The key arguments for high top rates of income tax are political as well as pecuniary

When people complain that neoliberalism is a meaningless concept, I should point them to what has happened to the top rate of income tax since around 1980, not just in the US and UK but elsewhere. (Source HT Marcel Fratzscher)

Here is a chart of the United States top tax rate over the last century (HT Martin Sandbu). Eisenhower had top earners paying a 91 percent marginal rate.

No doubt there are complex reasons for these reductions, but key among them has to be a neoliberal belief that cutting top rates would lead to more dynamic CEOs who would produce more dynamic companies, and the benefits of this would trickle down to the economy as a whole. Low top tax rates would encourage entrepreneurs to take more risks that were socially beneficial and so on. The argument is so familiar, trotted out routinely by right wing think tanks, it hardly needs elaborating. It is a classic example of neoliberals using a bit of simple economics to justify policy that is advantageous to themselves or their paymasters.

Yet the evidence for such an effect is weak, at best. The intuition for why it should be weak is straightforward. Above a certain level of income, other incentives beyond the purely pecuniary become important. Top CEOs, like top footballers, want to be successful at what they do, and more successful than others. They will want success whatever the overall financial rewards of being successful.

Another bit of basic economics that neoliberals hardly ever mention is the diminishing marginal utility of consumption. This implies quite the opposite of low tax rates at the top. It is socially much more beneficial to tax those to whom one dollar is not worth the effort of picking off the sidewalk and transfer it to those who are poorer. A well known paper by Diamond and Saez found that, after allowing for disincentive and avoidance effects, the optimal top rate of income tax in the US should be 73%. [1] [2]

There are two reasons why even 73% might be an underestimate. Piketty, Saez and Stantcheva have argued that giving CEOs lots of money can have negative incentive effects. The CEOs start putting effort into increasing their salary rather than improving their firm. Part of your status comes from what you can afford. When all CEOs are taxed a lot at the margin the size of your salary has little impact on that, but when your salary is not taxed so much you can increase your salary and theefore status by extracting more from your own firm. To use some economics jargon, a low marginal tax rate on top incomes can be a good example of an incentive for rent extraction rather than an incentive for increasing social output. .

But while an extra dollar for a CEO is not going to incentivise them in a positive way very much, you could argue that it incentivises those with talent to aspire to be CEOs. CEOs are always going to be among the richest in society, because a lot of their income will be taxed at lower rates. A paper by Lockwood, Nathanson and Weyl turns that argument on its head. High salaries are associated with activities, like finance and law, that have what economists would call negative externalities, which means that they do much less good for society than the size of the salaries they pay might suggest. A lot of finance, for example, is about trying to take money off other people rather than growing the size of the overall pie. If high post-tax salaries incentivise talented people into those professions, that is negative for society, which would benefit if they worked in different jobs. You can reduce this misallocation of talent by having higher tax rates on top incomes.

Neoliberals have one last line of defence against raising top tax rates in a single country, and that is migration. The argument is that talent, which could be quite mobile, will move to where talent is most rewarded. There is clear evidence that this is true, to an extent. This concern does not mean we leave top tax rates where they currently are or even reduce them, but simply that we might not put them up as high as they should otherwise go while some countries that are attractive to talent continue to have low tax rates on top incomes. Sweden seems to do pretty well with a 70% effective top tax rate.

This danger of a race to the bottom with top tax rates makes it all the more important that the United States raises it’s top marginal tax rate, along the lines recently suggested by Democrat Alexandria Ocasio-Cortez. For various fairly obvious reasons the US does not need to worry too much about a talent drain if it raised top tax rates.

In my view the arguments for higher top tax rates are at least as much non-pecuniary, by which I mean they do not depend on the points raised so far. The evidence that social welfare is higher in more equal societies seems compelling to me. In other words we should increase top tax rates just because that helps produce a more equal society. I have seen a few attempts to debunk the evidence for this in The Spirit Level, but they are not convincing as a collective, while there is even more evidence to support the idea that people are happier in more equal societies..

There is a final argument for high tax rates at the top which seems particularly relevant to the US and UK at the moment. If you have a political system like the US where money easily buys political influence, you will find some of those who earn very high salaries trying to do exactly that (some references here). You can create the kind of plutocracy I discuss here. Because money can also help to buy votes, that plutocracy may also be able to continue with democratic elections without in any way threatening the plutocracy. Even when you have laws limiting the amount that can be spent on elections, the UK shows there are ways for the rich to get around that, particularly if they control large sections of the press.

