Top left of each diagram is the after-tax income of the wealthiest household.
Bottom right is the after tax income of the poorest household.
What this experiment shows us more than anything else is that if we were to somehow lift the yoke of the plutocracy, and give members of the economy a salary that is commensurate with their actual meritocratic value to society, elementary school teachers would make $100,000. An essential worker with high school diploma who keeps our city clean, the food on the shelves, and provides social services will earn $40 an hour. A stay at home parent who never graduated high school would make $45,000. Even those who are out of work will earn a significant basic income that will keep everyone out of poverty and everyone with a roof over their heads.
Now imagine what the purchasing power of the economy would look like if so many Americans were thrust into an upper-middle class income status. Their discretionary income would be beyond anything before in human history.
Reversing the Mechanics of Tax
I’ll begin this chapter with some philosophical underpinnings of why I feel this kind of reinvention is necessary when it comes to the mechanism for the distribution of social wealth. Systems of progressive taxation of the existing variety, even systems as progressive as the simple curve tax, are limited in their ability to bring about social justice because they fall victim to the structural prejudices that give rise to the racial caste system that we find in America today. In our economy today, we let the market run ruthlessly free, and then—after grave disparities of income and wealth are entrenched—we skim just a little cream from the loot of the massive winners, gut the middle classes pretty hard, and throw some loose change at those in poverty through the earned income tax credit (EITC).
personal income − tax (+ EITC) = after-tax income
What you will read about below is a radical re-thinking of how we could remove the built-in systems of racial bias that exist within the first part of the equation, personal income.
Salary is notorious for being inequitable across lines of gender, race, sexual orientation, socioeconomic background, and even the zip code of one’s birth. This lottery of birthright within what is ostensibly a system of meritocracy picks winners and losers in the economy before they are even born.
The Definition of Freedom
Within political discourse in capitalist economies there are two competing definitions of freedom that are held up as the fundamental building block of society. It is the disagreement on this definition that is at the root of much of our political discussion.
On the one hand is the definition of freedom espoused by many classical liberals—proponents of laissez-faire, free-market capitalism, libertarianism, objectivism, and their late 20th century moniker, neoliberalism. This definition of freedom is about a playing field where the rules are the same for everyone (and the rules are few). A basic level of security and infrastructure is provided by the state, but there is no place for a central government that redistributes wealth (especially to the “undeserving” like convicted “felons” for example). This definition of freedom tends to place the highest value on qualities such as industriousness, entrepreneurialism, and other traits that can be useful to the expansion of gross domestic product, regardless of the impact on the environment or other people. Those who fail to evince such traits are often classified as lazy, and it is seen as the fault of individuals if they slip into poverty and homelessness. Outside of the framing of this definition of freedom are considerations of institutional racism, intergenerational trauma, cycles of poverty, political disenfranchisement, lack of access to public resources, and entrenched power structures.
Within this definition of freedom, to interfere in the beautifully orchestrated machinations of the invisible hand of the free market—a natural law akin to the survival of the fittest—would be a perversion of the system and would lead to a crippling of the pure and noble power of capital to raise the standard of living of all people. Whenever the government imposes new public health standards, environmental regulations, public health requirements such as facemasks, reparatory policies like affirmative action, or regulations on firearms, this group will see this as a violation of their freedoms even if the regulations are backed by peer-reviewed scientific literature, subject matter expert advice, and case studies in other political jurisdictions demonstrating that it will save lives.
This definition of freedom relies on the determinist idea of rational choice theory for its economic modeling. The theory considers each individual to be a deliberate agent within a free market—a homo economicus—who makes decisions and has preferences that are informed by personal cost-benefit analysis to provide them with the greatest happiness or utility in every case. The aggregate effect of these rational decisions is assumed to create the greatest good for the greatest number of people by guiding supply, demand, and prices. To justify the inequality that inevitably results, proponents of this definition of freedom tend to rely on the assumption that there is equal access to opportunity and that disparities of inherited wealth and power can be overcome by those opportunities. Instead, this kind of freedom results in a casino economy where the house always wins.
This definition of freedom believes mankind lacks moral judgement in our natural state and only through the civilizing force do we transcend our base instincts. Because of its inherent distrust of human nature this definition of freedom calls for strong law and order, adherence to moral dictates of authority, and the removal of capital and therefore power from the people’s government, instead placing the protection and investment in the commons and our social welfare into the hands of wealthy private entrepreneurs. This was on full display during the COVID-19 pandemic as testing, supplies, logistics, and the human health response was outsourced to well-connected private companies with predictable and disastrous results. It’s the subject of the book Disaster Capitalism by Naomi Klein.
