Guest Blog by Mafruza Khan: Inequality, Taxes and Sustainable Development - What do Bill Gates, Warren Buffet, Paul Tudor Jones and Regular Americans Support?

By Mafruza Khan

In a statement this past summer, Amtrak executive Stephen Gardner told New Jersey legislators that frequent train problems stranding commuters may "become the norm" because of the age and condition of the rail infrastructure. "When you have assets of this age, under this level of service and stress it’s not feasible really to imagine that you’re going to get perfect performance."

Studies have consistently shown countries with high inequality tend to invest less in public goods, such as infrastructure, technology, and education, which contribute to long-term economic prosperity and growth and that high income and wealth inequality are strongly related to lower social mobility and social cohesion.

Economist and Nobel laureate Joseph Stiglitz argues, 

“Full equality is not the goal. Some economic inequalities may be conducive to economic growth. Other inequalities may not be worth addressing because doing so infringes on cherished liberties. While the precise point at which inequalities turn harmful may differ from country to country, once inequality becomes extreme, harmful social, economic, and political effects become evident.”

In 2009, the President of the UN General Assembly, Miguel d’Escoto Brockmann, convened a Commission ofExperts on international monetary and financial system reforms in response to the financial crisis and to secure “a more sustainable and just global economic order.” The commission was composed of 17 experts headed by Joseph Stiglitz. The President of France also asked Stiglitz and economists Amartya Sen and Jean-Paul Fitoussi to head the Commission on the Measurement of Economic Performance and Social Progress, which raised concerns over growing inequality.

The need for addressing inequality is not just a populist or academic theme any more. It is gaining traction among some of America’s wealthiest. Peter Georgescu, the chairman emeritus of Young and Rubicam, in his New York Times Opinion piece, “Capitalists Arise: We need to deal with income inequality,” writes that if inequality is not addressed, the income gap will most likely be resolved in one of two ways: by major social unrest or through oppressive taxes. Mr. Georgescu proposes that government provide tax incentives to business to pay more to employees making $80,000 or less. It is, however, well established that current forms of subsidies, tax treatment, legal protection and other mechanisms aid the wealthy and often dampens economic gains for the rest.

Billionaire Paul Tudor Jones II, hedge fund manager and founder of Robin Hood Foundation noted in a TED Talk last year that current levels of extreme wealth gap will get closed. “History shows it usually ends in one of three ways—either higher taxes, revolution, or war. None of those are on my bucket list.” Mr. Jones supports higher wages for workers because he believes it is a better way to address inequality than raising taxes. One can appreciate where he is coming from even when the evidence is that we need to raise both wages and taxes given the current status quo. In an interview with Fortune magazine, he shares that he doesn’t care about the level of his taxes that much but he is generally against higher taxes because government spending is commensurately as inefficient as the tax itself. He believes that redistribution through the private sector would have a fivefold impact compared to redistributing wealth through fiscal means. Jones believes companies can afford to share more of their profits, which is near a 40 year high at 11.5%, without hurting the bottom line. But corporate America is already "warning" investors that a combination of factors - public demand and political pressure to increase state and federal minimum wages, rising payrolls, and industry specific issues - could make rising labor costs a bigger headwind for American companies in 2016.

Bill Gates, on the other hand, supports a progressive consumption tax. He believes that we will have to move away from taxing payroll because technology in general makes capital more attractive than labor over time. 

“Software substitution - whether it’s for drivers or waiters, nurses … it’s progressing. And that’s going to force us to rethink how these tax structures work in order to maximize employment given that capitalism in general over time will create more inequality, and technology over time will reduce demand for jobs, particularly at the lower end of the skill set. … Economists would have said a progressive consumption tax is a better construct at any point in history. But what I am saying is that it’s even more important as we go forward because … I want to distort in the favor of labor. …When people say we should raise the minimum wage — I know some economists disagree — but I worry about what that does to job creation. The idea that through the Earned Income Tax Credit you would end up with a certain minimum wage that you would receive, that I understand better than intentionally dampening demand in the part of the labor spectrum that I’m most worried about.” 

A recent report by the New York Times finds that other than a handful, such as financier George Soros, who supports progressive taxes, the 158 families that contributed half of the seed money or $176 million to support presidential candidates for 2016 in the initial phase of the campaign overwhelmingly support an agenda of pared regulations, lower taxes on income, capital gains and inheritances and shrinking social safety nets. These donors, mostly white, male and older believe that such measures are the surest path to preserving a system that would allow others to prosper, promote economic growth and help protect their own wealth. Another New York Times piece, "Raising Taxes on the Wealthiest Would Pay for Bold Plans" finds that " ... the government could raise large amounts of revenue exclusively from this small group, while still allowing them to take home a majority of their income."

