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February 23, 2014 10:30 AM The solution to inequality in San Francisco — and America? It’s the taxes, stupid!

By Kathleen Geier

The current issue of the London Review of Books contains an excellent Rebecca Solnit piece about how economic inequality created by the tech sector is destroying the social fabric of San Francisco. It’s a companion piece to a 2013 essay which explored similar themes.

It’s interesting that, until recently, the tech sector hasn’t been a target of populist rage in the way that Wall Street and the banks have been in the post-financial meltdown era. But in recent years, public frustration and outrage in the Bay Area has been mounting, leading to protests. The problem, in a nutshell, is that SF has become unaffordable to many long-time residents, as affluent tech workers have moved in and driven up the cost of housing. Many of the bohemians, political activists, and creative types that gave the city its character and charm — and made a lot of the techies want to move there in the first place — have been forced out. There are heart-rending stories like this one:

Money isn’t the only issue: even people who can pay huge sums can’t find anything to rent, because the competition is so fierce. Jonathan Klein, a travel-agency owner in his sixties living with Aids, jumped off the Golden Gate Bridge last year after being driven out of his home, with his business in the Castro facing eviction. ‘EVICTION = DEATH’, a sign at the memorial said, echoing the old ‘SILENCE = DEATH’ slogan of the Aids-activist era.

San Francisco is hardly the only city in America experiencing surging inequality. Just this week, the Brookings Institution came out with a report documenting rising inequality in our nation’s cities — especially the more economically vibrant ones like New York and San Francisco. And there’s even evidence that Brookings may have understated the problem.

So what do we do, politically, to fix this situation? Inequality policy fixes come in two basic forms. One kind seeks to raise the bottom, by helping low- and middle-income workers. San Francisco, as it turns out, has implemented a number of “raise the bottom” policies. As a new book documents, over the past 15 years, the city enacted a series of labor mandates such as a higher minimum wage, paid sick leave, domestic partner benefits, and increased spending on employee health care. Gratifyingly, those policies worked. They created a higher standard of living for workers and did not cause substantial disemployment effects. San Francisco’s rent control laws and the fact that it’s still a union town have offered additional protections to residents of modest incomes.

But vital as those policies are, they are also not enough. The median rent for an apartment in the city is shockingly high — approximately $3,256. As Solnit depressingly points out, “Minimum wage would have to be more than $50 an hour for someone to be able to buy a house in San Francisco, or to ensure that a $3200 a month rent accounted for no more than a third of their pre-tax income.”

Writers like Matthew Yglesias have claimed that the solution to San Francisco’s woes is to scrap existing zoning laws and start building more tall buildings. But SF is already the second-densest major metropolitan area in the country. I’m not necessarily opposed to building stuff higher, but I’m skeptical that creating probably not enough new apartments in a market that is already obscenely expensive is likely to make a significant improvement.

What then must we do? The answer is clear. Rather than letting the market work its magic, as Yglesias would have it; or addressing inequality solely through “bottom up” policies, the way San Francisco has been doing, the city — and America — has to start looking at inequality from a different angle: from the top down. The hammer needs to come down on the corporations and the one percenters, hard. We need to crack down on their rent-seeking activities, eliminate the special protections they enjoy via unreasonable patent and intellectual property protections, wipe out their undeserved public subsidies and unfair tax breaks, dramatically increase marginal tax rates, and institute a tax on all forms of wealth. These people have too much money, which gives them too much power, and it is poisoning our society and our political process. The bulk of their money needs to be taken away from them, for the sake of the public good.

Let me explain. For now, I’ll confine myself to the tech sector. Solnit helpfully unearths this gem of a quote from Bill Gates in 1998: “There isn’t an industry in America that is more creative, more alive and more competitive. And the amazing thing is that all this happened without any government involvement.”

That is a remarkable statement, because as anyone who knows the history of computers and the internet could tell you, the government, and the military, were essential to the development of the tech sector. Without the government, the tech sector would hardly exist. Moreover, Bill Gates owes the bulk of his fortune to the government’s decision to back down from pursuing an anti-trust case against Microsoft.

In addition, many of the other wealthiest tech companies — Facebook, Google, Twitter, etc. — owe their vast fortunes to monopoly rents. They have benefited enormously from first-mover advantage and/or network effects. They’ve reaped huge gains from these advantages. They’re also bundling with other companies to accrue yet more advantages and rents. Silicon Valley tech companies have even secretly and illegally conspired to keep employee wages down, as was revealed just last month in this bombshell investigative piece published last month by PandoDaily.

These companies’ ginormous profits are the not the result of robust competition and “the free market doing its thing.” They are pigs at the trough, benefiting from special deals and public subsidies. and feeding off the public largesse. Some great examples can be found in Julia Wong’s piece from a few days ago in Working In These Times, which tells the story of how Twitter blackmailed San Francisco into a tax break worth $56 million. As Wong reports, when Twitter threatened to decamp to the suburbs three years ago, the city caved to its demands for a partial payroll tax exemption. SF has granted many other such deals, including a $6 million tax break for Zynga and $500 million in fines that have been waived for companies whose tech buses illegally use public bus tops. The kicker: the city is now $69 million in the red. Contract negotiations for city workers are coming up; in recent years, the city has forced workers to accept lay-offs and cutbacks in benefits, in spite of the influx of wealth into the city.

No government should crater to corporate blackmail or dole out the kinds of sweetheart deals that San Francisco apparently has been giving away like candy. Outlawing this species of corporate thuggery is one type of “top-down” response to inequality, and one of its major advantages is that can be enacted at the state and local level.

The most powerful and necessary response, however, involves the federal tax code. I’ve long believed that steep increases in top marginal rates were important, and I became even more persuaded of that after reading Thomas Piketty’s forthcoming Capital in the Twenty-First Century. I’ve reviewed the book for the print edition of the Monthly, and I will have much more to say about it there, and in future posts in this space. But suffice it to say for now that Piketty makes a compelling argument that the most effective way to prevent a dystopian inegalitarian spiral is through a wealth tax — ideally, one that is global.

It’s also long past time we bring back ye olde confiscatory taxes. As Piketty points out, America bears the proud distinction of having invented the concept of confiscatory taxes — top marginal tax rates set at at least 70 percent, with the purpose not so much of raising revenue, but of discouraging socially harmful behavior. In many periods of the twentieth century, we had ‘em in this country, and they worked, helping to keep inequality relatively under control. Piketty supports raising top marginal tax rates to 80 percent or so. He presents evidence that such taxes, while not hurting economic growth, will discourage harmful economic behavior, and enable the gains from productivity to be distributed more equitably. If marginal tax rates become so high that the highest-paid executives no longer have an incentive to game the system to leverage more compensation for themselves, that leaves more money on the table for you and me.

Obviously, local governments can’t rehaul the tax code. It will take the federal government to do that. Just as obviously, enacting such dramatic changes will not be easy. But just because these reforms are not politically feasible right this minute doesn’t mean we shouldn’t be talking about them. That’s the first step. Progressives should start pressing for these changes right now. You never know when opportunity might come knocking and we might stand a fair chance of enacting them.

UPDATE: To satisfy everyone complaining about my use of the nickname “Frisco” for “San Francisco,” I’ve removed it from the piece. Now you can content yourselves with complaining about everything else in the post instead.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

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