Hillary defined the rich as starting with incomes over $250,000.  Bryce Covert, in an article, claimed that the middle class ends at $206,568. Why? Because this is the income that defines the start of the top 5% of income earners. The top 5% is the rich class whose incomes grew substantially during this period. The middle and working class had falling real incomes since 1973.

Read the full article on Huffington Post >>

We just got the news that JP Morgan decided to raise CEO Jamie Dimon’s pay by 35 percent! He will take home $27 million for 2015!

The JPMorgan directors think that Jamie is singularly responsible for the rise in their revenue and profits in 2015. Or they admit that a few other executives have helped. They decided to raise the salaries by some millions of their two operating officers and their asset manager.

How long is this corporate pay rigging going to continue before we have a second French Revolution at the gates of JPMorgan?

Let’s look at some other recent CEO payouts:

• The CEO of Discovery Communications was paid $156,000,000 or 1,951 times the median worker pay of $80,000.
• The CEO of Chipotle was paid $28,900,000 or 1,522 times the median worker pay of $19,000.
• The CEO of CVS was paid $32,400,000 or 1,192 times the median worker pay of $27,139.
• The CEO of Walmart was paid $25,600,000 or 1,133 times the median worker pay of $22,591.
• The CEO of McDonald’s was paid $7,290,000 or 644 times the media worker pay of $11,324.

All this raises the question: are CEOs overpaid or are workers underpaid?

The average Fortune 500 CEO takes home $10 million a year. Would the company be smarter to say to their CEO: “Take $5 million instead of $10 million. Let us use the $5 million to distribute $1,000 to each of our 5,000 workers. That would make 5,000 of our company people happier.”

We haven’t discussed yet Jamie Dimon’s retirement package. He has a few more years to go before retiring. In principle, he doesn’t need a retirement package because he has earned so much from JP Morgan over the years. But he is likely to have already built a huge retirement package. We can only judge by viewing other CEO retirement packages. For example, when CEO James Mulva of Conoco Phillips retired, his package included $70 million in retirement benefits and $44 million in deferred compensation. We can feel a little better by learning that when McDonald’s CEO James Skinner retired, he only received $10 million in retirement benefits and $38 million in deferred compensation.

If anyone says that we are not creating a New Royal Class in America, their head is in the sand. Maybe we would not care if we didn’t have 15% of our people living in poverty, 9.9% of our people underemployed, and so many wage workers at Walmart who need food stamps in addition to their pay to make it through the week.

Should we interfere with what companies choose to pay their top managers? Or should we put a “cap” on the maximum ratio of the CEO’s pay to the median worker in their company? The Securities and Exchange Commission*** recently announced that, starting in 2017, they won’t put a cap but they will require every large company to publish the CEO pay ratio to the median worker in their company. This revelation may lead a lot of us to stop buying the brands made by companies who overpay their CEOs. And workers and unions will welcome this information.

Or maybe it is better not to interfere with what companies choose to pay. We have another way to control the big company payout mania by another method. Let’s just add more income tax brackets to our current tax system. Up to now, the top marginal tax rate is 39.6 percent. My proposal is that for salaries higher than $200,000, we establish the following brackets:

Brackets                                                  Marginal tax rate
$200,000-$500,000,                            40%
$500,000-$1,000,000,                         42%
$1,000,000-$5,000,000,                      44%
$5,000,000-$10,000,000                    46%
Over $10,000,000                                50%

My argument is that “trickle down” doesn’t work. Workers disbenefit rather than benefit from high executive pay. The economy gets weaker. Why? Because workers are not paid enough to buy all the output made possible by Capitalism.

The poor are too poor to buy much. Low income earners have to borrow to pay their rent because they aren’t getting a living wage. The middle class is getting smaller and are finding it hard to finance their lifestyle and send their kids to college.

It’s time to stop tempting a Second French Revolution.

*** This is news because the U.S. Securities and Exchange Commission (SEC) just approved by a 3 to 2 vote along party lines that public companies will have to disclose these pay ratios. Five years earlier under the Dodd-Frank law, the S.E.C. was asked to come up with this measure. Now that it is official and beginning in 2017, public companies will be required to post these numbers.

