Huge Income Gap is Bad for America

  1. The following is a commentary found in the 6/18/2003 Times Union.

    I'm posting it for further discussion.
    ___________________________________

    Huge income gap is bad for America

    By STEVEN RATTNER
    First published: Wednesday, June 18, 2003


    The litany of well-founded complaints about the latest tax legislation seems endless. More complications for a tax code both parties profess to want to simplify. New frontiers in using gimmickry to hide the legislation's true cost. Questionable usefulness in sparking our economy. And another enormous hit to our horrifying long-term fiscal outlook.
    Add to this list one more pernicious aspect of the U.S. economy now made worse: the huge gap in income among Americans, the widest of any major country and not getting noticeably better.

    According to a Federal Reserve study this year, pretax family incomes of the top 10 percent grew by 19.3 percent between 1998 and 2001 after inflation, compared with 11.9 percent for the rest of Americans. Last fall the Census Bureau found that by any of five sophisticated measures, the gap in incomes has continued to widen.

    Most discussions of income inequality properly center on pretax statistics, in search of a true measure of how the labor markets and the economy are functioning. Considering pretax income is also proper because we should not legislate or redistribute our way to income equality. But neither should tax policy worsen the disparity between rich and poor.

    Widening that gap is what we've just done. According to analysis by the Tax Policy Center of the Brookings Institution and the Urban Institute, the new tax provisions will raise the after-tax income of Americans making more than $1 million by 4.4 percent while raising the average American's income by only 1.8 percent. More than 70 percent of households will receive $500 or less. For 8 million lower-income Americans who pay taxes, the news is truly dispiriting: no tax cut at all.

    That's because the bulk of the cut will be used to reduce capital gains and dividend taxes, and even though ownership of stocks has broadened in the past decade, the highest-income Americans still have a disproportionate share of the wealth. In fact, distribution of wealth is even more unequal than the distribution of income. In 1998, 47.3 percent of households' "net financial assets" resided with the top 1 percent of Americans, according to an analysis of consumer finance data by Edward Wolff.

    Proponents of the tax bill decry such talk as class warfare. But is it class warfare to talk about fairness? And if fairness isn't enough, how about the social tensions and economic inefficiencies that can result from such an enormous rich-poor divide? We've had a progressive income tax for many years; why choose to make it less progressive now, when natural economic forces are already driving us toward more inequality?

    Those forces include many of the same winds that have given us high productivity, low inflation and unprecedented prosperity over the past decade. The technological revolution and growth in the service sector increased the need for skilled employees, while the downsizing of American corporations as they became more efficient reduced the need for unskilled workers. Classic labor market economics at work led us to greater income inequality.

    This year, BusinessWeek labeled economists who worry about income inequality "declinists," meaning they believe the American economy isn't going to grow much so we should focus on how to divide the pie.

    That's disingenuous. Of course we shouldn't hold back economic growth just to keep the rich from getting richer. And many of us believe that our economy remains the most efficient and competitive in the world, fully capable of resuming very satisfying growth.

    But achieving that growth potential and lessening income inequality are not inconsistent. For example, investing in education and training -- a concept given short shrift by the Bush administration -- improves the quality of our work force, which leads to higher productivity, which leads to more economic growth.

    The massive tax cuts of the past two years mean no money for these or other kinds of public investments.

    We shouldn't dismiss all tax cuts simply because they benefit the wealthy. Double taxation of dividends is a source of economic inefficiency, and eliminating it would be a laudable goal. But we need balance.

    Policies that promote income inequality might also be tolerable if they represented the best way to encourage economic growth. But this tax cut hardly addresses today's need for more spending. It is aimed primarily at the wealthiest Americans, who are already spending all they want to, rather than Americans most likely to spend. With interest rates at record lows, a lack of incentives is hardly what's holding back business investment; it's anemic demand.

    Some argue that income mobility obviates the unpleasant consequences of income inequality. First, a number of studies have shown that income mobility affects a minority of the population and that there is little evidence it is increasing. But what's really significant is that CEO John Smith (whose average pay went up 14 percent in 2002) is making a far higher multiple of the income of waitress Mary Jones than was the case in the past.

