Tax Breaks Cost US More Revenue than Medicare, Defense or Social Security
Tax breaks, also know as federal tax spending, includes things like mortgage deductions, child tax credits and lowered tax rates on capital gains. The CBO published a report today on what these deductions and tax breaks cost the federal government in annual revenues. The total amount is enormous. The top 10 most revenue syphoning tax cuts (there are more than 200 tax deductions in all) cost $900 billion. Tax spending is greater than budge expenditures for Medicare, Defense, or Social Security. It equals 1/17th of the US economy (or GDP). But taxbreaks or loopholes don’t show up anywhere in the federal budget, so the relative size of these hidden expenses are not usually apparent. They don’t often make it into the national dialogue when we talk about the budget. Below is the CBO report summary.
congressional budget office
supporting the congress since 1975
http://cbo.gov/publication/43768
The Distribution of Major Tax Expenditures in the Individual Income Tax System
report date: May 29, 2013
A number of exclusions, deductions, preferential rates, and credits in the federal tax system cause revenues to be much lower than they would be otherwise for any given structure of tax rates. Some of those provisions—in both the individual and corporate income tax systems—are termed “tax expenditures” because they resemble federal spending by providing financial assistance to specific activities, entities, or groups of people. Tax expenditures, like traditional forms of federal spending, contribute to the federal budget deficit; influence how people work, save, and invest; and affect the distribution of income.
This report examines how 10 of the largest tax expenditures in the individual income tax system in 2013 are distributed among households with different amounts of income. Those expenditures are grouped into four categories:
- Exclusions from taxable income—
- Employer-sponsored health insurance,
- Net pension contributions and earnings,
- Capital gains on assets transferred at death, and
- A portion of Social Security and Railroad Retirement benefits;
- Itemized deductions—
- Certain taxes paid to state and local governments,
- Mortgage interest payments, and
- Charitable contributions;
- Preferential tax rates on capital gains and dividends; and
- Tax credits—
- The earned income tax credit, and
- The child tax credit.
Some of the provisions of law that reduce the amount of taxable income under the individual income tax also decrease the amount of earnings subject to payroll taxes. The figures presented in this report are generally based on the reduction in payroll taxes as well as the reduction in income taxes, but some figures separate those two effects. (Provisions that reduce payroll tax receipts generally reduce future Social Security benefits as well; that effect is not analyzed in this report.)
How Do Tax Expenditures Affect the Federal Budget?
Although the 10 major tax expenditures listed here represent a small fraction of the more than 200 tax expenditures in the individual and corporate income tax systems, they will account for roughly two-thirds of the total budgetary effects of all tax expenditures in fiscal year 2013, CBO estimates. Together, those 10 tax expenditures are estimated to total more than $900 billion, or 5.7 percent of gross domestic product (GDP), in fiscal year 2013 and are projected to amount to nearly $12 trillion, or 5.4 percent of GDP, over the 2014–2023 period. In addition, tax credits to subsidize premiums for health insurance provided through new exchanges to be established under the Affordable Care Act will represent a new tax expenditure beginning in 2014, estimated to equal 0.4 percent of GDP over the 2014–2023 period.
How Are Tax Expenditures Distributed Among Households?
The 10 major tax expenditures considered here are distributed unevenly across the income scale. In calendar year 2013, more than half of the combined benefits of those tax expenditures will accrue to households with income in the highest quintile (or one-fifth) of the population (with 17 percent going to households in the top 1 percent of the population), CBO estimates. In contrast, 13 percent of those tax expenditures will accrue to households in the middle quintile, and only 8 percent will accrue to households in the lowest quintile (see the top panel of the figure below).
When measured relative to after-tax income, those 10 major tax expenditures are largest for the lowest and highest income quintiles. In calendar year 2013, CBO estimates, the combined benefits will equal nearly 12 percent of after-tax income for households in the lowest income quintile, more than 9 percent for households in the highest quintile, and less than 8 percent for households in the middle three quintiles (see the bottom panel of the figure above).
