Joe Stiglitz Blasts Our Wealthy-Coddling Tax System for Increasing the Returns on Rent-Seeking

It’s a sign of how well relentless propagandizing works that Joe Stiglitz has to devote a lengthy op-ed in the New York Times to debunking the idea that our income tax system, whose salient characteristic is low tax burdens for the rich, is good for anyone other than the rich. Economists have increasingly taken note of the fact that the US experiment in lowering taxes produced the opposite of the outcomes that were claimed for it, namely, spurring growth and increasing incomes in all cohorts (the barmy “trickle down” theory). Cross-country comparisons show that advanced economies with higher growth rates, like Germany, typically tax their wealthy more, showing that high taxes on the rich are not a negative for growth. Instead, giving tax breaks to the rich has turbo-charged rentier capitalism:

Remember, the low tax rates at the top were supposed to spur savings and hard work, and thus economic growth. They didn’t. Indeed, the household savings rate fell to a record level of near zero after President George W. Bush’s two rounds of cuts, in 2001 and 2003, on taxes on dividends and capital gains. What low tax rates at the top did do was increase the return on rent-seeking. It flourished, which meant that growth slowed and inequality grew. This is a pattern that has now been observed across countries. Contrary to the warnings of those who want to preserve their privileges, countries that have increased their top tax bracket have not grown more slowly. Another piece of evidence is here at home: if the efforts at the top were resulting in our entire economic engine’s doing better, we would expect everyone to benefit. If they were engaged in rent-seeking, as their incomes increased, we’d expect that of others to decrease. And that’s exactly what’s been happening. Incomes in the middle, and even the bottom, have been stagnating or falling.

Stiglitz provides a compelling summary of how the rich get favored treatment:

The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes….

With such low effective tax rates — and, importantly, the low tax rate of 20 percent on income from capital gains — it’s not a huge surprise that the share of income going to the top 1 percent has doubled since 1979, and that the share going to the top 0.1 percent has almost tripled, according to the economists Thomas Piketty and Emmanuel Saez. Recall that the wealthiest 1 percent of Americans own about 40 percent of the nation’s wealth, and the picture becomes even more disturbing.

Stiglitz points out that not only are our tax rates on top earners strikingly low by OECD standards, but the income level at which they kick in are also higher than in most other advanced economies. And that is before you factor in that the rich for the most part don’t make their money through income but capital gains, which are taxed at lower rates. That preferable treatment has been exploited flagrantly by the hedge fund and private equity industries, which have been able to structure their funds so that the overwhelming majority of the income they get from managing the funds, which is labor income, is taxed at capital gains rates. And the worst is that the Masters of the Universe act as if that is perfectly reasonable. Stiglitz objects:

Some Wall Street financiers are able to pay taxes at lower capital gains tax rates on income that comes from managing assets for private equity funds or hedge funds. But why should managing financial assets be treated any differently from managing people, or making discoveries? Of course, those in finance say they are essential. But so are doctors, lawyers, teachers and everyone else who contributes to making our complex society work. They say they are necessary for job creation. But in fact, many of the private equity firms that have excelled in exploiting the carried interest loophole are actually job destroyers; they excel in restructuring firms to “save” on labor costs, often by moving jobs abroad.

And then the good professor turns to corporate tax breaks, citing poster child GE, which has paid on average less than 2% of its income in taxes since 2002. The picture is likely even worse than these figures suggest since corporations and wealthy individuals can hide income tax havens.

I do have a minor quibble with Stiglitz catering to the deficit scare-mongers by pointing out that a fairer system would collect more taxes and reduce budget squabbles. He closes by reminding us:

It doesn’t have to be this way. We could have a much simpler tax system without all the distortions — a society where those who clip coupons for a living pay the same taxes as someone with the same income who works in a factory; where someone who earns his income from saving companies pays the same tax as a doctor who makes the income by saving lives; where someone who earns his income from financial innovations pays the same taxes as a someone who does research to create real innovations that transform our economy and society. We could have a tax system that encourages good things like hard work and thrift and discourages bad things, like rent-seeking, gambling, financial speculation and pollution.

Of course, some people will object, and they are the ones who benefit from complexity, either by being loophole creators and users, or part of the service industry that caters to them. It’s time ordinary citizens look hard at who is peddling “go easy on the rich” advice and discount the source.