    Some sketchy recent data suggest that income inequality may have stopped worsening or perhaps gotten a little better as fierce efforts by companies to cut costs reach higher-paid workers. Not only is it too soon to reach that judgment but, even if it's true, the level of inequality is so great that we certainly shouldn't be tinkering with tax and spending policies in a way that makes it worse.

    In 1971 the top 5 percent of Americans made about 6.3 times what the bottom 20 percent made. In 2001, after 30 years of relentless widening, that same group made 8.4 times what the bottom 20 percent did. Income inequality in the United States is now not only at a record level and not only the greatest since we began measuring it -- it is also on a par with that of a Third World country. Is that the American dream?

    Steven Rattner is managing principal of Quadrangle Group LLC, a private investment firm. He wrote this article for The Washington Post.
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  2. 137 Comments

  3. by   sbic56
    Lots of interesting, but disturbing stats and information in the article, Ted. Coming from a very poor state, where as a nurse, I am in the upper income bracket,( )this makes it easier to see where the problem lies. We have lost many industries overseas, but someone in America is still benefitting; it just isn't the residents of Maine.
  4. by   kmchugh
    Ted

    It's interesting that you should have posted this just now, since I am currently working on chapters on taxes, welfare, and income. I've read this article through a few times, and I have an observation or two, as well as a question or two.

    It seems to me that this article really addresses two separate issues. The first is the growing income gap between high earners and lower earners. The second is the effect of the recent tax breaks. Lets look at both issues separately.

    First, the growing income gap. I think the reason for this is well identified in the article, though it is somewhat glossed over. As our technology advances, the need for unskilled and semi-skilled labor decreases. Unfortunately, the pool of laborers for these jobs has remained fairly static. A simple lesson in economics tells you that as supply increases and demand decreases, prices (or in this case, wages) fall. Hence, a big part of the reason for the income gap.

    I am disturbed by the outcry against this gap. Certainly, I don't fall into the "top 10%" category, but I don't resent those who do. And I really believe that resentment underlies much of this outcry. Salaries are determined by market forces. One of the issues that the author raised was the salary of corporate CEO's. Fine, lets use some fictional figures to make an example. Suppose that CEO John Doe contracts with his corporation for an annual salary of $14 million. Think that's ludicrous? Well, what if through his management, the corporation he heads increases profits by $200 million a year? Seems a lot less ludicrous, doesn't it? Salaries are whatever the free market will bear. As a CRNA, if I demanded a $1,000,000 annual salary, I'd be out of work. However, if I demanded a $50,000 salary, I'd be a fool. So before I ever started looking for my new job, I did a little research to find out what the ranges of salary were for a CRNA in various types of positions and locations. Hence, I was able to get a good salary with minimal haggling.

    What worries me here is that in decrying the income gap, we seem to be short on answers of what we should do. Do we enact laws that set salary limits? And who decides what those limits are? And in doing so, how do we get around that pesky constitution?

    I actually agree with the author that there is a need for increased spending on education benefits, particularly because increasing this kind of spending will, in the long run, reduce the need for other social programs. However, where is the money for these increased benefits to come from? Increased taxes? Or do we cut other social programs in favor of educational programs? (I bet you can guess what my answer would be.)

    The second problem addressed by the author (and his main point, really) was how "unfair" the tax cuts are. After all, how fair is that the richer you are, the greater tax cut you are getting? Well, I can accept this argument only if you really believe that "progressive taxation" is fair. Under this kind of taxation, the more money you make, the greater percentage of your salary you will lose to taxes. Only in a liberal's mind is this fair. A simple example: If you make $50, you fall into a 10% tax bracket, and pay $5 in taxes. If you earn $100, then you fall into the 10% category, and pay $20 (FOUR TIMES what someone who makes half your salary pays). Sorry, but you can't make that sound fair.

    Take another example: Suppose your next door neighbor has two large, rather ill tempered dogs. You are afraid for the safety of your children. So, you approach your neighbor, and propose that a fence be built between your yards. You offer to split the cost of the fence, which you have an estimate for a $1000. Your neighbor agrees, but says to be fair, since you make twice what he makes, you must pay $800, while he foots $200 of the bill. Sound fair? Oh, you'll probably pay it for the safety of your kids, but you'll see it as unfair, nonetheless.

