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principle-4

Chomsky’s fourth principle of the concentration of wealth and power is to “Shift the Burden.” He uses the word “burden” in the sense of the responsibility for maintaining and managing the society in which one lives. Morality demands that people who have greater wealth and bigger incomes ought to be held responsible at a higher level for meeting the needs of their community—they should contribute more to society because they’ve taken more from society. This means that the rich ought to pay a larger percentage of their wealth and income in the form of taxes. The idea behind the fourth principle is that, in violation of basic social ethics, the rich try to shift their tax burden onto the middle and lower classes. They do this by paying less than their fair share of taxes, thereby forcing everyone else to pay more than their fair share.

In “Requiem,” Noam Chomsky explains that wealthy individuals and business corporations used to pay very high taxes in the United States all the way up to the 1960s. Over the subsequent fifty years or so, however, they have succeed in changing the tax codes and other regulations so that today they are able to get away with paying only a tiny fraction of their fair share.

The higher taxes on corporations were put in place by President Roosevelt in the 1930s, despite vehement opposition from some sectors of the business class. The American economy expanded considerably during this period of high taxation. In the quarter-of-a-century following the Second World War, when Japan and much of Europe were struggling to recover from the devastation of war, United States experienced a period of rapid economic growth. This generated new wealth, which, coupled with the various welfare state policies established by Presidents Roosevelt and Johnson, led to increasing prosperity for large parts of the population. Even though economic disparities remained, they were prevented from growing out of control through government regulations. People generally felt that anyone who was willing to work hard would be able to escape poverty and achieve a relatively comfortable lifestyle.

Chomsky notes:

The American Dream, like many [other] ideals, was partly symbolic, but partly real. So in the 1950s and 60s, say, there was the biggest growth period in American economic history—the Golden Age. It was pretty egalitarian growth, so the lowest fifth of the population was improving almost as much as the upper fifth. And there were some welfare state measures which improved life for much of the population. It was, for example, possible for a black worker to get a decent job at an auto plant, buy a home, get a car, have his children go to school, and so on. And the same across the board.

In fact, many business leaders understood that their profits depended on the ability of ordinary people to buy their products, and therefore paying higher salaries made perfect business sense. They knew that if they didn’t pay good wages to their workers, those workers wouldn’t have enough money to spend, and that lower spending would mean lower consumption, which would mean lower profits. But this was true only when the workers and the consumers were essentially the same people. As Chomsky explains, for the super-rich in the United States, that is no longer the case.

When the U.S. was primarily a manufacturing center, it had to be concerned with its own consumers, here. Famously, [in 1914] Henry Ford raised the salary of his workers so they’d be able to buy cars. When you’re moving into an international “plutonomy,” as the banks like to call it—the small percentage of the world’s population that is gathering increasing wealth—what happens to American consumers is much less a concern, because most of them aren’t going to be consuming your products anyway, at least not on any major basis. Your goals [if you’re a business executive] are: profit in the next quarter, even if it’s based on financial manipulations; high salary, high bonuses [for yourself and your friends]; produce overseas if you have to and produce for the wealthy classes here and their counterparts abroad.

In the above quotation, notice the keyword “plutonomy.” Chomsky says that this is the word that banks use to describe an economy where only the super-rich matter, for they’re the main investors and the main consumers. What he doesn’t say is where that word came from, which is an interesting and very revealing story in its own right. Simply google the phrase “Citibank Memos” and you’ll find the information that’s missing from the film.

Chomsky then goes on to talk about the issue of taxation.

During the period of great growth of the economy—the 50s and 60s, but in fact earlier—taxes on the wealthy were far higher. Corporate taxes were much higher, taxes on dividends were much higher, simply taxes on wealth were much higher. The tax system has been redesigned [during the subsequent decades], so that the taxes that are paid by the very wealthy are reduced, and, correspondingly, the tax burden on the rest of the population is increased.

