During the past few years we have been experiencing an ever accelerating trend for money to bubble up from low and middle income people to a few rich folks, leaving those on the bottom and middle in an ever tightening bind. The number of billionaires has increased from 423 in 1996 to 2755 in 2021. (Statistics) Billionaires now own 12% of the GWP (gross world product). That is a staggering amount of wealth held by a vanishing small number of individuals – and the problem is rapidly growing. This situation is clearly unhealthy for the economy, or the individuals whose wealth is bubbling up away from them. The obvious questions are 1) “How can this be happening?” and 2) “What can be done to stop it?”
I don’t claim to have a final answer to these questions, but I have a few observations that might take a small step toward clarifying some of the issues involved. A caveat is appropriate for this discussion: The examples that I am using as the basis of this discussion are not accurate for any specific business or situation, they are presented illustrative purposes only. I believe they are close to the “average” values, but since there is such a wide variation between situations there are no “right” answers. I am using the numbers to illustrate some points, not provide dependable statistics.
I found myself pondering the situation for traditional hardware stores. Image a locally owned and operated “mom and pop” hardware store such as an ACE or True Value hardware store. Most of these stores are locally owned even though they have a “national” name resulting from them belonging to what amounts to a “buyer’s club”. For example, most ACE stores are locally owned, but belong to a COOP that provides many services (for a fee), including bulk purchasing capabilities. The owner of the individual store owns the land, the building, the merchandise and pays for all services including staffing. In order to cover all of their costs they have to mark-up their merchandise by an average of about 200% (they call it 50% – but in any case the cost to the customer is about twice what they pay for the item). The exact markup varies by department, local competition, and other things – but the average is close to that. After all of their expenses are paid, they hope to make a “profit” that is greater than what they could get it they invested their money some other way. The profit margin varies greatly between individual stores – for the sake of argument I am going to assume a 5% “profit” (a moderately profitable store) based upon the value of their gross sales. So if they do a million dollars in business a year, they will get a profit of around $50,000 (this is after paying all expenses, including the owner’s wages or salary).
This relatively thin profit margin puts strict limits upon the range of the markup. In my example, $1,000,000 in gross sales means that they purchased $500,000 of merchandise (wholesale price), cost of sales was $450,000 and “profit” was $50,000. However, if they could only mark up their cost by 180%, things become very different. In that situation an item that they bought for $1.00 would be sold for $1.80, resulting in a “discount” to the customer of 10%. The result is that instead of a gross of $1,000,000 for a given basket of goods, they only get $900,000. The cost of sales is still $450,000 and cost of goods is still $500,000 but they only receive $900,000 for their efforts – a negative $50,000 profit! Oops, it is no longer such a great opportunity to be in the hardware business. While a 10% discount seems like a small amount, it is the difference between a healthy profit of $50,000 and a disastrous loss of $50,000.
The point is that if competition drives the market price down by 10% the hardware store either must close, or must drastically reduce their cost of doing business. Since they have already had a few decades of extremely thin profit margins, they are faced with some daunting choices. Generally they don’t have the ability to respond to competition that forces a small decrease in prices.
Now I want to consider what happens with the introduction of companies such as Amazon, a direct competitor for many of the products stocked by hardware stores. These new businesses operate with a very different business model. They have vastly reduced costs for sales because of their reduced labor cost as a percentage of product cost, and skip one or two “middlemen” in the supply chain so that their initial costs are much lower. For the original example “basket of goods”, instead of paying $500,000 for the goods, they pay probably pay $300,000 or less. Instead of paying $400,000 as the cost of sales, it is probably pay less than $200,000. They also operate much closer to a “just in time” supply chain so they don’t have to invest nearly as much in maintaining stock on the shelves. These values are just guesses, but are probably conservative in the sense that actually differences are likely even greater that my assumptions.
Assuming my numbers are approximately correct, this means that their “break even” retail price for that basket of goods is $500,000 – which is $400,000 less than the breakeven point for the local store. The “Amazon” model now has a choice – they could add enough to make a 10% profit – selling the merchandise for approximately $550,000 (55% of what the local store has to charge to stay in business), or they can aim their price point to what the market will bare, just enough to out-compete the local stores – perhaps 10% below the local price. When they do that, their profit becomes 40% rather than 10%, and the local store’s profits become zero. The result is obvious, profits skyrocket for the Amazon style businesses, and the local stores go out of business.
The net result of this is that local money, money that is used to keep the local community solvent and functional, bubbles up to some distant location. Local jobs dry up, local entrepreneurs go broke, and the money used to purchase goods enriches those that own these new businesses. Perhaps 1/10 as many people are required to service these sales, no local taxes are paid for the services or property, and the local community takes the hit. Even though the individual purchaser gets a slightly better deal, their money joins an ever growing river of money/wealth flowing upward. It is not a trickle – it is a torrent.
For the past 20 or 30 years, the target for “what the market will bare” is balancing on the edge of bankrupting local businesses. They keep trying to cut costs, keep trying to find ways to reduce labor costs (paying people less or offering less benefits), purchasing cheaper goods, etc. But are fighting a losing battle.
