Here's what it's going to take to have a society where everybody prospers and get a fair shake, as this excerpt from Collins' book 99 to 1 explains.
The following is an excerpt from 99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It , by Chuck Collins (Berrett-Koehler, 2012).
We must change the rules of the economy so that they serve and lift up the 100 percent, not just the 1 percent. Starting in the mid-1970s, the rules were changed to reorient the economy toward the short-term interests of the 1 percent. We can shift and reverse the rules to work for everyone.
Three Types of Rule Changes
There are three categories of policy changes that we need: rules and policies that raise the floor, those that level the playing field, and those that break up overconcentrations of wealth and corporate power. These are not hard-and-fast categories, but a useful framework for grouping different rule changes.
Rule changes that raise the floor
- Ensure the minimum wage is a living wage
- Provide universal health care
- Enforce basic labor standards and protections
- Invest in eduction
- Reduce the influence of money in politics
- Implement fair trade rules
- Tax the 1 percent
- Rein in CEO pay
- Stop corporate tax dodging
- Reclaim our financial system
- Reengineer the corporation
- Redesign the tax revenue system
Policies that raise the floor reduce poverty and establish a fundamental minimum standard of decency that no one will fall below. The Nordic countries—Norway, Sweden, Denmark, and Finland—have very low levels of inequality, and they are also societies with strong social safety nets and policies that raise the floor.
One-third of people in the United States have no paid sick days, and one-half have no paid vacation days. Everyone deserves the right to take time off when sick and have a few weeks of vacation each year. In the rest of the developed world, these are considered basic human rights.
Examples of rule changes include:
Ensure the Minimum Wage Is a Living Wage. The minimum wage has lagged behind rising basic living expenses in housing, health care, transportation, and child care.
Provide Universal Health Care. Expand health coverage so that every child and adult has a minimum level of decent health care. No one should become sick or destitute because of lack of access to health care.
Enforce Basic Labor Standards and Protections. Ensuring basic worker rights and standards can lift up the bottom 20 percent of workers who are particularly exploited and disadvantaged in the current system. These rule changes include the forty-hour workweek, minimum vacation and family medical leave, sick leave, and protections against wage theft. Such rules contribute to a more humane society for everyone.
Rule Changes That Level the Playing Field
Policies and rule changes that level the playing field eliminate the unfair wealth and power advantages that flow to the 1 percent. Examples include:
Invest in Education. In the current global economy, disparities in education reinforce and contribute to inequality trends. Public investment in education is one of the most important interventions we can make to reduce inequality over time. “Widespread education has become the secret to growth,” writes World Bank economist Branko Milanovic. “And broadly accessible education is difficult to achieve unless a society has a relatively even income distribution.”
Reduce the Influence of Money in Politics. Through various campaign finance reforms—including public financing of elections—we can reduce the nexus between gigantic wealth and political influence. Reforms include limits to campaign contributions, a ban on corporate contributions and influence, and a requirement for timely disclosure of donations.
Implement Fair Trade Rules. Most international free trade treaties have boosted the wealth of the 1 percent, whose members are the largest shareholders of global companies. Free trade rules often pit countries against one another in a race to lower standards addressing child labor, environmental protection, workers’ rights to organize, and corporate regulation. Countries with the weakest standards are rewarded in this system. Fair trade rules would raise environmental and labor standards, so companies compete on the basis of other efficiencies.
Rule Changes That Break Up Wealth and Power
We can raise the floor and work toward a level playing field, but we cannot stop the perverse effects of extreme inequality without boldly advocating for policies that break up excessive concentrations of wealth and corporate power.
For example, we cannot pass campaign finance laws that seek clever ways to limit the influence of the 1 percent, as they will always find ways to subvert the law. Concentrated wealth is like water flowing downhill: it cannot stop itself from influencing the political system. The only way to fix the system is to not have such high levels of concentrated wealth. We need to level the hill!
This section examines several far-reaching policy initiatives, the tough changes that have to be considered if we’re going to reverse extreme inequality. Some of these proposals have been off the public agenda for decades or have never been seriously considered.
