The bank robber Willie Sutton, when asked by a reporter why he robbed banks, is reputed to have answered, "Because that's where the money is." Which brings us to a wealth tax.
Transforming our economy is going to be expensive. And a tax on the wealth of the super wealthy is one way to capture a sizeable amount of money, which is why both Bernie Sanders and Elizabeth Warren include the tax in their respective programs. The economists Gabriel Zucman and Emmanuel Saez estimate that Sanders's proposed wealth tax would raise $4.35 trillion over the next decade, while Warren's would raise $2.75 trillion.
Where the money is
The concentration of wealth has steadily increased since the mid-1990s, as illustrated in the following Bloomberg News chart.
A recent Federal Reserve Bank study highlights the fact that the top 10 percent and even more so the top 1 percent of households have been especially successful in increasing their equity ownership in US public and private companies. For example,
in 1989, the richest 10 percent of households held 80 percent of corporate equity and 78 percent of equity in noncorporate business. Since 1989, the top 10 percent's share of corporate equity has increased, on net, from 80 percent to 87 percent, and their share of noncorporate business equity has increased, on net, from 78 percent to 86 percent. Furthermore, most of these increases in business equity holdings have been realized by the top 1 percent, whose corporate equity shares increased from 39 percent to 50 percent and noncorporate equity shares increased from 42 percent to 53 percent since 1989.
It is worth emphasizing that last point: the top 1 percent of households now control more than half of the equity in US businesses, public and private.
The figure below shows total wealth holdings for all US families as of the second quarter, 2019. The top 1 percent now own almost as much wealth as all the families in the 50th to 90th percentiles combined.
A comparison with the size and distribution of wealth in 2006, shown below, illustrates the rapid gains made by those at the top.
In 2006, the total wealth held by families in the 50th to 90th percentiles was slightly greater than that held by families in the 90th to 99thpercentiles and significantly larger than those in the top 1 percent. But not anymore. And sadly, families in the bottom half of the distribution, whose wealth is predominately in real estate, have fallen further behind everyone else.
Time for a wealth tax
Recognizing this reality, and the fact that this concentration of wealth was aided by a steady decline in top individual, corporate, and estate tax rates, both Sanders and Warren want to tax the super wealthy to generate funds to help pay for their key programs, especially Medicare for All. And, as an added bonus, to begin weakening the enormous political power of those top families.
Sanders would create an annual tax that would apply to married couple households with a net worth above $32 million — about 180,000 households in total, or roughly the top 0.1 percent. The tax would start at 1 percent on net worth above $32 million, with increasing marginal tax rates–a 2 percent tax on net worth between $50 to $250 million, a 3 percent tax from $250 to $500 million, a 4 percent tax from $500 million to $1 billion, a 5 percent tax from $1 to $2.5 billion, a 6 percent tax from $2.5 to $5 billion, a 7 percent tax from $5 to $10 billion, and an 8 percent tax on wealth over $10 billion. For single filers, the brackets would be halved, with the tax starting at $16 million.
Warren's wealth tax would apply to households with a net worth above $50 million — an estimated 70,000 households. The tax would start at 2 percent on net worth between $50 million to $1 billion, rising to 3 percent on net worth above $1 billion. Her proposed tax brackets would be the same for married and single filers.
Zucman and Saez have calculated how some of the richest Americans would have fared if these wealth taxes had been in place starting in 1982. For example, Jeff Bezos, the founder of Amazon, is currently worth some $160 billion. Under the Sanders plan his wealth would have been reduced to $43 billion. Under the Warren plan, it would be $87 billion.
Over all, the economists found, the cumulative wealth of the top 15 richest Americans in 2018 — amounting to $943 billion, using estimates from Forbes — would have been $434 billion under the Warren plan and $196 billion under the Sanders plan.
Despite the fact that the super wealthy will still have unbelievable fortunes even if forced to pay a wealth tax, almost all of them are strongly opposed to the tax and determined to discredit it.
Polling done early in the year found strong support for a wealth tax. As Matthew Yglesias explains:
Americans are . . . positively enthusiastic about Sen. Elizabeth Warren's proposal to institute a wealth tax on large fortunes, according to a new poll from Morning Consult. Their survey finds that . . . the wealth tax scores a crushing 60-21 victory that includes majority support from Republicans.
Of course, this kind of support was registered before the start of any serious media effort to raise doubts about its effectiveness. Recently, a number of wealthy business people and conservative economists have begun to make the case that a wealth tax is a radical measure that will harm the economy. Some point to the fact that many countries that once used the tax have now abandoned it. Twelve OECD countries had a wealth tax in 1990, now only three do (Norway, Switzerland, and Spain). France, Germany, and Sweden are among the majority that no longer use it.