On the other hand is the definition of freedom espoused by Jean-Jacques Rousseau. One can find this kind of freedom in the speeches and writings of Dr. Martin Luther King Jr., “Injustice anywhere is a threat to justice everywhere.” This definition understands the existing conditions of structural inequality that have been built into systems of wealth creation and distribution and the generational disparities of outcomes that are the result of that structural injustice.
This kind of freedom seeks to rid society of the chains it finds everywhere. It seeks to chip away at the causes of inequality by enacting progressive policies that share our ample social wealth with intention and generosity. As Martin Luther King put it, “It’s alright to tell a man to lift himself by his own bootstraps, but it is a cruel jest to say to a bootless man that he ought to lift himself by his own bootstraps.” Whenever the government imposes new public health standards, reparatory policies like affirmative action, environmental regulations, or regulations on firearms, this group will see this as an expansion in support of their freedoms as long as it has a clear and measurable policy target, is backed by peer-reviewed scientific literature and the testimony of subject matter experts.
This definition of freedom recognizes that enfranchising people and providing equality of opportunity to the whole of society is a liberating power. Eugene Debs summed it up with his famous quote, ” While there is a lower class, I am in it, while there is a criminal element, I am of it, and while there is a soul in prison, I am not free.”
Behavioral economics, the scientific study through controlled experiment of economic decision-making, has demonstrated beyond a doubt that the every choice, decision, and preference made by individuals within any economic system is influenced by a complex interrelationship of “psychological, cognitive, emotional, cultural, and social factors” that are beyond their control. The very notion of a rational homo-economicus is magical thinking—an oversimplification of human behavior upon which we have legislated a fundamentally unjust socioeconomic contract. In light of this, a society that seeks to offer the greatest amount of freedom to its people will make laws that are forgiving, generous, reconciling, and healing. We can decide to share common social wealth in a way that is just and equitable. We can acknowledge the truth of our historic and contemporary transgressions of socioeconomic tyranny. We can intentionally moderate the more ruthless aspects of our economic behavior so that those who were previously shackled by poverty, racism, trauma, and prejudice can be set free from those social prisons.
In practicality, what this definition of freedom means is that each person agrees to sacrifice just a tiny margin of pure freedom off the top. For example, we all agree not to break certain laws and to wear a facemask if asked to wear one during a pandemic. We cede some of our individual sovereignty—through a living social contract—to a democratically elected representative government, whose job it is to ensure that Hobbesian social competition does not result in winner takes all scenarios and a level of income inequality we would rather safely read about in the pages of a Dickens novel.
The distinction of what constitutes freedom for humans within a civil society partly has its roots in the fundamental disagreement between Rousseau and Hobbes the human moral condition in a state of nature. Hobbes took the view that human life would be “solitary, poor, nasty, brutish and short.” He assumed that without law and order imposed from above by some absolute authority humans would devolve as the most vicious and self-serving instincts of human behavior would reign. Rousseau was under the opinion that there are fundamental and natural human morals that are endemic to our species. He famously remarked late in life, “men are wicked, yes, but man is good.” His contention was, that if allowed through democratic means, a people could justly govern themselves and make collective decisions that redound to the general benefit of everyone. By establishing a proper social contract that defends against corrupt instincts we could achieve greater equity and justice than could be possible under the strong arm of a more paternal and less representational government. Defending against corrupt instincts will require the regulation of capital and wealth. Within any commercial society, trades and exchanges are made through contracts between individuals and corporations. The neoliberal definition of freedom requires that that each party to a contract enters the agreement as an equal, which in practice is rarely the case. Commercial society operating through these aggregate effect of these individual and corporate contracts creates its own kind of sovereign power structure—one that is outside the bounds of our generally agreed upon social contract and that challenges the collective will of the people through their democratically elected representatives. By allowing free reign of the invisible hand of a laissez-faire free market, economic libertarianism brings about a more Hobbesian state of inequality and injustice than could ever exist in nature.
