"When Inequality is Too Great, is it Time to Consider Socialism?" Michael Howard, University of Maine
A Bloomberg poll reported in January that 43 percent of Democratic caucus goers in Iowa considered themselves socialists.
That’s Iowa, not Burlington or Berkeley. I doubt that most of them favor collective ownership of the means of production, a standard definition of socialism. Nor does self-described democratic socialist Bernie Sanders call for anything socialist in that sense except the extension of government-administered health insurance for all. More likely, what people mean by “socialist” is a revolt against the dominance of capitalist corporations and the growing inequality of wealth and income that results from and strengthens that dominance.
Would the costs of reducing inequality outweigh the benefits? Some will argue that inequality is beneficial to society, because wage and salary differentials lure people into socially useful occupations, and because high returns on invested capital incentivize risk-taking, promoting economic growth. But do current levels of inequality actually have these expected effects?
Consider the capital gains tax rate, set at 20 percent for high-income earners. One reason that wealthy people have lower overall tax rates than ordinary working people is that a higher percentage of their income is in the form of capital gains. This is partly why Warren Buffett pays a lower effective tax rate (17.4 percent) than his secretary (35.8 percent). This also is one of the contributing factors to the widening wealth and income divide between the super-rich and everybody else. The wealthy keep more of their income, then add it to their wealth, which consequently yields even more income.
The rationale given for setting the capital gains tax rate so low (down from 28 percent in 1987) is that it will incentivize savings and investment by the rich. Yet over this same period, savings rates have actually fallen. Instead, wealth has flowed upward to the wealthiest: the top 0.1 percent now receive 50 percent of all capital gains, while the bottom 95 percent receive only 10 percent. So capital gains tax rates could be raised with no pain to the wealthy, and with much to be gained by everyone else, such as better schools, improved infrastructure or lower taxes.
Not only capital gains taxes, but marginal income tax rates on the wealthiest also have been slashed from 70 percent before Ronald Reagan’s presidency to under 40 percent today, on the theory that this would boost growth, the benefits of which would “trickle down” to the rest. Economists Thomas Piketty and Emmanuel Saez have found that “countries that made large cuts in top tax rates, such as the United Kingdom or the United States, have not grown significantly faster than countries that did not, such as Germany or Denmark.” In fact, economic growth in the U.S. has been higher in years when the top tax rate was higher.
This evidence suggests that these tax reductions have done no social good, but instead have only enriched and empowered the wealthiest at the expense of everyone else. Piketty and Saez argue that top marginal tax rates could be raised to between 57 and 83 percent without discouraging productive effort, depending on whether one assumes that escalating executive salaries reflect some rising productivity or only the power of the most privileged executives to influence their own salaries. Either way, it is likely that marginal tax rates are inefficiently low and could be raised considerably with no loss in economic growth. In fact, more government investment and more of the social product going to wages and consumer spending would be likely to stimulate growth, as it did in the decades immediately after World War II. Such growth rates are probably not achievable in today’s globalized market, but the Clinton administration managed sustained growth, rising wages, and deficit reduction with higher upper tax rates.
Sanders is proposing something much more modest than what Piketty and Saez say is economically feasible. His website’s proposals for addressing income and wealth inequality include closing tax loopholes, an estate tax on fortunes greater than $3.5 million, lifting the cap on the Social Security tax for incomes over $250,000, and measures on trade, health care, minimum wage, education and infrastructure spending to improve the prospects for working Americans. But there is no proposal for raising the income tax on the wealthiest. We could implement his proposals and quite a bit more before we would endanger any socially useful inequality. If that’s socialism, then it’s time to give it serious consideration.
Michael Howard is a professor of philosophy at the University of Maine.