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A change in how the rich are seen

The notion that the poor always will be with us has been ingrained in our culture ever since the sermons of Moses were set down by the anonymous author of Deuteronomy.

The financial crisis of the present day raises a rather different issue, however: What should we do about the rich?

That the point is even open for discussion suggests that a sea change is taking place on the American political scene. For decades, the wealthy have been held up as people to be admired, victors in the Darwinian economic struggle by virtue of their personal ingenuity and hard work.

Americans consistently supported fiscal policies that undermined middle- and working-class interests partially because they saw themselves as rich-people-in-waiting: Given time, toil and the magic of compound interest, anyone could retire a millionaire.

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That mind-set has all but been eradicated by the damage sustained by the average worker’s nest egg, combined with the spectacle of bankers and financial engineers maintaining their lifestyles with multimillion-dollar bonuses while the submerged 99% struggle for oxygen.

(The price of admission to the top 1% income-earning club last year was roughly $400,000.) That may account for the near-total absence of public outcry over President Obama’s proposal to raise tax rates on the wealthiest Americans -- except of course from the wealthiest Americans.

One factor fueling the public fury over the AIG bonuses, so inescapably in the news this week, is the recognition that so many huge fortunes landed in the hands of the undeserving rich. Some of them added little value to the economy but merely moved money around in novel, excessively clever and ultimately destructive ways; others are corporate executives who were ridiculously overpaid whether they succeeded or failed at their jobs.

It won’t be long now, moreover, before Americans again wise up to the role of dumb luck in building wealth. By my count, roughly one-quarter of the names on the Forbes list of the 400 richest Americans got there by inheritance (and by no means have all of them enhanced the family fortune with their own toil or brainpower). A few years ago, it was common to think of the rich as a special breed. We may soon come around to George Orwell’s view that the only difference between rich and poor is income -- “The average millionaire,” as he put it, “is only the average dishwasher dressed in a new suit.”

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The shift in sentiment should surprise no one. As the management sage Peter Drucker once predicted, “In the next economic downturn there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions. In every major economic downturn in U.S. history the ‘villains’ have been the ‘heroes’ during the preceding boom.” Drucker was speaking in 1997, two downturns ago.

This brings us to a couple of questions certain to become more pressing as we stagger through the fiscal and economic hangover from the Roaring Oughty-Oughts: How much does our economy depend on the rich, anyway, and why shouldn’t we soak them good?

A bit of history will be useful here. The original case for a progressive income tax -- that is, one levied disproportionately on larger incomes -- was based less on raising revenue for the state than breaking up concentrations of wealth, inherited and otherwise. The nation’s Founding Fathers considered these to be undemocratic -- markers of “an aristocratic society, not a free and virtuous republic,” as the tax-law expert Dennis Ventry has written.

Recent events validate the Founders’ instincts. The craze for financial deregulation in Washington was fomented in part by Wall Street plutocrats brandishing lavish political donations, gifts, offers of employment and other trappings of economic power. Would Wall Street have gotten so far out of control if it had had less power to wield? No one can know for sure, but it’s a question worth pondering.

There’s also a social value in suppressing income inequality. In a country with only a slightly less ingrained tradition of civility than the United States, the AIG affair would provoke rioting in the streets.

“We live in a country with tranquillity and good feelings toward each other, and that’s precious,” says Robert Shiller, a Yale University economist and coauthor of “Animal Spirits,” a new book about the psychology of economics. In the current crisis, “there’s anger and a sense of injustice taking hold, and it’s not in the interest of wealthy people -- you don’t want people on the poor side of town to be angry with you.”

By the way, maintaining the civic institutions, police forces and public infrastructure that enable great fortunes to be made and kept costs money. Wealthy taxpayers should keep that in mind the next time they’re inclined to bellyache about not getting anything from government.

As a rationale for progressive taxation, the concept of regulation and redistribution eventually yielded to the quest for revenue. Taxing large incomes was justified because that’s where the money is, and, secondarily, a rich person suffers less in giving up a dollar than does a poor one.

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The inflection point was the Roosevelt administration. FDR kept talking about the justice of chipping away at “great accumulations of wealth,” but he also needed the money. The overall average tax bite on the richest Americans reached its high-water mark of nearly 59% during World War II.

After that, even though marginal rates (the amounts charged on the last dollars) remained as high as 91%, the average tax bite on the rich fell to as little as 25% in the early ‘60s, largely the result of their skill in exploiting loopholes. Starting with Ronald Reagan, federal income tax policy came to focus mostly on finding the rate that could produce the most revenue while provoking the minimum squawking from the wealthy chickens being plucked.

Those squawks sometimes take the form of a claim that too much taxation saps the economic value of the wealthy -- their capacity to invest, to create jobs, etc. It’s proper to note that years of study have unearthed no consistent evidence that taxation causes the rich to alter their investing behavior much, at least not until their tax burden reaches a point vastly higher than what Obama contemplates.

“The real rich -- the top 1% -- work very hard for reasons other than money,” Reuven S. Avi-Yonah, a tax historian at the University of Michigan, told me this week. The quest for prestige, political power and self-esteem, the ability to control things and people, are all factors in their behavior.

Thanks to the financial crisis, those goals are regarded with increasing hostility by the political establishment. Certainly the claim of the rich to play an indispensable role in the American economy will be treated with more skepticism than in the recent past, and their ability to preserve their loopholes and other advantages in the tax code will diminish.

Will the economy suffer as a result? The experiment is about to begin.

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Michael Hiltzik’s column appears Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com and read his previous columns at www.latimes.com/hiltzik.

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