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||January 31, 2011|
Oprah Winfrey apparently can't stand to pay her federal income taxes. Her accountants, Oprah has just revealed in a recent CNN interview, have taken to bringing her a shot of tequila along with her annual tax bill. She downs the tequila, then signs the check to Uncle Sam.
We can giggle, fairly freely, at Oprah's tax-time antics. In the grand scheme of things, her distaste for the income tax isn't going to tilt our national political discourse one way or another. After all, Oprah's only an entertainer, isn't she?
That’s what people used to say a generation ago about another wealthy entertainer who couldn’t stand to pay taxes. But all this week pundits and politicos will be celebrating the 100th anniversary of this entertainer’s birth — for good reason. He did tilt our nation’s political discourse.
This week, in Too Much, we explore just when his tilting started.
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|GREED AT A GLANCE|
Behind the explosion of popular protest in Cairo last week: decades of growing inequality that have created a nation, as one news report Friday noted, “where about half the population lives on $2 a day or less, and walled compounds spring up outside cities with green lawns and swimming pools.” About 1.1 percent of Egyptian adults currently hold over $100,000 in net worth, the Credit Suisse Research Institute reported this past fall, and only 10,000 of the 550,000 affluent Egyptians in this top 1.1 percent hold over $1 million. Egypt’s minimum wage, meanwhile, hasn’t nudged up in over 25 years. Protesters in Egypt and across the Middle East, says Emile Hokayem at the London-based International Institute for Strategic Studies, “all want the same.” They’re protesting against a “top of the pyramid,” he adds, that's continually “getting richer and richer.”
The chants from Cairo's streets last week echoed all the way up into the Alps and the posh hotels of Davos, the Swiss resort where the world’s top bankers, CEOs, and government finance ministers gather every January for the annual World Economic Forum. With the Egyptian protests as a backdrop, a host of speakers warned the assembled power suits that more “unrest” will surely be erupting — unless they did more to share the world’s bounty. People across the globe, noted Maurice Levy, the CEO of a French advertising firm, can't understand why “large corporations are doing extremely well while their lives have not improved.” Added the International Monetary Fund's Min Zhu, a former People’s Bank of China executive: “The increase in inequality is the most serious challenge for the world. I don’t think the world is paying enough attention.”
Corporations are beginning to release their CEO pay figures for 2010, and last week brought the official news that Walt Disney CEO Bob Iger pulled in $28 million last year, a 30 percent boost over his 2009 take-home. The Disney board calls the generous boost for Iger a reward for his “exceptional performance” amid a tough economic environment. Disney, overall, netted $4 billion in 2010 profits. Yet the company is still insisting that Disney workers making under $9 an hour take on as much as another $500 per month in added health care costs . . .
Disney workers have been pushing, unsuccessfully, the last two years for an advisory shareholder vote on the company’s executive pay. But that vote will now be coming anyway. The Dodd-Frank financial reform signed into law last summer requires all publicly traded companies to give their shareholders a “say on pay,” and last Tuesday the federal Securities and Exchange Commission okayed new regs that put that mandate into actual effect. The nation’s top companies, under the new rules, will have to hold advisory shareholder votes on top exec pay at least once every three years and also disclose, in their SEC filings, “whether and how” they took the vote results into account. Some firms already let shareholders take advisory votes on top pay. Last year, at about one in every ten of these firms, shareholders turned thumbs down on the pay plans presented . . .
The revenue-squeezed British government late last year began a fierce fiscal austerity campaign that’s going to cost the typical UK family an estimated £2,000, or $3,170, a year. But the government could avoid that massive hit against average families, says a member of the British Parliament, if the government tapped the wealth of UK’s ultra rich. Britain’s 1,000 wealthiest now hold a combined fortune of £335.5 billion, about $532 billion. These super rich, MP Austin Mitchell and University of Essex business analyst Prem Sikka wrote earlier this month, “could easily give 25 per cent, or some £84 billion, of their wealth away without hurting the quality of their life,” a move that would “reduce and probably eliminate the need for draconian cuts.” Add Mitchell and Sikka: “Politics is about choices. The Government can choose to punish millions of people for the recession that they did not cause or it can inconvenience a few of its rich friends.”
Quote of the Week
“Here are the Koch brothers with their unbridled wealth, using it to shape society as they see fit. It's our obligation to do everything we can to stop them.”
Stat of the Week
At the end of this year, a tax surcharge on New York State incomes over $200,000 will expire. The expiration of this modest tax — just an added 2.12 percent on incomes over $500,000 — will cost the state $4.6 billion in revenue a year, enough to offset, notes the Center on Working Families, over half of what the state spends every year on higher education and college student tuition aid.
|inequality by the numbers|
The Tax that Turned Ronald Reagan Right
With the centennial of our 40th President's birth fast approaching, how about a shout-out for the soak-the-rich tax rates that he so despised — and more civic-minded Hollywood stars so enthusiastically embraced.
