Why Reducing Inequality Is Government’s Most Crucial Job

(Return to the Contents Topics page.)

014 middleclass (2)

(Illustration from “Study: As Income Inequality Grows, Middle Class Areas Shrink,” The Liberal Curmudgeon, November 20, 2011, here.)

In America today, we have the most unequal distribution of wealth and income of any major country on earth, and more inequality than at any time period since 1928. The top 1 percent owns 42 percent of the financial wealth of the nation, while, incredibly, the bottom 60 percent own only 2.3 percent. One family, the Walton family of Wal-Mart, owns more wealth than the bottom 40 percent of Americans. In terms of income distribution in 2010, the last study done on this issue, the top 1 percent earned 93 percent of all new income while the bottom 99 percent shared the remaining 7 percent. 

Despite the reality that the rich are becoming much richer while the middle class collapses and the number of Americans living in poverty is at an all-time high, the Republicans and their billionaire backers want more, more, and more. The class warfare continues.  – Vermont Senator Bernie Sanders, “The Soul of America” (here).

This is the second of three posts highlighting my perspective on the economics of inequality after the last two years of studying this emerging field.  The first, “Falling Off the Inequality Cliff” (here), was designed to demonstrate, through a discussion of Paul Krugman’s analysis of budget and debt issues, how ignoring the macroeconomic impacts of growing income and wealth inequality results in seriously underestimating what will be required to reduce deficits and national debt, reduce unemployment, and stimulate recovery.  This second post puts meat on the bones of that argument, developing crucial points about the current dangerous situation and the unavoidable need for greater appreciation of the negative impact of inequality on growth, and of the role of taxation of top incomes and wealth to prevent further decline and deeper depression.  The third and last post will discuss the disintegration of the science of economics as four wildly divergent notions about the economic effects of taxation hopelessly confuse issues crucial to the recovery of the U.S. economy.

Senator Sanders’ observations about the current state of the U.S. economy and its growing inequality are factually accurate and can be easily verified.  In his recent book (The Price of Inequality: How Today’s Divided Society Endangers Our Future, 2012, p. 25) Joseph Stiglitz provided this, very similar summary list of “uncomfortable facts about the U.S. economy”:

(a) Recent U.S. income growth primarily occurs at the top 1 percent of the income distribution; (b) As a result there is growing inequality; (c) And those at the bottom and in the middle are actually worse-off today than they were at the beginning of the century; (d) Inequalities in wealth are even greater than inequalities in income; (e) Inequalities are apparent not just in income but in a variety of other variables that reflect standards of living, such as insecurity and health; (f) Life is particularly harsh at the bottom— and the recession made it much worse; (g) There has been a hollowing out of the middle class; (h) There is little income mobility— the notion of America as a land of opportunity is a myth; (i) And America has more inequality than any other advanced industrialized country, it does less to correct these inequities, and inequality is growing more than in many other countries.

The U.S. economy got this way over a thirty-year period of gradual and nearly invisible decline.  We can be aware of inequality and its implications today only because in the last few years, for the first time in the history of economic science, the necessary data has become available, in income distributional databases compiled by the federal government (Congressional Budget Office) and by economists Thomas Piketty and Emmanuel Saez;  This familiar graphic of Top 1% income shares in the United States plots Piketty/Saez data:

top-1-share-of-income-us

In 1935 John Maynard Keynes began the last chapter of his book The General Theory of Employment, Interest, and Money with this statement: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”  His General Theory, however, designed only to explain how full employment can be achieved, failed to account for the macroeconomic implications of income and wealth distribution. Unfortunately, because the data that can explain those implications are only now becoming available, such an explanation becomes possible only late in the current inequality growth cycle, just at the onset of the second “Great Depression.”

By 2007, income inequality (in terms of the top 1% share of all income) had deteriorated to the point it was at when the stock market crashed in 1929 and the first Great Depression began.  Notably, that was all before the “Crash of 2008.”  That crash and the “Great Recession” were logically predictable, given this history, but they were different: A real estate bubble burst and a great deal of wealth (net worth) evaporated, but following the bailout of big investment banks, pretty much only the middle and lower income classes (people whose principal assets are their homes) were permanently hurt, as the wealthy classes fully recovered and the growth of income and wealth inequality continued at an accelerating rate.

