I was (briefly) a guest on a BBC World Service radio program this morning discussing Obama's state of the union speech and income inequality in general. To my mind, this has always been a no-brainer. My argument is: we've done this experiment (of lowering taxes on the rich) twice now, once in the 1920's and again in the 1980's (and doubled-down in 2000). We have also done the control experiment. Between 1945 and 1980 top marginal tax rates in the U.S. ranged from 70 to 90%.
The results are clear: high marginal rates correlate with broad-based economic prosperity and an expanding middle class. Low marginal rates correlate with extreme income inequality, reduced prosperity overall, and ultimately, economic catastrophe.
Now, correlation does not imply causality. Economies are enormously complex systems. And one of the guests on the program dismissed my argument as "not being accepted by economists." To which I say, this would not be the first time economists have been wrong about something. But I freely concede that while the data are suggestive, this is not a slam dunk. In particular, it certainly does not prove (and in fact I do not believe) that raising taxes on the rich by itself will solve all our problems. The data do, however, convincingly falsify the opposite theory, that lowering taxes on rich people results in economic prosperity, and raising them causes unemployment.
The real problem is not really tax rates per se. The real problem is the power asymmetry that is invariably results from lassez-faire capitalism. Capitalism depends on competition in order to function properly, otherwise it devolves into fascism. But the problem is there is more than one way for a company to succeed. One way is to provide a superior product at a lower price, but another is to engage in rent seeking behavior like lobbying legislators to pass laws that favor entrenched interests at the expense of potential competitors or using your economic clout to bias binding arbitration proceedings in your favor.
In short, naked capitalism does not distinguish between success that arises from successful competition and success that arises from gaming the system. Angelo Mozilo made $40 million net of SEC fines (and 34 million net of taxes) for bankrupting Countrywide and helping to precipitate the greatest economic catastrophe in three generations. But his dollars buy just as many yachts, private jets, and politicians as someone who made their money by bringing an actually useful product to market.
After I was kicked off the BBC radio program the question was raised: can you make money without exploiting the poor? The answer I would love to have given is: yes, clearly it is. But it's a lot easier to make money if you do exploit the poor, so in the absence of some countervailing force, those who choose to exploit the poor will win, at least in the short term.
In the long term, of course, they will lose. But so will everybody else.