Socialism is Essential for Economic Equality

As I have discussed before on this website, I am a socialist. Moreover, like many others on this side of the political spectrum, my socialism is largely driven by an egalitarian moral impulse. However, not everybody who shares this impulse is a socialist. Some believe that a sufficiently egalitarian economy is completely compatible with capitalism- perhaps capitalism just needs to be reigned in via some taxation and redistribution, and there will be no more morally problematic economic inequality.

In this article, I will argue against such views. In particular, I will argue that there are substantial limits on the extent to which economic inequality can be eliminated within a capitalistic framework. Any effort to reconcile capitalism with economic equality, in other words, will stop significantly short of satisfying the latter goal. The conclusion of this article, then, is that capitalism necessarily implies the existence of substantial amounts problematic inequality.

In order to understand why capitalism is incompatible with satisfactory levels of economic equality, we must first inquire into why there exists so much economic inequality in our current situation.

In any modern, developed economy, a substantial portion of the national income falls under the category of “capital income”. In the US, owners of capital capture around 30 percent of the income produced by the country every year. Capital income does not flow to these people because they are working for it, like the way in which labor income flows to workers. Rather, this income flows to these people simply because they own income generating assets like real estate, equity, debt, stocks, etc. Needless to say, this capital income represents an extremely large amount of money. In 2015, for example, total US capital income was around 4.8 trillion dollars.

If this unearned portion of the national income was distributed equally to everyone in society, every member of society would receive about 15,000 dollars in capital income every year, in addition to whatever other money they get from working. Unfortunately, under capitalism, this capital income is not distributed equally, because, under capitalism, by definition, capital is not owned by the public as a whole, but is rather owned privately by a select class of individuals.

Not only is capitalism more unequal than socialism to start out with basically by definition, since it necessarily entails that wealth is distributed unequally, but capitalism also has a tendency to amplify this inequality over time. The reason for this is simple. In a capitalist economy, those with more wealth receive more income, those with more income tend to save more, and those who save more in turn accumulate more wealth. In other words, capitalism inherently involves inequality in wealth to start out with, and furthermore contains feedback mechanisms which cause that inequality to grow larger over time, in the absence of intervention.

As a result, we see some pretty startling numbers. For example, according to Matt Bruenig, in 2014,  the average wealth of the bottom half of society was $349. For the top one percent, it was over $16 million. As a result, In 2014, the bottom half of society had an average capital income of $826. For the top one percent, it was over $750,000. Bruenig notes that it is important to understand just how much income at the top of society comes from passive ownership of investments rather than from working. The top 0.01 percent of individuals in society have an average income of $28 million. In 2014, three-fourths of that income, or $21 million, came from capital.

So, capital income inequality, which is inherent to capitalism, is a massive driver of economic inequality. It seems natural to conclude, then, that if we are concerned with creating an economically egalitarian society, we ought to address capital income inequality by redistributing capital ownership to the public (ie, by implementing socialism).

Not so fast, say the pro capitalist egalitarians- sure, an unequal distribution of capital, which is inherent to capitalism, is a big source of economic inequality, but why must we address this by redistributing capital to the public? Why not leave capital in private hands, and simply use taxation to redistribute the capital income which accrues to capital owners in a more egalitarian way?

The answer, simply put, is that doing this would not allow us to redistribute as much capital income as we would be able to redistribute if we were to bring capital under public ownership and control.

It is well known that if the state tries to tax too much of capital’s profits, it will start to see diminishing returns as capitalists simply choose to stop doing things like investing and selling their assets, for instance. In economics, the highest tax rate that the state can impose before these dynamics start to kick in and make further taxation counterproductive is referred to as the “revenue maximizing rate”.

The revenue maximizing capital tax is estimated to be around 40 percent (though estimates vary, and I certainly am not prepared to take a strong stance on what the right answer is). However, if we introduce public ownership, every asset the public owns is equivalent to a 100% tax on that asset’s returns. If the public owns even 50 percent of the wealth, and imposes the maximum possible capital tax, that would be equivalent to a tax rate of 66 percent, which, without public ownership, would not be possible. In a fully socialist society, where virtually all wealth is owned by the state, the government would be capturing more revenue from capital income than the IRS could ever dream to.

Finally, so long as there is a capitalist class, its members will have an incentive to use their vast financial resources to lobby the government, or leverage the threat of “capital flight” to decrease their taxes, as we have seen many times. Socialism, on the other hand, by squeezing that capitalist class out of existence, eliminates the possibility of this happening.

In conclusion, for those of us who are serious about combatting economic inequality, socialism is not merely an option- it is a necessity.