The rich are different. Or so said the narrator of F. Scott Fitzgerald’s The Great Gatsby. As that chronicler of the messy life of Jay Gatsby and his wife Daisy found out, the main way the fabulously wealthy are different from you and me is that they are insulated in a bubble that protects them from having to be accountable for their actions. It’s a gilded bubble to go with a Gilded Age. In The Great Gatsby, it was the Jazz Age of the 1920s, the original Gilded Age of the history books.
Times haven’t changed.
Social observers have likened today’s corporate environment to a new gilded age. And like the last one, it is rife with irresponsible behavior and lack of accountability on the part of the wealthy and powerful. A combination of factors including corporate greed, growing social inequity, and too much access to the halls of power by special interests have produced a situation of political instability, increasingly bitter partisan division, and a world wide economic crisis that is starting to look as dire the one that produced the Great Depression of the 1930s. We have watched financial markets crash due to lack of proper regulation, and we are now witnessing shortages of fuel and food, which could threatened worldwide famine.
And at a time of economic peril, not just for the nation and the world, but for the very corporations that have so far benefited from the deregulation and lower taxes, the corporate environment that produced the culture of greed is now threatened by CEOs who continue to reward themselves with sky high salaries, bonuses and perks while profits plunge. The corporate raiders are turning and raiding their own companies to enhance their personal wealth at the expense of their employees and their investors.
The lack of any sense of responsibility to a community wider than their own exclusive clubs is a direct result of the growing inequality in society, which has produced a small, insular class of super rich separated from everybody else. This unequal society is a direct result of the past several years of tax policy that has reduced the capital gains and inheritance taxes, given tax cuts that have benefitted the top one percent of the wealthiest Americans and provided cuts in corporate taxes while shifting the tax burden to the middle class.
So, John McCain’s proposal to cut the rate of corporate taxes further from 35 to 25 percent, rather than helping to stimulate the economy, will only exacerbate the problem.
Bear with me while I pull the complex strands of these propositions into a coherent argument against Republicans’ economic policy and its perverse de-incentives to responsibility and accountability.
Let’s start with the lack of corporate fiscal responsibility and CEO salaries.
The tales of CEOs who reward themselves richly with salary increases, bonuses, and perks simply not merited by the performance of their companies is now common fodder even on the pages of the most pro-business newspapers. Still with all the public focus on it and the recurring criticism, the sheer continuing chutzpah of corporate America comes as a shock every time it’s put on display as it was in last Saturday's Washington Post with the report on the increase in the compensations packages for Radio One’s founder and Chairman, Cathy Hughes, and her son, Alfred C. Liggins, III.
According to an April 18th SEC filing, Hughes’ salary will climb 75%, from $427,800 in 2007 to $750,000 per year plus the opportunity to earn an annual bonus of $250,000. Her son, Liggins, received a 70% increase from $575,370 in 2007 to $980,000. The salaries, however, don’t tell the whole story. For 2007, Liggins actually earned $1.1 million and Hughes received $602,252.
As usual, it was defended as market driven and an incentive to enhance performance. The only problem with this is that while their salaries, perks and benefits went up 75% and 70% respectively, the company’s earnings went down 80% in the same time period. Business watchers called the terms of the deal "highly unusual."
Some compensation experts questioned the new pay packages in light of the company's recent performance.
The value of Radio One stock has dropped more than 80 percent over the past year, and the company announced recently that it would sell its Los Angeles station, which operates in the nation's most lucrative radio market but has struggling to maintain market share.
"This is a company where obviously performance is an issue," said Scott A. Fenn, managing director of policy at Proxy Governance, a Vienna proxy research and advisory firm. "When you look at what's happened to the stock, and pay over a three-year timeframe has been high, there are some red flags here as to whether this makes sense."
Unfortunately, this situation isn’t really as unusual as it’s being portrayed in Saturday’s story. You only need to look at a long line of similar situations, well documented hereto realize that top executives are being rewarded for failing performances and to see that it is an all too common pattern in the business community. But ask yourself, if you or I or any other middle management employee were to make a mistake that cost our companies an 80% loss in a year, would we be getting a good performance appraisal, let alone a performance bonus or a merit raise for that year?
We’d probably be on the unemployment line. We certainly wouldn’t be handsomely rewarded for it. Nor would we be given a contract that protects us from further failure such as Hughes and Liggins received. According to their three year contract.
Under the terms of the employment agreements, if the company were sold and either Hughes or Liggins were terminated for any reason, they would get three times their base salary plus the average of their last three annual bonuses, and a pro-rated annual bonus in cash.
But let’s put aside fairness to employees for a moment. The even greater outrage here is the stunning lack of accountability to ordinary investors. If I owned stock in this company that experienced an 80% loss of profit, I’d be damned mad that its Executive Officer was taking a70% increase. Excuse me, but isn’t that my money, ultimately, that he’s rewarding himself with for my loss?
The reason this happens is because corporate boards are usually handpicked by the CEO and then the board gives a vote of confidence to that Chief Executive Officer along with a handsome bonus. If you ever suspected that it’s a rigged system where one hand washes the others, you’d be right.
Now, here’s where all the tax cuts come in to aid and abet this game.
