posted March 11, 2007
The Trillion Dollar Income Shift, Parts 1, 2, AND NOW Part 3

“The Trillion Dollar Income Shift, PART 1″
by Jack Rasmus
copyright 2007

For three decades a ‘Great Leveling’ of incomes between classes in America occurred as the standard of living rose for tens of millions of American workers and their families from 1942 to the mid-1970s. American working class families received a share of record gains in productivity. Real wages rose. Guaranteed retirement benefits—private pensions and social security—were greatly expanded. Health insurance plans were negotiated. Medicare was added for the aged. K-12 public education was truly free and public colleges and universities nearly so. Unions represented 25%-35% of the work force, and typically 60% and more in key strategic sectors like construction, manufacturing, and transport. The tax burden for workers rose relatively slowly and corporations and the wealthy still paid a fair share.

Then, after three decades, the hourglass of history was inverted. Stood on its head. The ‘Great Leveling’ of incomes became, after a brief interregnum from 1974-1978, a ‘Great Reversal’. From the mid-1970s until the present a widening income gap began to open up, as it once had in the decade leading up to the Great Depression after 1929. Income inequality grew as income shifted from working class families to the wealthiest households and corporations. From the early 1980s on income inequality widened, deepened, and accelerated until today well over $1 trillion in income is being transferred every year from the roughly 90 million working class families in America to corporations and the wealthiest non-working class households.

How did this happen?—a question more important perhaps than even the current income gap itself.

After expanding both in scope and magnitude since the late 1970s, today’s widening income gap has finally begun to penetrate the periphery of public debate. Driven by policies, corporate and government, that have enabled and made it possible, growing inequality of incomes in America can no longer be hidden from public scrutiny.

From thoughtful analyses of shifting income shares by young academic-economists like Emmanuel Saez of the University of California, Berkeley, to focused commentary on the topic by media-economists, like New York Times columnist Paul Krugman, to pop-art economists, pro-Business rebuttalists, and panicky editorial page writers of the Wall St. Journal—all acknowledge to one degree or another the growing inequality of incomes in the U.S.

Shifting Income to the Wealthiest 1%

Income inequality in America today is not, as one might assume, about the upper 20% or even 10% wealthiest gaining at the expense of the rest. It is about the very rich, the extremely rich, the mega-rich gaining an ever-increasing relative share of national income while the middle, the working class, and the poor stagnate or decline in terms of their share of that income. It is about corporations and the wealthiest 1% households (the very rich), and even the top 0.1% (extremely rich) and 0.01% (mega rich), accruing for themselves a greater relative share of income at the expense of the rest and, in particular, at the expense of the lower 80% income groups in which fall virtually all the 90 million working class families and the government’s estimated 108 million non-supervisory workers in the U.S. workforce.

There are approximately 114 million households in the U.S. today. The wealthiest 1% make up 1.4 million households. They now receive between 19%-21.5% of the annual Gross Domestic Product (GDP) of the United States, depending on the source cited. That’s up from 8% in 1980. Today’s 19%-21.5% also represents a nearly full recovery of the roughly 22% share of national income the top 1% received in 1928 just prior to the stock market crash of 1929, the depression of the 1930s, and the ‘Great Leveling’ of class incomes that followed. That same 1% today also hold more than 35% of all assets and wealth of the country—about $17 trillion. They own 51% of all stocks and 70% of all bonds, own homes worth $3 million and have a net worth of $6 million. The bottom 50% of all households, nearly 60 million families—all working class—in comparison own only 2.5% of the country’s total assets and wealth.

The 0.1% extremely rich, 140,000 households, did even better than the top 1% and the 0.01% mega-rich, only 14,000 households, did better than they, as data later in this article will illustrate. Despite the 2001 Bush recession and the dot.com stock bust earlier this decade, since 2000 the number of millionaires in the U.S. rose from 6 to 7.5 million (which excludes home asset values in the calculation), according to a 2006 report by the corporate research firm, the Boston Consulting Group. One hundred new billionaires were also created since 2001.

Meanwhile real weekly earnings of 100 million workers are less today than in 1980 when Ronald Reagan took office—a virtual quarter century pay freeze! According to the U.S. Commerce Department the median (midpoint) households (where male workers earn about $41,000 a year and female workers $31,000 a year) have experienced a decline of 5.9% in income the past five years alone. Below the median, thirty-seven million workers and their families now live below the U.S. government’s official poverty level and sixteen million of them earn less than $9,800 for a family of four. Even workers above the median have done poorly. Except for a few years in the late 1990s, even college educated workers’ real wages have stagnated, growing less than a half of one percent a year from 1979 through 2005 and actually declining in 2004-05.

For the first time since the U.S. government began to collect the data in 1947, wages and salaries no longer constitute more than half of total national income. In contrast, corporate profits are at their highest levels since World War II, having risen double digits every quarter in the last three and a half years alone and 21.3% in the most recent year, 2005, according to Dow-Jones ‘Market Watch’. Corporate profit margins are higher than they have been in more than half a century, according to Merrill Lynch economist, David Rosenberg. After tax profits are now equal to 8.5% of the U.S. Gross Domestic Product—that’s more than a $ trillion dollars—and the highest since the end of World War II in 1945. A June 2006 report by the leading Investment Bank, Goldman Sachs, aptly summed it up: “The most important contribution to the higher profit margins over the past five years has been a decline in Labor’s share of national income.?

It was once said by President John F. Kennedy in the early 1960s that “a rising (economic) tide lifts all boats?. But that was a different time. A different America. Today, under George W. Bush, we are told the economy has been booming. And indeed GDP, the stock market, corporate profits, and the incomes of the wealthy have been rising. But tens of millions of American families have been thrown overboard, left to tread water or drown, while the wealthiest passengers celebrate into the night in the ballrooms of the new Titanic economy in America.

The $1.09 Trillion Low-End Estimate

The most telling statistic of what it all means comes from the U.S. Department of Commerce. It states that wages and salaries as of April 2006 constituted only 45.3% of GDP, a decline from 50.0% in 2001 and 53.6% in 1970. Furthermore, as the U.S. government itself estimates, “each percentage point now equals about $132 billion?!

