The WRONG Way to Look at Income and Wealth

(A Poorly Crafter Viewpoint, and My Response)

Inequality has run Amok. Do Leaders Care?


NY Daily News
Be Our Guest
By DMITRI IGLITZIN & STEVEN HILL
Posted Wednesday, June 27th 2007


When pets are poisoned by imported pet food or U.S. attorneys are fired under suspicious circumstances, Congress gears up hearings and vows quick action. A far greater scandal, however, has hardly gained the interest of legislators or the presidential candidates. That is the increasing wealth gap between the rich, the middle class and the poor, which is reaching alarming proportions.

The top 10% of income earners in the United States now owns 70% of the wealth, and the wealthiest 1% owns more than the bottom 95%, according to the Federal Reserve. In 2005, the top 300,000 Americans enjoyed about the same share of the nation's income - 21.8% - as the bottom 150 million.

New York is an especially bleak case study. The top fifth of earners in Manhattan now makes 52 times what the lowest fifth makes - $365,826 annually compared with $7,047 - roughly comparable to income disparity in Namibia.

Meanwhile, the ratio of average CEO to worker pay in the U.S. shot up from 301-to-1 to 431-to-1 in 2004. The average CEO now earns substantially more in one day than the average worker earns all year. Adding insult to injury, taxpayers actually give tax breaks to corporations for those salaries, to the tune of hundreds of millions of dollars.

In a country founded on the principle that "all men are created equal," this stark and growing economic inequality has become a third rail. Almost no one in political leadership touches it for fear of being accused of inciting class warfare.

Government has more than a right to confront the problem. It has an obligation to do so.

A small first step would be passing the Income Equity Act, denying corporations a tax deduction for excessive CEO salaries (defined as pay greater than 25 times the company's lowest full-time worker). They could still pay CEOs whatever they wished, but taxpayers would no longer subsidize it. That would create downward pressure on executive income while saving taxpayers hundreds of millions of dollars.

More substantive would be a fix to Social Security's dirty little secret of favoring the rich: Annual wage income above $94,200 is completely untaxed by Social Security. While an average worker pays 6.2% of her income to Social Security, a CEO earning $1 million pays only 1% of his salary. As is, only 83% of all wages are subject to Social Security taxes, so this would increase annual revenues by nearly 20%, or $100 billion a year.

Other worthy proposals include providing child care for working parents, expanding health care and lowering college costs. But the most direct way to address inequality is to reimpose higher income tax rates. Under President Dwight Eisenhower's Republican administration, the maximum marginal tax rate was 87%. The Reagan tax cut of 1981 dramatically lowered this to 50%, then again to 28% in 1986. Since then, no surprise, our nation has seen a steady rise in wealth disparity.

It is long past time for our political leaders toput aside the scandal du jour and take urgently needed action to slow if not reverse our nation's growing economic inequality.



Iglitzin is a labor law attorney. Hill is director of the political reform program of the New America Foundation and author of "10 Steps to Repair American Democracy."




Income Isn’t Wealth and Income Equality Isn’t the Answer

JMK

Mr. Dmitri Iglitzin and Mr. Steven Hill both subscribe to the “fixed pie” view of the economy.

The inane view that “there’s only so much money in the economy at any given time, so one person earning a lot of money, means many others will have to earn a lot less.”

That’s a view that’s been proven wrong since the 19th Century, when that idea first came into being. Today it’s folly is a staple of all first semester economics courses.

The fact is that the market determines what any given skill is worth. Skills that are particularly difficult to attain and master skills tend to be valued much higher than those that are more mundane.

Income disparities are not actually a sign that an economy is extremely healthy, NOT the reverse.

Moroever, income, contrary to what Mssr’s Hill and Iglitzin would have us believe, is NOT wealth.

In fact, there is virtually no overlap between the richest 1% of Americans and the top 1% of income earners! The truly “rich,” the Teresa Heinz-Kerry’s, the Tom Keane Jr.’s and the Kennedy’s don’t rely upon income as a major source of their wealth. Ergo, income equality is NOT the same as wealth equality, not that the latter is a good thing either.

In their article, Inequality has run Amok, they take issue with CEO “pay,” comparing CEO “pay” (total compensation) to average salaries.

That comparison conveniently does NOT count the full “compensation” of teachers, police officers, construction workers and firefighters, for instance, their healthcare and pension programs, their 457s and 401-Ks, etc., BUT it does very much count CEO “stock options.”

In fact, CEO stock options are investments, NOT mere “compensation.”

Just as we don’t count an employee’s 457 and 401-K contributions as “compensation,” a CEO’s stock options shouldn’t be counted as raw “compensation” either.

The reality is that there’s no way for any educated person today to argue in favor of the “fixed pie” economic model and because of that, there’s no way to argue, as Mr. Hill and Mr. Iglitzin do, in favor of higher marginal tax rates.

For one thing, higher across the board tax rates ALWAYS result in lowered government revenues, as more higher income earners (those Hill and Iglitzin would like to target) simply defer more of their compensation in various tax exempt vehicles, leaving the bulk of the tax bite to fall upon those earning lower incomes, those least able to defer income in order to avoid the full impact of the tax increase.

If either Mr. Hill or Mr. Iglitzin really cared about those earning lower salaries, one or both of these men would be supporting replacing the income tax with a consumption tax, along the lines of the Fair Tax, which would kick in after the first $30,000 spent each year, exempt medicines and basic foods like milk, bread, meats, etc. and tax luxury good slightly higher, having the effect of not only taxing the truly “rich” and the highest income earners more, as they all spend much more, but it would also tax the huge and growing underground economy of “off-the-books” workers, etc.

Instead the Steven Hill’s and Dmitri Iglitzin’s of the world still espouse 19th Century solutions (higher income tax rates) to deal with a problem (wide disparities in wealth and in tax burdens) that’s really not about income at all!