My latest post on the Huffington Post channel asks whether the Federal Government should raise more tax money and do some good in the process by placing a financial transaction tax (FTT) on the purchase and sale of securities.

Join the discussion!

by Philip Kotler

Hillary Clinton’s stated recently that she will not raise taxes on the middle class. She will raise taxes only on the rich and super rich.

But at what income does the middle class end and the rich begin? Hillary defined the rich as starting with incomes over $250,000. Bryce Covert, in an article, claimed that the middle class ends at $206,568. Why? Because this is the income that defines the start of the top 5% of income earners. The top 5% is the rich class whose incomes grew substantially during this period. The middle and working class had falling real incomes since 1973.

Let’s add that by 2012, the average income tax rate of the 400 wealthiest taxpayers fell to 16.7 percent. Advisors to wealthy families found creative ways to use tax shelters and tax loopholes. But why should wealthy families pay a lower tax rate than middle-class families?

Add that rich families spend millions on lobbyists to get Congress to pass legislation favorable to the rich. The Koch brothers are preparing to spend $900 million to help their preferred presidential candidates win the 2016 election.

I would like to propose that we consider setting the rich class as beginning at an annual income of $200,000. We will acknowledge that earning $200,000 a year in smaller cities or rural areas is a rich class income while in New York City or San Francisco is a middle-class income. But we need some number to start with.

The real question is how to distribute the tax burden between the rich and very rich. This calls for setting up a set of rising brackets where the marginal tax rate rises in each bracket. For example, the brackets and marginal tax rates can be:

Brackets, Marginal tax rate
$200,000-$500,000, 40%
$500,000-$1,000,000, 42%
$1,000,000-$5,000,000, 44%
$5,000,000-$10,000,000 , 46%
Over $10,000,000, 50%

It should be observed that brackets were commonly used under the Eisenhower administration and subsequently but were finally squeezed down by the Republicans to one bracket with the limit at 39.5%.

My figures represent a progressive income tax system that calls the rich to pay taxes at a rising rate. Since Ronald Reagan, the Republicans have been cutting taxes on the rich to where only one rate applies, namely 39.6% no matter how rich they are. This has resulted in a redistribution tax system that has transferred money from the poor to the rich.

I would add another tax feature: let persons with outstanding college loans cut their tax payment by some percentage (say 50%) of their outstanding college loan. As they repay their college loan, they move toward paying the full required income tax on their income.

Other taxes than the income tax need to be increased as well if we are to reduce the annual federal deficit and continue our welfare programs including Social Security and Medicare. Capital gains and carried interest should be taxed at the normal income rate, not the lower rates in existence. I would add two other tax programs to consider: (1) a tax on financial trading transactions to raise revenue and reduce the growing volume of speculative transactions in the equity market. (2) a tax on high-value luxury goods.

Conservatives will raise the following objections:

1. The government is practicing class warfare and this will change the economic behavior of the rich, leading them to work less hard, invest less and in many cases leave the country. (But the rich did not object when redistribution went from the workers to the rich.)

2. The rich will increase their drive to replace labor with capital and this will seriously reduce the number of jobs. (There is little that can stop the continuing advances in technology).

The proposed progressive tax system is further justified to meet the growing consensus that income inequality keeps getting worse. Even rich citizens are beginning to press for some compression of the growing income gap between the poor, the working class, the middle class, the rich and the super rich.

The spirit behind this taxation system is captured in the remark of Oliver Wendell Holmes, Jr., “I like to pay taxes. With them, I buy civilization.”

What do you think? Join the debate. And please tell us what you think in the comments section below.

Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Northwestern University Kellogg School of Management in Chicago. His most recent work is “Confronting Capitalism: Real Solutions for a Troubled Economic System.”

FIXCapitalism.com is dedicated to saving Capitalism from itself. Visit us at www.fixcapitalism.com to join the debate. Follow us on Twitter and Facebook.

