In this engaging book, leading analyst Sam Pizzigati details how egalitarians worldwide are demonstrating that a “maximum wage” could be both economically viable and politically practical. He shows how, building on local initiatives, governments could use their tax systems to enforce fair income ratios across the board.
The ultimate goal? That ought to be, Pizzigati argues, a world without a super rich. He explains why we need to create that world — and how we could speed its creation.
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Where does excess – in income – begin? At what point should society step in and say to any one individual that you simply make too much? Does too much begin at $1 million a year? Or £250,000? Or ¥500,000?
Any specific cap on monetary income, let's acknowledge at the outset, would have to be somewhat arbitrary. In the natural world, numbers that divide one state from another can be specific and unassailable. Water boils at 100 degrees centigrade. Water freezes at zero. In human social relations, by contrast, absolute numerical certainty will forever remain beyond our reach. Any limits we set in human affairs will always be at least a little bit capricious.
Take speed limits. Many nations limit speeds on major thoroughfares to no more than 110 kilometers per hour. But if we shifted that limit to 108 or 111, traffic would move along just as safely. None of us would consider this imprecision a reason to go without limits on how fast we drive. Any specific speed limit, we understand, will always reflect a judgment call. We humans can make good judgments. We can make poor judgments. Perfect judgments? Those we cannot make.
Minimum wage levels reflect our imperfections. The United States now has metropolitan areas where employers in one political jurisdiction must by law pay their workers at least $15 per hour while employers right next door in adjoining jurisdictions can legally get by paying a mere $7.25. Some public officials have clearly made a poor judgment. Workers in both the $15 and $7.25 jurisdictions have similar basic needs. The minimum required to live in decency simply cannot be twice as high in one jurisdiction as another.
In situations like these, those of us who care about fairness do not throw up our hands in frustration – or rail against the foolishness of trying to set a minimum wage. We instead commit ourselves to mending our inadequate minimums. We press public officials to make better judgments.
Similar dynamics would be at play with any future maximum wage. Specific maximum set-points would surely evolve over time, just as minimum wage levels have evolved. In the United States, employers had to pay only 25 cents an hour to meet the standard that the first national minimum wage set in 1938. The national minimum since then has increased, after adjusting for inflation, by two-thirds.
Let's also acknowledge another basic imprecision in these musings on maximums. Our label of choice for the policy outcome we seek, a "maximum wage," does not quite connote all that we need our label to express. We seek ultimately a cap on personal income. But setting a cap on wages– the compensation individuals receive in exchange for their labor – will not necessarily limit income because paychecks make up only one element of income, especially for our richest. An income cap that limits only compensation would leave our over-all economic divides still unconscionably wide – and dangerous. We need more than a cap on wages.
So why aren't egalitarians talking about a "maximum income"? The "maximum wage" label simply makes more sense to more people. Most of us already understand why we need minimum wages. A "maximum wage" phrasing builds on this understanding, the prime reason why advocates for capping income so commonly use it.
We could, to be sure, choose to define a maximum wage more literally. Laws that establish minimum wages require employers to pay workers at least a set specific sum. A law establishing a maximum wage could do the exact reverse and explicitly prohibit employers from paying anyone more than a set specific sum.
This approach has never attracted much interest among egalitarians. Most "maximum wage" proposals over the years have instead involved taxing away all income over a particular point. One of the earliest of these proposals came from the German-born philosopher Felix Adler. In 1880, Adler proposed a steeply graduated income tax, with a 100 percent top rate at the point "when a certain high and abundant sum has been reached, amply sufficient for all the comforts and true refinements of life." This 100 percent top rate, Adler explained to a packed Gilded Age lecture hall in New York City, would leave any wealthy man with "all that he can truly use for the humane purposes of life" and tax away "only that which is to him merely a means of pomp and pride and power."
Coverage in the New York Times gave Adler's call for an income maximum some significant circulation,1 but the notion of a maximum wage wouldn't take specific legislative shape in the United States until World War I, when progressives demanded a 100 percent tax on all income over $100,000 to more equitably finance the war effort. Their energetic efforts would totally alter the tenor of America's political discourse on taxes. The nation's top tax rate on income over $1 million, just 7 percent in 1914, would soar to 77 percent in 1918.
That top rate would sink back down to 25 percent in the 1920s, in the wake of the "Red Scare" that hammered the progressive movement right after World War I. But egalitarians would regain the political momentum during the Great Depression in the 1930s, and then a world war would once again shake up the tax structure. In 1942, just months after Pearl Harbor, President Franklin D. Roosevelt called for a 100 percent tax on individual income over $25,000, the equivalent of about $375,000 today. Lawmakers in Congress didn't give FDR his 100 percent top rate. But they did before the war's end hike the top tax rate on income over $200,000 to a record 94 percent.
