Here’s a very prescient analysis and a fascinating suggestion for change that seems to have some traction in Ecuador and the U.K.  Could it ever work in the U.S.?  One Illinois representative thinks so.

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Have the Rich Won?

Maybe not. A new approach to capping income at the top is starting to gain momentum.

By Sam Pizzigati

Everywhere we all looked, we saw people hurting, we saw
unfairness, we saw economic injustice. Now today, 35 years later, I’ve
come to understand what we didn’t see: the big picture.

Yes, back then in 1974, we certainly did face injustice at
every turn. But we were living, thanks to years of struggle—and
success—by our activist forebears, in a society where politics actually
revolved around confronting those injustices and making change that
could really help average working people.

And, even better, we had a realistic shot at achieving that
change. The reason? Our activist forbears had sliced the single
greatest obstacle to social progress—the rich and powerful—down to
democratic size. In 1974 we were living in a society with an enfeebled
wealthy, and we didn’t know it.

Shame on us. By not understanding—and not appreciating—the
equality our progressive predecessors had battled so hard to achieve,
we failed to defend it. We let the wealthy come back. We let grand
concentrations of private wealth reconstitute themselves across the
American economic landscape. We let the super rich regain their power
to dictate and distort America’s political discourse.

How rich—and powerful—have today’s rich become? Some numbers
can help tell the story. In 1974, the most affluent 1% of Americans
averaged, in today’s dollars, $380,000 in income.

Now let’s fast-forward. In 2007, the most recent year with
stats, households in America’s top 1% averaged $1.4 million, well over
triple what top 1% households averaged back in 1974—and, remember, this
tripling came after adjusting for inflation.

Americans in the bottom 90%, meanwhile, saw their average
incomes increase a meager $47 a year between 1974 and 2007, not enough
to foot the bill for a month’s worth of cable TV.

The bottom line: top-1% households made 12 times more income than bottom-90% households in 1974, 42 times more in 2007.

The numbers become even more striking when we go back a bit
further in time and focus not on the top 1%, but on the richest of the
rich, the top 400, the living symbol of wealth and power in the United
States ever since America’s original Gilded Age in the late 19th
century.

In 1955, our 400 highest incomes averaged $12.3 million, in
today’s dollars. But the top 400 in 1955 didn’t get to enjoy all those
millions. On average, after exploiting every tax loophole they could
find, they actually paid over half their incomes, 51.2%, in federal
income tax.

Today’s super rich are doing better, fantastically better, both
before and after taxes. In 2006, the top 400 averaged an astounding
$263 million each in income. These 400 financially fortunate paid,
after loopholes, just 17.2% of their incomes in federal tax.

After taxes, as a group, the top 400 of 2006 had $84 billion
more in their pockets than 1955’s top 400, $84 billion more they could
put to work bankrolling politicians and right-wing think tanks and
Swift Boat ad blitzes against progressive candidates and causes.

How could America’s super rich have so little, relatively
speaking, back in 1955 and so much today? What has changed between the
mid 20th century and the first decade of the 21st? We have lost, simply
put, the economic checks and balances that so significantly discouraged
grand concentrations of private wealth in the years right after World
War II.

Among the most important of these checks and balances: steeply
graduated progressive tax rates. Over most of the quarter-century
between the early 1940s and the mid 1960s, America’s richest faced at
least a 91% federal tax rate on “earned” income over $400,000. By 1974,
that top rate had dropped, but only to a still steep 70%. The top rate
today: 35%.

Tax rates on income from the sale of stocks, bonds, and other
property—capital gains—have traveled the same trend line. In the
postwar years, the wealthy paid a 25% tax on capital gains. The current
rate: just 15%.

So what should today’s activists for economic justice do about
all this? Hit the repeat button and re-fight the struggles of our
activist forbears?

That course certainly seems reasonable. Our forbears, after
all, pulled off quite a stunner. They faced, a century ago, a super
rich every bit as rich and powerful as the super rich we confront
today. Over the course of the next half-century, they leveled that
super rich.

By the 1950s, the incomes of America’s richest had been
“hacked to pieces,” as best-selling author Frederick Lewis Allen would
marvel in a 1952 book. The grand estates of the super rich, jubilant
postwar progressives would add, had become housing tracts and college
campuses for the first mass middle class nation the world had ever
seen.

