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Wealth Inequality and Our Brewing Social Crisis
by Brian T. Lynch, MSW
Wealth disparity has a profound, relativistic impact in human societies and this is worth understanding. Even in the most egalitarian societies where everything is shared, there are subtle differences in the distribution of goods and services. These small differences convey powerful social messages that are keenly felt by all its members. These messages impact social interactions and the social order. Wealth distribution has powerful symbolic meaning in every society, large or small, rich or poor.
Wealth Disparity is Worse Than You Think – Business Insider
http://www.businessinsider.com/inequality-is-worse-than-you-think-2013-3
When the actual material differences in wealth are subtle, the costs or benefits conferred by wealth distribution are limited to social perceptions and its impact on social order or governance. These material differences are not existential threats to the socially disadvantaged. However, as the actual material differences between members of society grows, the scarcity of essential resources for some may follow. This becomes ever more consequential as it increases the efforts needed to assure survival. It introduces more uncertainty and decreases the sense of personal control. Distribution induced disparity can grow to the point where it can even become life threaten. Additionally, the social power differential grows to the point where social relationships by the advantaged towards the disadvantaged can become exploitive and extractive.
Under conditions of extreme wealth disparity there are physical and psychological impacts on both the powerful and less powerful. The Socially disadvantaged undergo significant stress and will exhibit all the symptoms and conditions associated with chronic stress (alcoholism, drug abuse, depression, maladaptive behaviors, obesity, child abuse, poor health outcomes, etc.). What is important to understand is that it is the disparity in wealth that induces social stress, not the absolute measure of wealth. Extreme wealth disparity becomes pathological in all societies, both rich or poor. This appears to have been true throughout history. Evidence of the corrosive effects of social disparity has even been demonstrated in research studying the impact of dominance on subordinate primate populations, so this appears to be a natural phenomenon.
Extreme wealth disparity is a threat to society. This fact is underappreciated by many. And distribution induced shortages don’t need to be at starvation levels before reaching critical mass, especially in wealthy countries like ours. Pundits have used this starvation metric or comparisons of our poverty to that found in poor countries to dismiss the current threat we face from rapidly growing wealth disparity. A better measure of our social instability is the health and welfare of the nation’s poor. The ranks of the poor are growing and their welfare is rapidly deteriorating. Here we find a conspiracy of silence in the main stream press. The symptoms of poverty induced stress have been reinterpreted as moral weaknesses and personal failings for which the poor have no one but themselves to blame. Both the unfair distribution of current wages and the redistribution of wealth through taxes to assist the poor are almost taboo subjects. To raise these issues is to be accused of inciting class warfare, which is exactly what has been raging for decades to bring us to this point.
The last time America experienced such enormous wealth disparity we were fortunate that the worst consequence was the Great Depression and not a total social collapse. The Great Recession of 2008 is an early warning of what will happen if we don’t correct our current wealth imbalance. So far the alarm bells are ringing but the public address system is still on mute.
1st Qrt Report: Wages Sharply Down, Bank Profit at Record High
This is an mportant story that I want to share with readers of this blog. I encourage everyone to watch the video. Feel free to add your comments.
The Real News Network
Bank Profits Soar, Wages Suffer Sharpest Decline in 60 Years
Bill Black: The economy is recovering – unless you work for a paycheck. – June 9, 2013
JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I’m Jaisal Noor in Baltimore. And welcome to the latest edition of The Black Financial and Fraud Report with Bill Black, who now joins us from Kansas City, Missouri. Bill is an associate professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar criminologist and former financial regulator. And he’s the author of the book The Best Way to Rob a Bank Is to Own One.
Thank you for joining us, Bill.
BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.
NOOR: So, Bill, what can you tell us about this latest news from the first-quarter? Bank profits soared to record levels while wages suffered their sharpest decline since 1947.
