Extreme Inequality: Starting a Strategic Conversation

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How concentrated has wealth in the United States become? How did our wealth become so concentrated? Most importantly, how can we move toward a more equal United States?

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Extreme Inequality: Starting a Strategic Conversation

  1. 1. Extreme Inequality Starting a Strategic Conversation Washington, D.C. July 16, 2007 AFL-CIO  Institute for Policy Studies  Center for Corporate Policy  Essential Information
  2. 2. We live in extreme times. 2
  3. 3. A sign of our times: Extreme sports 3
  4. 4. Pushing the envelope 4
  5. 5. Inside the Beltway, we don’t play extreme games Maybe we should. 5
  6. 6. We could ‘tailwhip’ Longworth 6
  7. 7. Or maybe we could try something really extreme . . . like taking on extreme inequality 7
  8. 8. How extremely concentrated has wealth in the United States become? Total net worth, 2004 $16.8 trillion $15.3 trillion Does not include total net worth of the Forbes 400 Top 1% Bottom 90% Source: Federal Reserve Board, January 2006 8
  9. 9. How did our wealth become so extremely concentrated? Change in share of national income, 1979 - 2004 78% -15% Top 1% Bottom 80% Source: Congressional Budget Office, 2006 9
  10. 10. No one who’s anyone in American political life now disputes inequality. Not even the President. ‘The fact is that income inequality is real; it's been rising for more than 25 years.’ George W. Bush State of the Economy address New York, January 31, 2007 10
  11. 11. So what can we do to reverse this extreme concentration of wealth? The conventional wisdom: Not much 11
  12. 12. Our reigning wisdom We can’t turn the clock back on inequality To give America’s bottom 80% in 2004 the same share of the nation’s income they received in 1979 “would have required transferring $664 billion from the top 1% of households to the bottom 80%.” Treasury Secretary “No one would suggest this is feasible Lawrence Summers or even desirable . . .” 12
  13. 13. So are we doomed to wander forever in Ronald Reagan’s America? 13
  14. 14. In public policy circles today We discuss the absence of wealth, or poverty, not wealth’s concentration. We talk about lifting up the bottom. We ignore the top. 14
  15. 15. Should we swallow this conventional wisdom? Or has inequality in the United States grown so extreme — and dangerous — that we need to look beyond convention? 15
  16. 16. The reality we must face Inequality matters. Who says? A generation Economists of researchers. Political scientists Psychologists Environmental scientists Demographers Epidemiologists Sociologists 16
  17. 17. The more wealth concentrates The slower an economy grows The more corrupt politics become The costlier the median-priced home The fewer dollars charities receive The less leisure time The lower the voter turnout The less generous the social safety net The more children in poverty The higher the homicide rate The less efficiently business enterprises operate The more environmental degradation The longer the daily commute The shorter the lives that everyone — rich, poor, and middle — live 17
  18. 18. The research bottom line It’s important to lift up the bottom. But if we’re ever going to have a more cohesive, democratic, healthy society, we can’t let people at the top keep distancing themselves from everybody else. 18
  19. 19. Can public policy address concentration at the top?  Narrow the gaps between CEO and worker pay  Cap the executive pay corporations can deduct from taxes at 25 times what workers receive  Address the inheritance of wealth  Reform the estate tax to include a more progressive rate structure  End incentives for executive over-compensation  Deny government contracts to companies that overpay executives  Raise the top marginal federal income tax rate 19
  20. 20. Top marginal tax rates, today and yesterday Taxes on ordinary and capital gains income 91% 35% 39.6% 25% 20% 15% 2007 2000 1957 Ordinary Capital Gains 20
