For Two Economists, the Buffett Rule Is Just a Start
Don Feria/Getty Images for The MacArthur Foundation Awards, left; Paris School of Economics
Research done by Emmanuel Saez, left, and Thomas Piketty has shown that inequality among the middle class and the rich is nearly as acute as it was before the Great Depression.
By ANNIE LOWREY April 16, 2012
WASHINGTON — High earners who are worried that this year’s Tax Day will be the last one before their rates rise have more than just the White House and Washington to blame. They can also look to two academically revered, if publicly obscure, left-leaning French economists whose work is the subtext for the battle over tax fairness.
Emmanuel Saez and Thomas Piketty have spent the last decade tracking the incomes of the poor, the middle class and the rich in countries across the world. More than anything else, their work shows that the top earners in the United States have taken a bigger and bigger share of overall income over the last three decades, with inequality nearly as acute as it was before the Great Depression. [ http://topics.nytimes.com/top/reference/timestopics/subjects/g/great_depression_1930s/index.html?inline=nyt-classifier ]
Known in Washington and the economics profession by the of-course-you-know shorthand “Piketty-Saez,” the two have been denounced on the editorial page of The Wall Street Journal and won mention in White House budget documents.
Mr. Saez, 39, a professor at the University of California, Berkeley, has won the John Bates Clark Medal, an economic laurel considered second only to the Nobel, as well as a MacArthur Fellowship grant. Mr. Piketty, 40, of the Paris School of Economics, has won Le Monde’s prize for best young economist, among other awards.
Both admire, even adore, the United States, they say, for its entrepreneurial drive, innovative spirit and, not least, its academic excellence: the two met while re-searchers in Cambridge, Mass. But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes.
“The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”
As much as Mr. Piketty’s and Mr. Saez’s work has informed the national debate over earnings and fairness, their proposed corrective remains far outside the bounds of polite political conversation: much, much higher top marginal tax rates on the rich, up to 50 percent, or 70 percent or even 90 percent, from the current top rate of 35 percent.
The two economists argue that even Democrats’ boldest plan to increase taxes on the wealthy — the Buffett Rule, a 30 percent minimum tax on earnings over $1 million — would do little to reverse the rich’s gains. Many of the Republican tax proposals on the table might increase income inequality, at least in the short term, according to William G. Gale of the Tax Policy Center and many other left-leaning and centrist economists.
Conservatives respond that high tax rates would stifle economic growth, at a minimum, and cause some businesses and high-income workers to flee to other countries. When top American tax rates were much higher, from the 1940s through the 1970s, businesses could not relocate as easily as they can now, say critics of Mr. Piketty and Mr. Saez.
“I materially disagree with the idea you can raise a marginal tax rate to 70 percent and not have an impact on economic growth,” said Ike Brannon, an economist at the American Action Forum. “It’s absurd on its face.”
But Mr. Piketty and Mr. Saez argue that history is on their side: Many countries have higher tax rates — and the United States has had higher tax rates — without stifling growth or encouraging the concentration of income in the hands of the very rich.
“In a way, the United States is becoming like Old Europe, which is very strange in historical perspective,” Mr. Piketty said. “The United States used to be very egalitarian, not just in spirit but in actuality. Inequality of wealth and income used to be much larger in France. And very high taxes on the very rich — that was invented in the United States,” he said.
Mr. Saez added, “Absent drastic policy changes, I doubt that income inequality will decline on its own.”
The two economists’ project of mapping income inequality started two decades ago, when Mr. Saez was teaching at Harvard and Mr. Piketty teaching down the road at the Massachusetts Institute of Technology.
Their innovation was to measure American income inequality historically. Existing data went back only to the 1970s. Tedious archival research at the Internal Revenue Service allowed them to stretch the data all the way back to 1913.
Once they had collected the data, the computation was easy. They figured out the benchmark for various income levels — the top 10 percent, top 1 percent and top 0.1 percent of earners, for instance — and calculated what share of income each group took each year.
What they found startled them. As in other industrially advanced countries, income inequality in the United States fell after World War II, a period that economic historians call the “Great Compression,” and remained stable through much of the 1970s.
But then inequality started increasing again, with the top 1 percent of earners drawing a bigger and bigger share of overall income. Their graph showing the trend became well-known: a deep U, with inequality as acute today as it was just before the depression.
When they first published their work, income inequality was mostly off the political radar screen, thanks to the 1990s boom, Mr. Saez said.