    Now, as to the rich getting back more in the tax break, well, that is equally fair, since they are footing the lion's share of the taxes. (See the thread about California gubernatorial recall. The top 10% of income earners in California are paying 80% of the income taxes.) Go back to my example about you, your neighbor and the fence. Suppose after the work was done, the builder came back to you and said that through a clerical error, you were overcharged, and he was going to refund 10% of the price you paid. Accordingly, you get $80, and your neighbor gets $20. Now your neighbor comes back to your house, ranting and raving about how unfair this is. After all, you make twice what he does, you should get the $20, and he should get the $80. Sound ludicrous? It should, and for the same reason, whining about the tax breaks sounds equally ludicrous.

    Kevin McHugh
  5. by   Spidey's mom
    Kevin - your book is going to be great! Especially if you include examples like the ones above to make your points.

    Good job.

    steph
  6. by   Spidey's mom
  7. by   oramar
    That "salary is determined by market forces stuff" does not seem to apply to nurses. Median salary for nurses should be about 100,000 grand based on the shortage. You are ignoring the dirty tricks managment pulls like keeping cost down by increasing work loads while blaming the shortage(that they created) for the poor care that results. There are many other artificial means that people in power use to keep down wages. Immigration, legal and illegal is one of their favorite. Transfering the work outside the country is another. Another trick is cutting benefits or transfering cost of benefits on to employees. I don't care if you have a heart or not Kevin but your theories are leaking air. I don't hear a lot of people of people talking about the problem that stalks the lower half of the economic strata. The ever increasing cost of higher education is slowly putting the American Dream out of the reach of many.
  8. by   kmchugh
    Well, Oramar, if you want to talk specifically nursing, fine. You are right, hospital management works very hard to keep nursing salaries down. But, if you think that's the whole story, then you are astoundingly misled.

    Another part of the story is that charges for nursing care are included in hospital room costs. Therefore, if you have a minor illness that requires a short hospital stay, and visits from the nurse twice a shift, you pay the same per day room rate as the patient next door, who is a longer term patient, requiring dressing changes, multiple medications, and frequent vital signs.

    Another part of the blame falls directly on nurses. As a professional career field, we are so disjointed and disorganized, it is very easy for management to "divide and conquer." Recently, in the hospital where I used to work, nurses voted down a proposal to unionize. Management put out that unionization would take away the nurses individual power to negotiate wages and salaries, and some idiots believed this claptrap. We are almost always our own worst enemy.

    As to education, if you look to my original post you will see that I also believe in increasing spending in education. But, if your complaint is the rising cost of education, what do you propose? Do we lock in tuition costs, and forbid colleges from raising these rates? Good idea. Professorial salaries will be locked, there will be no improvement of school facilities. Pretty soon, schools will close.

    As with everyone, loans, grants, and scholarships are available to those from the "lower economic strata" whose fate you bemoan. If you were correct, we would not see anyone from that strata in college. Facts disprove emotion.

    Kevin McHugh
  9. by   Ted
    I'm at work! My one and only patient (so far) is safely sleeping with heart a-beatin. . . irregularly, I might add.

    Just finishing up some admitting paper work. Once I'm done, which will in a while, I'm going to kick back, take a good look at this thread with all responses, think, stink, think and stink some more. . . .

    And then write!

    From a very fart smella'

    :spin:

    Ted
  10. by   teeituptom
    Kevin your lonwinded response was interesting. However if I reaaly was concerned about those dogs and protecting my kids. I would just shoot them and barbecue them. Problem solved.
  11. by   Ted
    I'm back! All paper work finished. Patient safely sleeping with heart a-beatin'. . . irregularly, but beatin'.

    Soooooooo. . . . . .
    _______________________

    I really need to explain why I picked this article. I picked it because I noticed that it was written by someone who's career is in the financial world. He crunches numbers. Tries to make money work harder for people through investments.

    I'm taking for granted that he is using reasonable and trustworthy sources for his statistics. And it's with these statistics that he draws the conclusions outlined in his commentary. (This is a commentary, by the way. I pulled it from the "Opinions" page of the Times Union.)