  21. 21. Who’s enjoying today’s rates? $1,700 Sports CEOs Private Equity Hedge Funds $1,400 $1,300 $950 $900 $770 The Blackstone Group Taxed mostly at 15% capital $398 gains rate $291 $276 $213 $112 $97 $34 $35 $51 $60 $46 $46 $53 $59 $72 $17 $45 21
  22. 22. What are we rewarding? Richest 0.01% Hard work and Income, in 2005 dollars innovation should $25.8 million certainly be fairly rewarded. But rewards have gone far beyond what almost anyone would consider ‘fair.’ $3.2 million 1957 2005 22
  23. 23. Back to the future Gap between the average income of the top 0.01% and the average income of the bottom 90% 891 times 882 times 179 times 175 times 1928 1955 1980 2005 23
  24. 24. Americans once believed . . . . . . that smart societies do not let wealth concentrate in a precious few hands, but instead tax the wealthy to invest in opportunity for all. ‘In many countries of the free world private enterprise is greatly different from what we know here. In some, a few families are fabulously wealthy, contribute far less than they should in taxes, and are indifferent to the poverty of the great masses of the people . . . A country in this situation is Dwight D. Eisenhower fraught with continual instability. It is National Automobile ripe for revolution.’ Show Industry Dinner, Detroit, October 17, 1960 24
  25. 25. Democracy vs Plutocracy Dwight Eisenhower, like most Americans of his day, had a world view shaped by decades of debate over grand accumulations of private wealth, a debate that had been raging ever since Robber Baron fortunes first appeared on the American scene. 25
  26. 26. The Good Society Creed In those debates, our progressive forbears advanced a systematic critique of concentrated wealth. Wealth and power, progressives argued, go inseparably together. In any society where wealth concentrates, so will power. And societies where wealth and power concentrate never nurture policies that help average people. 26
  27. 27. Who preached this creed? We’re not talking radicals at the political margins. We’re talking immensely popular figures in the mainstream of American political life. 27
  28. 28. People like Louis Brandeis Supreme Court justice, 1916-1939 “We can either have democracy in this country or we can have great wealth concentrated in the hands of a few. But we can't have both.” 28
  29. 29. People like Joseph Pulitzer Crusading newspaper publisher “(A)lways oppose privileged classes . . . never be afraid to attack wrong, whether by predatory plutocracy or predatory poverty.” St. Louis Post-Dispatch, 1907 29
  30. 30. People like Teddy Roosevelt U.S. President, 1901-1909 “(T)he prime object should be to put a constantly increasing burden on the inheritance of those swollen fortunes which it is certainly of no benefit to this country to perpetuate.” 30
  31. 31. People like Franklin Roosevelt U.S. President, 1933-1945 “Great accumulations of wealth cannot be justified on the basis of personal or family security. Such inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our country.” 31
  32. 32. The consensus: No more John D’s Walter Lippmann, America’s top pundit, on the 1937 death, at 97, of America’s first billionaire “*John D. Rockefeller+ lived long enough to see the methods by which such a fortune can be accumulated outlawed by public opinion, forbidden by statute, and prevented by the tax laws . . . sentiment has turned wholly against the private accumulation of so much wealth.quot; 32
  33. 33. A much less dominant rich The top 1% share of national income in the United States, 1913 - 1978 23.94% 17.96% 8.86% 33
  34. 34. With the rich less dominant . . . Politics, in the mid 20th century, actually spoke to working family needs. Legislation significantly impacted people’s lives.  GI Bill  FHA home loans  Medicare  Food Stamps  Occupational Safety and Health Act 34
  35. 35. Enter the mass middle class Public policies in the mid 20th century created a America that boomed for Americans at every income level. Real family income growth, 1947 - 1979 Up 116% Up 114% Up 111% Up 100% Up 99% Up 86% Bottom Second Middle Fourth Top Fifth Top 5% Fifth Fifth Fifth Fifth 35