BLACK: What it all adds up to, of course: it is a very good time and a very good country to be a plutocrat, because the rich are getting richer at a staggering rate and poor people are actually getting poorer, just like the same saying goes.
So we’ve got a series of news that it has just come in this week. One thing shows that we have the largest decline in wages. Boy, that’s a big win. And that follows–that’s for the first quarter of 2013. And that follows what was a huge quarter for income in the fourth quarter, in other words the last three months of 2012. But, of course, there’s a footnote on that. And that huge quarter at the end of last year was to beat the tax increase. So that was the massive payment of bonuses to the wealthiest Americans. So they made sure the wealthiest Americans got their money before the tax increases kicked in.
And what happened as soon as we got back to the regular economy? Well, wages haven’t simply stalled; they’ve actually gotten negative. And productivity is up, which is supposed to mean that wages are up, but wages have gone in the opposite direction. So that’s the news on the wages front.
On the bank profit front, hey, we’ve got the highest reported profits ever for the first quarter of this year. Now, the twist in all of this is that the statistics, when you look at them closely, show the banks weren’t all that profitable in their regular operations, because, of course, they’re not making all that much in the way of loans and such. They’re mostly sitting on their money.
So how did the banks report record profits, but when they were doing their day-to-day business they weren’t earning all that much in the way of super profits? And the answer to all of that is that they reversed out a whole bunch of reserves for future losses, which is the same game they played leading up to the crisis. So reserves for those massive future losses, they’ve made them lower and lower. At the end of 2006, they had gotten to the lowest level of reserves against future losses in history since the savings and loan debacle. And we all know how disastrously this ended. Well, guess what? We’re at the record low again in 2007.
And this is how the accounting works. Every dollar they take out of reserves for future losses is an additional dollar they can pay in bonuses to the top executives. So the wealthier are getting wealthier at a record rate in banking as well.
So what else is happening? Well, we have record stock market appreciation. In fact, there’s a neat headline that says that when you disregard inflation–which of course you can’t–the losses that people suffered in the Great Recession have now been made back. It took a lot of years to do it, but they’ve made it back. But, of course, there’s a footnote, and the footnote says this: well, regular people haven’t, but people who own stock have made out like bandits. They’ve had a recovery measured by $1.5 trillion, and 80 percent of that gain goes to the 20 percent of richest Americans. So, hey, stock market–great news for the wealthy.
Well, but there was also some potential good news. So housing prices have finally started to go upwards. And that’s good news for all kinds of Americans who own their homes. But, again, there’s a little hitch in all of this, ’cause it turns out that for the first time in American history, a huge portion of these gains are going to massive corporations and investment firms and hedge fund types, and they are because they’re making massive purchases of homes at distressed prices to serve as what we call in the trade vulture funds and to sell it back to regular folks when those housing prices have appreciated. So a lot of this gain in housing prices is not going to regular people; it’s going to go to the hedge fund executives, who are already the wealthiest people in the world.
And how does all of this sum it up? Well, I did a paper recently on the Nobel Prize awarded to Mr. Myerson. Dr. Myerson got this award in 2007 when the world was blowing up, and he got the award for proving that fraud couldn’t exist in the financial sector. And he proved this by assuming that fraud couldn’t exist. And his mechanism for assuming that fraud doesn’t exist is plutocracy. And indeed he says the great advantage of the market system compared to socialism is that we have billionaires, and he says that people who are not that rich, in other words, ordinary multimillionaires who are CEOs, if they act rationally–that’s his word–will loot their corporations. And so the only safe thing we can do is to make some segment of Americans billionaires–in fact, probably multibillionaires–so they can run our largest corporations and made–be made into mega-billionaires. So you get a Nobel Prize for creating a system that leads to recurrent intensifying financial crises that caused $10 billion in losses in the United States and the loss of $10 million jobs. And we are told that we’re supposed to be happy and bless the system because it creates plutocrats who have incomes in the multibillion dollars who, when there is a crisis–in the words of Myerson in another article, people who are poor should pay taxes to bail out billionaire bankers, because that will be good for the poor people. That’s the status of economics in the modern era.