Back in the 1950s and 1960s, a period of solid prosperity, where the benefits were shared by large segments of the population including the working class, high corporate taxes and a progressive income tax acted as an incentive against the accumulation of too much wealth. The supply siders and free traders are right in their criticism of that. But they are wrong in thinking that it was a bad thing that led to less overall wealth. What it actually produced was a more equal distribution of the benefits of prosperity to all those who made it happen. After all, you don’t get a profitable company with just CEOs. You need investors willing to take risks and employees motivated to work hard for the good of the company.
Because corporate taxes on windfall profits were higher, there was greater incentive to put profits back into the company in the form of generous dividends to small investors, investment in the research and development of newer and better products, and into rewarding workers with salary increases and good benefit packages.
And since wealthier individuals were in higher tax brackets, there was an incentive to spend excess wealth by donating more to charities and establishing non profit foundations that benefitted society.
Because of this, it’s true that the rich were not as fabulously wealthy as they are today. Indeed, the old mansions of the last Gilded Age were largely museum pieces by the 1960s. But the vast majority of middle and working class people, while they lived modestly, had a greater share of the prosperity. They also had the security of health insurance and pension benefits that ensured they would have access to decent medical care and a secure retirement.
Contrast that with today, where the GDP has grown, productivity is up, profits have been soaring, and the middle and working classes have suffered stagnant wages, lost health insurance benefits and have an unsure retirement at best because 401K plans are so tied to stock market volatility.
The problem of wild disparity between the earnings of the top one percent and everybody else was caused in large part by an increasingly regressive tax structure that allowed the richest one percent to keep more money. That and lowering corporate taxes. More of the tax burden has shifted to the middle class.
As government services and the safety net at the federal level shrink, the states and localities have had to pick up the slack and their revenue stream is mostly produced through sales taxes and property taxes, which hit middle class consumers and small homeowners disproportionately hard.
Meanwhile, the cut in the capital gains tax has allowed the rich to keep more of their earnings on stocks. So, labor is taxed and money earned on large investment isn’t. That’s the heart of a regressive tax structure. It’s also why CEO’s bonuses so often come as stock options and dividends. Those are tax free or lower taxed earnings. So, wealth is rewarded, work isn’t.
High profits on paper are also rewarded while actually producing things at home isn’t. That’s why companies rush overseas to maximize profits by searching for the cheapest labor markets in impoverished countries. Since profits are not taxed there is an incentive to maximize them at all costs and less incentive to share the wealth with investors and workers. And that’s one of the things that lead to a gilded age.
The wealthy also exist in a gilded bubble of gated communities, exclusive clubs, first class airplane flights, and increasingly expensive hotels where they don’t have to come into contact with ordinary people. As you can see, the wealth gap is also producing ever more wrenching social inequality.
Even as they decry so-called entitlement programs like Social Security, welfare, Medicaid and Medicare, the rich feel completely entitled to their tax free compensation and they’ve lost their moorings in society. They no longer feel a sense of oneness or belonging to a community. Their sense of belonging comes from their clubs and corporate headquarters where they are artificially protected from contact with everybody else. Like the kings and courtiers of the past who simply never came in contact with the peasants and thought the solution to a shortage of bread was to suggest eating more cake, the rich are out of touch with the ordinary Americans who cut their lawns, clean their homes, build their yachts, and chauffer their limousines.
More tax cuts, such as those proposed by John McCain, will only make the problem worse not better. The rich don’t need more incentive to gobble up profits, behave irresponsibly even in times of loss and shortage, and continue on their merry way with even less accountability than they have now.
What’s actually needed is a return to a tax policy that rewards work. We need an income tax which taxes people who earn more on a graduated scale going higher the more money they make. To be sure, the 90% tax rate that we reached in the 60s and 70s was too high and was too much of a disincentive for wealthy people. But rates of 25% or 35% are far too low.
We also need to increase capital gains and inheritance taxes on the very wealthy. The revenue the government would get from that, as well as from letting the current Bush tax cuts expire, could pay for universal health insurance, investment in infrastructure, and investment in new green industries that help our environmental crisis.
In addition, if the rich couldn’t keep so much of their profits from investments and inheritance, it would encourage them to re-invest more, themselves, as well as give more to charities that could pick up some of the slack for the truly poor, especially given the looming food crisis in so much of the third world. And taxing windfall profits would encourage companies to once again return to recycling those profits into truly building stronger companies that produce better products and that share the wealth with investors and employees, as they did in the past.
An added bonus is that in bursting the gilded bubble and bringing the rich back into a position of greater equality with the ordinary person; we could have a more equitable and fair society with more true opportunity for all. Nobody wants to truly harm the wealthy or force them into poverty. That would be absurd.
But bursting the gilded bubble and creating a more equal society where the rich have a sense of belonging to an entire community, not one small segment of it, and where the wealthy feel a genuine sense of accountability to their fellow citizens, workers, and investors would not be a bad thing at all.
Indeed, what has been most threatened by the last eight years of growing inequality has been social stability and democracy itself. Wildly unequal class based societies have trouble being democratic. Nobody today can argue that the rich and their lobbyists don’t have more access to the halls of power than the rest of us.
The way to return government to the people is to burst that gilded bubble, make the rich a little bit more like everybody else and reward them for earning their bonuses the old fashioned way, by producing successful business outcomes that contribute to the well being of their investors and employees. Let a rising tide once again raise all the ships and boats not just the yachts.