The economist Giacomo Corneo is a self-proclaimed socialist. A professor at the Free University of Berlin, Corneo is steeped in the writings of Karl Marx and, in conversation, rattles off the beliefs of the founder of communism. The professor works with Germany’s Greens party.
But on perhaps one of the most important economic policy debates of the day — higher taxes on the rich and corporations — Corneo voices the types of concerns not typically raised by economists on the left.
“We have to recognize that the traditional instruments of taming capitalism — taxes and transfers to equalize the distribution of income — are not so powerful in a globalized economy,” Corneo said. “Capital is internationally mobile, and incentives matter.”
Corneo may have a point. Faced with a staggering rise in inequality, even European countries such as France and Italy have in recent years abandoned higher taxes on the wealthy and corporations amid a sharp drop globally in business tax rates. This international trend has created a challenge for policymakers on the left, including the Democratic presidential candidates, who have called for financing an array of new government programs by ratcheting up taxes on businesses and the richest 1 percent.
Corneo is part of a group of economists on the left who think they may have a better way, if not a substitute: Rather than taxing and redistributing income, the left’s traditional playbook, the government should slowly buy shares in public companies, becoming partial owners in the corporate world.
Under this arrangement, the government would use the returns from these investments to pay out dividends, much as Wall Street investors already do, but to society at large, while also acting as a powerful investor that influences company decisions.
This approach would still aim to correct for the enormous rise in inequality, while — at least in theory — sidestepping the challenge of taxing internationally mobile flows of capital that can cross borders more easily than tax collectors. These economists are proposing to have the government own, and control, a share of capital income in the United States — with the aim of more equitably sharing the gains from a surging stock market.
They call it “shareholder socialism.” Or as John Roemer, a political science and economics professor at Yale University, puts it: “You make the worker a shareholder.”
One version of this idea, called the sovereign wealth fund, already exists in Norway, where returns from a more than $1 trillion fund go into the country’s treasury and help finance its generous welfare state. Since the 1970s, Alaska has used the state’s oil revenue to give an annual dividend to residents. Singapore boasts a sovereign wealth fund that has been around for decades.
Leading figures of liberal parties in Austria and the Netherlands have also expressed support for the idea, and in Germany it is being discussed as a way to finance a supplemental pension for the elderly, according to Corneo.
“These plans are about redistributing the ownership of capital to workers, rather than just improving the wages of workers,” said Peter Gowan, a policy associate at the Democracy Collaborative, a left-leaning think tank, who also supports higher taxes on the rich. “They aim to give workers the power of being owners — a power currently controlled only by a small group of wealthy elites.”
But other experts, even on the left, have expressed skepticism that such a fund could generate enough revenue to meaningfully improve American incomes. Some note that it is unclear whether the government would be effective at choosing successful investments that bring in substantial revenue.
“It’s a very backward way to get revenue,” said Dean Baker, senior economist at the Center for Economic and Policy Research. “Corporate profits are up, but returns to shareholders are not that good.”
Other objections abound. A sovereign wealth fund would probably lead the government to force companies to adopt labor, environmental or other standards beyond what Congress approved with new laws, said Adam Ozimek, chief economist at Upwork. That could in turn discourage smaller firms from going public, which could inhibit economic growth and business dynamism.
Or the government could try to pressure or force companies to keep open unprofitable domestic factories, Ozimek noted, even if doing so was not in their financial interest. Ozimek added that the fund would still require new taxes (or some other revenue source) to raise the money to purchase enough assets so it does not entirely sidestep the challenges of taxation.
“Giving the government a great deal of control over the economy comes with a lot of risk,” Ozimek said. “They’re going to steer those companies in ways they want them to behave.”
A sovereign wealth fund may also make more sense in a country like Saudi Arabia, where it is clear that the country’s source of wealth — oil — will not last forever, meaning the revenue it produces will eventually wither, said Mark Mazur, a former treasury official in the Barack Obama administration now at the Tax Policy Center, a nonpartisan think tank. That calculus makes less sense in a diversified American economy with lots of growth sectors, Mazur said.
