The Taxman Cometh

Name a country where high tax rates on the rich didn’t discourage growth. How about the United States of America?

By Michael Tomasky

Tagged HistoryInequalityTaxes

There’s always a telling moment at the Davos World Economic Forum (at least one), but this year’s was a doozy. It involved Michael Dell, the eponymous computer magnate, at a panel discussing how to make digital globalization inclusive—which now has “a larger impact on GDP growth than merchandise trade,” according to the summit’s web site—more inclusive.

During the panel, moderator Heather Long, of The Washington Post, piped up to ask Dell how he felt about Alexandria Ocasio-Cortez’s idea for a 70 percent marginal tax rate on dollars earned above $10 million. The audience, among whom one doubts AOC’s proposal would poll particularly well, chuckled knowingly before Dell spoke. “No, I’m not supportive of that,” he said eventually. “And I don’t think it would help the growth of the U.S. economy.” Could you expand on why, asked Heather Long? “Well,” said Dell, “name a country where that’s worked, ever.”

There are many things you can get away with if you’re insanely rich. One, as the President of the United States has shown us, is ripping people off, forcing them to join a parade of litigants, and having them end up settling for 30 cents on the dollar if they’re lucky. Another might be falsifying your financial reports to hide kickbacks you were receiving from a supplier—except oops, Dell’s company actually got caught doing that, and paid a $100 million fine for it in 2010.

And another thing you can almost always get away with if you’re rich is saying stupid things in public and having no one question you because, well, you’re rich. So Dell—net worth around $28 billion—had no reason to think when he uttered those self-satisfied sentences that anyone in attendance would do anything other than nod approvingly as images of old Soviet-era breadlines flashed through their heads.

But this day, something interesting happened. Also on the panel was Erik Brynjolfsson of MIT, who has written extensively on the digital revolution, warning that digital technologies have a strong tendency to create winner-take-all markets. And when Dell posed his in-your-face challenge, Brynjolfsson answered it: “The United States.”

He continued: “From about the 1930s through about the 1960s, the [top] tax rate averaged about 70 percent. At times it was up as high as 95 percent. And those were actually pretty good years for growth. . . . There’s actually a lot of economics that suggests that it’s not necessarily going to hurt growth.”

As the kids say, mic drop. Brynjolfsson blew Dell away. He was wrong only in that the top marginal tax rate was 70 percent all the way up until 1981. That year, which was the last year before Ronald Reagan’s tax cuts kicked in, the government imposed a 70 percent rate on dollars earned above $215,400 for married couples (about $623,000 in today’s dollars). So if anything, he understated the case. But Brynjolfsson’s point couldn’t have been truer. I do hope, by the way, that Long, an economics correspondent for the country’s second most important newspaper, has brushed up on her tax history. One needn’t be anything close to an expert to know that Reagan cut tax rates dramatically, but when Brynjolfsson first said “the United States,” Long, in a slightly mocking tone, interjected: “Briefly, in the 1980s.”

Men like Michael Dell run the world, and since the 1980s, we’ve been accustomed to seeing them lionized in the mass media. We have long since stopped batting an eye at these net worths that start with a “b.” The American people have been trained over these last 40 years to think that their money is their money and they’ve earned every penny and the rest of us shouldn’t question it. Certainly, that’s what the Republican Party tells us, and it’s what conservatives on television—not as wealthy as Dell, but quite rich themselves, thanks—sell us as the one and true American way. The rich know better. Dell himself expressed precisely this view in Davos. In fact, in his initial response to Long’s question, before explicitly stating his opposition to the Ocasio-Cortez proposal, he answered with these words: “Well, look, I mean, you know my wife and I set up a foundation about 20 years ago and we would have contributed quite a bit more than a 70 percent tax rate on my annual income. And I feel much more comfortable with our ability as a private foundation to allocate those funds than I do giving them to the government.”

Michael Dell’s money does a lot of good things, I’m sure. But it doesn’t build interstate highways. It doesn’t clean lakes and rivers and befouled city air.

Now, the Michael and Susan Dell Foundation does give away a lot of money. The Chronicle of Philanthropy ranked Dell the third most generous donor of 2017, when he dished out $1 billion. I have no way of knowing whether his above assertion is true, that he gives away more than he’d have paid in taxes if Ocasio-Cortez had her way. God only knows how these people structure what they actually admit to calling their “income.” Some documents were released in 2016 showing his annual income to be around $2.4 million. But let’s say he does donate beyond that 70 percent rate. Good for him.