This is the argument made in this excellent NYT op-ed by Emmanuel Saez and Gabriel Zucman. They write

“An extreme concentration of wealth means an extreme concentration of economic and political power. Although many policies can help address it, progressive income taxation is the fairest and most potent of them all, because it restrains all exorbitant incomes equally, whether they derive from exploiting monopoly power, new financial products, sheer luck or anything else.”

The economist Greg Mankiw, in a short response to this op-ed, says

“most rich people I know would have been happy to spend vast sums of money to keep Mr Trump out of the White House. And many tried. The Trump phenomenon is not an argument that the moneyed elites have too much influence on politics. If anything, it is an argument that they have too little.”

But this misunderstands (as some on the left do) the nature of the plutocracy that super incomes and wealth create. It does not, as I make clear here, create a kind of committee of the very rich that between them decide who rules. It is much more erratic than this. Instead it allows small groups among the very wealthy, who may be quite unrepresentative, to hijack a democratic system. Trump and Brexit are clear examples. Mankiw is right that one way to avoid that would be to create a more representative kind of plutocracy, but a far better way of avoiding disasters of this kind is to deal with the problem at its source, by reinstating high rates of tax on top incomes.

[1] Some intuition on this number. If disincentive and avoidance effects were so large that an increase in tax rates led to no additional income, then there is no pecuniary advantage from doing so. If these effects did not exist, the optimal marginal rate at the top would be 100%. The paper estimates these effects are somewhere between these two extremes, so the optimum tax rate at the top will be between zero and 100%.

[2] For a discussion of these issues in a UK context, see https://www.ifs.org.uk/publications/9678. Note that HMRC calculations that the short-lived raising of the UK top tax rate to 50% did not raise any revenue involve debatable assumptions, and much of the avoidance only worked because the hike was temporary.    

Trump and Corporatism

For many years some have seen the US as a form of corporatism* - as a country run in the interests of the corporations and those who lead them. There is considerable evidence that in many senses they are correct. However to see Trump as the epitome of this ‘rule by corporations’ I think misses something important. Trump is different from what went before in important respects.

The way business influenced politicians in the past was straightforward. Campaigns cost a lot of money (unlike the UK there are no tight limits on how much can be spent), and business can provide that money, but of course corporate political donations are not pure altruism. The strings attached helped influence both Republican and Democratic politicians. It was influence that followed the money, and that meant to an extent it was representative of the corporate sector as a whole. The same point can be made about political lobbying. 

The government of Donald Trump is different. It is a selective plutocracy, and with one important exception that plutocracy is selected by Trump. In that way it can also be seen as a democratic dictatorship, where the complexity of government requires some delegation of power to other individuals. Like many dictatorships, some of those individuals are the dictator’s family members.

A dictatorship of this form would not be possible if Congress had strongly opposed it. That it has not is partly because the Republican party chooses not to oppose, but also because Trump wields a power over Congress that can override the influence of corporate money. That power comes from an alliance between Trump and the media that has a big influence on how Republican voters view the world: Fox News in particular but others as well. The irony is that under these conditions democracy in the form of primaries gives Trump and the media considerable power over Congress.

The distinction between traditional corporate power ‘from below’ and the current Trumpian plutocracy can be seen most clearly in Trump’s trade policy. It would be a mistake to see past US trade policy as an uninterrupted promotion of liberalisation, but I think it is fair to say that trade restrictions have never been imposed in such a haphazard way, based on such an obviously false pretext (US surpluses good, deficits bad). Trump’s policy is a threat to the international trading system that has in the past been lead by the US, and therefore it is a threat to most of corporate USA. Yet up till now Congress has done very little to stop Trump’s ruinous policy.

The photo above is taken from an extraordinary recent event (watch here) where Trump walks down a line of senior executives, who in turn stand up and say what they are doing for the US and pledge to do more. Each statement is applauded with a positive statement by Trump, as his daughter trails behind. These are top companies: IBM, Microsoft, General Motors etc. It is all a show, of course, but of a kind the US has never seen before. It seems indicative that this is not just a continuation of past corporatism but something quite different. These are corporate executives doing the President’s bidding for fear or favour.

All this matters because it creates a tension that could at some stage drive events. So far the Republican party has been prepared to allow Trump to do what he wishes as long as didn’t require their explicit approval (i.e their votes in Congress), but it has not as yet bent its collective agenda to his. (Arguments that it already has tend to look at past Republican rhetoric rather than actions.) This uneasy peace may no longer become tenable because of developments on trade, or Russia, or the mid-term election results. If enough Republicans think their future is safer by opposing Trump rather than indulging him, they still have the power to bring Trump to heel. But the longer the peace lasts, Trump’s influence on the Republican party will only grow.

