The Congressional Budget Office (CBO), a nonpartisan body, recently released a report on income disparity in the U.S. and, surprise, surprise, we’re back to the income disparity of 1928 . . . and that took the Great Depression and World War II and Franklin Roosevelt to fix.
One of the delights for me was the highlighting of the Gini Index of income disparity. This index is a number between zero and one, with zero being perfect sharing of income (Socialism!) and one being perfect despotism of income, one group gets all of the money, the rest none. This last summer Time magazine ran an article on the London, England riots and used the tag line “They should have seen it coming.” Time’s argument was that Britain had one of the highest income disparities in Europe, exemplified by a Gini coefficient of 0.38 (second highest in Europe behind Portugal). According to the CBO report, our Gini number hit 0.57 in 2007, far, far worse than in England! I wrote a letter to Time pointing this out with the question, “When should we expect riots here?” They didn’t print my letter.
Since then the “Occupy Wall Street” movement appeared which, bless them, has been nonviolent so far, that is if you exclude the behavior of various police departments. The CBO report is a free download and worth reading, but the Gini Index tells all, and it has been going up and up for three decades in this country. Little more need be said.
If you haven’t followed this blog, the reasons for this are fairly simple. Beginning with Ronald Reagan, the top income tax rate fell from 70% to below 40%, where it is now. (Please realize that the “top” or “marginal” rate is only paid on income above a certain high level. Everybody pays the same rates on each level, and the rates go up as the income goes up. Most people don’t make enough income to pay the highest rate at the highest level.) What this huge drop in the highest marginal rate meant to business executives, as an example, is that instead of receiving nontaxable finge benefits as perquisites, they started receiving more salary. Then the CEOs began manipulating their Boards of Trustees into ever higher compensation. The ratio of CEO to average worker salaries skyrocketed during this period. The money accumulated by the highest earners was then spent politically (on both Republicans and Democrats but more on Republicans) to lower taxes on the highest income categories and specifically on income earned from investments /”capital gains” (with CEOs arranging to receive more and more compensation in the form of stock options, resulting in their income being taxed at considerably lower rates than ordinary folks) and other tax benefits that allowed even higher concentrations of wealth. Today the top 400 families of Americans control as much wealth as the bottom 150,000,000 Americans.
What isn’t being discussed, yet is the cost of this income disparity. And, if you think there isn’t a cost, think again. A good start on understanding some of this has been summarized in an excellent TED presentation you can find here: http://www.ted.com/talks/richard_wilkinson.html
PS If you aren’t familiar with stock options they are very simple. I promise to sell you XX shares of stock (an option to buy) at a set price (usually a low one). At some time in the future, when the stock price is higher or much higher you can exercise your option: you buy the stock at that low, low price and immediately resell it at the current much higher price. And, with “capital gains” taxes at 15%, the taxes paid on this would be far less than if considered ordinary income. The one advantage to the company is, if the CEO drives the price of the stock down his/her options are worthless.