Exploring Income Inequality, Part 5: The Concentration of Income and Wealth

December 2, 2011 at 2:57 pm

Yesterday’s post illustrated the magnitude of the income gap.  Today, we’ll take a closer look at the distribution of income and wealth, focusing especially on the share accruing to the top 1 percent.

As the slideshow below shows, the share of the nation’s before-tax income going to the richest 1 percent of households has been rising since the late 1970s and in the past decade has climbed to levels last seen in the 1920s.  Wealth is even more concentrated.

The slideshow is based on research from economists Thomas Piketty and Emmanuel Saez, who examine IRS data on the highest-income taxpayers, and from economist Edward Wolff, who analyzes trends in wealth using data from the Federal Reserve’s Survey of Consumer Finance.  (See our guide for more information on these data sources and historical trends.)

While the recent recession caused a sharp drop in the share of income and wealth in the top 1 percent, the surge in corporate profits and the recovery of the stock market since 2009 suggest that incomes at the top will recover quickly in the coming years, as they did following the dot-com collapse of the early 2000s.

Thank you for tuning into the series; we’ll combine all of the slides into a single slideshow for easier viewing and post it on the CBPP website (cbpp.org).  Stay tuned for future analyses.

GOP Payroll Tax Proposal Would Mean Even Bigger Cuts in Discretionary Programs

December 2, 2011 at 2:34 pm

CBPP issued a report today that takes a close look at the Republican proposal to pay for extending the payroll tax cut.  Here’s the opening:

The plan of Senate Republican leaders to extend and expand payroll tax relief includes a smaller payroll tax cut and would provide less than half of the economic boost of the Democratic alternative. The plan claims to offset the costs of its payroll tax cut by freezing federal employee pay and cutting federal employment, but that claim is misleading. The plan actually secures these savings by cutting the overall funds available for defense and non-defense discretionary programs for the next ten years. Senate Republican leaders also say their offset reflects a proposal from the “Bowles-Simpson” commission, but their plan would force discretionary cuts of more than $500 billion more than Bowles-Simpson.

The Senate defeated both the Republican leadership and the Democratic plans last night. With President Obama and many lawmakers committed to extending or expanding the payroll tax cut, however, the contents of both plans remain relevant. With the parties now likely to move toward negotiating a final agreement on the payroll tax, participants in those talks may well raise elements of these plans for consideration.

Click here for the full report.

Today’s Jobs Report In Pictures

December 2, 2011 at 9:27 am

Today’s employment report shows continued moderate growth in private payroll employment but a further decline in government jobs.  As a result, the overall jobs deficit remains huge and jobs remain hard to find.

Below are some charts to show how the new figures look in historical context. Here is our statement with further analysis.

See our chart book for more charts.

Related Posts:

A Warning on the Likely Impact of Repeating the Corporate Tax Holiday

December 1, 2011 at 3:45 pm

Not long after Congress enacted a tax holiday in 2004 for foreign profits that corporations “repatriated” to the United States, some companies that had lobbied hardest for it — pledging to use the money to invest domestically and create jobs — announced massive layoffs while using the repatriated profits mostly for things like repurchasing their own stock and paying bigger dividends to shareholders.

Now, even as corporate lobbyists campaign for another tax holiday, two of the corporations that benefited the most from the first one — Pfizer and Hewlett-Packard — have announced major stock buybacks and layoffs.  Such examples, combined with abundant evidence that the 2004 holiday failed, should serve as a strong warning to any policymakers who think that repeating the holiday would significantly boost the U.S. economy.

For starters, corporations are flush with cash.  As the New York Times has reported:

When Pfizer cut its research budget this year and laid off 1,100 employees, it was not because the company needed to save money.  In fact, the drug maker had so much cash left over, it decided to buy back an additional $5 billion worth of stock on top of the $4 billion already earmarked for repurchases in 2011 and beyond.  The moves, announced on the same day, might seem at odds with each other, but they represent an increasingly common pattern among American corporations, which are sitting on record amounts of cash but insist that growth opportunities are hard to find.

The Times also reports that “Hewlett-Packard announced a $10 billion stock repurchase in July, and jettisoned 500 jobs in September after it discontinued its TouchPad and smartphone product lines.”

Under the first repatriation holiday, Pfizer brought $37 billion in foreign profits back to this country — more than any other company — and eliminated 10,000 jobs.  Hewlett-Packard repatriated $14.5 billion and laid off 14,500 workers.

A repatriation holiday would be an even bigger mistake the second time around for several reasons.

First, it would send a clear signal to companies that more holidays would come in the future, encouraging them to invest more overseas and bring the profits back during the next holiday.

Second, it would encourage companies to shift profits earned in the United States to offshore tax havens to avoid U.S. corporate taxes, and then bring them back during a future tax holiday at a massively reduced tax rate.

Third, it would raise deficits by tens of billions of dollars over the next decade, the Joint Tax Committee estimates.

Fourth and finally, it would be deeply unfair to domestic companies, which invest in the United States and create jobs but wouldn’t be eligible for the tax break.

Required Reading on the Payroll Tax Cut — and Much More

December 1, 2011 at 3:40 pm

Policymakers debating whether to extend and expand the payroll tax cut for working families and pay for it with a modest surtax on people with income above $1 million would be well advised to read a Bloomberg op-ed by Nick Hanauer, a wealthy and extremely successful entrepreneur and venture capitalist.

Describing the growing economic insecurity among millions of middle-class families, Hanauer points out the risks that three decades of burgeoning income inequality pose to the economy as a whole:

If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year.  It’s worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend.

Our post on this “great income shift” last year included the table below, which shows how the shift has benefited those at the very top of the income ladder.

Impact on Average Incomes of Change in Income Distribution
Between 1979 and 2007
Income Group Actual Average
Income in 2007
Average Income if
All Income Levels Had
Enjoyed Equal Growth
Since 1979
Gain or Loss
From Income Shift
Since 1979
Bottom Fifth $17,700 $23,700 -$6,000
Second Fifth $38,000 $48,000 -$10,000
Middle Fifth $55,300 $68,300 -$13,000
Fourth Fifth $77,700 $89,400 -$11,700
Top Fifth $198,300 $157,600 $40,700
Top 1 Percent $1,319,700 $537,100 $782,600

To be sure, average incomes grew at all income levels from 1979 to 2007, according to data from the Congressional Budget Office.  But, because incomes grew very strongly at the top but only modestly at best for other income groups, the wealthiest Americans now enjoy a much larger share of total income.  If incomes among all groups had grown at the same rate over this period, households in the middle would have $13,000 more in average annual income.  See the graph below:

Hanauer then sums up the case for putting a priority on middle-class paychecks:

Consider, for example, that a puny 3 percent surtax on incomes above $1 million would be enough to maintain and expand the current payroll tax cut beyond December, preventing a $1,000 increase on the average worker’s taxes at the worst possible time for the economy.

Finally, he debunks the argument that policymakers’ top priority should be to advance the tax interests of the nation’s wealthiest households:

We’ve had it backward for the last 30 years.  Rich businesspeople like me don’t create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit.  That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So let’s give a break to the true job creators. Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.

Hanauer’s op-ed contains a number of other points and is a must-read in full.