Tax the rich: increase employment and sustain demand

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Transnational finance, the corporate media, and rightwing political parties are using high government deficits as pretexts for cuts to public employment and social programs.

It is not a surprise that capitalists campaign to give returns on investments priority over employment, workers' income, and the wellbeing of the needy. Having aggressively supported cuts to business and income taxes, wealthholders have reason to worry about the real returns on bonds. It is also not a surprise that unions and students in Europe have mobilized millions against these cuts. Unions, public sector workers, pensioners, immigrants and the needy are not to blame. Government deficits are a direct result of capitalist speculation, the 2008 financial crash, government bailouts, and the resulting loss of employment, income and government revenues.

If government deficits were the real problem -- not just a pretext -- military spending, particularly in the U.S., would be drastically cut. Taxes would be raised. Of course, tax increases have consequences. In a time of fragile global markets, increasing sales tax or value-added taxes could reduce consumer purchasing power, further weakening markets. Taxes on enterprise revenues could reduce expenditures for plant and equipment and could cause the failure of more businesses.

Steeply graduated income taxes would upset the super rich but would otherwise be benign. Taxing the portion of income over $200,000 a year at rates of 75 per cent, and over $500,000 at 90 per cent would increase government revenues by five or 10 per cent of gross domestic income without reducing markets for most goods and services. Additional revenues could be raised by taxing speculative profits on the buying and selling of stocks, bonds, real estate, and currencies. International agreement to raise tariffs to 15 to 25 per cent from the current average of five to 10 per cent would raise more. The profits of transnational corporations would be squeezed, but the resulting growth in local production for local consumption would increase employment, income, and public revenues everywhere.

Supply-side economics, which has dominated government policy for 30 years, insists that increasing taxes on the wealthy will decrease the money available for private investment, causing job loss, reduced real incomes, and economic decline. Supply-side economics was a wealthholders' reaction to Keynesian demand-side policies. The Keynesian period -- from World War II through the 1970s -- had grown out of destructive 20th-century wars, financial crashes, and social upheaval. Keynesians increased public spending on pensions, unemployment insurance, education, healthcare and income support. Laws were changed to make it easier for unions to organize and to bargain collectively.

Much of the cost of stimulating demand was covered by steeply graduated income taxes. In Canada, the U.S., and the U.K., the highest incomes were taxed at marginal rates up to 90 per cent during the war and in the years immediately after. Although the top rates were lowered in the 1960s, these remained high. Throughout the period, the share of total income going to capital as profits, dividends, interest payments, and rent declined. Nonetheless, investments in machinery, equipment, infrastructure (bridges, roads, schools, hospitals, public transit), and housing stock rose steadily.

By the 1970s, the super rich and the corporate elite had concluded that Keynesian policies were not in their interests. These, they claimed, had led to stagnation and inflation, not growth. Expanding public employment and social entitlements may have increased consumer demand, but this, they claimed, had come at the expense of capitalist income, reducing the supply of funds available for investment.

In fact, the Keynesian period was a time of steady, impressive growth in investment and consumer income. Inflation rates did reach double digit levels in the 1970s. Neoconservatives blamed this on rising social spending and government deficits. A more obvious explanation was the combination of rising oil prices, a massive inflow of capital from abroad into the U.S., U.K, Europe and Canada, and increasing government deficits. Oil prices had risen from under $3 to over $30 a barrel, increasing the price of nearly all goods and services. The rulers of oil exporting despotisms were suddenly awash in revenues they could invest abroad. Meanwhile, rising government deficits were a predictable consequence of cuts in tax rates paid by corporations and top income earners. U.S. government decisions to finance war in Vietnam with borrowed money, not tax increases, compounded the problem.

After supply-side policies were adopted, taxes on upper incomes and businesses were cut further. Industries were deregulated. Laws were changed to make it more difficult for unions to organize and to engage in effective collective bargaining. Public utilities and services were privatized.

The rich did get richer -- the super-rich substantially richer -- but economies did not flourish as supply-siders had predicted. The quality of public services declined. Social infrastructure was allowed to decay. Employment in manufacturing and service industries fell. The real income of wage and salary workers stopped growing. Markets for consumer goods stagnated.