The entire episode consisted of a huge increase in the unequal distribution of wealth and incomes.  When the stock market crashed in 2008, the volatile top 1% income share fell, but it has rebounded to about the 2007 level, reflecting recovery of capital gains; the recovering value of securities investments, together with the decline in real estate values, represents a major increase in the inequality of wealth. The “Great Recession” (which has actually become a depression) witnesses, over the last four years, the continuing implosion of small businesses and middle class decline, rapidly falling median income, and a continuing high level of unemployment. The median household income has declined over the past four years by nearly ten percent.  These developments reflect an accelerating growth of income inequality.

A big crash that will see top 1% income share decline as it did so drastically in the 1930s (as shown on the graph) has yet to arrive.  Economic science has yet to offer a plausible explanation for what will arrive at the end of this inequality growth cycle, but as overall prosperity continues to decline, the possibility suggested by Robert Reich in Aftershock: The Next Economy and America’s Future (2010) of a complete collapse, greatly harming the entire bottom 99%, is all too real.  It is preventable, however, if we recognize and learn to understand the relationship between growing inequality and economic decline, and start addressing the problem.

We must start by recognizing that the factors making this happen over the last 30-40 years have not been corrected. Income inequality is still growing, and that growth is accelerating. Saez has reported these figures for the split between the amount of new income (growth) going to the top 1% and the amount going to everyone else:

       Period                Top 1%           Bottom 99%

1923-1929                    70%                    30%

1960-1969                    11%                     89%

 1992-2000                   43%                    57%

   2002-2007                  65%                    35%

  2010                               93%                      7%

Saez reported (here) that in 2010, the first full year of “recovery,” while average (mean) real income per family grew by 2.3%, top 1% incomes grew by 11.6% and bottom 99% incomes grew by only 0.2%.  Hence, the top 1% captured 93% of growth in 2010, a considerably higher rate of inequality growth than existed in the six years before the Crash of 1929 that ushered in the Great Depression.  He reported this trend continuing into 2011, predicting “that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s.”

Importantly, income and wealth inequality had already reached very extreme levels before the Crash of 2008 and the Great Recession, and the U.S. economy, despite recent growth in private sector jobs, is actually in a depression.  Collapsing tax revenues of state and local governments, as well as at the federal level, have caused draconian budget cuts, reducing public sector jobs and associated retailer incomes, offsetting private sector job gains. (For the Upstate New York example, see “Job losses erode gains,” by Eric Anderson, Albany Times Union, January 18, 2013, here.)

This is a dangerous situation.  The structural mechanisms for income growth below the top 1% — that is, the ability to achieve growth below the top 1% — have mostly been eliminated. What passes for economic recovery these days is almost entirely income growth at the top.  This makes stimulation of bottom 99% income growth by government essential, but also far more difficult to achieve.   

Changing Economic Perspectives

The Obama Administration, so far, has taken a conservative approach to inequality. In his inaugural acceptance speech, President Obama endorsed reducing government spending to reduce the budget deficit.  He has made it clear he is aware that a general “austerity” policy aimed at reducing the budget deficit would be disastrous and must be avoided at all costs, as strenuously argued by Paul Krugman for months (See my previous post “Falling Off the Inequality Cliff,” here).

He has not, however, addressed the implications of inequality growth for federal taxation and fiscal policy.  Indeed, the 2012 Economic Report of the President does not acknowledge any macroeconomic effects of inequality growth.  Its explanation of the income inequality problem is limited to the conservative supply-side position of Ben Bernanke and the Cato Institute that the income inequality problem consists of nothing more than the ability of people with college and graduate degrees make to more money than people with less education. That position would be laughable, were it not so widely endorsed: Not only is the extreme cost of higher education today making it uneconomical for many young people today to obtain or even consider going to college, but many college graduates and even people with graduate degrees (especially women) are living at or close to the poverty level, despite their education.  Obviously, income inequality is a far deeper problem: In End This Depression Now!, Paul Krugman underscored the absurdity of that argument, pointing out that educational differences cannot explain how a small handful of Wall Street hedge fund managers raking in over $1 billion per year can take home more income than all of New York City’s public school teachers combined.

Unfortunately, Krugman also implied in that discussion that income inequality is essentially a “political” problem, lacking significant macroeconomic consequences and not materially affecting growth. He declined to recommend increased taxation of top incomes and corporate earnings, either for reducing inequality or for achieving recovery and growth, and recommended instead stimulating growth and investment through deficit spending and monetary approaches.  He appeared, at least then, to believe (as did Keynes) that full employment solves the inequality problem.

