A Maximum Wage?

In The Case for a Maximum Wage, Sam Pizzigati advocates for, you guessed it, a cap on how much income an individual can claim for herself during a year.

The idea is driven by the realization that a highly skewed income and wealth distribution is also skewing the economy and political power. A lot of companies are profiting from high income earners chasing luxury good and large fortunes have come to dominate large parts of the economy. Watches for tens of thousands, cars for millions and yachts for hundreds of millions of dollars. There is hardly any vanity that isn’t in a fierce competitive battle for the attention of wealthy individuals. The sale of a single such item generates huge profits, which is way better than having to deal with hundreds of customers and having to compete on price.

Which is a problem or rather, leaves huge problems unaddressed: The basics of human needs - drinking water, food, energy, housing, transportation, education, health etc., while more or less satisfied in developed countries, are still unsolved problems for hundreds of millions of people. And even in the developed countries these necessities have reemerged as challenges for far too many families.

But apparently there is not as much money to be made in low-cost solutions for energy, housing, transportation and food, as there is in luxury handbags, shoes and make-up.

The maximum income

To put a lid on the chase for the highest highs, The Case for a Maximum Wage argues to tie the highest to the lowest earnings by mandating a multiplier on the low earnings, above which all income is taxed with a tax rate of 100%. The exact multiplier is of course open for debate. For convenience’s sake, let’s take the average German wage of 40k $US and a multiplier of 25. In the most stringent implementation of the maximum wage, no member of society could earn more than one million $US per year. In less stringent versions the multiplier only measures the highest to the lowest income within a company.

This would include imputed income from houses, yachts etc., (rents you could earn from your possessing, but choose to consume yourself), all interest and direct payments, dividends, license fees etc. Everything above that threshold is taxed at 100%. A wanted effect of this is that huge incomes “melt away”. If you have 10 renaissance paintings in your private bunker, you’ll have to pay for insurance and upkeep, draining your fortune; but none of your investments will earn you money beyond the maximum amount. A lot of the vanity assets would become liabilities, maybe even globally. Inheritance of “goods” would not necessarily be taxed, but earnings from sale and imputed rents of the estates would of course count against the heirs’ personal income limitation.

So old wealth would be drained and the accumulation of enormous, power law distributed wealth would effectively be quelled.

What are the effects?

I guess depending on your assumptions about “human nature”, this is either an awesome or a terrible thing. “What about entrepreneurial drive? Or the work ethic of the rich?” Good questions. Easy models of human behavior would predict that they stop working. But would they? A million dollars a year seems to be quite the motivation for a lot of CEOs of companies with about 10k employees. And I guess a lot of middle management would take that amount of money eagerly.

Is this driving away “the best talent”? I don’t know. I am probably biased against the notion that companies can always determine “the best” candidate and pay “reasonable” prices. Maybe, I am not aware of all the RCTs HR departments of companies are running with “talent” prior to hiring them, but from my vantage point it looks more like checking the resume for the school’s name and prior employers. Maybe the development of the prior employer’s stock prices during the candidate’s tenure is evaluated, but I’d refer to the myriad of books showing that stock market prices are, if at all, only loosely coupled to a company’s performance; there are too many effects from trade wars and Federal Reserve decisions to pandemics, to tease out a candidate’s “signal” from the “noise” of the market. So is there a huge loss, if CEOs can only earn something like a million dollars in today’s money? Common economic theory would predict a disincentive for the very wealthy. I’d say it’s a cost that has to be weighed.

Interestingly, we give public official, whose salary you can look up, if you’d care to, the responsibility to spend sometimes hundreds of billions, sometimes even trillions of dollars. That’s an inconsistency we should examine at some point. So why do we think it beyond the pale to imagine that people in the private sector would work for that much (or little?) money? And don’t forget that the income can easily grow, if the average (or median?) income grows. The better off the vast majority of the people, the higher the incomes of the elites can become. An argument could be made that a strong middle class can create self-sustaining demand that healthy job and wealth development require. Concentrating wealth, this argument goes, would strangle the demand an create a death spiral of falling demand in general. Because it is true that while a 1%er might make 1000 of times the median wage, she won’t buy 1000 cars.