Supply-side theorists ignored the evidence. Instead, they turned phrases from Adam Smith into a mantra. More income for capitalists, they intoned, would mean more savings, more investment, more economic growth. But Smith was not talking of 20th-century corporate oligarchs when he equated capitalist income with savings and investment. He was referring to a middle class of farmers, shopkeepers, and merchants, whose frugality he contrasted with the aristocracy's fondness for luxury. The middle class, he said, turned their income into savings for investment in the future; aristocrats spent and borrowed for their current pleasure.

Today's super-rich are more like eighteenth-century aristocrats than the middle classes of Smith's day. They are mega and giga-consumers who transform revenues made from productive assets and social labour into personal wealth -- into mansions, yachts, beachfront condos, and winter retreats. As a class, they are obsessed with maximizing returns on their wealth, but they have little interest in productive investment. For them, innovation means a search for new more profitable investment instruments: derivatives, futures, dubious mortgages packaged as collatoralized debt obligations, and credit default swaps (bankruptcy insurance).

Even when pyramid scams and outright fraud are not involved, nothing is added to means of livelihood when one capitalist buys and another sells stocks. Financial entitlements are merely shuffled from one to another. When the rich do invest in actual plant and equipment this is likely to be abroad where labour is cheaper and profits are higher.

The economic argument

Steeply graduated income taxes could quickly make public debt manageable. Unlike taxes on consumption, taxes on the highest incomes would not dampen markets for consumer goods. Additional public revenues could be used to improve education, healthcare, social housing, income support, public transit. As employment and markets expand, enterprises would be encouraged to invest more.

Most investment in real means of livelihood actually comes from undistributed corporate profits. Confiscatory tax rates on the highest incomes would discourage the distribution of profits as dividends, executive salaries, and bonuses. Higher levels of retained earnings would provide corporations with more funds to invest in research and development as well as on plant and equipment.

With far higher taxes on capitalist income, the super rich will have to make do with less sumptuous homes, fewer and less luxurious automobiles, yachts, and vacation spots. For everyone else, the cost of keeping up with the Joneses will be less. In all income groups, people are likely to save more, making more funds available for investment in housing and local enterprises.

The democratic argument

Capitalism claims to be a system of individual opportunities. Providing governments with the revenues needed to improve education, healthcare, pensions, and income support would expand opportunities for everyone. Steeply graduated income taxes would transfer control of social surpluses from a corporate oligarchy to elected national, regional, and local governments.

Can governments and elected representatives be trusted to act in the common interest? With steeply graduated income tax, a small self-serving minority would have less money to influence legislation and corrupt politicians. Billionaires, like the Koch brothers -- two of the wealthiest men in the U.S. who have bankrolled the U.S. Tea Party -- would have less spare cash to dominate and manipulate political agendas in their narrow class interests.

Steeply graduated income taxes alone would not end capitalist entitlement, but as governments gain more revenues to expand social entitlements and public employment, people will demand to be heard and to have a voice in economic decisions. The right of wealthholding minorities to impose their immediate interests will be replaced with the transparent, democratic right of people to direct economic life in the common interest, in the interests of human and environmental wellbeing.

The environmental argument

The wealthiest one per cent presently claim close to 20 per cent of total income. If their share was reduced to five per cent, extravagant consumption and the accompanying waste of resources would be greatly reduced.

Governments would have the funds needed to replace dependence on private automobiles with fast, efficient public transportation. Central heating systems and geothermal heating and cooling systems that require far less fossil fuels could be constructed. Local agriculture for local markets could be effectively encouraged. Environmental protection agencies would have the funds and inspectors needed to investigate complaints and to act against corporate damage to ecosystems.

As control of social surpluses passes from the hands of wealthholding minorities to elected governments, national, regional, and local communities will provide more employment and goods and services as human rights. Fewer people will depend on the profitability of capital in general and of transnational corporations in particular. More people will be free to oppose environmentally destructive industrial activity.

As economic democracy replaces the dictatorship of capital, industrial and service workers, professionals, the retired, homemakers, students, farmers, mushroom pickers, loggers, and ecologists will all have the right to a voice and equal vote in their communities' economic decisions. Private profits will not be allowed to take precedence over the income and employment of common people, or over the carrying capacity of environments.

Allan Engler is a Vancouver trade unionist, social activist, and author. His Economic Democracy, the working-class alternative to capitalism was published this year by Fernwood Books.

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