In the following graph from Wikipedia, notice the ups and downs in the marginal tax rate for the lowest and highest earners over a hundred year period. According to Investopedia, “A marginal tax rate is the amount of tax paid on an additional dollar of income.” Taxpayers are divided into various tax brackets depending on their income; as they move from lower tax brackets to higher ones, the rate at which they are taxed goes up. In other words, “As income increases, what is earned will be taxed at a higher rate than the first dollar earned.” The exact rates of increase from one tax bracket to another is up to the legislature to decide, which is where the influence of the affluent comes into play. The trends are clear, or, as Chomsky puts it, “the numbers are striking.”

tax-rates

There is a crucial distinction between the marginal tax rate and the effective tax rate. According to Investopedia, “The marginal tax rate refers to the tax bracket into which a business’s or individual’s income falls.” This, however, does not reflect the actual rate at which the income of the said business or individual is taxed, which depends on numerous factors, rules, and loopholes besides the income. For this reason, it is the effective tax rate that is “a more accurate representation of tax liability than an individual or business’s marginal tax rate.”

The tax on corporations is essentially a burden on members of the upper classes who own the most stocks and shares, which is why they invest considerable time and money to get the government to reduce the effective corporate tax rate. In practice, however, there are plenty of ways that allow the corporations to avoid paying even the reduced effective tax rate—such as hiding their wealth in tax havens like Delaware or the Cayman Islands.

The following graph from Wikipedia shows the ups and downs in the effective corporate tax rates over a sixty year period. Notice the downward trend.

us_effective_corporate_tax_rate_1947-2011_v2

Compare the downward trend in the effective corporate tax rate shown above with the upward trend in corporate profits over the same period. The latter is depicted in the following graph, also from Wikipedia.

us_corporate_profits_1947-2011

Chomsky then goes on to say:

Now the shift is towards trying to keep taxes just on wages and on consumption—which everyone has to do—not, say, on dividends, which only go to the rich.

Dividend is basically the cash payment that a company pays on a regular basis out of its profits to those who own the company’s stocks; such income is taxable. When the value of an investment or real estate increases above its purchase price, that’s called a “capital gain.” When that asset is sold, a capital gains tax is applied. Taxes on both dividends and capital gains are to be paid only by the wealthy, which is why there has been a trend towards lowering these taxes. When the tax burden is reduced on the upper classes, it has to be shouldered by the rest of society. As a result, taxes on wages and salaries are increased, as well as the consumption taxes that the government imposes on the sale of goods and services. These latter taxes are collected mainly from the middle and lower classes.

The unfairness of the U.S. tax system is pretty obvious. The top 0.1% of the population gets to increase its wealth while bankrupting the working classes. Worker productivity has consistently increased since the 1970s, but the wages during the same period have been stagnant or declining (when corrected for inflation). Corporations are earning record amounts of profits but are refusing to pay their fair share of taxes to sustain the very society that is allowing them to earn those profits. The public bailouts and stimulus packages after the crash of 2008 helped create an “economic recovery,” but almost the entire new wealth generated during this period has gone to the super-rich, leaving a few crumbs for the rest of the population.

class-warfare-color

By considering the above facts, anyone can reach the conclusion that the U.S. system of taxation is basically unacceptable and needs to be dismantled. Yet, we don’t see masses of people in the streets carrying the proverbial pitchforks and torches. This is so because while there is a great deal of discontent, there is very little clarity on allocating responsibility. It is all too tempting under such circumstances to look for saviors and to blindly follow charlatans and false prophets.

An important cause for the lack of clarity has to do with how our ideology has been shaped by powerful interests, as discussed under Principle #2. Whenever a grossly unjust arrangement is put into place, some form of justification is required to make this unfairness palatable to the exploited masses. Even when large numbers of people do not swallow the given ideology, those who do tend to make substantial change that much harder.

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The most common justification for lowering taxes on wealthy individuals and business corporations, while increasing it on wages and consumer goods, is called “trickle-down economics.” But this is sheer falsehood, since there is no concrete evidence that cutting taxes on the rich somehow “increases investment and increases jobs.” As already mentioned, the exact opposite seems to be the case: the period of maximum economic growth in the United States was a period with some of the highest marginal and effective tax rates. As Chomsky explains: “If you want to increase investment, give money to the poor and the working people. They have to keep alive, so they [will] spend their incomes. That stimulates productions, stimulates investment, leads to job growth, and so on.”

 

principle-5

Noam Chomsky’s fifth principle of the concentration of wealth and power is “Attack Solidarity,” which is basically refers to the same idea as “divide and conquer.” Chomsky defines the word solidarity simply as “caring for others,” but it’s a little deeper than that. Solidarity is the social form of altruism.