However, as Zucman and Saez explain, this fact does not mean that a wealth tax would not work in the US. For example, in some countries it was the election of conservative governments philosophically opposed to such taxes that led to their elimination. More substantively, they highlight four problem areas that tended to undermine the effectiveness of and support for national wealth taxes in Europe and why these should not be a major problem for the US.
First, European countries have their own separate tax laws and member states do not tax their nationals living abroad. Thus, a wealthy person living in a country with a wealth tax could easily move to a nearby country without a wealth tax and escape paying it. And many have. But, as the economists note,
The situation in the United States is different. You can't shirk your tax responsibilities by moving, because US citizens are responsible to the Internal Revenue Service no matter where they live. The only way to escape the IRS is to renounce citizenship, an extreme move that in both Warren's and Sanders's plans would trigger a large exit tax of 40 percent on net worth.
Second, European governments tolerated a high level of tax evasion. Until last year, they did not require banks in Switzerland or other tax havens to share information about deposits with national tax authorities. This made it easy for the wealthy to hide their assets. The US is in a better situation to avoid this outcome. The Foreign Account Tax Compliance Act, signed in 2010, requires foreign financial institutions to send detailed information to the Internal Revenue Service about the accounts of U.S. citizens each year, or face sanctions. Almost all foreign banks have agreed to cooperate.
Third, European wealth taxes had many exemptions and deductions. In contrast, there are none in the proposed plans by Warren and Sanders. Zucman and Saez highlight the French program that was in place from 1988 to 2017 as a prime example:
Paintings? Exempt. Businesses owned by their managers? Exempt. Main homes? Wealthy French received a 30 percent deduction on those. Shares in small or medium-size enterprises got a 75 percent exemption. The list of tax breaks for the wealthy grew year after year.
Fourth, European wealth taxes fell on a considerably larger share of the population than would the proposed plans by Warren or Sanders. In Europe, "wealth taxes tended to start around $1 million, meaning they hit about 2 percent of the population, compared with about 0.1 percent for the proposed U.S. plans." This broader reach of the European wealth taxes helped to generate popular pressure to weaken them, leading to their eventual removal. The more limited reach of the proposed US plans should help to blunt that development in the US.
We can certainly expect a fierce debate over the viability and effectiveness of a wealth tax as the campaign season continues, especially if Sanders or Warren becomes the Democratic Party nominee for president. We should be prepared to advocate for the tax as one important way to ensure adequate funding of needed programs. But we should also take advantage of the debate to shine the brightest light possible on the growing and already obscene concentration of wealth in the US and even more importantly on the underlying and destructive logic of the capitalist accumulation process that generates i
Europeans have long observed from a distance the mix of social and racial conflicts which structure political and electoral cleavages in the United States. Given the growing, and potentially destructive, importance taken by these identity conflicts in France and in Europe, they might do well to consider the lessons to be learned from foreign experiences.
Let's take a step backwards. After having been the party of slavery during the civil war from 1861-1865, in the 1930s the Democratic Party gradually became the party of Roosevelt and the New Deal. As far back as the 1870s, the Democratic Party had begun to reconstruct itself on the basis of an ideology which could be described by as social-differentialist: it was violently inegalitarian and segregationist towards Black Americans, but more egalitarian than the Republicans towards the white population (in particular the new immigrants from Italy and Ireland). The Democrats supported the creation of the federal income tax in 1913 and the development of social insurance after the crisis of 1929. It was not until the 1960s, under the pressure from Black militants, and in a transformed geopolitical context (Cold War, decolonisation), that the Party was to turn its back on its heavy segregationist past and to support the cause of civil rights and racial equality.
From this point on, it was the Republicans who were to gradually get the racist vote or more precisely the vote of those in the White population who considered that the main concern of the federal State and the educated white elites was to ensure that the minorities were given preference. The process began with Nixon in 1968 and Reagan in 1980; it then gained momentum under Trump in 2016 who hardened the identity and nationalist discourse in the wake of the economic failure of Reaganomics and its promises of prosperity. Given the open hostility of the Republicans (the stigmatisation by Reagan of the 'welfare queen', this 'queen of social welfare', presumed to personify the laziness of unmarried black mothers, until the support by Trump for the white supremacists during the riots in Charlottesville), it is not surprising to learn that the vote of the black electorate has been a consistent 90% for the Democrats since the 1960s.
This type of division on the basis of ethnic origin is in the process of being established in Europe. The hostility of the right in matters of extra-European immigration has led voters who originate from these parts of the world to take refuge in the only parties who do not openly reject them (therefore, on the left), which in return leads to right-wing accusations of favouritism towards them on the part of the left. For example, during the second round of the presidential election in 2012, 77% of voters who stated they had at least one grand-parent of extra-European origin (or 9% of the electorate) voted for the socialist candidate, as compared with 49% for the voters of European origin (19% of the electorate) as for those with no stated foreign origin (72% of the electorate).