America's top tax rate would hover around 90 percent for the next 20 years, a span that would witness the emergence of the first mass middle class in world history. By 1960, the clear majority of Americans, after paying for the basics of food and shelter, had disposable income. That had never happened before, in any modern nation. But the United States would not remain exceptional for long. In the decades after World War II, nations throughout the developed world taxed the rich stiffly and grew the middle class quickly.
Most of the developed world, in these post-war years, became significantly more equal. Back in 1928, the year before the Great Depression began, America's top 1 percent had raked in nearly a quarter of the nation's income, the bottom 90 percent only half. By 1970, the top 1 percent share had dropped below a tenth of the nation's income total, and the share going to America's bottom 90 percent had jumped to over two-thirds. European nations witnessed similar distributional shifts over the same period. In the United Kingdom, the top 1 percent's share of national income dipped from nearly 20 to just over 5 percent, in France from over 23 to under 9 percent. In Sweden, the top 1 percent income share plummeted from over 28 to under 4 percent.
This mid-twentieth-century egalitarian success raises an obvious political question for those of us who advocate capping, not just robustly taxing, income at society's summit. Why bother struggling for an outright lid on income – a daunting political task in even the most favorable of circumstances – when history shows that an income tax with steeply graduated tax rates can usher in substantially higher levels of economic equality?
In fact, we have good cause for not simply seeking to restore the steeply graduated progressive tax rates of the mid-twentieth century. Those steep tax rates could not be sustained. In the United States, they lasted a generation, only slightly longer in other developed nations.
Why did high tax rates on high incomes disappear? The rich did them in.
In the United States, the mid-twentieth-century rich longed for the comfortable world that "confiscatory" tax rates had upended. America's wealthiest felt "battered by the income tax," as Fortune, America's leading business magazine, reported in 1955. Some top corporate executives, the influential magazine related, "may cough up" to Uncle Sam "as much as 75 per cent" of their total incomes. Back in 1930, Fortune wistfully noted, the high-salaried executive "arrived at his office in his chauffeur-driven Pierce-Arrow." His 1955 counterparts, by contrast, were driving themselves "through the morning chaos." Early twentieth-century private yachts early had stretched over 300 feet long. In the America of the 1950s, Fortune lamented, 75 feet had come to seem "a lot of yacht."
But the wealthy did more than grouse against America's mid-century tax progressivism. They connived to subvert the federal tax code at every opportunity. They schemed to puncture the code with new loopholes. They bankrolled candidates who pledged to protect the precious loopholes – like the enormously lucrative oil depletion allowance – that had somehow survived Franklin Roosevelt's New Deal tax offensive. Above all else, wealthy Americans pressed for lower tax rates on income in the top tax brackets. They considered high tax rates a direct personal affront and felt viscerally invested in the drive to cut these rates back. Every point the rich could manage to shave off the nation's top tax rate would, they fervently believed, speed chauffeurs and long, lush yachts back into their lives.
The wealthy, in other words, had an intense personal stake in lowering top-bracket tax rates, and this intense stake gave the twentieth-century political debate over tax rates a basic – and ongoing – asymmetry. The aggrieved rich could see an immediate personal payoff from lower top rates. For everyone else, that immediacy just didn't kick in. The real and significant benefits average Americans were gaining from high taxes on high incomes were playing out too subtly to see.
High tax rates on high incomes, for instance, gave top corporate executives less incentive to exploit workers and shortchange consumers. Why make the effort to squeeze still another dollar of profit out of ordinary-income people when the personal gains that squeezing might bring would face a tax rate of over 90 percent?
This sort of benefit from significantly taxing the rich went largely unappreciated. Ordinary-income people felt no compelling personal need to keep top tax rates high. That left the rich with motive and opportunity to pull off the perfect class-war crime.
In the United States, the top income-bracket tax rate fell from 91 percent in 1963 to 70 percent in 1965 to 50 percent in 1982 to 28 percent in 1988, before bouncing around and ending up, at the close of the Obama years, at 39.6 percent. In 2017, even with two additional special taxes put in place to help finance the Obama health care reform, America's richest were on average paying federal income taxes at less than half the rate their wealthy forebears paid in the mid-twentieth century.