Solidarity is quite dangerous, from the viewpoint of the masters. You’re only supposed to care about yourself, not about other people. This is quite different from the people they claim are their heroes, like Adam Smith, who based his whole approach to the economy on the principle that sympathy is a fundamental human trait, but that has to be driven out of people’s heads. You’ve got to be for yourself, follow the vile maxim, don’t care about others—which is okay for the rich and powerful but is devastating for everyone else.

The economic ideology that has been dominant over the last half-a-century is known as “neoliberalism.” According to neoliberal doctrine, individuals are naturally selfish and, if everyone is allowed to follow his or her own (narrowly defined) self-interest then the whole society ends up benefiting. Exactly how does selfish behavior on the part of a society’s individual members lead to the overall benefit of that society is a mystery, usually explained by the magic of the free market as orchestrated by the “invisible hand.” In popular mythology, the eighteenth century Scottish philosopher Adam Smith (1723–1790) is believed to have discovered this phenomenon. For anyone who takes the trouble of actually studying Smith’s work, neoliberal ideology turns out to be the exact antithesis of everything he stood for.

Adam Smith was a moral philosopher and one of the first political economists; he was also a leading figures of the Scottish Enlightenment. His two most important books are titled The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). Smith’s economic theory is grossly misunderstood, or deliberately misinterpreted, primarily because the relationship between his two books is not widely appreciated, and also because he is frequently quoted out of context. Smith believed that sympathy, or benevolence, which is the foundation of solidarity, is one of the most basic human sentiments. We are the kind of creatures who’re naturally inclined to help our fellow human beings. While we often act from self-interest, no society can function if its members are lacking in sympathy.

In sharp contrast, neoliberal ideology emphasizes the pursuit of self-interest as the main human motivation. Since it gets human nature wrong, neoliberalism has to convince people through education and propaganda that they are supposed to be individualistic in their goals and that emotions like sympathy, benevolence, and altruism are to be shunned. We’re told that a society functions best when its individual members act entirely or almost entirely in their own self-interest, and that any attempt by society to restrain that motive is counterproductive to its own well-being. When people are brainwashed into thinking that they have no obligation to help their fellow human beings, they turn against each other and lose their capacity to resist and oppose the powers that be.

In “Requiem,” Chomsky discusses two major American institutions that are based on the principle of solidarity, both of which are under relentless attack—Social Security and public education.

Social Security means, I pay payroll taxes so that the widow across town can get something to live on. For much of the population, that’s what they survive on. It’s of no use to the very rich, so therefore there’s a concerted attempt to destroy it. One of the ways is defunding it. You want to destroy some system? First defund it. Then, it won’t work. People will be angry. They want something else. That’s a standard technique for privatizing some system.

In the United States, the Social Security Act was originally signed into law by President Franklin Roosevelt in 1935, and is now codified as U.S. Code, Title 42, Chapter 7. It is the foundation of the welfare state measures established in the wake of the Great Depression. The two Social Security Trust Funds are funded through payroll taxes collected by the IRS. It is the major source of income for the elderly, people with disabilities, and families needing temporary assistance. Attacks on Social Security include the argument that it reduces private ownership and redistributes wealth through government intervention rather than through free markets. Conservative and libertarian think tanks have been lobbying for the privatization of Social Security since the 1990s. In 1997, President Bill Clinton and Speaker of the House Newt Gingrich reached a secret agreement to “reform” Social Security. Clinton was supposed to make the announcement in his State of the Union address in January 1998, but this was derailed due to the Monica Lewinsky scandal. President George W. Bush also tried to privatize Social Security at the beginning of his second term, but he failed to receive sufficient popular support, while the Democratic victories in the 2006 midterm election basically killed Bush’s proposal in the Congress. Even though Social Security has so far survived privatization attempts, proposals for reducing benefits in a variety of ways keep appearing on a regular basis.

Another way in which the principle of solidarity has been institutionalized is public education, including K-12 schools and state funded colleges and universities. Chomsky calls public education “one of the jewels of American society.” Both sets of institutions are under attack. Writing in the Indypendent, scholar and activist Lois Weiner notes that the neoliberal assault on K-12 public education includes such tactics as “privatization of schools and services; charter schools, public-school closings, fragmentation of the school system’s administrative apparatus; budget cuts, high-stakes standardized testing and the destruction of the teacher unions.”