The distribution of tax expenditures across the income scale varies considerably among the different tax expenditures. For example, CBO estimates that more than 90 percent of the benefits of reduced tax rates on capital gains and dividends will accrue to households in the highest income quintile in 2013, with almost 70 percent going to households in the top percentile. Those benefits will equal 2 percent of after-tax income for the highest quintile and 5 percent of after-tax income for households in the top percentile. In contrast, about half of the benefits of the earned income tax credit will accrue to households in the lowest income quintile, equaling 6 percent of after-tax income for households in that group.
Tax credits that will provide assistance in paying premiums in health insurance exchanges are excluded from the distributional results presented here because they are not in effect in 2013. When those tax credits come into effect, they will appreciably increase tax expenditures for households in the lower and middle income quintiles. Individuals and families who have income between 100 percent and 400 percent of the federal poverty guidelines and who meet certain other requirements will be eligible for those credits.
How Do Tax Expenditure Estimates Differ From Revenue Estimates?
Estimates of tax expenditures are traditionally intended to measure the difference between households’ tax liabilities under present law and the tax liabilities they would have incurred if the provisions generating those tax expenditures were repealed but households’ behavior was unchanged. Such estimates do not represent the amount of revenues that would be raised if those provisions were eliminated, because the changes in incentives that would result from eliminating those provisions would lead households to modify their behavior in ways that would mute the impact on revenues. For example, if the preferential tax rates on capital gains realizations were eliminated, taxpayers would reduce the amount of capital gains they realized. Because the size of that tax expenditure is estimated on the basis of the gains that are projected to be realized with the preferential rates in place, the amount of additional revenues that would be received if those preferences were eliminated would be smaller than the reported tax expenditure.
Breadwinner Moms – A New Pew Research Report
The following report is an important story of America’s demographic shifts with significant impliciations for children. If 40% of households with children are headed by working mothers, and some smaller percentage are headed by working fathers, then we are approaching the point where only about half of the children growing up are coming from two parent families. What is the impact on tomorrows society when nearly have the young adults have not grown up with a father or mother role model in their life? It also has other significant implications in terms of equal pay for women issues, day care needs, after school programming and much more. Combine this data with the recent mile stone that there are more poor people living in the suburbs than the city and it all represents some significant social challenges that we must face.
Breadwinner Moms
Mothers Are the Sole or Primary Provider in Four-in-Ten Households with Children; Public Conflicted about the Growing Trend
by Wendy Wang, Kim Parker and Paul Taylor
http://www.pewsocialtrends.org/2013/05/29/breadwinner-moms/
CHAPTER 1: OVERVIEW
A record 40% of all households with children under the age of 18 include mothers who are either the sole or primary source of income for the family, according to a new Pew Research Center analysis of data from the U.S. Census Bureau. The share was just 11% in 1960.
These “breadwinner moms” are made up of two very different groups: 5.1 million (37%) are married mothers who have a higher income than their husbands, and 8.6 million (63%) are single mothers.1
The income gap between the two groups is quite large. The median total family income of married mothers who earn more than their husbands was nearly $80,000 in 2011, well above the national median of $57,100 for all families with children, and nearly four times the $23,000 median for families led by a single mother.2
Continue reading at the following URL: http://www.pewsocialtrends.org/2013/05/29/breadwinner-moms/
TOUR THE INTERNATIONAL SPACE STATION
The YouTube video below is an awsome tour of the international space station. This isn’t my usual post, I know, but it was so interesting I wanted to share it with you.
Market Logic’s Irrational Origin
In a side comment by Tim Worstall in his recent Forbes commentary, he says: “… if the social costs of climate change were clearly and obviously larger than the consumer benefits of CO2 emissions then we wouldn’t actually have a problem with climate change at all.” He says people would see the soical costs and stop using fossil fules.
That’s like saying smokers would stop smoking if they believed their collective habit raised national health care costs and caused premature death among their cohorts. People still smoke who believe this because human behavior is not so rational. Both of these are also examples of just how limited the logic of the market place really is. It’s limited because it relies on collective human behavior rather than human intellect for its logic. And this is precisely why we sometimes need government actions to supersede illogical market outcomes.
