President Obama's "millionaire tax" has generated two sound-bite replies. Not only is he engaging in "class warfare," but he is indulging in sheer political posturing -- there simply isn't a lot of money to be raised by targeting the super-rich. Both charges are mistaken.
Taxation aimed at the rich doesn't create class division -- it responds to the rise of a winner-take-all economy. Conservatives are right to point out that the super-rich pay a big share of federal taxes. According to the Congressional Budget Office, the top 1% paid 28.3% of all federal taxes in 2006, up from 15% in 1979. But the CBO also found that the elite's share of the nation's income more than doubled, growing from 9% to 19% in that same period. Their surge in taxes tracked their increasing command over the nation's resources.
The problem is getting worse, not better. During the boom between 1993 and 2008, the top one percent took more than half of the total increase in national income, as economists Thomas Piketty and Emmanuel Saez have established in path-breaking work. They also show that that the top one-tenth of one percent is doing even better. The elite's share of the national wealth has quadrupled over the past forty years -- growing from 1.28% in 1979 to 5% in 2008.
The rise of the winner-take-all economy has lots of causes -- ranging from the increasing export of high-wage jobs to the remarkable success of top executives in winning mega-million-dollar pay packages. These deep-seated problems require long-term responses. But in the meantime, it's right for the tax code to require the super-rich to share their winnings with the rest of us.
Up to now, President Obama hasn't made out this moral case to the American people. He's chosen a more technocratic message. His tax plan, he has insisted , "is not class warfare. It's math." The issue, the Administration insists, is the deficit, and it is merely asking the rich to contribute their fair share.
But deficit worries aren't enough to counter the charge of class warfare. After all, there are lots of ways to reduce the deficit without focusing on the super-rich. At the bottom of the Republicans' complaint is a moral claim: that citizens should coalesce on the basis of competing views of the public good, not on the size of their bank accounts. The only way to beat this claim is with a competing, and deeper, moral account: it's a mistake to suppose that taxing the super-rich is tainting our otherwise clean society with the stain of class division. To the contrary, a millionaire tax is an appropriate response to the rise of the winner-take-all economy and its extreme concentration of ecomonic power at the top. At the end of the day, the super-rich benefit greatly from the on-going exercise in social cooperation that is American society; it's only fair for the tax system to focus on their great wealth, especially when so many Americans are overwhelmed by economic forces beyond their control.
Which leads us to the second complaint -- that Obama's "class war" won't solve our fiscal problems. Critics charge that there simply isn't much revenue to be gained from millionaire taxes, and so the focus on the super-rich merely diverts attention from the need for more drastic measures.
It's true, of course, that a millionaire's tax is no panacea. But it can and should play an important part of a sensible solution to our long-term problems. To make serious progress, though, President Obama must raise his sights. He has thus far embraced the "Buffett Rule," requiring millionaires to pay an income tax rate no lower than their secretaries. But this focus on high incomes disguises a second, and more fundamental, feature of the winner-take-all economy. Our national wealth is even more concentrated than our national income. According to data compiled by the Federal Reserve, the top 1% owned a 35% of the wealth, as opposed to 21% of the income, in 2006-2007. Imposing a special tax on high wealth can generate very substantial sums. Suppose, for example, that we levied a two percent annual wealth tax on households owning at least $7.2 million -- a sum that puts them in the top one-half of one percent of American households. On very conservative assumptions, this tax would yield at least 70 billion dollars a year -- even after adjusting the most recent Fed data to 2009 to take into account the large losses suffered after the 2008 crisis. This means that, over the coming decade, a wealth tax on the super-rich would yield at least half the $1.5 trillion dollar deficit-reduction target set for the Congressional super-committee.
Wealth taxation is a part of many systems in Europe, and Spain recently embraced it in responding to its budgetary crisis. While it's perfectly appropriate for critics to oppose such a tax on the merits, it's wrong to suggest that a focus on the super-rich can't raise very substantial revenues. Not only is the "class warfare" charge misconceived; so is the notion that it is a cynical effort to disguise the seriousness of our budgetary problems.
More and more citizens believe -- and rightly so -- that we aren't all in this together, and that there isn't a level playing field. After all, the wealthy transmit their privileges to their children, creating, de facto, an American aristocracy. Intergenerational income mobility is lower in the United States than in many European countries. College graduation is highly correlated with family wealth, and it is elite college graduates who earn most and have suffered least from unemployment in the current recession. The rich get richer, and so do their children, while the great majority struggles.
It is the winner-take-all economy, not taxation, that is the moral problem threatening our democracy. Taxes on the rich don't create class division -- they attack it.
Bruce Ackerman and Anne Alstott are law professors at Yale and co-authors of THE STAKEHOLDER SOCIETY.
About our $70 billion/year estimate:
The Fed publishes comprehensive data on wealth distribution. The most recent full survey is from 2007. In preparing a second edition of our 1999 book, The Stakeholder Society (which advocates a wealth tax), we hired Ed Wolff, professor of economics at NYU and the leading expert in the field, to analyze and update the 2007 data to 2009 to reflect the onset of the recession. We base our $70 billion revenue estimate on his analysis. Wolff's static estimate (i.e., one that does not take into account evasion or behavioral reactions) suggests that our proposed wealth tax would raise $140 billion. But we have adjusted this estimate downward to $70 billion to leave a big cushion for behavioral adjustments, evasion, coordination with the income tax, and administrative costs. Better not to over-claim, but there is every reason to think that the yield will be significantly larger than our estimate.