As rich get richer, should their taxes go up?

America is far less egalitarian than other developed nations

By Nicholas Nehamas

Shrinking revenues and massive deficits: since the 2008 financial crisis, they’ve become a problem worldwide. How to reverse this troubling trend? In Greece, the government went for hard-core austerity, cutting the minimum wage by 22 percent. That sent the economy belly-up.

California’s Governor Jerry Brown has a different, if familiar, idea: tax the rich. Gov. Brown has proposed a budget referendum that will hike rates on those making over $250,000. The measure will expire after seven years and includes a 0.25 percent increase in the sales tax. It is expected to raise around $5.9 billion annually. Voters will decide at the polls in November.

Latitude News wants to hear what ordinary Americans think about public policy challenges in our country and around the world. So we sent reporter Jasmín López to interview Californians on the streets of downtown Los Angeles. Here’s what they had to say on tax hikes for the wealthy.

 

California still struggling through recession

California Governor Jerry Brown announces his revised budget proposal on May 14, 2012. The state is struggling to close a $16 billion budget gap. (Reuters/David McNew)

California, which has what would be the ninth largest economy in the world if it were an independent country, faces a $16 billion deficit, up almost $7 billion from earlier estimates. The recession hit the Golden State hard: California lost 6.77 percent of its jobs and 24 percent of government revenue. If his tax referendum fails, Brown says K-12 schools and public universities will have to pony up the missing $7 billion from their budgets.

But Brown is no anti-austerity populist. He’s also proposed $8.3 billion in spending cuts, with savings mainly coming from the prison system, state worker salaries and social programs.

As rich get richer, should their taxes go up?

The tax increase has caused far more controversy than fiscal belt-tightening. Those making $1 million and above will see their tax burden rise from 10.3 to 13.3 percent, the highest in the nation, according to Bloomberg.

What is Gov. Moonbeam thinking? Won’t new taxes kill any chance of recovery by stifling the economic activity of “job creators?”

Perhaps so. But data suggests that the very wealthy have more to share: in 1980, the top 1 percent of Californians took in 10.4 percent of state personal income. By 2010, that number had almost doubled. According to data compiled by PBS, the gap between rich and poor in California is the 8th largest in the nation (New York is the least egalitarian state, Utah the most).

Income Inequality on the Rise

Branko Milanovic, an economist at the World Bank who studies income inequality, says this trend isn’t just confined to California, or even the U.S. Over the last thirty years, wealthy people in nearly every country have taken a larger slice of the economic pie, even in traditionally egalitarian societies like Sweden.

Reasons vary country by country. In China, for example, marketization and privatization in the 1990s led to profit hoarding by politically connected elites. At the same time, economic growth in China’s coastal cities largely left rural areas untouched, reinforcing existing cleavages between prosperous urban centers and the struggling countryside.

A local group of upper income professionals who call themselves “Tax-Us” rally at City Hall in San Francisco, April 17, 2012.  (Reuters/Robert Galbraith)

Why are we growing less equal?

In the United States, Milanovic believes there are three main causes for the growing disparity between the rich and the rest:

1) Rapid technological change means people with training in engineering, computer science, advanced mathematics and other highly specialized fields can demand greater compensation than those who are less educated.

2) Globalization has allowed companies to move their operations overseas, while the migration of unskilled workers into the country has taken away lower-paying jobs.

3) Changes in the tax structure have led to declines in the marginal tax rates of the rich. Property, capital gains and inherited wealth used to be taxed at a similar rate to labor; no more.

How does the US stack up to other nations?

The United States lags well behind other developed nations in terms of income inequality, coming in 43rd out of 140 nations with available data. That puts America on par with China, Venezuela and Iran. Russia, Turkey and even India have higher income equality than we do. The most equal countries include the Nordic nations, along with Germany, Croatia and Hungary (where Michael Edelstein, one of our interviewees, lived and owned a small business).

Of course, poor Americans still live better than many middle-class people in less developed nations. And income inequality can give people the incentive to work harder. “But there is a certain point,” Milanovic says, “when it turns from a positive into a negative phenomenon in that it perpetuates differences between segments of society.”

Milanovic said that point happens when income inequality allows the rich to control politics and where people get cemented into a two-tiered society. He notes that Americans think they have social mobility, that children can do better than their parents. In fact, he says, studies show that “income mobility is actually greater in more equal places like Europe than it is in the U.S.”

The view from Brazil

Welcome to Cracolandia (“Crackland”), a Sao Paulo favela. Even here, innovative social programs like the Bolsa Familia are reducing poverty and getting children into school. (Reuters/Nacho Doce)

Brazil seems an unlikely model for reducing inequality. Its rich live in gated communities and drive bulletproof cars, while favela-dwellers struggle to survive in a lawless world of drugs, crime and limited opportunity. Its tax system is regressive and hurts the poor. But Milanovic says that over the last decade Brazil is one of the rare countries where income inequality has declined.

Boosted by strong growth and oil exports, left-leaning governments have rapidly expanded social welfare programs, increased access to education and raised the minimum wage. They’ve created the Bolsa Familia, or “family grant” program, which gives poor families cash for sending their children to school and getting them vaccinated. Some 13.4 million families are enrolled and President Dilma Rousseff recently announced plans for its expansion.

In order of appearance, the voices featured in this story belonged to Patrick (54), Michael Edelstein (53), Bob Eynon (65), Melanie Cunningham (31), Mark Johnson (48), Jessica Timsit (26). Audio recorded by Jasmín López.

 

 

  • Susan Glimcher

    Arguably, one of the most prosperous periods in recent American history was in the 1950′s and early 60′s when the highest marginal income tax rate for individuals approached 90%. Not surprisingly, income equality was also at one of its highest points. Appreciate your well-researched and thought out article on this issue!