Distribution of income - it's generally a boring topic, of interest mainly to economists - until lately, that is.
For several decades the fruits of a vibrant economy have accumulated exclusively to the nation's wealthiest elite - not the top half, but to the richest 1 percent, and even more, to the top one-tenth of 1 percent of our wealthiest citizens.
That's not the way American capitalism should work. On this issue, Democrats have been frustratingly slow on the uptake, and Republicans have been in denial. It should not have taken the Occupy Wall Street movement to wake up politicians and bring it to media attention. But if only economists talk about it, one can hardly blame the media for neglecting it.
It doesn't take an economist to remind the typical family that their incomes have stagnated over the last several decades, even during an expanding economy.
But why should we be concerned about increasing inequality of income? Aren't market results sacrosanct? Don't those who make multi-million dollar salaries deserve them because of superior intellect, ambition, and hard work? If we increase the tax rates on those multi-million dollar salaries - those tax rates being the lowest since the 1920s - won't that discourage their incentives for productive effort and discourage them from hiring workers?
Let's concede that the multi-million dollar salaried CEO puts in time and effort, and has administrative talent. And let's concede that market forces reward the talent of successful athletes and popular movie stars. Yet, those rewards are embedded in an economic system that has costs, including national defense, education, public transportation and infrastructure, and institutions that enable our way of life. However talented and hard working, those who reap the greatest rewards of the system have the responsibility of bearing a larger share of the costs of the system.
Okay, some of my readers may not agree with that. But let's look at it another way.
Multi-million dollar CEOs like to claim responsibility for the success of those huge multi-national corporations over which they preside. In 1965, the ratio of the typical CEO's salary to the typical worker was 23 to 1. In 2011, the ratio has skyrocketed to 383 to 1. This, even as rewards to those who labor in the cubicles and on the shop floor have received little or no increase. Yet, when things go haywire, or there is some skullduggery involved, the CEO who claims credit for success suddenly reverts to the "Sergeant Schultz" response - "I know nothing."
So, the notion of fairness or equity is a value judgment, subject to interpretation. But another reason to be concerned about income inequality is purely pragmatic. Economies do better when a broader share of the population shares in the prosperity, as was the case during the 1940s through the 70s. The broad middle class and, even more so, the "working poor," have suffered disproportionately during the Great Recession while our most affluent one or two percent have prospered.
As economist George Stiglitz puts it, "Increasing inequality means a weaker economy, which means increasing inequality, which means a weaker economy. That economic inequality feeds back into the political economy, so the ability to stabilize the economy gets weaker."
We see this playing out in the difficulty of increasing tax rates, however slightly, on our nation's most affluent. We are lectured that increasing tax rates on our most affluent will diminish their incentive to work, will irreparably harm small business, and send us back into recession. This is ludicrous.
Let's use the currently discussed $250,000 level income as an example. The vast majority of small businesses make nowhere near $250,000 in taxable income. It's more accurate to say that most small businesses struggle to cover their costs. And for a "small business," for example, earning $300,000 in taxable income, to increase the marginal tax rate on income over $250,000, from 35 to 39 percent would result in an increased tax bill of $2,000. This is hardly the deciding factor in hiring or firing another worker.
And the supposed diminished incentives to those with annual salaries in the multi-millions? Will an increased tax bill even of a fraction of a million dollars diminish the major league ball player's incentive to get on base? Will slightly higher taxes reduce the movie star's drive for fame and access to the world's beautiful women? Will slightly higher taxes on the multi-million salary of a CEO reduce his/her drive to corner a larger share of the detergent market? Only if you believe the eyewash handed out by politicians whose campaign war chests depend on, and who see their mission as making life comfortable for, the superrich.
Let's get back to the macro economy. We are told that onerous and uncertain tax rates are hindering employment. In reality, the primary source of uncertainty is lack of demand. That goes right back to income inequality. If the incomes of the broad middle class and the working poor were rising, and more certain - in other words, if the purchasing power, effective demand, were there, businesses would hire. Employment would increase, tax collections would rise, and the deficit would shrink, relative to GDP and in absolute terms.
Those who piously preach the need to reduce the federal budget deficit continue to resist ever-so-slightly increasing tax rates of the rich, their primary argument being that "taxing the rich" won't be nearly enough to solve the problem.
Of course not. Given the role of money in politics, reducing the deficit will not end with "taxing the rich." But since the real after-tax income of our top one percent has risen 275 percent since 1979, compared to stagnating wages and incomes for middle and lower income earners, that's where higher tax rates should begin - at the very top, for those who have disproportionately reaped the richest rewards of our economy.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
For several decades the fruits of a vibrant economy have accumulated exclusively to the nation's wealthiest elite - not the top half, but to the richest 1 percent, and even more, to the top one-tenth of 1 percent of our wealthiest citizens.