According to Chomsky:

Public schools are based on the principle of solidarity. I no longer have children in school; they’re grown up. But the principle of solidarity says, I happily pay taxes so that the kid across the street can go to school. Now that’s normal human emotion. You have to drive that out of people’s heads. I don’t have kids in school. Why should I pay taxes? Privatize it. The public education system, all the way from kindergarten to higher education is under severe attack.

Chomsky then goes on to discuss how public support for college education has declined in the United States and how this decline has contributed to huge student debt that only serves the interests of the wealthy elite.

You go back to the Golden Age again, the great growth period in the 50s and 60s. A lot of that was based on free public education. One of the results of the Second World War was the GI Bill of Rights, which enabled veterans, and remember, that’s a large part of the population then, to go to college. They wouldn’t have been able to, otherwise. U.S. was way in the lead in developing extensive mass public education at every level. By now, in more than half the states, most of the funding for colleges comes from tuition, not from the state. That’s a radical change.

 

principle-6

Perhaps the most important means for preventing huge concentrations of wealth and power involves appropriate government regulations on business, banking, and finance. The sixth principle, “Run the Regulators,” is meant to circumvent that problem. Chomsky explain the phenomenon of “regulatory capture,” whereby the foxes become guards at the hen house.

If you look over the history of regulation—say, railroad regulation, financial regulation and so on—you find that quite commonly it’s either initiated by the economic concentrations that are being regulated, or it’s supported by them. And the reason is because they know that, sooner or later, they can take over the regulators. And it ends up with what’s called “regulatory capture.” The business being regulated is in fact running the regulators. Bank lobbyists are actually writing the laws of financial regulation—it gets to that extreme. That’s been happening through history and, again, it’s a pretty natural tendency when you just look at the distribution of power.

Regulatory capture occurs when the government agencies responsible for ensuring that businesses follow the regulations allow themselves to become complacent; instead of actively preventing problems from arising in the first place, they lose interest in anticipating or detecting possible problems. They become “captured,” in effect, by the very entities they’re duty bound to keep under control. As Scott Hempling points out, regulatory capture is not the same thing as corruption. Illegal acts like “financial bribery, threats to deny reappointment, promises of a post-regulatory career” do occur, but they are examples of corruption carried out by the entity being regulated. In contrast, regulatory capture describes the attitudes, actions, and non-actions on the part of regulatory agencies that prevent regulations from being fully or properly enforced. According to Hempling:

A regulator is “captured” when he is in a constant state of “being persuaded”: persuaded based on a persuader’s identity rather than an argument’s merits. Regulatory capture is reflected in a surplus of passivity and reactivity, and a deficit of curiosity and creativity. It is evidenced by a body of commission decisions or non-decisions—about resources, procedures, priorities, and policies, where what the regulated entity wants has more influence than what the public interest requires.

In “Requiem,” Chomsky explains that the enormous expansion of lobbying in the 1970s constitute a direct response of the business elite to the restrictions imposed on them by government regulations, the purpose of which was, and continues to be, the control of legislation so that it serves the interests of businesses, and not those of workers, the general public, or the natural environment.

The business world was pretty upset by the advances in public welfare in the 60s, in particular by Richard Nixon. It’s not too well understood that he was the last New Deal president, and they regarded that as class treachery. In Nixon’s administration, you get the consumer safety legislation, safety and health regulations in the workplace, the EPA (the Environmental Protection Agency). Business didn’t like it, of course. They didn’t like the high taxes. They didn’t like the regulation. And they began a coordinated effort to try to overcome it. Lobbying sharply increased.

Business corporations have learned that the money they spent on lobbying is part of their normal cost for doing business in American.

riselobbyists

The success of the lobbying initiative could be seen almost immediately, as deregulation began in the Carter administration and gained tremendous momentum during the Reagan era. Chomsky notes how President Reagan bailed out banks like Continental Illinois. Instead of letting the bank fail, the FDIC spent $4.5 billion to bail it out; this was the largest government bailout at the time. That’s also when the term “too big to fail” became popular, after it was used by Congressman Stewart McKinney during a 1984 Congressional hearing. A company that’s “too big to fail” is basically too strong to be regulated by any government agency; it can indulge in questionable practices with the assurance that the taxpayers will rescue it if it starts to go down. One of the highlights of the Reagan presidency was the Savings & Loans crisis, which led to large bailouts. Financial regulations were weakened even further when the Glass-Steagal Act was dismantled under President Clinton, as already discussed under Principle #3. In 2008–09, the Bush and Obama bailouts of Wall Street set a new record. As a result of the Savings & Loans scandal of the 1980s, however, more than a thousand bankers were jailed. Nothing like that happened after the global financial meltdown of 2008. As Matt Taibbi explains here, the individuals and institutions responsible for the suffering of millions of people were never held accountable, let alone convicted or punished, mainly because of their deep financial ties with the Washington elite.

