Why do we have so much income inequality?

“We are the 99 percent!”

With that chant, the Occupy Wall Street movement thrust U.S. income distribution into public policy debate. It had already entered Minnesota politics in 2010 and 2011 when Mark Dayton proposed that taxes on upper-income taxpayers should increase.

Economists began addressing these issues more than 300 years ago when William Petty created estimates of English national income and its distribution. Let’s take a look at what we’ve learned since then. It may surprise you.

U.S. income distribution
Emanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Paris School of Economics spent much of the past 20 years gathering and synthesizing data on the income distributions in industrialized countries. (You can see their work at the World Top Incomes Database.) Drawing on information from U.S. income tax returns, Saez and Piketty go back to 1913 to show how the distribution of income changed over the past century.

The chart below traces the income accruing to the top 10 percent of income earners since 1917.


Source: Saez and Piketty, “Income Inequality in the United States, 1913-1998” in Quarterly Journal of Economics

The income share of the top 10 percent fell in the late 1930s and early 1940s, and stayed at that lower level until the late 1970s, when it started to rise and reached the same levels as the 1920s.

It turns out that most of this story is driven by changes in the top 1 percent’s share, as shown in the next graphic.


Income share of top 1 percent, 1913-2008

Income share of top 1 percent, 1913-2008
Source: Saez and Piketty, “Income Inequality in the United States, 1913-1998” in Quarterly Journal of Economics

Between 1940 and 1980, the top 1 percent of households received roughly 10 percent of national income. The share they collected in the late 2000s doubled to about 20 percent.

Minnesota experienced similar, though less exaggerated, trends. In its report “Income Distribution Trends in Minnesota,” the Minnesota State Demographic Center says: “In Minnesota, the results are more equivocal. From 1990 to 2000, growth at both the top and bottom of the income range was considerable and was higher than the growth for the middle levels of income.” Changes in the income distribution over the 2000s were also more muted in Minnesota.

Income inequality and economic growth
One response to these data, to the governor and to the Occupy Wall Street protestors is that there is a trade-off between greater income equality and economic growth. Alan Viard, a scholar at the American Enterprise Institute, recently expressed this view when he wrote that increasing taxes on high-income households “poses significant economic disadvantages, as they provide a large share of the nation’s savings, which finance the investments that drive long-term growth.” More bluntly, he implies that economic growth is driven by the savings of the wealthy and that taxing them at higher rates will slow the economy. Thus, high levels of income inequality are the price we must pay for economic growth.

Research does not support this. Economists, in general, and economic historians, in particular, have shown that economic growth is primarily driven by productivity improvements, not by higher saving rates. Saving and capital accumulation are important sources of growth, but they are dwarfed by our ability to use our resources more efficiently and in new ways — in other words, by productivity.

Further, there is no evidence of a trade-off between economic growth and income inequality. Jeffrey G. Williamson, emeritus professor of economics at Harvard, has analyzed economic growth and inequality in Europe, North America, Latin America and Asia for the past 250 years. In his book “Inequality, Poverty, and History,” Williamson writes that the supposed growth/equity trade-off is “not based on hard evidence or policy experimentation, but rather on theory, allegation, and, it turns out, spurious historical correlation.”

Williamson reached two important conclusions. First, income inequality does rise during industrialization. This is primarily due to the fact that productivity in certain sectors of the economy grows more rapidly than in others, leading to faster increases in income in some occupations than in others.

Second, the rise in inequality does not fuel growth. Specifically, Williamson finds that increased inequality does not lead to either higher saving rates or faster capital accumulation. Further, high-income households do not have higher saving rates than lower-income households, so redistributing income from lower to upper income people does not increase investment. Thus, even if saving were an important source of growth, increased income inequality would not promote faster growth.

To put these two results simply: Economic growth causes income inequality, but income inequality does not cause or promote economic growth.

Even more questions
Income inequality rose dramatically in the United States. since 1980. To a lesser extent, this was true for Minnesota as well. But income inequality did not promote more rapid economic growth; rather, the engine of growth has been and continues to be productivity gains.

