John Stafford for Washington State Representative 37th District
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Weekly Policy Article

5/19/2014

 
                             INCOME INEQUALITIES AND THEIR SOCIETAL DANGERS

Starting in 1920 in the U.S., the percentage of income earned by the top 1% of workers began rising -- from 15% to a peak of nearly 25% by 1929.  This was immediately followed by the Great Depression.  The New Deal and other initiatives precipitated a five-decade decline in the figure, and it eventually dropped below 10%.  Policy was then reversed, as tax cuts for the rich under Reagan (and other factors) caused income concentration to rise again.  By 2007, the figure had returned to nearly 25%.  And just like in 1929, this was immediately followed by economic collapse – the Great Recession.

Myriad phenomena contributed to the increase in income inequality over the past decades.  These included faith in false economic narratives (e.g., supply side economics); a dangerous view of the role of industry in society (e.g., Milton Friedman’s infamous assertion:  “There is one and only one social responsibility of business – to increase its profits.”); rapid decline in labor union membership; relaxation of antitrust provisions; repeal of Glass Steagall; growth in corporate lobbying; capital gains tax rate reductions; the Bush II tax cuts; Citizens United; etc.  And there is an ever-increasing array of new tactics being deployed to further exacerbate these inequalities (such as corporate domiciling inversion -- whereby a U.S. corporation acquires an O.U.S. corporation partly for the purpose of re-registering its tax domicile oversees in order to achieve a lower tax rate).

Several observations are important regarding these trends.  First, according to economist Thomas Piketty, U.S. income inequality levels are at an all-time high for any society in human history.  Second, many analysts expect U.S. income inequality to worsen.  Piketty observes that the source of income is undergoing a transition -- from income to wealth and finally to inheritance -- and that this progression will yield even greater inequalities.  Third, it is important to recall how far our society has descended ideologically in this regard.  In 1961, JFK proposed a reduction in the 91% top marginal tax rate for individuals and a reduction in the corporate tax rate from 52% to 47%.  These proposals were opposed by many Republicans because of their potential impact on the national debt!  Fourth, Paul Krugman notes that the primary culprit for our current income inequality is not the top 5% (i.e., highly well-educated workers), but rather the upper range of the top 1%.  This stratum is dominated by individuals who earn exorbitant incomes but play essentially no role in job creation (e.g., hedge fund managers) – what Krugman refers to as an emerging American oligarchy.  Fifth, as discussed in my blog from last week, it is important to remember that Washington State’s highly regressive tax policies are the worst in the nation at accentuating income inequalities.

Income inequalities have profound deleterious effects on society. These include declining social mobility, increased poverty, negative impacts on family stability (as stagnant middle-class wages often lead both parents to work), health care outcomes that vary considerably by zip code, and persistent educational achievement gaps based on ethnicity (Larry Summers states that, “The least bright rich kids are…more likely to go to a good college than the brightest poor kids.”).  Moreover, Piketty claims that large income inequalities are not even good for economic growth:  “When inequality gets to an extreme, it is completely useless for growth.”

The sum of these factors has led a plethora of commentators (throughout history) to posit that massive income inequalities are a threat to a society’s survival.  Nearly 2,000 years ago, Plutarch wrote:  “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”  In our era, anthropologist Jared Diamond’s research into historical societies indicates that income inequalities are a key indicator of societal collapse.  And economist Joseph Stiglitz refers to America as “a democracy in peril.”  In short, there are no upsides to large income inequalities, but the downsides are tremendous.

The critical question becomes how to address this challenge.  Naturally, this will require policy changes in multiple areas and multiple levels of government.  But two things are clear.  First, the economic interests that benefit from large income inequalities are not going to reverse course on their own – they will need to be addressed head-on.  This reality recalls a statement from FDR:  “We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering…They are unanimous in their hate for me and I welcome their hatred.” Second, addressing this challenge will require structural (rather than incremental) reforms, and this will entail momentous public policy proposals.

At the state level, one area where there is tremendous opportunity for policy reform is corporate tax breaks.  Washington State has over 600 different tax breaks, awarded to thousands of companies, and worth tens of billions of dollars each biennium.  The strong majority of these tax breaks are unjust (they transfer one company’s tax obligations to other companies or to individuals), they deplete public finances, and they exacerbate income inequalities.

One of the priorities of my campaign is to introduce legislation to massively repeal these tax breaks – several hundred at once.  This will not have a negative impact on the state’s economy, it will free up economic resources to fund the McCLeary decision calling for increases in public school funding, and it will reduce income inequalities.  I encourage readers to learn more about this and my other proposals in the “Campaign Objectives” section of my website.

- John Stafford


References:  Jared Diamond (Collapse), David Cay Johnston (Divided:  The Perils of our Growing Inequality), Paul Krugman (Seattle Times editorial, May 12, 2014), Thomas Piketty (Capital in the 21st Century), Richard Reeves (President Kennedy), and Joseph Stiglitz (The Price of Inequality).


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