Thursday, March 29, 2007

Income gap widened in 2005

In case you wonder why the American public isn't all that excited about their economic outlook despite an economy that's doing well on the macro level, here's the reason.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

So despite what looks like healthy wage gains, very little of it was actually wages. All of the income increase and more went to the top 10 percent. Actually most of it went to the top 1 percent, whose income grew 14 percent.

That explains the following statistics from the article:

1. Both the top 10 percent and top 1 percent have hit income shares not seen since 1928 -- shortly before the 1929 stock market crash and the Great Depression.

2. The top 300,000 Americans -- one tenth of one percent of the population -- earned almost as much as the bottom 50 percent -- 150 million people. On average, each of those 300,000 people earned 440 times as much as one of those 150 million.

And the numbers probably understate the situation:

The Internal Revenue Service estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures.

Defenders of the current tax system argue that the problem isn't tax levels -- even though federal income taxes, measured as a share of income, has stayed largely flat for middle-income workers over the past 40 years while dropping by half for the affluent.

They make two main claims:

1. The numbers simply reflect the demands of the global economy, where skilled workers command ever more of a premium and unskilled workers fall behind.

2. The numbers don't count benefits, such as health insurance, that make up a much larger share of total income for poorer Americans than they do for the wealthy.

There is probably some truth to #1, but it's a stretch to argue it accounts for the entire difference. And even if it did, it's not an argument for complacency or acceptance. Extreme income inequality is a hallmark of unstable societies. Too much wealth concentrated in too few hands sparks unrest.

#2 is mostly bogus. The reason health insurance makes up a larger share of worker income is because health costs have gone up sharply. My employer paying 20 percent more for health insurance doesn't leave me better off if my health costs go up that much; it's a wash as far as disposable income is concerned. Never mind that I'm probably worse off because health-care costs also are eating into my take-home pay, in the form of higher premiums, co-pays, deductibles and all the other ways hard-pressed employers are devising to push more such costs on to workers.

While there can be plenty of principled disagreement about what causes the situation and what should be done about, two things seem obvious:

1. The tax system that conservatives often criticize as "punitive" toward the wealthy or successful has turned out to be nothing of the sort. Despite such "confiscatory" measures, the wealthy have increased their share of income -- to the point of hoovering money out of the pockets of the less affluent.

2. Given #1, as well as the gigantic federal deficit and the consequences of extreme income inequality, it makes zero sense to prolong or enhance tax cuts for the wealthy. The estate tax should be retained, and the AMT fixed instead. The cap on Social Security taxes should be removed, and income caps on benefits should be added. Marginal rates should be re-examined. Tax enforcement should be beefed up to capture more of that non-wage income.

Perhaps you think this is somehow a socialist redistribution of wealth downward, ignoring the fact that the current situation is a socialist redistribution of wealth upward, which simply makes no sense.

Dealing with the national debt will require work on both the spending and revenue side of the federal ledger. But as far as the revenue goes, it is only logical to take the most money from those most able to pay. Everyone's second $100,000 should be taxed more heavily than everyone's first $100,000. Doing so will not only restore our federal finances to health; they will head off a building social convulsion that benefits nobody -- especially the rich.

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