This month, Forbes magazine celebrated capitalist excess with the release of its 29th annual list of the 400 richest Americans. In the list’s first year, only 14 of the 400 were billionaires. This year, every person on the list had reached that pinnacle of wealth.
Leading the parade is Microsoft cofounder Bill Gates, with a net worth of $54 billion, followed by investment kingpin Warren Buffett, at $45 billion. Four members of the Walton family, whose deceased patriarch, Sam Walton, founded Wal-Mart, are collectively worth $83.8 billion. Energy and manufacturing tycoons Charles and David Koch—two brothers who fund tea-party activism and right-wing think tanks—have a combined fortune of $43 billion.
Forbes boldly claims that these billionaires’ fortunes are “a critical barometer of how well the nation—and, to a degree, the world—is doing”. Taking Forbes at its word, the world must be doing pretty well, because everyone in the top 20 has a net worth in excess of $12 billion.
However, the authors of two new books have challenged that assumption, arguing that a sharply growing income disparity between the rich and the middle class is, in fact, undermining the economy and contributing to severe financial instability. In The Trouble With Billionaires (Viking Canada, $34), Canadian authors Linda McQuaig and Neil Brooks point out that in the U.S., the top one percent of earners collected 24 percent of the national income in 2008, the year financial markets imploded. The last time this level of disparity occurred was in 1928—a year before a stock-market crash signalled the start of the Great Depression.
“As long as we leave the extreme inequality uncorrected, I don’t see how we’re going to avoid similar kinds of things in the not-so-distant future,” McQuaig, a Toronto journalist and author, told the Georgia Straight in a phone interview.
Brooks, a professor of tax law at Osgoode Hall Law School, described increasing inequality in income and wealth as Canada’s “major social and economic problem”. Moreover, he and McQuaig argue that tycoons, including Gates and Facebook entrepreneur Mark Zuckerberg, don’t deserve so much money because they are merely building on knowledge that has accumulated for centuries. The authors also emphasize that inventions are often a “direct result of substantial government funding of research”. Therefore, they say, these entrepreneurs’ profits should be shared more equitably through higher taxation.
“There isn’t any theory of distributive justice that would justify some people making 700 times the average industrial wage,” Brooks told the Straight by phone from Halifax. “If you’re in the top 0.01 percent, you’re making about 11,000 times the average industrial wage. That is simply immoral.”
The Trouble With Billionaires cites a vast amount of research demonstrating that increasing inequality imposes enormous costs on society. These include poorer overall health, higher infant mortality, declining life expectancies, and less social mobility.
In addition, McQuaig and Brooks maintain that greater income disparity results in a far less vibrant democracy, because plutocrats use their wealth to influence fiscal and monetary policy to their benefit. This can come through ownership of the media and through cultivating party-leadership candidates, developing political platforms, and funding right-wing think tanks and lobby groups. Given that the richest one percent collect about half of all capital gains in Canada, it shouldn’t come as a surprise that only half of these gains are counted as regular income for the purposes of taxation. Or that the super-rich saved an estimated $7.93 billion in taxes from 2000 to 2010, as a result of a change in capital-gains taxation, according to the authors.
“No political party, not even the NDP, has made equality a political issue,” Brooks said. “I guess that’s one reason why we wrote this book.”
In the other new book, Aftershock: The Next Economy and America’s Future (Alfred A. Knopf, $28.95), economist and former U.S. labour secretary Robert Reich makes the case that stagnating middle-class incomes have diminished overall purchasing power. He emphasizes that unless average people receive a greater share of the national income, they won’t have enough money to buy all the goods and services being produced, creating overcapacity.
At the same time, Reich points out that the super-wealthy devote a far greater portion of their wealth to chasing returns in the investment markets because they lack the personal resources to spend their money on goods and services. “It is a problem few of us are acquainted with, but the fact is that the richest human beings find it difficult to spend more than a fraction of their incomes, notwithstanding an abundance of pricey temptations,” Reich writes. “The sheer magnitude of the task of spending obscene amounts of money can be surprisingly challenging. Few people have the time, energy, or stamina that’s required.”
Reich, who wasn’t available for an interview, writes that three “coping mechanisms” enabled middle-class Americans to keep buying goods and services in recent years despite flat incomes: women moved into the workforce in greater numbers; most people worked longer hours; and Americans drew down savings and accumulated higher debt loads. “Eventually, of course, the debt bubble burst,” Reich writes. “With it, the last coping mechanism disappeared.”
In both Canada and the U.S. during the late 1970s, the top one percent collected only about eight percent of the national income. Brooks told the Straight that by 2007, the top one percent of earners in Canada had increased their share to 16 percent, which is almost as high as it was a century ago. He noted that throughout the post–Second World War period, until the late 1970s, the top marginal tax rates for high-income earners were 70 to 80 percent. This corresponded with Canada’s lowest rates of unemployment and highest sustained periods of economic growth.