NOOR: So, Bill, it would seem like the dominoes are in a row for another massive financial meltdown. Would you disagree?
BLACK: No, that’s exactly what they’re putting in place. And they’re going to make the folks wealthy on both ends, right? We’re told that they have to be made billionaires so that they can invest prudently during the expansion phase of the bubble. And as soon as they destroy the economy, we’re told that we have to bail them out and make them ever wealthier. And the way we do all of these things increases the rewards to fraud and reduces the penalty to fraud, and especially in the modern era where you can dilute with impunity under the administration’s too-big-to-prosecute-or-even-indict standard.
NOOR: And finally, Bill, where are the movements that are challenging these policies?
BLACK: Well, they’re certainly not in either of the major parties. There are, of course, progressives within the Democratic Party, and they do some things, but in truth, both parties’ leadership are heavily dependent on funding from the largest banks and from other plutocrats. You’ve just seen the the Obama administration put a Pritzker in a cabinet position where the Pritzkers have a terrible reputation. And you saw that the Republicans, who usually block anyone that Obama nominates, were more than happy to have one of those wealthy folks, who is one of their kind, in a cabinet position.
So the dissent remains on places that are not typically found in the mainstream media, the Occupy movements and such. And, you know, it’s going to be the next crisis before there’s any serious chance of serious reform.
NOOR: Thank you for joining us, Bill.
BLACK: Thank you.
NOOR: And thank you for joining us on The Real News Network.
Bio – William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics. Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement. Black developed the concept of “control fraud” frauds in which the CEO or head of state uses the entity as a “weapon.” Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae’s former senior management.
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.
Ruppert Murdoch, Ayn Rand and A Sociopathic Economy
Rupert Murdoch, chairman and CEO of News Corp., and one of the richest men on the planet, recently claimed that free markets are morally superior to more social based ideas of morality and fairness. “We’ve won the efficiency argument,” he claimed. Now he hopes to persuade us that free markets are morally superior and that socialism fails because of its “denial of fundamental freedoms.” In Murdoch’s world the idea that market success is based on greed is a false characterization that creates confusion. He believe that markets succeeds where governments fail, not because of greed, but because people are given “… incentives to put their own wants and needs aside to address the wants and needs of others.”
It sounds great! But before you buy into this idea you should know he goes on to say, “To succeed, you have to produce something that other people are willing to pay for.”
Therein lies the rub. To succeed you must “produce.” For Murdoch, distributive justice is the natural outcome of these purely commercial transactions. He quotes Arthur Brooks at the American Enterprise Institute who defines fairness as, “… the universal opportunity to enjoy earned success”. The key words here being “earned success.” Accordingly, producers are entitled to all they earn because if their product wasn’t successful, consumers are free to not buy their product. This is a cruel argument to make in the face of an elderly person having to choose between buying food or medicine, of course. Nevertheless, in this view every sale in a free market system automatically results in a fair distribution of wealth. No other social factors should apply. In fact, to take from producers what they’ve earned to support the lives of less successful or non-producing human beings is immoral, in Murdoch’s view.
“What’s fair about taking money from people who’ve earned it and giving it to people who didn’t,” Murdoch asks.
But Murdoch’s whole notion, which closely mirrors that of Ayn Rand, ignores the whole complex social economy in which commerce and every other human activity actually takes place. It rejects the wisdom that markets only exist to serve societies needs. Markets are manmade entities and not a natural phenomenon, but Murdoch’s narrow view treats markets as natural entities that are morally superior to society. It limits the meaning of production to that which has a monetary exchange value. It assigns social value to the creators of products according to their market success, measured in material gain. It does not account for the material contributions of the public domain in making commerce and stable markets possible. Even though the monetary value of a product is co-dependent on a consumers’ willingness to pay, it does not assign any social value to the consumer. Only the source of a buyers money gives them any social status.
