Solving the Inequality Gap: Progressive Taxation or Economic Democracy?

By Roar Bjonnes

When editor-in-chief of multinational business magazine Fortune, Alyson Shontell, asked in its June/July 2022 issue if it’s time for a maximum wage, she got my attention. Back in the early 90’s, when I was an editor I published an article by Sam Pizzigati, co-editor of Inequality.org, which emphatically proclaimed that it was indeed time for a maximum wage. Does this now mean that Fortune, the glossy voice of corporate capitalism, and progressive activists like Pizzigati, finally agree that it’s time to curb the wealth of the Uber-rich? If so, how can this be done?

Growing Corporate Inequality

This is not the first time Fortune magazine has aired the sentiment, however, that corporate CEOs get paid way too much. In 1982, a Fortune cover story called the payment to corporate leaders at the time “madness.” And in 2003, the magazine said that “CEOs got paid more than ever.”

Since the late 1970s through 2020, writes Shontel, “compensation for chief executives rose 1,322 percent.” During that same period, however, annual worker compensation only rose by a paltry 18 percent. At the end of her editorial, Shontel asks: “Is [this] capitalism at its best? Or a bubble that’s finally ready to burst?”

When Fortune posed that question to its 1.8 million LinkedIn followers, they received over 10,000 responses and 65 percent of those said–yes, it’s time for a maximum wage. So, why this disconnect? Why is there no political change, when even conservative voices think the gap between the highest paid chief executives and the assembly line workers is so enormous? More importantly, what would that change look like?

The Political Power of Lobbyists

A study by political scientists Martin Gilens of Princeton University? and Benjamin Page of Northwestern concluded that the US is a corrupt oligarchy where ordinary voters barely matter. As they put it, “economic elites and organized interest groups play a substantial part in affecting public policy, but the general public has little or no independent influence.” In other words, there is no policy change regarding a maximum income because the rich and other special interest groups do not want to rock the boat by reducing their own wealth.

This is not just a US problem. According to Lobby Planet, a report by the Corporate Europe Conservatory, there are over 25,000 EU lobbyists in Brussel, most of them representing corporations. The report “takes you on a tour of the EU Quarter to explain the many – and often shady – methods of corporate lobbying used to influence decision making in the European Union.” Hard core capitalism and wealth concentration has also become a European past-time.

Increased Wealth Inequality Within Nations

My research suggests that globalization has reduced global wealth inequality between nations but has increased wealth inequality within nations. Typically, poorer countries are characterized by greater inequality than richer countries. However, there are exceptions to this rule: in some industrially developed countries, such as the United States and Russia, inequality is very high. In others, such as Iceland, Denmark, Norway and Sweden, economic disparity is relatively low.

According to French economist Thomas Piketty, author of the 2013 international bestseller Capital in the 21^st Century, growth in inequality is largely due to the massive wealth gained by the extremely rich: the top one percent. Many wealthy people increase their fortunes due to old wealth, or inheritance, but at present, inequality is mostly the result of increased wages. And Piketty assumes that the rich will keep fighting to not only keep this wealth but to make even more. History seems to support Piketty’s theory. So how can the increasing wealth inequality and wage gap be reduced?

In the above-mentioned social democracies of the Nordic countries, the economic inequality gap is relatively low due to two main reasons: a comparatively high and progressive tax rate—the more you earn, the more taxes you’ll pay—and because each year, the labor unions will sit down with management to negotiate salaries, paid holidays (generally five to six weeks), paid maternity leave, and other benefits. If labor demands are not met, then the workers will often go on strike until a negotiated settlement is reached. These negotiations have over the past many decades shaped the economic equality and socially humane conditions of the social democracies of Scandinavia.

Taxing the Rich

Piketty’s answer to the global increase in inequality is a progressive tax rather than a fixed maximum wage. Historically, such a progressive tax is not unheard of, not even in the US.  President Roosevelt and his New Dealers during WWII, right after the bombing of Pearl Harbor, needed revenue to boost and win the war, so they proposed a 100 percent top tax rate. FDR settled for a marginal tax rate of 94 percent. In the next three decades, progressive taxes became the norm in most Western countries. However, that trend ended, especially in the US, with globalization’s neo-liberal free trade policies and Reaganomics in the early 1980s.