    Understand that I'm not a well educated economicist (sp?). I'm not even sure how to spell the stupid word! :chuckle So I rely on the expertise of others to provide statistical and analytical information in dealing with the subject of economics.

    The writer of the commentary:
    Steven Rattner is managing principal of Quadrangle Group LLC, a private investment firm. He wrote this article for The Washington Post.
    Here's a guy who shows concern with regards to varifyable growing gap between the rich and the poor. Additionally, he makes the assertion that Income Tax structures shouldn't play a part in making the gap worse!!

    Kevin, I've re-read your thoughtful response to this commentary. You seem to reiterate what Mr. Rattner wrote explaining why a certain working class of people have declining incomes contributing to income inequality. The forces of "classic labor market economics" (quoting a phrase by Mr. Rattner) are at play here.

    This seems understandable even to a economically simple-minded person such as myself.

    With regards to the tax structures augmenting the inequality between the "rich and the poor", Mr Rattner comments:

    Most discussions of income inequality properly center on pretax statistics, in search of a true measure of how the labor markets and the economy are functioning. Considering pretax income is also proper because we should not legislate or redistribute our way to income equality. But neither should tax policy worsen the disparity between rich and poor.

    Widening that gap is what we've just done. According to analysis by the Tax Policy Center of the Brookings Institution and the Urban Institute, the new tax provisions will raise the after-tax income of Americans making more than $1 million by 4.4 percent while raising the average American's income by only 1.8 percent. More than 70 percent of households will receive $500 or less. For 8 million lower-income Americans who pay taxes, the news is truly dispiriting: no tax cut at all.

    That's because the bulk of the cut will be used to reduce capital gains and dividend taxes, and even though ownership of stocks has broadened in the past decade, the highest-income Americans still have a disproportionate share of the wealth. In fact, distribution of wealth is even more unequal than the distribution of income. In 1998, 47.3 percent of households' "net financial assets" resided with the top 1 percent of Americans, according to an analysis of consumer finance data by Edward Wolff.
    This whole set of paragraphs is worth repeating which is why I "quoted it". Not only are the rich benefiting the most from the tax cut, they're benefiting from reductions in capital gains and dividend taxes from ownership of stocks which MANY AMERICANS CAN'T AFFORD TO BUY!!!!!

    Here's your comment, Kevin, in apparent response:

    The second problem addressed by the author (and his main point, really) was how "unfair" the tax cuts are. After all, how fair is that the richer you are, the greater tax cut you are getting? Well, I can accept this argument only if you really believe that "progressive taxation" is fair. Under this kind of taxation, the more money you make, the greater percentage of your salary you will lose to taxes. Only in a liberal's mind is this fair. A simple example: If you make $50, you fall into a 10% tax bracket, and pay $5 in taxes. If you earn $100, then you fall into the 10% category, and pay $20 (FOUR TIMES what someone who makes half your salary pays). Sorry, but you can't make that sound fair.
    First off, the people who make tons of money do so through stocks, bonds, futures, etc. Again, I assert most Americans can only dream of making money off money. I support progressive taxation especially as it relates to money being made off investments. Why not?!? Using your example, Kevin, (and modifying it just a bit): The person who earns $100 through career income and portfolio income will still make $80 after the progressive tax! That's still a lot of money!!! The guy who's making $50 ($45 after taxes) is still making less that what Mr. Richo is making AFTER taxes!
    _____________________________

    But I'm only commenting on what Mr. Rattner's commentary and Kevin's reply.
    ______________________________

    Understand that I am totally against ANY tax refund this year. Mainly because:
    It just doesn't make any fiscal sense to have our country go farther into debt!
    _______________________________

    Meanwhile. . . . The rich ARE getting richer. The poor ARE certainly not getting richer if they're not getting poorer. . . . not thanks to this recent round of "tax refunds".

    And that's just in the United States.