This leaves open the question of how, or even whether, to assign social value to those not immediately involved in commercial production. These folks include children, the disabled, the elderly, the unemployed, those who care for children, woman on maternity leave, all government employees, military personal, clergy, law enforcement, etc. Murdoch’s view begs the question; What is a person worth when their value to society cannot be directly measured by their market place success?
Murdoch’s views are shared by many of today’s corporate elite. It is the makers vs. takers mentality. It is a view that can only be described as anti-social at best, sociopathic at its extreme. It opposes all government interventions in the market place and opposes most government regulations. It is a philosophy designed to restricts the ability of ordinary citizens (i.e. government) to assure that our markets and commerce works for the good of society and not just for the benefit of the economically powerful. It implicitly confers ownership and control of the markets to the most powerful market makers while failing to acknowledge the corrupting effects of power on financially successful human beings. By denying the humanity of markets it denies the vulnerability of markets to human weaknesses. This puts society at risk and cripples humanity from solving some of the really big challenges we face as a species. How we chose to define distributive justice is arguably the most important economic question of our time. How we ultimately marshal our economic resources to solve our really big problems depends on how we ultimately organize our economy.
[Ruppert Murdoch’s views as expressed can be found at the following URL: http://nation.foxnews.com/rupert-murdoch/2013/04/22/rupert-murdoch-op-ed-case-market-s-morality?utm_source=feedly&utm_medium=feed&utm_campaign=Feed%3A+FoxNation+(Fox+Nation)]
CLASS WARFARE – OVERVIEW OF WAGES, TAXES and WEALTH IN AMERICA
Since Reagan in 1980’s Tax Rates for the wealth were cut in half and capital gains tax (where most make their money) was cut in half again. http://j.mp/ZFFQHB
Wages and GDP rose together until wages were suppressed in the 70’s, otherwise median income today would be greater than $100K instead of $51K http://j.mp/14MoT67
The combination of wage suppression and the collapse of the upper income tax brackets is the cause of our wealth and income inequality today. http://j.mp/102YbAk and http://j.mp/10DVrLn
A majority of American’s don’t make enough money to support a robust economy because a handful of us have more money than they can spend. http://j.mp/16E3zOT
Current US policy is creating permanent income inequality. Income mobility is shrinking as income caste system forms. http://t.co/nK5uFGyCaG
We know what victory looks like in Class Warfare. It’s the formation of an income caste system where birth determines your level of success. http://j.mp/Y1HwQP
Obama’s proposed raise in min. wage from $7.20 to $9/hr would mean a person working 40hr/week at min. wage would still be below poverty line. http://j.mp/10DwY7V
If the minimum wage was raised to $18/hour the Federal Government could eliminate almost all aid to the working poor, saving tons of money. http://j.mp/10DVrLn
Every tax dollar paid to assist the working poor is a tax subsidy providing their employer a federally funded labor discount. http://j.mp/16Bml7r
God! When are we going to wake up?
Permanent Inequality Rising Over Past Two Decades
A Spring 2013 BPEA paper by Vasia Panousi, Ivan Vidangos, Shanti Ramnath, Jason DeBacker and Bradley Heim
Disadvantaged Becoming Worse Off Long-term; Tax System Has Helped But Not Significantly
Income inequality in the US has increased in recent decades, and this increase is of a permanent nature, according to a new paper presented today at the Spring 2013 Conference on the Brookings Papers on Economic Activity (BPEA).
