Can you be too rich? I think so, and so does newly-elected Congresswoman Alexandria Ocasio-Cortez. “I’m not saying that Bill Gates or Warren Buffet are immoral,” she said recently, “but a system that allows billionaires to exist when there are parts of Alabama where people are still getting ringworm because they don’t have access to public health is wrong.”
Many experts agree that inequality has gotten out of hand. According to a report from anti-poverty organization Oxfam, maximum tax rates in the richest countries have fallen from 62% to 38% over the last half-century, and inequality has surged. The number of billionaires has doubled over the past decade to 2,208. The collective wealth of the 26 richest people now equals that of the 3.8 billion poorest, whose total wealth fell last year by 11%.
In short, the rich are getting richer and the poor, at least lately, poorer. Ocasio-Cortez has proposed raising the federal tax rate for ultra-wealthy Americans to 70%, almost double the current maximum federal tax on income. The so-called marginal tax would apply to annual income above $10 million. Elizabeth Warren and Bernie Sanders have urged similar tax increases.
Paul Krugman, a Nobel laureate in economics, agrees on the need for such taxes. The 70% tax proposal of Ocasio-Cortez, he writes in his New York Times column, is based on research by economist Peter Diamond, a Nobel laureate, and Christina Romer, former chair of President Obama’s Council of Economic Advisers.
Their analyses, Krugman explains, are based on “the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes.” This is the reasoning behind progressive tax rates, which rise along with income. Raising tax rates too high might discourage high achievers from being more productive, resulting in a net loss of tax revenue. Balancing these factors, Diamond and Romer recommend maximum marginal tax rates of 73% and 80%, respectively.
Krugman rejects the claim that high taxes hurt the economy. Maximum tax rates reached 90% in the late 1950s, and they remained at 70% as recently as the early 1980s before plummeting during the Reagan administration. The U.S. economy “did just fine” during these periods, Krugman says. “Since then tax rates have come way down, and if anything the economy has done less well.”
Another Nobel-winning economist, Joseph Stiglitz, argues that inequality is socially corrosive. In “A Rigged Economy,” published in Scientific Americanin November, Stiglitz notes that “economies with greater equality perform better, with higher growth, better average standards of living and greater stability. Inequality in the extremes observed in the U.S. and in the manner generated there actually damages the economy.”
Rising inequality leads to a “vicious spiral,” Stiglitz contends, that subverts democracy. Economic inequality “translates into political inequality, which leads to rules that favor the wealthy, which in turn reinforces economic inequality.” Stiglitz recommends countering inequality with campaign-finance reform, cheaper education and, yes, higher taxes on the rich.
I appreciate capitalism. Over the last few centuries free-market forces have helped humanity escape millennia of crushing poverty, ignorance, and early death. To help my students appreciate humanity’s progress, I show them charts, compiled by economist Max Roser, that track the surge in humanity’s health and wealth.
But as anthropologist Jason Hickel points out, more than half of humanity still lives on $7.40/day or less, barely adequate for a decent life. The persistence of such poverty in our “fabulously rich” world is “obscene,” Hickel says. Neither I nor any of the critics I’ve cited wants capitalism abolished. We simply want the wealthiest to give more back to the system that enriched them.
John Horgan directs the Center for Science Writings, which is part of the College of Arts & Letters. This column is adapted from one published on his Scientific Americanblog “Cross-check.”
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