This leaves us with even more questions. Why did American income inequality fall and then rise over the past 70 years? Will policies that involve more government spending and transfers in an effort to reduce inequality hurt economic growth? We’ll tackle these questions next week.

Comments (36)

  1. Submitted by Dennis Tester on 11/16/2011 - 11:01 am.

    It seems to me that for a supposedly free society, we spend entirely too much time obsessed with what other people earn relative to our earnings. We also spend entirely too much time obsessed with how government policy should affect the economy in general and this disparity in particular. The ideology of envy is a short step from the ideology of justifying theft.

  2. Submitted by Neal Rovick on 11/16/2011 - 11:02 am.

    Taking it to the ludicrous extreme, productivity increases in the nth iteration would result in everything being made by no-one.

    Whose fortunes would be hurt by that? Whose fortunes would be helped?

    We, however are closer to that point than one might think.

    Products and services can be obtained faster and with less labor input than ever before. It is possible to swamp demand with excess supply in almost every field.

    So we now have excess labor that no longer have the means to buy goods and services. They are at the economic fringe, which is getting longer every year.

    Add outsourcing of labor to low-labor cost platforms and it is a double-whammy to the labor fortunes of America.

    But as the fortunes of the many stagnate or fall, is it surprising that the fortunes of those who control the corporations and finances of America control more of the wealth and income?

    As the amount of labor, or the amount of American to make something has fallen, does anyone seriously think that all of those savings are passed to the consumers? No, a good portion of the labor savings pass to those few percent who remain at the top.

    So concentration of wealth and income in a period of unprecedented productivity increases and labor dis-empowerment is certainly not a surprise.

    But the end of that train come with the fact that if people do not have income the business that depends on that consumer suffer.

    At this point in time, if the US business were entirely dependent on US consumers, they would be in trouble. But for many of these companies, the US is a declining portion of its sales and they are driven by the demands of world markets. Falling US consumption? There are customers throughout the world that can provide additional demand.

  3. Submitted by myles spicer on 11/16/2011 - 11:53 am.

    I have always believed unrestricted Captalism is analogous to the game of Monopoly — and you know how that game ends. The winner has all the properties on the board, and the loser…well you get the idea.

    Why? Money begets money.

    Having said that, bad as it may be, Capitalism is still probably the most free and viable economic system around — but mitigated by rules, regulations, and a blend of government participation, it works even better.

  4. Submitted by Connie Sullivan on 11/16/2011 - 11:57 am.

    Surely the next installment of this analysis will provide graphic views of how our national tax policies have increased income inequality, or the extraordinary concentration of wealth among a tiny minority of us.

    Wasn’t it the 1950s, when the top federal income tax rate was 70% or 80%? And estates were taxed at a hefty percentage, as well? We must never forget the tax cuts that have been imposed repeatedly, since Reagan, especially on dividends and capital gains, and hedge fund managers.

    And, since Reagan fired the air traffic controllers who went out on strike and destroyed their union as an example to American labor: unions, and their insistence on living wages and fair job conditions, are a faded force, weakened in numbers and influence. So the American labor force, as a consumer force, is, as this article portrays, less able to buy.

  5. Submitted by Bill Gleason on 11/16/2011 - 12:12 pm.

    “The ideology of envy is a short step from the ideology of justifying theft.”

    More bilge from the right. I find it amusing that the right likes to quote Adam Smith, when it serves their purpose.

    And yet, Adam Smith was a progressive on taxation as anyone with any sense would be:

    “the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.” The Wealth of Nations(1776)

    Unfortunately, for Mr. Tester the average voter is starting to realize that asking the rich to pay their fair share is not theft. And before anyone whines about what is fair, let me remind you that the effective tax rates for the rich are as low as they have been in at least thirty years.

    This question will be settled at the ballot box in 2012. The fiasco with property taxes and the unnecessary injection of social issues into politics will decimate the right.