But this triumph would not stand the test of time. The 20th
century would end as it began, with phenomenal wealth and power
concentrated at America’s economic summit. By century’s end, the
leveling institutions our progressive predecessors had fought so hard
to win—progressive tax rates, a vital trade union presence, regulatory
restrictions on corporate behavior—had all come unraveled.

Maybe we ought to ask why, before we rush to re-fight the
struggles our forbears so nobly waged. Why, for instance, did the
single most potent leveling instrument of the mid 20th century, the
steeply graduated rates of the progressive income tax, prove
unsustainable?

These steep rates, in their time, certainly did work wonders.
In the mid 20th century, with these rates in effect, the U.S. economy
essentially stopped generating colossal new concentrations of wealth
and power. Of the 40 richest individuals in U.S. history, not one made
the bulk of his fortune during the years of this progressive tax rate
heyday.

The big fortunes that did amass in these years mostly belonged
to oil magnates. They enjoyed what the rest of America’s rich did not:
a super loophole, the oil depletion allowance, that essentially
shielded them from the stiff tax rates that applied to every other deep
pocket.

But steeply graduated tax rates have an Achilles heel. The rich
hate them with an incredibly intense passion. That wouldn’t matter, of
course, if everyone else loved these rates with equal fervor. But they
don’t—because high tax rates on high incomes only impact the wealthy
directly. The wealthy feel the “pain.” They also see no
benefits—because they don’t need or use the public services high taxes
on high incomes make possible.

Those who do benefit from these public services, on the other
hand, don’t automatically connect the availability of these services to
progressive tax rates.

The end result of these political dynamics: Steeply graduated
tax rates—as traditionally structured—have never been able to stand the
test of time, anywhere. The rich attack these rates with far more
single-minded zeal than the general public supports them.

High tax rates on high incomes typically only come into effect
during periods of great social upheaval, during wars and severe
economic downturns that knock the wealthy off their political stride.
But after these upheavals, amid “normalcy,” the wealthy’s fervid and
focused opposition to high rates eventually wears down the public
political will to maintain these rates. The rates shrink, wealth
re-concentrates.

Today’s mainstream policy makers and politicos seem to have
concluded, from this history, that any attempt to tax the rich
significantly make no sense.

The Obama White House, for instance, wants to up the top
income tax rate on the wealthy, but just to the 39.6% rate in effect
before the George W. Bush tax cuts. If the top U.S. tax rate does rise
to 39.6%, America’s rich would be paying taxes at less than half the
rate they faced in the 1950s under President Dwight D. Eisenhower, a
Republican.

Even worse: Merely repealing the Bush tax cuts, as current
White House economist Lawrence Summers himself acknowledged in a 2007
Brookings Institution paper, would only wipe away one-sixth of the
income inequality the nation has experienced since 1979.

Similar tax games are playing out in Britain, where the
current government is upping the top tax rate on some high incomes from
40 to 50%. The new rate would still constitute a bargain, by historical
standards, for the British rich, who, at one point last century, faced
a 97% top rate.

Progressives in the UK, not surprisingly, are challenging their
government’s tax-the-rich timidity. But they’re not stopping there.
These progressives are also arguing that we need to go well beyond the
traditional progressive tax remedies previous progressive generations
put in place, beyond taxing the rich to actually capping their income.

And this capping, these British progressives believe, ought to
be done in a manner that gives average working families a clear and
powerful vested self-interest in keeping the caps in place. How do they
propose to accomplish this goal? They’re suggesting we link income
ceilings at the top to income floors at the bottom. In effect, they
seek a “maximum wage” tied to a minimum.

With a “maximum” set as a multiple of a minimum, society’s
richest and most powerful would only be able to increase their incomes
if the incomes of society’s poorest and least powerful increased first.
These rich, to become richer, have historically sought to depress
wages. A maximum coupled to the minimum would instantly create a
counter-incentive: the higher the wage at the bottom, the better for
the rich—and the better, of course, for the bottom, too.

In this new maximum wage environment, unions and other
traditional advocates for higher wages at the bottom might suddenly
find quite a few new—and distinctly wealthy—people in their corner.