The result of our small sacrifice of personal freedom to the common good (the kind of social contract made famous by Rousseau) is that we can all—even those without means or income—enjoy our lives in safety and free from the stress and trauma of living at the raw edge of survival. Those at the top also benefit due to the reduced threat that those who find themselves in a necessitous station in life will take soon to sharpening their guillotines. This kind of freedom is designed to lift everyone up on Maslow’s hierarchy of needs. One brand of its manifestation can be found in Franklin D. Roosevelt’s Second Bill of Rights. The quote, “Necessitous men are not free men” is particularly powerful and is a quote taken by Roosevelt from an old English property law case, Vernon v Bethell (1762).
It is our duty now to begin to lay the plans and determine the strategy for the winning of a lasting peace and the establishment of an American standard of living higher than ever before known. We cannot be content, no matter how high that general standard of living may be, if some fraction of our people—whether it be one-third or one-fifth or one-tenth—is ill-fed, ill-clothed, ill-housed, and insecure.
This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights—among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.
As our nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.
We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. “Necessitous men are not free men.” People who are hungry and out of a job are the stuff of which dictatorships are made.
In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all—regardless of station, race, or creed.
Among these are:
• The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
• The right to earn enough to provide adequate food and clothing and recreation;
• The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
• The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
• The right of every family to a decent home;
• The right to adequate medical care and the opportunity to achieve and enjoy good health;
• The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
• The right to a good education.
All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.America’s own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for all our citizens. For unless there is security here at home there cannot be lasting peace in the world.
President Roosevelt’s January 11, 1944 message to the Congress on the State of the Union. via
Roosevelt’s vision never came to pass (even if it did, it may have excluded whole groups of Americans as did the Fair Housing Administration and Social Security). Instead, a resurgent strain of neoclassical economic policy a few decades later led to an era of privatization and deregulation, which had the opposite outcome. Inequality in the United States is today at record levels.
If the body politic in America were an actual body, it is as if we have decided to give all of our resources to the head to spite the limbs. The result is that we are in danger of crippling ourselves and bringing an unorganized end to capitalist economic expansion. Economists and sociologists like Wolfgang Streeck and Joseph Stiglitz argue that we are close to the amputation stage as we prop up capitalism’s incessant hunger for ever increasing profits. Unfettered intergenerational wealth accumulation and a tax structure designed to enrich capital over labor have resulted in an ever increasing level of unequal opportunity and the consequent inequality of outcomes the likes of which the world has never seen before, where one man can hoard new wealth each year equal to the average annual income of 1,400,000 million of his fellow citizens.
In the United States, the idea of free-market logical supremacy has gone unchallenged, largely because it is the definition of “freedom” most often adhered to by those in positions of influence and power. The narrative most commonly held is a false binary. Free market capitalism—at its most neoliberal best—is cast as the hero against the evil and creepy alternative of an autocratic “People’s Republic” brand of socialism.
But there is another solution.
Freedom can reach an entirely new level of existence in a society that realizes that unchecked private wealth aggregation is not a way to find happiness and self-expression for anyone. Freedom can exist in a society that realizes that to distribute our social wealth more fairly and to take care of the least well-off among us would cause social and moral prosperity to “trickle up” to the most well-off among us. Freedom can exist in a society that possesses a plethora of historical and contemporary economic data and the analytical ability to derive a system informed by that data that rewards self-interested action, yet ensures that even the least self-interested of its citizens are able to provide for themselves and their families.
Equal is never fully equal if we are allowed to be free. One of the strengths of capitalism is its built-in motivating force. The game it sets up with carrots and sticks challenges us to reach the potential of our own greatness. There is a kernel of truth behind the libertarian argument for social Darwinism, but its utility is limited. Some humans will invent new ideas and will do great things for society during their lifetime and others will not. We are all imperfect, and we all will excel in life in varying degrees of complexity and impact. We will all be stronger in some fields of study or craft than in others. It is good to reward greatness and achievement in society. It is not in our DNA to live the life of ants, who completely sacrifice their freedom for the life of the colony. A communist system that gives to each person according to her needs and her needs alone is too limiting of individual freedom and not compatible with American tradition. Further, history has shown us that centrally planned economies are too susceptible to corruption and one-party rule.
On the other hand, an more egalitarian society has a great deal of benefits. As Richard Wilkinson and Kate Pickett show in The Spirit Level (2011), rates of mental illness, violence, prison population, and drug abuse are all correlated with income inequality. The greater the economic inequality, the greater the health and social problems that are experienced in society. And the negative impacts of inequality are not limited to the poor. The wealthy also benefit from more equal wealth distribution.
