Anatomy of the Global Economy
The 70% Solution
J. Bradford DeLong
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BERKELEY – Via a circuitous Internet chain – Paul Krugman of Princeton University quoting Mark Thoma of the University of Oregon reading the Journal of Economic Perspectives – I got a copy of an article written by Emmanuel Saez, whose office is 50 feet from mine, on the same corridor, and the Nobel laureate economist Peter Diamond. Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%.
It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.
The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.
From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them – to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue.
The utilitarian economic logic is clear. Yet more than half of us are likely to reject the conclusion reached by Diamond and Saez. We feel that there is something wrong with taxing our superrich until the pips squeak so much that further taxation reduces the number of pips. And we feel this for two reasons, both of them set out more than two centuries ago by Adam Smith – not in his most famous work, The Wealth of Nations, but in his far less discussed book The Theory of Moral Sentiments.
The first reason applies to the idle rich. According to Smith,
“A stranger to human nature, who saw the indifference of men about the misery of their inferiors, and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine, that pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than to those of meaner stations...”
We feel this, Smith believes, because we naturally sympathize with others (if he were writing today, he would surely invoke “mirror neurons”). And the more pleasant our thoughts about individuals or groups are, the more we tend to sympathize with them. The fact that the lifestyles of the rich and famous “seem almost the abstract idea of a perfect and happy state” leads us to “pity…that anything should spoil and corrupt so agreeable a situation! We could even wish them immortal...”
The second reason applies to the hard-working rich, the type of person who
“devotes himself forever to the pursuit of wealth and greatness....With the most unrelenting industry he labors night and day....serves those whom he hates, and is obsequious to those whom he despises....[I]n the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments....he begins at last to find that wealth and greatness are mere trinkets of frivolous utility....Power and riches....keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death...”
In short, on the one hand, we don’t wish to disrupt the perfect felicity of the lifestyles of the rich and famous; on the other hand, we don’t wish to add to the burdens of those who have spent their most precious possession – their time and energy – pursuing baubles. These two arguments are not consistent, but that does not matter. They both have a purchase on our thinking.
Unlike today’s public-finance economists, Smith understood that we are not rational utilitarian calculators. Indeed, that is why we have collectively done a very bad job so far in dealing with the enormous rise in inequality between the industrial middle class and the plutocratic superrich that we have witnessed in the last generation.
J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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MarkPitts 05:16 30 Nov 11
Mr. DeLong is incorrect in his math and in his reading of history:
(1) Historically governments have implemented all sorts of “utilitarian” measures against their citizens, but the resulting loss of freedom has more than wiped out any gain for society in general.
(2) If as Mr. DeLong claims “we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero” why not tax the rich at 99.9%? If forfeiting almost all their gains to the government will not affect their happiness, there is no reason they would change their work habits even at a 99.9% tax rate.
When Mr. DeLong speaks of our “moral obligation” to use a small number of citizens as mere instruments for the common good, he reveals that his definition of “moral” is quite different from that of the majority of his fellow citizens.
JakeLopata 05:52 30 Nov 11
I too have read this paper and I also found it very interesting. It reminded me of the top tax rate from 1944 to 1954, which was just above 90%. Sounds crazy to even imagine the top tax rate close to that today, but it happened.
To put the Diamond and Saez argument differently; $1 is worth more to people of lower income, than it is to people of higher income. Matthew Yglesias has a post today about that is a good example of this (although he is posting about something else).
This post made me think about a new approach to "taxing the rich". A "Savings Tax"
grondeau 07:21 30 Nov 11
It is these gut feelings about stealing someone's hard earned winnings that make the inheritance tax so much more compelling than a high income tax. In fact, an effective inheritance tax, that truly started us all out much more as equals would give even more credence to sympathy for the wealthy that "made it." However, being born with a silver spoon in your mouth, with no responsibility to your fellow man, if that's the attitude - then tax them at the rate they can just bare - 70%!
Zsolt 10:16 30 Nov 11
The problem is that we are not addressing the true cause.
We are all inherently selfish and greedy, we all only aspire to fulfill our own desires and achieve as much profit as we can legally or even illegally.
The only difference between people is their individual strength of the raw desire, how far the individual is willing to go to get what he/she wants. This difference in the raw desire what layers, constructs society.
Until we address the human nature itself, no superficial arbitrary measure is going to work, as those who really want to, will always find the loopholes, backdoors where they can go around the system.