Print Friendly, PDF & Email


  1. MaroonBulldog

    Our tax system is good for thousands upon thousands of tax accountants, tax lawyers, estate planners, and their like who make decent middle class livings helping clients take advantage of the many planning opportunities created by the system. These people are not “the rich.” Many of their clients aren’t that rich either.

    1. chris

      “decent middle class livings”

      “take advantage of the many planning opportunities created by the system.”

      i’d suggest you re-read Stiglitz, as you’ve totally missed the point.

      that some lawyers, accountants and planners aren’t rich it’s not for a lack of wanting to be.

      what’s the difference between “rich” and “not that rich?”

      and how do you spell b-r-a-i-n-w-a-s-h-e-d?

    2. Kevin S.

      That’s a decent #12 MaroonBulldog, but really closer to basic misdirection (

      I think that most of those that benefit from marketing services and investing in the PE and Hedge Fund world will probably continue to do so. It will be interesting to see if the elimination of carried interest in Obama’s new budget survives. From a pure PnL perspective it’ll be sad to see it go, but I really don’t believe that it changes the bottom line profitability of the industry. Financiers and speculators alike can do without.

    3. reason

      This is both true and unfortunate. It is a massive waste of resources that could be much better used.

    4. banger

      The income tax, despite the notion it is somehow “progressive” is a very bad tax. It makes us fret and hassle and, I believe, reduces productivity with its demands on our time. Almost anything is better than this system. But like all the systems we have dominating our lives it is firmly entrenched whether or not there might be an alternative system that is better. That’s the sad part for me, there is no chance of change of any kind about anything except more money for the rich and less for us.

    5. just_kate

      Our war system is good for thousands upon thousands of…. who make decent middle class livings helping…. take advantage of…. opportunities created by the system. These people are not “the rich.”

  2. Joe_in_Indiana

    Let’s go from the bottom up.

    What percentage get tax credits and what percentage get no credits but pay 0-3% taxes.

    I would like answers there to see the distribution curve.

    Effective tax rates were much higher in the 50s and 60s, but tax deductions were more plentiful also.

    I do agree of a total overhaul of the tax code, but TPTB(the Powers that Be) are begrudgingly moving there if at all.

    Joe Stiglitz along with Paul Samuelson both went to Horace Mann High School in Gary, IN and each was awarded the Nobel Prize.

  3. bdy1

    Yes, and lets not forget the prison guards who would be unemployed if not for our bloated incarceration industry, all of those engineers who would be on the streets if we didn’t have ’em developing weapons systems, and all those low level crack dealers and meth lab-techs who rely on the drug trade to make a decent, middle class, free market buck.

    “Planning opportunities.” Nice.

  4. R Foreman

    I was wondering when stiglitz would cease sucking cock of the super-wealthy. He was the very definition of bourgeoisie, throughout the bailouts and mass wealth transfer to the elite.

    At some point everyone sees the shining light of truth though.. what truth? that you are a slave Neo..Like everyone else, you were born into bondage, born inside a prison that you cannot smell, taste, or touch..

  5. Jim A

    Gee, it turns out that when Wall Street has more money than it can find productive uses for, it simply lends it out at interest to consumers. Whether through credit cards, HELOCs or ReFis, the effect of more money lent by those who have it is more debt for those who don’t. Add to that the wealthy’s ability to capture the political system and change the bankrupcy laws and it’s a pretty short trip to where we are now.

  6. TomDor

    In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
    If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
    If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
    If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
    Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.

