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Where Have You Gone, Gordon Gekko?
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"Over the first half of the twentieth century, after the industrialists and financiers of the first Gilded Age rose to the same levels of wealth and power as today's hedge fund managers, labor unions and populist social movements helped to curtail the effects of extreme inequality. Something similar is in the making now."
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Hedge fund manager John Paulson made $3.7 billion in 2007. [1] He made this money because of a clever bet against the subprime mortgage market, while 2.2 million American families foreclosed on their mortgages, with blacks and Latinos much more likely than whites to have lost their homes. The money Paulson took would have paid for a new police officer for every one of the 87,576 local government units in the United States. Yet the $3.7 billion all went to one man. He did nothing to contribute to America's productivity or to society, he used other people's money, he took advantage of investment tools that have been set up to benefit people like him. He paid a 15% capital gains tax, compared to a 40% total tax paid by many working people. Income has been DROPPING for 90% of American households over the past 30 years. America's overall productivity has continued to rise since 1980, but compensation for average workers has remained stagnant. The average two-income family today has less disposable income than one-income families had 30 years ago. [2] Economic inequality. Sounds boring. Greed is a more interesting topic. "Greed is good," said Gordon Gekko in the 1987 film 'Wall Street.' Reaganomics would reinforce John F. Kennedy's belief that "a rising tide lifts all boats." Free markets were the answer, for then prosperity would trickle down to all America. But it hasn't worked. As a small number of people take the greatest share of America's wealth, and pay relatively little back to the system that made it possible for them to do so, then everyone else is left with the payments for mortgage, health care, child care, infrastructure, education, and social programs. It has been argued by some that the rich deserve their money, for they work hard and take risks. And that capitalism is ultimately the fairest economic system. Left to its own devices, the 'invisible hand' will ensure that the community benefits from individual actions, and that 'comparative advantage' will equalize trade throughout the world. But Adam Smith, the father of capitalism, believed that unrestricted businesses tends to engage in "conspiracy against the public." John Kenneth Galbraith said, "Capitalism left to its own devices, doesn’t work properly; it excludes the poor, ruins the environment, and fails to deliver enough collectively produced goods, such as roads, reservoirs, schools and hospitals.” The Reagan years through the present show that Smith and Galbraith were right. The seemingly outrageous example of John Paulson is becoming commonplace. The top 50 hedge fund managers last year earned $29 billion. The average salary for CEOs of large U.S. firms in all industries was $11.6 million in 2005, with some oil company and military defense executives making much more, up to almost $100 million a year. A group of about 13,500 Americans have more income than the 96,000,000 poorest Americans. Wealth, which is created over many years by income and other sources, is even less evenly distributed than income. The richest 1% of America holds almost $17 trillion in assets, compared to $15 trillion for the bottom 90%. The Gini Coefficient, a measure of inequality, has grown steadily in the U.S. over 30 years, from .394 in 1970 to .466 in 2001. [3] At the other end, wage earners are not being paid what they're worth. From the end of World War 2 to 1980 worker productivity and compensation rose at approximately equal levels. Since 1980, productivity has risen steadily, but compensation has remained stagnant. [4] Yet the working poor don't even get a break in taxes. When income taxes, social security taxes, sales taxes, transportation fees, and utility costs are included, the typical wage earner pays about a 40% overall tax. [5] Many wealthy Americans pay much less than 40%, because the greater portion of their income is not even considered income. It is in the form of capital gains, derived from financial assets, such as property and stocks, which are subject to only a 15% tax. The top 400 U.S. taxpayers, with an average income of $151 million, paid 18% in income taxes, 27% in total taxes. In 2003 almost 3,400 people with earnings of $200,000 or more paid NO income tax. [6] The capital gains windfall has been enhanced by a stock market which has grown 7 times faster than America's GDP since 1981.Two-thirds of the country's stocks are owned by the wealthiest 1% of Americans. The stock market is adding wealth to the accounts of the super-rich, but it has little relevance for average American workers. [7] From 1950 to 1975, the 30,000 richest Americans made $36 for every dollar earned by the bottom 90%. From 1981 to 2005, the 30,000 richest Americans made $141,000 for every dollar earned by the bottom 90%. [8] Yet the top tax rate went from 