Neither Paul Krugman nor the Obama Administration can afford to continue taking income and wealth inequality so lightly. As argued in “Falling Off the Inequality Cliff,” with the downward spiral of income inequality continuously depressing the economy Obama cannot revive the middle class as he has vowed to do just by reducing or even by eliminating unemployment.  He cannot just put people back to work, he must do so in ways that do not keep contributing to the concentration of wealth at the top and to the decline of median real income.  Nor will he be able to avoid an ultimate economic collapse, or even significantly reduce unemployment, without substantially increasing taxation of top incomes and corporate earnings.

Two months after Krugman published his book, Joseph Stiglitz published The Price of Inequality, providing a macroeconomic explanation of the income and wealth distribution problem. Stiglitz stressed the same Keynesian (declining propensity to consume) and Georgist (growing transfers of economic rent) factors that had appeared to me to be the primary factors behind the decline associated with inequality growth. Stiglitz has been relatively silent since then, but two days ago, in an article in the Sunday New York Times of January 20, 2013  entitled “Inequality Is Holding Back the Recovery” (here), he said this:

Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined. Inequality stifles, restrains and holds back our growth. When even the free-market-oriented magazine The Economist argues — as it did in a special feature in October — that the magnitude and nature of the country’s inequality represent a serious threat to America, we should know that something has gone horribly wrong.

He argued further that: (1) Our middle class is too weak to support the consumer spending that historically has driven economic growth; (2) The hollowing out of the middle class since the 1970s leaves the middle class unable to invest in their future, by educating themselves and their children or by starting or improving businesses; (3) The recent modest agreement to restore Clinton-level marginal income-tax rates for individuals making more than $400,000 and households making more than $450,000, given the weakness of the middle class and the facility with which those at the top avoid taxation, are inadequate for “the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength;” and (4) “The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson.

“The dream of a better life that attracted immigrants to our shores,” he concluded, “is being crushed by an ever-widening chasm of income and wealth.”

Thankfully, Stiglitz’s perspective is beginning to gain serious attention: In The National Journal (September 28, 2012, here) Jonathan Rauch reported Stiglitz’s conclusion that “[w]idely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term.”  A few weeks later in Forbes (“How Income Inequality Is Damaging the U.S.,” October 2, 2012, here) the magazine’s leadership editor, Frederick Allen, said this:

New research indicates that growing income inequality isn’t just unpleasant; it is seriously hurting the U.S. economy. And economists are figuring out just how the damage is done, according to a fascinating new article by the journalist Jonathan Rauch in National Journal.

Allen’s acknowledgment that income inequality has macroeconomic significance is especially remarkable, given that the editor-in-chief of Forbes Magazine, Steve Forbes, has long been a leading protagonist of the supply-side ideology, which holds that individuals can always achieve success and certainly avoid poverty if they apply themselves, and that there is no inequality problem.

On October 16, 2012, the New York Times (here)  reported  a study published on April 8, 2011 by the International Monetary Fund (Andrew G. Berg and Jonathan D. Ostry, IMF Staff Discussion Note, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” here), a study that has gained the attention of both Krugman and Stiglitz.  Inequality can be “destructive to growth,” the authors said:

It has long been recognized that the quality of economic and political institutions, an outward orientation, macroeconomic stability, and human capital accumulation are all important determinants of economic growth. This note argues that income distribution may also – and independently – belong to this “pantheon” of critical growth determinants.

Then in November, Paul Krugman (“The Twinkie Manifesto,” New York Times, Op-ed, November 18, 2012, here) commented on the relationship between taxation and growth:

Consider the question of tax rates on the wealthy.  The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. * * * Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.

* * * And the high-tax strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth: nothing before or since has matched the doubling of median family income between 1947 and 1973.  * * * [E]conomic justice and economic growth aren’t incompatible.

It is gratifying that Krugman is not only emphasizing the relationship between inequality and growth, but also acknowledging the connection between the taxation of top incomes and the level of income inequality.  In his book, he discounted the high correlation between these factors revealed by the Piketty/Saez data as possibly coincidental.

On that same day, Daniel Altman (“To Reduce Inequality, Tax Wealth, Not Income,” New York Times, November 18, 2012, here) shifted the focus from income to wealth:

Often decried for moral or social reasons, inequality imperils the economy, too; the International Monetary Fund recently warned that high income inequality could damage a country’s long-term growth. But the real menace for our long-term prosperity is not income inequality — it’s wealth inequality, which distorts access to economic opportunities.