Pizzigati points to one important weakness of taxing the rich: they will cheat! But this does not need to be the norm, he writes in an article for Common Dreams. “Legislative decisions created a tax system that winks at tax evasion. Legislative decisions could, by the same token, fashion a tax system that clamps down on wealthy tax cheaters. That refashioning now appears to have some real momentum,” he writes.

“In the House of Representatives,” Pizzigati continues, “members of Congress belonging to the Progressive Caucus have introduced legislation that would, for starters, require the IRS to audit at least 20 percent of returns reporting at least $1 million in income and give the IRS the funding necessary to reach that goal.”

Pizzigati also points to Elizabeth Warren’s “legislative lead on a “wealth tax” that would raise an estimated $3 trillion over the next decade from the nation’s 100,000 richest households,” as well as a bill by the Nordic Economic Model advocate and senator Bernie Sanders. The bill “would hike the federal estate tax rate to 65 percent on bequests over $1 billion and plug decades-old estate tax loopholes along the way. The legislation figures to raise $430 billion over the next 10 years.” However, as optimistic as these bills sound, none of them have passed through Congress yet, so the US remains as unequal as ever.

Taxing the Rich is Challenging 

Recent studies by The Brookings Institution were contradictory in determining whether taxing the rich would have a significant effect on income inequality. Other studies have shown that tax evasion is and would continue to be a significant challenge to dramatically reduce economic inequality. Meanwhile, the Nordic economic model of social democracy has shown that a capitalist system with strong government regulation and ownership stakes in key industries such as energy, a strong union movement, and a progressive tax system can significantly lower income inequality.

According to an article by Beth Daley in The Conversation, “The Nordic countries are among the most equal in terms of distribution of income. Using the Gini coefficient measure of income inequality (where 1 represents complete inequality and 0 represents complete equality) OECD data gives the US a score of 0.39 and the UK a slightly more equal score of 0.35 – both above the OECD average of 0.31. The five Nordic countries, meanwhile, ranged from 0.25 (Iceland – the most equal) to 0.28 (Sweden).”

Outside of the Nordic countries, however, the law of the economic jungle increasingly reigns. According to an article in Forbes magazine, The Pandora Papers, an investigation conducted by over 600 journalists uncovered the ways “powerful politicians, billionaires and celebrities utilized offshore accounts and other measures to hide trillions of dollars over the last 25 years. Many have done this legally through well-connected tax accountants, lawyers, offshore tax havens, and by exploiting loopholes.”

“In addition to politicians and celebrities,” The Pandora Papers “found that religious leaders, drug dealers, successful business owners, doctors and affluent people have been hiding their investments in large yachts, mega-mansions, high-end beachfront property and other hard to trace assets.”

Thomas Piketty and the Long Road to Equality

Piketty’s monumental book Capital in the Twenty-First Century offered perhaps one of the most thorough and illuminating studies of capitalist economics ever published. Piketty’s voluminous tome provided searing insights into capitalism’s strengths and failings. He presented a well-documented case for how to solve the gap between the rich and the poor—both within nations and between nations.

Since then, Piketty has published two more books. In a review of the most recent one, history Professor Gary Gerstle writes in the Washington Post that “Piketty’s latest work, ‘A Brief History of Equality’, neatly summarizes the findings of his two original volumes in a ‘mere’ 250 pages of text. Readers will find this work attractive for its brevity alone. But ‘A Brief History of Equality’ is also a very different kind of book from the first two.”

The core message of Piketty’s last book is his confidence in the progress toward more equality made by European social democracies in the past 80 years. The social democratic evolution, combining the best of socialism with a capitalism reined in by taxes and labor unions, has laid the groundwork for the emergence of a more equal world, Piketty proclaims.

So, what are Piketty’s main proposals for a more equal economy? 1. Public financing of elections. 2. Transnational assemblies to complement national legislatures. 3. A two percent global tax on all individual fortunes that exceed 10 million euros (about $10.4 million). 4. Worker engagement in the management of large corporations to promote a move towards cooperative enterprises. 5. New global treaties to enhance rather than hamper the reduction of greenhouse gases and easing economic inequality between the Global North and the Global South.

Piketty’s wealth tax of two percent is rather timid. Many of his other proposals are practical and doable, though challenging to implement. That is, unless there is a growing global uprising putting pressure on political legislatures and corporations to create reforms. But the deeper questions we need to ask are: are such reforms enough and could there be a more effective way to reduce inequality?  

Reducing the Wealth Gap Through Taxes or Cooperatives?

