Save Democracy with a Wealth Tax

 Concentration of Wealth Endangers Our Democrcy

Last week’s post said that we needed to replace the property tax with a broad-based wealth tax because the property tax is outdated. It causes an unfairly large share of the cost of local government to fall on ordinary, working Americans while allowing most of the wealth of the rich of remain untaxed. That is true, but it is not the whole story.

There is another reason why we need a wealth tax: it offers a way to preserve our democracy by limiting the increasing concentration of wealth in the hands of the owners of capital. In his book, Capital in the Twenty-First Century, Thomas Picketty argues that in a capitalist economy, the share of national income going to capital will increase and the share going to labor will decrease as long as the rate of return on capital is greater than the growth rate of the economy. In addition, Picketty presents historical data showing that in fact the rate of return on capital has exceeded the growth rate of the economy in most periods with the major exception being the thirty years following the Second World War.

The "Glorious Thirty" Post-War Years

Many Americans remember the post-war period fondly as a period when a working family could afford to buy a house and a car and could live comfortably on one income. Fewer Americans remember that the period was exceptional in that respect. Most Americans were not so prosperous before the Second World War or before the Great Depression. The decline in the share of national income going to working Americans after 1975 was in fact a return to the normal situation that had existed throughout most of the history of modern capitalism.

A Way to Preserve Our Democracy

We should expect that the share of income going to capital will continue to increase and the share going to labor will continue to decrease in the future, and that presents a problem for our democracy. The American combination of market capitalism with democratic government depends on most people’s believing that the system is fair and not rigged against them.

They must feel that the system gives them a decent standard of living, which includes not only economic prosperity but also things like economic security, economic opportunity and personal dignity. Our system produces a high level of national prosperity, but it falls short on the other three elements of a decent standard of living for millions of our people because of the increasing concentration of wealth in a few very wealthy hands. Consequently, millions of people have lost faith in democracy and have become followers of authoritarian leaders who promise to Make America Great Again – that is to restore their security, opportunity and dignity.   

Our democracy has become unstable, and it will become still more unstable unless we can find a way to limit the ever-increasing concentration of wealth, which brings insecurity and lack of opportunity and dignity to millions of people. A wealth tax could give us a means of limiting the concentration of wealth, and the revenue it would provide would offer ways to provide more security, opportunity and dignity to millions of people.

The Property Tax – An Outdated Wealth Tax

 Resistance to the Property Tax

There is a lot of resistance to the property tax in our country today, but it is mostly misdirected. Some are saying that property taxes should not be levied on people’s homes if they are fully paid for. Others are saying that retired people should not have to pay property taxes or lose their homes if they are unable to pay the taxes.

In some ways the anti-property tax campaign is a fraud. The main beneficiaries of eliminating the property tax for retired people would be rich old people who own large properties. The specter of old folks struggling to stay in homes that they have paid for is mostly a front for wealthy folks trying to avoid paying their fair share of taxes.

High Property Values Have Led to High Property Taxes

However, there is also a real problem for some people. It has arisen because real estate values have risen enormously in recent years, and as a result, some people are faced with property taxes that are much higher than they can pay. This problem occurred in California in the nineteen seventies, and as a result, the voters there passed the famous Proposition 13 that limited what homeowners could be forced to pay. This created a problem for local governments, which depend heavily on the property tax for revenue.

A Little History

Why do local governments depend so heavily on the property tax? The use of the property tax to cover the cost of local governments began in the thirteen colonies in the seventeenth century. In order to fund important projects, local governments collected taxes, and inevitably, the taxes  had to be collected from people with sufficient wealth to pay them.

At that time, land was the principal form of wealth. Most private income was derived from land. Some people owned small farms, while others were major landholders. People who owned no land were mostly too poor to pay much in the way of taxes. Moreover, local projects like roads or harbors were often undertaken to promote trade in local products, which were often agricultural products. So, it seemed fair to pay for the projects by means of a tax on land, and local governments developed a tradition of using property taxes as a major source of revenue. People paid to support their local government in proportion to their shares of the community’s wealth. That continued to be true throughout most of our history, and today, local governments still depend on taxes on land for a large share of their revenue,

Today, Wealth Takes Many Forms

Today, however, a person's share of the land in an area no longer represents adequately his/her share of the wealth in that area, because today, land is no longer the principal form of wealth. People - especially wealthy people - own stocks, bonds, mutual funds, art collections. and other valuable investments. Today, land holdings account for only a small part of the wealth of wealthy people, who hold most of their wealth in other forms. In contrast, land holdings account for a very large share of the wealth or ordinary, working Americans, who often own little beyond the homes they live in.