In comparison, in the United States the European 'minorities' are characterised by a much higher percentage of mixed marriages (30% amongst first generation North African immigrants, as compared with little more than 10% for Black Americans), which should alleviate the divisions. Unfortunately the religious dimension and the question of Islam (almost totally absent in the United States) contribute on the contrary to hardening the situation.
From this point of view, the European situation is closer to that of India, where the Hindu Nationalists in the BJP built their ideology on the rejection of the Muslim minority. In India the confrontation of identities concerns the consumption of beef and the vegetarian diet. In France, it focuses on the question of the headscarf and sometimes on the length of skirts and the wearing of leggings on the beach. In both cases we witness a similar anti-Muslim obsession in the ranks of the supporters of Hinduism and the supporters of extremist Secularism and the National Front. This also takes the form of an extremely violent discourse which extends to all those who defend the rights of minorities (who are almost accused of being pro-Jihadi). In both cases the latter sometimes run the risk of exacerbating the conflict, for example by defending the legitimate right to wear a headscarf with more determination than the right not to do so, and not to be subjected to this somewhat retrograde form of pressure.
How can we escape this escalation of conflict? First, the discussion should be set in the context of economic justice and the combat against inequality and discrimination. Countless studies have demonstrated that for one and the same diploma, those whose names have an Arabo-Muslim consonance are often not invited to a job interview. It is urgent to set up indicators and sanctions enabling us to monitor the development of these discriminatory practices and get them to evolve.
More generally speaking, it is the absence of any economic discussion which feeds identity-based no-win conflicts. Once we abandon any discussion of an alternative economic policy and we continue to explain that the State no longer controls anything, apart from its frontiers, there is no reason to be surprised that the political discussion focuses on questions of frontiers and identities.
It is time for all those who refuse the clash forecast between identitarian nationalism and elitist globalism to get together and rally around a programme for economic transformation. This involves educational justice, going beyond capitalist ownership and an actual and ambitious project for the renegotiation of the European treaties. If we do not succeed in going beyond these petty squabbles and old hatreds, then hatred reminiscent of fascism may well win the day.
PK on progressives vs centrists reads my mind, but the EU skew in the article is a tricky defense, IMO.
Will the Democratic presidential nomination go to a centrist or a progressive? Which choice would give the party the best chance in next year's election? Honestly, I have no idea.
One thing I can say, however, is that neither centrism nor progressivism is what it used to be.
There was a time when arguments between centrists and progressives were framed as debates between realism and idealism. These days, however, it often seems as if the centrists, not the progressives, are out of touch with reality. Indeed, sometimes it feels as if centrists are Rip Van Winkles who spent the last 20 years in a cave and missed everything that has happened to America and the world since the 1990s.
You can see this in politics, where Joe Biden has repeatedly declared that Republicans will have an "epiphany" once Donald Trump is gone, and once again become reasonable people Democrats can deal with. Given the G.O.P.'s scorched-earth politics during the Obama years, that's a bizarre claim.
You can also see it in economics. There are many reasonable criticisms you could offer of Elizabeth Warren's economic proposals. But the one I keep seeing is that Warren would turn America into (cue scary music) Europe, maybe even (cue even scarier music) France. And you have to wonder whether people who say such things have paid any attention to either Europe or America over the past few decades.
Sign Up for Debatable
Agree to disagree, or disagree better? We'll help you understand the sharpest arguments on the most pressing issues of the week, from new and familiar voices.
Continue reading the main story
Just to be clear, Europe does have big economic problems. But they're not the ones such people seem to imagine.
When people say such things, they seem to have in mind a picture of the U.S.-Europe comparison that did seem to have some validity in the 1990s. In that picture, nations with large social spending and extensive government regulation of markets suffered from "Eurosclerosis," persistent lack of jobs.
Employers, the story went, were reluctant to expand both because of high taxes and because they feared not being able to fire workers once hired. At the same time, workers had little incentive to accept jobs because they could live off generous social programs.
Europe also seemed to be lagging in the adoption of new technology: For a while, the U.S. surged ahead in making use of the internet and information technology in general, leading to arguments that Europe's high taxes and regulation were discouraging innovation.
But all of that was a long time ago. The jobs gap has largely vanished; adults in their prime working years are actually more likely to be employed in Europe, France included, than they are in America.
New Library Is a $41.5 Million Masterpiece. But About Those Stairs.
As Men Are Canceled, So Too Their Magazine Subscriptions
Her Illness Was Misdiagnosed as Madness. Now Susannah Cahalan Takes On Madness in Medicine.
Continue reading the main story
Continue reading the main story
Any gap in the adoption of information technology has also long since vanished; households in much of Europe are as or more likely to have broadband than their U.S. counterparts, partly because the U.S. failure to limit providers' monopoly power has led to much higher prices for internet access.