    The "Gap" between the rich and the poor is even wider on a world-wide scale.
    _________________________

    More to follow. . . . hopefully!
    Last edit by Ted on Jun 19, '03
  12. by   oramar
    Ah, but Kevin, you said market forces would take care salaries. Then you turn around and gave evidence that they don't. That is exactly what I said. My son graduated from law school three years ago. He could not help but notice and point out to me that he was the only in his class from a blue collar background. He was also the only one with a family income in the $50,000 range. He said the bulk of the law students came from families with an income in $150,000 range. There were a small group of people who were truely poor who got massive goverment subs and got through. My son who was 27 and one of the older law students got his undergrad and grad degrees with scholarships and stipends. Since he was debt free he could assume the $80,000 in debt that getting through law school required. He also got some financial aid from goverment and us. Looking back now the whole deal looks like a bargain. Doing what he did is even more expensive now. I just saw a intellectual commentator on tv worrying about the fact that very few professional that make the big incomes are coming from the blue collar groups these days. I know of what he speaks.
  13. by   kmchugh
    First, to Tom: Spoken like a true Texan.

    Next, to Oramar: All the things I listed about nursing salaries ARE part of the market forces. If as a group, nurses are willing to take lower salaries, then that is what the market will bear. In fact, was hospital management to offer higher than the "going rate" for new grad nurses, they would be the foolish group. Suppose you were hiring someone to build new cabinets for your home. You got two different bids by two different contractors. Both are known for doing equally good work. Both have proposed doing exactly the same work. But one bid is 20% lower than the other. If you hired the contractor with the higher bid, you are the foolish one. Same applies to nursing. "What the market will bear" where salaries are concerned simply means the amount of money the average nurse will take to do the job. Clearly then, I gave you evidence of how nursing salaries DO reflect market forces.

    As to your son and law school, first let me congradulate both you and your son. Long road, tough school. But let me ask a question: Does the fact that he is the only student from a blue collar background reflect any predjudice or problem in our society, or is it more reflective that there are fewer kids from blue collar backgrounds who are applying for these positions? Should we now, in addition to "affirmative action" laws now enact laws that establish quotas for the number of people in each law school class who come from lower socioeconomic backgrounds? I mean, really, to level the playing field, I suppose we could enact a law that prevents all kids from "white collar" backgrounds from pursuing higher, professional level education. Would that suit you?

    Ted: Let me get this straight. It's ok to tax the rich at higher rates because of the source of their income? They have an income not available to many (a premise I don't necessarily accept), so its OK to tax that income at a higher rate. Well then, by that very logic, we must also tax welfare recipients at a higher rate, since they have income from a source not available to many.

    As to the author of the article, I understand who he is and what he does. However, that has not prevented him from adopting a skewed sense of fair.

    You wrote "First off, the people who make tons of money do so through stocks, bonds, futures, etc. Again, I assert most Americans can only dream of making money off money." Really? Do you participate in a 401k, or other retirement investment plan? Then you are making money off of money. My real point here is that the dichotomy you and the author decry is a false dichotomy. True, the rich may have more money to invest, may have more money to begin with, but that in no way means because they have more they should pay at a higher percentage than others. It is a form of reverse discrimination.

    Kevin McHugh
  14. by   kmchugh
    Having said all that, I realize there is more to say about "capital gains."

    Capital gains come primarily from investments. Investments we all, rich and not so rich, make with an eye towards increasing our personal financial status. But, lets face facts: Investments don't just magically make money, and they are not without risk.

    When you invest in a company, you are betting that it is going to take your money and use it to improve itself. You are betting that you are going to see a return on your investment, in other words. The company that you invest in benefits, because it now has more capital to expand operations, etc. In doing so, the company may be able to hire more workers, increase expenditures for raw materials for its product, etc. So, investments are one of the forces that drive our economy.

    If we tax capital gains at a higher rate, you discourage investment. Thats a really bad idea. Look at it like this: Let's say you have $1000, and are trying to decide what to do with it. You could invest it, but in so doing, you must accept that there is a risk involved. You could lose that money. But, you accept that risk since there is the potential that you will likely see a higher return on your money than you would if you simply placed your money in a savings account. If, however, we raise taxes on capital gains to the point where the return is not significantly different than the return on an interest bearing savings account, you remove the incentive to take the risk involved in investing. Bad for the economy, and money in savings accounts isn't really working for anyone at all. It is not contributing to the economy. That's the real problem with what the author had to say.

    Kevin McHugh

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