Working Americans Pay an Unfair Share

As a result, ordinary working Americans pay tax on most of what they own, but wealthy Americans pay tax on only a small part of their wealth. That means that in America today, people are not taxed in proportion to their wealth as they were in the past. Today, our tax system reflects the structure of our economy as it was in the seventeenth and eighteenth centuries, not the structure of our economy as it is today.

In the face of this unfairness, we need to rethink the structure of our tax system. We need to figure out a way to tax all forms of wealth and not only real estate.

Taxes, Free Enterprise and World Domination

 A Warning

Recently, Jamie Dimon the CEO of JP Morgan Chase warned that the dollar is at risk of losing its status as the world’s reserve currency unless the United States maintains its economic and military power. He said, 

If America is in a weakened state… like if we’re not the strongest military in 25 years and the strongest economy, we won’t be the reserve currency either. … The world will be fragmented, and it’ll be very dangerous for us.

He is right, of course, but his warning is wasted because there is no way that we can maintain the economic and military dominance that we enjoyed for many years. We cannot do so in part because the world has changed, but our inability to maintain economic and military dominance is also due to contradictions within our own political culture. Our political beliefs will make it difficult if not impossible for us to maintain our economic and political dominance in the world.

Dominating the World is Expensive

One of the beliefs that will make it difficult for us to maintain our military dominance is our belief in low taxes. Maintaining military dominance is very expensive, and we have never been willing to pay enough in taxes to cover its full cost. We have maintained our dominance using borrowed money, and we could do that for many years because our government was able to borrow money at extremely low rates of interest. Our bonds were regarded as the world’s safest investments. Our own people and foreign governments were willing to buy American government bonds even though they paid very little interest.

That situation has changed. Our bond ratings have been downgraded, and interest rates have risen. Servicing our national debt is now the largest item in the federal budget except for Social Security. We now spend more on interest on the national debt than we do on national defense. We have to borrow money just to cover the interest payments on our debt. This situation is not sustainable in the long run. If we really wanted to maintain our military dominance, we would have to pay much higher taxes than we have ever been willing to pay.

Dominating the World Would Require Limiting Free Enterprise

Our belief in the value of free enterprise also interferes with our ability to maintain economic and military dominance because maintaining such dominance is not a goal of profit-making companies. Their goal is to maximize their profits, and to do that, they have moved their factories to countries where wages are low and environmental regulations are minimal. As a result, our industrial base has been hollowed out. 

Large companies have also organized their businesses in ways that minimize the taxes they must pay. They have located parts of their businesses in foreign countries in ways that allow them to book their profits outside of the United States and thereby to avoid paying taxes here. Doing that makes perfect sense from their point of view, but it reduces the revenue that would otherwise pay for us to maintain military dominance.

Companies are able to do these things because we lack the political will to prevent them from doing them. We believe in free enterprise. We believe that companies should be able to pursue profits unhindered as far as possible by government interference. We believe that if companies are allowed to pursue profits in this way, our economy will grow, and we will all benefit. 

One result of that belief in today’s world has been that companies have moved their operations to places outside of the United States. In some ways, that has been good for Americans, at least for those who have not lost their jobs. As consumers, Americans have gained by being able to buy goods that are cheaper than they would be if they were produced here. 

However, we have also lost the economic dominance that we once possessed, and we have lost the ability to produce many of the components of the weapons that are used by our military. We depend on foreign companies to equip our military, and that means that we depend on the rules-based world order that our current administration is tearing down. 

In theory, we could rebuild the manufacturing capacity to support our military without foreign trade, but that would take years at best. It would be impossible unless we became willing to restrain companies’ freedom of action much more than we have ever been willing to restrain it in the past. 

We Must Get Used to Living in a World That We Do Not Dominate

Thus, our commitment to low taxes and our commitment to free enterprise make it difficult and perhaps impossible for us to continue to dominate the world economically or militarily. To maintain that domination, we would have to pay much higher taxes than we have ever been willing to pay, and we would have to limit the ability of companies to pursue profit by moving outside of the United States. We are unlikely to do either of those things, and so, we are going to have to learn to live in a world that we do not dominate.