Reducing inequality: what to do about the top 1%

If the value-added by particular individuals—a CEO, financial innovator, top athlete, movie star, or what have you—is sufficient to merit pay above the cap

Your statement is full of assumptions that have been undermined by experience.

CEOs and financial industry people don’t get high incomes because they *merit* them, because they have added value in some way. They have not been controlled by “the market”. The financial industry and much of the upper reaches of American corporate culture is a very successful kleptocracy. The first step is asking how do we break it up, if pitchforks seem too messy.

I would agree with DoctorScience; taxing the rich and redistributing their wealth is a good thing, but the salaries of the top 1% are increasingly not being driven by the market. This is especially true among corporate executives, whose salaries are set by boards of directors made up of other corporate executives who have a vested interest in keeping average corporate executive salaries high.

After all, value-added doesn’t particularly explained why the difference between CEO and line worker salaries has increased fifteen-fold in the last 28 years. CEOs haven’t become 15 times more productive than they were in the 1980s, or 15 times more qualified.

This survey (http://baselinescenario.com/2009/04/05/two-things-that-have-nothing-to-do-with-each-other/) notes that there doesn’t seem to be any relationship between compensation and return. So if there is a market, it’s in market failure.

”taxing the rich and redistributing their wealth is a good thing,”

Maybe necessary, but not good really; good would be having systems of governance that precluded the rise of the problem. For example look at Dana holdings – where the office is and where the boss’s live. Somehow their deal doesn’t inspire much hope for performing their job.

the salaries of the top 1% are increasingly not being driven by the market

There are literally over a million households in the top 1%. Some evidence about a few hundred CEOs does not address what is driving the success of the top 1%.

First, I’m increasingly of the opinion that this is addressing the wrong problem; that the presence of inequalities is inevitable and what should be focused on is maximizing upward mobilities within and between the income quintiles. If the position on the chart were more strongly determined by age than by social background, similar data would stop being so much of a problem for justice.

Which probably means a larger estate tax, but more fundamentally a restructure estate tax in which most of the current loopholes are closed while allowing economically-productive family owned businesses to escape it. (The last being a preference of mine independent of the general equalization interest.)

Which brings me to the individual topic of this post, which is to say that closing the popular tax loopholes is at least as important as raising the nominal tax rates at the top 1%. Doing away with the excecption for municipal bond interest in the AMT calculation, getting rid of the possibility to game differences in income and capital gains taxes by choosing different compensation plans, putting a cap on exemptable morgage interest. Because the top 1% are, almost by definition, going to have the best accountants around…

MarkUp: I don’t. I was just saying what my own position was.

Jeff: upward mobility is kind of hard when you’ve got existing inequalities; people pass on their advantages to their kids, better prepared and financed kids have an easier time getting into elite institutions, have better social networks, and so forth.

That’s why I think you need to redistribute the wealth here – because otherwise those kids from poor families aren’t going to have the tutors, summer schools, Kaplan prep courses for standardized tests, aren’t going to be able to know the right people to talk to for letters of recommendation or references, and too many rich kids are going to have unlimited resources, as they all gun for limited slots in colleges and limited numbers of jobs.

Steven: If the goal is to redistribute wealth, then focusing on income (both as a diagnostic and as a policy target) is wrongheaded and quite possibly counterproducting since some instances how high income are the result of the upward mobility betweeen wealth strata that we want.

I also think that you’re overestimating the degree to which the elite’s ability to pass advantage to their kids depends on their discretionary income: I don’t think you could crush it even with Stalinist-level taxation (and, in fact, one is fairly certain that the russian elites had no problem getting their children into the ideal positions…)

I’m not sure what the solution here is, exactly. But I don thing that mobility a better place to attack the problem than attempting to make sure everybody’s income is above average.

Also, many of the arguments about why we should care about inequality apply less the smaller the percentage of people being looked at. If the top 1% are unlikely to live near you or come into contact with you in any meaningful way, why care?

Kevin:
punishing those who create wealth

Do you realize how detached from reality that sounds?

For wealthy people to have an upper limit on their income is not *punishment* in any meaningful way, it does not *hurt* — or at least, it hurts no-one sane. I myself am a follower of the late, great Alice Trillin, who developed the principle of “Enoughness” — there is a upper limit to how much money (=power) a person should have, and saying “enough” is not a punishment.

Additionally, the idea that the very wealthy are that way because they “create wealth” is nonsense. If you look at the list of the wealthiest people in America (or the world), it’s heavily tilted toward people who were born to their fortunes. Even those who are much, much wealthier than their parents — like Bill Gates and Warren Buffett — did not come from even the middle class. Gates and Buffett, at least, know that they did not “earn” their money by personal virtue, and neither plans to leave a great fortune to his children.

This ludicrous proposal to limit wealth-building and legacy-passing will lead to less wealth for all.

Attention.

Jeff R:

You make a good point – I’m down for a wealth tax too.

(source for econ data: http://www.bea.gov/national/xls/gdpchg.xls)

The idea that increased taxes on very large incomes will somehow damage wealth creation is such an old one. It has been trotted out at the appropriate occasions all my lifetime, and probably has been around for longer than that.

The argument is not without holes.