Tax the 1 Percent. Historically, taxing the 1 percent is one of the most important rule changes that have reduced the concentration of wealth. In 1915, Congress passed laws instituting federal income taxes and inheritance taxes (estate taxes). Over the subsequent decades, these taxes helped reduce the concentrations of income and wealth and even encouraged Gilded Age mansions to be turned over to civic groups and charities.
Taxes on higher income and wealth reached their zenith in the mid-1950s. At the time, the incomes of millionaires were taxed at rates over 91 percent. Today, the percentage of income paid by millionaires in taxes has plummeted to 21 percent. Back then, corporations contributed a third of the nation’s revenue. Today, corporations pay less than one-tenth of the nation’s revenue. The corporate 1 percent pays an average of 11.1 percent of income in taxes, down from 47.4 percent in 1961.
Taxes on the wealthy have steadily declined over the last fifty years. If the 1 percent paid taxes at the same actual effective rate as they did in 1961, the U.S. Treasury would receive an additional $231 billion a year. In 2009, the most recent year for which data are available, 1,500 millionaires paid no income taxes, largely because they dodged taxes through offshore tax schemes, according to the IRS.
As with inequality, the higher up the income ladder people are, the lower the percentage of income they pay in taxes. This is why Warren Buffett’s disclosure about his own low taxes was so important. Buffett revealed that in 2010, he paid only 14 percent of his income in federal taxes, lower than the 25 or 30 percent rate that his co-workers paid. Buffett wrote:
While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.
These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.
The richest 400 taxpayers have seen their effective rate decline from over 40 percent in 1961 to 18.1 percent in 2010.
Between 2001 and 2010, the United States borrowed almost $1 trillion to give tax breaks to the 1 percent. The 2001 and 2003 tax cuts passed under President George W. Bush were highly targeted to the top 1 and 2 percent of taxpayers. They included reducing the top income tax rate, cutting capital gains and dividend taxes, and eliminating the estate tax, our nation’s only levy on inherited wealth.
Are we focusing too much on taxing millionaires, given the magnitude of our fiscal and inequality problems? Won’t we have to raise taxes more broadly? It is true that taxing the 1 percent won’t entirely solve our nation’s short-term deficit problems or dramatically reduce inequality in the short run. But it will have a meaningful impact on both problems over time. Thirty years of tax cuts for the 1 percent have shifted taxes onto middle- income taxpayers; they have also added to the national debt, which simply postpones additional tax increases on the middle class. Progressive taxes, as were seen in the United States after World War I and during the Great Depression, do chip away at inequalities. These extreme inequalities weren’t built in a day, and the process of reversing them will not be instant, either. But when there is less concentrated income and wealth, there will be less money available for the 1 percent to use to undermine the political rule-making process.
Rein in CEO Pay. The CEOs of the corporate 1 percent are among the main drivers of the Wall Street inequality machine. They both push for rule changes to enrich the 1 percent and extract huge amounts of money for themselves in the process. But they are responding to a framework of rules that provide incentives to such short-term thinking. An early generation of CEOs operated within different rules and values—and they had a longer-term orientation.
There is a wide range of policies and rule changes that could address the skewed incentive system that results in reckless corporate behavior and excessive executive pay. What follows are several principles and examples of reforms that will reduce concentrated wealth among the 1 percent and also reform corporate practices:
An effective policy would mandate reporting on CEO-worker pay gaps. The 2010 Dodd-Frank financial reform legislation included a provision that would require companies to report the ratio between CEO pay and the median pay for the rest of their employees. This simple reporting provision is under attack, but should be defended, and the pay ratio should become a key benchmark for evaluating corporate performance.
An effective policy would limit the deductibility of excessive compensation. The Income-Equity Act (HR 382) would deny all firms tax deductions on any executive pay that runs over twenty-five times the pay of the firm’s lowest-paid employee or $500,000, whichever is higher. Companies can pay whatever they want, but over a certain amount, taxpayers shouldn’t have to subsidize it. Such deductibility caps were applied to financial bailout recipient firms and will be applied to health insurance companies under the health care reform legislation.