  36. 36. The Great Public Policy U-Turn In mid 20th century America, public policies shared wealth. Over the last 30 years, public policies have concentrated it. The top 1% share of national income in the United States, 1913 - 2005 23.94% 21.83% 8.86% 36
  37. 37. Exit the mass middle class The more concentrated our nation’s wealth, the less lives have improved for average Americans. Real family income growth, 1947 – 1979 vs 1979 - 2005 Up 116% Up 114% Up 111% Up 100% Up 99% Up 86% Up 81% Up 53% Up 25% Up 15% Up 9% Down 1% Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Top Fifth Top 5% 1947-1979 1979-2005 37
  38. 38. Average Americans are going nowhere fast Average weekly earnings, 2005 $ $581.67 $561.74 $535.25 $544.81 $543.65 $514.24 $508.43 $361.02 1947 1967 1973 1979 1989 1995 2000 2005 38
  39. 39. Should we start the century over? If we simply erased the Robin-Hood-in-reverse policies of the George W. Bush years, would we be back on track? „I believe people are fed up with the policies of the past six years. So many people I talk to just want to hit the restart button on the 21st century and redo it the right way. And I agree with them.‟ Senator Hillary Clinton, May 29, 2005 Undoing the Bush years would reverse just one-sixth of the growth in inequality since 1979. Brookings Institution, June 2007 39
  40. 40. We need to be bolder One Modest Proposal Set New Top Tax Rates  50% on annual income from $5 million to $10 million  70% on income over $10 million Number of households impacted  38,410 Share of U.S. households  0.03% Estimated revenue in 2008 $105,000,000,000 Source: Institute on Taxation and Economic Policy Tax Model, May 2007 (preliminary) 40
  41. 41. Dare we tax the super-rich? Wouldn’t they just find loopholes? Wouldn’t they just take their money and run? Wouldn’t the economy tank, if rich people had less money available to invest? 41
  42. 42. The argument: Higher rates never work. The rich always exploit loopholes. Yes, the rich do find loopholes. But top rates make a difference. Actual share of income taxed, 68.4% 25,000 highest-income Americans Top statutory marginal rate 94% 41.4% Top statutory marginal rate 21.9% 70% Top statutory marginal rate 35% 1943 WW II 1967 Vietnam 2004 Iraq 42
  43. 43. The argument: The rich will take their money and run if they face higher taxes. The rich don’t need higher rates as an excuse to take their money offshore. They already do. Tax haven abuses currently cost U.S. taxpayers “$40 to $70 billion dollars each year.” U.S. Senate Permanent Subcommittee on Investigations, August 2006 Tax havens can be closed. Senators Carl Levin and Norm Coleman have introduced an eight-point plan to close them. 43
  44. 44. The argument: Without rich people investing, the economy will tank.  Capital formation doesn’t require Total annual $1.5 wealth to be concentrated in the dollar value trillion of U.S. pockets of a few plutocrats. mergers & acquisitions  Institutional investors — like pension funds — make for a powerful investing engine. $524.9 billion  Our current concentration of wealth fuels the ‘speculative reshuffling of the ownership of corporations.’ $72.9 billion 1983 1994 2006 44
  45. 45. The real question: Dare we not tax the super-rich? A quarter-century from now, what sort of America do we want to see? The top 1% share of national income in the United States, 1913 - 2030 27% 23.94% 21.83% 8% 45
  46. 46. A last word: Plutarch on plutocracy “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” Plutarch, ancient Greek historian Isn’t it time we started talking cure? 46
