Individual wealth in the billions of dollars (and arguably, considerably lower levels) creates a threat to social stability and to the continuation of our democracy.
On February 28, 2020, Vince Taylor writes on Common Dreams:
When one looks beyond the classical models, one sees clearly that those who have accumulated large fortunes did not in any sense earn them. (Photo: Spencer Platt/Getty Images)
Michael Bloomberg has opposed taxing his wealth, arguing that he earned it and has a right to keep it. This argument is echoed by other billionaires.
Hundreds of commentators have warned that extreme concentration of wealth threatens democracy and social stability. Not a day goes by without a new article with details on the unprecedented growth in income inequality and its dire consequences.
Bernie Sanders and Alexandria Ocasio Cortez argue that extreme wealth is immoral. Yet, no one is proposing measures that would take away wealth from the 600 or so U.S. billionaires and the 20,000 families with hundreds of millions. The wealth taxes proposed by Elizabeth Warren and Bernie Sanders are less than the interest the annual interest billionaires earn on their fortunes.
Why are no actions being taken to reduce extreme holdings of wealth? Apparently, there is some tacit agreement that even the very richest earned their money, and therefore it would be immoral and un-American to take it away. Certainly the wealthy promote this idea, but why is it so universally accepted?
I suggest it is because our economic models don’t provide any alternative explanation for wealth accumulation. The classic models view output as a function of capital, labor and technical change. There is no room in these models for gigantic, undeserved bonanzas going to the few. It follows logically from these models that those who acquire vast fortunes must have exceptional gifts. They deserve their fortunes.
When one looks beyond the classical models, one sees clearly that those who have accumulated large fortunes did not in any sense earn them. They captured for themselves wealth that rightfully belongs to society at large. There is a strong, logical case for the government to tax all huge fortunes down to the level that society considers acceptable.
The Concepts of Potential Wealth and Wealth Surpluses
What the standard models miss is that in the real world, major economic disturbances, innovations, new resources and new markets all create huge amounts of potential wealth where the costs of transforming the potential into actual wealth are far less than the wealth produced. When these wealth surpluses are captured by individuals rather than spread widely across the population, large fortunes are created.
To clarify these concepts, consider a concrete example – an oil field that contains oil worth a billion dollars on the open market. The oil field is not yet discovered. Its potential wealth is a billion dollars. Suppose the costs of exploration, drilling, and all other costs of delivering all the oil to market (actualization costs) were 400 million dollars. The wealth surplus gained from actualizing the wealth of the oil field would be $600 million dollars — one billion dollars (potential wealth) minus $400 million dollars (actualization costs).
Who should get the wealth surplus? The oil field developer has no special moral or economic claim to it. The actualization costs of $400 million, which include a market rate of return on capital, fully compensate the developer for all costs incurred. If the oil field were part of a “commons,” it would belong to all members of the commons. Government would appropriately collect the wealth surplus and use it for the good of all members of the common.
Under the legal rules of capitalism as currently practiced, all the wealth surplus from the oil field goes to private interests (the developers and financiers). None goes to the public. This is neither equitable nor socially desirable.
As will be shown, the concepts used to explain the oil field example apply equally to potential wealth that is not tangible, for example, unrealized wealth opportunities in finance and technology.
There is no room in standard economic models for fortunes derived from wealth surpluses. In a world of perfect competition, where prices reflect the costs of production, there are no large wealth surpluses to be captured by an individual. The real world is very different. History shows that in times when huge wealth surpluses come into being, large portions of these often have been captured by a few individuals.
The Gilded Age
The Gilded Age of the 1800’s exemplifies the appropriation of wealth surpluses by a few individuals — the railroad, steel, and oil monopolists, to cite the most prominent examples. They didn’t create the railroad, steel and oil refining technologies. These grew out of a large body of evolving knowledge developed by many scientists, engineers, and individuals over many years. The monopolists simply got “legal” titles to the wealth that arose from the new technologies. If these particular owners hadn’t gained these legal titles, others would have. In a more perfect society, the steel and railroad and oil refining technologies, would have been considered social assets, belonging to all of the people. The wealth that arose from their development would have been broadly distributed, not flowing disproportionately to a few.
As an example, look more closely at railroads. The introduction of railroad technology transformed transportation. Prior to the railroads, all transportation not by water was by animal-drawn wagons, which were slow and uncomfortable for people and slow and expensive for goods. Suddenly, it became possible to move goods and people incredibly faster and cheaper. This was an economic discontinuity even greater than those created by the automobile and the internet. The wealth surpluses created by the introduction of railroad technology were enormous, unprecedented in magnitude.