Given the nation’s vibrant private markets, Mazur said, the United States “can probably do better than establishing a sovereign wealth fund. Can you imagine the political infighting over investment choices?”
Supporters of the idea say a sovereign wealth fund would require much less new funding, even if some taxes had to be levied, because the assets purchased by the United States would grow in value over time. Funds also could be raised by selling off existing government assets, such as public lands, or printing money. And taxes would only have to be raised once, rather than every year, reducing opportunities for the rich to discover over time how to dodge them. Or the United States could mandate that companies hand over to the government a small percentage of their shares.
If the U.S. government required publicly traded companies to hand over shares equal to 1 percent of their value every year, then after 10 years, it would own 10 percent of the $34 trillion stock market, or $3.4 trillion. (The federal government is projected to raise about $46 trillion over the next 10 years, or about $4.6 trillion a year, according to the Congressional Budget Office.) With a 4 percent rate of return, this fund could generate for taxpayers a return of about $560 billion a year, or $2,210 per year for every American adult, said Matt Bruenig, founder of the People’s Policy Project, who has proposed a sovereign wealth fund for the United States.
“Once the wealth is in the fund, you got it. It’s a lot easier to grab a bunch of wealth and hold on to it, and collect the return on it directly, than try to tax that return year after year after year,” Bruenig said.
To detractors, giving the government power to influence corporate decisions is a potential drawback of the sovereign wealth fund. But from the perspective of “shareholder socialists,” what looks like a dangerous plan becomes an advantage: Why not have the government exert its power to force companies to stay in the United States, or allow it to force the corporate world to adopt stricter environmental standards?
“Once we have learned to manage a collective portfolio, we can get more ambitious and activate public ownership of capital … so as to fundamentally change our relations with [it],” Corneo said.
Only modest versions of this idea have started making headway with the left wing of the Democratic Party, although not much. Sen. Bernie Sanders (I-Vt.), a presidential hopeful, said this year he would propose an incremental version of a social wealth fund, called an “inclusive ownership fund,” in which large businesses would be required to regularly contribute a portion of their stocks to a fund controlled by employees, which would pay out a regular dividend to the workers.
In Britain, Jeremy Corbyn’s Labour Party has similarly said the party will push legislation requiring companies with more than 250 people to set up those kinds of ownership funds.
This type of idea may get an added push, particularly because the past few years do not bode well for higher tax regimes, with the average corporate tax rate across the world plummeting from 49 percent in 1985 to 24 percent in 2018 in a global race to the bottom.
Earlier this decade, for instance, France’s socialist president gave up on a new 75 percent “supertax” on the very rich after it did little to close the budget deficit, according to Reuters. Since the 1990s, nine nations have scrapped wealth taxes like the one proposed by Sen. Elizabeth Warren (D-Mass.), a presidential hopeful, according to the Organization for Economic Cooperation and Development.
Many of the “shareholder socialist” economists believe in the model of a sovereign wealth fund and dramatically raising taxes on the rich, seeing the two approaches as compatible.
But they also argue that the recent rise in inequality has little to do with the increase in CEO salaries that often dominates the headlines. Instead, dramatic increases over the past several decades in capital income — stocks, real estate and other assets — controlled by wealthy people who hold most of the stock market, have separated the winners and the losers in the global economy.
About 84 percent of the stock market is held by the richest 10 percent of Americans, according to the New York Times, and a paper by economist Edward N. Wolff found that the richest 1 percent of American households own 40 percent of the country’s wealth, higher than at any point since 1962.
Combating inequality, the shareholder socialists say, requires some mechanism for giving the country at large a way to close that gap.
“You’re hearing a lot about single-payer health insurance, the Green New Deal — that’s all fine, but it is not addressing the fundamental question of who gets the profits from the nation’s firms,” said Roemer, the Yale professor. “If the mechanism that takes money from workers to shareholders is broken, maybe you just make the worker a shareholder.”