HOUSEHOLD INCOME: GROWING INEQUALITY

Here’s issue #4 of my Policy and Politics newsletter, written 11/13/11. One piece of the debate on how to reduce the deficit is whether the well-off should pay more. Here’s some context.

Household income in the United States has become significantly more unequal over the last 30 years. Income for wealthy households has grown faster than for others, and the wealthiest households, the 1% of households with the highest incomes, have experienced by far the greatest increases. The increases in incomes between 1979 and 2007, adjusted for inflation and taxes, are as follows: [1]

  • The richest 1% of households had their average incomes increase by 275% – in other words they almost quadrupled. Their average annual wage income is $713,000 (not including income from investments). [2]
  • The next 19% of the population with the highest incomes saw household incomes grow by 65%. Their annual incomes are now over $112,500.
  • The 60% of households in the middle had their incomes grow by just under 40%. Their annual incomes are between $27,000 and $112,500.
  • The poorest 20% experienced income growth of about 18%. Their annual incomes are under $27,000.

In summary, the 1% richest got much richer – the equivalent of a 5% raise on top of inflation every year. The middle got about a 1% raise each year on top of inflation and the poor got about a half of a percent raise each year.

As a result, the top 20% of households now has more income than the other 80% of households combined – 53% of the total income of all households. [3]  The top 1% receives 23.5% of total income, up from 8.9% in 1976. A similar pattern is evident in wealth: the top 1% now has 35% of the total wealth in America, up from 18% in the late 1970s. [4]

This is due to a variety of factors including:

  • Growing executive compensation (CEOs now receive 300 times the typical workers’ wage, while in the 1970s it was 40 times)
  • An increased share of income that is received from investments, including capital gains and dividends
  • The equalizing effect of federal taxes is smaller
  • The composition of government revenues shifted from progressive income taxes to unprogressive payroll taxes, sales taxes, and gambling revenue
  • Federal benefit payments are doing less to even the income distribution due to growing amounts going to seniors that are without regard to income

The overall result is that the middle class does not have sufficient income and purchasing power to maintain its lifestyle and support full employment in theUSeconomy. And the poorest 20% of households struggle to survive on incomes of under $27,000.

[1]       Congressional Budget Office, Oct. 2011, “Trends in the Distribution of Household Income between 1979 and 2007”

[2]       Reich, Robert, 9/4/11, “The Limping Middle Class,” The New York Times

[3]       Reich, Robert, 9/30/11, “America Faces a Jobs Depression,” The Guardian

[4]       Reich, Robert, 10/16/11, “The Rise of the Regressive Right and the Reawakening of America,” Robert Reich’s blog

THE FEDERAL DEFICIT: HOW DID WE GET HERE?

In the previous newsletter on corporate taxes, I mentioned that having corporations pay their fair share of taxes would help reduce the deficit. The deficit is a hot topic with the federal Super Committee required to submit its recommendations on how to reduce the deficit in 2 weeks. (This is issue #3 of my Politics and Policy Newsletter, written 11/10/11.) 

The deficit does need to be addressed, especially over the long term. However, the strategies for reducing the deficit are hotly contested. The context and rational debate on the deficit often get lost in the heated rhetoric and political posturing. So here’s a first piece of perspective on the deficit.

In 2001, President Clinton turned over to new President George W. Bush a federal budget with a substantial surplus: [1]

  • 2001 federal budget: a $127 billion surplus (asClinton left office)
  • Projected surplus over the next 10 years of $5.6 trillion

When President Bush left office 8 years later, he had turned this surplus into a substantial deficit:

  • 2008 federal budget: a $455 billion deficit (as Bush left office)
  • Projected deficit for 2009 of $1.2 trillion and many trillions of dollars of deficits over the next 10 years

The surpluses turned into deficits due to three major reasons:

  1. Large tax cuts that particularly benefited high income individuals and corporations
  2. Increased military spending (including wars in Afghanistan and Iraq)
  3. An economic recession (largely caused by a lack of regulation of the financial industry)

To reduce the deficit, therefore, it only makes sense to reverse the policies that caused it in the first place:

  1. Reverse the Bush tax cuts. If all of them were allowed to expire at the end of 2012 as scheduled, future deficits would be cut roughly in half. [2]
  2. Reduce military spending. Military spending more than doubled from 2001 to 2008 ($332 billion to $686 billion). All other federal spending increased less than 50% ($332 billion to $494 billion), excluding Social Security and Medicare, which have their own funding separate from general revenue. [3] (Figures are not adjusted for inflation.)
  3. Improve the health of the economy, most importantly by increasing jobs and reducing unemployment. (More on this in a subsequent newsletter.)

I hope this is helpful context as you hear coverage of the Super Committee’s work to reach recommendations on deficit reduction. If you are so inclined, I encourage you to contact yourUSRepresentative and Senators by phone, email, or regular mail to share your thoughts on deficit reduction.

[1]       Manuel, Dave, retrieved from the Internet at www.davemanuel.com on 8/14/11, “A history of surpluses and deficits in theUnited States”

[2]       Tritch, Teresa, 7/23/11, “How the deficit got this big,” The New York Times

[3]       Government Printing Office, retrieved from the Internet at www.gpo.gov on 11/0/11, “Table 8.9 – Budget Authority for Discretionary Programs: 1976-2015”

CORPORATIONS: ARE THEY PAYING FAIR TAXES?

Here’s issue #2 of my Policy and Politics newsletter, written 11/5/11. It’s a bit long and dense, but has important information corporate taxation. I’ll be shorter and sweeter in the future!