We can see it today in the so called "charities", "good deeds" people are doing for tax cuts, or other benefits, only a very small minority of humanity is capable of true altruism, as reportedly they were born so (according to statistics about 10% of humanity is born this way), but then again even these people work towards fulfilling their own pleasure, except they find their pleasure in giving to others.
Thus the only solution is to change our inherent human nature, so instead of constantly working for ourselves, constantly making only self calculations we would start working for the collective, for the whole human society.
But this cannot happen without motivation. We say through multiple histori examples how forced ideas, even if they look good on paper lead to the most corrupt regimes, dictatorships.
Thus the key is to find the motivating factor that could lead the rich and poor alike to start leaving self benefit behind and start working for others.
Of course we are incapable of changing our nature from one extreme to the other just like that, so the first motivation should still be aimed at our selfish own interest, explaining to us why it is beneficial to work for others instead of ourselves. Today we have the opportunity to do so: we are gradually understanding how much of a closed, integral, interdependent system we exist, and we also see that our previous lifestyle crashed to a halt, and we all are sliding into crisis, recession, and oblivity, even our existence could be in danger, including rich and poor. In truth there is no 99% vs 1%, we are all sitting on the same boat.
In such an intermingled, interdependent system we can easily deduct, that the individual is adhered to the collective, and the individual can only become healthy, can only prosper if the whole system, the collective is healthy and functions optimally. This way we can understand that even out of selfish interest we should secure the wellbeing of the whole first of all and than we can receive our own share from it.
If humanity looks at all the available data and research which is already around us to see the big picture, out of the positive pull of a sustainable future up front and the negative push from behind and at the same time, as we feel the ever stronger pressure and suffering from the crisis we can start building a new humanity based on the new attitude.
Later on when such a system exist we will see that actually this mutual, unconditionally giving system is much more natural than how we lived so far, and we will simply continue living that way as it will feel "just right" regardless of our self benefit...
myerscpa 10:38 30 Nov 11
In the decades after World War II, the United States taxed unearned income at a higher rate than earned income. Why don't we go back to such a regime? Today under the Bush tax cuts the United States is doing the exact opposite. It is providing a huge subsidy to very wealthy trust fund babies.
May I suggest letting corporations deduct dividend payments on their tax returns while taxing unearned income, which is dividends and interest income, for top brackett taxpayers at 70 percent. Remember, under this proposal corporations would have an incentive to pay out more in dividends while most dividends would probably flow tax free to pension funds for productive reinvestment and only a small portion would be taxed as unearned income. This would promote efficiency in investment among other things while promoting equity.
rjh 01:20 01 Dec 11
Oh genius! A savings tax. That should spur capital accummulation.
MarkPitts 01:30 01 Dec 11
The only logical and moral (according to Mr. DeLong) conclusion is that America and other developed countries should make massive transfers of wealth, jobs, income, and benefits to the Third World.
mikerobe 02:50 01 Dec 11
The hardest working pople I know are farmworkers; they toil very long hours and work very efficiently often in grueling conditions (somtimes dying in the extreme summer heat of California's central valley). They are also among the poorest people I know. Yet they produce that which keeps the rest of us alive. It is only by a long chain of highly improbable argments that one might contend that the superrich provide labor of any remotely comparable sort.
Compensate people on calories expended making a few exceptions for truly life affecting modes of labor like heart surgery or firefighting. Then all of the discussion about proper tax levels becomes academic.
Or we might spend a few years focusing seriously on robotics, converting every aspect of drudgery to machine work. Then the farmworker and the parasitic hedge fund manager would bot become irrelevant and humankind could enjoy the lesisure promised by liberals during the Enlightenment.
Modicum 10:37 01 Dec 11
"But are we allowed to decide for the rich how much money they need and what will they do with them?"
"DeLong speaks of our moral obligation to use a small number of citizens as mere instruments for the common good"
It never ceases to amaze me how the political right in America regard taxing the rich as some great moral evil but allowing the poor to suffer without as just fine. They also seem to believe that if they just keep repeating (ad naseum) the assinine mantra that tax is theft and social welfare is totalitarianism they will somehow win over sensible people.
"he reveals that his definition of moral is quite different from that of the majority of his fellow citizens."
Really? Can you back this up with evidence? Because the polls say that most Americans support higher taxes on the richest citizens. Or were you just assuming that everyone agrees with your own callous ideology?