The big companies know that if they drop their prices much more, that will crash the retail sector of the economy, and that in turn will result in far fewer people having sufficient money to purchase what the large companies want to sell. Therefore, they cannot drop their prices. It is a little like when Henry Ford realized in order to be successful he had to pay his workers enough so that they could purchase is automobiles – otherwise nobody could buy his products. The large “internet” companies could increase their costs by increasing wages and benefits, but the business imperative is always to only pay what the market will bare – always keep costs as low as possible. No business is willing to pay more than someone is willing to take. That is the supposed “secret sauce” of the capitalist system. Supply and demand will even out all things. However, it is apparent that is a logical fallacy – it cannot, and does not, work to the benefit of all. It works very well for those in control of the supply. However, the prices cannot fall below the threshold that would cause the economy to crash, therefore the prices remain where they are – and profits go “through the roof”, creating the new and ever growing population of billionaires (according to the latest news, it is now trillionaires). Given the current situation, billionaires have no choice but to keep accumulating vast amounts of wealth. If they cut their profits they bankrupt too many local businesses, so in order to be “good citizens” they have to keep their prices high – forcing them to have huge profits. Huge profits mean that the value of their stock goes up, adding yet another multiplier to the rate that they accumulate wealth.
I see only one solution to this problem if we are to remain a viable capitalistic economy – vastly increased taxation for the wealthy. Instead of letting the increased profits flow to the corporations (and thus the wealthy owners), the money needs to be returned to the society, workers and local communities impacted by this diversion of funds. As a minimum we might consider returning to the “good old days” of the 1950’s were the maximum income taxation rates were near 90%. That resulted in a blossoming of the economy with money available to build a new national freeway system, new hospitals, good pay to teachers, free (or nearly free) college educations, a vastly improved overall health care system, a functioning postal service, functioning social security system and many other benefits. All the spending on infrastructure, health care, education and other things made good paying jobs available so that families with one wage earner could afford to own their home, take vacations, and have a secure retirement.
A 90% income tax at the highest levels has little, or no, impact on the lives of those paying those rates. The incomes are vastly greater than there is an conceivable way to spend the money. The only significant spending they can accomplish is through investments, which in-turn make more money, they don’t “cost” anything. They represent investments, not spending. As it stands, even charitable donations turn into profitable activities because of our broken tax system. Large corporate donors give unappreciated securities (stocks and bonds) to foundations that they control. There is a “step up” in value at the point of the donation, so that securities that were purchased at a small value but now have a high market value are donated, resulting in a large tax deduction based on the higher value without even having to pay capital gains taxes. For example, if they give stocks that cost them $1 but have appreciated to be worth $100, they claim a $100 donation. If they are in the 50% tax bracket (which most are) that creates a net income of $49.50 for their “donation” (they pay $49.50 less in income taxes). Since they are often on the board of directors of the foundation, they manage the foundation in ways that don’t require the sales of those stocks to do the charitable work(they use the income of the securities rather than the principle) – meaning that their ownership is never diluted. They keep control of their business. These donations are profit centers – they are not “gifts”. It would be much better to eliminate these types of charitable donations, and increase taxation so that they government could actually use the money to do the great things that are intended. Personally, I am of the opinion that all tax credits for donations to charitable organization should be eliminated. Why should I, as a tax payer, help fund charitable causes that you feel are important? If you fell they are important, that’s great – donate, but don’t make me support your donation.
A major problem with “income tax” on the wealthy is in determining what that means. The “normal” definition limits it to something like wages or salaries. It basically means money received for doing something (working, investing, retiring, selling things, etc). However, that clearly isn’t a definition that is particularly useful for the problem at hand. The problem is that this definition means that in order to be considered “income” it needs to be associated with receiving money. That leaves almost all means of increasing “wealth” out of the equation. For example, my house is being more valuable over time, but since I haven’t sold it there is no income. My wealth increases, but no money exchanges has, hence there is no “income” and no tax. I have become wealthier, but do so without paying any taxes until such time as I sell the property. When I sell the property then it becomes “income” (unless I use that income to purchase another house) except not income subject to income tax, it because a capital gain that has a much lower tax rate (20% instead of 50% for high income people). However, wealthy people seldom sell their properties, therefore they seldom convert their increased wealth into “income” or “gains” – avoiding all taxes. In most cases, wealthy people only have to convert as much “wealth” into “income” as is necessary to cover their living expenses. Billionaires seldom never convert this vast fortunes into income or capital gains and therefore don’t pay tax on their increased net worth. Even when they do “spend” money on things those things are often “investments” and therefore do not require converting investments to income.
Of course, if taxes are increased this means that you have to trust the government to do the right things with that money . We know the corporations won’t, they will do what is in the best interests of their shareholders (that is their legal fiduciary responsibility). However, we seem to have lost so much trust in the government that we don’t want to let them control the flow of money. I believe this lack of trust is because the government is being controlled by “big money” to make choices in favor of big money, instead of society. That is certainly a problem, one that needs to be fixed if we are ever going to move past the current situation of spiraling down into an apparently nasty future. The solution to the ever widening income discrepancy, and rapid decrease in our standard of living is fairly clear, but the problem of managing how government uses the increased taxes is far from clear. We don’t seem to have an agreed upon vision for what needs to be fixed.