In other words, the roughly 8.3% drop (53.6-45.3) in labor’s share by 2005 represents an annual shift in relative income today of about $1.09 trillion. That’s $1.09 trillion that now occurs every year, and is rising!

That $1.09 trillion shift is equivalent to every one of 108 million non-supervisory workers in the U.S. today writing out a check each year, every year, for $12,100 and signing it over to the other 24 million upper-class households—about 40% of which would go to the wealthiest 1.4 million families.

And not yet included in the $1.09 trillion annual figure are additional income transfers from labor to corporations as a consequence of employers shifting a greater share of the costs of health care to their workers in recent years; the destruction and only partial payouts to workers from the discontinuing of tens of thousands of defined benefit pension plans since the 1980s; and the transfer of hundreds of billions more every year in workers’ payroll tax payments (i.e. deferred wages) from the Social Security Trust fund to the U.S. general budget since the 1980s.

It is not surprising that the more prescient defenders of the status quo today see the looming potential threat in this situation. Janet Yellen, President of the San Francisco district of the Federal Reserve Board, recently pointed out the growing inequality may well lead to resistance to globalization (read: free trade and U.S. foreign direct investment), affect social cohesion, “and could ultimately undermine democracy’. In a somewhat less direct terms, the new Secretary of the U.S. Treasury, Henry Paulson, an ex-Goldman Sachs Investment Bank CEO transferred to the Bush economic team last summer, has raised similar concerns.

Recently some politicians have also begun to pick up on the theme of growing inequality, sensing as they campaigned in November’s Congressional elections the growing popular discontent of millions who hear every day from Bush & company how great the economy is doing, but know they are personally losing economic ground. As the newly elected Democratic Senator from Virginia, James Webb, no liberal by any means, put it in a recent editorial, “wages and salaries are at all-time lows as a percentage of the national wealth? and “America’s top tier has grown infinitely richer the past 25 years…The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.? Meanwhile, Fox News pundits squeal ‘class war, you’re talking class war’ at such comments—as if that wasn’t exactly what has been happening economically now for more than a quarter century to tens of millions of American workers and their families.

The Limitations of Government Data

Debate and discussion on income inequality in America today almost always refer to one or more of four U.S. government data sources. Given the undeniable magnitude of the income gap, all show evidence of its existence and growth. However, for different reasons all the four sources seriously underestimate that gap with the result that official estimates of income inequality in the U.S. are even more grossly understated. The gap is even worse, much worse, than it is reported.

The four sources are the U.S. Census Bureau, the Congressional Budget Office, and the Federal Reserve Board and the Department of Labor surveys. Except for one source, the Congressional Budget Office (CBO), all conveniently do not estimate the income of the wealthiest 1% households separately but lump them into broader groups with the result that the extreme concentration now occurring at the very top of the income scale is blurred and lost in a set of much larger numbers. The Department of Labor goes so far as to define the “rich? as the top third (33%) of households with annual income levels of only $70,000 a year. With that logic, Bill Gates and your average dockworker are considered no different in terms of income.

A major failing of two of the survey sources, Federal Reserve and Department of Labor, is that they are based on interview surveys of the very rich and extremely rich (the mega-rich of billionaires and their near-cousins are never bothered with such government survey requests). Government representatives either call or visit in home with the wealthy and ask them to reveal their most private financial situation. Why the super-rich would be inclined to thus reveal the details of their finances to government interviewers—after manipulating tax shelters and the like as most do and paying numerous lawyers and high-priced accountants large fees to hide their income—is an interesting and grossly naive assumption.

Several of the sources conveniently leave out capital gains income from the totals. Capital gains income accounts typically for 5%-8% of the IRS’s total revenue collected in a given year, and Bush’s first term tax cuts are calculated to yield $500 billion in accumulated capital gains tax savings, and therefore income windfall, for the wealthy in this decade. The best of the four sources, the Congressional Budget Office, includes capital gains and provides for a view of the top 1% but unfortunately grossly overestimates working family incomes, and correspondingly underestimates wealthy households’ income, by arbitrarily defining 65% of all business income as wages. But even these shortcomings are only a part of the picture and problems involved when using the traditional four government sources for estimating and discussing income inequality and the income gap today in the U.S.

Hiding $7 Trillion Offshore

Collectively all the four sources share two additional serious shortcomings when it comes to estimating the shift of relative income from working class families since the late 1970s.

First, none of them make upward adjustments in income for the wealthiest households to account for increasing tax avoidance and non-reporting of income by the wealthy in recent years, and the consequent squirreling away of $trillions of dollars in offshore tax shelters since the early 1980s.

In 1983 about $250 billion in income was reportedly diverted to emerging offshore shelters like the Cayman islands in the Caribbean. According to no less a conservative source than Morgan Guaranty Trust, the preeminent investment bank of the super-rich, today about $7 trillion is stuffed away in offshore shelters from the Caribbean to the Channel Islands in Europe, to Cyprus in the middle east, to the Seyschelle islands off the coast of India, to Vanuatu, Palau, Indonesia and multiple points throughout the Pacific. And that’s only what’s publicly reported. It is not known exactly how much of that is American-originated tax avoidance and sheltering, but it is probably safe to assume at least 60%, or around $4 trillion, represents holdings of U.S. corporations and the wealthiest households. Not too many workers deposit their IRAs in the Cayman Islands or Bermuda nowadays. It’s all income of the wealthy that doesn’t get reported to the IRS and is consequently not reflected in the income of the wealthiest households in the official government sources tracking income inequality in America.

Ignoring the Corporate Role

A second major shortcoming of official government sources is that none consider the relative shift in income from workers to corporations, despite the fact that working families’ income is being shifted directly to corporations as well as indirectly through the tax system to wealthy individuals.

