In 1947, the income of one wealthy person at the 95th percentile was enough to purchase the annual labor of just over five people living at the 20th percentile. For the next 34 years, that relationship stayed almost the same. However, in the 25 years that followed the relationship altered much more radically. Now the income of one person at the 95th percentile is enough to buy the work of more than seven people at the 20th percentile. Relative to the poor, the wealthy are far more wealthy. And relative to those at the top, both the poor and the middle class are far worse off than they were 25 years ago.
For the wealthy, when taxes were relatively high they could see that their interests were best served by making more investments in their business and providing the kind of benefits and training that gave them a long term edge. The only way to do well was by participating successfully in the market, and often doing well also required doing good. There’s no doubt about it, capitalism is driven by enlightened self interest, but the form of enlightenment varies wildly with the limits that society imposes. In a well governed economy, regulations and taxes exist that place responsibilities to community, employees, and the environment on par with those of shareholders and executives. In this kind of system, corporate officers and owners will see that they can build more value for themselves by building for the long term, by placing value in their employees, by sharing benefits and knowledge. An educated, competent workforce is the only way to create the broadly based, durable company needed for those at the top to enjoy the benefits.
However, enlightened self interest can also come in the form of realizing that no one is minding the shop. In such circumstances, it pays to ignore the community, ignore the workers, ignore the rules. When short term gain offers a better return than virtuous participation in the marketplace, enlightenment says “screw it, I’ll take mine now, thank you.” That’s what happened when deregulation of the savings and loans generated a crisis in the 1980s. It’s what built the unsustainable bubble that popped in 2008. And it’s what we’ve been doing to the broader economy since 1982. We’ve deregulated wealth; removed the incentives that made it reasonable for those who had much to invest in those who had little. We screwed up. When taxes drop so far that they cease to be a consideration, the best move is to simply grab all the money while it’s available. Why tempt fate in the marketplace, why risk unforeseen circumstances, why do all that boring old work if you can simply pocket the profits and run?
The current system provides no incentive to build companies and systems that can stand the test of time, companies built around valuable and educated workers who have a stake in the success of the company, community, and society. We’ve built a system that’s tottering on the edge of terminal instability, and those calling for still lower taxes are likely to knock out the last supports holding up the floor.
As it turns out, Ronald Reagan really did stage a second American revolution; a revolution that reversed the original. Because removing any pressure on income at the very top removed the only obstacle to what we have today—a system that inches ever closer to feudalism.
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