"taking someone's property against his/her will is simple robbery ..defines the difference between a democratic society that protects teh rights of an individual and a totalitarian one." [sic]
No. I think you'll find that the difference between a totalitarian state and democracy has to do with, you know, the absence of elections and independent courts, secret police, imprisonment without trial, torture chambers, genocide, etc. It has nothing whatsoever to do with the marginal tax rates paid by high earners or with providing healthcare to poor folk. The suggestion is frivilous and insulting to the memory of the victims of genuine oppression.
"The only logical and moral ...conclusion is that America and other developed countries should make massive transfers of wealth, jobs, income, and benefits to the Third World."
That sounds like an excellent idea. I won't live to see the day though.
davidmarquam 11:00 01 Dec 11
With respect, this passes for logic?
MarkPitts 12:01 02 Dec 11
Modicum asks what evidence there is that Mr. DeLong’s sense of morality does not conform to that of most of his readers. The answer, in short, is that most of the rules of our society do not conform to Mr. DeLong’s sense of morality which dictates that individuals are nothing more than instruments for the public good.
For example, we do not demand that parents limit the number of children they have, even though it may benefit society if they do so. We do not demand that people exercise, eat well, and get an education, although it would benefit society if they do so. We do demand that individuals take a particular job, even if society would benefit. We do not demand that the terminally ill deny treatment, although society may benefit if they were to do so.
Individual choice and freedom are inextricably linked. Without individual freedoms, gov’t officials are left to make the decisions, usually and primarily for their own benefit.
MarkPitts 12:06 02 Dec 11
Modicum should ask whether more money for the government really helps the poor in this country, much less worldwide. In the last 3 years of slowdown you would think spending on the poor would have increased. It hasn't. However, tax money spent on government salaries and pensions have soared.
Modicum 01:04 02 Dec 11
MarkPitt,
It's one thing to claim that Americans would oppose euthanasia, or the other list of horribles you mention, or to claim they would agree with the abstract proposition that individuals should not be treated as mere "instruments for the public good." It is quite another to suppose that they would see a 70% top rate of income tax as having any kind of moral equivalence. (Not that public opinion should be decisive in these matters anyway)
Modicum 01:06 02 Dec 11
Apologies, I meant to write "MarkPitts".
MarkPitts 01:17 02 Dec 11
Modicum - My problem with Mr. DeLong's sense of "moral obligation" is not that he advocates a 70% tax rate, per se. It his method of justifying it, namely his purely mathematical maximization of total utility, with no weighting of the rights of individuals. Using his stated methodology, we would get all the undesirable government measures I mentioned in the earlier comment.
phys_phys 08:05 02 Dec 11
Modicum: "No. I think you'll find that the difference between a totalitarian state and democracy has to do with, you know, the absence of elections and independent courts, secret police, imprisonment without trial, torture chambers, genocide, etc. It has nothing whatsoever to do with the marginal tax rates paid by high earners or with providing healthcare to poor folk. The suggestion is frivilous and insulting to the memory of the victims of genuine oppression."
This is confusing the reason and the consequence. Totalitarianism puts the good of the nation above the rights of an individual. How far it will go in suppressing these rights is a matter of quantity, not quality.
Nazis, for example, started with merely restricting the rights of the Jews to own property and it took for them more than 10 years to arrive to gas chambers. On the other hand, communists in Russia began right away with exterminating those, whose "utility" for the future society they deemed too low. Yet, several decades later USSR had all the visible attributes of a democratic state - elections, courts, no inprisonment without trial etc.
Modicum 03:47 02 Dec 11
..and in most liberal democracies they started with the welfare state and an income tax and now, about a centruy later, we have: the welfare state and an income tax. Not much evidence that Sweden is on the brink of totalitarianism. How long is the process supposed to take?
And it should not need to be stated that there is no moral equivalence between income tax and Hitler's early anti-semitic laws.
If the argument is that free school lunches eventually lead to gas chambers then I think I'll take my chances. The risk to me seems negligible. If you're saying that just about every liberal democracy in the world has already gone "totalitarian" then that is just absurd.
Please by all means argue that the welfare state in some sense reduces individual "freedom" (it's a plausible argument) but the constant overheated rhetoric about totalitarianism just makes the libertarian-right sound hysterical and unserious.
