Graphs Show It Clearly–the richest are much richer and most of us are poorer
by Linda Beale
Graphs Show It Clearly–the richest are much richer and most of us are poorer
David Cay Johnston has employed a couple of key graphic images that tell a significant story about the way that US laws have favored the rich–including tax administrative procedures that have reduced real audits of the rich and tax laws that have cut the top rates significantly and cut the rates on the “favorite” form of income of the rich to extraordinarily low rates. See David Cay Johnston, The rich get richer, reuters (Mar. 15, 2012) (noting that the figures he uses here, in 2010 dollars, are from an analysis of IRS data by Emmanuel Saez and Thomas Piketty). [hat tip Francine Lipmann and Tax Prof]
The 1934 economic rebound was widely shared, with strong income gains for the vast majority, the bottom 90 percent.
In 2010, we saw the opposite as the vast majority lost ground. National income gained overall in 2010, but all of the gains were among the top 10 percent. Even within those 15.6 million households, the gains were extraordinarily concentrated among the super-rich, the top one percent of the top one percent.
So while the Great Depression acted as a leveler, the cascading impact of tax and other fiscal policies that are extraordinarily favorable to the rich was little influenced by the Great Recession. Here’re the two telling graphs from the article.
Johnston notes that the story in numbers for adjusted gross income is discouraging:
Saez and Piketty show that the vast majority’s average adjusted gross income, of which wages are just a part, was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000.
Most shocking? The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.
At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.
The graphic illustration shows just how much the inequality we see today is from the richest of the rich getting an indecent proportion of income growth.
Is this a problem that needs fixing? Yes, it clearly is. We have long recognized the importance of a society where everyone takes part and everyone has at least the minimum essentials for a decent life and a chance for improvement.
A society where a very few “elite” at the top garner all the benefits of the system and more and more of the income for themselves is not a sustainable society–the top becomes predatory, willing to take gains no matter what the cost to everyone else. It is the kind of attitude that many who are familiar with Wall Street banks have criticized as endemic to Wall Street culture–and one that was revealed even more starkly by the resignation from Goldman of a star banker who publicly criticized the current culture at Goldman that believes in profits for the firm at the sacrifice of the good of the customer. See Greg Smith, Why I am Leaving Goldman Sachs, New York Times Op-Ed (Mar. 14, 2012). Shareholders obviously agree with Smith that the “profit for the firm above care of the client” mentality is wrong. See Christine Harper, Goldman Roiled by OpEd Loses 2.2 Billion for Shareholders, Bloomberg (Mar. 15, 2012).
[Goldman is worried–I got a release from a PR firm suggesting that Goldman’s profit-making is a boon to the economy and gives its clients great trust in the firm. I read it and thought–hmm, misses the point. Smith isn’t condemning profit-making per se. He is condemning profit-making at all costs, and in particular the “greed is good” type of profit-making that creates conflicts of interest with the client that is purportedly being served but would as soon eat a client as eat a steak, if money could be made for the firm (and the trader’s bonus) that way.]
If we want the kind of society that gives everyone a chance to have a decent education, we have to quit running down public schools and diverting public monies to support private religious schools. Hold schools accountable, but quit the wasteful focus on testing and assessment. Do a little assessment and a lot more teaching.
If we want a more equal society, then we have to change our tax laws so that they don’t favor the rich over everybody else. Reduce the interest deduction, so that leveraged buyouts aren’t a way to take a stable working company, make a huge profit by borrowing, and then dump it (either in bankruptcy or out of it, but nonetheless yoked with the debt that got the private equity firm rich). Get rid of provisions that are primarily beneficial to the wealthy–reinstate a hefty estate tax, eliminate the preferential rate on capital gains, reinstate the phase out of deductions at high income levels, increase the top income tax rate (let the Bush tax cuts lapse in toto or at least for the top earners), phase out the accelerated depreciation schedules, bonus depreciation and expensing provisions, and otherwise return our tax system to a saner progressive model that can support the important basic research at universities and basic public infrastructure development that are the real keys to economic growth.
The right has bamboozled the public with its tiresome but endless class warfare rhetoric pushing corporatist policies that claim that tax cuts for wealthy corporations and wealthy individuals are the way to boost growth and help the majority of Americans have good jobs and decent wages. It’s a lie. The way to do that is by moving to a more progressive tax system and providing more government funding for basic research (NIH, NSF, etc.) and for public infrastructure (mass transportation, rails throughout America and its inner cities, urban development).
crossposted with ataxingmatter
The comment I left at Reuters:
Sorry David, this just doesn’t work.