Trends in the distribution of wealth can look very different from trends in incomes, because wealth is a measure of accumulated assets, not a flow over time. High earners add much more to their wealth every year than low earners. Over time, wealth inequality rises even as income inequality stays the same, and wealth inequality eventually becomes much more severe.

This is exactly what happened in the United States.

Altman recommended a major shift in the United States from taxing income to taxing wealth, which he says would improve distribution.

Another important economic theorist recently lining up behind Stiglitz is Neil Buchanan (“A Mismatch Between Tax Politics and Deficit Rhetoric,” Verdict Justia, 1/3/13,  here):

Increasing taxes on the wealthy is an important policy goal, no matter what the situation with the federal budget may be.  As the economist Joseph Stiglitz argues (here), the level of inequality that we have reached in this country not only is immoral, but also actually harms the economy, reducing growth and making it harder to employ workers in modern jobs.

Therefore, even though the President and his Democratic colleagues have been treating minimal tax increases on the wealthy as part of an effort to bring down long-term deficits, the important reality is that income redistribution is both morally and practically essential.

Finally, in another excellent Op-ed (“The Big Fail,” The New York Times, January 7, 2013, here), Krugman refers again to the presentation by the IMF economists cited above, characterizing it as  a “major rethinking” of economic policy:

For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake. (Emphasis added.)

Krugman, engaged as he has been in the war against “austerity” around the world, perhaps tends to analyze new information mainly in terms of its relevance to that issue.  But the IMF study argued, as noted, that the adverse effect of inequality is so strong that income and wealth inequality should itself be considered an independent cause of decline. This, I believe, is also Stiglitz’s perspective.

Inequality and Growth

It is gratifying that in the last few months the relationship between inequality and growth has suddenly gained so much more attention.  The Piketty/Saez data show clearly that when inequality started to rise in the U.S. in recent decades, overall growth declined sharply:

3-27-08tax2-f2b

This chart shows that in the three decades after 1976 the aggregate cumulative growth was reduced by about one-third of what it had been in the three previous decades.  Meanwhile, the income inequality trend was turned on its head.  The cumulative percent growth for the top 1% of households increased astronomically, from 20% to 232%, while growth for the bottom 90% plummeted from 83% to 10%. It is this growth differential (the difference from 1976 to 2006, in this example, between a 232% cumulative growth for the top 1% and a 10% cumulative growth for the bottom 90%)  that boosted the top 1% share of total income from under 10% to nearly 25%.

Soon, hopefully, there will no longer be lingering doubts that the growth of income and wealth inequality depresses growth, and that controlling the distribution of income and wealth must be government’s top priority.  However, any understanding of what exactly governments should do depends upon understanding why this happens.

The Role of Taxation

One of the main things the new U.S. income distribution databases show is a very high degree of correlation between the top income tax rates (as well as effective tax rates) and the degree of income inequality.  Income inequality was reasonably low in the 1950s and into the 1970s, the period of middle class prosperity and greater overall growth, when effective income taxation at the top and taxation of corporations was twice as high as it is today.

It is important to understand why taxation and income inequality are correlated, and I’ll offer my opinions on that issue in my next post.  Meanwhile, given that it is true, for whatever reasons, this fact provides a very reasonable expectation that the United States economy can recover by returning to those former levels of taxation and tax progressiveness.  What is more difficult to understand, however, is the likelihood that the United States economy cannot avoid depression and return to prosperity unless it reinstates such a sufficiently progressive tax structure.

It may be just that very intriguing possibility that is drawing so much attention to the IMF study, which languished for 18 months before its discovery by the New York Times, and which is actually far less informative than the Piketty/Saez or the CBO databases of implications for the United States. What seems to be most important about the IMF study is the authors’ macroeconomic perspective.  Until we recognize income and wealth distribution itself as causal factors that control and limit growth and prosperity, as people evidently are starting to do, we may not be able to make any real progress.

The “Inequality Trap”

That thought was foremost in my mind when I read a fabulous blog post by Mary M. Cleveland, an adjunct professor of environmental economics at Columbia University, that was recently called to my attention (“Is Paul Krugman’s Liquidity Trap Really an Inequality Trap?”, January 16, 2013, here).  She argues:

Krugman cares deeply about unemployment and inequality, as did John Maynard Keynes before him. Yet like Keynes, Krugman seems caught in the inequality-free neoclassical paradigm. * * *

During the Great Depression, to his credit, Keynes bucked his colleagues by claiming that government spending could revive a depressed economy. But, caught in the neoclassical paradigm, he got the mechanism wrong. Keynes argued, as does Krugman today, that the problem is a lack of consumer demand. Consumers want to save instead of spend. Lacking demand, businesses won’t invest. So there’s a “savings glut” or “liquidity trap” — billions in cash sloshing around seeking in vain for investment opportunities. The solution: government should borrow some of that loose cash and spend it, no matter on what: war, high-speed rail, fixing potholes, or education. Deficits be damned.