Leading UK progressives have opened a campaign to inject these
notions into Britain’s mainstream political discourse. This past
August, 100 British progressive luminaries—all-stars who included three
dozen members of Parliament, veteran activists and economists, and the
UK’s most important labor leader, Trades Union Congress general
secretary Brendan Barber—called on their government to establish a
“High Pay Commission” and “launch a wide-ranging review of pay at the
top.”

This High Pay Commission, the progressive luminaries urged,
“should consider proposals to restrict excessive remuneration such as
maximum wage ratios.”

Thousands of British grassroots activists have since signed on
to the High Pay Commission call. And one party in the British
parliament, based in Wales, has already made advocacy for a UK-wide
“maximum wage” part of its official platform.

How exactly could a “maximum wage ratio” principle be
implemented? Top-bottom ratios could be tied directly to the
expenditure of tax dollars. A government could, for example, insist
that all publicly owned enterprises limit the pay between their top
executives and their workers.

Late in 2007, delegates to Ecuador’s Constituent Assembly
enacted legislation along this line. They created a remuneración
máxima—a “maximum wage”—for all agencies and enterprises that take in
over half their financing from tax dollars. The cap limits the pay of
top executives in Ecuador’s publicly subsidized sector to 25 times the
Ecuadorian minimum wage.

Executives at Ecuador’s Banco del Pacifico, a huge bank
nationalized after a 1999 financial crisis, have been able to exploit
and expand exceptions in the original legislation. But the principle
still stands.

Governments could also apply that principle much more broadly,
by mandating top-bottom pay ratios for any enterprises that seek
government contracts or subsidies or tax breaks. The British
government, as campaigners for a High Pay Commission note, could insist
on “reasonable pay structures” within private enterprises that gain
“public procurement contracts.”

Under current law, in both Britain and the United States,
private enterprises that win government contracts can pay their top
executives as much as they please. The CEO at Lockheed Martin, a
company that feeds almost exclusively off government contracts, last
year took home $26.5 million. That’s over 700 times the take-home of
the average American worker.

Lockheed, of course, only represents the tip of the
taxpayer-subsidized iceberg. Almost every major corporation and bank in
the United States is currently raking in big-time taxpayer dollars,
either through government contracts, economic development subsidies and
tax breaks, or, most recently, outright billion-dollar bailouts.

These taxpayer dollars are making rich people richer. Since
the beginning of 2008, the Institute for Policy Studies recently
reported, the 20 U.S. banks that have received the most bailout dollars
have laid off 160,000 workers. The 100 top executives at these 20
banks, in 2008 alone, collected a combined $791.5 million in personal
compensation.

Our tax dollars, in short, are increasing economic inequality
in the United States. They are growing the gap between our richest and
everyone else. That need not be. If we leveraged the power of the
public purse—as we already do in the struggle against gender and racial
inequality—our tax dollars could be helping us narrow, not expand, the
economic gaps that divide us.

Under existing U.S. law, companies that discriminate against
women and minorities in their employment practices cannot gain
government contracts. As a society, we’ve decided that we don’t want
our tax dollars subsidizing companies that increase gender or racial
inequality. So why should we let our tax dollars subsidize companies
that increase economic inequality—by compensating top executives at
levels that dwarf the pay that goes to average workers?

Rep. Jan Schakowsky, a progressive Democrat from Illinois,
doesn’t think we should. Schakowsky has introduced legislation, the
Patriot Corporations Act, that would give tax breaks and a preference
in the government contract bidding process to companies that pay their
executives less than 100 times what they compensate their lowest-paid
workers.

That standard, suitably expanded and strengthened, could become
a progressive principle worth rallying around: No tax dollars, in any
way, shape, or form, for any companies or banks that pay their
executives at over 25 times what their workers receive.

Why 25 times? The President of the United States currently
makes just under 25 times the annual pay of the lowest-paid federal
worker. Why then should we let our tax dollars go to executives who
demand—and get—hundreds of times more than their own workers?

Back in 1974, in a far more equal United States, we never needed to ponder questions like these.
Now we do.

Sam Pizzigati is a labor journalist and an
associate fellow at the Institute for Policy Studies, in Washington,
D.C. He edits Too Much (www.toomuchonline.org), an online weekly on
excess and inequality.