[editorial note: back from a great break in Colorado with children and grandchildren, so postings will resume normal routine. edited in afternoon to add cite to Angry Bear post by Mike Kimel.]
The Congressional Research Service recently released a new report on U.S. income inequality. See Hungerford, Changes in the Income Distribution Among Tax Filers 1996 to 2006: The Role of Labor Income, Capital Income, and Tax Policy, CRS (Dec. 29, 2011) (Download Hungerford. Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006. Role of Labor Capital and Tax. 122911). The CRS report is a sobering document, especially in light of the growing unrest as ordinary people realize how their opportunities are limited by the increased control of resources at the top (e.g., Occupy Wall Street, the "99% vs. 1%, etc.). For example, see the New York Times article today on inequality and the fact that U.S. mobility trails that of Europe and Canada. The article is based on a number of different studies such as that of Marcus Jantti and colleagues, American Exceptionalism in a New Light, and suggests that inequality has lingering impacts, especially on the poor and the ability of the poor to move out of the bottom. See Jason DeParle, Harder for Americans to Rise from Lower Rungs, New York Times, Jan. 4, 2012 (in print edition, Jan. 5, at A1). The article discusses the considerable evidence that there is limited access today to what we have called the "American Dream": stickiness exists especially for the poor and the affluent, as the poor generally lack opportunities to get out, and the affluent generally have all the advantages they need to stay affluent. See especially the graphic accompanying the article, Comparing Economic Mobility. Id. at A12. The causes of America's mobility problem are multiple--poverty; a thin safety net (threatened even more now by the right-wing's determined attack on earned benefits like Social Security and Medicare under cover of their purported concern about deficit reduction); the disadvantages of single motherhood; high incarceration rates, especially for black males; a long history of racial stratification that still impacts daily life; the pay tilt towards educated workers (usually made up of children of the affluent); the decline in unionization compared to other affluent countries; and the magnitude of the gap between the rich and the vast majority of Americans. Even conservatives, who tend to think that mobility is overrated as a policy goal, may conclude that "stagnation at the bottom [is] alarming and warn that it will worsen." Id. at A12 (citing conservative journalist Reihan Salam of the National Review and Daily Post).
Meanwhile, not surprisingly, the right-wing in this country continues to pursue exactly those policies that have so contributed to the decline of mobility, the stagnation of incomes for the lower income population, and the loss of employee power in the workplace. See, e.g., the plan of the Republican majority in Indiana to enact so-called "right to work" legislation that allows non-union members to freeload off unions by getting the bargained for rights and wages without paying dues to make that bargaining possible.
What those interested in tax policy should pay especial attention to is the role of tax changes over the last 40 years in augmenting the inequality gap. Tax is not the sole culprit, but it is a contributor and something that Congress can easily do something about, if it can summon the political will to act. From the report summary:
Inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.
Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006. Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.
Three potential causes of the increase in after-tax income inequality between 1996 and 2006 are changes in labor income (wages and salaries), changes in capital income (capital gains, dividends, and business income), and changes in taxes. To evaluate these potential reasons for increasing income inequality, a technique to decompose income inequality by income source is used. While earnings inequality increased between 1996 and 2006, this was not the major source of increasing income inequality over this period. Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.
The members of Congress who pass such preferences (the GOP in particular, but certainly various members of the Democratic party such as Max Baucus fall into the same group) spin such preference for the rich (a group which includes most members of Congress) as supporting job creation. Their spin suggests that anytime anyone invests in corporate stock, they are acting as entrepreneurs and increasing the possibility of jobs for the rest of us.
The spin is mostly just that. Most of the capital gains from sales of corporate stock have nothing to do with having invested in a company directly in ways that provide more capital to the company and lead to creationof jobs. Most of such gains are from secondary market sales--sales of stock from one rich person to another. Secondary market sales have absolutely nothing to do with job creation or entrepreneurship: they have everything to do with acquiring more money with taxes that are at extremely low preferential rates.