  6. Submitted by Joel Gingery on 11/16/2011 - 01:03 pm.

    The above analysis assumes that economic growth is “good;” that it is inherently desirable and should be pursued; and that economic measures and their relative distribution among the populace are the preferred way to evaluate policy decisions.

    In fact economic growth may or may not be desirable depending on one’s values. For example the proposed Keystone XL oil pipeline extension. If you are the owner(s) its approval would most likely be considered positively. But if you have to deal with the effects of global climate change or an oil spill that contaminates the water you rely on it may be negative.

    It seems reasonable to look at more than the economic parameters when judging if economic change is desirable.

  7. Submitted by Ray Schoch on 11/16/2011 - 01:17 pm.

    Many societies down through the centuries have had aristocracies of one kind or another. None of them have been “free” societies, so it’s interesting that Mr. Tester would feel it necessary to defend the latest wrinkle in aristocratic genesis: the industrial aristocracy. Teddy Roosevelt and the larger society probably thought they’d put sufficient limits on the Robber Barons of the late 19th century to assure a reasonably egalitarian society thereafter, but the 1920s proved them wrong, and the past generation and more, from the Reagan era forward, has proved them wrong again.

    As an adult, I’ve often wondered why the society has been willing to go along with the industrial model of executive pay. Why should the CEO of UnitedHealth, or Boeing, or 3M (it could be any sizable company), be paid hundreds of times more than company employees who actually manufacture its products or provide services to its customers? Or, if it makes the comparison seem less about apples and oranges, why should the CEO of a health insurance company be paid a hundred times more than the highly-trained physicians who actually provide the health care? Shift the focus to a manufacturing field, and I still ask the same question(s). Why do we pay the CEO hundreds of times more than the guy who assembles the truck, or casts the steel, or does the actual drilling for oil, or whatever?

    I’ve no objection to a pay premium for education, demonstrated skills in that particular field of business, past record of success, and so on, but a premium is rather different from a multiplier, and I don’t see anything coming from executive offices demonstrating that the multiplier effect of recent decades is either justified or earned. It’s not a matter of envy – I have an idea of what’s required to be paid that kind of money, and I neither want to do that, nor become that kind of person. Rather, it seems to me a structural problem that arises from the basis of industrial capitalism. Phrased crudely, the best economic system humans have been able to devise so far is one that’s essentially based on greed, and is inherently unfair. I don’t know of a better system offhand, and we’ve plenty of examples of alternatives that were purported to be cures for the evils of capitalism, but turned out to be worse than the disease in question. But too often, defenders of the status quo fail to acknowledge the very real problems and flaws in the existing system.

    It’s equally curious that Mr. Tester would suggest that using government policy to influence the economy is somehow an example of “The ideology of envy…” Government has influenced the economy, and affected the degree of income disparity, for as long as there have been human societies. There are no exceptions of which I’m aware, so arguing that we spend “…entirely too much time…” examining this is pretty nonsensical. It’s been a central focus of every national society humans have created.

    There’s plenty of history to show that when the wealthy make the rules, they make rules that benefit themselves, and usually at the expense of those who aren’t wealthy. That probably does represent “freedom” for the wealthy, but it often has meant something quite a bit less pleasant for everyone not among the privileged few. To be unconcerned about the distribution of wealth in the society suggests a somewhat counterproductive lack of interest in democratic institutions – curious, indeed, for someone who speaks so often in terms of “freedom.”

  8. Submitted by Dennis Tester on 11/16/2011 - 01:22 pm.

    Mr. Gingery, economic growth is necessary as long as every day, more people are born, graduate from school, and enter the job market.

    This economy needs 250,000 new jobs every month just to keep pace with that growth in the population and you don’t create new jobs unless the economy is expanding. Get it? Maybe not.

  9. Submitted by Dennis Tester on 11/16/2011 - 01:24 pm.

    “There’s plenty of history to show that when the wealthy make the rules, they make rules that benefit themselves,”

    There’s also plenty of history to show that when governments attempt to control the economy for the good of the people, they end up controlling the people for the good of the economy.