Most of the income held by the top 1% households passes through corporations. Corporations pay them interest, dividends, and it is the sale of corporate stocks, bonds and other assets and securities from which the wealthy receive the predominant share of their income. Similarly, corporations compensate their CEOs and executive management the record-breaking amounts that show up in front-page headlines of newspapers on a regular basis. In 1980 the average American CEO made 35 times the average pay of the worker in his company; today that ratio is more than 500 times, according to the business news source, Reuters. Since 1980, and particularly in the last decade, CEOs, senior management, and others have been allotting for themselves record income gains. In the last five years alone the senior managers (top 5 positions) of corporations in America have increased their share of corporate income by more than 100%, from around 5% of profits to more than 10% of profits.

However, and this point is noteworthy, not all the income shifted from workers to corporations is immediately passed on to the wealthiest households in the form of dividends, interest, capital gains or to corporate senior management. A significant part of corporate income is retained by corporations; i.e. is not distributed to shareholders, not spent on capital investment, paid out in wages and salaries, or otherwise used for operations. Corporate retained profits may thus be considered a form of ‘deferred income’ of the wealthiest households and individuals that will eventually be paid out to them in future years And the retention of undistributed profits is at record levels today.

For example, in 2001 total corporate profits before taxes amounted to $767 billion. In 2004 it had risen to $1.16 trillion. $400 billion of that $1.16 trillion was retained in 2004. In 2005 pretax profits were $1.35 trillion and about $460 was retained. The percentage of retained profits in recent years, in other words, is about one-third of total pretax profits. And that one-third in recent years exceeds the long run historic average by about 40%. That excess over the long term average, at least $180 billion a year, should rightly be considered part of non-working class income that has been shifted from workers to non-working class households and being ‘held in escrow’, as it were, by corporations for future distribution.

The widening income gap is therefore as much a shift in income from working families to corporations as it is to the wealthier households. A significant element of corporate retained profits should consequently be included, factored into total calculations of the overall shift in relative income from workers and their families. But none of the current discussion on the widening income gap considers the corporation’s role in the shift of relative income shares.

The Emmanuel Saez & Thomas Picketty Analysis

An interesting first step in this latter direction has been taken recently by two young French economists, Thomas Picketty and Emmanual Saez, the latter now at the University of California, Berkeley. In their seminal paper, “Income Inequality in the United States, 1913-2002? (updated for 2003), they created a database from U.S. Internal Revenue Service sources on taxes paid by family units dating back nearly a century. Although their results and findings are subject to the various limitations of the IRS data, their database represents a significant advance over the four traditional government sources that have been used to illustrate income inequality in the U.S.

Picketty & Saez focus primarily on the evolution of incomes of the wealthiest 1% families over the ninety year period. Their basic conclusion is that there is a three decades fall and then three decades rise in the incomes of the wealthiest 1%–i.e. a Great Leveling of income differences between the wealthy and the rest, between 1942-1970, followed by a Great Reversal and growing income inequality after 1978 once again. Their second fundamental finding is that incomes within the top 1% are concentrated and skewed strongly to the upper levels—the 0.1% and 0.01% of those top 1% households. A third is that the growing inequality since 1978 occurs only within the top 1% households in America. Other than some suggestive data for income inequality in the U.K., the wealthy 1% owners of capital incomes elsewhere in the industrial world have not experienced the same major shift in incomes in their favor since 1980 as has occurred in the U.S.

According to their data, after rising sharply in the 1920s the incomes of the wealthy drop significantly in the early years of the 1930s Depression, then further during World War II, and continue to drift downward thereafter until the early 1970s. From 22.5% of all incomes in 1929, the income of the wealthiest households falls to 15.56% of total income in 1932, remains in the 16% range during the Depression, then falls again sharply at the start of World War II in 1942 to 13.44% of total incomes. That decline continues from 1942 on for nearly three decades until 1970 when it stabilizes at only 9.09%. It then remains flat in the 9% range throughout the 1970s reaching a low of 9.06% in 1978. Thereafter the long, steady climb in income for the wealthiest 1% begins anew, continuing for nearly thirty years from 1978 up to the present, at which point the wealthiest 1% households have largely recovered in terms of income share to where they were in 1929.

The picture is the same, and even more dramatic, for the wealthiest 0.1% within the top 1%, and even more so for the wealthiest 0.01% within that 0.1%.

In terms of today’s households it means 140,000 families realized as much income as the remaining 1,260,000 households. And 14,000 of those 140,000 earned in turn about half of the income of those 140,000 families. It is a picture of extreme income concentration and gains at the very top. Roughly the same picture prevails today, with the top 0.1% earning about half of the total income of the top1% and the 0.01% earning in turn about half of the top 0.1% households’ income. The incomes of the wealthiest 14,000-140,000 families are therefore driving the Great Reversal of income shares of the past thirty years, as well as the current widening income gap. This overall picture is represented in the following table 1:

TABLE 1
INCOME SHARE OF WEALTHIEST 1% HOUSEHOLDS IN THE U.S.

Year Top 1% Top 0.1% Top 0.01%

1929 22.51% 10.99% 5.03%
1932 15.56 5.97 1.99
1935 16.71 6.41 2.19
1940 16.50 6.01 2.05
1942 13.44 4.82 1.55
1950 12.89 4.41 1.23
1960 10.10 3.27 1.18
1970 9.09 2.80 1.00
1978 9.06 2.68 0.87
1988 15.58 6.84 2.88
1996 16.69 7.24 3.06
2000 21.75 10.99 5.13
2002 16.97 7.39 3.16
2004 19.75 9.47 4.34
2005* 22.50* 11.50* 5.50*

Source: Thomas Picketty & Emmanuel Saez, “Income Inequality in the United
States, 1913-2002 (revised through 2004)?. * = this writer’s adjustments for tax avoidance, evasion, shelters, retained profits and other factors as described in Part 2 to follow.

The authors’ data also show that the incomes of the wealthy 1% have recovered from the 2001 recession, the economic shock of 9-11, the dot.com bust of 2000-02, and other negative developments earlier this decade. Since 2003 the incomes of the wealthiest 1% households are once again back on their long term expansion track that began in 1978-1982. In stark contrast, the 90 million working class families have not recovered at all from the 2001 recession and other economic effects, but have steadily fallen behind from 2001 through 2006. This dual fact is the defining economic characteristic and legacy of the George W. Bush presidency.