A more egalitarian society is also less likely to fall victim to the kind of racist politics of the Nixon southern strategy and the Trump coalition, which both managed to sway lower class White voters through a “law and order” campaign that portrayed Black people, People of Color, Indigenous people, and immigrants as a threat to their way of life. The very idea of “fiscal conservatism” is founded on the predicate that we must decrease government spending on programs for those in or at risk of poverty, while the structural racism from emancipation through the racial caste system of the carceral state has ensured that Black Americans are disproportionately represented among the poor (as are other minority populations for historic reasons of oppression and genocide). Never Trump conservatives can claim that they are socially liberal. They can support LGBTQ rights and legalized recreational marijuana. But when it comes down to economic issues, like the top marginal tax rate, and public spending on affordable housing, food subsidies, or public healthcare, the fiscal conservative will point out the need for a balanced budget while they lower taxes on the capital gains of billionaires to effective rates lower than those imposed on the wages of workers who balance two or more jobs to make ends meet.
As long as the present rules governing the flow of wealth remain fundamentally in place, the strategies employed by capital to repress classes of people will simply shift when the old strategies are deemed unconstitutional by a slightly more progressive Supreme Court. But the outcomes will remain the same. In the opening to The New Jim Crow, Michelle Alexander powerfully traces the lineage of Jarvious Cotton—from his father, to his grandfather, great-grandfather, and great-great-grandfather—all of whom were refused their fundamental right to vote and all for different reasons (in reverse order: slavery, murder by the Klu Klux Klan, threat of murder, poll taxes and literacy tests, and—in today’s racial caste system—a criminal record). The means may change, but the ends remain the same. This is true for our entire economy. As the old means of maintaining hegemony over wealth and power are taken away, FinTech innovation and neoliberal policies have been all too happy to provide new means.
The progression that Michelle Alexander identifies—from slavery, to prison labor, to Jim Crow laws, to the war on drugs, to predatory lending—the trend continues towards its next metamorphosis: the racist application of austerity as a conservative economic principle that guides government spending. Throughout all of the periods of oppression, the agenda of those in power has been to lower the cost of labor in the economy through the systemic political disenfranchisement and financial theft of an underclass within a culturally-reinforced racial caste system.
A system of taxation that could remove the chasms of class division and establish a generous floor—beneath which it is the right of all citizens not to fall—and that supports a generous public commons, could remove the historical root causes of social class division and racially motivated animus.
It is possible to design a system that will reward and support the existential commitments we make in our finite lifetimes to the projects and relationships that deeply matter to us, while raising the floor for those on the bottom who also have the right to self-fulfillment and actualization.
Defining the Problem
The neoclassical laissez-faire definition of freedom also discounts the limits of the Earth’s natural systems to absorb endless economic growth. In “The Nature of Economies,” Jane Jacobs provides a beautiful enhancement to the concept of the survival of the fittest within the context of the health of ecosystems. One example that she uses is that of the great cats. They are predators at the top of their food chain. If they had a mind to do so, they could hunt and eat interminably, and eventually cause the veritable extinction of the local food supply. Something in them, however, causes them to stop after two or three kills per week, and this inclination towards moderation establishes a harmony between populations of predator and prey.
Humans are not endowed by natural selection with an inclination towards moderation. If allowed to do so, most of us will hoard as much wealth as we possibly can. We are witnessing, since the dawn of the European renaissance, and the age of humanism, a complete disregard for the balance of the human population and the health of the ecosystems that sustain it. The subtleties of sustainability may prove too soon that it is not just the fittest, but rather the simplest that survive.
Any free market, winner-take-all system is inherently weighted to favor the most motivated, creative, crafty, and ruthless among us, and this is an idea that seems justified for its rewarding of risk, so as long as the least motivated, uninspired and clumsy among us may live lives of relative comfort and not be driven to crime and other acts of desperation.
We should also recognize the massive racial disparities that exist in both opportunities and outcomes in America—the long legacy of institutional racism, from slavery through mid-century housing discrimination, and its resulting clustering of low income households in neighborhoods with little access to healthy food, public parks, childcare, and civil infrastructure, which perpetuates the cycle of poverty. The wealth divide is where the numbers are incredibly striking (the median Black family owns just 2% of the wealth that the median White family owns). We can see how the intergenerational wealth problem is only going to continue to get worse over time without substantial change to tax law. If we let the system run forward starting today with such a gross disparity in the wealth gap and the income gap, there is no reason to believe that things will eventually get better. It was in the 1970s—as a consequence of the Civil Rights Act and other changes—that the income gap between workers of color and white workers reached its most equitable ratios (the average black family earned 75% of the average white family). While still a tragic number, this was a major improvement over the 1950s racial pay gap and the result of the equal rights legislation of the 1960s. Since the 1970s, the gap has widened again, and sadly has returned to pre-civil rights era ratios (around 59%). The ideal new system would make it impossible to continue this pattern and would immediately eliminate the racial pay gap.