What about their charitable contribution?

While I look up to people that do charitable work, I am very much appalled by an industry that claims to do good, but appears to mostly be a front for tax evasion by the 1%. Most of the money isn’t funneled into building toilets, desalination plants or the distribution of vaccines or vitamins for the world’s poor, but into some vanity project at universities or NGOs, where their offspring is guaranteed to be accepted, or into some specialty art museum. Alternatively, they can use these contribution to their advantage.

The super rich can get a lot of control over the public policy-making process through their charitable donations to think tanks and groups working on topics favored by the donors. These institutions shape - some might say distort - the political discourse. They can inject certain ideas and topics into the news cycles and are define the bounds of what “serious” people are allowed to discuss. Their reports are also occupying “metal shelf space”, crowding out underfunded topics and wiping them from the collective consciousness. It looks pretty much like a criminal racket from the outside. But probably there are good reasons for allowing this, that are just beyond my cognitive capabilities.

Wouldn’t the rich just leave?

Another common prediction is that rich individuals would leave in droves. I think this is a very plausible scenario. But there are already strategies to counter the outflow of rich individuals in place today:

1. The US, for example, taxes the incomes of its citizens globally. So wealthy individuals would have to renounce their citizenship.

2. The US levies an “exit tax”, when citizens above a certain net worth renounce their citizenship. All their fair market values globally the day before “expatriation” are added up and subjected to a capital gains tax due within 90 days. These unpleasantries would probably be multiplied, if a maximum wage were ever to be instituted.

Of course, it seems entirely probable that a new industry trying to move and hide wealth around will emerge. Or maybe banks just continue to operate as today…

Don’t they consume too many resources!?

The book was not strong in trying to create a moral outrage over the rich’s energy consumption. Even if the consume 1000 times as much energy as the typical denizen of Malawi, the social cost of carbon per ton is miniscule relative to their wealth. Let’s say they’d emit 1000t of CO2 per year; the cost to society should be something like 50k. And because their emissions act upon the atmosphere exactly as other people’s emissions, there doesn’t seem to be a special claim to be made, except for a “regular” carbon tax. That’s why I think, notions like

“A world without them could be a green world. Indeed, suggests British social critic George Monbiot, only a world without a super rich can ever become green.”

are overstating the case.

Global Adoption

I wonder what would happen, if this scheme were to be adopted globally. Imagine, if the spread between the lowest lows and the highest high would be fixed at the same or a slightly higher multiplier. So if the world saw towards pre- and redistributing income to make sure nobody is under 50% of the relevant mean (or median?) and none above 25 times the multiplier. How would that world look like? A communist hell hole? A capitalist utopia? Would it see the reemergence of a feudal class protecting its interests? Or even of fascist governments? It’s probably always a mistake to imagine the world as a homogeneous blob that can be acted upon. People have their own agendas, their own alliances, their own culture. Would a 5k $US annual minimum income for Afghanistan spawn the same reaction as in Bangladesh, Pakistan or India? Would people buy basic healthcare and public utilities or rather PS5s and TV sets? Or AK47s, RPGs and drones? Probably a mixture of all of this and way more than I can even imagine. Naively, I’d assume that a lot of the world’s problems causing a whole lot of suffering would get worked upon.

Conclusion

I think Sam Pizzigati’s The Case for a Maximum Wage is an interesting book. I think too much time is spent on an imagined moral dimension of the situation, i.e. the rich’s energy consumption and ties “they”, apparently as a group, allegedly were to have to the fossil fuel industries. There are obviously a lot of practical problems with implementing a Maximum Wage. The book has given me something to think about. For example, if it wouldn’t be more efficient to have an expenditure tax, where the difference of all streams of income and all investments is taxed with highly progressive taxes, but this would only add friction, but not a stop, on the accumulation of vast fortunes. Or if a tax rate of close to 100% is not more practical (Pizzigati argues counter to that. There was a time with high income tax rates, but these were not sustainable, because the rich still got rich enough to buy political influence to curb these taxes).