Similarly, getting dividends from a corporate enterprise has nothing to do with job creation--they just make the corporate stock holder richer at a preferential tax rate (under the 'temporary'[ provision enacted in 2003 and extended several times since). Many 'freshwater' economists and many tax professionals argue for "integrating" the corporate tax and the tax on dividends or outright elimination of the corporate tax, claiming that the dividend tax represents a 'double' (and therefore wrong) taxation of corporate profits. That logic has led to an increasingly rich variety of corporate loopholes built by Congress into the Code--from the various expensing and bonus depreciation provisions (letting corporations reduce their taxable income compared to their actual business profits by claiming a deduction for capital expenditures) to various preference gimmicks, such as the "domestic manufacturing deduction" that provided a significant reduction in the corporate tax rate to all kinds of industries, including many processes that few would consider to qualify for "manufacturing."
But the double taxation claim is merely that--a claim based on the way the theor treats corporate entities. Economists been unable to prove empirically that shareholders actually bear the burden of the corporate tax. But even if they do, there are other reasons having to do with institutional power and the sustainability of democracy for supporting a corporate tax. If you start out thinking that "only people pay taxes", you would likely conclude that "corporations can't pay taxes; therefore, the corporate tax is 'really' being paid by the owners of the corporation." Of course, we used to say that only people can vote, so only people should be allowed to spend money on campaign speech. Now the Supreme Court--which has treated corporations as "persons" under the Constitution since the nineteenth century--has decided that corporations have free speech rights that are broad enough to allow them to use their vast resources to influence who gets elected. Thus, corporatism has paved the way for corporations to buy elections and then lobby for the laws and regulations that suit them, while arguing that corporations shouldn't pay any taxes to support the government that grants them various subsidies through the election/lobbying/regulation (deregulation) process. It has supported the US movement towards "free trade" agreements, such as NAFTA, that have been difficult for the poor in countries with whom we trade, for environmental protections in the U.S., and for locally owned businesses and local workers in the U.S.
If you avoid the corporatist agenda and start out with the assumption that corporations pay tax (because we have treated such entities as taxpayers under the Code), then you can recognize that corporate tax policy can be set to permit reasonable profits and to disincentivize unreasonable--i.e., societally undesirable--behavior. An example would be the problem of corporate consolidation in a globalized economy, which provides inordinate power to multinational entities (I have called them quasi-sovereigns) and significantly reduces the power of ordinary employees.
To understand something about the problem of corporate consolidation (as if the 2007-08 financial crisis caused by "too big to fail" financial institutions shouldn't have been enought), read the book Methland: The Death and Life of an American Small Town, by Nick Reding (Bloomsbury 2009). In trying to understand the causes of the meth explosion in U.S. rural towns, it details the devastating effect of corporate consolidation on rural workers and economies--Big Agriculture and Big Pharma essentially bought out the vertical processes (for Ag, from seed to table, with a few firms like Cargill, Tyson, and ADM controlling huge swaths of the American food system). In the process of gaining control, they consolidated many small, local producers, shut out unions, sought-out illegal immigrant labor to avoid wage and benefits laws, and dropped wages--in one case, wages for workers in an Iowa meat processing plant dropped overnight from around $18 an hour to less than $6 an hour, with a simultaneous cut off of benefits. See Methland, at 69 (noting the decline in wages when Cargill took over the formerly locally owned Iowa Ham plant in 1987).
"[T]he evolution of the meth epidemic had occurred in lockstep with three separate economic trends that had contributed to the dissolution of small-town United States. ... And the things that spurred this simultaneous rise and fall: the development of Big Pharmaceuticals, Big Agriculture, and the modern Meican drug-trafficking business." Id. at 109.
"By 1999 ... Cargill-Ecxel [an agribusiness plant in Ottumwa Iowa] placed newspaper advertisements in the poork, industrial border towns of Jarez and Tijuana offering two free months' rent to workers who could make it to Ottumwa from Mexico. For Cargill and the rest of the packing conglomerates, employing illegals would appear to have been the best of all possible situations, for the simple reason that these employees, lacking legal identification, didn't technically exist, and therefore had no rights. Nor were they apt to argue with the harsh conditions of an industry that continues today to have the highest rate of employee injury in the United States. A failed 2001 federal criminal case brought against a Tyson plant in Shelbyville, Tennessee made clear that corporations would essentially not be held liable for employing or recruiting illegal immigrants to work in the plants. Despite the fact that two Shelbyville managers were caught on tape by federal investigators asking human traffickers for five hundred undocumented workers over four months, Tyson's defense team successfullyh maintained that it's too difficult for Tyson employees to determine who's who among legal and illegal employees. The ruling institutionalized the notion that employers of immigrants are not beholden to offering the same rights to workers that other companies must, for the simple reason that they don't know--and don't need to know--who works for them." Id. at 153.