America’s Social Contract And The Measure of Our Commitment
(Note: contains some material from prior posts)
by Brian T. Lynch, MSW
A key element in America’s social contract is the idea that government derives its authority from the consent of the people. So the question should occasional be asked, is our mutual consent to be governed wearing thin? There is evidence to suggest a growing restiveness in certain populations. Some symptoms of declining consent include gridlock in congress marked by an inability to pass any legislation on a simple majority vote, the resurgence in states’ rights activism, calls in some states for secession, citizens arming themselves in fear (or perhaps the hope) of armed resistance and wide spread efforts to manipulate elections. Perhaps the best, most quantitative way to judge the degree to which we consent (or commitment) to self-government is by our willingness to pay taxes.
The attitudes we have towards paying taxes, and the extent to which people and organizations will go to avoid them, is an underappreciated index of our consent to be governed. Just as taxation without representation was a rallying cry leading up to the Revolutionary War, the Tea Party and many other popular reform or resistance groups today rally around taxes as a central point of contention. Objectively speaking, the Tea Party’s opposition to taxes makes no sense since their complaint corresponded with the lowest federal tax rate since the Eisenhower administration. It isn’t until we understand that our attitude towards taxes is a barometer of our consent to be governed that the Tea Party’s tax objections become clear.
For the sake of discussion it is helpful to identify different segments of the population that are particularly opposed to taxes. But keep in mind that our personal attitude towards paying taxes is just as valid an indicator of where each of us falls on this measure of consent.
Let’s begin with those who see themselves through the lens of American individualism. They value self-reliance and see this as a patriotic duty. They tend to think less of those who are more collaborative, more dependent or less successful. They tend to discount the contribution of the public commons to their own welfare and don’t often recognize how massively interdependent advanced societies really are. They believe that less government is best for everyone. These folks are less willing to contribute to tax supported government services other than for military defense. They are ideological individualist. This group may include some libertarians and on the extreme fringes may also include some anarchists or survivalists.
There are those who are suspicious or uncomfortable with American pluralism. These folks tend to live in parts of the country where there is little diversity or just a single predominate minority group. However, folks who hold this belief can be found everywhere. They believe a disproportionate amount of their taxes go to support other ethnic or cultural groups whose members don’t share their same values or work ethic. They may fear that these other groups are taking advantage of government largess. As a result, they are more resentful of paying taxes and more critical of what they see as wasteful government spending. These folks are pluralism-adverse and at the extreme fringes this group may include racists or hate groups. A highly nationalistic subset of this pluralism-adverse group believe their government has already broken faith with them and is threatening their liberty. For them, paying taxes is akin to paying tribute to a foreign potentate. The most extreme of these consider themselves to be soverign citizens.
There are some religious fundamentalists who believe all secular government is evil. Some fundamentalist sects focus on The Book of Revelations and an apocalyptic view of the world in which governments plays a role in the rise of the false prophet. For these groups anything that expands government is evil as well, including increased taxes. They are usually considered to be on the fringe of the Christian community, but they have an impact beyond their numbers.
Then there are those who believe taxes compete or interfere with commerce and free markets. They believe that taxes reduce the capital available for businesses investments. They fear that more taxes will lead to more government regulations and further hinder commerce. They don’t see government spending as simulative for the economy. For them, the provision of government services to those who aren’t successful contributors is an unfair redistribution of wealth. Members of this group are more likely to have higher incomes and a sense of entitlement. They may pride themselves in their ability to avoid paying taxes. At the extreme fringes of this group members tend to see society as being made up of the have and the have nots, the makers and the takers. They are often contemptuous of taxes and government.
Next, there are the disaffected and those too self-absorbed to care much about government. For this group all taxes are an annoyance to be avoided. This is a large and diverse group that is often underrepresented in our national conversations. They include many who are poor, but also many who are middle class folks working hard just to make ends meet. They tend to be swing voters when they vote and their grasp of politics and government policies are more maliable. The underground cash economy is significant for them.
