How the Bubble Up Economy is Destroying our Democracy
And why taxing wealth is the obvious solution.
Take a look at the chart below…
How about this one?
What do you see? In the first chart we see that half of all US households have had close to zero savings for the last 50 years while the net worth of the top 10% of US households have grown almost 10x.
The second chart shows that the US government has been losing more and more of it’s wealth over the same period of time.
This seems incredible. How is it that in the most prosperous country in the world half of the population is permanently poor while our government is losing money and a small fraction of individuals have accrued the bulk of our national wealth?
What is Wealth?
Wealth is the sum of all of the assets owned minus liabilities (debts). A person can have wealth. So can a company or a country. Assets are things with intrinsic value. Gold, stocks, a house, land, a business. Some assets can generate income, like rent from a house or gold from a mine on land you own, dividends or profits from a business. But even without income, assets tend to retain their value during periods of inflation.
Money is also an asset, but it has no intrinsic value. A dollar is just a bit of paper (or more likely a number on a computer somewhere) with a promise to accept it in exchange for goods or services. And money isn’t a particularly desirable asset since it typically decreases in value (depreciates) over time due to inflation. In 1980 a dollar could buy a Big Mac. Today a Big Mac costs around $5. This is why it’s a good idea to buy assets to store your wealth instead of holding it as money.
How Money Moves
All US currency (money) is issued by the US government and ends up circulating in the world’s economy until it’s reclaimed via taxes, sales of government assets, fees, tariffs, etc. Since the US dollar is issued by the US government there is no limit to the amount of money that can be created. Unlike a physical asset like gold, it can never run out.
Once money enters the economy it will naturally bubble up from the least wealthy to asset owners. How? In a typical working class family the majority of income will be spent on expenses like housing (rent or mortgage), utilities, taxes, food, transportation, etc.
This money is paid to the owners of the corresponding assets. The rent to the landlord, the mortgage payment to the bank, the utility payment to the power gas and water companies and so on. And some portion of the money paid is retained as profit by the entity supplying the good or service. This profit naturally bubbles up through the economy and is accumulated by the asset owners. Without intervention this process will inevitably concentrate wealth into a very small group.12
And what happens to the money that bubbles up? Since households with disposable income don’t want or need money they buy assets like real estate, stocks, and bonds. And as more and more money bubbles up, the competition to buy these assets increases, driving up their prices. This is why the stock market continues to rise, housing prices keep going up and investors are increasingly turning their focus to government owned assets like public lands and government services like public utilities or health care.
This privatization push started in the Reagan era with the promise of economic renewal powered by the magic of free markets and trickle-down economics replacing government inefficiency. But tax cuts have never generated more tax income and privatization inevitability results in even more wealth bubbling up to the asset owners while the resulting deficits keep piling up to the point that our national debt is larger than our national income.
What the wealthy have done is use to their money to influence government policy in their favor, by weakening anti-trust enforcement, devastating unions, and buying favors through the political donations, which exploded following the Citizen’s United decision by the supreme court.
How Do We Fix It?
If wealth concentration is inevitable and undesirable the solution is simple and intuitive. Since all money comes from the government and tends to bubble up to the wealthy it’s hard to justify running continuous deficits. The obvious solution is, at the very least, to remove enough of the money via taxes to eliminate any deficit. And in a system like this, government spending isn’t a problem. In fact, given the right conditions, more money in the economy will create even more wealth. The problem isn’t government spending, it’s running the government at a loss.
Tax Wealth, Not Work
Today the federal government gets the majority of its income from income tax, but it’s clearly not enough to prevent continuous deficits and hasn’t prevented the enormous transfer of wealth to the top. We need a new approach.
The solution is to tax results instead of effort. Stop taxing the income of working families who live paycheck to paycheck and start taxing those of us who have benefited from the inevitable concentration of wealth inherent in a capitalist system. Tax the winners and put the money right back into the system in the form of public healthcare, infrastructure, education, etc. As we know from the discussion above, money injected into the less fortunate sectors of the economy will once again bubble up through the economy, generating a healthy cycle that actually does lift all boats.
Can we do it? The most recent federal deficit was about $2 trillion dollars. If we revisit the two charts at the beginning of this article it seems crazy to continue to run deficits when we can see that the money just further enriches the already wealthy.
Since the top 10% of households own roughly $110 trillion in wealth, a 2% wealth tax on this group alone would eliminate the deficit. And given typical returns on assets, still leave the wealthy with a tidy annual increase in their net worth. This seems like a great way to start reclaiming our nation’s wealth and could be a down payment on revitalizing the American Dream.
Based on several comments I'd like to add that I'm not suggesting the 2% flat tax as a fix for inequality, but just an example of how easy it is to find the money we need to balance the budget. A permanent solution is to eliminate the income tax and switch to a progressive tax on wealth.