The Arrogance of Wealth

Elias Van Emmerick (PO ’21)

Wealth and income inequality have been oft-cited issues in the runup to the 2020 Presidential election. The United States consistently ranks near the top of all developed countries in both metrics, and inequality has generally trended upwards for multiple decades. Amongst news of historically low unemployment and all-time highs in the stock market, the U.S. Census reported that we had also reached the highest level of income inequality in over 50 years. French economist Thomas Piketty has done extensive research on historical inequality, and argues that the only way to tackle this fundamental problem is to institute a tax on wealth so that the return rate on capital falls below the growth rate of the economy at large. In Capital in the Twenty-First Century, he shows that inequality is a structural component, rather than a flaw of capitalism. Inequality’s inherence derives from the relationship between the return rate on capital (r) and the growth rate of the economy at large (g). The return rate on capital, which includes investments, profits, dividends, rents, et cetera, tends to significantly exceed the economy’s overall growth rate in developed countries. From this difference it follows that, over time, the proportion of wealth that belongs to capital-owners must be ever-increasing, and the proportion of wealth going to others must steadily decrease. Any redistributional policy that fails to achieve this may slow down the growth of inequality, but will never be able to reduce it. As long as r exceeds g, wealth inequality must increase

While a wealth tax in the United States may have seemed unthinkable just a few years ago, we live in a moment where the idea has gotten widespread attention. Both Senator Sanders and Senator Warren, two of the top contenders for 2020’s Democratic nomination, have set forth detailed wealth tax proposals. Unlike a tax on income or capital gains, a wealth tax would be based solely on an individual’s total wealth holdings at any given point. The names of the two plans differ slightly (Warren employs the slightly catchier “ultra-millionaire tax” nomer), as do the exact rates at which they would tax wealth, but their purpose is largely the same. Both plans would slow the growth of wealth, and use the money gained for redistributive purposes. It is important to note that neither plan would reduce the growth rate of capital below the economy’s growth rate, and as such neither plan would (theoretically) eliminate the growth of income inequality altogether. Consider Warren’s plan, for example. Under her “Ultra-Millionaire Tax,” the highest tax rate would be 3% on wealth above $1 billion. The average stock market return over the last 60 years has been 8%–this would mean that the growth rate on capital would be roughly 5% after the implementation of Warren’s tax, which remains significantly higher than the economy’s growth rate. Assuming a 20% capital gains tax, this means that your average billionaire still makes about $40 million per year from passive income alone. 

Considering that a wealth tax wouldn’t make a dent in the coffers of the wealthy, the response to this proposal is all the more puzzling. The necessity of a wealth tax has not translated into public support for the policy on either side of the aisle. I believe that American inequality has failed to produce support for redistribution because it both benefits from and reinforces America’s obsession with wealth. This has led to a moment where billionaires are seen as being above the law–their judgement is more trustworthy than the government’s. Exemplary of this sentiment is Ellen-producer Andy Lassner’s response to Sanders’ tax proposal:

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Many feel that it is unfair to ask the wealthy to pay a higher tax rate on top of the (supposedly) progressive income taxes they already face, and the perceived size of their charitable donations. It is difficult to believe that the inherent arrogance behind this statement is supported by those who have nothing to gain from supporting the wealthy. There are two fundamental problems with this belief. One, it assumes that the wealthy have already paid a fair tax rate on the income that they gained. Two, it holds as a given that the wealthy are somehow more entitled to or capable of deciding where their money should best be spent than the average person. Unlike the average American, who has to rely on political institutions to determine where his or her tax dollars go, the wealthy are given the privilege to choose how to redistribute their capital (if they choose to do so at all). 

The first point is relatively easy to disprove. The Tax Policy Center has done extensive research on the ways in which the wealthy use loopholes such as a lower capital gains tax and favorable treatment of dividend income to drastically reduce the effective tax rate they pay. While top incomes should supposedly be taxed at 43.3%, in effect, the 400 richest Americans paid an average of just 20% in income tax. Add to this that many wealthy Americans hold a part of their assets abroad or in special shell companies designed to minimize their tax burden, and one can’t help but reach the conclusion that the wealthy are paying far less than their fair share. 

The second hints at America’s historical infatuation with wealth and the wealthy. Two centuries of chasing the “American dream” has left deep marks on the psyche of the country–Americans are overwhelmingly supportive of those who pursue wealth,  a majority opposes redistributing income from the wealthy to the poor, and almost 70% of Americans surveyed believed billionaires earned their wealth fairly. Contributing to this phenomenon is the frequent attention given to the wealthy by the media. “Humanizing” those in the highest income groups has been shown to decrease public support for redistributive policies. America’s increasing inequality has done nothing to the pervasive belief that wealth is earned, and that therefore the wealthiest must be the most deserving. Americans believe that the rich are both smarter and more hardworking than average. These beliefs are antithetical to the concept of a wealth tax. A policy that is so fundamentally redistributive cannot be seen as anything but unfair when positive attitudes about wealth are so omnipresent.

The real perversity of wealth inequality lies in the fact that it not only benefits from the aforementioned sentiments, but actively contributes to it. Contrary to what one might think, rising inequality generally does not increase dissatisfaction with the wealthy. As income and wealth disparities grew, Americans were less likely to see the tax system as unfairly benefiting the rich, and less likely to see the rich as undeserving of their wealth. Wealth inequality contributes to these attitudes in two ways. It both reduces the average amount the state spends on education, and reduces voter participation in elections. By itself these two are undesirable, but the link with attitudes about wealth derives from both activities’ relationship to information. Education provides citizens with the tools required to think critically and contextualize information, and those with higher levels of educational achievement both say they have a better grasp on the implications of new tax laws and express lower satisfaction with current tax policies for the wealthy. As people participate in elections, they tend to be more informed about policies. Information about wealth inequality and policy implications is a strong predictor for attitudes about redistributive policies–those who have a sense of how unequal the country is, and how beneficial a redistributive policy could be, are far more likely to support one. Inequality is such a pervasive problem partly because it works to prevent the formation of negative attitudes about the rich by reducing the layman’s awareness of wealth inequality and income disparities. 

The largest challenge proponents of a wealth tax face is not proving the economic efficacy of such a policy, but rather the irrational love Americans have for their billionaires. The cultural heritage of the country is simply stacked against any truly redistributive policy. Both Sanders and Warren seem to be aware of this–a large part of their campaigns revolves around demonizing and dehumanizing the rich, something research has shown helps to warm people to the idea of wealth redistribution. Both of them still have a long way to go. 

 

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