The impact of this growing reluctance by some citizens to pay income taxes is huge. According to a GAO report called “HIGH-RISK SERIES, An Update”, the Internal Revenue Service estimated that the gross tax gap–the difference between taxes owed and taxes paid on time–was $450 billion for tax year 2006. The IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. This doesn’t include the loss of tax revenue due to the underground cash economy and foreign US cash transactions. These create an additional tax gap estimated to be between $400 billion and $540 billion annually. There is also the tax gap created when wealthy investors hide their money in off shore tax havens. According to a study by the Tax Justice Network the world’s super rich have at least $21 trillion secretly hidden away in tax shelters as of 2010. This is equivalent to the size of the Japanese and United States economies combined, according to The Price of Offshore Revisited report. Further, the amount of secretly hidden wealth may be as high as $32 trillion.
Arguably the most tax resistant groups, which also have the greatest fiscal and political impact, are businesses and corporations. The largest loss of tax revenue, representing the lowest level of consent to be governed, comes from the corporate sector. The shift in the percentage of total federal income taxes paid by individuals verses businesses has grown substantially over the years. Individual income taxes raised 41% of the total tax revenue in 1943 while business income taxes made up the rest, or more than half of the income tax receipts. Compare this with today where 79% of total revenues comes from individual income taxes. This shift in tax receipts from corporations to individuals cannot be explained by a shift away from C corporations (who pay the corporate income tax) to S corporations (who don’t). According to the financial site NerdWallet, the 10 most profitable U.S. companies paid an average federal tax rate of just 9 percent in 2011. The group includes such giants as Exxon Mobil, Apple, Microsoft, JPMorgan Chase and General Electric. The Economist recently posted a graphic by the Bureau of Economic Analysis that depicts the decline in corporate taxes juxtaposed to the rise in corporate profits.
The inability of the federal government to collect taxes from the nation’s elite and its biggest corporations is a serious sign of trouble. It signals a real strain in our social contract and severly limits the ability of the government to serve its people. The problem is compounded by the fact that anti-tax sentiments are being exploited by wealthy business interests to ferment dissatisfaction and distrust of our government. A coalition of the most anti-tax, anti government constituents from the various tax adverse segments of society described above would look very similar to the Tea Party base of today’s Republican Party. The power we invest in civil government is the only check we have to balance the power of the largest corporations to do as they wish in pursuit of profits. It would be a mistake to weaken our commitment to good government now when it is under assault.
There are still many who believe taxes are the price we must pay for a just and robust society. Paying taxes is our civic duty and evidence of our commitment to one another. It reflects confidence that our government is representing us and upholding the social contract. The present IRS scandal over the targeting of Tea Party groups for selective scrutiny of their 503(c)4 tax status is really a minor but convenient distraction from the real tax crisis we face. We are facing a crisis of confidence in self-government. It is a challenge of our time to rekindle a popular passion for civil government that is truly of, by and for the people.
Taxes and America’s Social Contract
The American social contract is threadbare in certain parts of America. Areas of this great country are falling into disrepair, dissolution as if under a spell . In places like the Camden, New Jersey and now Josephine County, Oregon, public safety has been compromised by the failure of will to raise taxes. Below you will find a very disturbing report on the latter situation from Oregon Public Broadcasting. It dramatically highlights what can go wrong when citizens can’t make the connection between good government and the tax revenue it takes to have it. First, let’s consider the various segments of our population who oppose raising taxes.
There are those who see themselves through the lens of American individualism. They value self-reliance and see this as a patriotic duty. They tend to think less of those who are more collaborative or more dependent or unsuccessful. They tend to discount the contribution of the public commons to their own welfare and don’t often recognize how massively interdependent our advanced society really is. They believe that less government is best for everyone. These folks are less willing to contribute to tax supported government services other than for military defense. They are ideological individualist. They may include libertarians. On the extreme fringe they may include anarchists or survialists.
There are those who are suspicious or uncomfortable with Ameican pluarism. These folks most often live in parts of the country where there is little diversity or only a single other minority group. But folks who hold this belief can also be found everywhere. They believe a disproportionate amount of their taxes go to support other ethnic or cultual groups whose members don’t share their same values or work ethic. They sometimes fear other groups are taking advantage of government largess. As a result, they are more resentful of paying taxes and more critical of wasteful governement spending. They are pluralism-adverse. At the extremes this group may include racists and hate group. A highly nationalistic subset of this pluralism adverse group believes the federal government has already broken faith with the people and threat our liberty. For them, paying taxes is akin to paying tribute to a foreign potentate.
