Market Overview

Do We Need a Surtax on the Super Wealthy? Robert Reich Says Yes

Political economist and former Clinton labor secretary Robert Reich had an interesting article on the Huffington Post Tuesday regarding increasing taxes on the wealthy. Reich: "Let Santorum and Romney duke it out for who will cut taxes on the wealthy the most and shred the public services everyone else depends on. The rest of us ought to be having a serious discussion about a wealth tax."

Whereas the Federal Reserve issued a statistical release on March 8, 2012 reporting that household wealth increased from October through December, Reich noted that "the entire gain came from increases in stock prices." Whereas "the vast majority of Americans don't have their wealth in the stock market" and "over 90 percent of the nation's financial assets...are owned by the richest 10 percent of Americans", Reich suggested that in taking into account declining real estate values, the nation's economic situation portends an uncomfortable wealth gap, "an unprecedented concentration of wealth".

In order to deal with this wealth gap, whereas funds are needed "to rebuild our schools and infrastructure" while addressing government aid programs, Reich suggested that "there should...be a surtax on the super rich." Reich's analysis suggests that "a 2 percent surtax on the wealth of the richest one-half of 1 percent of Americans" would generate tax revenue in the amount of $70 billion per year. Reich discussed that far from letting Republican candidates "dominate the airwaves with their regressive Social Darwinism, Democrats need to be reminding Americans of what's happening in the real economy -- and what needs to happen." Reich concluded in that, "The wealth gap is widening into a chasm." As such, not only is a surtax on the super rich "fair", but it is also "necessary".

Marketplace's Mitchell Hartman recently discussed the wealth gap in the US. Hartman: "Back in 1979, the top 10 percent of earners took home about a third of the nation's income. By the late 2000s, half that income was flowing into their paychecks." In other words, "As the economy grew, fully 80 percent of the increase in our incomes went to the top 1 percent." While wealth has been concentrating in the hands of the wealthy, there appear to be "growing disparities" in health care, education, and economic mobility. From the article: "It's getting ever harder for the have-nots to move up the ladder."

According to Timothy Smeeding from the University of Wisconsin's Institute for Research on Poverty, "a growing economy that leaves so many stuck at the middle or bottom tears at the social fabric." Even so, "most low-income people do not begrudge the haves... The problem is they're increasingly realizing that their children will not have the same chance." Hartman concluded his discussion on the optimistic note that "the stronger job growth we've seen lately could expand the economic pie again." That being said, "few economists see the slice the rich get served up getting any smaller."

The issues of the wealth gap and concentration of wealth in the US become even more precarious in light of intergenerational mobility, or lack thereof. Per economist Justin Wolfers: "If income inequality in one generation can be linked to unequal opportunity in the next, then income inequality can't just be dismissed as the politics of envy." Taking into account the socio-cultural "equal opportunity" versus "equal outcome" debate, Wolfers' line of thought raises serious questions regarding the validity of the notion of "equal opportunity" in the free-market capitalist system and [some may argue] the legitimacy of the capitalist system going forward.

Whereas additional taxes on the wealthy will probably be a sensitive political issue as we approach the November general election, the idea of increasing taxes on the wealthy appears to be moving from a desire to something that is required. On Feb. 29, 2012, the Wall Street Journal had a piece written by Pete Du Pont suggesting that "more Americans [are living] off government, and the Obama administration is encouraging the trend." Du Pont: "The goal of the current federal government...is to expand its influence and control of everything." According to Du Pont, as a result of the Obama administration's push "toward government-centric policies and large spending increases", "more and more Americans are dependent on the federal government."

Du Pont discussed that "this increase in dependency has negative implications for our nation's finance." In light of data regarding demographic changes and the number of Americans depending on government aid, "difficult times are ahead of us unless we are more careful about what we do, what it costs, and who is responsible for it." Du Pont discussed that there should be further debate in the public discourse on "dependency-increasing policies". Du Pont cited the Heritage Foundation in asking: "Are Americans ready for the new class warfare, the battle lines of which are drawn by these dividing lines? These are questions increasingly in need of urgent answers. How Americans answer them may well determine the ultimate fate of their political system -- and society."

Despite ideological debates regarding tax increases, if it is the case that one in five Americans (not including government employees) depend on government aid (with that figure potentially rising as gas prices go up and the economy stagnates), per Reich's abovementioned discussion, it would appear that the issue of tax hikes on the super wealthy will be crucial heading toward the 2012 election. The New York Times' Binyamin Appelbaum and Robert Gebeloff recently discussed how "even critics of [the government] safety net increasingly depend on it." The fact that more and more Americans are relying on the government to subsist seems to reflect changing dimensions to the issue of income inequality in the US.

As I explored in January, "the current predicament portends that there may be no easy answers to the issue of income inequality." In light of the fear of the tearing of the social fabric, government aid, and the concentration of wealth, one has to wonder if capitalism has gone geriatric. This discussion brings to mind Karl Marx's observations regarding the inevitable capitalistic concentration of wealth where "a handful of immensely wealthy capitalists [is] confronted by a vast mass of proletarians, with nothing in between." Nonetheless, there are always taxes. Ah yes, taxes.

Of course, if only theoretically there may be room for increasing tax rates. A recent story from NPR's Scott Horsley and Tamara Keith discussed how tax rates "were a lot higher in the 1950s and '60s." That being the case, "while taxes on ordinary income went down [under Reagan], taxes on investment income, like capital gains, went up." At the end of the day, in light of questions regarding the role of government and finance, perhaps we would do well to remember the words of Benjamin Franklin: "Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes."

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