The Conventional Wisdom
According to some on the left (and some on the right), the “wealthy, capitalists, billionaires or 1%” are evil, irredeemable, “vampire squids” only interested in making, keeping and growing wealth, power and influence. They say that the only solutions to this situation are to tax, regulate and publicize their finances and influence. Any number of laws should be enacted to fight against this force against the public good.
History shows …
The wealthy and powerful actively invest to protect and expand their wealth. In the United States, they have repeatedly “captured” the political system with two interludes of effective opposition during the progressive era and the New Deal from FDR to LBJ. Their tools include political contributions, network influence, legal actions, administrative agency capture, media control, social influence, lobbying, contracting, funding political parties and thought influencers. They can easily hire the most effective professionals to pursue their goals in all areas.
Wealth Will Find a Political Way
The American political system generally undermines centralized governmental power. [Although the imperial presidency under Trump with possible Supreme Court support will be a big test]. Federal agencies, the Senate, Congress, the President and the courts jockey for federal power and compete with state and local governments. Focused investments by a relatively small group of wealthy individuals have a strong chance of finding the weakest spots in “the government of the people, by the people and for the people”. If this group makes good choices in setting goals, investing in politics, selecting strategies and showing that they are willing to do “whatever it takes” to win, they attract political supporters and greatly leverage their relatively small investments and very small voting numbers.
Repeated Failures of Their Opponents
Progressives have tried to legislate their way to victory. The wealthy have fought back and reversed many of the gains in limiting their power to pursue greater wealth without limits placed upon them by other stakeholders: labor, consumers, investors, nations, nature, religion, or local communities. There have been some permanent gains in labor conditions/rights, consumer safety, environmental protection, progressive taxation, public education, public infrastructure, monopoly regulation, anti-discrimination, etc. There are some real changes between 1850 and 2020. No one wants to turn back the hands of time.
Yet, on the enduring core political issues, the wealthy have successfully pursued counter-offensives. Lower taxes of all kinds. Undermined support for government and government services. Judicial challenges and rulings. Weakened regulations.
They have maintained effective control of the Republican party for 175 years. They have partnered with middle America, urban elites, WASP America, industry, corporate America and small business/entrepreneurial America, mainstream and fundamentalist religion, anti-slavery and states’ rights groups, Main street America, rural America, southern America, sunbelt America, isolationists and pro-traders, anti-communist hawks and America firsters, assertive neo-conservative foreign policy wonks and inherently defensive thinkers, promoters of American power through international relations and doubters, international free traders and mercantilist tariff warriors, libertarians, the professional class and the working class, skeptical protestants and conservative true believers, farmers and bankers, philosophical conservatives and political pragmatists, fiscal conservatives and political idealogues, preserving and restoring American culture, separation of church and state versus promoting one religious group, liberal and conservative social policies, the mainstream media is authoritative or fake. The end justifies the means. Some coalition of voters and interests can always be assembled to support their core financial interests.
The defenders of wealth have effectively shaped political debates by prioritizing issues, framing positions and policies to be considered, crafting favorable and unfavorable language and stories, shaping debates against extreme strawman positions, and polarizing positions. Democrats have attempted to use the same techniques but have been much less effective. Democrats have also shifted their positions on issues and reassembled their coalitions through time but been unable to secure a solid base of support in the last 50 years. They repeatedly point to a demographic “emerging majority” and the “rightness” of their causes and hope for more success soon.
Root Cause Analysis
Why does a small group of wealthy individuals consistently capture one political party and oppose efforts to reduce their wealth and power? Are they unusually evil? Is there a “class interest”? Don’t they care about our country and those less fortunate? I think there are two key factors. First, we have lived in an individualistic, relatively equal opportunity, relatively meritocratic economy for two centuries in the US. The economic winners can honestly look in the mirror and say, “I earned this”. [note the Obama buzzsaw around “you didn’t build this”]. Like each of us, they exaggerate their own merits and discount chance, privilege, inherited assets, opportunities, and ethical choices. Second, they have such great assets that they must protect them. The scale of accumulated wealth in the US is almost [or actually] beyond comprehension. Current GDP is nearing $23.4 Trillion, up 10 times in real terms from $2.2 Trillion in 1947. Stop for a minute to let this sink in. The US was truly the savior of the world in 1947. We now have 10 times as much wealth, resources, assets, power. Real $ GDP in 1850 was only $62 Billion. Real GDP increased 35 times in that century, perhaps the most amazing century of growth in world history, despite the Great Recession and WW II.
https://fred.stlouisfed.org/series/GDPC1
https://www.measuringworth.com/graphs/graph_1.php
America has grown its population, its productivity/per capita GDP, and its corporate profits by at least 350 times in the last 175 years. A million here and a million there, and pretty soon you have real money. This is the power of compound interest. Wealth begets wealth. This is Thomas Piketty’s point.
https://en.wikipedia.org/wiki/Thomas_Piketty
A well invested portfolio provides 3-5% real returns per year. It accumulates to infinity sooner than you might imagine.