It's true that European nations have lower G.D.P. per capita than we do, but that's largely because, unlike most Americans, most Europeans actually have significant vacation time and hence work fewer hours per year. This sounds like a choice about work-life balance, not an economic problem.
And on that most fundamental of indicators, life expectancy, the U.S. has fallen far behind: French residents can expect, on average, to live more than four years longer than Americans. Why? Universal health care and policies that mitigate extreme inequality are the most likely explanations.
Now, I don't want this to sound like praise of all things European. The nations on the euro remain terribly vulnerable to financial crises, because they've adopted a shared currency without a shared banking safety net; only the heroic leadership of Mario Draghi, the former president of the European Central Bank, avoided a catastrophic collapse of the euro in 2012.
Europe also suffers from persistent weakness in demand because key players, Germany in particular, have an obsessive fear of deficits, even when the European economy desperately needs stimulus.
These are big problems, severe enough that I wouldn't be surprised if Europe is the epicenter of the next global crisis. But the problem with Europe is not that its social programs are too generous and its governments too intrusive. If anything, it's almost the opposite: Europe's economy is vulnerable because a combination of political fragmentation and ideological rigidity has left its politicians unwilling to be Keynesian enough.
The point is that centrists who point to Europe as an illustration of the bad things that happen when you're too enthusiastic about pursuing social justice are stuck decades in the past. Modern European experience actually vindicates progressive claims that we can do a lot to make America fairer without destroying incentives. And even Europe's problems make the case for more government intervention, not less.
Continue reading the main story
By all means, let's talk about whether "Medicare for all," wealth taxes and other progressive proposals are actually good ideas. But trying to shoot them down by going on about how terrible things are in France is a sure sign that you have no idea what you're talking about. -- via my feedly newsfeed
Perhaps the best-known provision of the Fair Labor Standards Act (FLSA) of 1938 is that it set a federal minimum wage for the first time. In addition, this is the law that established the overtime rle that if you are a "nonexempt" work--which basically means a worker paid by the hour rather than on a salary--then if you work more than 40 hours/week you must be paid time-and-a-half for the additional hours.
Although wages and hours are regulated under the same law, policy developments and research on the law's impacts could not be more different between the two areas. The federal minimum wage has been raised numerous times; and many subfederal jurisdictions impose their own wage minima that, where they exceed the federal minimum, supersede it. Perhaps because of this variation, a huge literature examining the effects of minimum wages on the U.S. labor market has arisen and has continued to burgeon. A fair conclusion is that American labor economists have spilled more ink per federal budgetary dollar on this topic than on any other labor-related policy. The opposite is the case for regulating hours. The essential parameters of hours regulation have not changed since passage of the act; and perhaps because of this, the dearth of research on the economic impact of hours regulation in the United States, especially recently, is remarkable.
(In the shade of these parentheses, I'll also mention this issue of the the RSF journal, edited by Erica L. Groshen and Harry J. Holzer, is especially rich in content, including 10 articles on the general theme of "Improving Employment and Earnings in Twenty-First Century Labor Markets." I'll list the Table of Contents for the issue, with links to the articles, at the bottom of this post.)
The US minimum wage situation has changed dramatically in the last decade or so in a particular way: a much larger share of workers live in states with a minimum wage above the federal level. Brown and Hamermesh write:
Over the past thirty years, however, states' decisions to increase their minimum wages have become increasingly important given that the federal minimum has changed less frequently. For example, in 2010 (after the 2007 federal increases had become fully effective) only one-third of the workforce was in states with state minima that exceeded the federal $7.25. By 2016, with the federal minimum still at $7.25, that fraction had risen to nearly two-thirds. As of 2018, twenty-nine states ... had minimum wages above $7.25. States that have raised their minimum wages above the federal minimum have tended to be high-wage states, and the result has been a minimum wage much more closely (though still imperfectly) aligned with local wages.
Brown and Hamermesh focus on the studies that try to estimate the effects of a minimum wage by looking at these differences in minimum wages that have arisen across states (leaving the issues involved in studying city-level minimum wages for another day). Here are some of the points they make:
There are basically three ways to take advantage of the state-level changes and variations in minimum wage: comparisons between states; comparisons between border counties of states; and comparisons with states and "synthetic" control groups, which basically means finding a combination of other areas that had economic patterns to a certain state before the minimum wage was changed.
When doing these comparisons, a researcher will want to adjust for other factors that might affect state economies: for example, a natural disaster that hit one state but not another, or a change in the price of oil would affect an oil-producing state. A researcher can allow for each state or border-county to be following its own time trend, or for the effect of the minimum wage on employment to be different in every state. Is the relationship between a changing minimum wage and employment a straight line or a curved line--and if it's a curved line, how curved is it? The more variables like this you include, the smaller the effect of a minimum wages on employment is likely to be. There is considerable disagreement and controversy over what variables should be included.
It's been typical in many of these studies to focus on either teenagers or restaurant workers, because they are both groups that are presumably affected by the minimum wage.