In “Rising Inequality: Transitory or Permanent: New Evidence from a Panel of U.S. Tax Returns” … [the authors] use new data to closely examine inequality, finding an increase in “permanent inequality” — the advantaged becoming permanently better-off, while the disadvantaged becoming permanently worse-off. The paper has important public policy implications because rising income inequality will lead to greater disparity in families’ well-being that is unlikely to reverse, whereas “transitory inequality” or year-to-year income variability would imply greater income mobility—those who fare worse today might be able to do better in later years. The authors are among the first to examine various measures of income in great detail, including earnings from work activities as well as broader measures of family resources such as total household income. [SNIP]
Looking at the impact of tax policy on inequality, the paper finds that although the U.S. federal tax system is indeed progressive in that it has provided some help in mitigating the increase in income inequality over the sample period, it has, however, not significantly altered the broadly increasing inequality trend. All told, the results suggest that rising income inequality will likely lead to greater disparity in families’ well-being and reduce social welfare in the long-run.
Rising Inequality: Transitory or Permanent?
New Evidence from a Panel of U.S. Tax Returns
Click to access 2013a_panousi.pdf
Abstract
We use a new, large, and confidential panel of tax returns to study the permanent versus-transitory nature of rising inequality in individual male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2009. We conduct our analysis using a wide array of statistical decomposition methods that allow for various flexible ways of characterizing permanent and transitory income components. For male labor earnings, we find that the entire increase in the cross-sectional inequality over our sample period was permanent, that is, it reflected increases in the dispersion of the permanent component of earnings. For total household income, the large increase in inequality over our sample period was predominantly, though not entirely, permanent. For this broader income category, both the permanent and the transitory parts of the cross-sectional variance increased, but the permanent variance contributed the bulk of the increase in the total. Furthermore, the increase in the transitory component reflected an increase in the transitory variance of spousal labor earnings and investment income. We also show that the tax system partially mitigated the increase in income inequality, but not sufficiently to alter its broadly increasing trend over the 1987-2009 period.
Capital Investment Income Drives Income Inequality
A recently published analysis by Thomas L. Hungerford (see highlights below) looks at factors driving the growth of income inequality for the period between 1991 to 2006. Hungerford looked at the contributing impact of three factors, tax policy, labor wages and capital income. During the studied period he found that capital income (capital gains, interest income, business income and dividends) was by far the largest factor contributing to rising income inequality. Wages and salaries alone were not a factor and tax policies were only a minor contributor during this period, largely due to the more favorable tax treatment of capital gains.
This report doesn’t trace the history of income inequality prior to 1991 where changes in wage growth in the late 1970’s and the collapsing of upper income tax brackets in 1980 and 1985 were more dramatic.
It is worth remembering that for most of the past 100 years capital gains was treated as ordinary income for tax purposes. In recent times, capital gains have be treated as a separate class of income with a more favorable tax treatment. Capital ownership has always been more concentrated at the upper end of the income/wealth continuum. Capital is, of course, an ownership stake in our economy whether through stocks, bonds, property or business ownership. The income generated when these capital investments are bought and sold is currently taxed at 15% (if it is held for more than a year). That is less than half the top tax rate for wages and salaries. And how is capital ownership distributed in America?
Who Owns What In America?
The distribution of wealth ownership, as opposed to income inequality, is even more skewed towards the wealthy as the pie chart below shows. The whole pie represents the total wealth in America. Each of the five slices of the pie represent 20% of the US population according to how much wealth they own.
The slice of ownership for the poor and working poor are barely visible. Eighty-percent of all Americans own just 15.6% of America’s wealth. The number of people who slipped into poverty in 2010 was at an all time high of 46.2 million, so the poorest 20% of all Americans, in terms of wealth ownership, includes 15.5 million who are technically above the income poverty line. The poorest 40% of Americans essentially own almost nothing while the top 20% own almost 85% of everything. As a result, favorable tax policies for capital gains income has a highly disproportional benefit for the wealthiest Americans. Capital income for this wealthy segment is what drives rising income inequality today.