  10. Submitted by Jerilyn Jackson on 11/16/2011 - 01:40 pm.

    #1- Yes, that certainly is the mantra of the corporate wealthy, not surprisingly. Unfortunately many people who are actually harmed by inequality have fallen prey to that well funded message. As the vast majority of economists have proven, financial inequality is unsustainable in a society, therefore everyone does better when everyone does better.

  11. Submitted by Neal Rovick on 11/16/2011 - 01:58 pm.

    (#9)

    What real-world economy do you admire, either current or in history?

    It’s a serious question.

  12. Submitted by Hiram Foster on 11/16/2011 - 02:19 pm.

    This is a description of a problem, but not an explanation of how the problem, if it is a problem occurred. In effect, the author is saying the rich are richer because they have more money.

  13. Submitted by Jackson Cage on 11/16/2011 - 02:37 pm.

    Mr. Tester, your comments in #1 are particularly revealing. Most of us aren’t concerned enough to ever use words like “obession” or “envy”. we simply are trying to find the best ways to advance the economy and create jobs. I have no problem with my neighbors and friends doing well. That means there’ll be more goods and services consumed and thus more demand. And that will create more jobs and more wealth.

    If you want to create a running boxscore on who has what, feel free to do so. Just don’t visit your plague on the rest of us.

  14. Submitted by Jon Kingstad on 11/16/2011 - 03:00 pm.

    “Why did American income inequality fall and then rise over the past 70 years?”

    It’s no accident that this rise in in inequality started about the time Reagan was elected President. Then he (and our right wing Congress) deregulated the financial service industries which were then able to capture all of the productivity gains from American workers. The 2008 financial meltdown and TARP bailouts have solidified the transfer of wealth and productivity gains to the top 1%.

    The reason for the rise is a major shift in government policy to transfer wealth from the people who do the work to rentiers and absentee owners.

  15. Submitted by Ray Schoch on 11/16/2011 - 03:13 pm.

    “There’s also plenty of history to show that when governments attempt to control the economy for the good of the people, they end up controlling the people for the good of the economy.”

    Why, yes, Mr. Tester, that’s exactly what happens. It has happened in every society that has had anything resembling an organized economy down through the millennia of human history. That’s because, most of the time, it’s the wealthy who makes the society’s rules, and those rules generally benefit the wealthy. Why else, for example, would Congress alter the tax code so that the fabled “one percent” would see their income tax rates drop from 90 percent during the Eisenhower years (that would be General Dwight D. Eisenhower, the infamous liberal…) to, depending upon who you’re reading, somewhere between 20 and 30 percent today, to the vast increase of the national debt? “Job creation” as a rationale is pure horsepockey. An observer might have noticed a distinct lack of jobs being created over the past 3 or 4 years, yet, given the opportunity, Republicans in Congress have refused to let those tax breaks expire, so rates have remained especially low for the well-to-do, year after year.

    “Freedom” begins with breakfast, and the sort of income inequality we’re now seeing, with that “one percent” controlling an amazing amount of the nation’s wealth, and holding it, rather than using it to create jobs, means breakfast will be more and more skimpy in more and more households. The freedom that Mr. Tester seems to imply ought to be our goal has, quite frankly, never existed on this planet among human beings, though it’s hard to tell. 
“Freedom“ is one of those words that can have many different meanings to many different people.

    That said, I think Mr. Tester is quite correct about a “growth” model for the economy. It’s ultimately self-destructive, much like cancer kills its host, but as long as the population keeps increasing, we’re going to need an economy that continues to grow. This suggests population control is necessary, but that’s another thing the right opposes in knee-jerk fashion. The alternative to the current model – read James Howard Kunstler for a glimpse of one interpretation – is one that most of us would like to avoid. In the meantime, to echo Neal Rovick in #12, I hope Mr. Tester will let us know when he has discovered an industrial society more “free” than the one we’re living in right here, right now.

  16. Submitted by Dennis Tester on 11/16/2011 - 03:22 pm.

    @#12
    “What real-world economy do you admire, either current or in history?”

