Inequality and the Brandeis Ratio

When I took civics in school as a youth we learned about our progressive tax system.  We were supposed to learn that if you worked hard and opened a business you were entitled to the money you made.  Not everyone could be an entrepreneur, after all where would musicians, plumbers, accountants, and scientists come from?  We were told we live in a democracy and this implied some sort of equality.

We learned that there was something called a progressive income tax.  It was the extra tax on the rich who used the roads, factories, and benefits of society paid.  No man is an island, each contributed his labor and talent to the common good.  Sure, the guy who works 16 hours a day deserves more than the guy who wants to picnic with his family, who has no ambition except to work to support his family and lead a good life.

At the turn of the 20th century the personal income tax was relatively new (if you don’t count tithing) and in today’s money was 2% on anything over $100,000.  Not bad, since if you made less than $100k, there was no tax but the wealthy who accumulated more than that a year had to pay.

Taxation is very complex but we need to build the interstate highways, invest in technology, and go to the moon. Infrastructure that is the collective will of the people.  After WWII the top tax rate rose to over 90% until 1963 when it began to fall to today’s 35%.  A close friend is a CPA and has spent her life learning the ins and outs of paring this down to nothing – but that’s another story.

Some think the tax rate should be even lower, maybe it should.  But are we asking the right questions? – Carlos

I'll be right back!

Don’t Tax the Rich. Tax Inequality Itself.

By IAN AYRES and AARON S. EDLIN, Published: December 18, 2011

THE progressive reformer and eminent jurist Louis D. Brandeis once said, “We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” Brandeis lived at a time when enormous disparities between the rich and the poor led to violent labor unrest and ultimately to a reform movement.

Over the last three decades, income inequality has again soared to the sort of levels that alarmed Brandeis. In 1980, the wealthiest 1 percent of Americans made 9.1 percent of our nation’s pre-tax income; by 2006 that share had risen to 18.8 percent — slightly higher than when Brandeis joined the Supreme Court in 1916.

Congress might have countered this increased concentration but, instead, tax changes have exacerbated the trend: in after-tax dollars, our wealthiest 1 percent over this same period went from receiving 7.7 percent to 16.3 percent of our nation’s income.

What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.

Brandeis understood that 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.

We believe that we have reached the Brandeis tipping point. It would be bad for our democracy if 1-percenters started making 40 or 50 times as much as the median American.

Enough is enough. 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.

Importantly, our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.

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. 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.

A key aspect of our proposal is the tax’s automatic nature. Congress need only act once to protect our future. Just as our tax brackets automatically adjust with the inflation rate, Congress could specify nondiscretionary conditions under which the Brandeis tax would automatically go into effect.

Part of our goal is to change the way politicians speak about income equality. Framing the income of the wealthy in relation to the median income will help us all keep in mind the relative success of the middle class. Our grandparents would be shocked to learn that the average income of the 1-percent club has skyrocketed to more than 30 times the median income — just as we will be shocked if 20 years from now 1-percenters make 80 times the median, which is where we will be if inequality continues to grow at the current rate unabated.

The Occupy Wall Street movement is right to decry the increasing power of the 1 percent as a threat to democracy. President Obama is right to characterize the present as a “make-or-break moment” for the middle class. As 1-percenters ourselves, we call on Congress, for the sake of democracy, to end the continued erosion of economic equality in our nation.

http://www.nytimes.com/2011/12/19/opinion/dont-tax-the-rich-tax-inequality-itself.html?_r=1&nl=todaysheadlines&emc=thab1

Ian Ayres, a professor of law at Yale, is the author of “Carrots and Sticks: Unlock the Power of Incentives to Get Things Done.” Aaron S. Edlin, a professor of law and of economics at the University of California, Berkeley, is co-editor of “The Economists’ Voice: Top Economists Take On Today’s Problems.”

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About carlos

I'm a curious person, of reasonable intellect, "on the beach" (retired) and enjoying my interest in anthropology, language, civil rights, and a few other areas. I've been a hippie/student/aerospace tech writer in the '60s, a witness to the Portuguese revolution in the ‘70s, a defense test engineer and witness to the Guatemalan genocide in the '80s, and a network engineer for an ISP in the '90s. Now I’m a student and commentator until my time is up. I've spent time under the spell of the Mesoamerican pyramids and the sweet sound of the Portuguese language. I've lived in Europe, traveled in Brazil, Central America, Iceland, New Zealand, and other places. My preferred mode of travel is with a backpack and I eat (almost) anything local. Somehow, many of the countries I have been to have had civil unrest (for which I was not responsible). I'm open to correspond with anyone who might share my liberal, humanist interests. I live in San Buenaventura, California.
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