“Growing inequality was not perceived to be an issue because the economy was growing fast and even the incomes of the 99 percent were growing significantly,” he said.
But the deep downturn of the last few years, and Mr. Obama’s election, brought the issue back to the fore. Peter R. Orszag, the former Obama budget director, has said the Piketty-Saez work “helped to point the way for the administration in its pledge to rebalance the tax code.”
Now living many time zones apart, Mr. Piketty and Mr. Saez update their work with frequent e-mails, Skype conversations and data-sharing through Dropbox.
They have found that the trends have mostly continued. From 2000 to 2007, incomes for the bottom 90 percent of earners rose only about 4 percent, once adjusted for inflation. For the top 0.1 percent, incomes climbed about 94 percent.
The recession interrupted the trend, with the sharp decline in stock prices hitting the pocketbooks of the rich. But the income share of 1 percent has since rebounded. Data that the two economists released in March showed that the top 1 percent of earners got nearly every dollar of the income gains eked out in the first full year of the recovery. In 2010, the top 10 percent of earners took about half of overall income.
That has led the two economists to renew their calls for higher rates on the rich. Along with Peter Diamond, an emeritus professor at M.I.T. and a Nobel laureate, Mr. Saez has estimated the “optimal” top tax rates for the wealthy — getting the most revenue from those most able to surrender it — to be between 45 and 70 percent.
In France, François Hollande, the Socialist who may well succeed Nicolas Sarkozy as president, wants to raise the top marginal income tax rate to 75 percent, calling earnings over a million euros “impossible.” A candidate yet farther on the left suggests a top rate of 100 percent.“The debate in Washington is between the Bush-era and Clinton-era tax rates,” said Mr. Diamond, whom Mr. Obama nominated to the Federal Reserve and Republicans blocked. “Our finding is that the debate should be between the pre-1986 Reagan tax rate, which was 50 percent, and the rates that existed from Johnson until Reagan,” which were higher.
“Thirty percent is three times smaller than the 91 percent of Roosevelt,” Mr. Piketty said, responding to the Buffett Rule proposal and referring to the presidency of Franklin D. Roosevelt, who engineered the New Deal. “And inequality is greater than in the time of Roosevelt.”
“A Drunkard in the Gutter Is Just Where He Ought To Be”
Meet the man who invented the GOP’s defense of the wealthy—in 1883.
By Beverly Gage|Posted Thursday, March 29, 2012, at 7:15 AM ET
William Graham Sumner defended income inequality, as Rick Santorum recently has
The Warren J. Samuels Portrait Collection/Duke University.
Last month, Rick Santorum announced that he likes inequality. “There is income inequality in America,” he told the Detroit Economic Club in a much-quoted speech. “There always has been and, hopefully, and I do say that, there always will be.”
Many political observers have since ridiculed this stance, declaring Santorum “unhinged,” or at least unfit to conduct a serious presidential campaign. But the positive defense of inequality is not entirely new in American politics. From the moment that social reformers began to “discover” poverty in the 19th century, naysayers were on hand to explain why extremes of wealth and poverty made for a just society. By embracing inequality, Santorum is reviving the politics of our last Gilded Age.
One of the earliest (and most acerbic) champions of inequality was William Graham Sumner, a Yale sociologist and one of the best-known public intellectuals of the late 19th century. Sumner started his career as an Episcopal priest, tending to the pastoral needs of a New Jersey flock. Within a few years, however, he concluded that his temperament—famously standoffish and blunt—was better suited to scholarly endeavors. As a professor, he helped to pioneer the new discipline of sociology, coining such lasting terms as ethnocentrism and folkways in his studies of American culture. He also made a name for himself as a staunch anti-imperialist and principled opponent of the Spanish-American War.
But it was in the realm of economic philosophy that Sumner carved out his most controversial and lasting influence. In 1883, he composed a short book-length essay titled “What Social Classes Owe to Each Other.” His answer? Absolutely nothing.
In making his case for laissez-faire, Sumner highlighted one of the enduring paradoxes of American politics. “It is commonly asserted that there are in the United States no classes, and any allusion to classes is resented,” he noted. “On the other hand, we constantly read and hear discussion of social topics in which the existence of social classes is assumed as a simple fact.” This was particularly true of the 1870s, which witnessed a serious financial panic and depression, followed by a major national railroad strike. In response, reformers began to argue for government to take a greater role in aiding the poor and in softening the rough edges of industrial capitalism.