    Hong Kong’s economic freedom score is 89.7, making its economy the freest in the 2011 Index.

    http://www.heritage.org/Index/topten

  17. Submitted by Alec Timmerman on 11/16/2011 - 04:29 pm.

    The 1940’s to 1970 were considered the golden age of capitalism, when we had manageable inequality and high top step taxes. Why is that so hard for so many to understand? It obviously did not hurtngrowth.

    On the other hand, is it possible, that as taxes went down to historically low levels there was more incentive to take that as CEO income and less incentive to reinvest in labor or company growth?

    In our stepped tax system, if the top step is taxed at seventy percent, a CEO is more likely to expense it back into the company. When it is taxed so low, they might as well take it as income.

    We also have dangerously high inequality because we have made it harder and harder to rise above your class. While other nations a making higher education more and more affordable, we ae putting higher Ed further and further out of reach. We are also the only nation where the middle class fears bankruptcy if they get sick.

  18. Submitted by Neal Rovick on 11/16/2011 - 05:15 pm.

    (#18)

    I guess China is the flavor of the day for “conservative capitalists”.

    You and Bachmann.

    My, how times have changed !

  19. Submitted by Ginny Martin on 11/16/2011 - 05:35 pm.

    Our economy rests on the foundation of consumption. This is the problem with out current economy. Most people — 99%–do not have enough money to consume enough in one measure or another.
    What do we do when we run out of unsustainable resources, as we’re doing right now? Overpopulation is one big cause. The United States devours more than its share of unsustainable resources, and there is little recognition, much less a plan, for this coming event. Oil, water, plant and animal life (as species disappear quickly because of our residence here), air, pretty much every natural attribute. And the destruction goes on–the XL pipeline for example.
    Not many are talking about overpopulation, and meanwhile the Catholic church is trying to ban even birth control, and stem cell research and other gifts to the people.
    What would be a fair and sustainable economy?
    I think it’s probably too late. I think this planet will see devastation and poverty on a world-wide scale. Global warming (change or whatever) is going to further limit our options to produce and manufacture goods.
    Not an optimistic outlook, and no answers. Does anyone else have any?

  20. Submitted by Victoria Wilson on 11/16/2011 - 05:52 pm.

    I think it would be relevant to know the earning longevity of the one-percenters. It seems like the group is always portrayed with static membership. Once you’re in, you’re in for life. Professional ball players would be a group of high-wage earners who for the most part have but a brief stint in the one-percenters. Consider the entrepreneur who for years fails to make any profit but then hits it big. For a decade or two they enjoy a wealthy lifestyle. Or someone who inherits significant assets but is unversed in how to retain it and it slowly seeps back into the marketplace.

    It would be interesting to know what percentage of the one-percenters live on family money so great that it never dissipates back into society, and what percentage are individuals just passing through this category.

  21. Submitted by Wyn Achenbaum on 11/16/2011 - 05:56 pm.

    Why does income inequality rise? Because we’ve structured ourselves to create precisely that outcome! 120 years ago, most Americans understood this. They’d read the best-selling book of the day (second only to the Bible), Henry George’s “Progress and Poverty,” and understood its implications. So did those who funded the big universities, whose interests would not be served by these ideas

    Miles Spicer (@ #3), you come very close to an interesting story. The board game Monopoly is based on a 1902 game called The Landlord’s Game, created to teach the ideas of Henry George. (look for the story at lvtfan.typepad)

    When we permit the privatization of the value the community as a whole creates, the lion’s share flows into the pockets of our wealthiest.

    Part of American exceptionalism ought to be a firm attachment to the notion that we’re all created equal, and our structures ought to reinforce that rather than destroy that equality. We’re all equally entitled to that which nature provides, and that which the community creates. Anything else, it seems to me, just asks for the situation we’ve got now, where some grow rich in their sleep and others get low wages for work we consider essential.

    I commend Henry George’s ideas to your attention. P&P and a book of essays called “Social Problems” are both online — check wealthandwant (from the subtitle to P&P).