Similarly with gender discrimination, the ratio of male to female pay has improved in recent years but stubbornly persists around 85%. The ideal new system would bring gender pay gap down and compensate for the childbearing penalty.
The simple curve tax is a progressive improvement over our present convoluted tax bracket scheme, but it does nothing to address structural racism, sexism, and discrimination against other identity groups, and the downstream impact that conscious or unconscious bias has on salaries and wages. Devah Pager and Bruce Western in a 2004 Princeton University study have documented that, “black job applicants without criminal records are equally likely to be hired as their white counterparts who have served time in prison.” There is no tax bracket system that can possibly guard against those types of before-tax income disparities that are endemic in our society.
The new system of income distribution should also strike a balance between the extraction of natural resources and their ability to replenish themselves. There is a very wide gap between the ecological footprint of the 1% and the environmental impact of everyone else. We can design a system that will bring about a simplification of the lives of the most well-off (the top 0.1%), a moderation of the highest incomes and a more even distribution of social wealth.
However well intentioned it is in theory, the application of capitalism has been an exercise in “the end justifies the means.” The moral abomination of outlandish levels of income inequality somehow is justified by the utopian notion that the market will eventually provide prosperity as long as the invisible hand is left alone, and that a rising tide will eventually lift all boats. While that has happened on occasion (during cycles of growth), it is not the normative function of capitalism over time as is born out in the data on inequality over the past few generations.
For those who may want to grasp onto free-market capitalism perhaps because it hasn’t been allowed to reach its full potential, remember that the United States is not an example of pure free-market capitalism any more than China is a pure example of socialism. The freer it is allowed to get, the more disparate and unequal the outcomes in society. We live today within a set of complex and arcane economic regulations on an order of magnitude never known in the history of law. The tangled webs of rules are in place to protect the wealth and power of the established oligarchy. The great American dream is just that—a dream. Maybe that is why so many of the working poor play the lottery. Their chances of making it through means of a jackpot are statistically greater than if they would invest an equal amount into any productive endeavor.
Who could argue with the suggestion that, if possible, the wealth of a nation should instead be at least as well proportioned among its people so that children are not starving and people are not dying in the street? According to the US Census, there were 39.5 million men, women, and children living in poverty in 2017. These American families are in many cases undernourished (or victims of fast food malnutrition), and many are living without health insurance.
More than 12% of our fellow Americans are not afforded the opportunity of self-actualization and therefore are deprived of their inalienable right to the pursuit of happiness guaranteed to them within their social contract, the US Constitution.
Along with increasing income disparity, we are witnessing the consequences of shortsighted investment in urban infrastructure, which threatens regional economies. When a bridge collapses or a levee breaks it hurts commerce.
In the name of austerity we are witnessing curtailing of social programs that can soften some of the symptoms of poverty, while taxes are drastically reduced for those few at the top who already have all the wealth. When is it time to think about the concept of austerity being applied to those who consume the most among us?
The challenges of climate adaptation and the demands of the low-carbon energy transition will require a massive investment of public wealth in new infrastructures, and yet our coffers appear empty to us. Our public institutions are drained of public trust. If we are serious about tackling social issues such as early childhood education, substance abuse, incarceration, childhood pregnancy, and public health (to name a few), we need to massively increase the percentage of our social wealth that we invest in programs that have been proven by good social science to work.
It is time that we open our eyes to the bigger picture, and gaze upon the systems of our survival with an enlightened sense of belonging to the earth. We must experience this collective moral awakening during this century lest we go the way of the dinosaurs.
We must bring back more of our wealth into the commons. We must establish a fairer sharing of the new wealth that is born from our labor under capitalism. Natural resources are there for us to steward collectively, and their utility for wealth creation should offer a dividend to all people.
Still, there is certainly room within a system of egalitarian wealth distribution to allow for the rewarding of personal initiative and merit of achievement, and any government that should take it upon itself to respond to this moral awakening should not consider itself as therefore limiting the ability of its citizens to seek compensatory reward for their contributions to society. This is the cornerstone of capitalism, and it is a just and fair notion. It’s just that the way the system is designed right now is broken and unsustainable. We can fix it.