Brooks states that in the late 1970s, the wealthy began fighting back by funding think tanks in a “deliberate and aggressive strategy” to regain their privileged position. As president, Ronald Reagan introduced huge tax cuts, which were later copied by other politicians, including B.C. premier Gordon Campbell. The highest combined federal and provincial tax rate in B.C. now stands at 43.7 percent.
Brooks said that regardless of the tax rates, many of the super-rich are not declaring all of their incomes. “Estimates are that about one-third of personal wealth of these high-income individuals is held in tax havens,” he said. “So the question is: how does any one country find out about that? There isn’t any way you can do it. We’ve got these exchange-of-information agreements with some of these tax-haven countries but they’re absolutely worthless, because in order to get the information, the Canadian government has to come up with a name. It has to show it has reasonable grounds for suspecting the person.”
When asked to describe the difference between The Trouble With Billionaires and Aftershock, Brooks said that his book makes a moral case for imposing sharply higher taxes on the rich, who he believes pose a threat to democracy. He claimed that Reich, on the other hand, is “primarily concerned” about middle-class incomes and making an economic argument for reducing inequality. “Namely, middle-class people have to have enough money to create a demand for goods and services that are being produced,” Brooks added.
Both books highlight eerie parallels between the financial crashes of 1929 and 2008. In The Trouble With Billionaires, McQuaig and Brooks trace the roots of the earlier crash to a 1911 meeting at the White House between then-president William Howard Taft and representatives of two of America’s most powerful capitalists, John D. Rockefeller and J. P. Morgan. Banks controlled by these tycoons had set up affiliates to trade stocks and bonds in violation of U.S. law. Taft ended up overruling his solicitor general, who wanted to halt this practice.
That was followed in the 1920s by massive tax cuts for the wealthy under successive Republican administrations, which resulted in a torrent of money flowing into the stock market. Meanwhile, mortgage debt in the U.S. tripled between 1920 and 1929, before the financial bubble finally burst.
This cycle was repeated after 1980 in Canada and the United States, as a result of intense lobbying by the financial-services sector on both sides of the border. Walls were broken down between banks, insurance companies, and securities dealers. In recent years, Wall Street banks began bundling what were to become known as toxic mortgages, which were sold as securities to unsuspecting investors. A clever hedge-fund manager, John Paulson, took advantage of the situation and generated a $3.7-billion income in 2007 by speculating that the housing market would collapse. The Trouble With Billionaires reveals that another hedge-fund manager, David Tepper, collected $4 billion in 2009 on bets that the U.S. government would rescue the banks.
“One of the reasons they [politicians] haven’t been able to get proper reregulation through is because the financial elite on Wall Street remains absolutely dominant,” McQuaig explained to the Straight.
Former president Franklin Delano Roosevelt’s administration strengthened regulation and increased taxes on the rich in the 1930s, but President Barack Obama has not been nearly so eager to take such steps. “Consequently, the middle class will not be able to buy nearly enough to keep the economy going,” Reich predicts in his book. “Neither richer Americans nor foreign consumers will fill the gap. All of this will constitute the Great Recession’s aftershock. From it will emerge either a political backlash—against trade, immigration, foreign investment, big business, Wall Street, and government itself—or large-scale reforms that reverse the underlying trend.”
Aftershock and The Trouble With Billionaires each argue for higher taxes on the wealthy, among other measures. Reich would tax income beyond US$410,000 at 55 percent and income between US$260,000 and US$410,000 at 50 percent. For their part, McQuaig and Brooks would raise the top marginal tax rate to 60 percent for those earning more than $500,000 and 70 percent on any income above $2.5 million. They also recommend closing loopholes that allow businesspeople to hide their money in tax havens and to write off the cost of meals and entertainment.
Brooks pointed out that the European Union requires banks in member countries to send financial statements to the tax departments of countries where their depositors reside. He suggested that with sufficient international cooperation and negotiation, this could be extended to tax havens around the world, thus preventing billionaires from simply stashing income off the financial grid.
McQuaig said her favourite policy prescription in The Trouble With Billionaires is to reinstate an inheritance tax, which would fund a $16,000 educational trust for every child in Canada. She and Brooks propose allowing up to $1.5 million worth of inheritances and gifts tax-free. From there, a low tax rate would apply, rising to 70 percent on those who inherit in excess of $50 million. This would encourage the super-wealthy to distribute their money to a larger number of people to minimize the amount of tax paid.
McQuaig emphasized that when the top one percent of income earners controlled only eight or nine percent of the national income in the 1970s, they didn’t have enough political clout to quash ideas like this. “Money, to a certain extent, equals power,” she pointed out. “When money is more widely distributed, you get more distributed power.”