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Democracy, Economics

Capping Inequality?

Here’s an interesting idea to try to solve the issues related to the previous post about growing inequality.   Why not put a cap on the level of inequality that is acceptable in the country?  As described by Ian Ayres and Aaron S. Edlin in a NYT OpEd:

Congress should reform our tax law to put the brakes on further inequality. Specifically, we propose an automatic extra tax on the income of the top 1 percent of earners — a tax that would limit the after-tax incomes of this club to 36 times the median household income.

…Here’s how the tax would work. Once a year, the Internal Revenue Service would calculate the Brandeis ratio of the previous year. If the average 1-percenter made more than 36 times the income of the median American household, then the I.R.S. would create a new tax bracket for the highest 1 percent of income and calculate a marginal income tax rate for that bracket sufficient to reduce the after-tax Brandeis ratio to 36.

This new tax, if triggered, would apply only to income in excess of the poorest 1-percenter — currently about $330,000 per year.

The thinking behind what the authors are proposing is that the ratio of the after-tax income of the 1% vs. the median household is indicative of our societies stability where increasingly concentrated wealth results in distortions of our democracy.

…at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.

Additionally, as the authors astutely point out, this tax would not limit incomes of the 1%, as long as everyone is actually gaining as well.  In other words, if the “rising tide did indeed lift all boats” and that trickle down economics does indeed trickle down.

So I’m all on board.  With the basic idea at least.  My points of departure come from the idea that the cap is entirely ratio based.  In that scenario, the absolute gap can (and would) continue to grow, but the ratio would not change.  That’s better than the current situation, but it is by no means an equitable or sustainable solution.

Similarly, the authors choose their cap at the current ratios of inequality where the 1% makes 36x that of the median household.    They seem be afraid of the idea of inequality increasing from current levels:

It would be bad for our democracy if 1-percenters started making 40 or 50 times as much as the median American.

But they also seem to be afraid of the idea of reducing inequality as well…

Our Brandeis tax is conservative in that it doesn’t attempt to reverse the gains of the wealthy in the last 30 years. It is not a “claw back” tax. It merely assures that things don’t get worse.

Given the concern that wealth concentration can undermine democracy, do the authors really think that has NOT already occurred?  That the situation is already “worse enough” and untenable?  I understand the desire to make the proposal palatable politically, which it may or may not be if it seeks to “reverse the gains.”  However, it would seemingly make sense to lower that cap to something considerably lower than 36x.  In 1980, the ratio was 12.5x.  What reason, other than political viability, is there to not ultimately strive for something closer to that historical level instead of the current exorbitant one?

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