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Changes in Income Inequality Among U.S. Tax Filers Between 1991 and 2006: The Role of Wages, Capital Income, and Taxes
Thomas L. Hungerford
thunger@starpower.net
January 23, 2013
Electronic copy available at: http://ssrn.com/abstract=2207372
HIGHLIGHTS FROM THIS REPORT:
Research has demonstrated that large income and class disparities adversely affect health and economic well-being (see, for example, Marmot 2004, Wilkinson 1996, Frank 2007, Singh and Siahpush 2006).
Research has shown, however, that income mobility [in the United States] is not very great and the degree of income mobility has either remained unchanged or decreased since the 1970’s (Hungerford 2011, and Bradbury 2011).
Earnings inequality has been increasing since at least the late-1960s (Kopczuk, Saez, and Song 2010). [The] CBO (2011) has documented that income inequality has been increasing in the United States over the past 35 years.
Three potential causes of the increase in after-tax income inequality between 1991 and 2006 are examined in the analysis: changes in labor income (wages and salaries), changes in capital income (interest income, capital gains, dividends, and business income), and changes in taxes.
Increased salaries paid to CEOs, managers, financial professionals, and athletes, is estimated to account for 70 percent of the increase in the share of income going to the richest Americans (Bakija, Cole, and Heim 2010).
A declining real minimum wage could affect lower income tax filers (the inflation-adjusted minimum wage fell from $6.57 per hour in 1996 to $5.57 per hour in 2006).
Income of the richest 0.1 percent of taxpayers is sensitive to changes in asset prices and this may have been especially important in the increase in the income share of those at the top of the income distribution (Bakija, Cole, and Heim 2010).
Frabdorf, Grabker, and Schwarze (2011) also find that capital income’s share in disposable income has increased in recent years in the U.S. and show that capital income made a large contribution to income inequality in relation to its share in income.
While the individual income tax system is progressive and has been since it was introduced in 1913, the trend has been toward lower marginal tax rates and a less progressive tax system (Piketty and Saez 2007, and Alm, Lee, and Wallace 2005). As a result, the tax system may be less able to equalize after-tax incomes.
The major tax changes between 1991 and 2006 were (1) the enactment of the Omnibus Budget and Reconciliation Act of 1993 (OBRA93), which increased the top marginal tax rate from 31 percent to 39.6 percent, and (2) the enactment of the 2001 and 2003 Bush tax cuts, which reduced taxes especially for higher-income tax filers. The Bush tax cuts involved reduced tax rates, the introduction of the 10 percent tax bracket (which reduced taxes for all taxpayers), [it also] reduced the tax rates on long-term capital gains and qualified dividends. In 1991, long-term capital gains were taxed at 28 percent (15 percent for lower-income taxpayers) and all dividends were taxed as ordinary income. The next year, the
long-term capital gains tax rate was reduced to 20 percent. By 2006, long-term capital gains and qualified dividends were taxed at 15 percent (5 percent for lower-income taxpayers). Tax policy changes that affect progressivity will affect after-tax income inequality (Kim and Lambert 2009, and Hungerford 2010).
Hungerford (2010) notes, however, that about 75 percent of families contain just one tax unit (another 17 percent contain two tax units with the second tax unit usually a cohabitating adult or a working child that cannot be claimed asa dependent on another tax return). Consequently, most of the tax units likely represent a family.
Piketty and Saez (2003) argue that capital gains are not an annual flow of income and have large aggregate variations from one year to another; they exclude capital gains from much of their analysis. Blinder (1980) argues that capital gains should not be included in income because what is important is real accrued capital gains [cashed out]. Also, that capital gains represents partial maintenance of in an inflationary world. [in other words, gains shouldn’t be taxed as it serves as an inflation adjustment for capital]
capitals gains have increasingly become an important source of compensation for corporate executives (through stock options), and private equity and hedge fund managers (carried interests). Consequently, income from capital gains is included in the analysis.
Several recent studies estimate that most or all (in some cases more than 100 percent) of the burden of the corporate income tax falls on labor through reduced wages [while] other evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital. [So take your pick!]