A common finding is that a rise in the minimum wage of 10% raises the wages of teenagers as a group or restaurant workers as a group by about 2%--presumably because some teenagers or restaurant workers were already earning more than the minimum wage and thus weren't affected.
Estimates of the effect of a raising the minimum wage on either employment of teenagers or restaurant workers are all over the place, depending on exactly how the estimation process is done, usually "small"--which in this case means "small enough that the earnings gains caused by a minimum wage increase are only partially offset by employment losses."
Of course, showing that past minimum wage increases had small effects in reducing employment doesn't prove that additional minimum wage increases would also have small effects. The usual belief of economists is that the effects of a rising minimum wage on employment would be small up to some point, but then start getting larger. That point is likely to vary according across states--which is why it makes some sense to have a different minimum wage across states.
At least one recent study has tried to focus on workers age 16-25 who have not completed high school--rather than teenagers in general. There some evidence a higher minimum wage might have a bigger effect on low-education workers in particular, rather than looking at teenagers or restaurant workers.
It's plausible that the effects of a higher minimum wage on employment might be larger in the long-term. For example, perhaps a firm doesn't fire anyone when the minimum wage rises, but instead just slow down on hiring. Or perhaps a minimum wage causes certain kinds of firms to be more likely to exit the market over time, or less likely to enter, or more likely to invest in labor-saving technology. Some studies have found support for these effects; others have not.
For some complementary discussion of the evidence on raising minimum wages in previous posts, see:
In contrast to minimum wage laws, overtime rules haven't changed much over time. Brown and Hamermesh write: "In the eighty years since the FLSA was enacted, the specification of its crucial parameters regulating hours—a penalty rate of 50 percent extra wages on hours beyond the standard weekly hours (HS) of forty—has not changed." Maybe the main way it has come up in recent policy disputes is when laws are proposed that employers should be able to give "comp time" for overtime work, meaning extra vacation time, instead of paying higher wages.
But a big change in the overtime rules has been happening in a subtle way. Back in the mid-1970s, the rule was that a salaried worker had to be paid at least $455/week to be exempt from the requirement to get paid time-and-a-half for overtime. But that $455/week hasn't been changed since then, even though it's value has been eaten away by inflation. Brown and Hamermesh calculate that $455/week was about double the median weekly earnings in the US economy back in the mid-1970s; now, it's about 50% of median weekly earnings.
To put this another way, it used to be that you had to be earning a salary of double the typical weekly earnings before you were exempt from overtime rules. Now, you can be paid a much lower salary, half of typical weekly earnings, and you are still exempt from the overtime rules. The rules requiring overtime pay thus have gradually come to apply to many fewer workers over time. The Obama administration tried to raise the limit to $913/week by using an administrative rule, but the courts held (reasonably enough, in my view) that this kind of decision needed to be made by Congress passing a law. Apparently the Trump administration has now proposed raising the limit to $679/week.
What would happen if the rules were changed so that dramatically more workers needed to be paid overtime for working more than 40 hours/week? Presumably, some of these workers would get paid overtime, but in addition, employers would try to reduce the number of workers who ended up above that weekly limit. Brown and Hamermesh run through various calculations and look at some international evidence. They write: "We can conclude that increasing the exempt limit would have raised some salaried workers' earnings and reduced their weekly hours. One exercise suggested that 12.5 million workers would have been affected ..."
The effects of changing the rules so that more workers are eligible for overtime pay aren't enormous. Still, for workers who are being paid salaries below the median weekly wage, and thus aren't eligible for overtime, it could be a meaningful gain. They write:
If we are interested in spreading work among more people and removing the United States from its current position as the international champion among wealthy countries in annual work time per worker, minor tinkering with current overtime laws will do little. We might borrow from some of the panoply of European mandates that alter the amount and timing of work hours. Among these are penalties for work on weekends, evenings, and nights and limits on annual overtime hours, while lengthening the accounting period for overtime beyond the current single week. If our goal is to spread work and make for a more relaxed society, these changes will help but their effects will also be small.
Table of Contents RSF: Russell Sage Foundation Journal of the Social Sciences December 2019; Volume 5, Issue 5 "Improving Employment and Earnings in Twenty-First Century Labor Markets"
This is a big deal in all "human capital" occupations where the employer plunges the employee into indentured servitude as long a "proprietary idea" resides in his head -- even if the employee is the author or co author of the IDEA. Ideas should NOT be property.
There is a growing bipartisan consensus that non-compete agreements harm workers and the economy. This bipartisanship scarcely seemed possible back in 2015 when we were government lawyers coordinating investigations by the Offices of the Illinois and New York Attorneys General into Jimmy John's use of non-compete agreements for sandwich makers and delivery drivers. But earlier this month, in what seems like the first bipartisan federal effort in far too long, Senators Todd Young (R-Ind.) and Chris Murphy (D-Conn.) introduced a bipartisan bill that would effectively stop the abuse of non-compete agreements. This builds on a year in which six state legislatures also passed significant non-compete reforms.