70% to 35% between those two times. The richest 1 percent of Americans received a half-trillion dollars in additional tax breaks between 2001 and 2008. Every U.S. taxpayer contributes about $600 a year to pay for the tax cuts that give $34,000 a year to each of the wealthiest 1% of Americans. [9] Adding to the insult is that, according to OMB Watch (watching the Office of Management and Budget), the IRS spends more time auditing poor taxpayers than rich ones. Very rich people battle for a continuation of the tax cuts. They adamantly oppose any changes in the capital gains tax, even though it is less than the overall tax on productive work. They are taxed very little for taking other people's assets and exploiting them for fees, dividends, and interest. And they would like to eliminate the estate tax, which is imposed on multi-million-dollar property gains, much of which has never been subjected to a tax. Millions of tax-free dollars have been made on property value increases that are largely due to years of strong American growth and productivity. The owners of these estates benefit further from public-funded national defense, local security, and property rights laws. It is reasonable to expect the very wealthy to return a fair share of their incomes, through progressive taxes, to the system that made their extraordinary wealth possible. But some of them have taken extreme measures to avoid taxes altogether. About 500 people a year actually renounce their U.S. citizenships and repatriate themselves to tax-friendly countries such as Belize to avoid the IRS entirely. [10] It's not only about individuals. Corporations have had a good time, too. The portion of federal revenue derived from corporate income tax has decreased from 33% in the 1950s to 12% in 2005. Over 60% of US companies reported no tax liability from 1996 to 2000. Eighty-two of our largest corporations paid no tax in at least one of the first three years of the Bush administration. [11] At a time when regular workers are not receiving their deserved share of their own productivity, wealthy business executives refuse to give back any of their unfair share. The Business Roundtable, an association of CEOs for top U.S. companies, has vehemently opposed "say on pay," which would give shareholders the right to vote on executive salaries. [12] Corporate lobbyists helped to defeat a proposal to put a limit on tax-free deferred pay. An attempt to raise the 15% tax rate on capital gains died in the Senate. [13] Just like the rich individuals noted earlier, many companies skip out on taxes by moving their headquarters to tax havens such as Bermuda or the Cayman Islands. According to the Center for Public Integrity, American oil and gas companies have nearly 900 subsidiaries located in tax havens. Merck, Pfizer, Microsoft, and Google are some of the companies who report profits as offshore earnings to avoid taxes. Other companies, such as Halliburton, Ingersoll-Rand, Accenture, and Tyco, skipped out even though they have hundreds of millions in U.S. government contracts. [14] How did this all happen in just 30 years? Former Secretary of Labor Robert Reich attributes the rise of 'supercapitalism' to the new technologies and methodologies originating in the 1950s and 1960s -- computers, fiber optics, satellite, global supply chains -- which provided better investment opportunities and, combined with deregulation of government, squeezed equality out of the system by catering to well-positioned money managers. A greater emphasis was placed on improving business performance to satisfy the demands of investors, to the detriment of social programs, labor rules, and environmental laws. [15] According to columnist and economics professor Paul Krugman, economists cite three main forces that contribute to the phenomenon of inequality. The first is globalization. With the introduction of trade policies that favor the wealthier and more highly educated countries, a greater fraction of the wealth from trade is going to the few well-positioned financial experts who manufacture lucrative business deals for multinational companies. Second, economists believe that the income gap is largely an education gap. The demand for technology-capable individuals and companies has driven the imbalance between the haves and the have-nots. Third, the 'superstar' hypothesis holds that astute business people are, like sports and entertainment stars, richly and disproportionately rewarded for their accomplishments, or at least for being in the right place. Krugman proposes a fourth reason related to social standards. Whereas the American post-WW2 society disdained individual gain at the expense of the many, the changing corporate culture of the 'me-first' 1970s and 1980s may have triggered the change in wealth distribution that now grows more apparent every year. [16] So what's wrong with having rich people? Despite the greed, our economic growth is driven by the belief in a capitalist system, open to all, through which an industrious and risk-taking individual might become the richest person in the world. We admire this, aspire to it, desire to be like our wealthy role models. We do not wish to regulate the companies and executives who lead the way, for this would impede our country's