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

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.

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About elnwebmaster

This is the discussion blog of the Labor Fightback Network, an auxiliary to the laborfightback.org website. It is designed to facilitate discussion among labor activists concerning the critical issues facing working people in the current economic crisis. Readers’ comments are welcome, but flaming is not. Any comments which are racist, sexist/homophobic, or disrespectful on a personal level will not get past moderation.
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