The growing use of non-compete agreements
Employer use of non-compete agreements has mushroomed in recent years. These agreements prevent people from working for their former employer's competitors, and they were once used sparingly to prevent, for example, executives with trade secrets or confidential business information from sharing them with new employers. Now, they're often used indiscriminately to chill job mobility for employees with no access to such information. A 2015 study found that 40% of Americans have had a non-compete agreement at some point in their career. As lawyers, we've worked on cases involving non-compete agreements used for janitors, receptionists, customer service workers, fledgling journalists, even employees of a day care center.
Why are non-compete agreements so bad? They fly in the face of our fundamental American belief that anyone can work hard, gain skills, and move on to a better opportunity to build a better life. Non-compete agreements can trap workers in jobs they want to leave—whether because of sexual harassment or other poor working conditions, or even just a bad boss. They limit the talent pool, preventing employers from hiring the best worker for the job. Non-compete agreements can also stifle economic dynamism, blocking people from starting their own businesses.
Workers' inability to leave their jobs because of non-compete agreements and similar limitations has also contributed to the wage stagnation of recent decades. Two studies released just last month found that non-compete agreements adversely affected wages and job mobility. This makes sense, given that the agreements erode the leverage that workers typically get from the threat of leaving their jobs to work elsewhere. That threat is now empty for millions of Americans subject to these provisions, showing that non-compete agreements aren't really about trade secrets anymore. They're about limiting workers' bargaining power.
A new Senate bill could restore bargaining power
The new Senate bill, the Workforce Mobility Act of 2019, is notably robust, and should attract bipartisan support, from legislators motivated by concerns about economic liberty and entrepreneurialism as well as those focused on job quality and workers' rights. The bill contains the following key provisions:
Prohibition of non-compete agreements: The bill would prohibit use of non-compete agreements in almost all situations. The bill also declares that non-compete agreements are unenforceable. (While the bill does not explicitly address whether non-compete agreements already entered into would be automatically rendered unenforceable on the effective date, the plain language suggests that they would not be grandparented in.)
Limited exceptions: The bill contains limited exceptions that in our view are minimal and sensible, allowing for use of non-compete agreements with regard to owners and senior executives in the sale of a business.
Trade secrets: The bill explicitly permits employers to protect trade secrets by requiring workers to sign more limited agreements not to disclose such secrets.
Enforcement: If enacted, the law against non-compete agreements would be enforced collaboratively by both the Federal Trade Commission (FTC) and the United States Department of Labor (DOL). The bill also provides for civil fines of $5,000 per week of violation, and creates a private right of action, with damages and attorneys' fees available for successful lawsuits.
Public education and outreach: Given the lack of knowledge of many workers about workplace rights, the bill sensibly contains outreach and public education provisions, requiring employers to post a notice and also requiring the Labor Secretary to conduct outreach specifically on this issue.
Regulations: The bill would allow the Labor Secretary to promulgate regulations.
Reporting: The bill requires a report from the two enforcement agencies one year after the Labor Secretary issues regulations.
Other efforts to curb non-compete agreements
This strong bill comes in the context of many other efforts to curb non-compete agreements. At the federal level, the FTC is reviewing a petition submitted by the Open Markets Institute along with numerous labor groups and law professors, seeking a rule prohibiting non-compete agreements; a group of senators also urged the FTC to take this action. The FTC appears to be seriously considering the petition. Although last month in congressional testimony, FTC Chairman Joseph Simons saidhis team "couldn't find enough existing economic literature to justify a rulemaking," he also noted that the Commission would continue to examine the issue.
Meanwhile, in the past several years, over 10 states have passed laws limiting employers' ability to impose non-compete agreements on their employees. Many of these laws, including those reforms passed in Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, Rhode Island, and Washington, ban non-compete agreements or make them unenforceable for some or most workers in the state based on their income. States like Illinois exclude only low-wage workers while others, like Washington, bar non-compete agreements for any worker earning up to $100,000 annually. Other states have recently limited use of non-compete agreements for certain professions such as physicians (like in Florida), broadcasters (like in Utah), and home health care aides (like in Connecticut). State reforms also vary in terms of whether they specify a time limit for the duration of non-compete agreements and whether an employer has to pay money to workers while a non-compete agreement is in effect.
In addition, some states have other types of limitations for non-compete agreements. They've long been unenforceable in California; also, in most states, even without a statute on point, courts will generally only uphold a non-compete agreement if it protects an employer's legitimate business interest and is reasonably limited in duration and geographic scope. The issue, of course, is that non-compete agreements are rarely reviewed by courts so this case-by-case approach is insufficient.
