It's Time End Income Inequality--Here are Two Things We Can Do

As this chart prepared by the Center on Budget and Policy Priorities shows, until about 1980, the real family income of Americans at all income levels increased at approximately the same rate.  It didn’t matter if your family was in the 20^th percentile, 95^th percentile or anywhere in between, you participated about equally in the growing wealth of the nation.  That all changed around 1980 when Reagan took office and the Republicans began their accent to power.  Since about 1980, lower and middle income Americans have seen few if any income gains.  The country has become richer overall, but the wealthy has gone to the top 5%.  The rich got richer, almost every year.  Income creation became less fair.  Why was that?

Chart 1:  Real Family Income

Source: http://www.cbpp.org/cms/?fa=view&id=3629

Cause #1: Decline of Progressive Taxes

As you can see from the following charts, since the 1950s and particularly since 1980, the highest income tax bracket (the tax rate very rich people pay on their income above a certain level—over about $400,000 in 2014) has been cut dramatically as has the average tax rate that the highest income earners paid.  The highest tax rate is now at a level comparable to the late 1920s, just before the Great Depression and New Deal.  These dramatic cuts in the tax rates the top 10% of Americans pay has made the taxe much less progressive as shown in Chart 3.    As a result, the burden of taxation has been shifted to lower and middle income brackets.

Chart 2: Top Tax Bracket

Chart 3: Average Tax Rate Paid by Highest Income Tax Payers

Source: https://www.fas.org/sgp/crs/misc/R42729.pdf

Chart 4: Progressive Taxes

Source: http://weblaw.usc.edu/who/faculty/conferences/income-inequality/documents/Burman-Eng-Toder-v2.pdf

NOTE:  Republicans argue that reducing the tax burden on the rich is the true path to economic growth.  They say with less taxes to pay, the rich will create jobs for the rest of us and wealth will come trickling down.  The fact is, it never happens.  The independent Congressional Research Service analyzed the impact of cuts in the top tax rates on economic growth going back to 1945.  It found practically no relation between the top tax rate and economic growth.  In fact, real per capita GDP growth was higher in the 40s and 50s when the top rate was 90%.

"Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it

is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the

1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP

increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was

1.7% and real per capita GDP increased annually by less than 1%. This analysis finds no

conclusive evidence, however, to substantiate a clear relationship between the 65-year reduction

in the top statutory tax rates and economic growth. Analysis of such data conducted for this report

suggests the reduction in the top tax rates has had little association with saving, investment, or

productivity growth."

Source: https://www.fas.org/sgp/crs/misc/R42729.pdf

Cause #2: The Decline of Union Membership

The decline of union membership is a second contributing cause of income inequality as can be seen in Chart #3 from the Economic Policy Institute.  Union membership in America peaked in the 1950s and has been in decline since then. The decline has been particularly sharp since 1980, again coinciding with Reagan and the rise of Republicans who have waged an ongoing and largely successful war on unions, first private and now public, by advocating so called “right to work” laws that make it very difficult for unions to operate.  

Click here for an explanation of why Right To Work laws are so deadly for unions:

http://www.progressive.org/news/2015/02/187983/right-work-laws-are-fatal-cure

Without the ability to organize, the average working American is at the mercy of his/her employer for wage gains and employers are typically very reluctant to share the bounty from productivity growth even when that bounty in no small part from worker sacrifices.  In fact, a 2013 Bureau of Labor Statistics report found more than a $3 per hour difference in he average wages of union vs non-union workers.  In short, wages for most Americans remain low because they have lost he one vehicle through which they could bargain for higher wages.  Without unions, profits from productivity gains flow to the owners and top managers who, thanks to favorable non-progressive tax policies allow the to keep most of the gains as after-tax income.

Chart 5: Union Membership and Top 10% Income

Sources:

http://www.epi.org/publication/unions-decline-and-the-rise-of-the-top-10-percents-share-of-income/

http://www.progressive.org/news/2015/02/187983/right-work-laws-are-fatal-cure

http://www.law.umaryland.edu/marshall/crsreports/crsdocuments/R42575_12062012.pdf

http://www.nytimes.com/2015/02/10/us/illinois-governor-bruce-rauner-acts-to-curb-power-of-public-sector-unions.html?_r=0

http://inthesetimes.com/working/entry/17595/friedrichs_v_california_teachers_association

http://www.bls.gov/opub/ted/2015/union-membership-by-state-2014.htm

http://www.bls.gov/opub/mlr/2013/04/art2full.pdf

Bottom Line:  If we are concerned about income inequality (and we should be) then we need to re-institute a progressive tax system and make it easier, not harder, for Americans to organize and bargain for better wages and benefits.  It’s called Income Fairness.