There are some religious fundamentalists who believe all secular government is evil. For them, anything that expands government is evil as well, including raising taxes.
There are those who believe taxes compete or interfere with commerce and the free market. They think that taxes only reduce the capital available for business and contribute to government regulations. They don’t see government spending as stimulating for the economy. For them, the provision of services to those who aren’t successful contributors to the economy is an unfair redistribution of wealth. This group are more likely to have higher incomes and to pride themselves in their ability to avoid paying taxes. In the extreme they tend to see society as made of the have and have nots, the makers and the takers.
I believe all these groups are being aggitated and moulded into an anti-government political movement to reduce the power of government to regulate powerful corporate interests. But regardless of what you or I believe, the truth of who we are becoming is reflected in the hopes and fears of this 911 caller in Josephine County, Oregon.
With No Officers To Respond To 911 Calls, Josephine Co. Considers Tax Levy
OPB | May 14, 2013 3:40 p.m. | Updated: May 15, 2013 10:50 a.m. | Grants Pass, Oregon
http://www.opb.org/news/article/josephine-county-tax-levy-would-add-deputies-fund-the-jail/
Corporate Taxes Fall as Profits Soar
The Economist states it just right. Big corporations are avoiding their tax obligation. They have no sense of duty or obligation towards the peoples government which created corporations and the condition in which they have flourished. Increasingly, government is a gadfly to corporate profit making as citizens insist, through their government, that we breath clean air, drink pure water and eat healthy foods. Corporations are so large and powerful today that the only checks on their power is big government… hence the sustained attacks they are waging on big government. But when governments no longer have the power or ability to collect taxes from the elite or the largest corporations, they are close to colapsing. That is the message I take away from this latest report. I encourage everyone to go there and read more.
Taxing for some
America’s corporation-tax receipts falter even as company profits soar
THE pressure on tax-avoiders is mounting. In the latest episode Tim Cook, Apple’s boss, was called before a Senate subcommittee to explain why the tech giant had paid no tax on $74 billion of its profits over the past four years—though it has done nothing illegal. This comes at a time when America’s corporate profits are at a record high, thanks to the swift sacking of workers at the start of the recession, lower interest expenses, and the fact that cheap labour in emerging markets has eroded union power, allowing firms to move production offshore and defy demands for pay rises. Meanwhile corporation tax, which makes up 10% of the taxman’s total haul (down from about a third in the 1950s) has plummeted. An increase in businesses structuring themselves as partnerships and “S” corporations, which subject profits to individual rather than corporate income tax, is in part to blame. But tax havens are also culprits, as they lower their tax levels to lure in bigger firms.
Visualizing Our Wealth Inequality
Wealth Inequality in America
Does Philanthropy End Up Hurting the Poor and Vulnerable?
What follows is my response to an open discussion about the role and social value of philanthropic foundations. It is my response to the lead article by Dr. Rob Reich, which can be read in its entirity at the URL below.
BOSTON REVIEW
http://www.bostonreview.net/BR38.2/ndf_rob_reich_foundations_philanthropy_democracy.php#c5t_form
Lead Essay:
What Are Foundations For?
Rob Reich
This article leads off our debate on philanthropy, with responses from Stanley Katz, Diane Ravitch, Larry Kramer, and others.
Graham Smith
Judge Richard Posner, one of the foremost American jurists outside the Supreme Court, once observed, “A perpetual charitable foundation . . . is a completely irresponsible institution, answerable to nobody. It competes neither in capital markets nor in product markets . . . and, unlike a hereditary monarch whom such a foundation otherwise resembles, it is subject to no political controls either.” Why, he wondered, don’t we think of these foundations as “total scandals”?
If foundations are total scandals, then we have a massive problem on our hands. We are now living through the second golden age of American philanthropy. What Andrew Carnegie and John D. Rockefeller were to the early twentieth century, Bill Gates and Warren Buffett are to the early twenty-first century.