State and federal policy recommendations
At the federal level, the Senate bill and FTC petition are both positive developments that have the potential to address the abuse of non-compete agreements in a nationwide and holistic way that addresses both their individual and market harms.
Meanwhile, more states can and should continue to act on this issue. Indeed, a bill was just introduced in the District of Columbia to ban non-compete agreements for individuals paid below $87,654 (3 times D.C.'s minimum wage). Here are some important considerations as policymakers consider their options:
Non-compete agreements should be prohibited, not just unenforceable. This distinction is important, because if they are unenforceable, this just means that they won't be upheld if they are challenged in court. But most non-compete agreements never make it to court: workers assume they are valid or, even if they suspect the non-compete is too broad, most workers can't afford to take on the risk and expense of possible litigation. This results in a chilling effect, as workers stay in their jobs regardless of the actual legality of their non-compete agreement. It also fails to disincentivize employers from using overly broad non-compete agreements; the worst that can happen is that the provision would be found invalid.
For this same reason, there should be penalties available for employers that include illegal or unenforceable non-compete agreements in their employment contracts.
Non-compete agreements should be prohibited ideally for all workers, or for the vast majority of workers. Some states have limited the prohibition only for very low-wage workers. This approach does not address the larger impact on job mobility and competition, as well as basic fairness, as we have previously written. Non-compete agreements should also be prohibited for independent contractors and interns, as states like Washington have done.
Given limited public enforcement resources, laws should include a private right of action with attorneys' fees. Legislators concerned about excessive litigation should note that this is not a complex topic and should be easy for employers to comply with: all they have to do is not include a non-compete agreement in their employment contracts.
States that do decide to permit non-compete agreements for certain categories of workers or in certain circumstances, should consider:
Adopting a relatively high, and also very clear, income cutoff below which employees cannot be subject to a non-compete agreement. This kind of bright-line rule is much more administrable for employers, workers, and enforcers, and leads to less litigation.
Specifying that non-compete agreements must be clearly and fully disclosed to workers at the time a job offer is made, not after a job is accepted or after work has begun.
Requiring, as Washington does, that employers pay workers a mandatory set amount (a reasonable percentage of their salary) during the time any non-compete agreement is in effect. This type of payment, known as "garden leave," serves two important purposes: it provides income to a worker whose earnings are limited or nonexistent because of a non-compete agreement, and it creates a disincentive for employers to include such terms in their contracts, causing them to actually consider whether a non-compete agreement is truly needed to protect business interests.
Clarifying that all non-compete agreements must still conform to that state's case law, used only to protect a legitimate business interest, and reasonable in terms of duration and geographic scope.
Whether the new federal proposals gain traction or the states continue to lead on non-compete agreements, it's good to see that there are still some issues so fundamental to our economic well-being that policymakers can find allies across the aisle.
This post is a perfect illustration of why it is always a mistake NOT to read Larry Summers. His critique is highly skeptical of Senator Warren's (and also Senator Sanders and other M4A advocates) health care universality programs. Further he is just as skeptical of the other very large regulatory, financial and labor market shocks embedded in the large scale economic restructuring envisioned in the emerging progressive Democratic Party platform agenda. The blowback from markets, it can be inferred, is not going to be abstract or academic.
On the other hand, Summers, kinda like Biden, has really ONLY a return to Obamacare enhanced with a public option. I am good with that as a pause in the DROP in coverage going on now. But is there really a path back to that state that the Rs cannot sabotage in the manner already demonstrated?
Summers cautions should be taken VERY seriously. He knows what he is talking about to the Nth degree. But there is no challenge here greather than that faced by the depression and World War II, is there? If the country is mobilized to reform, train, defend against climate change, bring MORE equality and lift all boats, mountains can be climbed and crossed. But THATS what its gonna take, seems to me.
Warren's plan to finance Medicare-for-all pushes into dangerous and
Warren's plan to finance Medicare-for-all pushes into dangerous and uncharted territory
November 5, 2019
Democratic presidential candidate Elizabeth Warren last week mounted a passionate defense of universal government-provided health care and made a detailed case that it can be paid for without burdening the middle class. The vision of Medicare-for-all is immensely attractive and evokes health systems in other countries that perform much better than ours does. I could easily imagine supporting a well-designed Medicare-for-all plan.
However, no other country offers as broad coverage as Medicare-for-all would or claims to provide universal health insurance without taxing its middle class. With respect to the admirably detailed plan the Massachusetts senator laid out, there will, I suspect, be serious questions about the accuracy of her arithmetic, the impact on labor markets, the feasibility of applying Warren's full set of proposed taxes to the rich, and the financial and economic impacts of the plan.
