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.

Exploring Income Inequality, Part 4: More on the Widening of Inequality Since the 1970s

December 1, 2011 at 1:38 pm

Yesterday’s post in our series showed that average incomes nearly quadrupled between 1979 and 2007 for the top 1 percent of households, while growing much more modestly for households in the middle and bottom of the distribution.

Today, we’ll take a closer look at average households at different points in the income distribution, using Congressional Budget Office estimates of average after-tax incomes from 1979 to 2007, adjusted for inflation.  (See our guide for more information on data sources and historical trends.)  Pay attention to the scale of these charts to truly understand the magnitude of the income gap.

Tomorrow, we’ll take a look at the concentration of income and wealth.

Arrow to the Heart of Inequality

December 1, 2011 at 10:56 am

Our series of posts this week describing trends in income inequality has prompted a natural question:  what has caused the sharp rise in inequality over the past three decades or so?

The causes are complex and not fully understood, but via Mark Thoma, a good place to start is a new essay by Nobel Prize-winning economist Kenneth Arrow.

Arrow acknowledges the standard economic explanations, based on the impact of technological advances and globalization:

Skilled industrial jobs have disappeared, while growing information services require a different set of skills. This shift has undoubtedly been augmented by globalization, which has resulted in considerable imports of manufactured goods. The weakening of unions is in good measure attributable to the relative decline in manufacturing, where unionization is easier.

He also points to the “steady attack on the use of the tax system as a means of equalizing income,” citing the steep drop in the top marginal income tax rate in recent decades and the weakening of the estate tax.

In addition, Arrow notes that “Contemporaneous with the decline of manufacturing has been the increase of two service industries, finance and health.  Profits from the finance sector, which historically have been about 10 percent of all profits, have risen to an extraordinary 40 percent.”  And while Gordon Gekko’s “greed is good” mantra may well apply to the normal competitive process, which tends to raise standards of living more broadly, it does not apply to today’s finance industry:

After all, the search for improvement in technology, and consequently in the general standards of living, is motivated by greed.  When the market system works properly, greed is tempered by competition.  Hence, most of the gains from innovation and good service cannot be retained by the providers….

But the products of the finance and health industries are individualized and complex.  The consumer cannot seriously evaluate them — a situation that economists call “asymmetric information.” … In these circumstances, greed becomes more relevant.  There arises an obligation to present the relevant information as fully as possible, an obligation that has been violated in the financial industry.

The piece as a whole is well worth reading.

Exploring Income Inequality, Part 3: Widening Inequality Since the 1970s

November 30, 2011 at 10:51 am

Yesterday’s post showed that the era of shared prosperity ended in the 1970s and highlighted the widening of income inequality since then.  Today, we’ll take a look at what has happened to income since 1979, using the comprehensive data in the Congressional Budget Office’s (CBO) recent report on inequality.

As the slideshow below shows, average after-tax incomes for households in the top 1 percent of the distribution nearly quadrupled between 1979 and 2007, after adjusting for inflation.  That compares with increases of about 40 percent for the middle three-fifths of the distribution and just 18 percent for the bottom fifth.

The CBO data shown here reflect a more comprehensive income definition than the Census data that we showed yesterday. As we explain in our guide, CBO uses a broader measure of income than either Census or tax return data alone can capture.

Tomorrow, we’ll take a closer look at incomes over the 1979-2007 period.

Greenstein on the Perils of a Balanced Budget Amendment

November 30, 2011 at 10:37 am

Testifying before the Senate Judiciary Committee’s Subcommittee on the Constitution, Civil Rights and Human Rights today, Center President Robert Greenstein explained why a constitutional balanced budget amendment would be unwise.  Here’s the opening of his testimony:

Thank you for the invitation to testify today.  I am Robert Greenstein, president of the Center on Budget and Policy Priorities, a policy institute that focuses both on fiscal policy and on policies affecting low- and moderate-income Americans.  We, like most others who analyze fiscal policy developments and trends, believe that the nation’s fiscal policy is on an unsustainable course.  As part of our work, we have been analyzing proposed changes in budget procedures for more than 20 years.  We have conducted extensive analyses of proposals to write a balanced-budget requirement into the Constitution, among other proposals.

The purpose of changing our fiscal policy course is to strengthen our economy over the long term and to prevent the serious economic damage that would likely occur if the debt explodes in future decades as a share of the economy.  But we need to choose our fiscal policy instruments carefully.  We want to avoid “destroying the village in order to save it.”

The goal of a constitutional balanced budget amendment is to address our long-term fiscal imbalance.  Unfortunately, a constitutional balanced budget amendment would be a highly ill-advised way to try to do that and likely would cause serious economic damage.  It would require a balanced budget every year regardless of the state of the economy, unless a supermajority of both houses overrode that requirement.  This is an unwise stricture that large numbers of mainstream economists have long counseled against, because it would require the largest budget cuts or tax increases precisely when the economy is weakest.  It holds substantial risk of tipping faltering economies into recessions and making recessions longer and deeper.  The additional job losses would likely be very large.

Click here for the full testimony.