The Software Society

How digital technology is changing our culture and economy

The role of the Top 1% in reducing income inequality

There is a real problem of the rich getting richer while the bulk of the population does well to simply maintain. Beyond limiting the demand that drives economic growth, such trends can lead to social instability. “An imbalance between rich and poor is the oldest and most fatal ailment of all republics,” according to Plutarch, the Greek historian.

The divergence in incomes will become a major item of discussion in the US, driven by the upcoming political campaigns. Federal Reserve Chairman Janet Yellen expressed her concern on widening US income equality in an October 2014 talk. And discussion of the subject has been driven in part by recent books such as Thomas Piketty’s Capital in the Twenty-First Century, which claims that growth in inequality is essentially built into the capitalist system given current conditions, and Joseph Stiglitz’ The Price of Inequality, which largely blames “rent-seeking” by the top 1% of income earners. Stiglitz argues that corporations run by the Top 1% and wealthy individuals in that category have inordinate influence on politics through campaign donations and Political Action Committees, as well as the “revolving door” that sees politicians move into industry when they move out of politics. Because of their control of politicians, Stiglitz argues, the Top 1% can block any reforms.

However, the Top 1% is outnumbered 99-to-1. They must recognize this basic fact and the ultimate danger in ignoring it. As the topic of income inequality gets increasing attention, the best way for the Top 1% to prevent laws or tax reform they don’t like–even the possibility of social unrest targeted at the wealthy–is to help solve the problem. We are starting to see some of that with corporations raising pay above minimum wages and in a recent drop in executive pay relative to the average worker. Another positive trend is the Top 1 % running investment funds placing more independent directors on corporate boards; independent directors can represent shareholders by challenging inordinate rewards to executives, particularly for short-term versus long-term performance.

But ultimately the Top 1% must support more fundamental reforms that lead to some redistribution of tax income, a redistribution that reduces the burden on the middle class and increases it on corporations. Raising taxes on the highest individual incomes is unlikely to work; there are too many ways for high-income, high-wealth individuals to minimize such taxes. But higher taxes on corporate profits, while they might minimally impact the Top 1%, are indirect enough that they can and should be supported by that group. In The Software Society, I proposed a form of corporate tax (an “automation tax”) that was directly related to creating or maintaining jobs, providing a secondary economic benefit beyond the taxes generated.

The Top 1%, to repeat the obvious, is heavily outnumbered. They ignore this incontrovertible fact to their peril.

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