Monday, September 12, 2011

Why Do We Treat Capital Better Than Labor?

A question I have been pondering for some time is, “Why does capital get all the rewards? Why do profits flow to the money men and not to the laborers? Why does our system crown money as king?” Is it only because the wealthy make the rules in our plutocracy? Or is there some underlying economic principle at work? I don’t think so. I think this is a reflection of the fact that we are still living in a semi-feudal economy.

Warren Buffett made a splash a month ago by publishing an op-ed in the New York Times, "Stop Coddling the Super-Rich," restating his sense of outrage that his employees pay a higher percentage of their income in tax than he does. The top rate on wages is currently 35%; the investment income rate is capped at 15%. “As a result, anyone making more than $34,500 a year in wages and salary is taxed at a higher rate than a billionaire is taxed on untold millions in capital gains,” says a Washington Post article, "Capital Gains Tax Rates Benefiting Wealthy Feed Growing Gap Between Rich and Poor." The abstract for the article claimed that the “job-creating” benefits attributed to a low rate were disputed, but then never really gave a cogent opposing argument (of course). In fact the drop in the capital gains tax (under Clinton and G.W.Bush) encouraged the speculative investments that brought down the world economy in 2008.

Couldn’t you make a case that there is no difference between capital and labor? That capital is in fact, excess labor, and should be treated identically? When humans first began agriculture there was no such thing as capital. There was only human labor. But as our skills increased, we accumulated excess food—this was the first capital. Slowly this excess built on itself until it became abstracted into currency.

Labor is the source of capital and should be what is rewarded by our tax code. Instead of passive investment we should be rewarding active labor. The Washington Post article quotes Marty Sullivan, an economist and a contributing editor to Tax Analysts: "The way you get rich in this world is not by working hard. It's by owning large amounts of assets and having those things appreciate in value."

Unfortunately there’s bipartisan support for low capital gains taxes, because a huge number of members of Congress are rich. Here’s some numbers from an article in The Week magazine "The Congressional Millionaires' Club: By the Numbers":
261: Number of millionaires in the last Congress, out of a total of 535 members

$911,510: Median wealth of all members in the last Congress

$25,149: Median estimated wealth of an American over the age of 18 (2005)
What we have in this country is a plutocracy. The wealthy are rule this country. The trappings of democracy, elections for example, are maintained as a superficial veneer to hide the truth.

And of course since the wealthy are in control, capital will be rewarded and labor penalized. In 2009 I wrote an article for my column in Highlands Newspaper called "Feudal Economics." An excerpt:

What do I mean by “feudalism”? Feudalism is a socio-political system where a very few “lords” own almost everything and everyone else is a “vassal,” or servant of the lord. The vassals work for the lord and are completely dependent upon him. We usually think of the Middle Ages in Europe or the Shogun era in Japan when we think of feudalism, not modern-day America. 
In the United States, wealth is highly concentrated in a relatively few hands. According to G. William Domhoff, a sociology professor at the University of California Santa Cruz (using 2004 numbers), the top 1% of United States households owned 34% of all privately held wealth, and the next 19% owned 50%. In other words, 20% of the people own 85% of everything in this country. That leaves 15% of the wealth for the bottom 80% of the population. 
In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households have an even greater share, 42.2%, and the top 20% owned 95.2%, leaving only 7.5% for the bottom 80%. (To be clear, we’re not talking income here, these figures are for assets.) 
We haven't moved past feudalism; we've just added a new wrinkle or two. Case in point: the rise of the corporation.According to the World Institute for Development Economics Research, the 500 largest corporations in the U.S. “control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 percent of the sales, and collect over 70 percent of the profits.” 
Further, the CEOs of these corporations serve on each other’s boards, creating an even more incestuous relationship, something like the royal families of feudal Europe intermarrying to keep the power in the family. The CEOs grant each other huge pay packages, and you can only imagine the secret favors they do for each other. 
The current concentration of wealth in the hands of a few is very dangerous to our democracy, because wealth is power. Our government is owned by the wealthy and the corporations. The elite run this country and the rest of us—the majority of people in the country—are no better than wage-slaves. 
Karl Marx’s theory of economic development predicted countries would progress from feudalism through capitalism to socialism. No reason to worry about this country going socialist—we haven’t even made it to capitalism yet. Let’s concentrate on throwing off the chains of our feudal lords.

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