As mentioned above, implementing taxes to curb the growing wealth of the one percent will be challenging. Add to that the massive amount of wealth hidden in tangible assets and tax shelters which is unavailable for taxation and the increasing levels of higher incomes, and we start to see the enormity of the problem. Additionally, in the US, the CEO-to-worker income ratio is now on average 339 to 1, with the upper end of the spectrum surpassing more than 2000 to 1. Strangely, according to a 2016 Stanford University survey, most Americans think a fair executive-to-worker pay ratio should be considerably smaller—a stunning 6 to 1. Still, US inequality keeps growing.

Hence, Piketty might be onto something fundamentally important when suggesting a movement towards cooperatives as a major solution for inequality. According to The Financial Times Stock Exchange index (FTSE), the average CEO salary in European companies is $7 million a year. This yields a CEO-to-line-worker pay ratio of 129-to-1. In contrast, the co-ops in Mondragon, in the Basque region of Spain, which employs around 80,000 workers, have decided on a ratio that runs from 6-to-1 to 9-to-1. No CEO of a Mondragon co-operative makes more than $1 million a year.

Roberto Lovato writes in the Craftsmanship Quarterly that “estimates vary wildly on how many people work in co-ops (perhaps because people differ on how a co-op is defined).” A 2014 report for the U.N., for example, puts the figure, worldwide, at 12.6 million. However, the Harvard Business Review counts more than 17 million (or 12% of the U.S. workforce) who are employed in ESOPs [Employee Stock Ownership Programs], credit unions, consumer and purchasing co-operatives and other worker-owned enterprises.”

“Whatever the figure,” he writes, “nowhere is the co-operative advantage as obvious as in the struggle to close today’s gargantuan, ever-widening income gap, both in the U.S. and across the world. Defeating the dragon of income inequality, may, in fact, be one of the most appealing social benefits of the continued interest in cooperativism.”

Beyond Taxes: Toward Economic Democracy

While Piketty has received growing support for his soft version of socialism–even from billionaires like Bill Gates–there is also another progressive economy movement afoot today. As with Piketty’s way of thinking, this movement also seeks to create a new and more equal economy. However instead of using tax reforms to do so, it focuses on structural changes through the concept of economic democracy.

In theory, democracy distributes power equally to all people, but it is often a small, powerful elite that runs for office, forms parties, owns the media, and frames political policy. Those with money and power are the ones who control the flow of news and opinion, and often politicians are more beholden to the corporations than to the people they represent. Hence, political democracy today also concentrates power in the hands of the few. Therefore, many new economy thinkers believe that the long-term solution to reducing inequality and creating more sustainability is to move away from this concentration of power and initiate more democracy in the economy as well.

Economic democracy means, in part, to change the distribution of income and wealth. It means a powershift in economic decision making—from the corporation and the wealthy elite to the people, just like in the Mondragon coops. Presently, the production of wealth is socialized—everyone contributes—but most of the benefits of the production is privatized. A small minority reap most of the economic and political benefits from everyone else’s hard work, hence the growing economic inequality.

A restructured economy through economic democracy avoids much of the bureaucracy needed to implement an effective tax-the-rich economy. Moreover, a more cooperative economy has many other benefits, as it creates stronger social bonds and pride in one’s community. It also gives people the opportunity to exercise their decision-making powers locally every day, not just once every two to four years on election day.  

Mathematician and philosopher David Schweickart defines economic democracy through these four distinct features:

• Worker self-management: each productive enterprise is controlled democratically by its workers.
• Social control of investment: funds for new investment are returned to the economy through a network of public investment banks.
• The market: enterprises interact with one another and with consumers in an environment largely free of governmental price controls.
• Protectionism to enforce trade equality between nations

Trade unionist and social activist Alan Engler defines economic democracy as an alternative structure to corporate capitalism. Economic democracy is “a world of human equality, democracy and cooperation,” he writes. It is the alternative to capitalism and “the goal will be to transform capitalism into economic democracy through gains and reforms that improve living conditions while methodically replacing wealth-holders’ entitlement with human entitlement, capitalist ownership with community ownership and master-servant relations with workplace democracy.”