The last decade of the twentieth century witnessed the creation of unprecedentedly large foundations, such as Gates’s. The assets of the Gates Foundation and a separate Gates Trust, which holds wealth donated by the Gates family and Buffett, together total more than $65 Billion. If the combined entities were a nation, it would be 65th on the world GDP list. And it’s not just billionaires and their mega-foundations that command attention. Record wealth inequalities might be a foe to civic comity, but they are good for philanthropy. The boom in millionaires has fueled unprecedented growth in the number and assets of small foundations as well.
So foundations have seen explosive growth. But why are they a scandal? Read the Full Article. http://www.bostonreview.net/BR38.2/ndf_rob_reich_foundations_philanthropy_democracy.php#c5t_form
My Comments:
In setting up his essay on philanthropic foundation in this “second golden age”, Reich offered the following: “Let us dismiss quickly one common and intuitive thought: that foundations exist because they are remedial or redistributive, responsive to the needs of the poor or disadvantaged.”
He goes on to identify public goods this way: “It has long been understood that the commercial marketplace does not do well at providing what economists call public goods. These are goods that, like a well-lit harbor, are available to everyone if they are available to anyone; and that, like clean air, do not cost more when they are consumed by more people. “
After three decades in the field of child welfare, this was a startling and insightful dismissal. In debating whether America’s philanthropic foundations are worthy of the tax exempt status conferred on them in 1937, Reich excludes consideration of their value relative to public services that reduce human misery but carry a cost per use. In other words Reich’s definition of public goods includes only passive public services, like street lights, but not active public services, including child welfare. This certainly explains why foundational giving for public needs is so small a percentage of their activity. Yet we are asked to judge whether their social contribution is worth their $53 billion in tax exemptions each year? How much good could that revenue do to support and strengthen our most vulnerable citizens? Don’t ask!
To characterize social services as remedial “or redistributive” of wealth, is offensive to me. When used to characterize government spending on the general welfare, “redistribution” is a code word to frame partisan arguments in our muffled debate over distributive justice. Taxing the more successful citizens to promote the general welfare, except for military spending, is considered an unfair redistribution of wealth, yet any discussion on the fair distribution of profits between workers and business owners is considered out of bounds.
The context for this discussion on foundations is the social value of philanthropy at a time when wealth disparity has never been greater. When a growing number of wealthy foundations are extracting ever more revenue from an already dwindling federal revenue stream, excluding consideration of their impact on public services makes this discussion itself a plutocratic exercise.
The pros and cons of whether foundations generate valuable diversity and innovation were well explored by the forum’s other contributors, but none of their essays addressed underlying assumptions. Foundations actually do play an outsized and often deterious role in how community social services are structured, funded and distributed. None of the contributors picked the scab off this wound to consider the broader picture. Financially speaking, foundations are in direct competition with public social services and the vulnerable populations served. I was disappointed.
Do Pro-business Policies Reduce Poverty?
President Calvin Coolidge once said, “” the business of the American people is business”. He was quoted out of context at the time. His remarks were aimed at newspaper reporters who were inept at covering business news, but this intentional misquotation seemed to sum up his economic policies.
Today this misquote seems prophetic. Political leaders from both parties speak as if whatever benefits business benefits the people. State governments offer tax breaks and business friendly regulations to attract companies that might bring in more jobs. This is especially true in less wealthy states where poverty rates are high. President Lyndon Johnson’s “War on Poverty” has been transformed into pro-business politics and the promise of work for the worthy.
It is true that the poor need jobs, but the causes of poverty are more complex. There is little regard for other factors such as the need for quality daycare, health care access, job training or transportation. Journalists rarely asks politicians how they plan to help the poor. When they do, candidates talk about their plans to grow the economy. This has some become an acceptable answer.
The insurgent idea that serving business interests is the best way to fight poverty arguably arose in the mid 1970s when corporate interest groups were forming and the business lobby became a powerful influence on Congress. This was the high water mark of American unions as organized business groups launched campaigns to turn Congress and public opinion against them.
