Stopping the Rich from Getting Richer

On April Fools Day this year, The Atlantic posted an essay by Christine Emba with the title: What Would Society Look Like if Extreme Wealth Were Impossible? 

This was not an April Fools joke. Her essay addresses an issue that, in my opinion, is not getting enough attention.

Emba’s essay is all about a book authored by Dutch philosopher Ingrid Robeyns and published in January 2024: Limitarianism: the Case Against Extreme Wealth. Emba sums up the book in this fashion: “Extreme wealth keeps the poor poor . . .  and expands inequality. The super-rich undermine democracy through their outsize political influence and wreck the climate with their luxurious lifestyles.” I couldn’t agree more.

Robeyns points out, per Emba, that “Any individual’s wealth is dependent on the resources, effort, and cooperation of the society that surrounds them.” Robeyns goes on to propose an individual, ethical limit on personal wealth of $1 million and a national, legal limit of $10 million.

Let’s not focus on these specific limits. Even Emba suggests that the $1million ethical limit is too low for the United State—because of its broken health insurance system in particular. Robeyns also argues for a global limit on wealth, but it seems much more politically feasible for every country to establish its own legal limit with a view toward harmonizing these limits over time.

What is missing in the Emba essay is limits on income. There is an obvious connection between income and wealth, so it’s puzzling to me why she never mentions income. Maybe Robeyns addresses income in her book. 

Given where the world is today, it is not sufficient to impose limits on income. There is too much accumulated wealth among the global 1 percent by wealth, or even the 5 percent, I would argue. The touchy policy question is whether it will be politically easier to start with limiting wealth or limiting income. The answer may vary from country to country.

In either case, however, the core of the argument for setting limits on either one—as laid out by Robeyns—is that the top income earners and the top wealth holders owe their success to “the system” more than to their individual efforts. 

Let’s examine two cases where individual efforts are clearly important. One is the case of a sports star, like Michael Jordan or Shohei Ohtani (the Japanese baseball player). Their income and wealth are derived from an open auction process that they did not create. It comes from an advertising industry they did not create. It comes from having a good agent, who is well compensated. But there are many others who get no monetary compensation, like the people who buy tickets to their games. The same goes for entertainers like Taylor Swift.

The other case is a scientist like Robert Langer, a founder of Moderna, Inc., that produces one of the most widely purchased Covid-19 vaccines. Much of his research was funded by the US Government. Most of the purchases were made by the US Government and the governments of other countries. His ability to profit from his research depended on patent laws he did not create, and other laws created by others that allowed him to float a company in a stock market he did not create and that enabled him to build the factory (within zoning limits he did not create) that produces the vaccine.

My interest in this issue is directly related to one personal experience. In 1994, having reached some kind of glass ceiling for promotions in the US Treasury Department, I went to work at the Institute of International Finance for twice the salary I was earning as a civil servant. When I left the IIF seven years later, I was earning three times my former Treasury salary. Did I need to be getting this much money to be happy in my job? Not at all. I might even have been content with a Treasury-equivalent salary—as long as I had the same pension benefits—because my work at the IIF was much more interesting and satisfying.

Then, during the seven years I was with the IIF, I worked with financial industry Board Chairmen and CEOs who were getting astronomical levels of compensation (in my eyes). Moreover, it became increasingly clear that they were benefitting from a practice of having compensation set by Compensation Committees of Boards of Directors that were systematically ratcheting up compensation to “stay ahead of the competition”. And too often, increases in compensation were being awarded even when their company’s profits and share price were falling.

 Now consider how this issue plays in the context of American politics. It has been on my mind for a long time, but let’s just go back to November 2016. A couple of weeks after Trump was elected President, Brookings Institution President Strobe Talbott convened an all-staff meeting for an open discussion on how the institution should respond to a Trump presidency. I wasn’t satisfied with the overall thrust of the discussion, but I operated at the margins of the institution and doubted that any intervention by me during the meeting would be taken seriously. However, I had by good fortune done some work directly with Strobe and believed that he would read my words even if they went in two eyes and then vanished. Here is what I wrote: 

Only one question needs to be answered to get to the heart of today's malaise, in the USA and beyond:  are the rich getting richer while the poor are getting poorer?  In my mind, the answer has been crystal clear since the Global Financial Crisis: Yes.  It is also clear to me that for millennia the rich have been doing better than the poor and that's not about to stop.  At points in time, however, the poor revolt and that's what we're seeing now.  If I'm right, therefore, a key challenge for Brookings is to identify policies that will make the rich less rich and the poor less poor.  I believe Brookings has been doing a good job on the latter for a long time, but these are the easy policies to identify and adopt, I suspect.  Much harder is to identify the policies that will make the rich less rich and to help build the political force required to get them adopted.  This is harder in part because Brookings is mentally among the rich.  It is not just perceived as part of the elite; it is part of the elite.  I don't see how Brookings will ever earn the respect of the bottom half of Americans (by income) without visibly and forcefully advocating policies that will hurt the rich.  Arguments in favor of keeping the inheritance tax, for example, will not be enough.  Brookings will have to find arguments that appeal to--and get heard by--the left-behind majority that seems to have embraced the notion that it is just one more bad, intrusive federal tax. [my newly-added emphasis]

This post is already too long, but I can’t resist the urge to add two more thoughts prompted by the Emba essay:

--In any legislation that might be considered to limit income or wealth in the USA, the move could be made more palatable by giving wealthy people the option of transferring “surplus” income or wealth to a charitable foundation that is managed independently for socially beneficially purposes chosen by the donor.

--Part of our problem of excessive wealth is private ownership of land and how it is taxed. A case can be made for limiting land ownership, not just for foreigners. But it might require a constitutional amendment. More feasible should be “land value capture”, a form of taxation that diverts increases in land value due to infrastructure improvements or other factors to the public sector instead of adding to the wealth of the landowners who did nothing to raise the value of their land.

PS.  Robeyns is a professor of ethics at Utrecht University in Netherlands.

Note: I missed an important development on this policy issue. At the end of February, the Brazilian Finance Minister announced a proposal for a global tax on the "super-rich". This has to be taken seriously because Brazil is chairing the G20 leaders forum this year and his proposal is being added to the work program of the G20 Finance Ministers. The proposal generated supportive statements from the French Finance Minister and the Managing Director of the International Monetary Fund. The proposal also received serious media attention during the Spring Meetings of the IMF and World Bank in Washington DC during the week of April 15 as an add-on to the Global Minimum Tax on corporate income that has already been agreed upon at the G20 Summit level. (Added 29 April 2024)