The following table 2 shows in absolute dollar terms (adjusted for inflation in $2000 dollars) how the wealthiest 1% have fared since the ‘Great Reversal’ and widening income gap began.

TABLE 2
ANNUAL INCOMES OF WEALTHIEST 1% HOUSEHOLDS IN THE U.S.

Year Top 1% Top 0.1% Top 0.01%

1978 $338,643 $1,001,858 $3,240,098
1982 $373,259 $1,443,749 $5,994,492
1988 $617,620 $2,710,338 $11,411,233
1996 $649,082 $2,816,838 $11,905,656
2000 $1,012,584 $5,117,680 $23,869,868
2002 $700,436 $3,048,937 $13,048,843
2004 $940,441 $4,506,291 $20,692,285
2005* $1,072,102 $5,452,612 $26,029,279

Source: same as Table 1 above.

Given the foregoing analysis of the income inequality gap ‘from above’, the fundamental question becomes: what’s behind it? What’s determining the income shift of the wealthiest households the past six decades—three decades down and three decades back up?

Unfortunately, that’s a question that Picketty & Saez don’t thoroughly address, despite their otherwise historic, excellent work revealing the movement of the wealthiest households’ income over the past century. The decline in the incomes of the wealthiest households, they argue, was due to the external shocks of depression and war. However, causes for the historic recovery of the incomes of the wealthy since 1978 is less adequately addressed. At times they briefly note the possible influence of major changes in the tax structure, such as during World War II or Reagan’s 1986 tax cuts—the former reducing income inequality and the latter exacerbating it—as possible contributing causes for both the decline and then recovery in the incomes of the wealthy. But their discussion focuses largely on income tax rates—and not to the proliferation of tax shelters, evasion, avoidance and fraud over the past 30 years and its role in the rise in the wealthy’s income share. This focus fails to account for the fact that the capital income gains produced by a quarter century of tax cuts for the rich are sheltered and shuffled offshore to the tune of $4 to $7 trillion to avoid their reporting to the IRS.

In a later published version of their work, Picketty & Saez do mention briefly the possibility that tax avoidance and tax evasion may be at play. But income from tax shelters, evasion, avoidance and fraud simply do not show up in the IRS data used by the authors. Therefore what’s clearly yet to be added to their analysis is a thorough consideration of the proliferation of tax shelters, tax evasion schemes, and spreading tax fraud that have become rampant the past few decades, and the inclusion of that missing income in the overall estimation of the new income inequality in America.

Similarly, corporate profits gained at the expense of workers’ income are also increasingly held and/or diverted offshore. Like income sheltered offshore, the IRS data do not pick up the ‘deferred’ income not fully distributed by corporations to their wealthy shareholders. Corporate retention of profits during World War II is generally acknowledged as having made a significant impact on the decline in incomes of the wealthiest 1% during the 1940s, as Picketty & Saez themselves acknowledge. And it appears profit retention in recent years is again at all time highs and may be contributing once again to the underestimating of capital incomes. This contributing factor to income inequality is also not addressed in their analysis.

What the two above points mean is that widening income inequality may in fact be larger—in fact very much larger—than even that reported by the authors, not to mention the even more conservative four government sources. Add $4 to $7 trillion in offshore tax shelters, today’s runaway tax avoidance and evasion, hundreds of billions more every year in legally retained corporate profits, plus profits increasingly held offshore in violation of U.S. tax laws, unreported, and never repatriated by Multinational Corporations, and the real percent of national income going to the wealthiest households would certainly rise well above even reported levels. Conservatively, the share of income of the wealthiest 1% today is likely in the 22%-25% range of total income. That represents a return for the wealthiest households at least to the levels of the late 1920s, the halcyon years for their share of income on the eve of the Great Depression.

The Still Missing Link in the Debate on Income Inequality

Today’s public debate on income inequality has focused on differences in estimating the actual size of the income gap, or else on solutions to the growing inequality that are totally unrelated to its roots causes and origins in recent corporate policies and practices. Limiting discussion in this manner leaves out consideration of more fundamental questions such as: After narrowing for decades from the 1930s through the early 1970s, why did income inequality re-emerge thereafter? And why has it been widening progressively since the 1980s? Conspicuously missing in the discussion and debate on income inequality thus far today—by liberals and conservatives alike—is an analysis of those corporate and policies and practices that have been primarily responsible for the growing inequality since the 1970s—i.e. an analysis of policy from ‘the bottom up’.

Part 2 of this article to follow in the subsequent issue of this magazine will attempt to identify and quantify the leading corporate policies since 1980 that have played a central role in the shift of more than $1 trillion annually today from the incomes of the 90 million working class families in America to the wealthiest households and corporations. Part 2 will also consider the main positions taken by liberals and conservatives in the current public debate, showing how that debate has yet to address the fundamental causes of the growing inequality or to propose solutions based on those root causes.

The November 2006 Congressional elections and the retaking of the House and Senate by the Democratic Party places the question of income inequality in America, and policies responsible for it, once again at the forefront of agenda. An opportunity exists to begin to do something about the growing inequality gap in America. It remains to be seen, however, what will actually be done with the brief window of opportunity. One cannot help but see the current transition period ahead, 2007-08, in historical perspective and ask which road will be taken? Will the next few years, 2007-08, represent a repeat of the similar transition period, 1976-1980, during which great opportunities for defending and even advancing working class incomes were possible but were dissipated and lost, leading to a resurgence and new aggressiveness by corporate America and its right wing allies? Or will the next few years look more like 1946-50, when working class families’ wages, incomes, health care and retirement benefits improved significantly. Whichever the outcome, accurately understanding the true root causes of that inequality, which lie in various corporate policies and practices of the last quarter century, is an absolute essential first step that has yet to be taken in the current public debate on the growing inequality of incomes in America.

