We put the American aristocracy in place

By James McCusker

Our economy and our country have changed so much that some of our favorite ideas about public finance and taxation can easily lead us to the wrong targets for reform.

One thing that changed in America is our aristocracy. There was a time not too long ago when, as Bugs Bunny put it, our true American royalty and nobility consisted of … “the Duke of Ellington, the Count of Basie…” and a few others.

More recently, though, we have been hard at work creating a new kind of aristocracy, one with considerably less talent. It is an economic elite, not a traditional, European-style aristocracy where it was a matter of blood lines and birthrights. This is America and we do things our own way. Our aristocracy is based on levels of income and wealth that are outsized by comparison to all but a few.

Outsized income and wealth are not exactly new things in our country, but they used to be linked more closely to achievement. The opulent summer “cottages” in Newport, R.I., and elegant winter homes in Florida were built by individuals whose names were synonymous with industries they created and developed.

Much of the fabulous wealth they accumulated had preceded the introduction of the flat-rate federal income tax, a government innovation that did a lot more than provide revenue to finance our preparation for World War I. The income tax changed the game and, as an unintended consequence, made government a player.

At the beginning, the progressive part of our tax system was simple, just as the tax was, and consisted of determining who had to pay. In the 1916 tax, the one that “stuck” legally and begat our current tax system, people who had annual incomes lower than $4,000 — about $76,000 in today’s money — did not have to pay any tax.

Neither the introduction of the income tax nor its increasingly progressive rates ended the market’s process of selecting winners and losers and delivering prize money to the former. The structure of American business, and later global business, probably changed our economic aristocracy more than the tax code itself.

The market still rewards success but increasingly also rewards “winning,” which is often distant from the reality of achievement and closer to luck. And as rewards became more detached from achievement they became more detached from basic economics and other anchors to the real world. This paved the way for such things as outsized payouts to those who bet huge amounts of someone else’s money and guessed right about a market trend. And it ushered in bloated compensation packages for corporate CEOs, modestly talented athletes, and seriously flawed celebrities.

This economic distortion offends our sense of fairness because it violates our belief that our system is a meritocracy and that talent, hard work, and a little luck will be rewarded.

But that doesn’t mean that the often unlikeable crew that has been receiving all this income is the right target for government action. In many cases they have honestly earned our disdain. But we have the power to get rid of these people, and we can do it in a far more efficient way than any tax code.

While we tend to blame others, we have to remember that the income and wealth gap is partly our own creation. We may not feel personally responsible but all together we idolize and underwrite the preposterous salaries — including “appearance fees” — of celebrities and we encourage the firms that pay outrageous amounts of money to CEOs, money traders, hedge fund managers, fad-based tech businesses, and financial speculators of all descriptions. We have done this; not Obama, not Bush, not Clinton, or even FDR. It isn’t the tax structure, it’s us. We did it … and we can undo it anytime we have the attitude and the will to do so.

The real culprit, and our real target for change, then, isn’t the overpaid winners but the government. It is the natural tendency of economic aristocracies to try to preserve their privileged position and they use their economic resources to get the government to help them do so. The increasingly money-devouring campaign process, though, encourages our government to do just that, which undermines both the market system and the democratic process.

If we want to indulge our distaste for the wealth of others, we can support the politicians in their scheme to cover up their own shortcomings by raising taxes on the successful. If we want real and permanent change, though, and a fully functional market economy with a merit-based income distribution, we have to clean up our government.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.