I usually give two answers. First, I am a Ph.D. economist and I have spent many years studying how markets and marketing works. Marketing is essentially a branch of economics.

Second, marketing is the enabler of Capitalism. It is the Engine of Capitalism. Without marketing, capitalism would collapse.

I will explain this by first discussing how marketing works (see below).

Marketing’s job is to create real value for some defined group. A company creates value by (1) developing an attractive product or service, (2) pricing it right, (3) placing it so that it is easy to find and get, and (4) promoting it so that the intended market knows about the product’s existence and develops a desire for it. We call these the 4Ps of the Marketing Mix.

Now a company should not set the Marketing Mix until it determines which customers it wants to reach, serve, and satisfy. A company can’t win all customers unless it is a monopoly. The company chooses a specific category of customers (e.g., millennials, retirees) and creates the marketing mix that would be most attractive to that customer segment. The company can succeed best if it is also aware of its competitors and is aware of the community at large and its values and beliefs.

The company hopes to acquire economic wealth (profits) through its activities. Enlightened companies will also want to contribute to environmental wellness, social well-being, and human wisdom (the 4Ws).

The company can focus on either itself, or its stakeholders, or the global world as a whole.

The company can be judged by the public on whether it developed a better product, more satisfied customers, and created a better world.

Now I am able to answer why I claimed earlier that Marketing is the Engine of Capitalism. Capitalism is the best economic system for producing the greatest volume and diversity of goods and services. For it to succeed, however, there must be enough buyers for all the goods and services that Capitalism is capable of producing.

Marketing responded by developing several tools for stimulating the consumers’ desire to buy:

• The Sears catalogs introduced millions of Americans to millions of products and services. The catalog’s arrival each period in American urban and rural areas was eagerly awaited. Consumers saw goods that they never imagined. Most of them described the Sears catalog as their “wish” book or “dream” book.
• The growing number of Sears and other department stores and boutique stores made many goods tangible and accessible and desirable.
• Newspapers, magazine articles, and the growth of the movie industry featured the life styles of the rich and famous and created an aspirational and accumulative American mindset.
• Buying was stimulated by the use of various tools such as.discounts, two for the price of one, layaway plans, rebates, zero-interest financing, gift certificates, coupons, guarantees and warranties, credit cards, subscription selling, branding.

Marketing then faced a second task, namely, to convince consumers to borrow the money needed to buy the product. Most people don’t have the income to afford a home, a car, or a college education, let alone a second suit, expensive meals, or foreign vacations. The marketing of credit cards, mortgages and other credit devices made Capitalism possible. To understand our Capitalist economy, we need to replace the term “consumers” with the term “borrowers,” because that is the only way to keep an economy going when most people don’t earn enough money.

So what role does marketing play in a Capitalist economy? It gets people to want and buy all the things that are made and it gets them to accept debt to obtain these goods. Capitalism flourishes as long as marketers can stimulate buying interest and gain public acceptance of debt.

Is the job of marketing really to get people to spend money with credit cards?  Could that be called irresponsible?  And does that make marketers aiders and abetters of our debt – both individual and public?

Marketing’s job today is to sell materialism and consumption.  Tomorrow’s marketing will be markedly different.

What alternatives are there?  Should we make fewer goods and provide less employment?  All of us have to see if capitalism can operate under a new paradigm that involves less consumer debt.  Remember – our GDP depends 70% on consumer spending!

I am personally not happy that marketing’s role is to tempt people to buy products that they might not be able to afford. An ethical company would confine its promotion to people who can afford these products and discourage would-be buyers who cannot afford the product. Thus an ethical real estate agent would tell a prospect who is poor that buying a particularly expensive home would be highly risky. If the prospect lost his job or ended up with high medical expenses, he would not be able to make payments on his mortgage. Or a car salesperson would say to a prospect who is poor that buying a Mercedes could get the buyer into trouble later That prospect would be safer buying a low cost Chevrolet.

Even if sellers wanted to caution buyers, buyers are likely to resent being cautioned. Most sellers understandably find it easier to assume that buyers know what they are getting into and must take responsibility for their action.