At the same time, these industry lobbying groups began fermenting hysteria over the growing “welfare state.” The poor were poor, they argued, because anti-poverty programs make people dependent on government handouts while government regulations restrict the ability of companies to create jobs for those willing to work. According to their narrative, government needed to spend more resources supporting commercial interests and deregulating markets. President Reagan road these pro-business, anti-union, anti-government sentiments to the White House in 1980.
The success of the pro-business movement is evident. In this past election Mitt Romney’s entire presidential campaign centered around the idea that business prosperity was key to growing jobs and the economy. The California Republican Party explicitly incorporates this thinking in their core beliefs:
“” each person is responsible for his or her own place in society. The Republican philosophy is based on limiting the intervention of government as a catalyst of individual prosperity” Republicans believe free enterprise has brought economic growth and innovations that have made this country great. Government should help stimulate a business environment where people are free to use their talents. “[California Rep Committee Philosophy http://cagop.org/inner.asp?z=585A]
In other words, it is the role of government to facilitate the business economy but each individual’s responsibility to avail themselves of the opportunities businesses provide.
The sufficiency of robust commerce to lift all boats isn’t just a conservative or partisan idea. It is expressed and pursued often by Democrats as well. In this last election even President Obama avoided talking about the poor by referring to them as “those aspiring to be middle class.” There was almost no mention by either party of how they would accomplish this beyond trying to grow the economy.
So how well is our pro-business politics working out for the poor? This should be an empirical question that can be tested by examining the data. Are business interests and the interests of the poor perfectly aligned? Are there points of departure where the needs of some folks cannot be met without compromising some business interests? Most importantly, does the data show that when businesses are doing well there are more jobs and better wages?
Profits, Employment and Wages
Corporate profits are a measure of how well businesses are doing, so conventional wisdom would say wages and employment should rise and fall commensurate with corporate profits. The hypothesis is that when companies do well there are more good paying jobs and therefore less poverty. Is there evidence to the contrary?
In June of 2012, the St. Louis Federal Reserve released data showing a number of economic indicators over the last 71 years. Using their report, the graph below plots corporate profits (CP) as a percentage of gross domestic product (GDP) from 1940 to 2011. GDP is total value of all the goods and services sold and a good measure our economy. The shaded areas represent periods of recession. This graph shows that corporate profits rebounded since the 2007 recession and are at the highest level since 1940. The recession is clearly over for corporate America.
Corporate Profits to GDP by St. Louis Federal Reserve
Does it therefore hold true that robust corporate profits mean more jobs? The next graph plots the number of employed Americans as a percentage of our population. This graph uses an employment per population percentage because the population doesn’t stop growing during recessions. A fair comparison over time has to incorporate population growth for the same reason dollar comparisons over time have to factor in inflation.
Civilian Employment to Population Ratios by St. Louis Federal Reserve
—– PAGE BREAK —–
This above graph shows that there are actually fewer people working today as a percentage of the population than at any time in the past thirty years. Last June, in an article related to this graphs, Business Insider magazine speculated that one reason corporations are so profitable is that they aren’t employing as many Americans.
Does it also hold true that robust corporate profits means better wages? The next graph depicts the total amount of U.S. wages paid as a percentage of the value of all goods and services sold (GDP). It shows that wages are at an all-time low relative to the wealth being generated. If jobless recoveries are one reason for record corporate profits, the decline in wages pictured in this next graph may be the other.
US Wages as a percentage of GDP by St. Louis Federal Reserve
It turns out that the null hypothesis is true. Corporate profits are at a record high, employment and wages are at a record lows and the notion that what is good for business is good for people is false. The stock markets have recovered. Corporate profits have recovered, but the financial well-being of families have declined. Median incomes are shrinking and prospects for the poor are increasingly dismal.
Are Measures of Business Competitiveness Compatible with the Interests of Individuals?
When considering what factors make businesses more competitive it’s best to take a broad global view. A global survey of business competitiveness was recently conducted and released by the World Economic Forum. The study on global business competitiveness ranks 144 nations according to indicators grouped in 12 general categories.