An effective policy would raise top marginal tax rates. As discussed earlier, taxing high incomes at higher rates might be the most effective way to deflate bloated pay levels. In the 1950s and 1960s, compensation stayed within more reasonable bounds, in part because of the progressive tax system.
An effective policy would give shareholders a binding voice on compensation packages. The Dodd-Frank reform includes a provision for a nonbinding resolution on compensation and retirement packages.
An effective policy would ensure wider disclosure by government contractors. If a company is doing business with the government, it should be held to a higher standard of disclosure. Taxpayers, workers, and consumers should know the extent to which our tax dollars subsidize top management pay. One policy change would be to pass the Patriot Corporations Act to extend tax incentives and federal contracting preferences to companies that meet good-behavior benchmarks that include not compensating any executive at more than 100 times the income of the company’s lowest-paid worker.
These same companies, however, use our public infrastructure—they hire workers trained in our schools, they depend on the U.S. court system to protect their property, and our military defends their assets around the world—yet they’re not paying their share of the bill. In a time of war, the unequal sacrifice and tax shenanigans of these companies are even more unseemly.
Corporate tax dodging hurts Main Street businesses, the 99 percent that are forced to compete on a playing field that isn’t level. “Small businesses are the lifeblood of local economies,” said Frank Knapp, CEO of the South Carolina Small Business Chamber of Commerce. “We pay our fair share of taxes and generate most of the new jobs. Why should we be subsidizing U.S. transnationals that use offshore tax havens to avoid paying taxes?”
This same offshore system facilitates criminal activity, from the laundering of drug money to the financing of terrorist networks. Smugglers, drug cartels, and even terrorist networks such as al-Qaeda thrive in secret offshore jurisdictions where individuals can hide or obscure the ownership of bank accounts and corporations to avoid any reporting or government oversight.
The offshore system has spawned a massive tax-dodging industry. Teams of tax lawyers and accountants add nothing to the efficiency of markets or products. Instead of making a better widget, companies invest in designing a better tax scam. Reports about General Electric’s storied tax dodging dramatize how modern trans-nationals view their tax accounting departments as profit centers.
The combination of federal budget concerns and a growing public awareness of corporate tax avoidance will lead to greater focus on legislative solutions. One strategic rule change would be for Congress to pass the Stop Tax Haven Abuse Act, which would end costly tax games that are harmful to domestic U.S. businesses and workers and blatantly unfair to those who pay their fair share of taxes.
One provision of the act would treat foreign subsidiaries of U.S. corporations whose management and control are primarily in the United States as U.S. domestic corporations for income tax purposes. Another provision would require country-by-country reporting so that transnational corporations would have to disclose tax payments in all jurisdictions and not easily be able to pit countries against one another.
The act would generate an estimated $100 billion in revenues a year, or $1 trillion over the next decade.
We sometimes forget that our financial sector is a human-created system that should serve the public interest and be subordinate to the credit needs of the real economy. Instead, we have a system where the planet is ruled by a tiny 1 percent of financial capital.
As quoted earlier, David Korten writes in “How to Liberate America from Wall Street Rule” that the “priority of the money system shifted from funding real investment for building community wealth to funding financial games designed solely to enrich Wall Street without the burden of producing anything of value.”
Communities across the country, as discussed earlier, are shifting funds out of the speculative banking sector and into community banks and lending institutions that are constructive lenders in the real economy.
More than 650,000 individuals have closed accounts at institutions such as Bank of America and moved their money. A number of religious congregations, unions, and civic organizations have followed suit. Now local governments are beginning to shift their funds. In the City of Boston, the City Council has voted to link deposits of public funds to institutions with strong commitments to community investments.
Here are some interventions to break Wall Street’s hold on our banking and money system:
- Break up the big banks. Reverse the thirty-year process of banking concentration and support a system of decentralized, community-accountable financial institutions committed to meeting the real credit needs of local communities. Limit the size of financial institutions to several billion dollars, and eliminate government preferences and subsidies to Wall Street’s too-big-to-fail banks in favor of the 15,000 community banks and credit unions that are already serving local markets.