Did Ronald Reagan change history? Well, we all change history in our own way. The more interesting question: What changed Ronald Reagan?
What changed the labor advocate — with enough street cred to get elected president of Hollywood's actors union — into a labor basher extraordinaire? What turned Reagan the standard-issue New Deal Democrat into the 20th century's premiere pusher for almost entirely unrestrained “free enterprise”?
The answer? According to Reagan himself, the federal income tax — specifically the over 90 percent top rate on top-bracket income that went into effect during World War II — changed Ronald Reagan. That tax levy absolutely incensed the amiable actor.
At his Hollywood height, actor Ronnie Reagan was making $400,000 per picture. With the top federal tax rate over 90 percent, Reagan used to tell his White House chief of staff Donald Regan, he always chose to “loaf” around rather than make more than two pictures a year.
“Why should I have done a third picture, even if it was Gone with the Wind?” Regan remembers Reagan asking. “What good would it have done me?”
Actually, instead of griping about his tax bill, the World War II-era Ronnie Reagan should have been counting his lucky tax stars. Things could have turned out much worse for Reagan — and the rest of America's high-income set — if Congress had let President Franklin D. Roosevelt have his way.
In April 1942, just a few months after Pearl Harbor, Roosevelt asked Congress to enact a 100 percent top federal income tax rate, in effect a “maximum wage.” No individual, FDR told lawmakers, should be taking home, after taxes, over $25,000 — the equivalent of about $335,000 today.
FDR's call for a $25,000 personal income limit struck millions of patriotic Americans as right on the mark. A Gallup poll, in late 1942, found 47 percent of Americans supporting the notion of an income limit and only 38 percent in opposition. And the supporters of FDR's $25,000 cap even included some of Ronnie Reagan's fellow Hollywood stars.
“I regret,” the widely admired Ann Sheridan told reporters, “that I have only one salary to give for my country.”
Sheridan was following in the footsteps of an even more widely admired film star, Carole Lombard. In 1937, notes film historian Eric Hoyt, Lombard paid over $300,000 in federal taxes on $465,000 in income.
“I was glad to do it, too,” she told reporters. “Income tax money all goes into improvement and protection of the country.”
No other news item, the New Yorker magazine would later relate, probably “ever did so much to increase the popularity of a star.”
Most of America's highest income-earners, predictably enough, didn't share either Lombard’s or Sheridan's sentiments. They howled in protest at FDR’s 1942 income cap proposal, and Congress felt their pain — but only to an extent. Lawmakers didn't buy FDR's 100 percent top rate, but they came close.
America’s rich would end the war years facing a 94 percent tax rate on income over $200,000.
America's rich would see, after World War II, only limited relief from that 94 percent top rate. In 1948, over President Harry Truman's veto, the GOP-controlled Congress did drop the top tax rate down to 82 percent. But the top rate would jump back over 90 percent during the Korean War, and the top rate would sit fixed — at 91 percent — straight through the 1950s.
Not until 1964 did that top rate start dipping, down to 70 percent. In 1981, the newly elected President Ronald Reagan would make gutting that 70 percent rate his first major White House priority. By 1986, after two Reagan tax cuts, the top rate on the top income bracket had shrunk to a mere 28 percent.
Actor Ronnie Reagan had won. Never again would a B-movie star have to stew about lost windfalls. Unfortunately, never again — in our modern age — would America have an effective check on the accumulation of grand private fortunes.
In the middle decades of the 20th century, the steeply graduated progressive income tax that actor Ronald Reagan so detested operated marvelously well as just that sort of check. America's super rich — our top tenth of 1 percent — saw their share of the nation's income drop precipitously in those years, from nearly 12 percent before the Great Depression to under 3 percent by the 1970s.
The top 0.1 percent share in 2007, right before the Great Recession? Over 12 percent. The rich, in other words, have come all the way back — and more.
And average Americans? After enjoying historic levels of middle-class prosperity in the tax-the-rich mid-20th century, they’ve been treading water ever since.
And Carole Lombard, the Hollywood star who welcomed the high taxes on high incomes that Ronald Reagan so abhorred, whatever happened to her?
Lombard died in a tragic January 1942 plane crash, on her way back to Hollywood from a war bond rally in her native Indiana. She never had a chance, in all the subsequent tax-the-rich political battles, to stare Ronnie Reagan down. Too bad. Now that might have really changed history.
Gap Between Rich and Poor Named 8th Wonder of The World, The Onion, January 24, 2011. The initial Seven Wonders “pale in comparison,” says this apt satire, to the “vast chasm of wealth” that now “stretches across most of the inhabited world.”