    Leona Helmsley might not have been talking about tax evasion when she said “We don’t pay taxes. The little people pay taxes.” She knew whereof she spoke!

  22. Submitted by Alec Timmerman on 11/16/2011 - 06:21 pm.

    The 99% movement is not about envy in the least. Most people just don’t value money past the point of having enough to be comfortable. Most people value autonomy, creativity, and having a purpose. It’s purpose and not profit that drives most people.

    What the 99% movement is about is an unsustainable level of dysfunction in our society. Inequality of our level is emblematic of a banana republic, and that is why it is important. I, like most 99%’ers, could care less about how much money rich people have.

  23. Submitted by Solly Johnson on 11/16/2011 - 07:56 pm.

    The American Dream is only that, a dream. A study by the London School of Economics showed that the socialist democracies of Scandinavia had more social mobility than the USA.

    Also, the “godless liberals” in those nations close most stores on Sunday, enabling people to spend time with families.

  24. Submitted by Wyn Achenbaum on 11/16/2011 - 08:34 pm.

    “Williamson reached two important conclusions. First, income inequality does rise during industrialization. This is primarily due to the fact that productivity in certain sectors of the economy grows more rapidly than in others, leading to faster increases in income in some occupations than in others.”

    Hmmm. How does this relate to something Joe Stiglitz has said this past year, in a number of settings: that the FIRE sector has been creaming something like 40% of the profits of the productive sectors of the economy?

    Builders create something, but land speculators create nothing. NOTHING! Nothing other than havoc and mayhem. And look what our mortgage lenders have added to our recent life experience.

  25. Submitted by Bernice Vetsch on 11/17/2011 - 01:05 am.

    #18 Dennis Tester

    The “freedom scale” is prepared each year by the Heritage Foundation and the Wall Street Journal.
    It’s interesting to see how “economic freedom” as defined by these Milton Friedman-like institutions corresponds to income inequality as measured by the United Nations (largest gaps between rich and poor): (Business Week, 10/16/2009). Hong Kong is Number 1 on both measures and Singapore Number 2.

    Top 10 in Economic Freedom:
    1. Hong Kong
    2. Singapore
    3. Australia
    4. New Zealand
    5. Switzerland
    6. Canada
    7. Ireland
    8. Denmark
    9. United States
    10. Bahrain

    Top 10 in Income Inequality, with Gini* Scores:
    1. Hong Kong (43.4)
    2. Singapore (42.5)
    3. United States (40.8)
    4. Israel (39.2)
    5. Portugal (38.5)
    6. New Zealand (36.2)
    7. Italy (36.0)
    Tie Britain (36.0)
    9. Ireland (34.3)
    Tie Greece (34.3)

    The “share of income or expenditure” of Hong Kong’s poorest 10% is 2.0 and the richest 10% 34.9.

    *In the Gini measure of equality, zero would mean every person has an equal share while 100 means that one person has it all and the rest nothing.

  26. Submitted by Paul Udstrand on 11/17/2011 - 09:58 am.

    As Hiram points out, this author does seem to have difficulty writing titles that actually describe his content. However for the first time Johnson is actually saying something here, and that’s an improvement.

    I think a obvious point is being missed however. Looking at the graph and the data I think it’s kind of obvious that economic disparity is actually bad for the economy. When you look at periods of increased disparity you’re looking at periods of economic decline. Yes, there were bubbles that made the economy look good in some ways, but under the surface in the 20’s and the 90’s we were laying the groundwork for the the great depression and recession.

    It all depends on how you define a “good” economy. If you define it purely in terms of GDP, or in terms of how well off the wealthy are, the 20’s and 90’s look good. But if you define in terms of how well off the majority of people are- you see the economy declining, until it crashes.

    Kevin Phillips calls that period of lower disparity in the 50’s and 60’s the great contraction and points out that middle class affluence grew at unprecedented rates during those periods. Most ordinary people would call that a good economy, and in a democracy that’s what you would expect.

