Chronicles of Inequality —[Too Much, July 30, 2012]

Consider JPMorgan CEO Jamie Dimon. In 2011, Dimon pocketed an 11 percent raise to $23.1 million. Doesn’t Dimon, and not just Ina Drew and the power suits she so poorly managed, bear some responsibility for the JPMorgan trading mess? The messing all took place, after all, on his watch.

But let’s be fair. On Wall Street, Dimon hardly stands alone. The sky-high rewards for financial industry executives that we’ve seen over recent years rest, across the board, on a recklessness that almost crashed the nation’s entire banking sector — and would have if taxpayers hadn’t come to the rescue in 2008.

Last week, the now-retired CEO who helped swing open the door to that recklessness went public with an apology of sorts.

As a top corporate exec in the late 1990s, Sandy Weill had pressured Congress late to gut the federal law that had for years prevented banks from gambling with federally insured bank deposits. Congress eventually passed legislation that did just what Weill was asking. Now he’s calling for a regulatory do-over, a restoration of the old rules that kept apart commercial and investment banking.

Giant banks, proclaims Weill, should never again be able to place taxpayers and depositors “at risk.”

The banking colossus Sandy Weill created, Citigroup, made him a billionaire, and Weill spent most of the first decade of the 21st century on the Forbes list of America’s 400 richest. Should a chunk of his huge fortune now be clawed back?

Former CEOs at two other financial industry giants, Merrill Lynch and Morgan Stanley, also now acknowledge the disaster that our reign of big banks has created. Should they be clawed back, too?

We as a nation actually answered questions just like these generations ago. In 1916, we enacted a federal estate tax, a national levy on the grand fortunes that affluent people leave behind at death.

Back then, most Americans agreed that the richest among us had either ripped the rest of us off to build up their grand fortunes or benefited much too royally from an infrastructure the rest of us, through our tax dollars, had fashioned.

Either way, our forebears concluded, the wealthy had a responsibility to give back to the society that had made them fabulously rich. They saw the estate tax, in effect, as the ultimate clawback.

In future years, the estate tax would do some serious clawing. Between 1941 and 1976, the estates of the rich faced a tax rate of 77 percent on wealth over $10 million. In 1980, the top estate tax stood at 70 percent on wealth over $5 million.

Estate tax levies have been falling ever since. In 2010, thanks to the Bush tax cuts enacted in 2001, we had no estate tax at all.

Since then, thanks to a late 2010 deal between the White House and GOP leaders in Congress, we’ve had an exceedingly weak estate tax. Couples have had all wealth under $10 million totally exempt from any estate tax, and no estate with a value over $10 million has faced a tax rate higher than 35 percent.

If the current Congress does nothing on the estate tax over the rest of this year, the pre-Bush estate tax of 2000 — with a 55 percent top rate — would go back into effect as of January 1, 2013. Lobbyists for America’s most comfortable are, predictably, working hard to prevent that eventuality.

To help in that effort, Republican lawmakers are seeking to make the 2010 estate tax deal permanent. Top Democrats in Congress and the White House want to revert back to 2009’s 45 percent top rate. But the Democratic congressional leadership hasn’t been able to round up enough Democratic votes to move forward on even this mildest of stabs at significant estate taxation.

How mild? In real life, a 45 percent top estate tax rate translates, after exemptions and deductions, into not much of a burden on the super rich.

In 2007, for instance, the top estate tax ran 45 percent. In that year, 1,192 wealthy Americans died and left behind estates worth at least $20 million. These estates held a combined $75 billion. But after exemptions and deductions, only$10.2 billion of that $75 billion, 14 percent, went to federal estate tax.

Two years ago, three U.S. senators introduced legislation that would, if enacted, subject net estate wealth over $50 million to a 55 percent top tax rate, with a surtax of an additional 10 percentage points on wealth over $500 million.

Estate tax rates at that level might do some serious clawing. And claw we must.

