The Case for a Maximum Wage

Sam Pizzigati

• Publisher: Polity
• Year: 2018
• ISBN:
  9781509524952
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftspolitik

Modern societies set limits, on everything from how fast motorists can drive to how much waste factory owners can dump in our rivers. But incomes in our deeply unequal world have no limits. Could capping top incomes tackle rising inequality more effectively than conventional approaches? In this engaging book, leading analyst Sam Pizzigati details how egalitarians worldwide are demonstrating that a "maximum wage" could be both economically viable and politically practical. He shows how, building on local initiatives, governments could use their tax systems to enforce fair income ratios across the board. The ultimate goal? That ought to be, Pizzigati argues, a world without a super rich. He explains why we need to create that world — and how we could speed its creation.

1
Defining Excess

Where does excess – in income – begin? At what point should society step in and say to any one individual that you simply make too much? Does too much begin at $1 million a year? Or £250,000? Or ¥500,000?

Any specific cap on monetary income, let’s acknowledge at the outset, would have to be somewhat arbitrary. In the natural world, numbers that divide one state from another can be specific and unassailable. Water boils at 100 degrees centigrade. Water freezes at zero. In human social relations, by contrast, absolute numerical certainty will forever remain beyond our reach. Any limits we set in human affairs will always be at least a little bit capricious.

Take speed limits. Many nations limit speeds on major thoroughfares to no more than 110 kilometers per hour. But if we shifted that limit to 108 or 111, traffic would move along just as safely. None of us would consider this imprecision a reason to go without limits on how fast we drive. Any specific speed limit, we understand, will always reflect a judgment call. We humans can make good judgments. We can make poor judgments. Perfect judgments? Those we cannot make.

Minimum wage levels reflect our imperfections. The United States now has metropolitan areas where employers in one political jurisdiction must by law pay their workers at least $15 per hour while employers right next door in adjoining jurisdictions can legally get by paying a mere $7.25. Some public officials have clearly made a poor judgment. Workers in both the $15 and $7.25 jurisdictions have similar basic needs. The minimum required to live in decency simply cannot be twice as high in one jurisdiction as another.

In situations like these, those of us who care about fairness do not throw up our hands in frustration – or rail against the foolishness of trying to set a minimum wage. We instead commit ourselves to mending our inadequate minimums. We press public officials to make better judgments.

Similar dynamics would be at play with any future maximum wage. Specific maximum set-points would surely evolve over time, just as minimum wage levels have evolved. In the United States, employers had to pay only 25 cents an hour to meet the standard that the first national minimum wage set in 1938. The national minimum since then has increased, after adjusting for inflation, by two-thirds.

Let’s also acknowledge another basic imprecision in these musings on maximums. Our label of choice for the policy outcome we seek, a “maximum wage,” does not quite connote all that we need our label to express. We seek ultimately a cap on personal income. But setting a cap on wages – the compensation individuals receive in exchange for their labor – will not necessarily limit income because paychecks make up only one element of income, especially for our richest. An income cap that limits only compensation would leave our overall economic divides still unconscionably wide – and dangerous. We need more than a cap on wages.

So why aren’t egalitarians talking about a “maximum income”? The “maximum wage” label simply makes more sense to more people. Most of us already understand why we need minimum wages. A “maximum wage” phrasing builds on this understanding, the prime reason why advocates for capping income so commonly use it.

We could, to be sure, choose to define a maximum wage more literally. Laws that establish minimum wages require employers to pay workers at least a set specific sum. A law establishing a maximum wage could do the exact reverse and explicitly prohibit employers from paying anyone more than a set specific sum.

This approach has never attracted much interest among egalitarians. Most “maximum wage” proposals over the years have instead involved taxing away all income over a particular point. One of the earliest of these proposals came from the German-born philosopher Felix Adler. In 1880, Adler proposed a steeply graduated income tax, with a 100 percent top rate at the point “when a certain high and abundant sum has been reached, amply sufficient for all the comforts and true refinements of life.” This 100 percent top rate, Adler explained to a packed Gilded Age lecture hall in New York City, would leave any wealthy man with “all that he can truly use for the humane purposes of life” and tax away “only that which is to him merely a means of pomp and pride and power.”

Coverage in the New York Times gave Adler’s call for an income maximum some significant circulation,¹ but the notion of a maximum wage wouldn’t take specific legislative shape in the United States until World War I, when progressives demanded a 100 percent tax on all income over $100,000 to more equitably finance the war effort. Their energetic efforts would totally alter the tenor of America’s political discourse on taxes. The nation’s top tax rate on income over $1 million, just 7 percent in 1914, would soar to 77 percent in 1918.