* Readers outside the US may be confused by my use of the term corporatism: it is one of those terms with many meanings. I'm using it in the fourth and final sense described here.

If we treat plutocracy as democracy, democracy dies

The snake-oil salesmen

There are many similarities between Brexit and Trump. They are both authoritarian movements, where authority either lies with a single individual or a single vote: the vote that bindsthem all. This authority expresses the movement’s identity. They are irrational movements, by which I mean that they cast aside expertise where that conflicts with the movements wishes. As a result, you will find their base of supporters among the less well educated, and that universities are seen as an enemy.  Both groups are intensely nationalistic: both want to make America or England great again.

It is easy to relate each group to familiar concepts: class, race or whatever. But I think this classification misses something important. It misses what sustains these groups in their beliefs, allows them to maintain their world view which is so often contradicted by reality. Both groups get their information about the world from a section of the media that has turned news into propaganda. In the US this is Fox, and in the UK the right wing tabloids and the Telegraph.

A profound mistake is to see this media as a symptom rather than a cause. As the study I spoke about here clearly demonstrates, the output of Fox news is not designed to maximise its readership, but to maximise the impact of its propaganda on its readership. I think you could say exactly the same about the Sun and the Mail in the UK. Fox and the Sun are owned by the same man.

Even those who manage to cast off the idea that this unregulated media just reflects the attitude of its readers, generally think of this media as supportive of political parties. There is the Conservative and Labour supporting press in the UK, and similarly for the US. In my view that idea is ten or twenty years out of date, and even then it underestimates the independence of the media organisations. (The Sun famously supported Blair in 1997). More and more it is the media that calls the shots, and the political parties follow.

Brexit would not have happened if it had remained the wish of a minority of Conservative MPs. It happened because of the right wing UK press. Brexit happened because this right wing press recognised a large section of their readership were disaffected from conventional politics, and began grooming them with stories of EU immigrants taking jobs, lowering wages and taking benefits (and sometimes much worse). These stories were not (always) false, but like all good propaganda they elevated a half-truth into a firm belief. Of course this grooming played on age old insecurities, but it magnified them into a political movement. Nationalism does the same. It did not just reflect readers existing views, but rather played on their doubts and fears and hopes and turned this into votes.

This is not to discount some of the very real grievances that led to the Brexit vote, or the racism that led to the election of Trump. This analysis of today's populism is important, as long as it does not get sidetracked into debates over identity versus economics. Stressing economic causes of populism does not devalue identity issues (like race or immigration), but it is the economics that causes the swings that help put populists in power. It was crucial, for example, to the trick that the media played to convince many to vote for Brexit: that EU immigrants and payments were reducing access to public services, whereas in reality the opposite is true.

Yet while economic issues may have created a winning majority for both Brexit and Trump, the identity issues sustained by the media make support for both hard to diminish. Brexit and Trump are expressions of identity, and often of what has been lost, which are very difficult to break down when sustained by the group’s media. In addition both Trump and Brexit maintain, because their proponents want it to be maintained, the idea that it represents the normally ignored, striking back against the government machine in the capital city with all its experts.

But to focus on what some call the ‘demand’ for populism is in danger of missing at least half the story. Whatever legitimate grievances Brexit and Trump supporters may have had, they were used and will be betrayed. There is nothing in leaving the EU that will help the forgotten towns of England and Wales. Although he may try, Trump will not bring many manufacturing jobs back to the rust belt, and his antics with NAFTA may make things worse. Identifying the left behind is only half the story, because it does not tell you why they fell for the remedies of snake-oil salesmen.

As I wrote immediately after the vote in my most widely read post, Brexit was first and foremost a triumph for the UK right wing press. That press first fostered a party, UKIP, that embodied the views the press pushed. The threat of that party and defections to it then forced the Prime Minister to offer the referendum the press wanted. It was a right wing press that sold a huge lie about the UK economy, a lie the broadcast media bought, to ensure the Conservatives won the next election. When the referendum came, it was this right wing press that ensured enough votes were won and thereby overturned the government.

Equally Donald Trump was first and foremost the candidate of Fox News. As Bruce Bartlett has so eloquently written, Fox may have started off as a network that just supported Republicans, but its power steadily grew. Being partisan at Fox became misinforming its viewers, such that Fox viewers are clearly less well informed than viewers of other news providers. One analysis suggested over half of the facts stated on Fox are untrue: UK readers may well remember them reporting that Birmingham was a no-go area for non-Muslims.

