The Trouble with Billionaires
By Linda McQuaig and Neil Brooks,
Penguin Canada, Paperback Edition, 2011, 272 pages
Review by J. Peter Venton
In this book, the authors present a comprehensive and detailed case against the extreme inequality in the distribution of income and wealth that has developed in the U.S. and, to a lesser degree, in Canada over the past thirty years. In the U.S. the share of income earned by the top 1% of income earners increased from just under 10% in the postwar years to 24% in 2008. The case is supported by evidence-based research by economists, political scientists, other social scientists and epidemiologists as well as many factual anecdotes.
The authors maintain that the increases in inequality in both countries have been largely driven by wealthy elites who have captured the political agendas. Inequality has not been the result of forces inherent in the free market capitalist economic systems. In both Canada and the U.S. the authors document how the wealthy elite have subverted democracies by advancing their economic interests at the expense of the values of the majority.
For example, U.S polls around 2000 showed that 74% of American voters preferred spending surpluses on social security to tax cuts. Nevertheless Republicans implemented tax cuts in 2001 and 2003. In a March 2001 survey, 73% of Americans favoured tax cuts that would be aimed more at middle income Americans than across- the- board cuts that would give the largest share of the cut to wealthy Americans.
Despite these preferences, the richest 0.1 percent of Americans saved 284 times more from the Bush tax cuts between 2001 and 2010 than people in the middle 20 percent of the U.S. income distribution.” For Canada the authors describe how business men and the wealthy succeeded in pressuring the federal government to eliminate estate taxes in 1971, how they blocked attempts of finance ministers in 1972 and 1981 to make the income tax more progressive, how they influence the change in rules on family trusts in 1991 that saved wealthy families untold billions.
Increasing inequality has created a lot of collateral damage. It has been bad for the health and social well being of citizens. It has reduced social mobility which is at the heart of the American Dream. And it has been bad for the economy as it has reduced economic growth and increased unemployment. Indeed increasing inequality was one of the primary factors causing the Great Depression of the 1930s and the financial crisis of 2008.
A central argument in the book is that the wealthy elite deserve only a fraction of their legally- earned income. Much of the success of billionaires can be attributed to past scientific and technological breakthroughs that properly belong to society as a whole rather than to individuals. Another part of the success of billionaires results from government policies that enhance markets for their products and services by enforcing property rights and by giving them degrees of monopoly power (e.g., through patent legislation on pharmaceuticals and computer software, and copyright laws).
Government regulations on international trade, banking and commerce also contribute to their success. Last but not least, the authors’ analysis of billionaires Bill Gates, John Paulson and Warren Buffet reveal instances where their success has been, to a significant extent, the result of just plain luck, connections or government bail outs rather than hard work or innovation.
To reverse inequality in Canada, the authors propose an inheritance tax, increased marginal tax rates of 15% and 25% on incomes over $500,000 and $2,500,000 respectively, and the elimination of tax loop holes. In addition they propose that Canada support international measures for a clampdown on tax avoiders and evaders that would involve the establishment of a simple international system for reporting financial transactions. Finally they recommend (that Canada) support the international implementation of a financial transaction tax (often referred to as the “Tobin tax”). Such a tax would impact primarily on the wealthy, raise much needed revenues for governments and curb short term financial speculation that adds little value to the economy.
The book concludes with an exhortation to strive to change current social attitudes about the role of progressive taxation in a democracy – attitudes that neoconservatives have successfully propagated with fallacious arguments. The following fallacies stand out.
1.The assertion that the wealthy work harder is not supported by systematic evidence. At the anecdotal level, individuals on minimum wage who have two jobs to make ends meet work harder than many CEOs. Moreover it is illogical to assume that Canadian CEOs who work 60 hours a week or 1.5 times a 40 hour week of an average Canadian deserve pay that is 45 times greater than the average Canadian.
2. The assertion that extreme pay levels are necessary to motivate high performance is not supported by any systematic evidence. Are the top 400 U.S. earners in 2006 who were paid 19 times more than the top 400 U.S. earners in 1961 (in 2006 dollars) more motivated? Where is the evidence?
3. The assertion that high CEO pay for performance is analogous to the pay of sports superstars is false. Sports superstars’ pay is based on measures that are objectively related to their performance; there are no such realistic measures of performance for CEOs of large corporations.
4. The slogan about “tax freedom day” gives the false impression that taxes completely eliminate the freedom of businesses to exchange in markets. It ignores the fact that at least a majority of citizens have freely chosen through their elected representatives government services over private services. They may have chosen government services because they are less costly than private services (e.g., education) or because it is simply not feasible to provide the services in private markets (e.g., defense and policing services) or because they are less risky (e.g., municipal water). So tax freedom day should be repositioned as “paid up” public services day.
5. One of the rationales for taxation is to fund activities that are in the public interest. Neoconservatives rely on public choice theory to suggest that there is no such thing as the “public interest” (only a collection of private interests) in order to discredit their rationale for taxation. However the authors point out that public choice theory is based on two false assumptions: (1) humans are exclusively concerned with their own welfare and (2) individual welfare depends solely on material goods.
The authors’ exhortations to change social attitudes about taxation are directed to the left and the progressives who have abandoned the moral high ground for protesting against the concentration of wealth. Apparently they view it as a losing proposition and an unwise political strategy. In this regard they are advised to develop moral counter arguments to the neoconservatives’ “moral” positioning of progressive taxation as “class warfare” and “the enemy of hard working citizens trying to live the American Dream”. The authors have explained how the American Dream has already been compromised by the loss of social mobility. The more recent charge of “class warfare” completely ignores the democratic polity’s aim of fairness. This aim was embodied in the implicit social contracts in postwar Canada and the U.S. that combined highly progressive taxation systems with good economic growth where both business and labour were in relative harmony.
In his book The Conscience of a Liberal Nobel prize-winning economist, Paul Krugman states that (in the U.S.) “This age of economic equality roughly corresponded to the golden age of political bipartisanship “. In this context the implicit social contract could be said to be truly democratic and hence legitimate. The book presents a coherent explanation of how the wealthy elite breached this contract. In this light the authors’ proposals can be positioned as a remedy to correct a class action suit for breach of contract.
In my view the analysis and proposals in this book provide a good foundation for the development of a coherent historically- buttressed ideological narrative for progressives and the left in Canada. In contrast with the neoconservative ideology it would be evidence-based and resonate with the aims and aspirations of a majority of Canadians. Such a narrative might serve as a manifesto for beneficial change that would address the frustrations of the participants in the Occupy Canada movement.