Federal individual and corporate income taxes had an equalizing effect on inequality regardless of the inequality measure. Federal taxes had a slightly greater equalizing effect in 2006 than in 1991—taxes appear to have been slightly more progressive in 2006 than in 1991. The top marginal tax rate in 1991 was 31 percent compared to 35 percent in 2006; the lowest tax marginal rate was 15 percent in 1991 and 10 percent in 2006. However, the increased equalizing effect of the individual income tax is likely due to bracket creep—more income is taxed at the highest rates—than to tax law changes. Tax policy changes appear to have played a direct role: OBRA93 tended to have an equalizing effect on after-tax income while the 2001 and 2003 Bush tax cuts tended to have a disequalizing effect.
Tax policy may have also have had an indirect effect on rising income inequality, especially between 2001 and 2006. The reduction in the tax rate on long-term capital gains and qualified dividends may have led to the increased importance of this source in after-tax income.
Overall, changes in [wage] labor income does not appear to be a significant source of increased income inequality between 1991 and 2006. Wages had no or a small disequalizing effect when other inequality measures are used.
By far, the largest contributor to increasing income inequality (regardless of income inequality measure) was changes in income from capital gains and dividends. Capital gains and dividends were less equally distributed in 1991 than in 2006, though highly unequally distributed in both years.
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Thomas L. Hungerford currently works at the Congressional Research Service (CRS) which is part of the Library of Congress. The CRS provides the policy and legal analysis to Congressional committees and Members, regardless of their party affiliation. CRS staffers sometimes do reports on their own. Hungerford says this report, “… [does] not reflect the views of the Congressional Research Service or the Library of Congress.” Hungerford is well-published in the professional literature. He has worked for the Social Security Administration, the Office of Management and Budget, and the General Accounting Office in the past. The excerpts highlighted here are of my own. You are encouraged to read the full study at the URL address provide above.
Raising Wages Would Revive Our Economy
It seems so obvious that consumption is the fire that powers an economy and money is the fuel. It doesn’t matter from where the spending comes in the short run, but it must come from ordinary people in the long run. Wages paid are dollars spent and a dollar spent is a dollar earned in a free economy. Just as you can dampen consumption by raising the cost of borrowing, you can also dampen consumption by suppressing wages, which is exactly what we have been doing for more than 30 years. Corporations have become cash rich but customer poor. They could end this sluggish economy tomorrow by raising wages.
Minimum Wage Proposal A Small Step
In his State-of-the-Union Address President Obama proposed raising the federal minimum wage to $9.00 per hour and indexing it to inflation. He said a family of four with two children still lives below the poverty line when one parent works full-time at minimum wage. The proposed increase would lift them out of poverty, he said.
by Google Images
What a welcome suprise! Virtually no attention was given to the working poor in the last election. In the past decade real wages rapidly declined for the working poor, driving ever more citizens into the grip of intractable poverty.
When a person works full-time for a profitable company their compensation should enable them to care for their family. When this isn’t the case, they must rely on taxpayer-subsidized housing, food stamps, medical care, daycare, or other supportive services. This takes a toll. It can erode a person’s dignity and self-worth. It can foster a sense of inadequacy or self-loathing.
On a social level the working poor are often labeled and marginalized. They are deemed to be less worthy. They are less likely to be promoted or rehired after a layoff. Any economic hardship at all can lock them into a cycle of poverty where their hope for a better life evaporates with each passing year. Escaping poverty in America today is the exception, not the rule.
Many wealthy companies are just as dependent on government subsidies for cheap labor. Without taxpayer assistance for their workers these companies would have to pay a living wage in order to maintain a stable workforce.
And what is wrong with that? Shouldn’t adequate compensation be part of the cost of doing business? Why should business owners be allowed to pad their profits by cutting labor costs at taxpayer expense?