    It’s already been pointed out that the author fails to actually explain this, maybe he’ll come back to it. However I think it’s clear that tax policy actually has a lot to do with it. For one thing tax rates in general were higher, which allowed for more government spending on infrastructure, research, and anti-poverty programs (like social security veteran’s benefits). The other tax policy was progressivity, which was largely eliminated by Reagan. At one time the tax rate on the wealthy was as high as 94%. We still had wealthy people, but that kept the disparity lower by redistributing their wealth. The reduction of those tax rates has obviously allow more wealth accumulation. The third leg of the disparity tripod has been the financialization of the economy. When the finance sector grows as a proportion of the economy as it has in the last 30 years, you see this accumulation of wealth because that’s how the wealthy grow their wealth for the most part. The growth of the financial sector is what drives the executive pay and everything else. The problem is you have too much money flowing around non-productive business, the financial sector doesn’t actually produce anything, it just moves money and paper around. This is why such huge bubbles of various types emerge during periods like this.

  27. Submitted by Paul Udstrand on 11/17/2011 - 10:49 am.

    I would add a fourth leg to my tripod (sic), deregulation. The periods leading up to and during the greatest disparity were highly deregulated periods. This deregulation was actually designed to give the wealthy the ability make as money as possible, and they did. Behind every bubble and recession is a financial crime wave of some kind. When you legalize corrupt practice, and eliminate oversight, you invite disparity and disaster.

  28. Submitted by Dennis Tester on 11/17/2011 - 11:25 am.

    “*In the Gini measure of equality, zero would mean every person has an equal share while 100 means that one person has it all and the rest nothing.”

    Bernice, that’s because socialism is the antithesis of economic freedom, which is the primary requirement for a free society.

  29. Submitted by Paul Udstrand on 11/17/2011 - 11:31 am.

    I should clarify. In a capitalist economy a certain about of disparity is inevitable, and probably desirable, so “disparity” itself is not “bad”. I think what we need to be working out is how much disparity can a good economy tolerate and under what circumstances.

  30. Submitted by Dennis Tester on 11/17/2011 - 11:39 am.

    I agree with Paul that the growth of the financial sector was a negative turn of events for the economy because, as he said, the financial sector doesn’t actually produce anything, and those aren’t the blue collar jobs that are important in maintaining a middle-class.

    The problem is that investors don’t have anything to invest in anymore other than financial services because the manufacturing sector has been destroyed by organized labor.

    The solution is to attract foreign manufacturers to the U.S. with zero corporate income taxes. That, coupled with a zero capital gains tax rate will attract American investors back to the sector that actually builds things, creating blue collar jobs again.

    If you want to re-grow and expand this economy so people have good-paying jobs in the private sector, you have to stow your resentment for people who will make a lot of money as a result. It’s as simple as that.

  31. Submitted by Paul Udstrand on 11/17/2011 - 01:50 pm.

    Dennis, you almost had it. The problem is your ideological demand that Unions be blamed despite reality. Union participation has been steadily and rapidly decreasing during the collapse of US manufacturing, and union participation started decreasing before that collapse, not after it. You can’t blame unions for the collapse of a largely non-unionized manufacturing sector. It was investors demanding greater returns on their stocks that drove manufacturing jobs out of the country, not unions. The textile industries didn’t move to Asia because of unions, they moved because no one in the US, union or non-union will work for 10 cents an hour.

  32. Submitted by Annie Grandy on 11/20/2011 - 07:34 pm.

    #33 Dennis Tester
    “attract foreign manufacturers to the U.S. with zero corporate income taxes”
    Who, then will pay for the construction and maintenance of roads and bridges that will transport these companies’ raw materials and employees to these plants and finished goods and customers to the point of sale?
    Who, then will pay for the educations of the skilled and even unskilled (obedient, punctual and consistently attending) employees to work in these plants? Who, then will pay to educate those who will educate these workers?
    Who, then will pay for the security provided by local and state police and plant protection by firefighters?
    Are the people in these jobs supposed to work for nothing?
    That is slavery and slavery is the antithesis of the freedom we all deserve and expect as equal members of this “supposedly free society” you reference in #1.

