Essays on Inequality XII – Inequality Growth, Taxes, and Federal Debt

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 * * * * Off the Radar Screen * * * *

Lately I’ve been dismayed at how little meaningful attention is being given to inequality – more precisely, the economics of income and wealth inequality – in the media or on the internet.  So I borrowed this spin radar from a Flickr GeoRadar post to make an important point: This topic is off virtually everyone’s radar screen.  Despite the fact that six months ago Occupy Wall Street and hundreds of other Occupy camps sprang up in America mainly to protest the poor economy, economic injustice and the growing income and wealth disparity between the wealthiest 1% and the bottom 99%, there has been very little detailed discussion of how serious the problem is, and what must be done to correct it.

I can’t stress enough that growing wealth and income inequality is America’s number one problem, and countering it simply has to be America’s top priority.  President Obama is working hard to improve the economy, with some success, but as I will show in this post, while his budget proposal is a necessary step in the right direction, much more will be needed for long-term improvement in the economy and to stop an inexorable back-slide into depression.  Further, the Republican alternatives (the policies that got us here) would be instant disaster, a prescription for the next Great Depression.  Discussions of budget and tax issues elsewhere pay insufficient attention to the growing inequality problem.

Internet activity on this topic continues at a minimal level.  I Googled “income inequality images” yesterday (March 9), and was surprised to find two of our posts near the top of the first page, one in the #2 position.  For our little site to be so far up on the list is, frankly, a discouraging testament to people’s inattention to this issue.

When I Googled “wealth transfers” nearly all the sites listed belonged to companies like Wells Fargo Advisors and a top .5% company Wealth Transfer Group (which “serves only an elite clientele with estates exceeding $10,000,000”) in the business of helping rich people optimize massive bequests to their heirs.  A Forbes article “Wealth Transfers: How To Reverse The 70% Failure Rate” by Carolyn Rosenblatt was near the top of the list.  Her report:

70% of intergenerational wealth transfers fail, according to research conducted on over 3,250 families who transferred wealth.  That is, inherited wealth is dissipated by the heirs at this stunningly high rate.  It’s an international phenomenon.  

What’s going on here?  According to Roy Williams (The Williams Group) and his partner Vic Preisser, their research indicates that wealth often becomes a source of friction and dispute among family members. * * * [T]he major reason was that no post-transition planning or preparation was going on.  In short, no one in the unsuccessful transferring families was preparing their heirs for the multiple kinds of responsibilities they would face when having to take over the reins.  * * *

By contrast, the 30% of families who succeeded did so with broad and well thought out planning, preparing both children and grandchildren for their futures. A key component was to identify a family mission as well as a strategy to attain it.  The heirs understood what the family’s identified mission was about the family wealth.  With that known they were given the opportunity to practice their roles for the future, in philanthropy, the family business and other ventures at a more minor level than they would have upon the passing of the patriarch or matriarch who headed the family at the time. (Original emphasis.)

A piece of advice, Carolyn: Family missions will likely be more successful if they include the objective of keeping the United States out of another Great Depression.  Also, wealthy families preparing their children and grandchildren for the future should watch Jamie Johnson’s documentary The One Percent.

There was just one reference high on the Google list to economic wealth transfers: Wikipedia’s anemic article Redistribution of wealth.  The lead-in reference there is to Norton and Ariely’s study of public perceptions (guesses) about the state of inequality in America, “Building a Better America – One Wealth Quintile at a Time”, a study we have pointed out is only marginally helpful (Essays on Inequality X – Optimal Inequality).  By all means, get a fresh cup of coffee, go to the Wikipedia article, and try to stay awake.  The depth of America’s current inequality problem is simply not discussed.

Why so little attention?  Perhaps too many of us are increasingly “lost in cyberspace”, lost in the social networking process that John R. Ehrenfeld, who posted this interesting graphic, notes is addictive: “It is critical,” he argues, “to regain the sense of caring that is fundamental to being human; not retreat further into a virtual world.  Social networking technology is very seductive. . .”  Perhaps, as we become more and more lost in cyberspace, we retreat too much from the pressing problems of the real world.  If so, that is unfortunate, for the real world is preparing some very nasty surprises for us.

Stone Age Economics

Most of the people who understand the inequality problem, for reasons of their own, are not educating us.  Meanwhile, the nation and our government (for the benefit of the wealthy) are in the grip of a simplistic “Reaganomics” idea that has generated a killer inequality. This is the very wrong idea that “tax cuts for the rich” beneficially increase government tax revenues (a cousin of “don’t tax the job creators”).  Alas, the discussions of Reaganomics that turn up in Google searches are mostly superficial, if not cursory: Underlying presumptions are almost never evaluated.  We have made an effort in this blog to disprove Reaganomics, and I will soon expand on these efforts with a thorough, complete refutation of “trickle down,” including this time a full discussion of the “Laffer curve” upon which it relies.  Stay tuned.