rs-19081-rectangle

Illustration by Victor Juhasz

According to Chomsky, all of these bailouts violate the ideology of neoliberal capitalism, since governments are not supposed to intervene in the functioning of the “free markets.” Conservatives use the term “nanny state” to criticize public assistance like Social Security or publicly funded programs like schools. In practice, however, they are eager to ask for taxpayer bailouts every time a major corporation is about to go bankrupt or an investment bank is about to face the consequences of its own irresponsible behavior.

In a capitalist economy, you wouldn’t do that. In a capitalist system that would wipe out the investors who made risky investments. But the rich and powerful, they don’t want a capitalist system. They want to be able to run to the nanny state as soon as they’re in trouble, and get bailed out by the taxpayer. That’s called “too big to fail.”

While happily accepting government bailouts, the American oligarchs continue to preach the free market ideology and the need for small government to everyone else.

Meanwhile, for the poor, let market principles prevail. Don’t expect any help from the government. “Government is the problem, not the solution.” That’s essentially neoliberalism. It has this dual character which goes right back in economic history: one set of rules for the rich; opposite set of rules for the poor.

It didn’t have to be that way. When President Obama took office in January 2009, he could have listened to the advice of experts on how to fix the financial sector. Some even thought that the tremendous mandate that Obama had received in the elections meant that the had a once-in-a-lifetime chance of bringing about real change—that he could become a worthy successor to FDR. It soon became apparent that these hopes for change were illusory, as the President surrounded himself with the same people whose policies and actions had previously produced one crisis after another.

There are Nobel laureates in economics who significantly disagree with the course that we’re following. People like Joe Stiglitz, Paul Krugman, and others, and none of them were even approached. The people picked to fix the crisis were those who created it—the Robert Rubin crowd, the Goldman Sachs crowd—they created the crisis [and] are now more powerful than before.

Chomsky is fond of saying that the increasing concentration of wealth and power should not surprise anyone. It is not by accident or bad luck. It is the natural and expected result of the policies that our representatives have supported for decades. If the individuals who run large corporations and financial institutions end up as chief government regulators, there is no reason to think that they would suddenly become defenders of the rights and interests of the general population.

Nothing surprising about this. It’s exactly the dynamics you’d expect. … Everywhere you look, policies are designed this way, which should come as absolutely no surprise to anyone. That’s what happens when you put power into the hands of a narrow sector of wealth, which is dedicated to increasing power for itself, just as you’d expect.

Members of the United States Congress are responsible for safeguarding the rights and interests of the American people whose votes elect them. In practice, they tend to pay a lot more attention to what lobbyists want than what their voters need. Every member of the Congress has to spend about 30% of his or her time asking people for money, and each of them must raise about $10,000 a week for the next election campaign. Most lobbyists represent the biggest donors, and the policies they favor cannot be ignored. American business has certainly taken the advice of the Powell Memorandum. Writing in the Atlantic, Lee Drutman points out that business corporations spend approximately $2.6 billion on lobbying. “Of the 100 organizations that spend the most on lobbying, 95 consistently represent business.” Large corporations often have more than a hundred lobbyists working for them in Washington DC, “allowing them to be everywhere, all the time.” Which citizens’ group can possibly match the spending power and ubiquitous reach of Exxon Mobile or Goldman Sachs? “For every dollar spent on lobbying by labor unions and public-interest groups together, large corporations and their associations now spend $34.” Is it any wonder, then, that laws and policies are made that consistently increase the wealth and power of business corporations? Or that regulatory agencies like the EPA or the SEC are essentially powerless to enforce public interest regulations? No surprises here. You can’t put the foxes in charge of guarding the hen house and still hope to see your brood cackling in the morning.

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