Tag Archive for marginal tax rates

Extreme Inequality or Democracy?

Reposted from CounterCurrents.org

Last autumn, likely due to the Occupy movement, there was a shift of media attention from debt reduction and the cutting of vital public programs (for example, Social Security, Medicare and Medicaid) to the issue of extreme wealth and income inequality in America. Extreme inequality is of concern for many reasons, but Supreme Court Justice Louis Brandeis provided perhaps the most crucial reason when he said: ” We can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both . “

Many of those who support grossly unequal outcomes attempt to distract the public from the critical extreme inequality in wealth and income here by stressing equal opportunity as the key. Incredibly, they seem to think that we have equal opportunity in America. However, Paul Krugman ‘s January 8th column , ” America ‘ s Unlevel Field “, clearly points out that the playing field in the U.S. today is definitely not anywhere close to being level.

Despite the terribly unequal opportunities that exist, Americans have generally accepted the idea of some reasonable level of wealth and income inequality. The public ‘ s acceptance sprang from the idea that some people have special talents or make special contributions that merit greater rewards.

However, two factors have undercut this support. First, there is a weakening of the connection between reward and merit. In addition, we have now reached an obscene level of inequality that is exemplified in a report from the Heritage Institute . Based on data from 2000, the Heritage Institute showed that CEO pay for major U.S. corporations was wildly out of line with those of our economic competitors. For example the average pay for CEOs in Japan was 10 times the average worker’s wage compared to 531 times here. Of the 26 countries in the report, Brazil had the second largest inequality with a value of 57.

The obscene rise in this inequality in the U.S. is striking, going from a value of 24 times in 1965 to 42 times in 1980 to 85 times in 1990. More recent data show that the U.S. value declined from the 531 times in 2000 to well over 300 times the typical worker’s pay in 2010 . Note that the comparisons are affected by how many major corporations are included in the studies. For example, another estimate for the U.S. in 2000 was 300 times compared to the 531 times mentioned above; regardless, the U.S. is way out of line compared to our economic competitors and the change over time is appalling.

The Heritage Institute report included 2004 and 2006 quotes from Warren Buffett, chairman of Berkshire Hathaway, that address both merit and extreme inequality. According to the report, in a May 2004 letter to shareholders, Warren Buffett wrote about the inadequacy of corporate governance structures among U.S. companies. “(If) Corporate America is serious about reforming itself, CEO pay remains the acid test.” Buffett added: “The results aren’t encouraging.” Buffett criticized lavish pay packages and the “lapdog behavior” of directors, calling the situation an “epidemic of greed.”

In a 2006 shareholder report, Buffett stated: “Too often, executive compensation in the U.S. is ridiculously out of line with performance.” “Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.”

Extreme inequality is even more problematic when it results from questionable behavior and/or political connections. Consider that those in the financial sector, whose unethical and immoral practices almost collapsed the financial system, were not held accountable for their actions. Talk about the lack of a moral hazard! Instead, besides initially profiting from fraud, they became even wealthier due to the taxpayer-funded bailout of the financial sector.

Changes in the tax system played a major role in increasing the level of inequality in America over the past decades. For example, the corporate share of federal taxes went from 28% in the 1950s to an average of roughly 10% over the 2001 to 2010 period. In addition, the top marginal individual tax rate dropped from 91% in 1954 to 35% today. Cuts in the top capital gains taxes for long-term gains from 28% to 15% have primarily benefited those at the top of the wealth scale. Politicians have also greatly weakened the estate tax that worked to lessen inequality somewhat. These changes certainly have played a major role in creating the extreme inequality we see today.

Our method of financing political campaigns, some would call it legalized bribery, makes it particularly easy for large corporations and the wealthy to push for tax reductions and tax loopholes at the expense of small business competitors and the public. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) and Perfectly Legal : The Covert Campaign to Rig Our Tax System to Benefit the Super Rich–and Cheat Everybody Else , two books by Pulitzer Prize winner David Cay Johnston, provide numerous examples of this corruption and other questionable business practices by large corporations. America: Who Really Pays the Taxes? and several other books by investigative reporters and twice Pulitzer Prize winners Donald Barlett and James Steele also address how the tax code is manipulated to the benefit of the rich and powerful. In The Tyranny of Oil , Antonia Juhasz details how huge energy and financial corporations greatly profit from their corruption of the political system, and how the public bears the cost. Among her many examples are the government’s failure to enforce anti-trust laws and its creation of the “Enron loophole”.