"Consider what used to happen in Oelwein, Iowa before the large scale consolidation in the 1980s and 1990s of almost every niche of the food-production chain. Corn farmers...would have bought seed from the local seed company. Once harvested, that corn would go to a grain elevator, also locally owned. It would be shipped to a small feedlot in order to fatten cattle raised in Nebraska, Wyoming, Florida or Arizona; or perhaps it would go to a dairy in northern Missouri, a chicken farm in Indiana, or a pork outfit in Kansas. The variables were infinite and the market was dynamic. The barge, truck or railroad car that carried the grain was likely independently owned, too, as would have been the pigs, cows, and chickens it fed. At each stae, the price would have to be 'discovered' as multiple potential customers vied to handle the product, with competition keeping the price 'true'... in the context of the marketplace. Eventually, the Oelwsin corn used to feed sows in Topeka might return to Oelwein in the form of hocks to be disassembled, packaged, and shipped at the Iowa Ham plant... From there, a whole new market ... would take over in order to distribute the food and sell it at the retail level, perhaps at the grocery once owned by the Leo family (which today is an IGA). James and Donna Lein would have been the essential building blocks in a vibrant system in which the variables contributed at all stages to what's called the 'social capital' of rural communities.
Beginning with the precedent set in 1987 with the IBP takeover of Hormel in Ottumwa--and the subsequent takeover of Iowa Ham by Gillette--a few companies would come to control most of the U.S. food business. ... Price discovery no longer happens; the value chain is controlled by a limited number of entities. Seed is not sold; it's biogenetically engineered by companies like Monsanto, which entered into a joint venture with Cargill in 1998. Cargill--not the farmer--owns the corn this is grown [under contract].... In the Illinois and Ohio river valleys, Cargill owns 50 % of the grain elevators and other storage facilities. Along with Tyson, Swift and the National Beef Packing Company, Cargill owns 83.5% of the beef packing inustry [and so on for turkey production, flour milling, ethanol production, animal feed plants, and soybean crushing]. Id. at 169-160.
Once competition has been annihilated ... the surviving companies, like Cargill, begin to effect political decisions through their enormous lobbying capabilities. The government no longer governs unimpeded: it does so in tandem with the major companies. Id. at 161 (citing Douglas Constance, a rural sociologist at Sam Houston State University, Huntsville Texas).
This loss of local ownership through massive consolidation of business enterprises was a change orchestrated from the top of the U.S. government under Reagan's policies of privatization, deregulation, tax cuts (and loosening of tax and antitrust mechanisms that had worked against consolidation), and militarization. It is a change continued today through the more and more flexible tax regulations and Code provisions governing tax-free reorganizations. These policy approaches supporting consolidation of enterprises both vertically and horizontally favor the development of powerful corporations that can influence governmenbt in their favor while demanding subsidies (bonus depreciation, expensing, and other tax loopholes that have steadily reduced corporate taxes well below 25% for most of those that pay them at all, even while the rates remained statutorily at 35%. Looking at the way corporate consolidation has harmed rural America should lead us to ask whether reversing the policies favoring such consolidation--such as making tax-free reorganizations much more difficult, pursuing anti-trust violations under new theories that look to the problems inherent in quasi-sovereign corporate entities, charging corporate and other businesses an expatriation fee equal to the increase in value of business assets while in the United States--may not be worth considering as one step in remedying both the "too big to fail" and "quasi-sovereign" problems while also providing resources to address the thin safety net and falling wages of the bottom of the income distribution.
For more ideas on inequality and its relation to a dynamic, growing economy and more stable society, see Mike Kimel's post on Angry Bear, The Pelzman Effect: Why Economic Growth Has Slowed in the US over Time.