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One of the major problems in America today is the growing gap between the rich and not-so-well-off. It is not just that the really rich have so much more compared to the rest of us (cool link), but that upward mobility seems to have stalled for most people as well. As a consequence, as the US slides into recession, many people are struggling just to stay afloat.
While the middle class has remained relatively stagnant, the differences are growing at the extremes. Since the late 1990's average incomes have declined 2.5 percent for families on the bottom fifth of the country's economic ladder, while incomes have increased 9.1 percent for families on the top fifth, said the report from the liberal-leaning Center on Budget and Policy Priorities and Economic Policy Institute.
The result is that the average incomes of the top five percent of families are 12 times the average incomes of the bottom 20 percent.
In those states with the most pronounced income gaps the differences are even greater: in New York, the average income of the bottom 20% is $17,107 while the average income of the top 5% is $262,679. This means that as an aggregate group the top 5% in New York have 3 times the income of the entire bottom 20%. For the whole report, see here.
These differences did not just happen through the invisible hand of the market. While some are the result of demographic trends, most are the outcome of deliberate policy choices, acting not an invisible hand but a strong thumb on the scales to benefit one group at the expense of another. Different policy choices aimed not at letting the rich make and keep more but on eliminating barriers that frustrate upward mobility, charging the wealthy a fair share of the cost of maintaining the struture that defines and protects their wealth and limiting the growth of great family fortunes will all help redress the balance back towards what it was in the mid-20th century.
A responsible plan for reversing growing income inequality would have three components: fairer tax policies, expanding opportunity and rebuilding the safety net.
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| Fairer Tax Policies We have all heard that wages have been falling recently. But at the same time the share of income derived from capital has been rising. The EPI report linked above attributes much of the growth in income inequality to the rise in the amount of income derived from capital, as rents, dividends, interest and capital gains, compared with labor income. While labor income fell as a share of aggregate personal income by 4 percent, capital income grew by 8.3%. Since the top percentiles own a disproportionate share of capital assets, they reaped the lion's share of the gains, increasing the base from which they can generate yet more income.
Moreover, capital income is given preferential tax treatment. Wage labor is doubly and triply taxed, through Social Security taxes and federal and (often) state income taxes. By contrast, most dividends and capital gains are taxed at a maximum 15% rate, interest used to acquire capital assets, including mortgate interest, is not taxed, there are various write-offs for income-producing property, and interest income from municipal bonds is not taxed. Most income of hedge-fund managers is taxed as capital gains not salary.
A first step would redress these imbalances by reversing most of the Bush tax cuts: raising the capital gains tax at least back to 20% and taxing dividends as ordinary income, except, perhaps, for the first $3000 or so of dividends from domestic companies, and freezing the estate tax exemption at the current level of $2 million and retaining the high tax on amounts over that level. As more and more income is generated from financial transactions, a small transfer tax on stock purchases and sales, such as the modest .25% imposed by the UK and recently proposed by Dean Baker would cost the investor only $2.50 per $1000 in stock and generate as much as $150 billion a year. Given the huge rise in incomes of the top 5% over the past several years, an increase in the top income tax rates back to the level they were under Bill Clinton would be entirely appropriate. At the very least a top bracket of 37.5% for those happy few with taxable incomes over $700,000 should be created. The earned income tax credit should be increased.
Expanding opportunity We need to remove as many as possible of the barriers that limit upward mobility. Aid to college students has not kept pace with inflation and needs to be greatly increased. Unions need to be strengthened, not hindered. We need more policies that aid the creation of small business and fewer subsidies for big business. Encouraging energy-saving and alternative energy technologies would create new jobs and businesses while reducing oil consumption and greenhouse gas emissions. Agricultural subsidies should be capped, which would have the added advantage of modestly lowering food prices here and abroad.
Rebuilding the safety net During the Bush years the federal government and even some states have cut back on various forms of assistance to low-income people, enacted pro-creditor bankruptcy legislation, failed to enforce the laws against predatory business practices, repealed or failed to enforce regulations that protect our food and drugs and consumer products and failed to reform the health care system. All of these policy decisions have made it more difficult for people to recover from setbacks, thus exacerbating inequality.
We need to rebuild the safety net. This means further raising and indexing the minimum wage, reversing the decline in unemployment insurance, revisiting the 2005 bankruptcy legislation, reregulating or strengthening enforcement to protect consumers, dealing with the victims of predatory lending practices (and the perpetrators), and above all reforming the health care system so that people get the care they need at a reasonable cost and serious illness does not mean financial devastation.
Many of the changes suggested above will cost money, making it imperative to reduce our commitments in Iraq as quickly as we feasibly can while maintaining the safety of our troops. But we also need a resposible plan for combatting our growing inequality. A sink-or-swim, you're-on-your-own society is inherently unstable, less pleasant and wastes the talents of a great many of its people at a time when we face great challenges. This is a first step in that process. |