That top rate would sink back down to 25 percent in the 1920s, in the wake of the “Red Scare” that hammered the progressive movement right after World War I. But egalitarians would regain the political momentum during the Great Depression in the 1930s, and then a world war would once again shake up the tax structure. In 1942, just months after Pearl Harbor, President Franklin D. Roosevelt called for a 100 percent tax on individual income over $25,000, the equivalent of about $375,000 today. Lawmakers in Congress didn’t give FDR his 100 percent top rate. But they did before the war’s end hike the top tax rate on income over $200,000 to a record 94 percent.

America’s top tax rate would hover around 90 percent for the next 20 years, a span that would witness the emergence of the first mass middle class in world history. By 1960, the clear majority of Americans, after paying for the basics of food and shelter, had disposable income. That had never happened before, in any modern nation. But the United States would not remain exceptional for long. In the decades after World War II, nations throughout the developed world taxed the rich stiffly and grew the middle class quickly.

Most of the developed world, in these post-war years, became significantly more equal. Back in 1928, the year before the Great Depression began, America’s top 1 percent had raked in nearly a quarter of the nation’s income, the bottom 90 percent only half. By 1970, the top 1 percent share had dropped below a tenth of the nation’s income total, and the share going to America’s bottom 90 percent had jumped to over two-thirds.²

European nations witnessed similar distributional shifts over the same period.³ In the United Kingdom, the top 1 percent’s share of national income dipped from nearly 20 to just over 5 percent, in France from over 23 to under 9 percent. In Sweden, the top 1 percent income share plummeted from over 28 to under 4 percent.

This mid-twentieth-century egalitarian success raises an obvious political question for those of us who advocate capping, not just robustly taxing, income at society’s summit. Why bother struggling for an outright lid on income – a daunting political task in even the most favorable of circumstances – when history shows that an income tax with steeply graduated tax rates can usher in substantially higher levels of economic equality?

In fact, we have good cause for not simply seeking to restore the steeply graduated progressive tax rates of the mid-twentieth century. Those steep tax rates could not be sustained. In the United States, they lasted a generation, only slightly longer in other developed nations.

Why did high tax rates on high incomes disappear? The rich did them in.

In the United States, the mid-twentieth-century rich longed for the comfortable world that “confiscatory” tax rates had upended. America’s wealthiest felt “battered by the income tax,” as Fortune, America’s leading business magazine, reported in 1955. Some top corporate executives, the influential magazine related, “may cough up” to Uncle Sam “as much as 75 per cent” of their total incomes. Back in 1930, Fortune wistfully noted, the high-salaried executive “arrived at his office in his chauffeur-driven Pierce-Arrow.” His 1955 counterparts, by contrast, were driving themselves “through the morning chaos.” Early twentieth-century private yachts early had stretched over 300 feet long. In the America of the 1950s, Fortune lamented, 75 feet had come to seem “a lot of yacht.”⁴

But the wealthy did more than grouse against America’s mid-century tax progressivism. They connived to subvert the federal tax code at every opportunity. They schemed to puncture the code with new loopholes. They bankrolled candidates who pledged to protect the precious loopholes – like the enormously lucrative oil depletion allowance – that had somehow survived Franklin Roosevelt’s New Deal tax offensive. Above all else, wealthy Americans pressed for lower tax rates on income in the top tax brackets. They considered high tax rates a direct personal affront and felt viscerally invested in the drive to cut these rates back. Every point the rich could manage to shave off the nation’s top tax rate would, they fervently believed, speed chauffeurs and long, lush yachts back into their lives.

The wealthy, in other words, had an intense personal stake in lowering top-bracket tax rates, and this intense stake gave the twentieth-century political debate over tax rates a basic – and ongoing – asymmetry. The aggrieved rich could see an immediate personal payoff from lower top rates. For everyone else, that immediacy just didn’t kick in. The real and significant benefits average Americans were gaining from high taxes on high incomes were playing out too subtly to see.

High tax rates on high incomes, for instance, gave top corporate executives less incentive to exploit workers and shortchange consumers. Why make the effort to squeeze still another dollar of profit out of ordinary-income people when the personal gains that squeezing might bring would face a tax rate of over 90 percent?

This sort of benefit from significantly taxing the rich went largely unappreciated. Ordinary-income people felt no compelling p...