Tax rates in the United Kingdom underwent a similar downward spiral. The top British tax rate – 97.5 percent at the end of World War II – had spiraled down to 40 percent by the late 1980s. The French top rate, 90 percent on the eve of World War II, was hovering at 65 percent in 1983 and then dropped to 40 percent in 2007. In New Zealand, the top rate fell by half in the 1980s, from 66 to 33 percent. Most everywhere in the developed world, the same trajectory held. Top rates fell. They could not be sustained, and that failure may well be built into the DNA of the progressive income tax as traditionally structured. The rich simply have much more of a direct personal stake in sabotaging high taxes on high incomes than the rest of us have in keeping those taxes whole.
Could that change? Could we somehow transform the traditional progressive income tax and give those of modest means a more direct personal stake in the taxes paid by people of excessively ample means? Could we, in the same transformation, give the rich an incentive for not obsessively seeking to obliterate tax progressivism? We certainly could – if we began linking incomes at the top of our economic order to incomes far below.
Some analysts are making this connection. One proposal along this line, from Yale law professor Ian Ayres and University of California economist Aaron Edlin, would have US tax collectors annually compute the income equal to 36 times the nation's median household income. If the average taxpayer in the top 1 percent makes more than this 36-times figure, this proposal would have the government put in place a special annual tax rate that reduces average 1-percenter incomes to the 36-times level.
A far simpler and much bolder approach – and the approach that these pages advocate – would be to set a new income maximum as a multiple of the existing minimum wage. Any income above that multiple would face a tax set at 100 percent.
How would this work? Let's use the United States for our example. A worker laboring at the federal minimum wage currently earns $7.25 an hour, a rate that would return $15,080 for a standard 40-hour week over the course of an entire year. This $15,080 would become the base for calculating the income maximum. If society set that maximum at 100 times the minimum wage, that maximum would be $1,508,000. Any income above that $1,508,000 would face a 100 percent federal tax rate.
This maximum would apply to all income an individual taxpayer reports, whatever the source. And the maximum for a couple filing a joint tax return would be twice that $1,508,000, or $3,016,000.
A "maximum wage" set in this fashion would immediately intertwine the economic fates of society's poorest and society's most privileged. Those with too much "pomp and pride and power," to use Felix Adler's classic nineteenth-century formulation, would suddenly have a substantial incentive to care deeply about the well-being of those they overshadow economically. Society's wealthiest would only be able to increase their own after-tax incomes if those who toil in the darkest shadows – minimum-wage workers – saw their incomes increase first.
These toilers would soon find themselves basking in society's spotlight. Improving their well-being would become the central focus of any society that linked top incomes to incomes at the economic base. Minimum-wage workers would strive to keep this linkage in place. And so would workers making just above the minimum wage. The "ripple effect" of a higher minimum wage would raise their paychecks, too – and help build a sizeable constituency of working people personally committed to the preservation of any multiple-based maximum. The political asymmetry that doomed high tax rates on high incomes in the twentieth century would be no more. A multiple maximum would be sustainable.
But what should the ideal multiple be? The 100 times of our example above? Twice that? Half that? The creative imaging of the late Danish economist Jan Pen suggests an even smaller multiple.
In a classic 1971 book, Pen asks us to visualize Britain's distribution of income as an hour-long parade, with income earners marching in income order, from lowest to highest. Pen's parade has a special touch. Each marcher's height corresponds to each marcher's income. Average income earners have average heights. Marchers making half a society's average income stand only half average height. Marchers making double the average stretch up twice as tall as that average.
Pen's hour-long parade begins. The poorest of the poor walk by us first, all tinier than any adult human has ever been. In short order, the working poor walk past us, all small of stature, but now recognizably human. The marchers slowly grow taller, to average height and then to seven feet. Finally, in the parade's closing moments, the marchers begin to lose all human scale. Their heights suddenly start soaring. Fifty feet tall, one hundred feet, one mile high – much too high to have any human interaction with any other marchers.
Researchers have over the years applied the "Pen parade" framing to many different modern societies. They find the same basic pattern that Pen's initial parade revealed: a slow, steady, incremental increase in the height of the marchers, then a sudden surge upwards. Within that first phase, real human interactions can abound. Everyone who marches before the parade surge, as the British economist Henry Phelps Brown once noted, "rubs elbows with others who are a little better or worse off." After the surge, the marchers become parading giants who can rub shoulders with only their fellow rich.(Continues…)
Excerpted from "The Case for a Maximum Wage"
Copyright © 2018 Sam Pizzigati.
Excerpted by permission of Polity Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
- Introduction/ Moderation in All Things, Even Income
- 1/ Defining Excess
- 2/ The Magic of Maximum Multiples
- 3/ A Society without a Super Rich
- 4/ Pipe Dream or Politically Practical Project?
- 5/ Evolving toward Equity