By Colin McAuliffe (@ColinJMcAuliffe)
A recent post by Samuel Hammond of the Niskanen Institute, a center right think tank, criticized Congresswoman Alexandria Ocasio-Cortez’s recent proposal to impose a 70% marginal tax rate on income over 10 million dollars. A few of the points raised in the piece are interesting jumping off points for discussion.
Hammond presents a figure on the wealth shares held at different levels of the wealth distribution in Sweden over the 20th century, which shows that the top 1% of Swedes held over half of the wealth in the early 1900s. This amount dropped to the neighborhood of 20% by 1970, and has held relatively stable since. Hammond suggests that this stability is proof that high marginal income tax rates in Sweden cemented the country’s old dynastic families in their positions of wealth, while locking out everyone else. This is ultimately a good point that the left should take seriously, but it’s not a particularly good argument against raising marginal rates on income.
To unpack what we mean by this, let’s first take a look at how wealth in the US has evolved over the same time period. Since the 1970s, when Sweden saw stable or moderately increasing inequality, the US saw rapidly increasing inequality. In the past, when the US had high marginal income tax rates, there was much less inequality than there is today.
It’s obviously incorrect to claim that high marginal income tax rates themselves cause inequality or have no role in reducing inequality, but it’s true that they will prevent someone who is not already wealthy from accumulating levels of wealth comparable to the billionaires in the US today or elsewhere. Preventing these levels of wealth accumulation is in fact the stated goal of high marginal tax rates, but these kinds of income taxes do not actually reduce the wealth households who have pre existing wealth.
Instead, what high marginal rates on income do is slow the rate of accumulation at the top, in addition to compressing the pre-tax income distribution. The reductions in wealth inequality result from the bottom of the distribution accumulating wealth at a faster rate than the top. As the bottom catches up to the top, the inequality in the wealth distribution goes down.
We can see this if we plot the wealth in dollars instead of a share of total wealth. Periods of US history where wealth inequality went down are not explained by assets being transferred from the top 1% to the bottom 90%, but instead result from a faster rate of wealth accumulation by the 90% relative to the 1%.
High marginal rates on income are good, and as Hammond shows, they achieve their stated purpose of preventing high levels of wealth accumulation. However, the left should be clear eyed about the limitations, since higher taxes on income do not address existing accumulations of massive concentrated wealth. Hammond’s principle of focusing on eliminating all forms of income that are unfairly captured (regardless of whether that income is captured by a wealthy or non wealthy person) also does not address the question of what to do about wealth that is currently held but was ill-gotten. However, Hammond’s criticism of high marginal rates on income seems easy to resolve. High marginal rates on income put the brakes on accelerating inequality, but they don’t reduce the amount of wealth that is already held by the mega rich. Therefore, implementing high marginal income rates does not cement the upper class in their position of privilege, implementing high marginal income rates while simultaneously declining to implement high taxes on wealth and inheritance does.
This is not to say that high taxes are incompatible with social mobility. Hammond cites a study which notes that overall social mobility in Sweden is very good. The statistics he cites for the US, for example that an American has a 56% chance of being in the top 10% of earners for at least one year in their lifetime, are really measures of income volatility, not neccisarily social mobility.
Hammond correctly notes that there is nothing even remotely radical about Ocasio-Cortez’s tax proposal. It seems hard to even call it progressive, since it would simply restore the top marginal tax rates to comparable levels from the Nixon era. This chart could perhaps give us some insight as to how we ever came to a point where a moderate tax policy would be considered politically radical.
The most striking feature of the wealth chart is the growth of the blue curve followed by its collapse around 2008. Around the mid 1970s, we often see some significant changes in many economic data series, but not in this one. For example, this is when after-tax corporate profits as a fraction of the total value of goods and services produced begins to steadily increase. There is also a pronounced divergence in the growth of productivity and compensation at this time. Real wage growth has essentially been stagnant for the bottom half of the income distribution since then, with the exception of a period between 1996 and 2001 when labor markets were tight.