The Meritocratic Maximum Wage Solution
The solution presented here is a substantial departure from the current model of free market capitalism, but it is founded upon the same ideological principles. Namely, that purely egalitarian wealth distribution (i.e. communism) is not a pragmatic alternative to a natural hierarchical apportionment, and that if merit is not adequately rewarded, a lack of financial motivation on the part of the workforce leads to a stagnation of innovation and economic development.
Looking back now it is clear that we took that idea a little too far. We are simply not looking after our own and this vacuum of self-maintenance at the national scale will lead to breakdowns in society. A nation in which half of the population is struggling to get by is not a sustainable model. Its deleterious effects have been, and will continue to be, distressing to the long term economic and environmental health of the nation and of the world. Human nature being what it has proven itself to be, those in positions of power and wealth cannot be counted on to alleviate the symptoms of poverty through acts of charity and largess. Philanthropy itself has become captured by the profit motive. It’s time for a new era of humility. Let’s recognize that we’ve not yet gotten it right, and let’s try something radical and new.
Note: If the solution presented here is too strong for your taste, you may be more interested in the Simple Curve Tax proposal as an alternative. It maintains the system generally as is, and instead increases the progressive nature of the tax bracket structure.
As demonstrated by the many corporate scandals of this young century, the market is not a good arbiter of personal salary. While record lay-offs and bankruptcy filings were taking place during the 2008 financial crisis, we saw the income of management at record levels. In 2008, the CEOs of Lehman Brothers, Capital One, Goldman Sachs, and Countrywide Financial each took compensation of in excess of $70 million. The last company, Countrywide, was one of the largest villains in the 2008 subprime mortgage debacle and yet the CEO, Angelo R Mozilo made over $100 million that same year. Leaving aside the question of what one person does with $102 million in one year, there is no possible meritocratic relationship between that salary and the real contributions of that one person, Angelo Mozilo, to the generation of new wealth in the economy. It could be argued that he should have been handed an invoice for more than that amount because he cost society by destroying that much wealth.
It is promising to note that a few of the more responsible CEOs, such as John Chambers of Cisco Systems, have requested salaries of only $1 in years when their companies are doing poorly. They can afford to do this since, in the case of Chambers, his income in the preceding two years topped $100 million.
I propose that salary be determined in direct relationship to the actual achievements of wage earners and their contribution to the creation of social wealth. The measurements of an individual’s personal achievements and commensurate social contributions are readily available to be verified. All of the necessary information is now collected as a matter of course by the government. The idea is to reward success while mitigating the collateral damage of gross income disparity.
It is not about giving to each according to her needs, but rather leaving each with individual wealth in accordance with her contribution to social wealth.
In a sense, it is a plan to take the best of the theories of capitalism and of socialism and combine them in a practical system of meritorious wealth equity. It is the logical extension of the movement for transparency in employee compensation on the scale of a nation.
Before we get too far into this, let’s reflect on how extremely complex the economic system we currently live and operate under is. It has been designed over time, under the influence of the wealthy and powerful, to pick winners and losers in the marketplace. It is a complex and messy algorithm that quickly creates chaos when stressed. But when it is working smoothly, and when it is propped up by lax antitrust regulations, gutted environmental laws, a captured Securities and Exchange Commission, a broken Federal Trade Commission, an underfunded Internal Revenue Service, tax havens around the world, stock buybacks, stock options, net operating loss rules, planned obsolescence of commercial products (the disposable culture), offshoring of production, union busting, wage deflation, and tax cuts for the wealthy—it has the effect of maintaining an exponential growth rate for profit to be made on capital, both active and passive. The laws have been intricately woven so that Amazon can pay zero in corporate income taxes in 2018 on profits of $11.2 billion (after executive compensation has been paid, which in the Amazon CEO’s case was $78.5 billion that year), while the family business around the corner has to shell out at least 20% of their modest profits.
If we lived in a more equitable world today and someone brought up the idea of designing a complex system that requires the completion of dozens of IRS forms and worksheets, all for the end goal of keeping poor people poor and rich people rich, we would say no to that idea. But we never noticed the water around us getting slowly hotter and now it’s about to come to a boil.
Before it boils over we can design it differently and turn down the heat. We can simplify. We have that power in a democracy. We are still a democracy after all.