  33. Submitted by Joel Jensen on 11/21/2011 - 07:33 pm.

    Despite all the wailing and gnashing of finely shaped pearly white teeth, the rich are making more and paying less of it in taxes than they did 20 years ago, even measured by their effective rate of federal income tax.
    We’re not asking them to pay “more”. We’re asking them to start paying something near to what they did 20 years ago, something closer to what the rest of us pay in effective tax rate. This shift from progressive to regressive taxes has distributed more wealth to the wealthy.
    Regressive taxes are a greater part of government revenue than we might imagine. Federal Personal Income Taxes account for only about 40% of federal government revenue (about the same as the highly regressive payroll taxes.) In Minnesota, State Personal Income Tax accounted for only 31% of total state/local revenue in 2008. All told, personal income tax accounts for roughly 36% of all government revenues. So, over $6 of every $10 comes from a varying degrees of regressive taxes.
    On a state and local tax level, even Minnesota (one of the least regressive states) applies effective overall tax rates on the middle class that are surprising higher than those at the top – a major shift from only a few decades ago.
    Back in 1990, the differences in effective rates paid for all our state and local taxes and fees etc, were within a few tenths of a percent for most categories of income. It wasn’t progressive, but at least it wasn’t regressive.
    Since then, while the rich grabbed a much greater slice of the income pie and the middle class stagnated (relying increasingly on easy credit to sustain their spending levels), things have changed when it comes to taxes.
    The effective state/local tax rates for the lower, middle and upper middle categories have increased since 1990. Effective rates for the bottom categories have gone up the most with the second lowest income category going from 11.1% to 13.3%. The middle (5th) category started at 11.1% in 1990 and now pays an effective tax rate of 12.1%.
    But at the top, while income was going up, effective tax rates were going down.
    The effective rate for the Top 10% has gone down from 11.8% to 11.5%. For the Top 5% it went down from 11.6% to 10.1%. For the Top 1% it went down from 11.2% to 9.7%.

    And yet the 1% is whining about being asked to pay something closer to the effective rate paid by the middle class? Boo. Hoo.
    Under the higher effective tax rates of the 1990s the 1% somehow continued to drag themselves to work, continued to invest, continued to respond to increased aggregate demand by adding plant production capacity and workers to meet that demand (i.e. they ‘created’ jobs).
    But now we’re told that going back to the ‘uncertain’ or ‘frightening’ state of affairs that existed in the 1990s will undermine our recovery or cause the 1% to hold trillions of their capital on the sidelines instead of investing (something they’re already doing, presumably awaiting the return of sustainable consumer demand.)
    We’re told that a better option is to further depress the aggregate purchasing power of (and consumer demand from) the middle and lower income segments of our society.
    Somehow for these already financially strapped segments of our economy, the glowing prospect of a slower rate of increase in the national debt over the next decade or two will supposedly overcome their smaller disposable income and job uncertainty. (No wonder these 1% folk ran us off an economic cliff.)
    Beyond all arguments of fairness or regarding the impact of such wealth and income disparities on the health of our representative democracy, there is another argument that should be persuading the 1% to be less greedy and short-sighted.
    By starving their own consumer base they are sowing the seeds of their own economic destruction – one that cannot be avoided by shifting their reliance to foreign middle classes whose continued growth is likewise dependent on the buying habits of American middle class consumers.
    That’s a rule of economic gravity that even a Gaussian copula formula cannot overcome.

    Sources:
    * 2011 Minnesota Tax Incidence Study(Using February 2011 Forecast)
    http://taxes.state.mn.us/legal_policy/Documents/other_supporting_content_2011_tax_incidence_study_links.pdf
    As to Effective State/Local Tax Rates by Income:
    Table 1-8 Pg 34/160 pdf (Effective Tax Rates by Population Decile
    All Taxes, 1988–2008, 2013 (est.))
    Who Pays? A Distributional Analysis of theTax Systems in All 50 States (2009)
    http://www.itepnet.org/whopays3.pdf

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