  47. 47. References Slide 8: Total Net Worth, 2004. Source: Arthur B. Kennickell, Currents and Undercurrents: Changes in the Distribution of Wealth in the U.S., 1989-2004, Federal Reserve Board, January 30, 2006. Table 11a. Available online at http://www.federalreserve.gov/Pubs/FEDS/2006/200613/200613pap.pdf Slide 9: Change in share of national income, 1979 – 2004. Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2004, December 2006. Available online at http://www.cbo.gov/ftpdocs/77xx/doc7718/EffectiveTaxRates.pdf Slide 17: A comprehensive introduction to the research on the social, economic, and political impact of income and wealth concentration appears in the 2004 book, Greed and Good: Understanding and Overcoming the Inequality that Limits Our Lives by Sam Pizzigati (Apex Press). The text now appears online at http://www.greedandgood.org/ Slide 21: Sports: Jonah Freedman, The 2007 Fortunate 50, SI.com. Available online at http://sportsillustrated.cnn.com/more/specials/fortunate50/2007/index.html. CEOs: Ellen Simon, Hundreds of CEOs top $8.3M pay mark, Associated Press, June 9, 2007. Available online at http://www.usatoday.com/money/companies/management/2007-06-09-ceopay_N.htm?loc=interstitialskip. Private equity: Henny Sender, How Blackstone Will Divvy Up Its IPO Riches, June 12, 2007. Available online at http://www.equilar.com/NewsArticles/061207_wsj.pdf. Hedge funds: Alistair Barr, Simons, Griffin, Lampert earn over $1 bln in 2006, MarketWatch, April 24, 2007. Available online at http://www.marketwatch.com/news/story/simons- griffin-lampert-earn-more/story.aspx?guid=%7B55DBE196-3461-495D-8B27-DE4CA6C5641D%7D Slide 22: Richest 0.01%. Income, in 2005 dollars. Source: Emmanuel Saez and Thomas Piketty, Income Inequality in the United States, 1913-1998, Quarterly Journal of Economics, 2003. March 2007 update of tables and figures available online at http://elsa.berkeley.edu/~saez/ Slide 23: Gap between the average income of the top 0.01% and the average income of the bottom 90%. Source: Analysis of data from Saez and Piketty March 2007 update. Slide 33: The top 1% share of national income in the United States, 1913-1978. Source: Saez and Piketty. Slide 34: Real family income growth, 1947-1979. Source: Source: Analysis of U.S. Census Bureau data in Economic Policy Institute, The State of Working America 1994-95 (M.E. Sharpe: 1994). Available online, through Inequality.org, at http://www.demos.org/inequality/numbers.cfm Slide 35: The top 1% share of national income in the United States, 1913-2005. Source: Saez and Piketty. 47
  48. 48. References Slide 37: Real family income growth,1947–1979 vs 1979-2005. Source: U.S. Census Bureau, Historical Income Tables, Table F- 3. Available online, through Inequality.org, at http://www.demos.org/inequality/numbers.cfm Slide 38: Average weekly earnings, 1947-2005, in 2005 $. Source: Economic Policy Institute Datazone. Available online at http://www.epi.org/content.cfm/datazone_dznational Slide 42: Actual share of income taxed, 25,000 highest-income Americans. Source: For 2004 tax data, Internal Revenue Service Statistics of Income Tax Stats: Individual Statistical Tables by Size of Adjusted Gross Income. Available online at http://www.irs.gov/taxstats/indtaxstats/article/0,,id=96981,00.html. For the 1943 data, Fritz Scheuren and Janet McCubbin, Individual Income Tax Shares and Average Tax Rates, 1916-1950, Statistics of Income Bulletin, Volume 8, Number 3, Winter 1988-89. For the 1967 data, Janet McCubbin and Fritz Scheuren, Individual Income Tax Shares and Average Tax Rates, 1951-1986, Statistics of Income Bulletin, Volume 8, Number 4, Spring 1989. The “top 25,000” figures round off actual average rates paid by the highest 23,730 incomes in 1943, the highest 27,066 in 1967, and the highest 24,440 in 2004. Slide 44: Total annual value of U.S. mergers & acquisitions. Sources: Thomson Financial Securities Data, Mergers & Corporate Transactions Database. Available online at http://www.allcountries.org/uscensus/ 882_mergers_and_acquisitions_summary.html . Statistical Abstract of the United States 2004. No. 741. Mergers and Acquisitions-Summary: 1990 to 2003. Available online at http://www.census.gov/prod/2004pubs/04statab/business.pdf Slide 45: The top 1% share of national income in the United States, 1913-2030. Source: Saez and Piketty, for data through 2005. For updates on extreme inequality in the United States — and the campaigns against it — check the online weekly, Too Much, published by the Council on International and Public Affairs. Available online at http://www.toomuchonline.org/ 48

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