Income Inequality in America: What Can Be Done About It?


Income Inequality in America: What  Can Be Done About It?

Emergency Labor Network

A dominant  characteristic of the U.S.  economy today—and a fundamental cause of the faltering, stop-go economic  recovery in the U.S. since  2009—is the long-term and continuing growth of income inequality in America.

That inequality is most  dramatically represented by the growth in the share of national income by the  wealthiest 1% of households, on the one hand, and the decline in the share of  national income for the bottom 80% and remaining 110 million-plus U.S.  households, on the other — i.e.  between those earning an average of $593,000 a year (top 1%) and those  earning less than $118,000 a year (bottom 80%) with a median annual income of  around $50,000.

The Wealthiest 1%  Households Historic Income Gains

With average annual  incomes of $593,000 a year today, the wealthiest 1% of households in the U.S. — approximately 750,000 out of a total of more than 150 million families — receive  about 24% of all income generated in the U.S. every year, according to Nobel  Prize winning economist Joseph Stiglitz. That’s up from only 8% of total income  in 1979. According to studies of IRS data by University of California economist Emmanuel Saez, and others, during  the Clinton years, 1993-2000, the wealthiest 1%  households captured 45% of all the increase in U.S. income  growth. During the George W. Bush years, 2000-2008, they captured 65%. And in  the latest year of available data, 2010, they captured 93%. So the top 1%  recovered quickly from the recession. So did their corporations, from which the  same 1% households obtain more than 90% of all their income in the form of  capital gains, dividends, interest, rents, and other forms of “capital  incomes.”

Corporate Profits and  the 1%

Profits are the major  conduit through which the wealthiest 1% incomes grow, redistributed to  stockowners, bondholders, and senior executive managers in the form of capital  incomes like capital gains, dividends, interest, rents, etc. And Corporate  Profits have done extremely well the past three decades, since 2001 in  particular, and especially since the Great Recession of  2007-09.

This record gain in  pre-tax corporate profits since the onset of the economic crisis in 2007-08 was  achieved not from the increased sale of goods and services, but from record  profit margins from cost-cutting operations — i.e. by cutting jobs, by reducing  wages, benefits, and hours of work, and by productivity gains pocketed by  management and not shared with their workers. Profit margins since 2008, i.e.  profits as a percent of operating costs, by 2011 thus attained the highest  levels in more than 80 years.

Just as cost-cutting at  the direct expense of workers has been the main factor in generating record  pre-tax corporate profits, so too have corporate after-tax profitssurged as a consequence of massive  corporate tax cutting by governments at all levels, federal as well as state and  local.

Corporate cost cutting  at the direct expense of labor resulted in record corporate pre-tax profits  during the last decade and especially since 2008. Three decades of corporate tax  cutting—intensifying since 2001 and continuing through the recent recession — resulted in even greater after-tax profit gains. But as corporate tax cutting  has intensified so too has the cutting of taxes on recipients of capital incomes — i.e. capital gains, dividends, interest, rents, etc.

The personal income tax  has concurrently been reduced for the wealthiest 1% households, enabling the “pass through” of ever larger magnitudes of corporate after-tax profits to the  wealthiest 1% and permitting that 1% to retain ever greater amounts of those  distributed corporate profits as a result of accompanying reductions in the  personal income tax.

The outcome has been the  shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of  national income in 2012, and the accelerating accrual of all income gains by the  top 1% noted above.

In the 1970s, the top  federal income tax rate on the wealthiest individuals ranged from 50% to 70%.  But the top 1% paid an actual average tax rate — after loopholes, deductions and  exemptions—of about only 45%. By 2011, however, this 45% actual rate had  declined much further to 22.5%, according to a late 2012 study in the “Tax  Justice” journal — i.e. very much lower than the official 35% top personal  income tax rate typically mentioned by the press, the government, and in current  debates about the “fiscal cliff.”

If federal tax revenues  were restored to the pre-2000 level of 20.6% of GDP, it would produce an annual  increase in federal government revenues of $458 billion a year. That’s more than  $4.5 trillion in additional revenue over the coming decade — and a number which  is just about the same as that proposed by Republican and Democratic politicians  today in Fiscal Cliff negotiations at year end 2012 as the target to reduce the  U.S. deficits and debt. Congress and Obama could solve the deficit problem for  another decade by just doing nothing and letting the Bush tax cuts expire on  December 31, 2012.

Alternatively, the $4.5  trillion could be achieved by means of just one simple tax measure: raise the  effective, actual tax rate on the wealthiest 1% households from the present  actual average rate of 22.5% today, to a 45% actual effective top marginal rate.  That simple measure alone raises federal tax revenue by the $458 billion a year,  and restores federal tax revenues from the current 14.4% low to the prior  long-term average of 20.6% of GDP.

That single measure — raise the top tax rate on the wealthiest households averaging $593,000 a year in  income to 45% ─ would also more than meet the target of a $4 trillion cut in the  U.S. deficit over the next decade—thereby eliminating any and all need to cut  Social Security, Medicare, Medicaid, education, or any other spending, or to  raise any tax on the middle class.