But as the graph clearly shows, the wealth held by the bottom 90% grew quite a lot, and even overtook the amount of wealth held by the top 1% for several years. This is the result of the fact that the bottom 90% and top 1% hold wealth from different types of assets. In particular, the wealthy tend to hold more stock, while the bottom 90% don’t have much stock but hold a large portion of their wealth in their home. In a new working paper, Kuhn et al show that the bottom 90% made substantial gains in wealth from 1970-2007 due to rising home values. During the 2008 crisis when home prices collapsed, the bottom 90% lost billions in wealth. On the other hand, the wealthy did not take much of a hit, and stocks bounced back relatively quickly.
Since the 70s, austerity and privatization became embedded into the conventional wisdom of both political parties. Historical counterfactuals are always tricky, but it’s worth pondering the extent to which these political changes were aided by rising home prices staving off economic unrest in the middle class as wages stagnated and corporations took a larger share of the national income. What’s clear though, is that by the time the crisis hit, there was no political will among elites to address the underlying structural causes of the crisis and of rising inequality.
In fact, the crisis presented new opportunities for the wealthy to make money by immiserating the vulnerable. Institutional investors took this opportunity to buy up cheap properties and convert them into rentals. An analysis from the Philadelphia Federal Reserve found that purchases by these investors decreased homeownership rates and increased the rate of growth of rents. Another study by the Atlanta Federal Reserve examined evictions in Fulton county Georgia and found that these “investor landlords” were much more aggressive in evicting tenants than small landlords. In a country where this kind of economic violence is normal, and where one of the architects of the 2008 crisis can go in television to casually discuss how recessions present opportunities for him to get richer, simply of pointing out the sickness and dysfunction in our society is a radical act.
Hammond notes that the Democratic party has become more educated and wealthier on average over time, but some additional context is needed due to persistent myths circulated in the media. Democrats remain the preferred party of the working class, with the caveat that many in the working class are checked out of the electorate entirely. The notion of working class support of Trump is only valid if your definition of the working class is strictly limited to white males without a college degree, excluding women, people of color, and blue collar workers in the service industry. Democrats are winning in many areas that are wealthy, but that does not imply that income is correlated with preferring Democrats. Higher income predicts higher preference for Republicans, but in wealthy areas, this relationship gets weaker. In other words, poorer areas have more class polarization.
It’s important to account for these factors to avoid overstating the gains that Democrats are making among the upper middle class. It is a valid trend however, and presents some opportunities for the left. As a larger fraction of the Democratic base becomes educated, this elevates important social issues and makes it less feasible for Republicans to retain suburban voters while engaging in explicit racism and sexism. The 2018 election showed that the two parties are becoming more polarized on issues surrounding racism, sexism (even among women), and xenophobia. The left may be able to find common ground with suburban moderates on criminal justice and policing reform, halting and reversing the steady erosion of a woman’s right to choose, and working to end human rights abuses against migrants.
It’s much harder to say if this will lead to an alliance between the left and suburban moderates on progressive economic issues however. Ultimately, the left needs to make an affirmative case for the role of an expanded public sector in decommodifying and guaranteeing delivery of certain basic needs like healthcare, housing, nutrition, education, and care. This is going to require convincing members of the middle class that they would be better off giving up their sacred tax breaks, which often contribute to inequality as Hammond notes. It’s going to be an uphill battle, some may be won over by things like quality health insurance that remains stable if they move or lose their job, affordable care for their children and elderly or ailing relatives, pathways for their children to live a middle class life that do not require a lifetime of debt, and a voice in their workplace. In the long run, this seems like a much more viable strategy that calling the upper middle class “Dream Hoarders” while simultaneously making spurious arguments against tax hikes on the wealth.
Colin McAuliffe (@ColinJMcAuliffe) is a co-founder of Data for Progress.