Economic democracy has become a rallying call within the growing new economy movement, and it generally means to have more worker and local control of the economy and by that to achieve reduced economic inequality. The Indian social reformer and economist, P. R. Sarkar, was, like the influential political economist and social philosopher Karl Polanyi, highly skeptical of a market without it being an extension of environmental and societal laws and values. Sarkar thus expands on the features above by suggesting the following steps to achieve economic democracy and to avoid concentration of wealth in the hands of the one percent:

• Economic democracy is essential, he claims, “not only for the economic liberation of human beings, but for the wellbeing of all—including animals and plants.” In other words, economic democracy needs to be grounded in a deep ecological ethic to be truly sustainable.
• Guarantee the basic minimum necessities, such as education, food, housing, employment, and medical care to all people. This can be fulfilled through a universal basic income scheme, but Sarkar suggests that a constitutional guarantee of employment is a more progressive way to fulfill this guarantee. For those who are temporarily unable to find work, a universal basic income can step in to cover basic needs.
• A three-tiered restructuring of the economy through a) government-owned large-scale industries such as for energy, water, road, and bridge infrastructure, b) privately owned corporations to become cooperatively owned enterprises much like in Mondragon, and c) small-scale privately-owned enterprises, such as shops, restaurants, small farms etc.
• Limits on how much wealth an individual can accumulate.
• Increase development in rural areas through decentralized planning, so that local economies can thrive and be more sustainable.
• A more balanced overall economy with a sustainable combination of agriculture, manufacture, and services.
• Protectionism by not allowing trade of local raw materials from one area to another, only finished goods.  

According to economic democracy advocates, we cannot assume that limits on wages and wealth accumulation through higher taxes or caps on wealth would be enough to stem economic inequality. As in the Mondragon coops, the difference in income between the lowest and the highest paid person in society must be an inherent part of the economic structure itself, not an afterthought implemented and enforced through taxation, as that opens for loopholes such as tax evasion and the hiding of wealth in additional properties or offshore bank accounts.

Moreover, capitalism as a system is inherently based on maximizing profits, and the best way to balance the inevitable impulses for greed in an economy may, in the long run, be to restructure the economy itself through economic democracy. Systems change through the new economy movement, on the other hand, is not solely profit-driven but rather welfare and democracy driven by making sure basic needs are met and that the economy is environmentally regenerative.

In the Nordic countries, economic democracy is established through high wages for workers relative to the management, a high tax rate which gives back to the population through welfare services, such as free health care and education, and a relatively high retirement income. Partly due to changes in and pressures from the global market economy, however, economic inequality is now also increasing in the Nordic countries.

It is unlikely that Fortune magazine and the wealthy class that it supports will start advocating for radical changes like economic democracy any time soon. The proposals advocated by the new economy movement are therefore more important than ever, as they do seem to hold the promise of a brighter future of reduced economic inequality. Perhaps more importantly, economic democracy may also increase worker satisfaction and engagement in the local economy through increased cooperation and service to people and planet. And if Sarkar’s promise of economic democracy having as its foundation a deep environmental ethic, then economic democracy may not only solve the widening inequality gap but also the widening environmental sustainability gap.  

Roar Bjonnes is the co-founder of Systems Change Alliance, an international platform for organizations and individuals advocating for environmental, social, and economic systems change. He is also the co-author of the book Growing a New Economy, which environmental activist and author Bill McKibben called a “hopeful account of the possibilities contained in our current crisis.” 

References:

Thomas Piketty, Capital In the Twenty-first Century, Belknap Press of Harvard University Press, 2017

Ibid, A Brief History of Equality, The Belknap Press of Harvard University Press, 2022

Alyson Shontell, Is it Time for a Maximum Wage?, Fortune Magazine, June/July, 2022

UN Report on Coops: https://www.un.org/esa/socdev/documents/2014/coopsegm/grace.pdf

Roberto Lovato, Could Coops Solve the Inequality Crisis?, Craftmanship Quarterly, Summer, 2020Martin Gilens, Benjamin I. Page, Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, Cambridge University Press, 2014

Allan Engler, Economic Democracy: The Working-Class Alternative to Capitalism. Black Point, Nova Scotia: Fernwood Publishing, Engler, 2010

David Schweickart, After Capitalism, Rowman and Littlefield, 2002

Gary Gerstle, Thomas Piketty’s optimistic blueprint for easing global inequality, The Washington Post, June 19, 2022

Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time, Amereon Limited, 2021

Roar Bjonnes and Caroline Hargreaves, Growing a New Economy: Beyond Crisis Capitalism and Environmental Destruction, Innerworld, 2016

P. R. Sarkar, Proutist Economics: Discourses on Economic Liberation, Ananda Marga Pracaraka Samgha, 1992

Photo by Ibrahim Boran on Unsplash