As Warren Buffett wrote in 2011, 

"OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched." "These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species."

And, what do Americans want? According to a June 2015 New York Times/CBS News poll, two-thirds of Americans support higher taxes on those earning $1 million or more a year and six in 10 favor more government intervention to reduce the gap between the rich and the poor. In a survey of Harvard Business School Alumni, one in seven respondents acknowledged tax policy had contributed to widening inequality.

As noted by Robert McIntyre of Citizens for Tax Justice, back in 1984, economists across the political spectrum believe that the only real difficulty with a progressive consumption tax involves overcoming public misconceptions about it. McIntyre further notes that, 

“… quite the opposite from the thinking of the modern consumption taxers, it was once a popular notion that capital income should be taxed more heavily than wages. The original 1913 income tax law, for example, set generous personal exemptions that intentionally exempted almost all wage earners from taxation, so that the tax fell primarily on capital income—the “swollen fortunes of the rich.” In 1969, Congress concluded that wage -earners have to make more sacrifices than savers to turn a penny and set the maximum tax rate on wages at 50 percent, compared to 70 percent on “unearned” investment income. As economic analysis goes, however, all the above is pretty simple-minded. Mere theorizing, it has been shown, produces “indeterminate” answers about the incentive effects of a consumption tax versus an income tax. A serious economic evaluation ought to examine the various incentives and disincentives to work or not to work, to save or not to save, and then try to measure the impact of various tax rules on those incentives based on real evidence. Thus, for example, the conclusion that people will save more if the after-tax rate of return is higher—the underlying theme of the consumption taxers’ case —may be true some of the time.”

Since the publication of the bestselling book Capital in the Twenty-First Century by Thomas Piketty, some fear that we may head for an extreme tax hike. 

But as British economist Anthony B. Atkinson demonstrates in, Inequality: What Can be Done (the book focuses on Britain but many of the proposals are adaptable for other countries as well), which is reviewed by Piketty, while we can’t expect everything from fiscal redistribution, that is, however, where we have to begin.

At the core of Professor Atkinson’s agenda, as Piketty notes, is a rights-based approach to equity that aim to transform the operation of the markets for labor and capital for those who now have the fewest rights. Professor Atkinson calls for the need to broaden the agenda beyond taxes and transfers given the kind of redistribution needed to tackle current levels of extreme inequality. And, as Eduardo Porter correctly argues, “The trick to achieving a more equitable society might simply be to turn the government from an active participant in widening inequality, to one that at least seeks — through norms, laws, regulations — to narrow the gap.” The 158 families that have donated half the money for the 2016 elections were able to do so through channels legalized by the Supreme Court’s Citizens United decision five years ago.

Equally importantly, national governments can act and be held accountable without being constrained or delayed by international agreements or lack thereof. Professor Stiglitz and others propose the following targets for the goal of eliminating extreme inequality at the national level in every country, which do most harm to equitable and sustainable economic development and undermine social and political stability.

1. By 2030, reduce extreme income inequalities in all countries such that the post-tax income of the top 10 percent is no more than the post-transfer income of the bottom 40 percent.

Professor Stiglitz advocates for using the Palma Ratio, which effectively focuses on the ratio of incomes at the very top to those at the bottom, and, which is considered by many to be the best indicator for these targets. A Palma ratio of 1 is an ideal reached in only a few Scandinavian countries, which do not seem to suffer from the problems and injustices associated with extreme inequalities. Rather, these societies exhibit efficient, flexible, stable and equitable growth and development.

2. By 2020, establish a public commission in every country that will assess and report on the effects of national inequalities.

Professor Stiglitz and proponents argue that this is the more important target because “countries differ not just in how unequal they are now but also in their culture, tolerance of inequality of various kinds, and capacity for social change.” “A national dialogue would draw attention to the policies in each country that exacerbate inequality (for example, deficiencies in the education, legal or the tax and transfer system) and that simultaneously distort the economy and contribute to economic, political, and social instability but might most easily be altered.” These examples are discussed in Professor Atkinson’s book as well.

Abraham Lincoln signed the first federal income tax act into law many years ago.  Earlier this year, The Addis Tax Initiative, a Partnership for generating substantially more resources in capacity building in the field of taxation was initiated by the governments of Germany, the Netherlands, the United Kingdom, and the United States of America. Its goal is to enable countries to take responsibility, cooperate and support each other in developing a more robust and viable tax system.

Benjamin Franklin said,

 “In this world nothing can be said to be certain, except death and taxes.”

But in this age of unprecedented inequality and disruptive technological and climate change, progressive taxes, along with other common and uncommon sense measures, are needed for certain to enable a sharing and caring economy that fosters co-operation and cooperation and mobilizes adequate finances for sustainable development in the U.S and globally.