    Written around 1925

    Laborers knowing that science and invention have increased enormously the power of labor, cannot understand why they do not receive more of the increased product, and accuse capital of withholding it. The employer, finding it increasingly difficult to make both ends meet, accuses labor of shirking. Thus suspicion is aroused, distrust follows, and soon both are angry and struggling for mastery.
    It is not the man who gives employment to labor that does harm. The mischief comes from the man who does not give employment. Every factory, every store, every building, every bit of wealth in any shape requires labor in its creation. The more wealth created the more labor employed, the higher wages and lower prices.
    But while some men employ labor and produce wealth, others speculate in lands and resources required for production, and without employing labor or producing wealth they secure a large part of the wealth others produce. What they get without producing, labor and capital produce without getting. That is why labor and capital quarrel. But the quarrel should not be between labor and capital, but between the non-producing speculator on the one hand and labor and capital on the other.
    Co-operation between employer and employee will lead to more friendly relations and a better understanding, and will hasten the day when they will see that their interests are mutual. As long as they stand apart and permit the non-producing, non-employing exploiter to make each think the other is his enemy, the speculator will prey upon both.
    Co-operating friends, when they fully realize the source of their troubles will find at hand a simple and effective cure: The removal of taxes from industry, and the taxing of privilege and monopoly. Remove the heavy burdens of government from those who employ labor and produce wealth, and lay them upon those who enrich themselves without employing labor or producing wealth.

    1. banger

      Excellent points. Speculation is fairly easily taxed through a Wall Street sales tax which clearly ought to be the main focus, in my view, of progressive politics, outside of lobbying for the a real justice system–but we aren’t going to get that. The era of rule-of-law is over.

      1. Thisson

        No, they most assuredly are *not* excellent points. The speculator is a part of the economic ecosystem, bearing risk for others in exchange for a price. This risk-shifting is what enables more productivity and employment in the industries that use the markets to hedge their risk.

        I would agree that all forms of income should be taxed at a uniform rate; I do not agree that we should subjectively judge the goodness or badness of any particular activity, so long as it is otherwise lawful.

        1. Kurt Sperry

          Which is why nobody is proposing categorically prohibiting speculation but merely taxing it differently. An economy does require speculators–at least in the sense that they will inevitably exist in any system–but it does not require speculators who pay less taxes on their gains than income earned through more directly productive means. A transaction or sales tax on speculative activity might merely level the playing field.

        2. TomDor

          Tax at 90% to refrain from gambling on derivatives, from lending for currency and commodity speculation, and from making takeover loans and other predatory financial practices. Public ownership would have run the banks like savings banks or post office banks rather than gambling schemes fueling the international carry trade (computer-driven interest rate and currency arbitrage) that has no linkage to the production-and-consumption economy.
          If it does not link to the production and consumption economy then tax it to inhibit it.
          As for ‘speculators’ shifting risk – Show me how that has been helpfull

        3. banger

          Speculation at this point in history is destructive to society and the human spirit when carried out as a way to game the system which is it’s main use. Speculation is useful to the system but not to the insane degree it is used today. It encourages wasterful use of energy and a buccaneer ethic that is driving people into collective insanity. Social capital is way more important than capitalism and we have been running on social capital that was plentiful during Adam Smith’s day and is now almost gone–yet we are still operating as if we had the same amount–we don’t. We have to start throttling down the rogue economy into some semblance of a socially useful system. We cannot go on like this and expect to live in anything other than a brutal feudal culture and despoiled world and a potentially unlivable planet.

        4. Ed S.

          “The speculator is a part of the economic ecosystem, bearing risk for others in exchange for a price. This risk-shifting is what enables more productivity and employment in the industries that use the markets to hedge their risk.”

          Yes, that’s the traditional role of the speculator — classically the individual who agrees to purchase a commodity today at a set price for delivery in the future. The risk exists.

          But much of the so-called “risk” that is “shifted” isn’t risk at all — it’s gambling. Trillions of dollars of “derivatives” slosh around the financial system unmoored from any productive economic activity. Now if private organizations want to, for example, gamble on the future value of the Thai Bhat, that’s fine by me but — when they are unable to pay off their wagers — don’t ask me to make good on the wager.

        5. ChrisPacific

          I do not agree that we should subjectively judge the goodness or badness of any particular activity, so long as it is otherwise lawful.

          How else can we identify situations where laws might need to change, or new laws might be required? How would you tell the difference between a good law and a bad one? (For example, a law that resulted from corruption of the regulatory process). Or are you arguing that there’s no such thing as a bad law, or an incomplete one?

          Ultimately laws are a mechanism by which we create the type of society that we, its members, collectively agree that we want. They are not an end in themselves.

  7. RueTheDay

    A modest proposal for reforming the personal income tax system:

    – Tax all capital gains as ordinary income. Index the basis for CPI inflation. Perhaps have an exemption for the sale of a primary residence, up to the level of the median home price, when the proceeds are used to replace the primary residence with another.

