfort to one of dominance. While status is part of human nature and should not be denied, allowing this condition to be purchased and acquired outside of strength of character is a danger to us all. For this reason, a wealth tax as defined by Saez & Zucman (2019) and others must be part of the solution. History has shown money begets power and as Lord Acton has stated, power when absolute, tends to corrupt absolutely.
Economic Performance
The other area where extremely large concentrations of wealth in the hands of a few relates to economic performance. The ability of policy makers to influence economic performance is compromised when forced to confront excessive wealth. Excessive saving represents a hit upon an economy. Money poured into tax shelters and government securities extracts revenue from circulation resulting in less value to society. Revenue that no longer circulates and no longer works toward a sustained demand for goods and services slows production and affects levels of employment.
The goal of any economy must be full employment. All stakeholders must be able to participate as a fully functioning member of the economic community or they will be a drag on economic performance. A tax regime that more equitably administers the tax burden helps to ensure a contribution by keeping money in circulation and creating an effective demand for goods and services. By preventing excessive saving, a more equitable tax burden allows revenue to flow at a greater rate within the economy.
Excessive wealth results in a high propensity to save. Too much saving in relation to income dampens economic performance by withdrawing money from circulation. The possibility for an effective demand is then lost leading to higher rates of unemployment. Spending must be in proportion to income for an economy to operate efficiently. The wealthy cannot spend their money fast enough to support the needs of the economy.
As the levels of the wealthiest have continued to rise, it’s clear they cannot even give it away fast enough. Large fortunes continue to grow. To break the cycle of greater and greater wealth accumulation, a sufficiently progressive tax code must be initiated.
Sufficiently Progressive
A sufficiently progressive tax code is not the same as a merely progressive tax code. A sufficiently progressive tax code is designed to ensure that excessive levels of saving do not accumulate. A sufficiently progressive tax code will prevent hoarding. It does this by tying income tax rates to saving behavior. The greater the rate of saving, the higher the rate of taxation.
Just as growth measures economic productivity, it can be argued one’s ability to save measures an individual’s or a corporation’s viability and, therefore, one’s value to society. One’s ability to save signals a fully functioning and successful member of an economic community. It is suggested here, this signal can be used to apportion fairness and ensure sustainability among all economic stakeholders in such a way as to meet the needs of the individual taxpayer and the needs of the economy. Developing sufficiently progressive income tax rates, based upon one’s ability to save, will be the task ahead and the subject of Part Two of this essay.
Conclusion
As has been duly noted by others, a billionaire is a sign of policy failure. To form a ‘more perfect union’, we need to mitigate the effects of extreme wealth. When wealth is warehoused above its useful purpose, revenue sits idle, and the seeds of autocratic rule are sewn. It is beholden upon us all to recognize the threat excessive saving has upon our way of life and to act accordingly. We owe it to posterity to develop a viable course of action. As one of our Founding Fathers cautioned at the establishment of the constitution, “We have a republic, as long as we can keep it”.
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