The rich just keep getting richer — not only by gobbling up more income, but also by paying less in taxes. That means less support for the poor, who are getting increasingly poorer relative to the top one percent.
One chart in a new study of income inequality in developed nations, published by the National Bureau of Economic Research, puts this in stark relief. It shows that the more top tax rates are cut, the greater the share of national income that is mopped up by the wealthiest citizens.
And of course perhaps no country illustrates this better than the United States, which is at the extremes of income inequality and tax cuts for the wealthy, as you can see in the chart below. The only other nation that even comes close is the United Kingdom, which was hijacked by “trickle-down economics” at about the same time as the U.S., back in the 1980s under Reagan and Thatcher. (Story continues below infuriating chart.)
The U.K. has cut top tax rates more aggressively than the U.S. in the past few decades, but the U.S. still has a lower top marginal income tax rate — 35 percent, compared to 50 percent in the U.K. And income inequality is far worse in the U.S., where the top one percent of households gets a fifth of all the nation’s income. In the U.K., the income share of the top one percent is less than 15 percent.
Slashing top tax rates has had none of the positive effects on economic growth that the supply-side economists promised us, the NBER paper points out. Instead, it has just worsened income inequality.
There are other factors driving income disparity, including a rise in investment income (think stock dividends) compared to earned income (think wages). The recently soaring stock market, helped along by the Federal Reserve, is only pushing investment income higher. Wage income, in contrast, has been stagnant — making income inequality even worse.
As if that weren’t enough, investment income is typically taxed at lower rates, further amplifying the disparity. That means this chart doesn’t begin to tell the full story of just how little the top one percent are paying in taxes. Mitt Romney isn’t paying 35 percent on most of his income. He’s calling his private-equity income “carried interest” and paying just 15 percent on it.
a cartoon from the California Federation of Teachers has stirred some controversy, not for its scathing critique of income disparity in America, but for a particular scene in which a wealthy man urinates on poor people below him. Actor Ed Asner narrated the video, and so a producer for Fox News’ Hannity confronted him.
TEDChris claims “the audience at TED who heard it live (and who are often accused of being overly enthusiastic about left-leaning ideas) gave it, on average, mediocre ratings.” Odd considering that at the end of the video you can see he received a standing ovation.
It is astounding how significantly one idea can shape a society and its policies. Consider this one.
If taxes on the rich go up, job creation will go down.
This idea is an article of faith for republicans and seldom challenged by democrats and has shaped much of today’s economic landscape.
But sometimes the ideas that we know to be true are dead wrong. For thousands of years people were sure that earth was at the center of the universe. It’s not, and an astronomer who still believed that it was, would do some lousy astronomy.
As far as the true reasoning behind the video not being chosen by TED I’ll leave that the reader. That is not important. What is important is Nick Hanauer’s message and one that while oft repeated in certain circles is one that needs to be spread among all American citizens.
Again and agin convenient talking points are just more misunderstanding of the situation.
It’s time to end the myth that the nation’s wealthy are getting rich off the backs of the poor. Instead let’s figure out what they’re doing right.
By Nina Easton, senior editor-at-large
FORTUNE — What if I told you that there was a group of hard-driving workaholics who tend to have advanced degrees and bring a level of talent and skill to their jobs that attracts premium pay in the global economy? Scholars have found that this group is more likely than much of the population to raise their children in two-parent homes.
The 1% club stands accused, accurately, of more than doubling its share of the nation’s income since 1980. By 2007 it controlled nearly 24% of total income, the second highest in history, after 1929. (In 2009 its share dropped to 17%, suggesting that recessions aren’t necessarily kind to the rich.)
Railing about the 1% club has become shorthand for expressing outrage not only over growing income disparity but also about the state of the nation’s working class. Wages of men without college diplomas, for example, have dropped by a whopping third over the past three decades.
That’s deeply troubling. Socially and politically, there are plenty of reasons to worry about the growing income gap. But rage against the 1% is misplaced. Income is not a zero-sum game: The rich aren’t getting wealthier at the expense of the poor. Harvard’s Lawrence Katz has calculated that even if all the gains of the top 1% were redistributed to the 99%, household incomes would go up by less than half of what they would if everyone had a college degree. In other words, the financial rewards of higher education are a big contributor to the income gap.
During Angelo Mozilo’s tenure as CEO of the subprime mortgage giant Countrywide, he made more than $520 million. At one point, the board’s compensation committee tried to object to the lenient performance goals in his generous pay package. So Mozilo hired a compensation consultant—with the cost covered by shareholders—to squeeze the board for more. He got it, as well as subsidies for his wife’s travel on the corporate jet and for the associated taxes. By the end of 2007, when Countrywide finally revealed the massive losses it had previously obscured—the company had overstated its profits by $388 million and ended up paying $8.7 billion to settle predatory lending charges—Mozilo had made more than $103 million for the year. Countrywide’s shareholders, meanwhile, lost more than 80 percent of their investments.
In most high-paying jobs, people are basically paid according to performance. When a film makes millions at the box office, the star of the movie can demand more for her next contract. Conversely, when actors perform—or behave—badly, salaries slide and endorsement deals disappear. Similar market considerations apply to rock stars, athletes, investment bankers, and just about everyone else who makes eight or nine figures.
CEOs are different: They are almost certainly the only category of Americans who regularly get rewarded for failure with massive amounts of money. Mozilo of Countrywide was hardly an outlier. In 2009, Aubrey McClendon of Chesapeake Energy was among the highest-paid CEOs in the nation, despite a near-60 percent decline in stock price the previous year. He received more than $114 million in total compensation, including a bonus of $75 million. (The sale to the company of his antique map collection for more than $12 million was scuttled when shareholders filed a lawsuit.) When Hewlett Packard CEO Mark Hurd was ushered from the company for filing false expense reports for outings with a former soft-core porn actress, he left with his $12 million severance package intact. In 2011, 97 percent of companies paid their executives bonuses even if performance was below the median level of their industry peers.
The astronomical sums commanded by CEOs are the culmination of a decades long trend. In 1980, the average ratio between CEO salary and the median salary of a worker was 40 to 1. In 2010, it was 325 to 1. Among the top 50 corporations in the United States, the most extreme pay ratio, according to the compensation data firm payscale.com, is 1,737 to 1. That salary belongs to Stephen Hemsley, the UnitedHealth Group CEO, who received nearly $102 million last year, compared with the median employee salary of $58,700. Even in the midst of a lingering recession, median S&P 500 CEO pay has continued to climb—growing by 36 percent from 2009 to 2010. It is the single biggest factor in the widening income disparity that has occurred in the United States over the past two decades.
THIS ACCUMULATION of wealth by a small group of individuals came about for a number of reasons, none of which reflect market forces. The roots of elevated CEO salaries lie in the mergers and acquisitions and leveraged-buyout frenzy of the 1980s, plus the dot.com explosion of the 1990s, which made twerpy twentysomethings into billionaires overnight. I’m a captain of industry, CEOs said to themselves and their boards. Those kids should not be paid more than I am!
These CEOs were aided by a perfect storm of self-interest. The pay-consultant industry came up with new ways to justify higher salaries—and to ensure their own compensation. Boards of directors set the pay for CEOs, who set the pay for the directors. Boards sometimes included CEOs from other companies, who were eager to raise the bar so they could demand the same at their own firm. Something like the Lake Wobegon effect took place: In measuring performance, all CEOs were above average.