“The man of great wealth owes a particular obligation to the state,” the great Republican estate tax champion Teddy Roosevelt noted a century ago, “because he derives special advantages from the mere existence of government.”

Wealthy Americans today aren’t meeting that obligation, not even coming close.

Paul Buchheit, Three Big Lies Perpetuated by the Rich, Common Dreams, July 23, 2012. Topping the current prevarications: the notion that higher taxes on the rich slow job creation.

Stewart Lansley, Why more equal societies have more stable economies,Inequalities, July 24, 2012. A leading British analyst runs down the three basic reasons why inequality inevitably undermines economic health.

Mark Weisbrot, End tax-cuts for super-rich only and spend new revenues on job creation, South Coast Today, July 28, 2012. Between 1979 and 2007, America’s top 1 percent took three-fifths of all the nation’s income gains. Ending the Bush tax cuts for this elite could be a first step toward economic recovery.

Interview: World’s Super-Rich Hide $21 Trillion Offshore, Radio Free Europe, July 28, 2012. Former McKinsey & Company chief economist James Henry explains the basic findings of his new blockbuster report on the cash stuffed in global tax havens.

Conservatives have an explanation for these numbers. High tax rates on high incomes, they claim, discourage entrepreneurs. Lowering high rates, the claim continues, encourages them. Entrepreneurs who can keep more of their income go on to invest in their economy, create jobs, and make everybody happier.

In the bigger economy these lightly taxed entrepreneurs build for us, conservatives freely admit, the rich will make plenty of money and even increase their income share. But the rest of us shouldn’t mind any of this at all. Thanks to the rich, they argue, we get to live in larger, more buoyant economies.

In their new Tax Justice Focus paper, Piketty, Saez, and Stantcheva put these claims to the test. If the conservative argument reflected reality, they note, nations that have cut tax rates on the rich substantially should show much higher economic growth rates than nations that still levy stiff taxes on their richest.

In fact, the three economists point out, reality tells no such story. Nations that have “made large cuts in top tax rates such as the United Kingdom or the United States,” they detail, “have not grown significantly faster than countries that did not, such as Germany or Denmark.”

So what’s going on in countries where the rich all of sudden face substantially smaller tax bills?

In these countries, Piketty and his colleagues posit, top executives don’t suddenly — and magically — become more “productive.” They suddenly instead find themselves with a huge incentive to game the system, to squeeze out of the companies they run all the personal profit their power enables them to squeeze.

The more these executives can squeeze, in countries that have sheared tax rates on the rich, the more they can keep. The result? The top 1 percent in nations that go easy on the wealthy at tax time proceed, as Piketty and his fellow authors put it, to “grab at the expense of the remaining 99 percent.”

The three authors don’t go into chapter and verse on this grabbing in their new paper. They don’t need to. Millions of Americans already know this grabbing behavior first-hand. They’ve seen corporate execs routinely outsource and downsize, slash wages and attack pensions, cheat consumers and fix prices.

How can we start discouraging these sorts of corporate executive behaviors? Piketty, Saez, and Stantcheva have a straightforward suggestion: raise taxes on America’s highest-income bracket, raise them as high as 83 percent.

This suggestion, the three acknowledge, may now seem politically “unthinkable.” But back between the 1940s and the 1970s, they point out, the notion that we ought to raise taxes on the rich to reduce the incentive for outrageous behavior rated as the conventional wisdom in the United States.

In those years, “policy makers and public opinion” felt strongly that pay increases at the nation’s economic summit “reflected mostly greed or other socially wasteful activities rather than productive work effort.”

Is this perception about pay at the top now about to make a comeback? Piketty and his fellow researchers certainly think so, and they see in the Occupy movement signs of a shifting public perspective on the wealth of the wealthy.

Economists ought to be speeding this shift “with compelling theoretical and empirical analysis,” add Piketty, Saez, and Stantcheva in a hopeful final note.

These three authors, their new paper demonstrates, practice what they preach. All the rest of us should be grateful.

United for a Fair Economy

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