In my view, we don’t have a “liquidity trap”; we have an “inequality trap”. What’s that? An “inequality trap” happens in a downturn, when the One Percent, big corporations and banks hoard cash, starving small businesses for capital: The greater the inequality and deeper the downturn, the tighter the trap.

Data published by the Congressional Budget Office (CBO), “Trends in the Distribution of Household Income Between 1979 and 2007,” October 2011 (here) does show that “small” business income has been significantly absorbed by the top One Percent, evidence of a decline in small businesses:

10-25-HouseholdIncome CBO_Page_27

This Lorenz curve shows that between 1979 and 2007 the bottom 95% of the population saw its share of small business income reduce from about 55% to about 30%.  The bottom 99% of the population share was reduced from over 90% to about only about 55%. Nearly half of small business income was going to the top 1% by 2007.  This greatly increases the proportion of small business income going to the top.

I would add to Cleveland’s hoarding of capital at the top, as another explanation for the critical decline of small businesses in the U.S., the exercise of monopoly power and destructive financial consolidation exercised by mega-corporations. (See Barry Lynn, Cornered: The New Monopoly Capitalism and the Economics of Destruction, 2010.)  However it has happened, the “inequality trap” concept importantly highlights the structural and macroeconomic impediments to investment below the top 1% that contribute to increasing decline.  The bottom 99% is compressed into a smaller economy as wealth is removed from active circulation, dooming (these days) all below the top One Percent to lower real incomes.  Thus, Keynes did get the mechanism wrong: It’s not that the bottom 99% has decided to reduce its spending and increase saving; rather the bottom 99% has been forced to reduce spending as its incomes have been reduced, and it has reduced saving and increased borrowing to try to stay afloat.

I don’t believe Keynes’ General Theory is wrong in arguing that liquidity preference causes the pace of investment to falter: The experience of my own career in regulatory economics has led me to perceive “the marginal efficiency of capital,” or the cost of capital, to be central to decisions by firms to make real investments, and to their ability to finance their operations. (Money is not invested automatically just because it is saved.) Nor is there error in Keynes’s perception that reduced demand for consumption does not result in increased demand for investment in the means of production, but results instead in lower expected returns from such investment and consequently in reduced growth and increased unemployment. The proposition based on Keynes’ “propensity to consume” that an increasing concentration of income at the top necessarily reduces aggregate demand, endorsed by Stiglitz and only now gaining public attention, also seems indisputable to me.  It’s just that the ballpark in which The General Theory is playing out today seems to have been limited pretty much to the top 1-5% income classes.

Regardless, these fundamental Keynesian principles, when coupled with the consequences of economic rent recognized by the 19th Century American economist Henry George, provide a potent description of the loss of both money and real value when resources are idled through inequality growth.  Keynes did establish, after all, that market economies are inherently unstable, and no necessary impetus to return to full employment “equilibrium” has ever been identified.

Mary Cleveland’s concept of an “inequality trap” captures the reality of this instability for me. Because it is always unstable, it would seem, the economy is always caught in Cleveland’s “inequality trap.” All of the relevant Keynsian and Georgist factors (notably land value speculation) appear to push an economy away from “equilibrium,” and disequilibrium is left to run its course, wherever it may lead.  At the most basic level, market capitalism appears to be locked in a constant redistribution struggle, with a core principle as fundamental as gravity: What goes up must come down.

For me, it all keeps coming down to this: “Tax the rich.” Taxation is the only saving grace, governments’ fail-safe mechanism.  Tax the hoarders — the One Percent, the banks, and the big corporations — the very entities that today because of their overwhelming market power have been able to extract trillions of economic rent to hoard, and because of overwhelming political power have been able to push the tax burden they avoid onto the losers in the inequality battle (the 99%).

Keynes, to his credit, took it for granted that progressive taxation was the uncontroverted remedy for inequality growth. Now we have quantitative proof from Piketty and Saez (here) that insufficiently progressive taxation of the incomes of the “hoarders” is causally related to the growth of extreme income inequality, and to deterioration into depression.

So yes, Keynes did miss the underlying mechanism; the fundamental determinant of economic health is not employment; it is the distribution of wealth and incomes, the factor Keynes described as “arbitrary.”

