BUSINESS
05/26/2016 08:59 pm ET Updated May 27, 2016

There's A Solution To People Abusing Their Wealth: Super-High Taxes

It's the only way to stop plutocracy.
Neilson Barnard/Getty Images

Peter Thiel offers a case study in the way America's top tax rate is much, much too low.

This week, we learned that Thiel -- a Silicon Valley techno-libertarian billionaire who co-founded PayPal, sits on the board of Facebook and is estimated to be worth $2.7 billion -- is trying to sue Gawker Media out of existence by financially backing plaintiffs who want to bring lawsuits against the company. 

What does it mean that Thiel has amassed enough wealth -- and thus enough power -- to make a credible attempt to cripple a major media company by throwing money at the legal system?

It doesn't necessarily tell us that individuals shouldn't be able to fund litigation. It tells us that some people in this country have too much money.

Thiel funding a lawsuit he wasn't involved in, a practice known as champerty, was once illegal in the U.S. But as Eugene Kontorovich, a professor at Northwestern University's Pritzker School of Law, points out in The Washington Post this week, anti-champerty laws eventually underwent a gradual attrition -- particularly because of civil rights litigation, which often involves a third party funding the lawsuits. 

"They were gradually eroded by numerous developments, most saliently public interest litigation and the private provision of legal aid to indigents," Kontorovich writes. Progressives are generally in favor of those last couple of things, so changing these laws would be complicated.

Yet here is Thiel, using the power afforded by his vast wealth to make serious trouble for Gawker. The media company has certainly shown questionable editorial judgment sometimes, but more often than not it speaks truth to power -- a crucial function of the press in a democracy. Gawker's now-inactive Silicon Valley blog, Valleywag, wrote unflattering things about the stars of the tech world, Thiel included -- something to which most of them were, and still are, unaccustomed. In response, Thiel used his money to try to destroy Gawker. There are countries whose governments use their power to control what the media says about them. We generally refer to these as autocracies

Thiel is a private citizen, of course, not a public servant. But that doesn't make it much better. Imagine if other private citizens, like Bill Gates or the Koch brothers, tried to destroy every media outlet that wrote something nasty about them. The public's access to information would suffer. Not immediately, maybe, but certainly after the eighth or ninth crippling lawsuit.

But there's another way to prevent this kind of abuse of power: taxes. What this country really needs isn't a law to keep incredibly wealthy people from funding litigation in an attempt to destroy the First Amendment. We just need fewer incredibly wealthy people. 

Economists agree. Back in 2014, my colleague Ben Walsh wrote about a report by Fabian Kindermann from the University of Bonn and Dirk Krueger from the University of Pennsylvania that found the ideal top marginal tax rate on the highest 1 percent of earners -- the tax rate that makes everyone in society the most well-off overall -- is between 85 and 90 percent. That's more than twice the current U.S. top rate of just under 40 percent, which is paid on income above $415,050 for individuals and above $466,950 for couples.

Marginal tax rates don't mean that all income is taxed at that rate -- just the income above a certain level. So if the marginal tax rate for individuals making $1 million a year was, say, 99 percent, only the money they made after the first $1 million would be taxed at that rate. That first million bucks would be taxed at a lower rate, leaving the person plenty to live off of. But a robust top marginal tax rate would prevent people who make, say, $100 million per year from becoming exponentially wealthier than everybody else, and getting to more or less make up their own laws as a result.

Having several million dollars in the bank is a way to live comfortably, have some influence and generally be considered a rich person. Having several billion dollars in the bank is different. A billion dollars is power -- power to grind down your enemies through endless litigation; power to throw off an entire state's budget because you moved to a new house. A billion dollars is plutocracy

Of course, if we take away the plutocrats' power by taxing them at higher rates, that money -- and the power that goes along with it -- will go to the government instead. And governments, to state the obvious, abuse their power all the time, including here in the U.S. But elected officials are still accountable to the public, and bound by the Constitution, in ways that individual billionaires are not. Do we want the power of regulating the press to be in the hands of the many or the hands of the few?

It's important to remember that there are different kinds of rich. There's the kind of rich where you can live comfortably without worrying about money, and there's the kind of rich where you can manipulate democracy or fund a never-ending series of lawsuits in pursuit of a personal grudge. Taxes are the way to keep the first kind of rich from metastasizing into the second. The higher we set the top marginal tax rate, the harder it becomes for anyone to make that jump.

Without high tax rates, huge amounts of wealth simply beget more huge amounts of wealth. In this chart, compiled by economists Thomas Piketty and Emmanuel Saez, you can see the massive amounts of wealth created for the top 0.1 percent by capital gains (that's returns on investment) in the 1920s, and again in the 2000s. 

Not coincidentally, U.S. inequality reached historic heights in the 1920s, and it's happening again now. As capital gains soar, real median incomes in the U.S. have fallen since 2000. What's good for the extremely rich is not necessarily good for average Americans. When top marginal tax rates decline, income inequality balloons:

What happens when income inequality grows too extreme? It's not just about Gawker, or any corporation a billionaire might dislike. Inequality can be a threat to both politics and the economy. The more money is concentrated at the top, the more political power accrues to that same small group of people. If power becomes too concentrated among the rich, and they are no longer exercising that power in a way that benefits everyone, you get violence. Ask Marie Antoinette.

And then there's the less obvious consequence: sluggish economic growth. Recent research has shown that as wealth concentrates at the top, everyone who's not at the top stops producing as much. As a result, the economy cools off and stagnates. Even when there is some growth, who benefits from it? An OECD report from 2015 shows that not only does growth slow and inequality increase under such conditions, but "when such a large group in the population gains so little from economic growth, the social fabric frays and trust in social institutions is weakened." And once again we're back to the lessons of the French Revolution. Any way you look at it, neglecting to tax the rich is bad for democracy.

Sure, perhaps you dislike Gawker and are unfazed by Thiel's meddling. But what if it were The New York Times? What if it were The Huffington Post? What if it were Breitbart?  

If we tax the rich properly, we never have to find out.

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