The mostly superficial discussions I am finding of inequality and tax policy are infected by what Skip and I call the “presumption of normalcy.”  Much like the analogous, gradual trend of global warming, the growth of income and wealth inequality over the last 30 years has not been universally noticeable in our everyday lives, so we tend to reach conclusions without factoring significant change into our analysis; we tend to discuss inequality (and the related federal budget and taxation issues) without recognizing its continuing and accelerating growth.

The presumption of normalcy is at work, for example, in a Novemer 9, 2011 article by Joyce Appleby, The Myth of U.S. Prosperity.  Appleby reports:

From 1776 to the present, the bottom 60 percent of the American population, as University of Southern California historian Carole Shammas has documented, has never had more than 11 percent of the country’s   wealth. We may embrace the American dream of broad prosperity and wealth equity, but we have never been close to achieving it.  * * *

[W]ealth is forever, as long as the possessor can resist risky investments and live on the income from it rather than the principal. * * * Enduring wealth also translates into enduring political power.  And what about wealth for the rest of us? How are we faring?  * * *   

Inequality has simmered just beneath the surface of public concern over the last quarter of a century as the median income of American households has fallen by about 4 percent.  * * * For the two decades before the recession, the American economy saw greater productivity and more wealth generation, but despite the predictions of supply-siders, little of that wealth trickled down. Instead, it redounded in a hugely disproportionate way to the benefit of the 13,000 households in the top 10th of the top 1 percent.  Never in the history of the United States has there been such a concentration of wealth in the hands of a small elite. We now rank 27th in the least-equal countries, falling between Portugal and Chile.

But let’s get back to the bottom 60 percent of American    households, and how they have never enjoyed more than 11 percent of the country’s wealth. Doesn’t that figure suggest we should review the content of the American dream and emphasize what is actual rather than illusory?  * * *   We have a constitutional government, widespread enjoyment of personal freedom and government policies that protect opportunity. Perhaps the current public conversation about the 1 percent and 99 percent can focus on the fundamental question of how long political equality can survive amid such economic inequality.

No.  Political equality is already long gone.  The public conversation about the 1% and the 99% needs to focus on how long we can survive economically in a world of rapidly growing inequality.  Appleby’s seemingly sympathetic discussion of inequality is infected by the presumption of normalcy, defusing the issue and leading to faulty conclusions.  Although Appleby acknowledges that there has never before been such a high concentration of wealth in the hands of the wealthy elite, she emphasizes that throughout U.S. history the bottom 60% have never held more than 11% of the wealth, and Americans have always had personal freedom and opportunity.  The implication?  The basic parameters of wealth distribution aren’t really changing, so it’s no big deal.  We just need to lower our sights a bit – there’s no crisis here.

Oh, but there is.  Appleby uses limited data, superficially, with no real appreciation for their economic implications or how they are changing.  Inequality growth is accelerating rapidly, and the situation is far more serious than that article implies.