I’m very concerned about the pervasive and powerful influence corporations have on our every day lives, as well as on our politics and policy in the United Sates. This is a theme I will address fairly regularly. I will attempt to link various facets of this influence together, because I do believe the whole is more than the sum of the parts and that the reinforcing interactions among the various facets often go unnoticed and underestimated.

A study just came out of 280 of America’s most profitable companies (all were profitable in each of the last 3 years, 2008-2010, and all are from the Fortune 500 list). [1] The study finds that:

1.   Many large corporations pay taxes at actual rates much lower than the stated rate of 35% despite being quite profitable, with roughly a quarter paying no taxes at all.

  • The average effective tax rate for all 280 companies in the study over the three year period was 18.5%; roughly half the 35 percent rate they theoretically pay. (Note: An individual with over $35,000 in income and a couple filing jointly with over $70,000 in income are taxed at a 25% rate.)
  • About a quarter of the companies (71) did pay an average effective tax rate of 32%.
  • Almost a quarter of them (67) paid an average of no federal income tax over the last three years, despite combined profits of $357 billion.
  • 30 of these companies actually got money back from the government (i.e., had a “negative income tax rate”) over the three year period, despite combined profits of $160 billion. For example, GE paid a rate of negative 45% and Verizon negative 3%.
  • The top ten defense contractors with profits of $67 billion over 3 years paid at an average rate of roughly 15%.

2.   Many large corporations receive subsidies from the federal government.

  • Total tax subsidies given to all 280 profitable corporations amounted to $223 billion over 3 years.
  • The financial services industry received the largest share (17%) of all federal tax subsidies over the last three years.
  • Wells Fargo tops the list of 280U.S.corporations receiving the most in tax subsidies, getting nearly $18 billion in tax breaks from theU.S.treasury in the last three years. Others in the top 20 include AT&T, Verizon, GE, IBM, Exxon Mobil, Boeing, Goldman Sachs, Proctor & Gamble, Wal-Mart, Coca-Cola, and American Express.

3.   Corporations are paying less in taxes today than they used to, measured in a variety of ways.

  • The corporate tax rate today is 35%; it was 46% up until 1986. The overall effective corporate tax rate (i.e., what was actually paid) today is 18.5% for these 280 corporations; it was 26.5% in 1988. This is a 24% reduction in the stated tax rate and a 30% reduction in the effective tax rate based on what is actually paid.
  • In 2010, corporate taxes paid for 6% of the federal government’s expenses, roughly half of the 11% they paid in the late 1990s and a quarter of the 25% they paid in the 1950s.
  • As a share of the economy (i.e., of gross domestic product or GDP), overall federal corporate tax collections for fiscal years 2009-2011 fell to 1.16% of GDP, their lowest level since World War II. This is roughly half the level of the 1970s through 2008 and a third of the level of the 1960s.

4.   Stark inequities exist in taxes paid across industries and among companies in the same industry because of special tax breaks and the complexities of our tax policies.

5.   Corporations claim that US firms pay more income tax than their foreign competitors. However, overall, the effective foreign tax rate on the 134 companies with significant foreign profits was 6.1 percentage points higher than their effective U.S. tax rate — almost a third higher. Furthermore, they can “defer” paying U.S. taxes on their foreign profits indefinitely.

Twenty-five years ago, President Ronald Reagan was horrified by a similar epidemic of corporate tax dodging and addressed the problem by eliminating many corporate tax loopholes in 1986. Over time, the results of this effort have been reversed and, ironically, that reversal has been led in large part by politicians who claim to be Reagan’s disciples and to oppose government subsidies that interfere with market incentives.

 Over the years, corporations clearly have, through lobbying and campaign contributions, convinced policy makers to reduce their tax burden. Today, they are lobbying for lower tax rates and an exemption for profits of overseas subsidiaries. However, the report (on page 1) notes that “today corporate tax loopholes are so out of control that most Americans can rightfully complain, ‘I pay more federal income taxes than General Electric, Boeing, DuPont, Wells Fargo, Verizon, etc., etc., all put together.’”

 The evidence indicates that significant numbers of corporations are not paying their fair share of taxes. Requiring them to pay their fair share would not only make our tax system fairer, but also help to reduce the budget deficit.

[1]       Citizens for Tax Justice and the Institute on Taxation and Economic Policy, 11/3/11, “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010,” http://www.ctj.org/corporatetaxdodgers/

Bill Moyers and Winner take all politics

The first issue of my Policy and Politics Newsletter, back on 11/1/11, was an atypical item. It provided a link to a speech by Bill Moyers at an event honoring Ralph Nader and the 40th anniversary of his organization, Public Citizen. I did not send other videos, let alone anything this long – 20 minutes. But Bill Moyers and this speech are special. I imagine many of you feel the way I do about Bill Moyers: he is incredibly well informed, thoughtful, and articulate. His professionalism and integrity set a standard that all should aspire to. I hope you can find the time to listen to this.

Bill Moyers: Democracy in Shambles: “Money First, People Second… If At All”

http://www.commondreams.org/video/2011/10/31-1

In January, Bill Moyers came back on public television. You can also download the podcasts of the shows from billmoyers.com or other sources. His first show back (Jan. 13) was on Winner Take All Politics, the title of a recent book by Hacker and Pierson, whom Moyers interviews. The book and show document that the huge income disparity in the US (see issue #4 of my newsletter) is, in large part, the result of government policies over the last 30 years. Although globalization, technological change, and other changes in our economy have been factors, the real culprit is our public policies and how they have responded to these challenges. Other countries face these same challenges but have not experienced the dramatic increase in inequality that has occurred in theUS. A further summary of the show is in newsletter issue #21.

The website at http://mysite.verizon.net/vzew302m has all past issues of my newsletter.