The End of the “Fiscal Policy” Rope

One final point: These considerations mean that Krugman’s insistence on following the Keynesian playbook — fiscal policy (deficit spending) when monetary policy is inadequate  — is doomed in the face of extreme inequality growth, confirming Mary Cleveland’s perspective that “Krugman seems caught in the inequality-free neoclassical paradigm.”

Consider this: Every year for the last thirty years our federal government has run up budget deficits, effectively engaging in deficit spending.  Over this period, about $16 trillion of debt, in current dollars, has been incurred.  A major argument back in the 1930s, between Keynes and the Austrian economist Friedrich Hayek was about the degree to which the economy would overheat from such stimulation, as demand exceeded supply, leading potentially to a runaway cycle of inflation. (See Nicholas Wapshott, Keynes Hayek: The Clash That Defined Modern Economics, 2012), and for years, Milton Friedman and the Chicago school opposed deficit spending for basically this reason.  But what happened over the last thirty years?

This $16 trillion of borrowing caused no runaway inflation.  What’s more, it didn’t even succeed in stimulating the economy. Instead, following major reductions in the top income tax rate (from 70% down to 28% then back up to 35%), the U.S. economy experienced a much reduced GDP growth rate accompanied by a huge increase in income inequality (along with more wealth concentration at the top).  The end of that road was the Crash of 2008, a new depression, and a mountain of national debt that now exceeds the nation’s annual GDP.

In other words, the stagnating effect of inequality growth on economies, which economists seem astonished today to discover from a recent IMF study, has continuously more than offset the potential stimulation of the U.S. economy over thirty years of continuous deficit spending!  The entire Keynes/Hayek debate, in effect, was “caught in the inequality-free neoclassical paradigm;” thus, to paraphrase Krugman, “the adverse effect of [inequality] is much stronger than previously believed.”

What must be done?

The lesson in this light seems obvious:  The only thing governments can do to prevent capitalist market economies from destroying themselves is to maintain a sufficiently progressive tax structure to tax back down the excessive levels of wealth that are continuously transferring up.  And because 93% of all new income is currently recycling back to the top 1%, government will have to dismantle the major structural mechanisms that have been set up over the past thirty years to ensure that wealth and incomes siphon up to the top 1%.

The tax increases now contemplated in Washington are not nearly adequate to that end. The New York Times on New Year’s Day reported the agreement in the Senate to raise the top tax rate to 39.6% from 35% for individual incomes over $400,000 and couples over $450,000, while “tax deductions and credits would start phasing out on incomes as low as $250,000, a clear win for President Obama.”  (See “Tentative Accord Reached To Raise taxes on Wealthy,” The New York Times, 1/1/13here).

The Tax Policy Center estimated in November (here) that: “If all Mr. Obama’s tax proposals for wealthy Americans were enacted, they would raise $1.6 trillion over the next decade.”  That’s an average of $160 billion per year, but starting at less and growing over the decade.  There is no final budget resolution yet, so “final” estimates are not yet available.

Anything in that ballpark, however, would be far less than required to reduce the deficit or the debt, or even avoid an eventual plunge over the “inequality cliff.” The additional revenues may begin to slow the rate of inequality growth a bit, but the top rate at around 40% is still far below the 70% top rate that was in effect when income inequality was relatively stable in the 1970s, and the task of reviving corporate taxation lies ahead.

According to my computations from federal net worth data, over the last thirty years the top 1% has gained more than $10 trillion of wealth (in 2010 dollars) in excess of its per capita share of the growth in the nation’s net worth.  That’s an annual average of more than $300 billion of wealth moving to the top.  The economy is much larger today, so a better estimate of the current transfer rate would be above the average, perhaps around $500 billion.  Thus, the projected annual revenues expected from these tax increases will not be enough for recovery, deficit improvement, or debt reduction.

Conclusion

Many thanks to Mary Cleveland for her beautiful new concept of the “inequality trap.” There is a clear need to incorporate the continuing depressive effects of income inequality growth and increasing concentration of wealth in all economic reasoning, and now, especially, in the economic growth models that are used for tax policy and budget planning purposes.

My next and final post in this series will undertake a review of competing economic theories on the impacts of taxation: These competing theories have expectations so diverse and contradictory as to render the application of almost any economic theory virtually useless for informing public policy.

JMH – 1/23/2013, ed. 1/24/2013

(Return to the Contents Topics page.)

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

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s