- Create a network of state-level banks. Each state should have a partnership bank, similar to what’s been in place in North Dakota since 1919. These banks would hold government funds and private deposits and partner with community-based banks and other financial institutions to provide credit to enterprises and projects that contribute to the health of the local economy. The North Dakota experience has shown how a state bank can provide stability and curb speculative trends. North Dakota has more local banks than any other state and the lowest bank default rate in the nation.
- Create a national infrastructure and reconstruction bank. Instead of channeling Federal Reserve funds into private Wall Street banks, Congress should establish a federal bank to invest in public infrastructure and partner with other financial institutions to invest in reconstruction projects. The focus should be on investments that help make a transition to a green, sustainable economy.
- Provide rigorous oversight of the financial sector. The 2010 reforms to the financial sector failed to curtail some of the most destructive, gambling-oriented practices in the economy. The shadow banking system—including unregulated hedge funds—should be brought under greater oversight, like other utilities, and Congress should levy a financial speculation tax on transactions to pay for the oversight system.
- Restructure the federal reserve. The Federal Reserve has been creating money and channeling it to beneficiaries within the economy with no public accountability. The Fed contributed to the economic meltdown by failing to provide proper oversight for financial institutions under its jurisdiction, keeping easy credit flowing during an asset bubble, ignoring community banks, and then propping up bad financial actors. The Fed must be reorganized to be an independent federal agency with proper oversight and accountability. Its regulatory functions should be separated from its central bank functions, the new regulator given teeth to enforce rules, and individuals who work for the regulatory agency prevented from subsequently going to work for banks.
- Re-engineer
the Corporation. The concentration of power in the corporate 1 percent
has endangered our economy, our democracy, and the health of our planet.
There is no alternative but to end corporate rule. This will require
not only reining in and regulating the excesses of the corporate 1
percent but also rewiring the corporation as we know it.
Unfortunately, the Supreme Court’s Citizens United (2010) decision moves things in the wrong direction, giving corporations greater “free speech” rights to use their wealth and power to change the rules of the economy. An essential first step in shifting the balance back to the 99 percent is reversing the Citizens United decision through congressional action.
At the root of the problem is a power imbalance. Concentrated corporate power is unaccountable—and there is little countervailing force in the form of government oversight or organized consumer power.
Looking at corporate scandals such as those of Enron and AIG, or at the roots of the 2008 economic meltdown, we find case studies of the rule riggers within the corporate 1 percent using political clout to rewrite government rules, dilute accounting standards, intimidate or co-opt government regulators, or outright lie, cheat, and steal.
Changing the rules for the corporate 1 percent is not anti-business and, by creating a level playing field and a framework of fair rules, will actually strengthen the 99 percent of businesses that most contribute to our healthy economy. A new alignment of business organizations reflects this. The American Sustainable Business Council is an alternative to the U.S. Chamber of Commerce and advocates for high-road policies that will build a durable economy with broad prosperity.
Communities have used a wide range of strategies to assert rights and power in relation to corporations. In 2007, the Strategic Corporate Initiative published an overview of these strategies in a report called “Toward a Global Citizens Movement to Bring Corporations Back Under Control.” Many strategies are incremental, but worth understanding as part of the lay of the land in rule changes.
- Engage in consumer action. As stakeholders, consumers have leverage to change corporate behavior. Examples include consumer boycotts that changed Nestlé’s unethical infant formula marketing campaigns around the world and softened the hardball anti-worker tactics of companies such as textile giant J. P. Stevens. New technologies are enabling consumers to be more sophisticated in leveraging their power to force companies to treat employees and the environment better.
- Promote socially responsible investing. Shareholders can also exercise power by avoiding investments in socially injurious corporations. In 2010, over $3 trillion in investments were managed with ethical criteria. Companies do change some behaviors when concerned about their reputations.
- Use shareholder power for the common good. For more than forty years, socially concerned religious and secular organizations have utilized the shareholder process to change corporate behavior and management practices. Shareholder resolutions, in conjunction with educational and consumer campaigns, have altered corporate behavior, such as the movement to pressure U.S. companies to stop doing business in South Africa during the apartheid era.
- Change rules inside corporations to foster accountability. There are internal changes in corporate governance that potentially could broaden accountability and corporate responsibility.