Campaign arithmetic is always optimistic, but errors are highly consequential with respect to a program that on some measures is eight times as large as the Trump tax cut. Warren estimates the revenue potential of increased Internal Revenue Service enforcement as being about 65 times as large as the Congressional Budget Office's enforcement proposal. The University of Pennsylvania's Natasha Sarin and I have been working to make the case that the CBO is far too pessimistic in its estimates of the potential for better enforcement to generate revenue. But the most optimistic scenario we can envision is still more than $1 trillion short of the Warren estimate.
Further, Warren's plan would double the 3 percent tax on wealth over $1 billion that she has already proposed. Many experts believe the Warren wealth-tax revenue estimates are too high, perhaps by a factor of two, because they overestimate the wealth of the very rich and, as Sarin and I have argued, underestimate potential avoidance. Whatever the merits of these arguments, it is hard to see a defense for assuming — as the Warren proposal does — that wealth taxes can be doubled with no impact on avoidance, or that annual capital gains taxes can be levied without reducing the wealth tax base. The estimates are also infected by erroneous transcription of the CBO's 10-year growth estimates and by a general failure to take account of interactions between the different tax measures proposed.
Second, there will be large labor market effects: Warren's plan will discourage hiring, particularly of low-skilled workers, by firms that currently provide generous benefits. These firms will face the most burdensome taxes when they increase hiring and will gain the greatest cost savings by laying off workers. In addition, workers' incentives to take jobs will be dulled because they will no longer be compensated with health benefits (which will become available regardless of what they do). There are further potential economic perversities as well: To cut costs, firms will be incentivized to get below the 50-employee threshold and scale back on current health benefits. And all the efforts that employers have engaged in to contain costs and to encourage prevention will become pointless.
Third, the combined tax impact of Warren's various plans is extreme. While the case for more tax progressivity is compelling, and each of the Warren measures can be defended in isolation, there is the concern that their cumulative impact may be excessive should, as the Warren campaign repeatedly claims, they be borne only by the very wealthy. Here is a suggestive comparison: The total after-tax adjusted gross income of all those earning more than $1 million or more, as last reported by the IRS in its Statistics of Income publication, was under $1.1 trillion. The sum of all the new taxes on the wealthy proposed by Warren is of comparable magnitude: adding together around $310 billion a year in new wealth taxes; $330 billion a year in corporate taxes from her new proposals and her previous real corporate profits taxes; $240 billion a year from her new capital gains and finance tax proposals; at least $90 billion from her across-the-board 14.8 percent taxes of labor and investment income; and $190 billion in increased compliance. This totals nearly $1.2 trillion — more than millionaires' total after-tax income.
Of course, this calculation is an oversimplification. Different taxpayers are situated differently and will be affected differently by any set of proposals. There will be tax collections from those who are not middle class but still earn less than $1 million a year. There are sources of "income" that will be taxed under the Medicare-for-all proposal that do not show up in current adjusted gross income — unrealized capital gains or corporate retained earnings, for example. On the other hand, it's highly problematic given the avoidance and other bad incentives likely to result, to be anywhere in the ballpark of confiscatory taxation of high-income taxpayers.
Finally, what of the economic and financial effects of Warren's proposals? A place to start is by thinking about the potential impact on the stock market. The market is valued as investors' claim on future corporate earnings, which the Bureau of Economic Analysis estimates are about $1.8 trillion this year. As a result of all the tax claims just described, the Warren program would reduce investors' claim on these earnings. Recognizing that some of these taxes fall on salary income or non-corporate business, it is reasonable to estimate that investors will pay an extra $500 billion to $600 billion in taxes related to corporate profits. Then, Medicare-for-all proponents cite a severe hit to health industry profits, currently on track to be over $200 billion this year. Then, there will be the broader impacts of overhauling regulation, often to serve vital social interests, in initiatives such as banning fracking and reforming the energy industry, stepping up financial regulation, a major increase in antitrust enforcement and the regulation of technology companies, and filling corporate board seats with labor representatives. It is hard to see an argument that investors' claim on profits would fall less than a third. The figure could be considerably greater.
Because of abnormally high valuations, along with increased uncertainty and volatility, loss of business confidence and selling pressure from those in distress, the market would likely fall more than proportionally to earnings. Accurate market predictions are impossible and will in any event depend not on what is proposed but on what the market expects will actually take place. There is, however, the real risk of economic contraction following a sharp market decline, especially given that the current very low level of interest rates puts the Fed in a weak position to pursue counter-cyclical policy.
For decades, I have emphasized that corporate profits and the market do better when progressives are in power and have dismissed conservative fear-mongering about progressive policies.
This time seems different. Judged relative to gross domestic product, the Medicare-for-all program dwarfs the federal spending hikes of the New Deal and the Great Society. Presidents Franklin D. Roosevelt and Lyndon B. Johnson emphasized that their new benefits would be paid for by contributions from their middle-class beneficiaries. With Warren's plan, it is the combination of vast new entitlements with total reliance on the top 1 percent for revenue that puts us in uncharted and, I fear, dangerous territory.