I welcome comments from others on how we might discourage people from not buying more than they can reasonably afford. Can we re-market to people the old debt-free life style where they stop using credit cards or refuse to finance their purchases?

We’ve just begun a partnership with Huffington Post – and we invite you to join us.  It’s worth repeating why we’re doing this:

Capitalism must evolve to serve the needs of all citizens, not just the very affluent. Our goal is to discuss the 14 Shortcomings of Capitalism and systematically analyze the problems and potential solutions. We want to gather opinions and recommendations from everyone – and begin the process of saving capitalism from itself.

My first entry on HuffPost is here >>

Most countries have a similar list of income classes: the poor, the working class, the middle class, the affluent, the rich and the superrich. The trends in the U.S. over the last 20 years for real, inflation-adjusted income are: the poor remain poor, income for the working class does not grow, the middle class shrinks in size, and the rich and superrich get richer. Look at the recent street-art from Greece about how the pie is divided.

Photo by Christoph Asche, HuffPost Germany, June 18, 2015

More of us are looking at whether the growing income gap is a time bomb and needs to be defused below it blows up.

And the best answer might be that it is time to increase the progressivity of our income tax and estate system.

There remains a lot of confusion in the public mind about the difference between a flat tax and a progressive tax system. Taxes increase in both systems as income grows. If the flat tax rate is 20%, a person earning $50,000 would pay $10,000 in taxes; a person earning $500,000 would pay $100,000.

A progressive tax calls for increasing the tax rate from say 20% to a rising rate as income grows. So the person earning $500,000 will pay more under a progressive tax than a flat tax. The rule may be to pay 20% on the first $100,000, and pay 30% on anything over $100,000. In this case, the rich person would pay $140,000 in taxes on an income of $500,000, compared to $100,000 on a flat tax of 20%. The rich persons 20% on the first $100,000 plus 30% on the remaining $400,000 = $20,000 + $120,000 = $140,000.

What is the ethical argument for charging a rich person a higher tax rate than the basic flat tax rate of say 20%? It is the view that lower income earners can barely afford to buy the needed food, clothing and shelter on their low income. Besides that, they pay as much as 10% sales tax on virtually everything they buy. Wealthy people pay the same sales tax rate but spend proportionately much less on consumption, so sales taxes are quite small in relation to their high incomes. Rich people can only spend so much on food and clothing. They save or invest the rest. A higher marginal tax rate in no way reduces their basic standard of living. It does not create a weekly budget crunch or a need to borrow more money at high interest rates. A progressive tax simply reduces savings and investments for the rich.

The U.S. uses a progressive income system with seven income brackets. The current marginal tax rate on the highest bracket is 39.6%. Figure 1 shows the tax rates on three income sources: income tax, corporate tax, and capital gains tax between 1916 to 2011. Let’s first focus on the income tax rate since 1945.

Note that the highest bracket rate varied considerably in the post-World War period.

chart by:  Catherine Mulbrandon (visualizingeconomics.com)- click to enlarge

The income tax rate stood at 90% during 1945 – 1964. It dipped to 70% during 1965 – 1981. Then it dipped again from 1981 to average under 40%. Note that throughout the period marked by a very high marginal tax rate, the economy kept growing. Apparently investors continued to invest even when they had to pay a high marginal tax rate.

Many Republicans think that 39.6% is too high. They want to lower it or eliminate the progressive element entirely and return to a flat tax. They argue that the rich will still pay more taxes than the poor. But they ignore the fact that this reduces the total tax revenue. It leave less money for social benefit and earned income tax programs which help maintain a minimal standard of living for the poor and working classes..

Liberal Democrats on the other hand think the tax system isn’t progressive enough. The rich receive a lot of their income in capital gains, dividends or other clever sources. These are taxed at a much lower rate than normal income. With a maximum capital gains tax rate of 20%, wealthy people like Mitt Romney or Warren Buffet sometimes pay lower tax rates than their secretaries. It turns out that the average tax rate on the rich is about 24%, nowhere near the highest marginal rate of 39.6%.