The ideological leap that has to be made is one of the logistics of wealth distribution and the concept of profit.
Today in any free market capitalist system, money is exchanged for goods and service and upon exchange, the profit is owned entirely by the recipient or provider of the service. Taxes are then paid to the government for the privilege of its protection and for the maintenance of the public domain. In the proposed system, instead of keeping what is earned and giving up a percentage, business owners would keep as much as is required for capital reinvestment, an established rate of profit, and to provide for the salaries of employees. Salaries would be based on a set of merit-based variables within an equation that would be adjusted to maintain a balance between maintenance of a free and healthy human population and the health of the ecosystems that sustain it. Though a business may see a profit beyond its capital liabilities, a maximum wage limit will act as a top marginal tax rate and also as a floor under which no one can fall. Sole proprietorships (the self-employed), management, and executives would be reflected by a variable within the system that rewards the unique responsibilities, dedication, and commitment inherent in running a business. Along with other careers, informal home care providers and stay at home parents of young children would be classified as essential employees, providing compensation to a long-overlooked and undervalued profession.
If net compensations are limited by the application of an equation for salary, all businesses would act as socio-economic engines, the proceeds of which would be used for capital investment in the public sector. The equation for personal salary would include variables that would favor business owners and those with academic achievements, yet still pull everyone out of poverty status. Even the lowest paid would be comfortable and never seriously want for anything. And why should they? This incredible fact would result in the eventual drawdown of social programs, and would seriously attenuate the occurrence of crime and substance abuse. Eventually, the payroll deductions could be scaled back gradually to zero, further increasing the benefits shared equally across society.
Soon following the enactment of this system the available funds for reinvestment into society will rapidly increase, allowing the fiscally responsible reinvestment into education (free college), families (free childcare), health (medicare for all), welfare (free access to counseling, rehab, and support services). With a more equal access to opportunity, young people could adequately plan their lives attaining the level of education and achievement they are capable of attaining based on their capabilities and not based on their ability to afford it.
The equation that is presented below is shown here as a very simplified example of the idea. I do not suppose to have addressed all of the implications and subtle consequences of the application of the system. I would recommend that simulation models be created and tested, and that the final resulting system of equations be more thorough and exacting than the context length of this book allows for. For those who are interested in taking this idea forward, you can download the data here.
When the excess income of the top 1% is re-invested into the maintenance of our society, the overall balance will be positive by a factor that would allow for a vast new environmentally sustainable civic and rural infrastructure that can solve the problem of climate change and other human caused environmental damage. This system would effectively alleviate poverty and mitigate its criminal social consequences. At the same time health care and unemployment could be provided for all people. Those adversely affected by the new system would be those who earn the highest salaries in America. They would find a new wage ceiling, but it would be a beautiful ceiling—a veritable Sistine Chapel of social harmony and accord.
The other concession here is that there is no need for a wealth tax. No one need begrudge the wealth of the super rich any longer because everyone is doing well together. Over time the wealth gap will close naturally as the income gap remains small year after year.
What follows is an example of how this could work. As stated above, the values attributed to each of the variables could be the subject of a more in depth study, employing mathematical models for simulation.
The Equation for Salary
Would consist of the following variables:
e = Educational accomplishment
q = Quantifier of cost of living
u = Umbrella of dependents
a = Age (life experience)
l = Level of employment
i = Important and hazardous occupations
t = Time with current employer
y = Per capita embodied carbon of employer and other eco-accommodations
It would be the job of the Secretary of the Treasury or the Federal Reserve to oversee the numbers assignable to these variables in order to manage inflation and as a tool for economic priming or easing.
I put forward the following example in which the equation relating them all is as follows:
S (yearly salary) = $19,569 x (equality)
The Big Picture
Based on the percentages of people who would check each of the boxes within each letter variable of the equality equation, we can take a look at what such a system might look like in aggregate if applied to the current population of the United States. In a glance it looks like the right half of the image at the top of this chapter.
In 2018, the latest year of available data as of the writing of this post, the total amount of after-tax salaries and wages (not including capital gains and other investment income) was $7.7 trillion. That was before income tax. There is no income tax under the proposed meritocratic maximum wage system since the distribution mechanism is front-loaded.
The $19,569 multiplier in the equation is set up so that when applied to the population of 328 million people in the USA (and how they fit today within the categories), the total for salaries and wages stays exactly the same. This baseline multiplier will be shifted each year by the government, perhaps in coordination with the Federal Reserve, to keep in alignment with productivity and with the consumer price index.