Sumner’s essay rejected all such nonsense. “It is not at all the function of the State to make men happy,” he declared. “They must make themselves happy in their own way, and at their own risk.” Today, he would be called a libertarian. At the time, the term of choice was “Social Darwinist.” One of the more fashionable theories of Gilded Age class relations, Social Darwinism attempted to apply the laws of evolution to human society, and thus to explain why those who ended up on top were necessarily “the fittest” among men.
Sumner was unabashed in his admiration for millionaires, and indignant at criticism lobbed in their direction. “The rich are good-natured,” he insisted, model citizens to be applauded for their initiative and patience with lesser souls. He approved the “aggregation of large fortunes” as “a necessary condition of many forms of social advance.” Toward that end, he argued strenuously against restrictions on Wall Street stockjobbing and other forms of speculative gain. “To denounce financial devices which are useful and legitimate because use is made of them for fraud is ridiculous,” he wrote. Also to be avoided were government investigative commissions, increased taxes, and Sunday-morning haranguing about how the rich owed something to the poor.
All of this offered a portrait of the elite utterly at odds with the Gilded Age stereotype: Rich men were virtuous, not “wicked”; self-disciplined, not profligate. Much of the staying power of Sumner’s arguments came from his ability to describe the class divide in cultural rather than economic terms. On one side were the virtuous rich, guardians of liberty and individual ambition. On the other were a host of interlopers seeking to drain wealthy entrepreneurs of their creativity, freedom, and resources. “If you get wealth, you will have to support other people,” he complained. “[I]f you do not get wealth, it will be the duty of other people to support you.” Call it the politics of resentment, 19th-century style.
Sumner’s list of deadbeats and drags on society will be familiar to any casual observer of modern conservative politics. First were the social reformers (usually well-educated Northeasterners, preferably women), whom Sumner chastised for their arrogance, hypocrisy, and dangerous utopian schemes. Next came government bureaucrats, typified by the “obscure clerk” whose small-minded enforcement of rules threatened to crush the nation’s visionary spirits. Finally, there were the poor themselves—often “negligent, shiftless, inefficient, silly, and imprudent.” “A drunkard in the gutter is just where he ought to be,” Sumner argued with his trademark bluntness. He even went so far as to denounce democracy itself, viewing mass voting as a modern experiment perilously close to mob rule.
Ultimately, though, it was neither the rich nor the poor who were the greatest objects of Sumner’s concern. Even as he cheered the richest of the rich, he positioned himself as the champion of a far more humble social figure, an ordinary taxpayer-citizen dubbed the “Forgotten Man.” In Sumner’s formulation, the “Forgotten Man” was the backbone of American society, the sort of fellow who “watched his own investments, made his own machinery safe, attended to his own plumbing, and educated his own children.” It was this earthy taxpayer-citizen—not the wealthiest Americans—who truly stood to suffer under a regime of government regulation and social reform. “He is an obscure man,” Sumner explained. Moreover, this hidden figure was usually too busy or too disgusted to engage in political debate. “He might grumble sometimes to his wife,” Sumner wrote, “but he does not frequent the grocery, and he does not talk politics at the tavern. So he is forgotten.”
This image of the overlooked law-abiding citizen has since become a staple of American political rhetoric—and one that conveniently declares the mass of voters in secret agreement with any given set of ideals. In the 1930s, as historian Amity Shlaes has noted, New Dealers adopted the idea of a “Forgotten Man” to promote reforms such as Social Security and labor rights. In the decades since, the figure has mostly reverted back to its conservative origins. In 1969, journalist Peter Schrag identified the “forgotten American” as a white working-class man “alienated” by the civil rights movement and the War on Poverty. “He does all the right things,” Schrag wrote, “obeys the law, goes to church and insists—usually—that his kids get a better education than he had.” That same year, Richard Nixon tweaked the idea to come up with his “Silent Majority.”
Today’s Republican candidates have yet to coin such catchy slogans. But they have already put at least part of Sumner’s original approach to work. As a political thinker, Sumner’s chief contribution lay neither in his praise for the rich, nor his lament for the Forgotten Man, but in his attempt to combine the two. For better or worse, he offered a model for resolving the great conundrum of modern Republican politics: how to champion the wealthy while claiming to speak for the unsung middle class.
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