So … America has 350 times more annual economic output than in 1850. The wealthy have captured more than an equal share, so their wealth per person has grown 500-fold. Digest this ratio. There are more wealthy individuals. The winnings are divided across a larger population. Wealthy individuals control 500 times more assets per person than they did in 1850.
Average incomes have also increased. The reported $144/month for farmhands with board in 1850 becomes $5,800 today with 40X inflation. The current median income is $37,600, so the “typical” worker is 6.5 times better off today than in 1850.
The bottom line is that wealthy individuals or families have tremendous wealth to “manage” or protect. Some will highly value the other factors that produced their wealth and their obligations to society. Others will discount them and be the leading investors in political actors to preserve their wealth even though they too will face the “free rider” dilemma. Why should I invest to protect my wealth if others will do so for my benefit? As wealth has grown, a greater share of wealthy individuals has rationally invested in the political system to protect their wealth.
What is the Greatest Risk?
Wealthy individuals and families have much to worry about. If you have a billion dollars of assets, there are many risks and obligations, duties and responsibilities, social obligations, political interests, generational interests, black swan risks, portfolio effects, opportunities, and legacies. I would argue that the greatest risk is posed by democracy. Plato, Socrates and Aristotle all pointed to pure democracy as a threat to the wealth of the ruling class. This was clear when extreme wealth was a mere 1/1,000th of the level today. The individuals with the lowest incomes and wealth could use the power of the state to capture a greater share. Everyone thinks that they deserve more. This is human nature. The many outnumber the few. In a pure democracy they will “take from the rich”. They might reduce the top quintile by 20% to benefit the bottom 3 quintiles. They might flatten incomes. They might confiscate wealth. They might confiscate ALL wealth. This is the greatest fear of the economic winners in our society. The political system might “take” more than half of their income and all of their wealth. Wealthy individuals are “highly motivated” to prevent these outcomes. This is not spoken of “in polite company”.
Removing the Greatest Risks
Although most Democrats, liberals, leftists and progressives have an intuitive sense that they must fight wealth and power because it is right and fair, I argue that we ought to agree to permanently remove the risk of significant confiscation of wealth and income from the economic winners in our society. As those who claim to look at the big picture and the long run, we should set limits on how much income and wealth redistribution is required to meet our goals of a fair and prosperous society.
We should agree to set permanent structural limits on these areas. Enact constitutional amendments to clarify the redistribution limits of our society. We are so much wealthier today as a society.
JK Galbraith in 1958 was way ahead of the people in 1958 with his Affluent Society argument.
The wealthy can “make do” with a lesser share of our continually growing wealth. But no one wants to lose or give up what they have. This is human nature. I think the time has arrived to stop fighting the economic redistribution war that has never been won and find a solution that can gain support from a majority of wealthy individuals.
- Federal marginal income tax rate shall not exceed 50%.
- Combined wealth or property taxes shall not exceed 3% of value per year. Zero tax rate on the first $50 million of assets.
- Any inheritance tax rate shall not exceed 15% of net assets received. First $5 million of assets is tax free. 10-year interest free period provided to pay inheritance taxes in excess of $100,000.
- The tax rate on long-term capital gains shall not exceed 75% of the tax rate on earned income. Any long-term capital gains tax must include a deduction for at least 50% of the inflation rate during the asset holding period.
- Any tax on financial transactions shall not exceed 0.5% of the transaction amount.
- Fix the independence of Federal Reserve Board to pursue its joint goals of minimizing inflation and unemployment.
- Limit the federal workforce to no more than 1% of the US population.
- Require Congress to pass a budget each year that reduces any prior year budget deficit by one-third whenever the unemployment rate is 5% or lower.
- Require the Treasury to pay any legally incurred debts of the government in a timely manner (no government shutdown crisis risk).
- Limit federal government net spending to no more than 25% of prior year GDP, which restriction may be waived by the President with concurrence of at least 50% of the Senate in times of war or national emergency.
- No limit on charitable deductions for donations to governments as an offset to earned income for federal taxation purposes.
- Maximum corporate income tax rate of 30%.
- Corporations are not considered persons. They do not have “free speech” rights with respect to political contributions.
- State and federal election campaign communications shall be funded solely by the government and the active period of campaigning and voting shall be limited to 6 months or less.
- If citizens do not agree with 100% government funding of political campaign communications, then individual or corporate contributions to any political organization shall be publicly reported each quarter.
Summary
Wealthy individuals and families have great wealth to protect. As a nation and society, we have an obligation to eliminate this concern from being a primary role in our political decisions. We can set reasonable limits on the maximum contributions required from prosperous individuals in our society. Many left-leaning individuals are focused on increasing the share of taxes paid by wealthy individuals on an equity basis. I argue that the nation would be best served by setting maximum taxation limits. Wealthy individuals might prefer lower tax rates, but they will be able to relax knowing that there is a limit on what political groups might choose to extract. Fewer would be highly motivated to invest extraordinary amounts in our political system if their greatest risks were already protected.
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