“The different results in 1934 and 2010 show how a major shift in federal policy hurts the vast majority and benefits the super-rich.”
It’s not a shift in Federal policy. It’s a shift in hte sources of income. Go back to the Piketty and Saetz papers. Look at what they say about sources of income.
1930 etc the vast majority of income for that top percentiles was capital income. From investments in bonds and stocks. Today the vast majority of income for that group is labour income. They themselves, in one of their papers, point this out.
So, what you’re picking up here in your analysis is not a change in how labour income was distributed as the good times returned. Not at all. In the first instance you’re picking up how labout income improved while capital income did not, in the second you’re picking up the distribution of labour income.
Those just aren’t the same thing at all and really, really, should not be compared in this manner.”
Defenders of Goldman who base that defense on “greed is good” reductionist understanding of capitalism are simply ignoring the legal and I would say moral structure in which banking and management were embedded: that of fiduciary responsibilities and principal/agent law.
Before Glass-Steagal repeal (and similar legal and business culture changes dating back to the fifties) there was an understanding that commercial bankers had a fiduciary responsibility to their customers,that the relation in question was one of agent to principal. And the same for management, managers were agents of the owners whether directly in a private firm, or indirectly via the Directors of either a joint-stock company or as in insurance of a mutual structure where policy holders were ‘owners’. On the other hand investment banks ad law firms and reinsurance companies like Lloyd’s and it’s ‘Names’ we’re generally set up on a partnership basis where the agents were principals, at least at top levels.
But that distinction broke down, maybe as early as the rise of the Conglomerate and the Multinational where the link between the manager/agent and the principal/owner the principal/mutual holder became attenuated to the point of near nonexistence with the result that what had been agents, say a plant superintendent, now reported to an executive suite at ‘Corporate’ where one-time agents were de facto principals. As exemplified by the bastard blend of President and Chairman of the Boardand Chief Executive Officer into a single person whose theoretical agency relation to ownership was at best mediated through a board of Directors often largely serving under his direction.
And this attenuation of Agent-Principal relations broke down entirely when Glass-Steagal and other actions simply smushed together the partnership and joint-stock/mutual models where the formal and legal structure remained the latter even as the decision making went with the former.
Thus Goldman-Sachs Corporate culture. Instead of maximizing profits for the partners on one hand or for the shareholders on the other and all while maintaining a fiduciary responsibility to the customer/depositor, the executives and traders, who in law are simple hired help, I.e agents promoted themselves in their own minds to principals. Something complicated by the fact that various forms of stock based compensation made certain top executives both de facto and de jure principals quite beyond their selected/elected Chairman/CEO/President blended position
This obviously needs some polish, it is a blog comment after all, but I think I am on to something, something I have been bouncing around in my mind since I first took a course on Post WWII American History back in the early eighties, that is post multi-national conglomerate but prior to the barrier break represented by Glass-Steagal repeal. That is we are seeing a confluence of several streams that have mostly reduced all notions of fiduciary responsibilities and/or principal-agent law into a fetishizing of maximizing individual self-interest as if every trader at G-S was in the same legal and moral position as a medieval chapman selling goods from his pack purchased with his own money from the producer.
So yes capitalism is organized around the principle of principals maximizing their self-interest. But not everyone is, or should be considered,a principal. And no “Well duh, capitalism equals maximizing return” does not in itself wipe out the entire legal and moral structure that grew up around it. Agency and fiduciary responsibilities still are or should be operative. That is you don’t get to operate Wall Street on the principle “We eat what we kill” no matter what some hot-shot MBA trader might think.
Yes, Bruce, I think you are onto something. It is part of what many of us attempt to capture by the term “corporatism”–the kind of structure where managers are serving themselves, and are interested in short-term profits that increase their bonus payouts over long-term, stable business that is good for the community, good for the workers, and good for the shareholders. It is one of the reasons that a ban on all proprietary trading by banks was and is a good idea–banks that are trading for themselves cannot create a sufficient “chinese wall” to protect the customers who may be on the other side of some of the trades, they cannot be devoting the attention to their fiduciary duties to those clients as they should. In short, they are so focused on their own benefit that there is an inherent conflict of interest between conduct that will serve their own interests and conduct that will serve their clients in all instances.