Our Findings on Inequality Thus Far

  • Income inequality in the U.S. is now worse than in 1928, at the start of the Great Depression, and continues to grow.  The top 1%’s share of total income grew from about 9% in the late 1970s to 23.5% in 2007;
  • Since 1979, top 1% average income has risen over 280%, while there has been virtually no growth in real income for the bulk of the bottom 99%.  The top 1% takes in over 60% of all income growth (new income) today, and income inequality growth is accelerating;
  • Newly updated data shows that inequality fell to under 22% in 2008, after the Crash, but since then top 1% incomes have renewed their growth, and corporate profits and the stock market have soared, while median income has fallen 10% since 12/07.  The top 1% is likely getting 26-27% of all income today;
  • The bottom 90% is in a depression, and the 99%ers’ economy continues to decline;
  • From 1979-2007, inequality growth resulted in the transfer of about $8.8 trillion of wealth (net worth) from the bottom 99% to the top 1%.  Since then, about $1.5-2 trillion has likely transferred up to the top 1% in the normal course of business;
  • After the 2008 crash, homeowners in the bottom 99% have lost about $8 trillion in the value of their primary assets, their homes;
  • Since 1979, therefore, the bottom 99% has lost over $18 trillion of its total wealth, about 1/3 of the wealth it would have had but for the growth of inequality.  This amounts to more than $60,000 (in current dollars) per capita, for each of the more than 310 million Americans in the bottom 99%;
  • Inequality growth has a number of causes, chief among them the one that can be most quickly and easily corrected – inadequate taxation of the rich and corporations.  Among the necessary fixes is increasing the top marginal income tax rate to at least 60% (it was at 70% before 1979, and at 91% after WW II until the early 1960s);
  • Reaganomics (aka “trickle down” or “voodoo” economics) is an ideological fraud, soundly disproved by the rise in inequality itself over 30 years. More and more, millionaires and billionaires like Warren Buffett, who understand economic reality, are pressing hard for higher taxes on their incomes, recognizing that their success depends on a functional economy;
  • Today’s $15.53 trillion of  U.S. National debt is mostly “Republican debt” (i.e., over $13 trillion of it, including subsequent interest, was raised during Republican administrations) that mostly financed tax cuts for the rich and military spending;
  • With total federal debt approaching total GDP for the first time since the end of World War II, the compounding of interest costs (which grow exponentially) has become a serious concern, making the traditional fiscal policy of “deficit spending” problematic;
  • Attacking deficits by reducing government spending, however, is suicidal.  The “austerity doctrine” is reportedly depressing economies in Europe (especially Great Britain, Italy, and Spain, and now even Germany), as it already has in America.  The only way to avoid Great Depression II in America is by taxing the rich.

In the second bullet, the conclusion that income inequality growth is accelerating, with the top 1% now capturing more than 60% of all income growth, was based on citations to the latest data from Emmanuel Saez.  As cited in a Huffington Post article, Saez has recently issued a report (Striking It Richer: The Evolution of Top Incomes in the United States (Updated with 2009 and 2010 estimates)) updating his inequality database, and showing the rapid acceleration of income inequality since the beginning of the Bush Administration.  He includes a table showing the percentage real income growth over recent periods, and the fraction of total growth (or loss) of after-tax income, including realized capital gains, captured by the top 1% during these periods:

__________________

xxxxxxxxxxxxxxx       xxxxxxxx Real Income Growth

xxxxxxxxxxxxxxxxxxxxxxxxxxxx % of Total, Top 1%             Top 1%    Bottom 99%

Full period 1993-2010                          52%                                    58.0%                  6.4%

Clinton Expansion 1993-2000             45%                                   98.7%                 20.3%

2001 Recession (2000-2002)              57%                                 -30.8%                 -6.5%

Bush Expansion (2002-2007)              65%                                   61.8%                   6.8%

Great Recession (2007-2009)              49%                                 -36.3%                -11.3%  

Recovery (2009-2010)                          93%                                   11.6%                   0.2%

 ______________________

Notice that the top 1%’s share of income growth went from 45% in the Clinton expansion to 65% in the Bush expansion, reflecting the Bush tax cut for the wealthy.  Then came the Crash. “During the Great Recession, from 2007 to 2009,” Saez notes, “average real income per family declined dramatically by 17.4%, the largest two year drop since the Great Depression.”  The most alarming thing about these numbers is that there is virtually no income growth in the bottom 99% anymore.  In fact, after real income for the bottom 99% fell by over 11% in the Great Recession, it has not come back.  And with the top 1%’s lock on new growth, its share of total income has continued to grow at an accelerating rate.

These trends help explain the economic news we are getting:  (1) Applications for unemployment aid fell in February, but incomes and spending  remained flat, with consumer spending declining for the fourth straight month; (2) With declining incomes over the last couple of years,  state and local government revenues have fallen and the increase in private sector hiring has been accompanied by a major loss of public sector jobs, and; (3) A new study from the National Poverty Center shows that  extreme poverty in America has doubled in the last 15 years – bringing the number of Americans who live on less than two dollars a day to 1.46 million.

Regarding the enormous growth of poverty, Thom Hartmann opines:

This is an outrage in a nation of four hundred billionaires who own more wealth than 150 million other Americans combined – and more proof that Reagan’s trickle-down economics is nothing more than a scam.  

Saez himself dryly concludes his report with this:

A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II – such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality. We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional and tax reforms
should be developed to counter it.

That’s masterful understatement: Yes, but the presumption of normalcy has routinely prevented an understanding of “institutional and tax reforms” required to counter this increase.  Fortunately, the Saez data make it possible for us to get a sense of what it will take to reverse this huge concentration of new income (and hence wealth) in the top 1%, and for the bottom 99% to avoid another Great Depression.