“The Trillion Dollar Income Shift, Part 2″
by Jack Rasmus
Copyright 2007

In Part 1 of this article in last month’s issue it was shown how even conservative estimates based on U.S. government data reveal that income inequality in America today has reached extremes not seen since the 1920s. More than $1 trillion a year in relative income shares is now being shifted annually—from roughly 90 million middle and working class families to the wealthiest households and corporations.

Corrections for limitations in the same government data suggest, furthermore, that the $1 trillion annual shift is likely a low end estimate. The failure of government sources to consider massive offshore tax sheltering in recent decades, as well as the record high retention of profits by corporations in recent years, means the annual shift in income today may in fact be as high as $1.5 trillion a year or more.

Recent independent academic studies also briefly described in Part 1 show that the current decades-long growth in income inequality has been strongly skewed to the very high end—the gains in income accruing largely to the wealthiest 1%, or 1.1 million of the roughly 114 million households in the U.S. After four decades of narrowing income inequality in the U.S. from the 1930s through mid-1970s, IRS data shows that inequality of incomes has steadily grown since the late 1970s—accelerating under Reagan in the 1980s and once again even more rapidly under George W. Bush.

Notwithstanding the value of ‘top down’ academic studies of recent years, a thorough understanding of income inequality in the U.S. today requires a corroborating ‘bottoms up’ analysis of its root causes—causes which originate in various corporate and government policies and practices. However, the current public debate on income inequality has yet to consider its root causes. Part 2 therefore begins this task of identifying and quantifying those policies and practices that are responsible for the more than $1 trillion dollar annual shift in relative income annually today from 90 million working/middle class families to the wealthiest households and corporations in the U.S.

The Policy Origins of Income Inequality

The policies and practices responsible for today’s widening income gap date back to the 1978-1982 period. At that time, policies and practices—both corporate and government—underwent a fundamental shift. The consequence of this shift has been a major restructuring of the U.S. economy since 1980 along a number of fronts.

That economic restructuring has assumed a number of forms, including a radical overhaul of jobs and job markets, widespread de-unionization, breakup of industry wide collective bargaining agreements, a realigning of the federal tax structure, a new free trade offensive by corporations and government, cost shifting of health care and pension plans, government assisted compression of the minimum wage and overtime pay, annual diversion of social security fund surpluses to the U.S. general budget to offset federal deficits, deregulation and privatization of entire industries—to name but the most significant.

Corporate lobbying and electoral strategies also underwent a fundamental overhaul between 1978-1982, as new ways began to emerge that de-defined how the corporate elite functioned within the Republican Party. Roughly a decade later, in the late 1980s, other changes also took place altering how corporate interests functioned within the Democrat Party. The political reordering played a key role facilitating and enabling the economic restructuring. New legislation and laws, executive orders, U.S. government rule making, federal agency decisions, etc., subsequently followed the reordering of the political landscape, assisting the implementation of the new corporate policies and practices then emerging at the economic, industrial, and company ‘shop floor’ levels.

There has been a long term continuity in the new policies and practices that emerged after 1978-1982. Despite alternating Democratic or Republican administrations in both the Congress and the Presidency, the combination of policies that have defined the past quarter century have remained essentially unchanged since 1980. Over intervening years they have been simply adjusted, refocused, or given different relative emphases by the string of administrations and Congresses from Ronald Reagan through George W. Bush.

For example, during the Reagan period, 1980-88, a relatively greater emphasis was placed on changing the tax structure, industry deregulation, shifting the power balance between unions and management, taking first steps to dismantling the post World War II retirement system, and encouraging job market restructuring.

During George Bush senior, 1988-1992, the emphasis shifted in a relative sense to policies more strongly promoting U.S. corporations’ foreign direct investment, trade, and on implementing ‘neoliberal’ policies in emerging offshore economies and markets.

Under Clinton, 1992-2000, the focus centered largely on promoting and expanding free trade. Additionally, the Clinton period was characterized by the introduction of new formulas for enabling health care cost shifting from corporations to workers, by accelerating the diversion of social security payroll taxes to the U.S. general budget to create the false appearance of declining federal budget deficits, and by passing government rules encouraging the further decline of the traditional private pension system.

Under George W. Bush, as under Reagan, once again tax cuts for corporations and the wealthy became the pre-eminent policy focus, while further expanding free trade assumed a close second policy priority, in particular in the case of U.S.-China trade. In as much as government tax and trade policy have been among the largest contributing sources to the general income shift, the George W. Bush era has thus combined the worst of both the Reagan (tax) and Clinton (trade) eras in terms of income shifting policies. Not surprisingly, the income inequality gap accelerated at the fastest rate during the Bush period, 2000-2006. Nor has the George W. Bush period been limited to a focus on tax and trade policies as means to shift income shares. In addition to tax and trade-driven income inequality, under George W. Bush other new income-shifting policy initiatives were launched as well in areas health care cost shifting, retirement system restructuring, and legislated wage compression by government edict targeting overtime pay for millions of hourly paid workers.

While the above government-assisting tax, trade, wage and benefits policies were being implemented ‘top down’ between 1980-2006, at the company and industry levels corporate policies and practices further contributing to the growing income inequality gap were being simultaneously overhauled from the ‘bottom up’.

High on this ‘bottom up’ list was the corporate shift from full time, permanent jobs to part time, temporary, and independent contract work. Growing consistently since the 1980s, today more than 44 million of the employed 137 million workforce in the U.S. are now part time, temporary and contract workers earning 60-70% of the pay of full time workers and typically 20% of benefits. New company-industry driven de-unionization policies also launched in the 1980s have resulted after twenty five years in the decline of union membership from 22% of the workforce in 1980 to barely 7% in the private sector in 2006. Two decades of corporate job offshoring policies sent millions of high paying, decent benefit jobs in manufacturing, technology, and business professional services overseas, a loss filled with lower paying service (which have been frequently part time, temp and contract) jobs. Corporate fringe benefits policies shifted fundamentally during the same period, resulting in the dismantling of more than 100,000 traditional pension plans and their replacement with cheaper cost 401K plans; the discontinuance and/or shifting of costs of health insurance plan coverage; widespread unilateral corporate elimination of retirees health benefits; reduction of paid vacation and other paid time off; and other similar company-driven benefit cost reduction measures.