Fox became a machine for keeping the base angry and fired up, believing that nothing could be worse than voting for a Democrat. It was Fox News that stopped Republican voters seeing that they were voting for a demagogue, concealed that he lied openly all the time, that incites hatred against other religions and ethnic groups, and makes its viewers believe that Clinton deserves to be locked up. It is not reflecting the views of its viewers, but moulding them. As economists have shown, the output of Fox does not optimise their readership, but optimises the propaganda power of its output. Despite occasional tiffs, Trump was the candidate of Fox in the primaries.

We have a right wing media organisation that has overthrown the Republican political establishment, and a right wing press that has overthrown a right wing government. How some political scientists can continue to analyse this as if the media were simply passive, supportive or even invisible when it brings down governments or subverts political parties I do not know.

The plutocracy

Trump and Brexit are the creations of a kind of plutocracy. Politics in the US has had strong plutocratic elements for some time, because of the way that money can sway elections. That gave finance a powerful influence in the Democratic party, and made the Republicans obsessive about cutting higher tax rates. In the UK plutocracy has been almost non-existent by comparison, and operated mainly through party funding and seats in the House of Lords, although we are still finding out where the money behind the Brexit campaign came from.

By focusing on what some call the demand side of populism rather than the supply side, we fail to see both Trump and Brexit as primarily expressions of plutocratic power. Trump’s administration is plutocracy personified, and as Paul Pierson argues, its substantive agenda constitutes a full-throated endorsement of the GOP economic elite’s long-standing agenda. The Brexiteers want to turn the UK into Singapore, a kind of neoliberalism that stresses markets should be free from government interference, rather than free to work for everyone, and that trade should be free from regulations, rather than regulations being harmonised so that business is free to trade.

It is also a mistake to see this plutocracy as designed to support capital. This should again be obvious from Brexit and Trump. It is in capital’s interest to have borders open to goods and people rather than creating barriers and erecting walls. What a plutocracy will do is ensure that high inequality, in terms of the 1% or 0.1% etc, is maintained or even increased. Indeed many plutocrats amassed their wealth by extracting large sums from the firms for which they worked, wealth that might otherwise have gone to investors in the form of dividends. In this sense they are parasitic to capital. And this plutocracy will also ensure that social mobility is kept low so the membership of the plutocracy is sustained: social mobility goes with equality, as Pickett and Wilkinson show.

It is also a mistake to see what is happening as somehow the result of some kind of invisible committee of the 1% (or 0.1% and so on). The interests of the Koch brothers are not necessarily the interests of Trump (it is no accident the former want to help buy Time magazine). The interests of Arron Banks are not those of Lloyd Blankfein. Instead we are finding individual media moguls forming partnerships with particular politicians to press not only their business interests, but their individual political views as well. And in this partnership it is often clear who is dependent on whom. After all, media competition is slim while there are plenty of politicians.

What has this got to do with neoliberalism? which is supposed to be the dominant culture of the political right. As I argued here, it is a mistake to see neoliberalism as some kind of unified ideology. It may have a common core in terms of the primacy of the market, but how that is interpreted is not uniform. Are neoliberals in favour of free trade, or against? It appears that they can be both. Instead neoliberalism is a set of ideas based around a common belief in the market that different groups have used and interpreted to their advantage, while at the same time also being influenced by the ideology. Both interests and ideas matter. While some neoliberals see competition as the most valuable feature of capitalism, others will seek to stifle competition to preserve monopoly power. Brexiters and their press backers are neoliberals, just as the Cameron government they brought down were neoliberals.

I think there is some truth in the argument, made by Philip Mirowski among others, that a belief in neoliberalism can easily involve an anti-enlightenment belief that people need to be persuaded to subject themselves fully to the market. Certainly those on the neoliberal right are more easily persuaded to invest time and effort in the dark arts of spin than those on the left. But it would be going too far to suggest that all neoliberals are anti-democratic: as I have said, neoliberalism is diverse and divided. What I argued in my neoliberal overreach post was that neoliberalism as formulated in the UK and US had made it possible for the plutocracy we now see to become dominant.

By the nature of an unorganised plutocracy, what types of neoliberalism hold sway may be largely random, and depend a lot on who owns media organisations. It leads to a form of politics which is in many ways unpredictable and irrational, with an ever present tendency to autocracy. This is what we are witnessing, right now, in the UK and US. It is not the normal politics that either of these countries are used to, although it may be more familiar to those in quasi-dictatorships. We all know about how the Republican’s tax cutting bill just happens to favour real estate moguls who inherit their money as Trump did. This is simple corruption, enacted in a corrupt way. That the President of the United States retweeted a British far right group that inspired an individual to murder a British MP is not normal. When Brexit supporting MPs respond to the Irish border problem by saying ‘we are not going to put one up’ this should not pass as an acceptable response: it should be laughed at as the nonsense it is.