We can expect the pro-business lobby to oppose an increase in low-wage pay while calling for more spending cuts and lower business taxes. Austerity can’t create more jobs and spending cuts will never result in more pay for low-wage earners. Only an increase in the minimum wage or a living-wage law can do that.
Pro-business economists will claim that a higher minimum wage will increase unemployment and hamstring businesses, especially small businesses. Much evidence suggests the opposite. Higher minimum wages have a simulative effect on the economy. The extra $1.75 per hour will be spent immediately, boosting business profits and sparking more demand.
The pro-business lobby will claim the proposed increase is excessive, but here the facts are against them. Even President Obama got this wrong. The poverty wage for a family of four is current $10.60 per hour. If passed, President Obama’s proposal would still means a minimum-wage worker would have to work overtime, take another part-time job, or have their spouse work part-time to reach the poverty line.
And what does it really mean to be at the poverty line? Does this make a family economically self-sufficient?
No, it does not. A living wage to lift a family of four above the need for taxpayer subsidies is considerably higher. In Wyoming, for example, a living wage for this family is $16.93 per hour. In Virginia it is $20.88 per hour, and in California it is $22.15 per hour. These figures are not government artifacts. They are actual costs based on local free-market economies.
While business owners and corporations may squeal at the size of the proposed increase in the minimum wage, they would still benefit greatly from taxpayer subsidies for their low-wage employees. Raising the minimum wage shifts some of the burden of caring for employees to the employers, but not much. It still doesn’t hold wealthy corporations responsible for their low-wage workers or for the harm that poverty wages inflict on their families.
Taxpayer Subsidized Downsizing in America
The business of quick and dirty layoffs has become a familiar feature in our culture. One recent example involved a journalist who worked at a large news organization. He was new to the company so he gratefully accepted the friendship of a well respected senior reporter. One Friday morning his mentor emailed him about a story idea and ended it by writing, “I’ll see you at the 10 AM meeting.” This prompted the following email exchange:
“What meeting? I didn’t get the email.”
“I’ll forward it do you.”
Then a short time later: “Forget the email. This meeting isn’t for you. Don’t come to this meeting!”
This is how the newsroom learned that day of the layoffs. Many senior journalists were let go along with a few younger reporters to avoid the appearance of age discrimination. As these “redundant” employees filed from the meeting they were handed garbage bags for their personal effects and accompanied to their desks by hired chaperones. It was all over in an hour.
Coolly calculated business decisions and pitiless firings toss employees off company books and onto government unemployment rolls somewhere in this country nearly every week. No notices, no outplacement services, no severance pay and no extended benefits are required. In many cases there is no effort to treat employees with the dignity or respect they deserve.
Apart from union contracts or employment agreements, American companies have no legal obligations to citizens being fired. They need not assume any responsibility for the impact it has on an employee, their family or their community. The only business costs of any significance are the premiums companies pay for government unemployment insurance. This easy, low cost ability to fire workers is called “workforce efficiency” and the U.S. is among the most efficient in the world. We ranks 12th out of 144 nations according to the study on global business competitiveness .
In most other advanced nations there are laws requiring companies to provide loyal employees with advanced layoff notices, severance pay and other benefits. These structural costs for downsizing may make businesses a little less competitive, but it brings significant benefits. It helps maintain a stable workforce and postpones government funded assistance to severed employees while they look for jobs. Requiring larger companies to provide mandatory severance benefits helps the nations absorb minor bumps in the economy without adding to problems by throwing people out of work at the first sigh of trouble. It also happens to be a humane way for citizens to treat one another.
Here in this country we treat our labor force as if it were a commodity to be bought and discarded at will. In the end, big business lets taxpayers foot most of the costs for unemployment benefits and supplemental welfare services for people out of work. At the same time the pro-business lobby pushes Congress for business tax breaks and budget cuts in the programs that help the workers they leave behind. Isn’t it time we stopped bowing to the pro-business lobby and stand up for the American worker?
Data Driven Viewpoints 