That's not the way American capitalism should work. On this issue, Democrats have been frustratingly slow on the uptake, and Republicans have been in denial. It should not have taken the Occupy Wall Street movement to wake up politicians and bring it to media attention. But if only economists talk about it, one can hardly blame the media for neglecting it.
It doesn't take an economist to remind the typical family that their incomes have stagnated over the last several decades, even during an expanding economy.
But why should we be concerned about increasing inequality of income? Aren't market results sacrosanct? Don't those who make multi-million dollar salaries deserve them because of superior intellect, ambition, and hard work? If we increase the tax rates on those multi-million dollar salaries - those tax rates being the lowest since the 1920s - won't that discourage their incentives for productive effort and discourage them from hiring workers?
Let's concede that the multi-million dollar salaried CEO puts in time and effort, and has administrative talent. And let's concede that market forces reward the talent of successful athletes and popular movie stars. Yet, those rewards are embedded in an economic system that has costs, including national defense, education, public transportation and infrastructure, and institutions that enable our way of life. However talented and hard working, those who reap the greatest rewards of the system have the responsibility of bearing a larger share of the costs of the system.
Okay, some of my readers may not agree with that. But let's look at it another way.
Multi-million dollar CEOs like to claim responsibility for the success of those huge multi-national corporations over which they preside. In 1965, the ratio of the typical CEO's salary to the typical worker was 23 to 1. In 2011, the ratio has skyrocketed to 383 to 1. This, even as rewards to those who labor in the cubicles and on the shop floor have received little or no increase. Yet, when things go haywire, or there is some skullduggery involved, the CEO who claims credit for success suddenly reverts to the "Sergeant Schultz" response - "I know nothing."
So, the notion of fairness or equity is a value judgment, subject to interpretation. But another reason to be concerned about income inequality is purely pragmatic. Economies do better when a broader share of the population shares in the prosperity, as was the case during the 1940s through the 70s. The broad middle class and, even more so, the "working poor," have suffered disproportionately during the Great Recession while our most affluent one or two percent have prospered.
As economist George Stiglitz puts it, "Increasing inequality means a weaker economy, which means increasing inequality, which means a weaker economy. That economic inequality feeds back into the political economy, so the ability to stabilize the economy gets weaker."
We see this playing out in the difficulty of increasing tax rates, however slightly, on our nation's most affluent. We are lectured that increasing tax rates on our most affluent will diminish their incentive to work, will irreparably harm small business, and send us back into recession. This is ludicrous.
Let's use the currently discussed $250,000 level income as an example. The vast majority of small businesses make nowhere near $250,000 in taxable income. It's more accurate to say that most small businesses struggle to cover their costs. And for a "small business," for example, earning $300,000 in taxable income, to increase the marginal tax rate on income over $250,000, from 35 to 39 percent would result in an increased tax bill of $2,000. This is hardly the deciding factor in hiring or firing another worker.
And the supposed diminished incentives to those with annual salaries in the multi-millions? Will an increased tax bill even of a fraction of a million dollars diminish the major league ball player's incentive to get on base? Will slightly higher taxes reduce the movie star's drive for fame and access to the world's beautiful women? Will slightly higher taxes on the multi-million salary of a CEO reduce his/her drive to corner a larger share of the detergent market? Only if you believe the eyewash handed out by politicians whose campaign war chests depend on, and who see their mission as making life comfortable for, the superrich.
Let's get back to the macro economy. We are told that onerous and uncertain tax rates are hindering employment. In reality, the primary source of uncertainty is lack of demand. That goes right back to income inequality. If the incomes of the broad middle class and the working poor were rising, and more certain - in other words, if the purchasing power, effective demand, were there, businesses would hire. Employment would increase, tax collections would rise, and the deficit would shrink, relative to GDP and in absolute terms.
Those who piously preach the need to reduce the federal budget deficit continue to resist ever-so-slightly increasing tax rates of the rich, their primary argument being that "taxing the rich" won't be nearly enough to solve the problem.
Of course not. Given the role of money in politics, reducing the deficit will not end with "taxing the rich." But since the real after-tax income of our top one percent has risen 275 percent since 1979, compared to stagnating wages and incomes for middle and lower income earners, that's where higher tax rates should begin - at the very top, for those who have disproportionately reaped the richest rewards of our economy.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