These include:
- Shareholder power reforms. Presently, there are many barriers to the exercise of real shareholder ownership power and oversight. Corporations should have real governance elections, not hand-picked slates that rubber-stamp management decisions.
- Board independence. Public corporations should have independent boards free of cozy insider connections. This will enable them to hold management properly accountable.
- Community rights. Communities should have greater power to require corporate disclosure about taxes, subsidies, treatment of workers, and environmental practices, including use of toxic chemicals.
- Require federal corporate charters. Most U.S. corporations are chartered at the state level, and a number of states, including Delaware, have such low accountability requirements that they are home to thousands of global companies. But corporations above a certain size that operate across state and international boundaries should be subject to a federal charter.
- Define stakeholder governance. A federal charter could define the governing board of a corporation to include representation of all major stakeholders, including consumers, employees, localities where the company operates, and organizations representing environmental interests. The German experience with co-determination includes boards with community and employee representation.
- Ban corporate influence in our democracy. Corporations should be prohibited from any participation in our democratic systems, including elections, funding of candidates, political parties, party conventions, and advertising aimed at influencing the outcome of elections and legislation. This would require legislation to reverse the impact of the Supreme Court’s Citizens United decision.
Citizens United and Corporate Power
In January 2010, the U.S. Supreme Court decided the case known as Citizens United v. Federal Election Commission. It gave new rights of free speech to corporations by saying that governments could not restrict independent spending by corporations and unions for political purposes. This opened the door for new election-related campaign spending and has given birth to super PACs that further erode the power of the 99 percent to influence national politics.
Senator Charles Schumer (D-N.Y.) sponsored legislation called the DISCLOSE Act to force better disclosure of campaign financiers, but it has been opposed by the U.S. Chamber of Commerce and other big business lobbies.
Other potential remedies include a push for an amendment to the Constitution to remove the free speech rights for corporations that Citizens United provides. Move to Amend is a coalition organizing such an amendment.
The reeingineered corporation will still employ thousands of people and be innovative and productive. But it will be much more accountable to shareholders, to the communities in which it operates, and to customers, employees, and the common good.
Redesign the Tax Revenue System. This final section of rule changes examines how farsighted tax and revenue policies can aid in the transition to a new and sustainable economy. Present tax rules do not reflect the widely held values and priorities of the 99 percent. Rather, they reflect the designs and worldview of the powerful 1 percent of global corporations and wealthy individuals. The 1 percent devotes considerable lobbying clout to shaping and distorting our tax laws, which is one of the reasons those laws are so complex and porous.
Our tax revenue system should be simple, treat all fairly, and raise adequate revenue for the services we need. Tax rules and budgets are moral documents; we should not pretend they are value neutral.
We’ve already discussed two ways that the tax code has been distorted. The first is how it privileges income from wealth over income from work by taxing capital gains at absurdly low rates. Second, the offshore system gives advantages to the global tax dodgers in the corporate 1 percent who force domestic businesses in the 99 percent to compete on an uneven playing field.
Another example is the way our tax code offers larger incentives to mature extractive industries such as oil and natural gas instead of directing resources to communities and corporations that conserve resources, care for the Earth, and catalyze new green enterprises.
The present tax system not only fails to raise adequate revenue from those most capable of paying but also serves as a huge impediment to progress. Current tax rules lock us into the economy of the past, rather than encouraging a transition to a new economy rooted in ecological sustainability, good jobs, and greater equality.
Conventional tax wisdom asserts that we should “tax the bads” by placing a higher price on harmful activities. Hence the notion of “sin taxes” levied on liquor, tobacco, and now, with increasing ferocity, junk food. Taxing these items raises revenue to offset the societal costs of alcoholism, cancer, and obesity. But sin taxes, like any sales tax, are regressive, requiring lower-income households to pay a higher percentage of their income than the wealthy pay.
There are three major “bads” that our tax code should be revised to address:
- Extreme concentrations of income, wealth, and power that undermine social cohesion and a healthy democracy
- Financial speculation, such as the activities that destabilized our economy in 2008
- Pollution and profligate consumption that deplete our ecosystems
There are several bold interventions that focus on “taxing the bads” of our contemporary era and reversing two generations of tax shifts away from the 1 percent. They cluster around three foci: taxing concentrated wealth, taxing financial speculation, and taxing the destruction of nature.