economic progress. But there are some practical reasons why we need to address economic inequality. Perhaps the greatest danger is that political power concentrated among the wealthy threatens the democratic process, as money becomes a greater factor in the election process. [17] Wealth concentrated in the hands of a few also reduces the incentive to support the common good through funding for health, education, and infrastructure. Under the Bush Administration, Medicaid and food stamps were cut, and the minimum wage, adjusted for inflation, is 30% less than in 1979. Around the country proposals are being made for privatizing highways because of a lack of public funds. This, of course, means higher costs for the users. Inequality has been shown to impact the health of, and incite violence among, those who don't fit into the elite group at the top. Supporting society with tax money makes the country safer and more liveable for all of us. [18] Inequality even promotes continued intervention in other countries, wars for oil, and competition among factions in developing countries for the resources demanded by the western world. Each American consumes over 5 times the amount of land, water, and resources available to each person on earth. [19] Clearly, we are over-reaching our boundaries. And inequality is exacerbating the problem, causing Americans to seek even MORE rather than to give something back. Studies show that we're engaged in a national mania of 'keeping up with the Joneses.' [20] We view the world of the super-rich and yearn to be part of it. Ever since the feel-good days of the 1980s, when Jimmy Carter's call for sacrifice was mocked and overridden by Ronald Reagan's assurance that better times lay ahead, we have been, as author Juliet Schor observed, "impoverishing ourselves in pursuit of a consumption goal that is inherently unachievable." [21] If we are to address the growing inequities in our country, it will almost certainly require a more progressive tax structure. Some people believe that taxes are already too high in the US. But a 2007 OECD survey placed the US 29th out of 30 countries in taxes (national and local) as a share of GDP. [22] Many people reject any suggestion of redistributing income. According to a Pew-sponsored public opinion poll, Americans are nearly twice as likely as people in other rich countries to believe that they will be "rewarded for intelligence and skill," while less than 1 in 5 believe that success depends on coming from a wealthy family. But recent studies show that most young people today are actually doing worse than their parents. [23] Progressive taxes do not "take from the rich." They ensure that people removing wealth from society return a part of it to the system that made them rich and supports their lifestyle. The very wealthy benefit the most from national security and property rights. They benefit the most from a system that supports growth at the top. Bill Gates, Sr., a prominent advocate of the estate tax, explains, “The reason the estate tax makes so much sense is that there is a direct relationship between the net worth people have when they pass on and where they live. The government that protects their business activities, the traditions that enable them to rely on certain things happening, that’s what creates capital and enables net worth to increase.” Yet it often seems that nothing will actually change. There have always been rich and poor. Plato said, "Any city, however small, is in fact divided into two, one the city of the poor, the other of the rich; these are at war with one another." Today, attempts to regulate executive excess are regularly defeated by corporate lobbyists. But over the first half of the twentieth century, after the industrialists and financiers of the first Gilded Age rose to the same levels of wealth and power as today's hedge fund managers, labor unions and populist social movements helped to curtail the effects of extreme inequality. Something similar is in the making now. The Working Group on Extreme Inequality proposes (1) an increase in the top marginal federal income tax rate on ultra-high incomes; (2) a cap on the tax deductibility of executive pay at no more than 25 times worker pay; (3) the elimination of inflated tax deductions for executive stock options; (4) a cap on tax-free deferred pay; and (5) a reforming of the estate tax to include a progressive rate structure. [24] Other measures might include a revision of the capital gains tax to a level approaching the tax on regular income, and the overhauling of a system that allows corporations to avoid income taxes in the very country responsible for their success. Greed is good for you, Mr. Gekko, and for people like you who know how to perform magic with other people's money. But greed is also blinding us to its long-term effects on our descendants. We are every day a little less a democracy, a little further removed from our promise in the Declaration of Independence to "mutually pledge to each other our Lives, our Fortunes and our sacred Honor." Paul Buchheit is a professor with the Chicago City Colleges, co-founder of Global Initiative Chicago (GIChicago.org), and the founder of fightingpoverty.org.
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