Taxing the symptom

Wealth distribution is unquestionably a problem in many societies these days–and not just in poor countries, as has traditionally been the case:

USA Wealth Distribution

It’s becoming hackneyed to point out that this is really bad, but I want to do so anyway: this is really bad! Consider that in 1980, the top 20% of earners in the US held “just” 42.8% of wealth.

There are many reasons as to why this has happened, but the most obvious and oft-cited has to do with this:

ratio of pay

Most people would agree that the pay of CEOs has quite swiftly spiraled out of control, and now the debate is centered upon how to mitigate the wealth inequality that has arisen from said spiraling. Unfortunately, as CEOs’ pay has been increasing, something interesting has been happening…

tax burden

There are several alarming implications of this chart. (Yes, it is an old one, but surprisingly little has changed since 2004. And this is a good-looking chart.) First of all, the share of taxes that the wealthy pay has been cut in half. This is alarming to me not because I believe that everyone should pay more taxes, but because of the astronomical disparity between top earners and the rest of the population. Which brings me to the second implication of this chart, which is more a question: how the heck is the government funding itself if the rich’s  tax burden has been dramatically slashed, and middle to low earners have seen little change in their rates?! While Obama has slightly raised taxes, an uphill battle to be sure, he has made little headway in changing the overall look of the tax burden paradigm.

In my research I have encountered the argument that the rich actually have a bigger tax burden now because they end up paying more money due to the ginormous fortunes they have amassed–40% of $10 million is a lot more than 94% of $500,000, after all. So yes, more money is being taken from less people as a consequence of unequal wealth distribution. Those millionaires who argue that this should not be the case should talk to the “99 percent,” many of whom are happy to scrape by on $30,000 a year or much less.

Now I’m no class warrior, nor am I a communist. I have no problem with people working hard and reaping the rewards of hard work. But it is becoming apparent that at some point, someone built a dam in the river of wealth, and instead of trickling down, the wealth is building up at the top, out of reach of the many. While I cannot speak to the exact causes of this situation, I can surmise that it has to do with a unique combination of communism panic in the 1960s, stagflation in the 1970s, and an individual by the name of Ronald Reagan in the 1980s. This is overly simplistic. Business Insider has a helpful article on the history of tax rates, and they also point out the correlation between low taxes and ballooning deficit.

I think the legacy of the 1980s is one of unquestioned trust in bankers and CEOs due to a widespread lack of understanding of what they do. I am reminded of a scene in the film American Psycho in which a woman tells Christian Bale’s character, who works in finance, that she really appreciates how hard all the “guys on Wall st. work for us.” Meanwhile his character is shown day after day sitting in his office, doing nothing. While this attitude is no longer all that prevalent, I think it played a big part in inflating salaries (and bonuses) of CEOs and bankers.

What we have here is a systemic issue that has arisen in part because of a values system that places a premium on knowing how to manipulate a complex financial system that no one understands. Taxing the rich is a good way to temporarily redistribute wealth AND reduce the deficit (you’re welcome, Paul Ryan). But it is not a good solution in the long run. Nor is putting a cap on salary or bonuses, as policy makers in the EU are attempting to do, unless every country in the world gets on board.

In taxing the rich, we are taxing the symptom of a deeply rooted way of thinking that no longer serves the greater good. This is like taking an Advil for a brain tumor; the pain will be temporarily alleviated, but at some point you’re going to have to deal with the cause of the headache. This is not an anti-business sentiment–on the contrary, we should be encouraging entrepreneurs and companies that create jobs and innovation, not giving a CEO a five million dollar bonus that (s)he will stash in Switzerland until it is noticed that (s)he’s been fudging the books to inflate his/her company’s stock price. Of course, simply changing our thinking will do little if we cannot stop the horrendous feedback loop that the coziness of lobby groups and Congress has produced. But acknowledging the situation and getting angry about it is a good start.

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