Overall, the United States is very competitive, ranking 7th out of 144 countries. When you drill down in some of the 12 categories, however, you find indicators favorable for business that are clearly at odds with worker interests. For example, In the area of “Labor Efficiency” the U.S. labor “redundancy” costs are low, which means it doesn’t cost as much here to fire employees. This makes us more competitive (12th place) on this measure. This variable includes the estimated costs of providing advance layoff notices, severance payments any penalties that other countries might impose on employers for terminating “redundant” workers. The U.S. may be more competitive in this measure, but is this factor good for individual workers? Does it reduce poverty?
The U.S. also did well (8th) when it comes to the ease of hiring and firing people. All of this makes for a “flexible” work force, which is good for business, but does it stabilize the workforce or encourage employers to try and weather out minor economic storms?
Are the states with the most competitive business environments doing better at lifting people out of poverty?
Every year for the past five years CNBC has scored all 50 states on 43 measures of business competitiveness. This survey was developed with input from business groups including the National Association of Manufacturers and the Council on Competitiveness. States receive points based on their rankings in each factor and the factors are organized into broader categories. I was unable to locate a detailed list of factors within each category, but CNBC has published general descriptions of each category. In the category of “Workforce” for instance, they indicate that the prevalence of unions in a state is a negative factor for business competitiveness, while lower costs of doing business is a positive factor. Among the factors creating low costs for doing business are lower tax rates and tax incentives or tax abatement for business. The general category findings for each state are published.
The hypothesis, again, is that when companies are doing well there are more good paying jobs and less poverty. So it follows that the states with the most competitive business environments should also be the states with the lowest rates of poverty.
To test this I used the CNBC business competitive findings to compare ten states with the highest poverty rates and ten states with the lowest poverty rates. The high poverty states, starting with the highest poverty rate, are Mississippi, Arkansas, Kentucky, Louisiana, New Mexico, West Firginia, Oklahoma, Texas, Alabama, and South Carolina. The ten states with the lowest rates of poverty, starting from the top, are New Hampshire, Mariland, Alaska, New Jersey, Hawaii, Connecticut, Wyoming, Utah, Minnesota and Massachusetts. The results of this analysis are found in the table below.
State poverty levels and business competitiveness by Self
Business Competitiveness Rankings are from CNBC’s Top States for Business Special Report:
ttp://www.cnbc.com/id/100000994
It is striking that states with the highest poverty levels are also states that are more business competitive. The average rank in “Overall Business Competitiveness” for high poverty states is 7 points higher (more business friendly) than the rank for low poverty states. In the “cost of business” category, high poverty states have an average rank of 18 versus 37 for low poverty states. In the “workforce” category, which includes the prevalence of unions in a state, the high poverty states have an average rank of 20 versus 32 in low poverty states.
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Despite being “business friendly”, the ten high poverty states have over eight million poor citizens while the ten low poverty states have just over three million poor. There may be some political asymmetry as well since 7 out of 10 states with the high poverty rates have conservative Republican governors, while 6 out of 10 low poverty states have Democratic governors.
Conclusions
It is clear that pro-business politics, which puts commercial interests above the individual’s interests, isn’t working for the poor or for most Americans. While a healthy economy is necessary for individual prosperity, it is clearly not sufficient. What is best for business may be good for some, but not for all of our citizens. There are certain business interests at odds with individual interests. Our political leaders need to acknowledge this when making policy.
The total dominance of pro-business politics has successfully crowded out meaningful debate on how to help the poor, the ranks of whom are swelling every year. The poor are more marginalized and invisible than ever. Almost no one speaks for them. There is no hope for them in the more competitive business policies being proposed. In fact, business prosperity is no longer well correlated with job growth or adequate pay, so plans to grow the economy ring hollow. The social contact that once pegged wage increases with increased productivity is broken. As a result, big business can flourish while the welfare of workers and the poor decline. This is unacceptable.
The ascendance of pro-business politics has given rise to commerce without conscience and too many ordinary citizens are being left behind. We need to change the dialogue and strike a better balance. We need to reclaim the role that government must play in meeting the needs of all our people.
Data Driven Viewpoints 