As for the labour versus capital issue, part of the problem is the same corporatism discussed int he paragraph above. When managers are able to reward themselves outsize chunks of the corporate profits–which they have done through salary and bonus determinations, with buddies on their boards whose boards they serve on in turn–then ordinary workers are the losers. In a broad sense, managers of companies should have a fiduciary responsibility to their workers, but the corporatist perspective instead treats workers as commodities that can be used up and tossed out, whose pensions can be undone by a mere flick of the pen, and whose jobs are just another way for the company to make more profits that can be passed along to the top managers. It is a real problem, and until we recognize it, talk about it, acknowledge it, we won’t solve it.
We could solve the problem with carried interest fairly quickly though by simply passing legislation that treats carried interest as compensation income subject to payroll taxes and taxed at ordinary income rates. We could solve even more of the problems by eliminating altogether the preferential rates for capital gains. But we won’t ensure that managers return to their “agent” status–and treat workers as deserving of at least quasi-fidicuiary care–without a considerable change in the way we view corporate entities. A good start would be to repeal restrictive anti-union provisions and better enforce anti-trust laws.
@ Tim Worstall, please see my answer to your identical post at my Reuters page, but the short answer is that I did not misuse the data.
see David’s response to Tim…
(quote)@ Tim Worstall, please see my answer to your identical post at my Reuters page, but the short answer is that I did not misuse the data.
Dan here….ifted from Reuters comments:
@ Tim Worstall, the relative components of income have indeed changed, Tim, but that doesn’t in any way challenge the column’s point that government policy plays a major role in the changes we are seeing in total income.
The increases in income to CEOs and other executives are also the product of government policy, as thoroughly documented by me and many others and as taught to me by a number of compensation consultants. And wages for the vast majority are heavily influenced by government policy from anti-union rules to moving manufacturing to China.
If you compare Tables A4 and A6 (without and with capital gains) you will see that the first is less volatile. You may also want to read my column (linked above) from last fall on wage data.
Professor Saez, BTW, sent me a note saying “a great article and two great charts. I hope it will have an impact on the public and policy makers.”
Posted by DavidCayJ (unquote)
As I’ve pointed out over there, you’re really not comparing like with like.
You’re telling us that there has been a difference in the way that incomes during the recovery have been distributed. Which is certainly true. You then go on to ascribe that to government action. Which is what I disagree with.
For, as Saetz has pointed out, the gilded rich of the earlier age were largely getting their incomes from capital. No, not capital gains, but interest and dividends. And as Saetz says, the gilded rich of our age are largely getting their incomes through labour income (whether it’s really labour income or the more likely rent seeking is another matter: it’s listed in the stats being used as labour income).
I submit that it is this difference that gives us the difference in the way incomes are distributed during the recovery. To show the point that you weant to make you would need to show that there was a significant difference in the way that rises in total *labour* income were allocated in the two recoveries.
Which you haven’t as yet……
So for many many many years, under the partnership model and under the neo-publicly traded model, investment banks targeted a 50% of revenue payout ratio. This had/has nothing to do with carried interest, executives enriching themselves at the behest of “cozy boards”, union advocacy, Glass-Steagall, agent/principal, or any of the other umm, stuff that’s been tossed against a wall herein. And Goldman wasn’t a beneficiary of Glass-Steagall, if anything, Citi and JP Morgan tried to use their balance sheets and capacity to provide non-publicly issued debt, i.e., direct loans, as a leverage point in competiting against Goldman, Morgan Stanley, Bear, and Lehman for Advisory and Equity Underwriting business.
Since the crisis, payouts have been materially less than 50% of revenues. So in one sense, the majority of contributors can be happy that those i-bankers are taking home significantly less cash, and demand for Porsche’s are down, clearly making the middle class better off, as far as we compete for the limited supply of Porsche’s. On the other hand, contributors should be dismayed that the rank and file of Goldman, Morgan, et. al, have seen drastic compensation reductions, while the profit margins dropping to the shareholders have expanded. Oh my, what’s a sympathetic liberal to do?
As for board composition, please explain, how in the world of Calpers/Calstrs, et al, union internventionism into how companies manage themselves, and independent director mandates , that boards are cozier now than they were in the age of verticalized conglomerate, living off the shareholder teet, golf club membership business environment out of which the LBO was born as a method for unlocking shareholder value and trapped capital.
i did not read the cited articles, but i did not notice on this page anyone making a distinctioin between income from capital and income from labor… except you.
whatever the merits and implications of that, i can’t really take seriously the image of the oppressed rich “laboring” to earn their millions.