    – Eliminate all deductions, exemptions, and credits. Including home mortgage interest, charitable donations, state & local taxes, etc. Replace them with an expanded personal deduction and dependent exemptions. Replace the EITC with a slow income-based phaseout of Medicaid and other benefits (the problem the EITC was originally supposed to address).

    – Keep the current progressive rate structure. Tack on a couple of extra brackets at the top end in recognition of the absurdity of the fact that a person with $400 million in income faces the same marginal rate as someone with $400 thousand.

    That would be a good start.

  8. ella

    “return on rent-seeking” Better terminology would explain this concept to the masses. What we non-economists need are terms that clearly express their meaning. Senator Warren is very good at explaining legal and economic concepts, she should be emmulated.

    1. Leviathan


      For “rent-seekers” substitute “monopolists.”

      We are at that stage in the game when you are grateful to land in jail because that is the only place the monopolists and bankers can’t get you. All your deeds are mortgaged and you have a crumpled yellow twenty and pink five to your name.

      People understand monopoly, a depression-era classic that has withstood Parker Brothers’ every attempt to ruin it by bastardization. It has ruined many a weekend in every home in America (what do you want to play? nnooooo! not again!!!). We need to use it more as a teaching tool.

  9. Heron

    The problem is that our political class is very much a part of the larger rentier class, and getting them to do anything effective about these issues is therefore difficult, because to create greater equality for the rest of us means shooting themselves in the feet. For every Elizabeth Warren out there, 10 Carl Levins are sitting in the wings ready and willing to pull the bankers’ plow to ensure all our wealthy keep getting richer on the sweat, toil, stress, and broken marriages of the labor, small merchant, and clerking classes.

    I sometimes feel like the only way to get any good changes through DC would be some populist revolt bringing fresh faces to Congress, but when you look at how often the Republican voters have tried just that only to see them quickly subverted you realize how fantastical such dreams really are. Even when new blood is injected, the Party Bureaucracies and the sheer weight of the Corruption Industry of lobbyists, think tanks, and consultant firms quickly ensures it falls to supporting the same old policies as the “good ole boys” it has replaced. A Third Party offers hope, but since the Duopoly physically controls the election machinery from the county to the federal level, the chances of widespread Third Party victory are laughable at best. Mass activism is the only avenue for change I can see as having any viability, but how to motivate it and how to translate it into genuine policy change in a system so completely captured by the wealthy and corporate interests is damndably hard to see.

    1. Heretic

      You made some excellent points Heron… I agree that both the Democratic Party and Republican Party and he law making machinery of government are firmly in the control of oligarchs and will pervert or frustrate any attempt by any person to govern effectively. What is necessary is a third party to rise up.

      How can a third party rise up and take over the reigns of power? How did Italy’s Five Star Movement gain so much success. Conversely, how can we deepen democracy in America so that the corruption that grips its political and legal systems can be thwarted with need for radical action. How do we build a culture of respectful engagement and debate and action, to replace the atomization, frustration, and discord that is rising through America?

      1. banger

        Well, Five Stars, may hot be so great but Italy is mainly a democracy–we are not. We are kind-of-democratic but not really. The ruling elites can always shape politics through various well-worn and effective means to navigate through popular opinion.

        1. Kurt Sperry

          Most of the means for the oligarchs to control the political processes that are in place here were as well in Italy. Berlusconi put most of them shamelessly on view to name just one example. M5S has created a template for an effective, low budget, transformative political movement that will apply to any putative democracy. The systemic corruption and gaming of the system do have their limits if the pretense of a democracy is to be maintained–and we aren’t yet near the point where the pretense can be abandoned altogether.

          The biggest hindrance to an emergent third party in the US isn’t the system or rules in place to prevent it but simply the consensus belief that such a thing isn’t possible–and obviously most critically among those who would otherwise join such. The “Two Party System” is more Jedi mind trick than anything concrete. The minute a significant number of people no longer believe in it, it will no longer work as designed. Our biggest enemies aren’t in fact those we disagree with but those we agree with that have bought into the futility argument.