When politics becomes the whims and mad schemes of a small minority that only listen to themselves, unmodified by the normal checks and balances of a functioning democracy, it should be treated by the non-partisan media for what it is, not normalised as just more of the same. If we treat a plutocracy as a democracy, democracy dies. We should not be fooled that this plutocracy looks like normal politics just because the plutocrats have taken over the main party of the right.

A dividing point

We are very close to a point where neoliberalism becomes something much worse. The POTUS is following a fascist strategy of demonising a religious minority. If Mueller’s investigations proceed as expected, but he is sacked and/or the Republicans block any attempt at impeachment, we may have passed that critical point. If the Brexiters succeed in breaking away from the EU’s customs union and single market, the UK may have nowhere else to go but the arms of a permanently Republican US.

If there is a way of escaping this fate, and rescuing democracy in both the UK and US, it has to involve a democratic defeat of the right wing parties that allowed this plutocracy to emerge, and indeed encouraged it and then made bargains with it when it believed it was still in control. The defeat has to be overwhelming and total. Those who brought us Brexit and backed or tolerated Trump have to be disgraced as the harbingers of disaster. Their control of the Republican and Conservative parties must end.

Only that will allow the left, and I think it has to be the left, to end a system by which elements of the plutocracy can control so much of the means of information. In the UK that means extending rules that apply to broadcasters, suitably adapted, to the press. In the US it means not just bringing back the Fairness doctrine repealed under Reagan, but also bringing controls on election spending similar to those in the UK (and the UK controls need to be strengthened). In short, we need to take money out of politics to ensure democracy survives. Give journalists the freedom to write about or broadcast the news as they see it, rather than as their employer want it to be seen.

Why the left rather than the centre? The centre will agonise over what this means for freedom of expression or freedom of the press and therefore nothing much will happen (see Leveson), as nothing happened under Clinton or Blair. That may be a little unfair to both leaders, because the danger of plutocracy may have been less obvious back then, and the media was more restrained. But with Brexit and Trump no further evidence is needed. The left should see more clearly how in practice this freedom is in reality just a freedom to sustain a plutocracy. Only it will have the courage to radically reverse the power and wealth of the 1%. I fear the centre will not have the will to do it. Although Anthony Barnett’s focus differs from mine, he puts this point very well here: if all you want to do is stop Brexit and Trump and go back to what you regard as normal, you miss that what was normal led to Brexit and Trump.

That will have many wise and sensible people shaking their head, but the alternative does not work. Defeating or impeaching Trump and letting the Republican party survive in its current form achieves little, because they will go on gerrymandering and Fox news will go on poisoning minds. The energy of Democrats will be spent on trying to clear up the damage Trump has caused, and the next autocrat from Republican ranks who wins power because they will ‘clear the swamp’ will be smarter than Trump. In the UK, if the Conservatives survive in their current form, their ageing membership is in danger of selecting more Brexit nutters who will overwhelm the dwindling number of reasonable Conservative MPs. We will find the BBC, if it survives at all, will become more and more like the mouthpiece of a press dominated by plutocrats. [1] In either case a critical point will have passed.

I know from many conversations I have had that there is a deep fear among many of leadership from the left. Here the UK is ahead of the US. The story in the UK used to be that the left could never win, and it was a plausible story, but recent events have cast great doubt on it. That remains the story in the US, but there are good reasons for doubting it there too. There is no reason why all of the disenchanted who fell for the lies of the snake-oil salesmen could not support radical remedies from the left: identity and the media are strong but it is economics that dictates the swings.

In the UK now the story seems much more elemental: that somehow the left threatens the existence of capitalism and democracy. In truth there is no way Corbyn could persuade the Labour party to abandon democratic capitalism, just as there is no way Sanders or Warren could do the same in the US. All we are talking about is rolling back many of the results of neoliberalism. But it is difficult to logically convince someone the ghosts they see do not exist. In contrast to these ghosts on the left, the dynamic of plutocracy that I have described here is very real, and it requires radical change to bring an end to this dynamic.

[1] This is why arguments that say the UK press is becoming less powerful because of its falling readership fail. If this press dominate the news agenda of the broadcasters, they do not need many readers.