In one form, the argument involves an assumption about talent. If you assume that talent is very scarce, you might conclude that very large rewards are justified. For this form to work, you need to prove first that the talent in question is directly related to wealth creation, and second that the talent is in fact rare. As far as the talent/wealth creation link is concerned, surely since we have just lived through (are living through) a dramatic expose of how untold billions of dollars are effectively used for gambling by the very wealthy, the link is questionable at best. Either the very wealthy don’t have much wealth creating talent or if they have it is easily swamped by their talent for games of chance.

And as for scarcity of talent, I’m unconvinced. I recently watched the video of a dumpy 47-year-old lady from Britain get on the stage in “Britain’s Got Talent” and astonish a sceptical audience with the quality of her singing. I think that example can be multiplied through a range of talents, not just singing. There are probably millions of people out there who would be just as good at running a bank as the ones we have now – and many of them probably better. Certainly many would be more honest.

Another form of the “wealth creation” argument revolves around effort. We are told that large rewards are needed to provoke effort. In response to this it has often been pointed out that historically the multiple of CEO remuneration to mean or median employees’ salaries was much lower than it now is. Were the forebears in office of today’s managers therefore lazy?

Finally, we need to remember what “wealth creation” means. It means investment. And Govt. investment is no less investment than private investment. Again, the current debacle in financial markets shows us that large aggregations of private wealth are no guarantee of large private investments – unless you count truckloads of valueless paper as an “investment”. I’d rather have a bridge to nowhere. At least some people got paid for building it.

Just to slightly change the subject, if I were happily in the category being discussed, I am pretty sure my accountant/financial adviser would be very… tired. And I think everyone that I paid good money to to help me and others like me would be tense and irritable. It’s hard to do financial planning when you don’t know what you’ve got to play with.

As the bottom line of all this is, what level of payment must I make to insure that you don’t eat me, it is a protection racket and we can learn lessons from them. And your predecessors in Sicily know that predictability is really important. If a government were to commit itself to taxing the super-rich at a certain level (probably a band with firm margins), the super rich and those that serve their financial needs would be able to plan successfully. These financial plans would be more successful than those in areas where taxes were changed too frequently, and the super rich would gravitate to those areas–much like they did to London when Blair and Brown committed to low taxation of the rich and used statements similar to Deng’s ‘to get rich is glorious.’

This is a relative game, after all. If you threaten to eat the rich, they will move. They will shop for a tax-lite country. I should think the yield management software used by airlines could be adapted to estimate the most effective tax regime…

“If you threaten to eat the rich, they will move. ” There are a lot of countries where the rich would be taxed less; it’s amazing that they haven’t all fled by now.

the labor markets are broken.

Given your previous postings, I come up with two possible meaning of ‘broken’.

(1) The workers do not receive enough of the surplus they create.

(2) The other is that some workers are in positions that do not create much (or any) surplus, although their work might ‘appear’ valuable. Examples of the latter might be providing quality child-care, for which nobody is willing to pay what some might feel it is worth, or workers in industries where demand for their product has collapsed.

Are you arguing (1) or (2)? Or have I misconstrued the meaning of ‘broken’ altogether?

There is a joke a Russian colleague likes to tell:

A poor German farmer lives down the road from a rich farmer. A passing stranger stops by talk. He asks the poor German farmer what he thinks about the rich farmer. The poor German farmer swears “by God, I will work, my wife will work, and my children will work, day and night, until we are as rich as he is!”.

A poor Russian farmer lives down the road from a rich farmer. A passing stranger stops by talk. He asks the poor Russian farmer what he thinks about the rich farmer. The poor Russian farmer swears “by God, I will work, my wife will work, and my children will work, day and night, until he is as poor as we are!”.

Personally, not so much a fan of Plan B.

Tom West 04.19.09 at 3:07 am

“The area where the US really outshines the rest of the world is in entrepreneurship.”

I *hear* this a lot.

“These are the guys that might think twice about investing their life savings (and the savings of their friends and family) in a business that is 90% likely to go bust if they realize that they are unlikely to see much of the payoff in the unlikely event that they manage to strike it rich. ”

Considering that we’re discussing rates for which we have historical data, and that the historical data suggests *better* performance than now, I think that few will ‘think twice’.

“One might see it as privatizing losses and socializing profit.”

As opposed to the current system?

Barry – This whole thread presupposes that all wealth ultimately belongs to the State. With such a crowd, it is simply prudent to suggest a goal of equally rich rather than the implied movement towards equally poor. The actual reality in the US is that wealth belongs to the individual. The State’s power to exercise takings, is granted by the citizens, in an effort to achieve goals not possible individually.

Barry – Yes, I have come right out and stated that one of the justifications for this kind of wealth redistribution is the belief that all wealth ultimately belongs to the State.

james’ strawman is also a false dichotomy, of a sort that is both (a) IME very common among libertarians, and (b) relevant to the “neoliberal” discussion in the other thread.

What you’ll not about james’ dichotomy is it opposes wealth as held by individuals to wealth as held by The State — but there is no mention of the principle holders of wealth in our society, families and/or corporations. Painting the big opposition as between individuals and The State is a way of distracting attention from where the money is really going.