Income Decline for the  Bottom 80%

But income inequality is  a consequence not only of income shifting to the wealthiest households and their  corporations.  Income inequality is  a double-edged sword. It is also the consequence of conditions and policies  which have simultaneously reduced the real incomes of the bottom 80% households — i.e. those 110 million earning less than $118,000 annual income and most of  whom earn less than $50,000 — while simultaneously raising the incomes of the  wealthiest and their corporations. Once again the nexus is Corporate  America.

Policies and measures  that have raised corporate profits in the U.S. to record levels over the past three  decades, and especially since 2001, are in many instances the same policies that  have reduced income for the middle and working classes in America. A short  list of the major causes would include:

1.      De-unionization of much  of the labor force and a consequent collapse in the union-nonunion wage  differential.

2.      “Free trade” policies  that have lowered wages for new export companies by 20% compared to higher paid  jobs lost to imports.

3.      Millions of jobs  permanently lost to “free trade” from NAFTA, CAFTA, and  others.

4.      Offshoring of high  paying jobs by multinational corporations to Asia and beyond.

5.      Creation of a 40 million  two-tier workforce of part-time and temp workers, with 60% wages and virtually  no benefits.

6.      Elimination of  health-care benefits for tens of millions, and reduction in benefit coverage and  higher cost sharing for those remaining with benefits.

7.      Longer duration between  adjustments of minimum-wage legislation, and smaller progressive adjustments  when they occur.

8.      Rising base level of  unemployed as recessions occur more frequently, are deeper and longer in  duration, resulting in longer job recovery and at lower  pay.

9.      Management hoarding of  all productivity gains without sharing in part with wages.

10.  Elimination of  defined-benefit pensions and replacement with minimal 401k  plans.

11.  Exemption by government  rule changes of millions of workers from eligibility for overtime  pay.

12.  Rise in property tax,  sales taxes, and other local government fees and charges as local governments  grant more and more tax cuts to corporations and  businesses.

13.  Indexation and rise in  payroll tax contributions by workers.

14.  Reduction in paid leave  time for vacations, holidays, sick leave, etc.

These and scores of  other measures have resulted in a concurrent decline in working and middle-  class income, as profits of corporations and income from capital simultaneously  have risen. The heaviest impact has been on working-class households earning  annual income from $39,000 to $118,000 a year — virtually all of which is wage  income — sometimes called the middle class.

While some of the income  decline is due to wage and benefit reductions by those who did not lose their  jobs during the recent recession, much more of the relative income decline has  been due to massive loss of jobs since 2007, which reached a level of 27 million  at one point and still remains at 22 million after four years of so-called  recovery. While more than 15 million jobs were lost, no more than 5 million have  been “recovered” since the recession began. Moreover, the jobs added during the  recession have paid significantly less than the jobs lost, thus lowering income  accordingly.

In summary, while  corporate profits have continued to grow, so too has the income of the top 1%  wealthiest households. This has been made possible in large part at the expense  of the middle and working classes, as rising corporate profits gained at  workers’ expense are passed through to forms of capital incomes — the latter  process accelerated by the reduction in both corporate taxation and personal  income taxation for the wealthiest 1% households.

A rebalancing of the  increasingly skewed distribution of income in the U.S. must  include a major restructuring of the tax system, which is a central enabling  factor behind the growing inequality, although not the only cause. The causes of  inequality include those corporate and government policies that have reduced  working and middle class incomes in order to accelerate the growth of corporate  profits. But the tax system has played the key role of recycling those profits  to the wealthiest households as well, at an increasing rate and in ever larger  magnitudes of income transfer to the 1% from the rest, especially the bottom  80%.

The stagnation and  decline of middle and working-class incomes in America has  resulted in the inability of the economy to fully recover. Consumption is 70% of  the economy, and the middle and working classes are the overwhelming core of  that consumption. Without income growth, they can only resort to consumption  based on more credit and debt and on withdrawing savings to finance basic  consumption — neither alternative of which is a long-run solution to stagnating  income and consumption and therefore continued faltering economic  recovery.

The current fiscal cliff  negotiations between the two parties in Congress and the Obama administration  will inevitably produce an outcome that will only reduce disposable income for  consumption by the middle and working class in America in order  to continue much of the personal income tax cuts for the wealthy and reduce  still further the tax rates for their corporations. The consequences for income  inequality trends in America is that those trends will  inevitably worsen further. And with it, so too will the U.S.  economy.

It’s obvious from the  above that the downward slide for lower-and middle-income families is directly  attributable to legislation enacted by the two corporate-dominated parties,  which has enabled the millionaires and billionaires to seize more and more of  the nation’s wealth. That’s why it is high time for labor to end its  subordination to the Democratic Party and start running independent  labor/community candidates for public office, which could be the forerunner of a  much-needed labor party capable of challenging capital’s  monopoly of political  power.

Issued by the Emergency Labor Network  (ELN)

For more information write or P.O. Box 21004, Cleveland, OH44121 or call 216-736-4715 or visit our website at Donations gratefully accepted. Please make checks payable to the ELN  and mail to the above P.O. Box.



    • Actually Jeff, we are screwed — only if we don’t fight back as a class, only if we continue to support politicians that serve Wall Street. We are many, They are few.

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