Congress should be wary about adopting the recent flat-tax proposals being pursued on the Hill, says Cornell economist Robert Frank, who met with Treasury Secretary Robert Rubin, U.S. Sen. Bill Bradley, Reps. Charles Schumer and Richard Gephart and other key lawmakers last month in Washington, D.C.
A flat tax would create a larger gap between the super-rich and the middle class with harsh consequences for American culture, claims Frank, co-author with Philip J. Cook of Duke University of The Winner-Take-All Society (Free Press, 1995), in which he details how extreme wealth pollutes the nation's economic and cultural landscape.
According to Frank, a flat tax of 17 percent would have allowed Disney CEO Michael Eisner to deposit an extra $50 million in the bank in 1993. Flat tax proponents say this windfall for the wealthy is healthy and would ignite economic growth.
While the flat tax would be favorable for Eisner and others, Frank believes that such a windfall for the wealthy would be pernicious legislation for America.
"As the rich get richer, more and more individuals are drawn to the pursuit of a limited number of superstar positions in what Cook and I call winner-take-all markets," said Frank, the Goldwin Smith Professor of Economics, Ethics and Public Policy at Cornell. "If the prizes weren't as big as they are, fewer people would seek them and more would choose traditional career paths like teaching, manufacturing and accounting. These and other important career choices are currently underserved."
For example, Streisand and Schwarzenegger wannabes may spend years earning low wages while waiting tables in hopes of one day bringing home the million dollar paycheck. But if the rewards for stardom were less alluring, Frank said some wannabes would be content to pursue careers that desperately need additional talent, such as in the classroom or laboratory.
Frank suggests that recent research showing a decline in the SAT scores of students seeking teaching careers is evidence that our best and brightest are pursuing higher paying jobs than those found in education.
Is there a cure for the lure of the winner-take-all market or a way to bridge the ever-widening divide between rich and poor?
Frank believes there is a surprisingly simple remedy. One antidote would be a steeply progressive consumption tax, which would transfer resources from people who consume most lavishly. "This would make the payoff from landing a superstar position a little less spectacular and would thus steer some contestants into other professions," said Frank, who holds appointments in Cornell's Johnson Graduate School of Management and the College of Arts and Sciences.
"In addition, we'd end up with a more equal distribution of income, and -- the surprising part is -- we'd actually get more income," he said. "We'd still have the same talented people doing the top jobs, but we'd get more people making more money in traditional careers like engineering and manufacturing."
Changing the tax policy is the only lever government can pull to reduce the awards at the top. "You can't exhort firms not to pay their CEOs the going rate," he said.
While Frank admits that support for a tax hike on the wealthiest by a Republican-controlled Congress is not likely, he believes those subject to the steeper tax would agree that it has benefits.
"I think many millionaires would buy my argument in a minute," he said. "I don't think people are so venal that they feel they need to keep on getting huge increases even though the people in the middle are falling behind.
"CEOs would still try their best regardless of whether they were making $30 million or $15 million," he said. "In Japan, CEOs earn a fraction of what their peers here earn, and many stay late at the office. I'm sure Michael Jordan would play just as hard if he made $18 million instead of $36 million." Frank adds that a progressive consumption tax would also boost savings rates, which are lower in the United States than in other industrial nations. He acknowledged that if tax increases are too high, the United States would risk losing its jet-setters to other countries -- note the flight of wealthy Europeans to parts of the world with lower taxes. "But this is not an imminent danger," he said. "Among major industrial nations, the United States currently has by far the lowest tax rates on top earners."