Hugh Son and Michael Moore, Banker Pay Fueled Risk That Hobbled Economy, Crisis Panel Says, Bloomberg, January 27, 2011. The commission investigating the 2008 meltdown concludes that “soaring pay pushed traders to disregard risk and limited regulators’ ability to lure top talent to police banks.”
Robert Reich, The President Ignored the Elephant in the Room, Business Insider, January 26, 2011. The former U.S. secretary of labor on what the State of the Union address missed: “the central structural flaw in the U.S. economy — the dwindling share of its gains going to the vast middle class, and the almost unprecedented concentration of income and wealth at top.”
Neil Buchanan, What Are They Teaching in Our Schools? Dorf on Law, January 28, 2011. A law prof demolishes the argument that tax cuts for the rich stimulate the economy more than tax cuts for the poor.
Debating Wealth's Fearsome Concentration
Most observers would likely rank the UK-based Economist as the world's most influential business news magazine. Week in and week out, the Economist offers perspectives that shape how corporate movers and shakers see the universe. In other words, the Economist matters.
“What's the correct way to think about the rise of the global super-rich?” this debate’s intro asks. “Is there any reason to be concerned about recent changes in the income distribution, in America, across rich countries, or globally? Is there reason to believe that inequality contributes to financial or economic instability?”
Analysts have been debating all these questions, of course, for some time now, ever since inequality began skyrocketing three decades ago. Most apologists for our unequal economic order, in the early years of that surge, simply denied that anything unnatural — or untoward — was going on. Many still do.
The new Economist inequality debate, for instance, includes a contribution from Hal Varian, the chief economist at Google. In a global marketplace, Varian argues, grand accumulations of wealth will always be inevitable, since new technologies are forever amplifying talent.
“Ocean voyages, railroads, and the telegraph, along with the businesses they enabled, created vast amounts of wealth,” writes Varian, “so we should expect the same from modern communications technologies.”
But new technologies don't always create vast personal fortunes. In the 1950s, television swept the United States and recast the daily routine of nearly every American. Yet the TV tsunami left no new vast fortunes behind. The progressive tax structure then in place kept those fortunes from accumulating.
Varian's boss, outgoing Google CEO Eric Schmidt, has just received a $100 million stock award. On that windfall, he'll pay taxes at not much more than one-third the rate his CEO predecessors faced a half-century ago. The “globalized marketplace” isn't making Schmidt fantastically rich. Friendly tax laws are.
Another inequality-matters denier in the new Economist debate, Bentley University's Scott Sumner, dismisses the study of income maldistribution as “not a very useful way to think about economic inequality.” Income inequality simply reflects, he pronounces, the natural ebb and flow of the modern lives we lead.
“I spent my first eight adult years in the bottom 20 percent of the income distribution,” says the University of Chicago-trained economist. “Now I’m in the top 10 percent, but will drop down sharply when I retire at 62.”
But how do personal income trajectories explain why America's richest 1 percent today have nearly triple the national income share of our richest 1 percent back 50 years ago? Sumner has nothing to say on that matter. He's too busy advocating lower taxes on capital, to stimulate the economic growth that will surely, as another Economist debater argues, enrich us all.
“As long as the tide is rising,” writes Michael Heise, an economic adviser for the German financial industry giant Allianz SE, “the emergence of a class of super-rich causes limited social frictions.”
Nothing new here. Rationalizers for the rich have always gravitated toward the rising-tide analogy and its growing-pie cousin. With a growing pie, the argument goes, you can be better off even if your share of the pie is decreasing.
Most Economist corporate readers will no doubt nod in smug satisfaction at the claims that Heise, Sumner, Varian, and their what-us-worry soul mates so self-confidently assert in this new Economist debate.
But what will the Economist's readers make of the debate’s contributors who directly challenge these claims, who contend that rising inequality is making it ever easier, as Konstantin Sonin of Moscow's New Economic School posits, for the rich to rig the economic game in their favor — at the expense of everybody else.
The greater the economic inequality that this rigging manufactures, University of Oregon economist Mark Thoma goes on to explain in his debate contribution, the weaker future economic growth will be — and the fewer the future opportunities, adds MIT's Daron Acemoglu, for social mobility.
The solution? We need, Thoma urges, to get serious about redistributing wealth — from the top down. We can all expect, Thoma acknowledges, “considerable protest when the wealthy are asked to give up a portion of the growth that has been flowing exclusively to them for so long.”
“We’ll hear every reason you can think of and a few more as to why redistributive polices are bad for jobs and bad for America more generally,” he continues. “But sharing economic gains among all those who had a hand in creating them is the right thing to do.”
Will perspectives like Thoma’s give the Economist's corporate readers pause — or just stomach pain? We can only hope for the former. And keep pushing for the greater equality this Economist debate demonstrates we so desperately need.
|About Too Much|
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