Modicum 03:50 02 Dec 11
MarkPitts,
Fair point. As a philosophy pure utilitarianism is not without it's flaws.
Modicum 04:05 02 Dec 11
phys_phys,
By the way, does any totalitarian state actually put "the good of the nation above the rights of an individual." It seems to me, to put it mildly, that the actual problem with undemocratic states is not an overweening concern for the common good. Rather, it is that government by the few means government in the interests of the few, so the state quickly devolves into a kleptocracy.
No doubt a state actually governed in accordance with pure utilitarianism would have its own share of problems and moral evils. But no such nation as ever actually existed or is particularly likely. (It would be more Brave New World than 1984).
kjlsjak23 08:26 02 Dec 11
"But are we allowed to decide for the rich how much money they need and what will they do with them? At best, taking someone's property against his/her will is simple robbery... at worst it defines the difference between a democratic society that protects teh rights of an individual and a totalitarian one."
Yes, yes, yes and YES! Unless you are one of these people who think that we have no right to tax individuals WHATSOEVER (not even for a military or to ensure the rules of business) then we ALWAYS decide 'how much money they need and what they will do with them'; we will make this decision if we tax them AT ANY LEVEL. Back in the real world, taxation is not the same as robbery, it's taxation. It's one of the rules that is enshrined in the constitution. And we all implicitly agree to uphold this constitutional order, or else you go to jail, or you need to leave the country. I also love your post hoc fallacy at the end, if you tax someone, you don't protect their rights and therefore you must be totalitarian? Back in the real world, and what DeLong is saying that keeping all your money is not a fundamental right (I know you want to believe that absolute property rights are given to you by God, but they're not; there's no real reason you deserve every penny you've earned, you just got lucky--yes even your hard work ethic comes from somewhere outside you). Moreover such an infringement of property rights causes an EXTREMELY MINIMAL infringement of liberty (people won't get to buy million dollar doll houses for their daughters) and creates SO MUCH MORE positive liberty.
kjlsjak23 08:26 02 Dec 11
"(1) Historically governments have implemented all sorts of “utilitarian” measures against their citizens, but the resulting loss of freedom has more than wiped out any gain for society in general."
[citation needed]
"(2)... why not tax the rich at 99.9%?"
Did you even read the article? DeLong is an economist, he knows that there is such a thing as prohibitive taxation; hence the 70%. Go and read the Diamond/Saez paper, they take into account all this when arriving at their number.
"When Mr. DeLong speaks of our “moral obligation” to use a small number of citizens as mere instruments for the common good, he reveals that his definition of “moral” is quite different from that of the majority of his fellow citizens."
Actually I don't think it's that different:
http://www.utilitarian.net/singer/by/199704--.htm
kjlsjak23 08:26 02 Dec 11
"The only logical and moral (according to Mr. DeLong) conclusion is that America and other developed countries should make massive transfers of wealth, jobs, income, and benefits to the Third World."
Yes that is the conclusion. I know it seems odd, but that's only because your psychological development has made you selfish and you can't see that we have this moral obligation. Here's the argument for what you thing is absurd: http://www.nytimes.com/2006/12/17/magazine/17charity.t.html?pagewanted=all It turns out it's not as bad as you think it is.
kjlsjak23 08:27 02 Dec 11
"For example, we do not demand that parents limit the number of children they have, even though it may benefit society if they do so. We do not demand that people exercise, eat well, and get an education, although it would benefit society if they do so. We do demand that individuals take a particular job, even if society would benefit. We do not demand that the terminally ill deny treatment, although society may benefit if they were to do so."
Logical fallacy: false analogy. What DeLong is saying is that the infringements of liberty are SO UNBELIEVABLY SMALL from taxation on the rich (they still get millions and millions and millions and millions of dollars, they just dont' get billions; they can still buy almost everything, they can still do almost everything, eat anywhere, go anywhere, do anything, and work as little or as much as they want). How is any significant infringement on liberty? How is this **IN ANY WAY** similar to making someone die if they want to live??????????????????????
kjlsjak23 08:27 02 Dec 11
"My problem with Mr. DeLong's sense of "moral obligation" is not that he advocates a 70% tax rate, per se. It his method of justifying it, namely his purely mathematical maximization of total utility, with no weighting of the rights of individuals. "
I swear it's like you don't want to understand the article. Look, they paper and what DeLong is saying is that it is ***********AN EXTREMELY MINIMAL INFRINGMENT ON LIBERTY************ It is weighting the rights of [super rich] individuals, it is very,very,very,very low. They can still do almost everything they did before.