His money does a lot of good things in the world, I’m sure. But it doesn’t build interstate highways or modernize intermodal rail-freight hubs, which are crucial to American competitiveness. It doesn’t clean lakes and rivers or befouled air in urban neighborhoods. It can’t address the opioid crisis by putting free treatment centers in every state. It can’t cover the bill for getting broadband Internet service to the roughly 8 percent of American homes that still don’t have it.

These and many other things are pressing public needs, and they’re too expensive even for the likes of Michael Dell. They’re why we need taxes, and they’re one reason why we need more tax revenue than we’ve been getting from the wealthiest Americans. According to OECD numbers for 2017, the total tax revenue in the United States as a percentage of GDP is comparatively quite low. Ours is at around 27 percent. The OECD average is just above 34 percent. To look at two countries with which we feel some measure of kinship, two countries we often don’t mind using as models, the United Kingdom is just above 33 percent, while Germany is at 37.5 percent. (Yes, France is even higher.)

So whatever good Dell does in the world with his foundation, the country still needs his tax money for proper and legitimate purposes that only the federal government can undertake. There are simply many tasks that private charity can’t perform—only the federal government can. Many needs are inappropriate to private charity. As I write these words, Congress is trying to figure out a solution to the border crisis. One point on which both parties agree in theory is that the United States needs many more immigration judges seated at the border to dispose of cases expeditiously. The proper administration of justice costs a lot of money. But even if he wanted to, Michael Dell can’t pay for that; could you imagine, Dell judges at the border, deciding who makes a useful addition to this country and who does not?

But it isn’t just that we need the money. It’s the principle involved. And the principle, in the words of Emmanuel Saez and Gabriel Zucman, is “safeguarding democracy against oligarchy.”

Saez and Zucman argued, in a brilliant piece on The New York Times op-ed page in January, that the real point of high marginal tax rates on the rich is to try to ensure that we don’t create an oligarchic class that can do things like take control of the government. They point to two other countries whose tax policies the United States helped formulate as they emerged from totalitarian rule. In postwar Japan, a top marginal rate of 85 percent was imposed, similar to what prevailed in the United States at the time. Democracy took root, economic growth was robust, and no oligarchic class emerged. Even today, while we know that the average U.S. CEO earns more than 300 times what an average worker makes, in Japan that ratio is around 67:1. In post-Soviet Russia, however, the top rate was set at 31 percent—again reflecting the then-current American model. (It was later lowered even further.) Russia is completely undemocratic and owned by oligarchs.

It’s hardly melodramatic at this point to fret that Russia-lite is where we’re headed, especially with a Supreme Court majority that seems inclined to hold, one of these days, that there should be no limits whatsoever on how campaigns are financed. At that point, a small, hard-right coterie of billionaires will be able to buy Congress openly.

The tax code can play a role in seeing to it that those kinds of fortunes aren’t amassed in the first place. Saez and Zucman go so far as to say that a higher marginal tax rate on the rich isn’t really about revenue at all. I wouldn’t go that far, but I hear them when they write: “Just as the point of taxing carbon is not to raise revenue but to reduce carbon emissions, high tax rates for sky-high incomes do not aim at funding Medicare for All. They aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.”

Changing all this does not involve merely changing policy. We have to change how the country has been trained to think for 40 years. Conservatives will scream socialism. Even liberals who happen to be billionaires will engage in class histrionics. Michael Bloomberg invoked Venezuela when discussing Senator Elizabeth Warren’s proposed wealth tax, and Howard Schultz scoffed at criticizing excess wealth, saying it was “so un-American to think that way.” The overclass, a word that somehow never caught on in the same way “underclass” once did, will go to war to preserve what they have come to think of as their right. The reflex of many in the middle class will be to support them. We must do the work of reminding them of what Erik Brynjolfsson reminded Michael Dell. There was a country where high top tax rates did not hinder growth (far from it in fact) and helped prevent the creation of an oligarchy. It was ours.

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Michael Tomasky is the editor of Democracy: A Journal of Ideas.

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