In an earlier post (Essays on Inequality X – Optimal Inequality) we reported Hacker and Pierson’s computation that by 2005 and 2006 the growth in income inequality as new growth concentrated in the top 1% (a concentration that Saez now shows has increased in 2009-2010) was about $700 billion/year.   With this in mind, let’s take a look at recent tax proposals advanced by President Obama and Republican candidate Mitt Romney:

In a February 13, 2012 post on Ezra Klein’s Wonkblog at The Washington Post, Klein reports the revenue figures associated with these rates:

First, it’s important to establish our baseline: If we just extend our current policies — which would mean extending the Bush tax cuts — revenues will be 17.9 percent of GDP over the next decade.

Obama’s plan would raise revenues to 19.2 percent of GDP. Most of that would come from people making more than $250,000 a year. Back in September, the nonpartisan Tax Policy Center ran the numbers on his proposal — which is unchanged in the budget — and they estimated that taxpayers in the bottom 20 percent would pay an average federal tax rate of 1.8 percent, those in the middle 20 percent would pay 15.2 percent, and the top 1 percent would pay 36.3 percent.

Romney’s plan cuts taxes to about 17 percent of GDP. Most of those cuts would accrue to upper-income Americans. According to the Tax Policy Center, under Romney’s plan, taxpayers in the bottom 20 percent would pay a rate of 3.4 percent, those in the middle 20 percent would pay a rate of 15.6 percent, and the top 1 percent would pay 25.9 percent.

So low- and middle-income families would pay a bit more under Romney’s tax plan, but high-income families would pay a lot less. Taxes would also fall far short of spending. A realistic estimate of federal spending over the next decade is in the 22-23 percent of GDP range. Romney’s revenues are five to six points below that, and because Romney has promised to balance the budget without cutting defense spending, he would have to cut every domestic spending program, including Social Security and Medicare, by more than 35 percent to make his numbers work.  

Because Obama’s plan shifts the tax burden toward the wealthy while Romney’s shifts the tax burden away from the wealthy, each plan affects the growth of income inequality. Romney’s would increase inequality growth and Obama’s would decrease it.  The estimated GDP in 2013, based on 2011 GDP of $15,094.4 billion and the CBO growth estimates for 2012 and 2013, will be $16,075.5 billion.  Thus, the expected federal income tax revenues are:

Baseline         $16,075.5 billion x .179= $2,877.5 billion

Romney         $16,075.5 billion x .170= $2,732.8 billion

Obama           $16,075.5 billion x .192= $3,086.5 billion

Obama’s plan adds $208.9 billion over the baseline, basically reversing the revenue drain of the Bush tax cut for the wealthy, while Romney’s plan reduces revenues from the baseline by $144.7 billion.  Two points:

(1) The Romney plan vs. the Obama plan requires about $350 billion from somewhere to finance Romney’s proposed lower taxes for the rich, and that would as Klein points out most likely be taken from social programs;

(2) Although Obama’s increased taxes on the wealthy would tend to reduce the growth of inequality, about 3.5 times as much additional tax revenues from the wealthy (around $700 billion) would be needed today to stem inequality growth.

It sounds unbelievable, but that’s how bad things have actually become.  In a previous post (Essays on Inequality X – Optimal Inequality), I argued that returning to a top tax rate of 70% is desirable, and that a top tax rate in the 50-60% range might be sufficient.  Actually, these numbers confirm that the revenue effect of a 55% top rate might be enough to stop the growth of income inequality.

Remember, it would be important both to raise that kind of revenue from the wealthy and to use it to create jobs and grow the economy first, before paying down the national debt, as advocated by economists like Robert Reich (The Seven Biggest Economic Lies) and Paul Krugman (Nobody Understands Debt).  If the federal government uses its revenue increase to grow the economy, it can further increase tax revenues, automatically increasing its ability to pay off debt.

Alas, the presumption of normalcy has infected the national debate to the point that the situation is made to seem much more “normal” and much less serious than it really is.  The policies of the Republican right (cut taxes on the rich, cut government spending, except for corporate welfare, and so on) are all exactly wrong, and must be avoided at all costs. Inequality has gone way too far already, and the problem and its consequences will take years to fix.  The bottom 99% doesn’t really have any choice any more:  It must collectively pick up inequality issues on it’s radar, and fight back.


JMH – 3/13/2012 (ed. 3/14/2012)

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This entry was posted in - FEATURED POSTS -, - MOST RECENT POSTS -, Wealth and Income Inequality. Bookmark the permalink.

One Response to Essays on Inequality XII – Inequality Growth, Taxes, and Federal Debt

  1. @Aine says:

    Reblogged this on The Lefty Gazette and commented:
    How the corporate media fails We The People every single day.

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