The two approaches—corporate policy changes at the company-industry level (from ‘the bottom up’) and government policy changes (from ‘the top down’)—worked in close concert with each other. Government policy facilitated, enabled and accelerated the implementation of the company-industry economic restructuring. For example:

Government corporate tax, depreciation, and free trade policies provided significant financial incentives to corporations for expanding offshoring of jobs and consequently dismantling and transferring abroad much of the manufacturing sector in the U.S. Government agency rule changes allowed corporations to extract pension fund surpluses for general business use and/or to delay properly funding pension plans. Government bodies like the National Labor Relations Board directly aided corporate efforts to de-unionize, while government de-regulation and privatization of entire industries further decimated union membership ranks and undermined union bargaining effectiveness. On the health front, government policy in the form of ‘managed health care’ under Clinton, and ‘consumer driven health care’ and ‘health savings accounts’ under George W. Bush, encouraged corporations to more rapidly shift health care costs to workers.

The net result of these related policies and practices—both ‘bottoms up’ and ‘top down’—has been the continuing shift of more than a $1 trillion a year in relative income from 90 million working/middle class families to the wealthiest households and corporations in America.

Estimating the $1 Trillion Dollar Income Shift

The following represents a first effort at estimating the growing income inequality in the U.S. based on an analysis of the impact of policies and practices from ‘the bottom up’. Two sets of policy impacts are considered. First, policies responsible for the reduction of relative income that once accrued to 90 million middle/working class families and the consequent shift of that income to corporations and the wealthiest households; Second, the estimation of sources of income received by corporations and wealthy households that have not been accounted for up to now in official government estimations (e.g. the U.S. Census, Departments of Commerce, Labor, the Federal Reserve Board, the Congressional Budget Office) of the income share of the wealthy.

Table 1 following summarizes some of the major shifts in middle/working class incomes that occurred in 2005 as a consequence of accumulated past corporate-government policies.

Given the magnitudes of these income shifts, it is not surprising that corporate profits have increased at double digit rates (more than 10%) every quarter for the last three and a half years to more than $1.4 trillion; or that CEOs and the top five managers of US corporations have increased their total share of national income from around $50 billion a year in 2001 to more than $140 billion a year in just five years; or that the wealthiest 1% (1.1 million) households have grown their share of total national income reported back to levels of 20%-22% of total national income not seen since the late 1920s.

TABLE 1*

CATEGORIES OF INCOME SHIFT I:
(Shifting Income FROM Workers and Their Families)

Category of Income Shift 2005 Annual Amount ($ billions)

De-Unionization (Union wage differentials & secondary effects) $156

Temporary/Part-Time/Contract Work Wage Reduction $250

Manufacturing/Job Offshoring Negative Net Wage Effects $95

Free Trade (Net Export-Import Job Creation Wage Differential) $19

Legislated Wage Compression (Overtime Pay Elimination/Other) $41

Health Care Benefits Cost Shift (Premiums/Copays/Other) $43

Defined Benefit Pension Plans (Cash Outs/Liability Owed) $85

Social Security Payroll Tax Surplus Diverted to General Budget $151
$840

The above numbers are conservative estimates. They do not include, for example, other potentially significant categories associated with today’s shifting of incomes. Not accounted for in Table 1 are the increase in tax payments by the upper ten million or so of the ninety working families due to growing impact of the federal Alternate Minimum Tax; Or the full discontinuation of employer-provided health insurance coverage in addition to cost shifting of coverage in plans still provided by employers; Or the full discontinuation by employers of a pension instead of just replacement of a defined benefit pension with a lower cost 401k plan; Or the shifting of disability insurance and workers compensation costs from employers to workers. All such examples amount to further income shifted, in addition to that noted in Table 1 above. The income shifted from working/middle class families thus may exceed even the $840 billion estimate above and may total well in excess of $1 trillion.

However, policies promoting domestic cost-driven income transfer (from the 90 million households) are not the whole picture. U.S. corporations and wealthy households are able to expand their income additionally from speculative activities and from offshore investment activity as well. And a good part of that income—corporate and individual—never gets reported in the income totals of the wealthiest households in the official data.

Table 1 categories represent income that is shifted from the 90 million households in the U.S. which then passes through the conduit of the corporation. From there it may be disbursed by the corporation to shareholders, senior managers and CEOs in the form of dividends, interest payment, capital gains, and various forms of deferred and total compensation for senior management. What is not disbursed may be accumulated and expended on corporate expansion (i.e. invested) or held by the corporation as retained profits. Official figures for retained profits by U.S. corporations are now at the level of more than $500 billion a year, now running about $200 billion a year higher than long term historical averages. And those figures only represent retained profits that are reported.

Largely unreported are additional profits by multinational corporations which get transferred by various accounting means to their offshore subsidiaries and affiliates and then held there as unrepatriated profits for years. The precise totals for such unrepatriated profits are not known, either by the IRS or the US government. A brief glimpse was provided, however, by the investment bank, Morgan Stanley, in 2005 when it publicly reported that the total in offshore unrepatriated profits held by US corporations amounted to about $700 billion. But that was only what was publicly admitted at the time.

A third and even more opaque category of profits is that which is neither reported as retained or unrepatriated. This third category consists essentially of unknown profits (from domestic US or foreign operations) that are diverted to offshore tax shelters and never reported to the IRS.

The latest unofficial indication of the level of income held today in offshore tax shelters—which now proliferate from islands in the Caribbean to Cyprus to the Seychelles in the Indian ocean to various locales throughout the Pacific archipelago—is about $7 trillion. That is up from a ‘mere’ $250 billion in the mid-1980s. It is reasonable to assume that at least $4 trillion of that $7 trillion is held by US corporations and wealthy households, the mix between corporate and individuals essentially unknown. An annual additional net flow of income from the U.S. into such shelters is easily around $200 billion a year, not counting interest earned annually on the $4 trillion already there (which would amount to another $300 billion assuming a highly conservative 7% rate of return). Discounting the additional $300 billion, the $200 billion never gets reported to the IRS and is therefore never counted as income of the wealthiest households or corporations.