The huge wealth surpluses created by railroads attracted every major entrepreneur and speculator of the era. Railroads were the perfect vehicle for accumulating fortunes. Not only did the first railroads create large wealth surpluses, they were natural and completely unregulated monopolies. Owners could charge whatever the traffic would bear, allowing them to appropriate much of the wealth surpluses that the railroads actualized.
According to standard economic models, the introduction of railroads should have increased the wealth of Midwest farmers. Suddenly, the cost of transporting their wheat and corn to market would have fallen precipitously; so their income should have risen accordingly. This did not happen. The railroads set their rates at levels far above the true costs, keeping the farmers in poverty and capturing the created wealth surpluses for themselves.
The wealth surpluses appropriated by the railroad owners made them incredibly wealthy. In a listing of the seventy-five richest people in recorded history, twelve acquired their wealth primarily through ownership of US railroads.
Is anyone willing to argue that the railroad millionaires (billionaires in today’s dollars) created the wealth they accumulated? They didn’t create the technology. They didn’t do the physical labor or produce the materials needed to build the railroads. All that they did was to acquire legal title to the railroads, ownership that allowed them to transfer the wealth surpluses to themselves.
The Robber Barons of the Gilded Age were ruthless businessmen, single-minded in their pursuit of riches, without legal or moral scruples, and gifted with a political and legal environment where greed and survival of the fittest were guiding principles. In a real and concrete sense, they stole most of their fortunes from the general public by establishing monopolies that allowed them to set unfairly high prices.
The Dynamics of Surplus Wealth Appropriation
When major innovative technologies emerge, they bring with them major wealth surpluses. What appears to be a repeating pattern is that early pioneers use their quickly generated wealth to establish market dominance, if not complete monopoly, by buying up or crushing competitors. They then are able capture a large share of the wealth surplus for themselves. When there is a surge in wealth surpluses such as occurred in the late 1800s, a further dynamic seems to that the courts and Congress come to reflect the interests of the rich and powerful.
In the United States in recent decades, most fortunes have arisen from micro-chip technology, globalization of trade, innovations in financial markets and, most recently, by capturing a large share of the wealth surpluses arising from the internet.
As was true in earlier eras, the recent entrepreneurs who have reaped large fortunes from wealth surpluses have no economic or inherent right to retain them.
The Internet
The internet provides the most compelling and significant example of fortunes arising from private appropriation of wealth surpluses. For the sake of brevity, only the internet example is examined here is detail, but examining fortunes derived from financial innovations and trade globalization would lead to similar conclusions.
From an economic viewpoint, the emergence of the internet can be compared to the discovery of a hugely valuable, virgin, unowned land. The sudden ability to transmit vast volumes of information virtually instantaneously at almost no cost created a myriad of hugely valuable wealth opportunities. The costs of transforming these potential wealth opportunities into actualized wealth have been relatively small. Huge amounts of wealth surplus have been created. Individuals, investors, and corporations, have taken title to much of the wealth surplus, creating a new generation of ultra rich.
There is no valid argument that the individuals who gained fortunes from the internet have a “right” to keep them because they “created” the wealth they gained. That internet billionaires didn’t “create” the wealth is made obvious by considering what would have happened if Mark Zuckerberg and his backers had not developed Facebook. Absent Zuckerberg, does anyone doubt that something essentially identical would have come into existence at about the same time? Others would be the billionaires, but the functionality would be essentially the same. It is the capitalist system of ownership that has allowed private individuals and corporations to capture the vast surplus wealth of the internet.
Internet Wealth Surpluses Rightfully Belong to Society as a Whole
It needs to be emphasized again that a wealth surplus is the excess of actualized wealth over all the actualization costs (which include a market return on invested capital). Actualization costs fully and fairly compensate the actualizers for their services. Wealth surpluses are windfalls that arise from external factors, not from the labor, capital, and other resources used to transform potential into actual wealth.
Arguably, the potential wealth of the internet should be treated as residing in a commons. No individual or company created more than a miniscule fraction of the complex web of knowledge and equipment that constitute the internet. No individual or single company developed de novo the technology of the internet. The internet is a consequence of fifty years of inventions, innovations, development and marketing carried out by innumerable individuals, private and publicly funded colleges and research institutes, and corporations. The activities that brought into being and sustain the internet were and are inextricably interwoven into the web of our society. Society as a whole has a just claim to all of the wealth surpluses arising from the internet.