llisa2u2 09:18 04 Dec 11
I thought your commentary was very interesting and well developed except for the final sentence. "We" have misunderstood what Smith understood and you present to the members of the collective "we" (like me) an opportunity from your comments to understand better just what is occurring for the 99%. No one has necessarily done a bad job. It's just that activities of capitalism have reached a more visible level that then allows more of us to discern what Smith originally presented as theory. "We" also are not dealing with "the enormous rise in inequality between the industrial middle class". There is no longer and has been no longer, for quite a number of years, probably 20 years, an industrial middle class in the US. Any members of the industrial middle class have been gradually dying out since the 1960's. There is an extreme time-lag, and an extreme word-choice, and quality- of- thought -reference lag that has occurred since the 1980's to honestly and directly address political economic issues in the mass media. This trend has worsened during the 1990's, and in the 2000's. Today, any factual word reference to the reality of political economic issues is extremely difficult for most of the "We"/99%/like me because of the focus on advertising for specifically focused results. Most verbal or written commentary is to obtain results based on marketing demographics. The results can vary and really don't make much of a difference anymore. There has been a divergence between the "message" and "results" that has been disregarded for so long that the 99% realize that the 99% are not the guilty, gullible ones, and actually are a different and distinct collective "we". Now, exactly how the 99% can in fact regain entrepreneurial, and new monopolisitc holds and establish new political economies will be an interesting process especially over the next 5 years. Neither you,"me" nor any one else has witnessed the transitory process of the last generation. We all are, and can only witness what is occurring for each one of us depending on our cognitive recall from yesterday, today, and now.
I know my comments only superficially probe the gaps between your last two sentences. I also know that Smith wasn't too concerned with advertising. I'd say he was more concerned with delivering an interpretive, factual, theoretical and thoughtful message. We're lucky he shared his well written thoughts. I also appreciate your thoughtful message. Neither of you were, or are overwhelmingly ( at least as experienced by perhaps some of, and upto the greater 99%) focused on short-term results from extensively analyzed sound-bites for individual, personal profit.
How many of the 1% write their own stuff, or can even read it when someone else writes it for them? So why should anyone wonder why WYSISYG.
rebentisch 01:27 07 Dec 11
Why don't you simple define a gini coefficient that suits your society and then set tax rates accordingly?
Pilgrim 05:30 13 Dec 11
A brilliant article, and intelligent comments! I had to make an account after reading this.
I'd only add the following thoughts: A high tax rate is a great cap on wealth with significant benefit for society, as was seen in the years 1940 to 1980. With these high tax rates, you have limits such as CEO salaries only 30 - 40 times average wage, instead of 300 times; top 1% acquiring 1/10th of total income instead of 1/4th; and so on. This has the practical benefit of driving more money into the economy through higher salaries, more investment, more jobs, less debt. After all, when we had these higher tax rates, we managed to defeat Hitler, lower the WW2 national debt from 120% GDP to 35% GDP, win the cold war and land men on the moon.
On the other hand, too low a tax rate has clearly witnessed negative effects. The top 1% will include geniuses, yes, but also pathological hoarders and the truly selfish. The infamous Koch brothers gained $18 billion in wealth over the last 4 years while laying off 13,000 of their employees. Like Scrooge on steroids, they work to break unions, suppress the votes of poor people, and resist even the smallest tax increase even as the economy suffers for virtually everyone else. And with the top 1% owning 46% of all financials and taking 1/4th of all income, the lifestyle of the top 1% has become a bigger financial burden than the cost of the whole federal government. Everything is more expensive because, one way or another, a chunk of every transaction goes to the top 1% like an invisible but very large tax on the rest of us. Healthcare would be less expensive if we were not paying Hammergren's $130million/yr salary, etc.
Excellent article. America needs to reconsider its basic economic system. Are we to imitate third world nations where only a few benefit? Or will we look at the golden age of the middle class, 1940 to 1980, and recognize that history teaches us that a strongly progressive tax structure is important to national prosperity?
phys_phys 04:44 30 Nov 11
But are we allowed to decide for the rich how much money they need and what will they do with them? At best, taking someone's property against his/her will is simple robbery... at worst it defines the difference between a democratic society that protects teh rights of an individual and a totalitarian one.