    2. Massinissa

      It may be hard to agree with the ideology of Republican voters, but their general success with grassroots organizing is often rather impressive. But as you say, even that hardly changes the Republican political machine at all. Rather disheartening, honestly, as its difficult to imagine the left ever getting off their asses to organize half as much as certain right wing groups tried to do a few years ago (And im not really referring to the Tea Party, theyre totally corporate…)

    3. Ed S.


      One other issue — not to be underestimated — is the degree to which Congressional districts are drawn to favor one party or the other. As an example, consider Pennsylvania.

      In the 2012 House races, only one (1!) of 18 races was competitive (winner took 51.5% of the votes). In the other 17 races, the winner received over 64% of the votes — with a range from 55% (low) to 89% (high). We’re not comparing San Francisco to Meridian, MS — this is a “typical” state.

      Ohio, THE “swing” state was comparable — although the average wasn’t quite so high. But only one competitive race (winner took 52.2%). And of the 14 seats, two were unopposed.

      So vote anything but purple!

  10. banger

    I’m not sure I understand why Stiglitz thinks that lower tax rates at the top were “supposed” to be anything other than moving power to the top rungs of society. That’s all it was and all it is right now–the rest is just misdirection. I appreciate his outrage but, damn, this thing has been coming on since the 80s.

    We’ve seen a very blatant power-grab that oligarchs have made after their personal setbacks during the reign of FDR and the sense during the early Cold War that maybe we were in all this together.

    Tax policies and, in fact, most policies, are meant to move us further along the line towards a peculiar form of feudalism and there’s no force to stop it as long as the train we’re on is a local and not an express.

  11. jonas the bold

    Collect revenues through a national sales tax (VAT) — most businesses already have mechanism in place, just turn on another spigot.

    Ditch the income tax — closes loop holes, eliminates the monstrosity our tax code has become, streamlines business and government, stops idealogical bickering (at least on the revenue side).

    1. Massinissa

      And shift the burden of taxation onto the lower quintiles? I dont see how this would fix the problem.

  12. TheCatSaid

    Bill Marsh’s NYT chart here

    showing 2011 winners & losers from all different kinds of tax breaks is a good visual tool.

    (Note that the bars in blue represent the upper 20% of taxpayers; those in orange are the lower 80%.)

    Refundable credits are the *only* category that primarily helps the lower & middle classes.

    Most tax breaks help the upper 20%. That goes for
    * Exclusions / exemptions
    * Itemized deductions
    * Capital Gains & Dividends lower tax rates
    * Miscellaneous

    In particular, the lower capital gains tax rate helps the top 0.1% the most; fully 55.5% of taxpayers in this top category benefitted. For the next 0.9%, 19.6% benefitted.

    In comparison, of the majority 80% of taxpayers only 3.9% benefitted from the lower capital gains tax rate.

    It would be better still if the NYT chart made it clear whether the % breakdowns for each tax break were according to the % of the *number of taxpayers* in each category, or the relative *monetary value of the tax break* for each category. If someone knows perhaps they can comment.

  13. Felipe

    Well, below are four of the best deals and hot sellers for this 2008 season.

    Every store on the list is an authorized Ugg retailer, so if the store you want to buy from is listed on the website, you can relax
    and be glad that you found a good deal on Uggs.
    But you might want to check out a hot item that Europeans
    seem to love.

  14. Jim Shannon

    “In America you have a right to be stupid” John Kerry Secretary of State
    “A Rich man is either a thief or the son of a thief” my dad.
    CentaMillionaire$ like John Kerry who clearly are and own the government depend on the support of Stupid Americans for their existence and profit!
    Clearly those CentaMillionaire$ now control a corrupted form of wage slave Capitalism for CentaMillionaire$ and written a Tax Code to benefit them and them alone!
    The stupid will continue to pay for the financial corruption of society and ALL governments. Those Trillion$ in personal wealth have always supported and depended on a stupid electorate!
    If the stupid ever choose to see the reality behind the corruption money buys things might change, but until then CentaMillionaire$ will continue to profit from that stupidity!

  15. Jim

    Ditch the workingman’s income tax and ditch the sales tax. Tax rentier income, put in place a land tax. That would be equitable; it also will never get done.

Comments are closed.