The only other requirement will be that the average corporation is required to spend 30% of corporate receipts on salaries and wages, which is basically (each industry has its own standard) what they do now (and if they don’t they should). If they do not, then the balance is taxed in addition to their standard corporate income tax on profit. This number varies greatly by type of business, and unique business types would have their own specific requirements. Taken together they would average to 30%.
Other than this new system of maximum wage administered through a new method of taxation, everything else in the economy is unaltered. Payroll taxes would still be applied to the salary at the same rate (you can see the effect of this in the calculator above). Excise, estate, and other taxes could stay the same. There is no big government telling anyone what they can do with their life or centrally planning an economy. It’s not socialism at all. It’s simply a new way of taxing income at the federal level.
My simple model under the new EQUITY system shows the Treasury can expect to net an additional $500 billion in receipts at the same time as the vast majority of Americans are earning double what they used to. The highest possible salary would be approximately $2 million. Certainly something to work for. The entire system is a set of transparent wages for the country that does not allow room for implicit bias on the basis of sex, race, religion, gender, politics, exploitation, or anything else. The additional revenue that this brings in is shown on the “aggregate social wealth” tab of the excel file.
If the salary you are paid by your employer is less than your maximum wage, then the government will make up the difference. If it is more than your maximum wage, then you owe the balance to the government.
What this experiment shows us more than anything else is that if we were to somehow lift the yoke of the plutocracy, and give members of the economy a salary that is commensurate with their actual meritocratic value to society, elementary school teachers would make $100,000. An essential worker with high school diploma who keeps our city clean, the food on the shelves, and provides social services will earn $40 an hour. A stay at home parent who never graduated high school would make $45,000. Even those who are out of work will earn a significant basic income that will keep everyone out of poverty and everyone with a roof over their heads.
Now imagine what the purchasing power of the economy would look like if so many Americans were thrust into an upper-middle class income status. Their disposable income would be beyond anything before in human history. It will make the rise of the middle class in the 1950s/1960s look like the Great Depression.
Now that we’ve unleashed such a dynamic force of buying power and kinetic wealth into the economy we’ll need to put environmental safeguards in place, lest we begin to consume natural resources at a faster pace. The last thing we want to do is give a shot of adrenaline to an economy that is pillaging the earth’s resources and polluting her air and water.
That is why the shift to terrametrism from capitalism is so important. Without that shift, either the simple curve tax or the EQUALITY equation system when implemented will immediately place a large amount new disposable income into the wallets of the bottom half of the present distribution. The effect will be an economic stimulus, that if applied to an extractive capitalist economy could end up having a negative impact on the environment. Oddly, we can look back at the massive income disparity of the late twentieth century as a kind of restraint on consumption and we should be aware of the impact of the removal of that restraint should we legislate our way to a more equal income distribution.
Still, the last few economic booms were driven by the information and service economies. Greater disposable income does not need to be spent on material goods, but can go instead towards self-actualization, savings, investments, and life experiences.
Additional Thoughts
The accepted notion in our society today is that a CEO’s compensation should be commensurate with the value of the company she oversees. But starting and running a small business is often harder than overseeing an established corporation that has its own inertia and sits upon substantial assets and capital. The CEOs of major corporations do not necessarily work more hours on average than do owners of small businesses. The fact that they open themselves up to more liability is a result of the speculative and marginally ethical nature of big business. If large corporations were subject to a level of accountability in which the assets reported in a company’s annual report to its stockholders were equal to the assets reported by the same company to the Internal Revenue Service, the risks of executive management may be far less.
This proposal still allows for a method, through stock options and profit sharing, whereby successful corporations would return value to shareholders and give bonuses to valuable employees. This amount would be limited by a percentage of gross receipts to match the level of growth desired in the economy and would be deducted from the amount given quarterly to the government, along with capital investment, overhead, and personal salaries as referred to above. The proportion of internal company profit distribution would be at the discretion of the board or the president. The percentage of profit put to this use would be a variable that would be controlled, along with those used to calculate salary, by the democratically elected legislature.
The treatment of capital gains and estate taxes under this new system remains largely the same, although the rate could be made progressive. Small capital gains from middle income stock portfolios and real estate investments could be exempt up to a certain amount. Other taxes like excise tax would also remain unchanged under the new system.
For a look at the numbers behind this chapter, please download the excel file.