The point is that neither retained profits, nor unrepatriated profits, nor income held in offshore shelters by corporations of individuals are ever calculated and added to the estimations of income of the wealthy in the U.S. However, such profits and sheltered income should be considered as temporarily undistributed ‘deferred income’ of wealthy households that will eventually be paid out in subsequent years to those households.

Government tax policies have also had the effect of shifting income to the wealthiest households (and corporations). This, however, is based on income that does get reported. This income to the wealthy has been a result of government policies providing record tax cuts on capital (dividends, interest, capital gains, estate, gift tax, etc), extending from Reagan’s then record $752 billion tax cut in the early 1980s to George W. Bush’s sequence of annual tax cuts from 2001 to 2006.

During George W. Bush’s first term alone, more than $4 trillion in tax cuts were passed. Studies show that approximately 80% of these cuts are accruing to the wealthiest 20% households, and largely in turn to the highest income groups within that 20%. Should the Bush tax cuts be made permanent, the amount will grow to $11 trillion, again with the highest income groups receiving the overwhelming lion’s share of the cuts and income. Additional corporate tax cuts amounting to more than a $1 trillion were also passed under Bush during the period and have contributed significantly to the previously noted bulge in corporate retained profits.

Thus, while corporate level policies have increasingly shielded unreported income from the IRS on behalf of the wealthy in various ways, government tax cut policies from Reagan through Bush Jr. have served to shift income to the wealthy from sources that are reported to the IRS.

Table 2 shows select categories of income shifted to the wealthiest households and corporations as a result of government tax policies, as well as from corporate-level policies diverting and/or shielding income.

TABLE 2

CATEGORIES OF INCOME SHIFT II:
(Shifting Income TO Wealthiest Households and Corporations)

Category of Income Shift 2005 Annual Amount ($ billions)

Tax Sheltering, Avoidance, Evasion by Wealthiest Households $200

Bush Tax Cuts on Capital Incomes (Dividends/Capital Gains/etc.) $118

Bush Tax Cuts of Estate Taxes $29

Corporate Tax Windfall from Foreign Profits Repatriation $193

Corporate Profits Retention (In excess of historical average) $180
$720
Not included in the above income shifts in favor of wealthy households and corporations are various government direct subsidies to corporations and wealthy individuals which conservatively amount to additional tens of billions of dollars a year from the U.S. government.

Concluding Remarks

From the foregoing it is clear that there is, at minimum, a $1-$1.5 trillion shift in relative income occurring annually today, the majority of which is being shifted from the approximately ninety million American working class families to the wealthiest 1%, 1.1 million, households and corporations.

The income shifted from the 90 million working/middle class families alone amounts to about $1 trillion a year. Even assuming the possibility of some double counting (ie. overlap) in the income categories in Table 1, the amount of income shifted annually as result of policies represented in Table 1 is easily in the $700 billion to $1 trillion range. Added to this must be categories of income in Table 2 which represent underestimations of income accruing to the wealthiest households due to tax sheltering, tax avoidance, evasion, and the record tax cuts to the wealthy over the past twenty-five years. Even reducing the totals in Table 2 by half yields at minimum $300-$400 billion a year in additional income to the wealthy. When Tables 1 and 2 are therefore combined, the result is a cumulative total income shift of at least $1 trillion annually today.

The $1 trillion annual shift in relative income is roughly equivalent to the $1.09 trillion reported by the U.S. Commerce Department in Part 1 of this article. It is likely this $1.09 annual income gap will continue to widen in the next few years, since gains from Bush’s Capital Income tax cuts for the wealthy are projected to increase through 2010 while the policies which are responsible for shifting working families’ incomes in areas of wages, jobs restructuring, job offshoring, shifts to more part-time/temporary/contract work, health and pension benefits cost shifts, payroll tax diversions, and the like show no sign of deceleration or reversal. Furthermore, should recession occur by late 2007-early 2008, an increasingly likely prospect, the income shift will further accelerate as it always does during recessions. In short, the outlook and probability is high that income inequality gap in the U.S. will continue to grow even further.

Jack Rasmus

“The Trillion Dollar Income Shift, Part 3″
by Jack Rasmus
Copyright 2007

Corporate and government policymakers today argue that the 90 million working and middle class households in the U.S.—who as a group have been experiencing an historic stagnation and decline in their incomes since at least 1980—are themselves directly responsible for that stagnation and decline. Today’s growing income inequality exists, it is argued, because tens of millions of those households lack the necessary skills and education to ensure adequate income growth for themselves and their families in the new competitive global economy. The lack of skills and education is the fundamental origin and cause of inequality. The victim is thus the cause and not the consequence; the mugged the mugger; the truth its opposite.

In focusing on the alleged deficiency in education and skills of American workers, discussion of the root cause of inequality is conveniently crowded out and shunted to the margins of public debate. The true origins of inequality—which lay in coordinated corporate and government policies of the past three decades—are ignored: origins which lay at root in the wholesale dismantling and offshoring of the U.S. manufacturing base; in free trade-driven job loss and wage reduction; in massive tax evasion, offshore tax sheltering, fraud, and fundamental tax shifting; in the radical restructuring of job markets in the U.S. resulting in the wide-spread demise of unions, balkanization of what little remains of collective bargaining, and the displacement of tens of millions of previously permanent full time jobs with lower paid part time, temporary and contract work; in the dismantling of traditional pension and health benefit plans, retirement and healthcare cost-shifting from corporations to workers, and the annual raiding of the social security trust fund by politicians; in the gutting of minimum wage, overtime, and various forms of disability pay; and in countless similar policies of lesser quantitative, but no less qualitatively important, impact.