- Tax inheritances. Levy a progressive estate tax on the fortunes of the 1 percent. At the end of 2010, Congress reinstated the estate tax on estates over $5 million ($10 million for a couple) at a 35 percent rate. Congress could close loopholes and raise additional revenue from the 1 percent with the greatest capacity to pay. The Responsible Estate Tax Act establishes graduated tax rates, with no tax on estates worth under $3.5 million, or $7 million for a couple, and includes a 10 percent surtax on the value of an estate above $500 million, or $1 billion for a couple. Estimated annual revenue: $35 billion.
- Institute a wealth tax on the 1 percent. A “net worth tax” should be levied on individual or household assets, including real estate, cash, investment funds, savings in insurance and pension plans, and personal trusts. The law can be structured to tax wealth only above a certain threshold. For example, France’s solidarity tax on wealth is for those who have assets in excess of $1.1 million.
- Establish new tax brackets for the 1 percent. Under our current tax rate structure, households with incomes over $350,000 pay the same top income tax rate as households with incomes over $10 million. In the 1950s, there were sixteen additional tax rates over the highest rate (35 percent) that we have today. A 50 percent rate on incomes over $2 million would generate an additional $60 billion a year.
- Eliminate the cap on social security withholding taxes. Extend the payroll tax to cover all wages, not just wage income up to $110,100. Today, some in the 1 percent are done paying their withholding taxes in January, while people in the 99 percent pay all year.
- Institute a financial speculation tax. A tax on financial transactions could generate significant funds for reinvesting in the transition to a financial system that works for everyone. Speculative trading now accounts for up to 70 percent of the trades in some markets. Commodity speculation unnecessarily bids up the cost of food, gasoline, and other basic necessities for the 99 percent. A modest federal tax on every transaction that involves the buying and selling of stocks and other financial products would both generate substantial revenue and dampen reckless risk taking. For ordinary investors, the cost would be negligible, like a tiny insurance fee to protect against financial instability. Estimated revenue: $150 billion a year.
- Tax income from wealth at higher rates. Giving tax advantages to income from wealth also encourages speculation. As described by Warren Buffett and others, we can end this preferential treatment for capital gains and dividends and at the same time encourage average families to engage in long-term investing. Estimated revenue: $88 billion per year.
- Tax carbon. Instead of taxpayers paying indirectly for the expensive social costs associated with climate change, taxes could build some of these real costs into purchases and products. Perhaps the most critical tax intervention to slow climate change would be to put a price on dumping carbon into the atmosphere from the transportation, energy, and other sectors. For example, the real ecological and societal costs of private jet travel would greatly increase the cost of owning or using private jets. A gradually phased-in tax on carbon would create tremendous incentives to invest in energy conservation and regional green infrastructure. Proposals include a straight carbon tax or a cap-and-dividend proposal that would rebate 50 percent of revenue to consumers to offset the increased costs of some products and still generate $75–100 billion per year. We could also explore similar taxes on other pollutants, such as nitrates that are destroying our water supplies.
- Tax excessive consumption. Consumption of unnecessary stuff, especially by the 1 percent, is filling our landfills and destroying our environment. A tax on certain nonessential goods, such as expensive jewelry and technological gadgets, would reflect the real ecological cost of such items. It could apply only to purchases that exceed a certain amount, such as cars that cost more than $100,000. Some states currently charge a luxury tax on high-end real estate transactions.
For several generations after the introduction of a federal income tax at the end of the nineteenth century, our progressive federal tax system was moderately effective in reducing concentrations of wealth. As we briefly described, during the 1950s wealthy individuals paid significantly more taxes than they do today. Since 1980, however, we’ve lived through a great tax shift as lawmakers moved tax obligations off the wealthy and onto low- and middle-income taxpayers, off corporations and onto individuals, and off today’s taxpayers and onto our children and grandchildren.
This program would reverse these tax shifts and set up signposts to help with the transition to the new economy.
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