Other Cases
We have only looked at the internet in detail, but the same reasoning and findings apply to major fortunes however acquired. Those that gained huge fortunes did not create their wealth. External conditions created huge wealth surpluses, and through luck, skill, or influence, certain individuals were able to transfer a major share to themselves.
Upon close examination, all wealth-generating activities are seen to be dependent on society’s infrastructure, and thus society has a just claim on all wealth surpluses privately appropriated.
Rate of Return on Capital Measures the Magnitude of Privately Appropriated Wealth Surpluses
The rate of return on capital equals the amount of annual profit as a percentage of the amount of invested capital. In a perfectly operating, competitive free-market economy, the returns to capital wherever invested will tend to cluster around a “normal market rate of return,” adjusted for risks of individual investments. Shortages and market dislocations may raise rates of returns, but the rises will be temporary.
In contrast, investments that capture substantial wealth surplus will have rates of return on capital that are substantially greater than the normal market rate of return.
Consider Google and Facebook, two quintessential internet companies. Google’s profit in 2017 was $34.9 billion, compared to total capital invested in property and equipment of $42.3 billion, yielding a one-year rate of return of 81%. Facebook did even better. Its 2018 profit was $24.3 billion compared to invested capital of $13.7 billion, a one-year rate of return of 177%.
There is room for disagreement on what constitutes a normal rate of return on capital, but there is no question that Google and Facebook had rates of return that are multiples of a normal rate of return. Arguably a normal rate of return is around 8%. This is the average return on investments for the very wealthy, but using a higher value would not change the conclusion that Google and Facebook are capturing huge amounts of wealth surplus.
Rates of return on capital combine the financial benefits of wealth surpluses and monopoly pricing. Google and Facebook have captured such large amounts of wealth surplus because they are unregulated monopolies. Both bought up or crushed all significant competitors.
A Progressive Tax on Excess Profits
Rates of return on capital far above normal are concrete proof a company is transferring to itself wealth that rightfully belongs to others. There is a strong case for a progressive tax on such excess profits. It could start at zero on profits providing a normal rated of return. Marginal rates would rise along with rates of return. For rates of return unarguably above a normal return, a marginal tax rate of 90% or even higher is socially and economically justified.
Actual implementation of a tax on such excess profits would need to address numerous practical issues, many of which are common to any tax on company profits, but some of which are specific to this type of tax. One specific issue is setting a value for a “normal” rate of return. Various approaches will yield different values. Those affected will weigh in heavily, and the value chosen will be arrived at through negotiation. Still, history provides some guide. During WW I and WW II the US and England imposed excess profits taxes based on the rate of return on investment. The values chosen were in the range of 6% to 10%, with 7% and 8% being most common.
Some other issues are: How are capital investments to be valued? How to allow for depreciation, and obsolescence? How to deal with fluctuations in profits?
While complex and challenging, issues related to implementing an excess profits tax seem no more so than those related to the existing taxation of corporate profits.
Taxation of Wealth
Because those with large fortunes did not create the wealth they hold, they have no inalienable right to keep it. When individuals gain so much wealth that their economic and political power threatens democracy or harms the general well being, society is fully justified to take away that wealth. Although an excess profits tax and a sharply progressive tax on all sources of income would greatly reduce individuals’ ability to join the ranks of the ultra wealthy, these would not affect existing fortunes.
Individual wealth in the billions of dollars (and arguably, considerably lower levels) creates a threat to social stability and to the continuation of our democracy. A way to reduce socially excessive wealth holdings is through a tax on such holdings that exceeds the return on that wealth. High wealth holders earn an average annual return of about 8% on their wealth; thus the tax rate on excessive wealth holdings would need to exceed 8%. It would need to be significantly greater than 8% on extreme levels of wealth in order to bring them down to an acceptable level in a reasonable period of time.
Progressive taxes for the purpose of reducing excessive wealth holdings would be revolutionary and vigorously resisted by the wealthy. Because they address a critical need, they deserve careful consideration.
Vince Taylor is an economist, entrepreneur, and activist. He is currently focused on developing public support for taxation to reduce holdings of wealth that threaten democracy. He can be reached on Twitter @vtaylor100.
https://www.cnn.com/2020/02/24/perspectives/billionaire-wealth-taxes/index.html
Gary Reber Comments:
Vince Taylor has a pinned a very important article that questions the hoarding of capital wealth.
Abraham Lincoln said that the purpose of government is to do for people what they cannot do for themselves. Government also should serve to keep people from hurting themselves and to restrain man’s greed, which otherwise cannot be self-controlled.
