TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, December 26, 2011

Ayers & Edlin: An Inequality Tax Trigger

Following up on last week's post, Ayers & Edlin: Don’t Tax the Rich. Tax Inequality Itself: Freakonimics, An Inequality Tax Trigger: The Brandeis Ratio Explained, by Ian Ayres (Yale) & Aaron S. Edlin (UC-Berkeley):

A central idea behind our Brandeis tax proposal was to have a tax that is triggered by increases in inequality. Our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down. ...

[T]he Brandeis ratio as a measure of concentration is immediately graspable, and is more closely tied to the specific concern that a sliver of plutocrats with gargantuan wealth could distort the political process.  It doesn’t take a Ph.D in economics to understand that something seismic has occurred when the average one percenter goes from earning 12.5 medians to 36 median incomes. ...

Steve Silberstein has been promoting an interesting way to make the corporate income tax for specific corporations contingent on an analogous inequality ratio.  As mentioned in the New Republic:

[A]nother proposal, put forward by investor Steve Silberstein, would adjust the corporate tax rate based on the ratio of CEO pay to the average worker. A company with a ratio at the 1980 level of 50:1 would pay tax at the current rate of 35%, with the rate rising for companies with a higher ratio and lower for those with a narrower pay gap.

We had briefly thought about modifying our proposal to allow one percenters to avoid a trigger Brandeis tax if they could show that their income was less than 36 times the median income of workers who produced it, but concluded that personalized Brandeis ratios would be an administrative nightmare.  The Silberman corporate tax proposal is by comparison elegantly straightforward.

Our proposal starts with an out-of-the-money status quo inequality trigger as a way to promote political common ground.  You can vote for a contingent Brandeis tax without voting to necessarily raise taxes.  Ours is a “tax more tomorrow” idea where the relevant tomorrow may never come.  Our trigger avoids the concern that we’re engaged in crude “class warfare.” It doesn’t take away any of existing inequality, it just tries to make sure that 99% share in prospective future gains of the 1%.  But reasonable people could argue for either higher or lower triggers – for example, returning to a simpler time when rich people only earned 20 medians.   Perhaps like with carbon emissions we could seek to lower inequality to 1990 levels by 2020.

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"T]he Brandeis ratio as a measure of concentration is immediately graspable, and is more closely tied to the specific concern that a sliver of plutocrats with gargantuan wealth could distort the political process. "

It doesn't take gargantuan wealth to distort the political process. The political process has been distorted throughout time, regardless of inequality.

Thus, arguing that this is the goal is silly.

If you want to avoid distorting the political process, then hold leaders accountable for the same things CEOs are held accountable for. Apply SARBOX to congress.

When something really bad happens due to government incompetence (Katrina, financial crisis, etc), we should pick the number of "heads" we want from congress. Adn then have congress determine who among the was most responsible. And those should be fired immediately and stripped of all benefits and barred from any lobbying in the future.

For example, after Katrina, the people should have determined that was worth firing 4 members of congress. 2 from the left, and 2 from the right. We tell congress to name the names of those most responsible. They vote among themselves in a secret vote and produce the names. Those people are fired and their benefits stripped.

When something bad happens to a congressman due to lack of control (Weiner), the outcome shoudl be similar. Loss of all privs, barred from lobbying again.

Serving in congress is a privilege. If someone cannot keep their nose squeaky clean while doing so, they don't deserve to be there.

Sadly, CEOs are more accountable today than congress.

Posted by: | Dec 26, 2011 9:42:08 AM