If compensation were indeed based on merit, Americans could accept a reasonable level of inequality. However, as shown above, besides merit, income and wealth are often linked to many other factors, including the corruption of politicians.

Given the dire straits – high levels of unemployment and underemployment, homelessness, lack of health insurance, home foreclosures, huge credit card debts and college loan debts, shortages of food – that many Americans face today, our extreme inequality is intolerable. The current situation demands a drastic overhaul of our corrupt political/economic system to end and to prevent future extreme inequality. Unless we act now, control by the wealthy and powerful will be solidified.

Ron Forthofer a retired professor of biostatistics from the University of Texas School of Public Health. Since his retirement,he has been a volunteer for peace and social justice. In addition, he was a Green Party candidate for Congress and for governor of Colorado.

Rescued against all odds

Some people toss terms like snowballs – terms such as “socialism” and names of political parties, etc. I’m not a member of the latter or an advocate of the former, per se. But it’s a shame that misinformation and angry rhetoric make reasoned debate impossible.

Start with taxation. Income taxes are marginal – that is, only the income between amount x and amount y is taxable at a certain rate z. That income above $374,000 a year is today subject to the top rate. The top 1 percent of income earners in the U.S. paid an average federal tax rate of 19 percent in 2007 (2008 data are not yet available). The top 5 percent paid an average of less than 18 percent.

There cannot have been much “socialism” around lately if U.S. corporations were able to amass more than $1.8 trillion – a mountain – in cash. That’s a lot of Ford trucks.

A few years ago, Sweden suffered what would today seem to us a minor economic setback. Its socialistic system quickly righted the ship, and now that country faces far fewer challenges than we do. Norway displays extensive government economic planning based on welfare capitalism. The Norwegians boast the highest GDP per capita on the planet.

What of the dark side? Lacking stimulus, Ireland’s economy contracted last year by 7.1 percent. The Irish, by the way, significantly reduced their corporate tax rate in the late 1990s. Here in the U.S., private-sector wage income shrank last year by about 5 percent. Since early 2008, the dollar loss exceeds $300 billion. That’s also a lot of Ford trucks.

Since New Year’s Eve, American business has added a net of only about 200,000 jobs. The federal stimulus is the reason firms are back on their feet. Europe was more tentative with stimulus, a big reason why that region is in worse shape today. In short, the folly of opposition to relief efforts such as extension of unemployment benefits is like throwing a cigar butt instead of a life preserver to a drowning man. Unemployment is quite corrosive. There is peril in allowing creation of a stratified society.

Venture capitalists today structure their business plans with a specification regarding maximum and most speedy transfer of jobs from a young enterprise to China. There’s loyalty for you.

It is clear to most economists today that lingering corporate refusal to hire poses a significant risk to the onset of a sustainable recovery. Talk about a self-fulfilling prophecy. Business has a responsibility to maintain the industrial base and the society whose stability we may have taken for granted. Who said that? Former Intel CEO Andy Grove.

No less prominent Republicans than Richard Cheney and Ronald Reagan asserted (one in word, the other in deed) that “deficits don’t matter. ” Without significant changes to the tax code, revenues cannot deliver a balanced budget. Weak revenues are the largest cause of the deficit – federal tax receipts in the first quarter amounted to 15.76 percent of (a reduced) GDP, while the average since 1947 is 18.04 percent. We grew a lot since 1947. To rapidly reduce deficits at this point would mean flirting with a severe economic decline that looks “downright frightening.” I didn’t make this up; the writer is Jeremy Grantham, one of the most respected money managers on the planet. It is essential for everyone to comprehend that the only significant contributions to positive economic indicators (and there still are some) have since early last year been reflective of government efforts to shore up the economy.

What would some rather have? Depending on the discretion of that 1 percent to dole out a little largesse now and then? I don’t know about you, but slavery has never appealed much to me.

The U .N.’s Human Development Report of June 8 tells us the United States is “better” than Turkmenistan in terms of income inequality, but 76 countries place ahead of us. Perhaps now we can all see what’s behind all the talk about deficits and socialism. The well-off among us should recruit workers, not word warriors.

Gregory Iwan retired to Longmont in 2007. Mercifully, only about one-fourth of his career was spent as an economist.