Liberal Democrats make an ethical or social justice case that high income earners should be taxed at an even steeper progressive rate. They make the argument that low income earners are not paid more when their productivity increases. The profits resulting from higher productivity do not even go to the middle class. They only go to the rich and the superrich, the top 1% and especially the top .1%. Traditional Capitalism in the U.S. consistently resists letting workers participate in productivity gains, which keeps their incomes down and ironically requires the imposition of progressive taxes on the rich to support the necessary social programs.    The rich come back with two arguments against progressive taxation. First, productivity gains are largely the result of capital and innovation. The workers are working the same but it is capital, not labor, that boosted worker productivity. Therefore capital (and the owners of capital) should receive the profits from productivity gains. This leads to the second argument, namely that higher taxation of the rich leads to less investment by the rich. Then the pie won’t grow as big. They even add a non-fact that all boats will rise with the tide. This has not happened for more than 20 years.

The rich basically want the non-rich to build a bigger pie which leaves them with more money to invest. They do not want any oversight or changes in how the larger pie is to be distributed.

I believe the pie distribution issue can no longer be ignored. Distribution is now the real issue, not the size of the pie. We hear more statements today that the rich have rigged the system. We hear that the three top men at the private equity firm Carlyle each took home $500 million of income this year. We hear that the compensation industry tells a company to pay more to the new CEO than his competitors, if they want the best new CEO. We know the rich use offshore tax shelters such as Swiss banks or Caribbean islands to avoid or minimize their taxes. It is estimated that loopholes and exemptions cost the public about a trillion dollars a year.

My argument is to not only keep our progressive income tax system but to increase its progressivity. This is long overdue. The Republicans have done everything to lower the marginal tax rate which stands at 39.6% on the highest bracket. In Scandinavian countries, the marginal tax rate on the highest incomes is around 50%. We need to move toward 50% and use more brackets to address the super-high income levels of the top 1% and .1%.

If we look at Figure 1, two other things should be observed. First, the corporate tax rate hovered around 50% between 1952 – 1986, then fell to 35% around 1986 and remained there. Corporations that once paid a 50% tax rate are not happy to pay today a 35% tax rate. They prefer to keep billions of dollars overseas that might otherwise be invested in the U.S. They won’t budget until the 35% tax rate is reduced by half or more      Second, the capital gains tax fell to 15% by 2003 and remained there, although it has moved up recently to 20%. Why shouldn’t the tax on capital gains be raised to the normal income level? This is income for the rentier class who do little work while the working class puts in long hours and pays a normal tax rate.

Finally, we need to increase the estate taxes. If a husband and wife die in a car accident, their family will receive a tax bill on their estate. There will be no tax on the first $10 million of the couple’s estate. The rest of their estate is taxed at 55%. I think that the initial exemption amount is fair but I would advocate a higher tax rate on the remaining estate. Otherwise wealth continues to concentrate among the wealthy few and increase the size of the Plutocrat class, who live in a separate world from most people and whose interests are often contrary to the general welfare.

I invite readers to comment on this article. State where you agree or disagree. What might a fair income tax and wealth tax system look like?

As you’re aware, we live in a time where rational voices are increasingly questioning the shortcomings of capitalism.

A group of us are starting a new online-community called FIXCapitalism.com and I wanted to personally invite you to participate.

My name is Phil Kotler, and I’m a professor at the Kellogg School of Management at Northwestern University.

The community brings together business thought-leaders and professionals, along with their socially active counterparts, to actively discuss the issues and propose needed solutions that are both sensible and meaningful.

I’ve prepared a list of 14 points that highlight the areas where capitalism is falling short. We think that concerned citizens would like an opportunity to discuss these shortcomings more thoroughly.  We’d like to get your opinion and views on these and other topics as we go along. We’re building a space for open-discussion: respectful of all serious opinions.

In a sense, we must save capitalism from itself.

Will you join us?

P.S. If you have friends you’d like to invite to participate, please feel free to ask them to join us as well.