“Rough Equality of Means” – Reversing Economic Inequality in America

In Budget Politics, Economics, Financial Crisis, History and Politics, Inequality, Living Wage, Political Ideology, Politics of Policy, Poverty, Social Democracy, Social Policy, Taxes on August 14, 2009 at 8:48 pm

Introduction:

A recent paper by Professor Emmanuel Saez of U.C Berkeley provides further evidence for something that we’ve sensed already – economic inequality has never been greater in American history. We have finally succeeded in accomplishing that most dubious of accomplishments: we are now officially more unequal, more elitist, and more disproportionally in-egalitarian than the benighted America of 1929.

In 2007, the top 10% of Americans received 50% of the nation’s wages. That number, the sheer unreality of the idea that a tiny fraction of the population should have the sheer unmitigated selfishness to claim every other dollar in wages paid out, pales before an even more troubling figure. The top 1% of Americans captured 2/3rds of income growth and 1/2 of economic growth from 2002-2007.  At the same time that the rich have gotten even richer, the rest of us have not fared as well – indeed, even before the recession, the average working-age household lost $2000/year of income since the year 2000.

Can this state of affairs continue? And how can we stop it?

Background:

Consider the following chart:

I apologize that this was the only chart I was able to find, as Saez’s charts mostly focus on the extreme expansion of wealth among the top 10, 1, and .1% of the country. However, As Saez’s paper shows, economic inequality has dramatically worsened since 2002 – the top 15,000 families in America (.1% of the population) now own 6% of the national income, and the top 10% now own 50%. What’s even more staggering, and what Saez’s paper shows that this chart does not, is how concentrated this increase of income has been, even within the top 10%. Those in the top 10-5% range and those in the top 5-1% range have seen only the most modest of increases over the last decade, whereas the top 1% have seen their income shoot up by roughly 10 percentage points.

This throws a massive monkey-wrench in the conventional explanations for economic inequality, which focus heavily on the impact of de-industrialization, the decline of unionization, and the increasing need for education in an “information economy.”  While this could conceivably explain why the 5th and 4th quintiles have seen their share flatline in the last thirty years, it does not explain what is going on at the top. There simply is not that much difference between members of the top 10% to account for the enormous variation we see within the group – members of the top 10-5% all graduated from college and hold advanced degrees, and in all likelihood attended the very same institutions and made the same connections, and all likely work in the same kinds of jobs as those within the top 5-1%, and the top 1%. Can claims of higher industry or intelligence or thrift of daring really explain why one group of wealthy executives virtually indistinguishable from their peers prosper and the others not?

No.

Moreover, in addition to the moral injustice of this vast inequality, which is increasingly beginning to resemble the gulf between the feudal aristocracy and serfdom in the Middle Ages, there is the sober fact that this economic inequality is by itself damaging our economic system. When too much of the national wealth is distributed up the income ladder, the aggregate propensity to consume decreases as fewer people at the bottom have the income they would need to express their potential demand, and the people at the top show an ever-greater propensity to save and invest. When too much of the national income is directed towards savings and investment and too little towards consumption, it should come as no surprise that we’ve seen one succession of bubbles after the other, as too much money tries to chase too few sound vehicles for investment.

Creating a more just society has become more than a moral cause – it has become a necessity.

Redistribution Done Right:

The scale of this inequality should make one thing clear – efforts to regulate executive compensation are completely inadequate to the task.

Rather, we must be prepared to redistribute wealth far more substantially.

Progressive Taxation – the first step in achieving a more equal society is to make our tax system more progressive. We should work to gradually expand our capital gains, estate, and income tax rates, especially focusing on making these taxes more progressive by adding additional brackets at the top. For example, our current income tax brackets end at 35% of all incomes over $373,000 a year as if there were no difference between a household consisting of two affluent professionals and a household of multimillionaires. There is no sane reason why additional brackets should not be added at $500k, $1 million, $5 million, and so forth.

Progressive Redistribution – in addition to increasing normal social spending, which by its very nature benefits ordinary Americans more than the poor, we should also combine a progressive change in taxation with the expansion and progressivization of our social benefits. While I will expand more upon this subject in future posts, I believe that one of our chief mechanisms of redistribution must be the expansion of the earned income tax credit and the various child-related tax credits into a guaranteed minimum income for workers. Just to take the current EITC, the credit at present is virtually worthless to single people and couples without children (maxing out at $428 a year), while the maximum benefit of $$4,716 is restricted to those with two or more children.

The Goal: I believe that our goal must be to gradually push economic distribution back towards where it was in 1979, when the quintile distribution of income looked like this (2007 numbers shown in parentheses):

1st Quintile – 44% (49.7%)

2nd Quintile – 24.7% (23.4%)

3rd Quintile – 16.9% (14.8%)

4th Quintile – 10.3% (8.7%)

5th Quintile – 4.2% (3.4%)

You will see that this is hardly a dramatic levelling of the sort envisioned by Marx or Engels; indeed, the top quintile of Americans would lose a mere 6 percentage points of their income, which would hardly bring anyone to penury. It’s also worth noting how broadly increasing inequality has been felt – the 2nd and 3rd quintiles have lost far more ground, absolutely, then the bottom 4th and 5th quintiles in the last thirty years. In this sense, redistributing wealth would be almost as far from “class legislation” as one can imagine, in that it would benefit 4/5ths of the population.

Accomplishing this by means of taxation and redistribution would mean, as Larry Summers(!) points out, that the top 1% of households would lose $500,000 a year from additional taxes (although given that the top 1% starts well over $250k a year, this shouldn’t be too painful), and the bottom 80% of Americans should receive $8000 per year per family – easily accomplished by expanding the EITC (or a combination of the EITC and the Child Credits) to a universal and automatic $8000 rebate for all Americans making less than $100,000 per year. Moreover, all of this could be gradually accomplished if that would soothe the fears of those solicitous of the rich, turning the yearly bite on the rich to no more than, say $25,000 a year.

Conclusion:

A scheme to redistribute some $670 billion in wealth might seem to risk attacks of “class warfare.” Certainly, the Blue Dog and New Democrats who balk at income tax surcharges on the wealthy to pay for universal health insurance would quickly run out of superlatives should a proposal of this scope ever be seriously introduced. However, as the 2008 campaign and the subsequent battles over the stimulus, the budget, health care, and even something so babies, apple pie, and flags as “Cash For Clunkers” have shown, we will be attacked for “class warfare” no matter what we do.

So let’s be rather be hanged, if hanged we will be anyway, for stealing a sheep than a lamb. Let’s have a real fight over what kind of society we want to have, one in which America has the same wealth distribution patterns we had under President Reagan, or one in which America has the same wealth distributions as we enjoyed under President Bush.

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  1. Just a question on numbers, perhaps I’m not getting something right. In the last paragraph of “The Goal”, you mention that the top 1% who starts well over 250k would lose 500k a year? Is there a typo there? If not, how does this math work…

    • The numbers that I could find on where the thresholds are only gave me the top 1.5%, which starts at $250k plus. Hence, the top 1% would likely have incomes much higher than that, as would the top .5% and the top .1%.

  2. Well, I’m all for redistribution, but I don’t see how it’s viable to knock a 550k earning family down to 50k by taxing them… or is it that top 1% would lose 500k ON AVERAGE, not per family, therefore implying that multi-million dollar households would pay more than 500k while those close to say 250k would pay (much) less than 500k?

    • I don’t think it is that, I think it’s on average. And I think the top 1% are probably earning about a million.

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