Anyone who seeks to own productive power that they cannot or won’t use for consumption are beggaring their neighbor — the equivalency of mass murder — the impact of concentrated capital ownership.
Taylor claims that the wealthy did not earn their wealth and that our economic models don’t provide any alternative explanation for wealth accumulation.
While the natural right to own should not be denied to any human, should a few humans hoard and concentrate among themselves the productive capital assets of a nation or world?
The answer should be clearly NO.
Most economist limit their thinking to one-factor economic input –– the human factor, and do not see that there is a second factor that contributes to economic input –– the non-human factor. Both factors embed the right to own and control in the individual.
Capital wealth fortunes are accumulated through a system designed to favor those with access to capital credit to gain legal title to what was acquired using capital credit.
To understand, in simple terms, binary economists (as distinguished from the majority of schooled economists) recognize that there are two independent factors of production: humans (labor workers who contribute manual, intellectual, creative and entrepreneurial work) and non-human physical capital (productive land; structures; infrastructure; tools; machines; robotics; computer processing and apps; artificial intelligence, certain intangibles that have the characteristics of property, such as patents and trade or firm names and the like, which are owned by people individually or in association with other individuals). Thus, fundamentally, economic value is created through human and non-human contributions.
NOTE, real physical productive capital isn’t money; it is measured in money (financial capital), but it is really producing power and earning power through ownership of the non-human factor of production organized through businesses, owned by individuals or assemblages of people.Financial capital, such as stocks and bonds, is just an ownership claim on the productive power of real capital. In the law, property is the bundle of rights that determines one’s relationship to things.
As binary economists Louis Kelso and co-author Patricia Hetter put it, “Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods, products and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector.”
The role of physical productive capital is to do ever more of the economy’s work efficiently, which produces wealth and thus income to those who own productive capital assets. As such, “capital” can be defined as productive assets, including job-displacing physical and informational technologies, structures, land and other natural resources, patents and copyrights — or non-human “things” contributing to the production of marketable goods, products, and services.
Taylor correctly points to what should have happen with huge technological innovations during the Industrial Revolution, which was they should have been formed with broad ownership participation, and not limited to the disproportionately few who, using capital credit, were able to gain legal ownership title to the productive capital assets formed with the credit and reap the wealth-creating and income-producing rewards.
Significantly, these entrepreneurs depended on finance to pay for the technological development and physical implementation of productive capital assets and retire their debt with the earnings generated by the productive capital assets.
Sadly, Americans are illiterate when it comes to our monetary and financial system that forms the means to acquire productive capital with its own earnings. Academia, the wealthy capital ownership class, such as represented by the Michael Bloomberg’s of our world, and politicians, have failed to educate the American people through our schools, even at university levels, and the national media dialogue to teach effective monetary and financial means to acquire productive capital with the earnings of capital, simultaneously with economic growth. As a result, the vast majority of Americans do not understand and comprehend the free-market, private property rights concepts and financial mechanisms that are related to an understanding of money, credit, banking and finance.
Unfortunately, the vast American majority only understands earning an income via employment and have self-inflicted on themselves wage slavery. As a result of their dependency solely on employment, which is always subject to downward cost pressures, elimination and insecurity, they are unable to make reductions in consumption to accumulate savings and secure self-liquidating capital credit used to acquire ownership stakes in wealth-creating, income-producing productive capital assets. With meager savings they are limited to speculating via purchasing existing stocks with claims on ownership stakes in public, for profit corporations, hoping for a financial gain when they sell the stock (legalized gambling). ). They are excluded from purchasing new stock issues, representing new capital asset formation using capital credit paid off solely with the earnings generated by the investment, without the requirement of past savings pledged as loan collateral security.
While the national focus is always on job creation instead of ownership creation, our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success –– always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent is not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the goods, products, and services produced as a result of substituting “machines” for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.”
An critical focus should be on the reform of corporate structure and finance, de-incentivizing retained earnings and corporate debt financing, neither of which creates any new owners, but instead constantly enriches the value of capital assets owned by the present owners. With respect to the corporations growing the economy the corporate income tax should be raised to at least 90 percent, with the caveat that corporations who pay out fully their earnings to the OWNERS of the corporation, will pay no corporate income tax. Of course, the OWNERS would be subject to personal income tax rates.
We need to begin instituting financial mechanisms, monetary and tax reform that empowers EVERY child, woman and man to acquire personal ownership stakes in FUTURE capital asset projects (investments) using insured, “pure” interest-free capital credit repayable solely with the FUTURE earnings of the investments, without the requirement of past savings.
The ONLY justification for reducing or eliminating the corporate tax burden on corporations is the stipulation that they are broadly owned, including employees, and fully pay out dividend earnings, which then would be taxed at personal income tax rates. Instead, new growth should be financed with the issuance of new stock and its purchase by citizens and employees of the corporation. Such purchases can be transacted using insured, “pure” interest-free capital credit loans payed for with the FUTURE earnings of the investments in capital asset growth, without abolishing private property ownership. The proposed Capital Homestead Act (aka Economic Democracy Act and Economic Empowerment Act) would accomplish this objective.
See http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/.
The majority of Americans, dependent on labor worker wages, no longer think that good jobs and labor wages will return suddenly — if at all — and at a livable earnings level, that they will be able to afford purchasing a home, or that their limited retirement funds (Social Security) will last them into old age. Americans are scared but attribute their worsening finances to job losses, reduced hours, wage givebacks, having to work two jobs and overall reduced earnings. They do not understand the role of productive capital driven by technological invention, innovation and science, and the requirement for them to become capital “workers,” to support or replace their earnings as labor workers, as the means to earn a viable economic future. And until we, as a society, understand how wealth is produced, how consumers earn the money to buy products and services and the nature of capital ownership, we will not be able to set a course to attain an affluent quality of life for middle and working class citizens, and poor Americans, where everyone “can earn enough to raise a family, build a modest savings, own a home, and secure their retirement.” The REAL solution is to build an economy of universally productive individuals and households through broadened wealth-creating, income-producing capital asset ownership.
In Kelso’s words, “a democratic capitalist economy is a private-property, free-market economy in which goods and services are produced through the voluntary and universal cooperation of concurrent labor workers and ‘capital workers’ [those who own the tools] under a politically democratic government.” At present, the United States economy, nor, for that matter any other economy, does not operate as a private-property democratic-capitalist, free-market economy. What needs to transpire is an understanding of binary economics along with instituting “pure” interest-free capital credit mechanisms that will implement the goal of broadening productive capital ownership simultaneously with the productive growth of the economy in ways wholly compatible with the U.S. Constitution and the protection of private property.
The systemic injustices of monopoly capitalism can only be addressed by comprehensive reforms to the tax, monetary and inheritance policies favoring the top 1 percent at the expense of the 99 percent. The current system perpetuates budget deficits and unsustainable government debt, underutilized workers, a lack of financing for financing advanced energy and green technologies, and outsourcing of U.S. industrial jobs to slave-wage labor countries, trade deficits, shrinking consumption incomes among the poor and middle class, and conventional methods for financing productive growth (with past savings requirements) that increase the ownership and power gaps between the top 10 percent and the 90 percent whose combined ownership accumulations are already less than the elite whose money power is widely known as the source of political corruption and the breakdown of political democracy.
The unworkability of thetraditional market economy is evidenced by the diverse and growing deficits — federal budget deficit, trade deficit, city, county and state budget deficits — which are making it increasingly impossible for governments at every level to function. The increasing deficit burden is the result of the growing numbers of people who cannot earn, from legitimate participation in production, enough income to support themselves and their families. Thus, government is obliged to “redistribute” to starve off economic collapse. The key means of redistribution is taxation — taking from the legitimate producers and giving to the non- or under-producers — to make up the economy’s ever-wider income and purchasing power shortfalls.
The question that requires an answer is now timely before us. It was first posed by Kelso in the 1950s but has never been thoroughly discussed on the national stage. Nor has there been the proper education of our citizenry that addresses what economic justice is and what capital ownership is. Therefore, by ignoring such issues of economic justice and capital ownership, our leaders are ignoring the concentration of power through concentrated ownership of productive capital, with the result of denying the 99 percent equal opportunity to become capital owners.
The question, as posed by Kelso is: “how are all individuals to be adequately productive when a tiny minority (capital owners) produce a major share and the vast majority (labor workers), a minor share of total goods and services,” and thus, “how do we get from a world in which the most productive factor — physical capital — is owned by a handful of people, to a world where the same factor is owned by a majority — and ultimately 100 percent — of the consumers, while respecting all the constitutional rights of present capital owners?”
For an in-depth overview of solutions to economic inequality, see my article “Economic Democracy And Binary Economics: Solutions For A Troubled Nation and Economy” at http://www.foreconomicjustice.org/?p=11.