The net consequence of the above panoply of corporate-government policies over the past quarter century has been—as was shown in preceding Parts 1 and 2 in this series of articles—the relative shift of more than a trillion dollars every year from the 90 million middle/working class households to the wealthiest 10% (and even 1%) and the corporations through which the income and wealth of this 10% largely pass.

Bush & Co. Discover Inequality

Like the irrefutable reality of global warming, the fact of growing income inequality in the U.S. has become so undeniable that even George W. Bush this past January 2007 was provoked by journalists to admit, in one of his not infrequent slips of the tongue, that “income inequality is real. It has been rising for more than 25 years?. But for Bush and Co. the acknowledgement is merely tactical, and not a matter of grave national material or moral concern. As a recent Wall St. Journal article, aptly entitled “Bush Reorients Rhetoric, Acknowledges Income Gap?, pointed out: “Top White House economic officials still don’t consider today’s inequality—the growing share of income going to those at the top—an inherently bad thing; they believe it simply reflects the rising rewards accruing to society’s most skilled and productive members?.

The growing income gap for Bush & Co. simply raises the opportunity to find new ways to cleverly turn the growing concern over income inequality into the service of his pro-wealthy/ pro-corporate legislative agenda. Income inequality is tactically useful: token funding increases for worker ‘Trade Adjustment Assistance’ might help blunt growing protectionist sentiment in Congress and opposition to Bush & Co. free trade plans (which reduce jobs and income). It could help firm up support for new tax breaks for the self-employed to buy health insurance (further shifting healthcare costs to workers). Or ensure financial institutions can continue to rip-off college students with high cost education loans (converting income from students’ families to excess profits for those institutions). In such ways Bush can appear to be addressing the problem of the growing income gap, while actually continuing to promote measures that in fact contribute to the ongoing growth of that gap.

The ‘Official’ Explanation

The core message of Bush & Co. on income inequality is that the skilled and educated are, by definition, the most productive and therefore the most worthy of a growing share of national income. As Bush’s Chair of the Council of Economic Advisers, Stanford University economist, Ed Lazear, put it: “most of the inequality reflects an increase in returns to investing in skills?. Or as Federal Reserve Board chairman, Ben Bernanke, echoed in a recent address to a U.S. Chamber of Commerce meeting: “The degree of inequality in economic outcomes has increased for at least three decades…Education is the single greatest source of the long-term increase in inequality?.

Like Bush, however, Bernanke in his speech also made it clear his concern about growing income inequality was really secondary; the primary concern was that it might unleash anti-free trade protectionist sentiment that could inhibit continued, unfettered corporate offshore investing and job relocation (read: free trade) which in fact is a major cause behind income inequality.

The message that income inequality is the consequence of inadequate skills and education can be inverted and restated thus: if you aren’t among the relatively few receiving a larger and larger proportion of income today for yourself at the expense of the rest, it must be by definition that you are therefore unskilled, uneducated, and unproductive. In other words, your decline in income is your own fault. You haven’t kept up with the new global reality. So get yourself more skills and education, become more productive as a consequence, and join the great income accrual party!

If such logic were correct, however, it would follow that corporate CEOs in America—who have raised their total compensation the past quarter century by nearly 400 per cent—must have really re-educated and re-trained themselves since 1980. To have raised their income by 400%, they must be singly responsible for virtually all of the nearly 70% gain in U.S. productivity since 1980. After all, the existence of their record income gains is proof of their rising contribution to productivity, which in turn is a consequence of rising education and skill levels. Or so the argument goes.

In contrast, the 90 million households with declining incomes must have made no contribution whatsoever to productivity the past thirty years since their incomes have not risen at all over the period. And if productivity is the consequence of one’s improving one’s education and skills, the majority of the 90 million must be therefore seriously deficient in education and skills.

The logically nonsensical argument that income gains are due to personal productivity—and in turn personal productivity is the consequence of improving one’s education and skills—has its ultimate roots in 19th century neoclassical economic ideology. That ideology maintained that income inequalities were the direct outcome of one’s relative contribution to production and national income. Nothing else mattered so far as one’s share of national income was concerned. If you got rich it was because you contributed more—i.e. were more productive. If you weren’t rich it was because you didn’t. But in the last analysis this was just an identity statement wrapped in circular reasoning—not scientifically proven fact or theory.

Corporate-government policies aimed at shifting income had no place in such 19th century theory. Nor are such policies accounted for today in contemporary restatements of the theory. The century-old notion that one’s share of income was the sole consequence of one’s contribution to productivity eventually made its way to conservative think tanks and elite academic institutions in the U.S. circa the late 1970s-early 1980s. There it was refined, polished, and re-packaged for conservative policymakers intent on promoting a shifting of tax burdens and expanding free trade, accelerating deregulation of entire industries, assisting de-unionization, and the like. Since 1980 the notion has become embedded in conventional economic wisdom where it remains to this day—in the form of the widely accepted official explanation of Bush & Co. that today’s growing income inequality exists because those not enjoying income gains are less skilled, educated, less productive, and therefore unable to compete with those who are.

An alternative explanation of the relationship between education, productivity and relative income—never considered by Bush, Bernanke, Lazear, and colleagues—is the 90 million households (and 108 million non-supervisory workers in them) have been simply politically cut out of sharing in the 70% productivity gains since 1980. Not due to inadequate skills and education. But due to conscious policies adopted and implemented since 1980 by government and Corporate America designed to shift those gains to the wealthiest households and corporations.

For example, it is a fact that from 1947 to the mid 1970s annual incomes of middle and working class households rose roughly equal to the 3%-4% annual productivity gains in the U.S. economy over that same period. But since 1980 the roughly similar gains in productivity have gone all to CEOs, senior management, owners of capital incomes, have been funneled into offshore tax havens, allocated to offshore corporate investment projects, channeled into bloated corporate retained earnings accounts, or squirreled away in corporate coffers in foreign subsidiaries where they remain un-repatriated in order to avoid U.S. taxation. Middle and working class families have been largely cut out of sharing the gains. This has been especially true since Bush took office in 2001. But this didn’t happen because they were insufficiently educated or skilled. It happened because of political and policy reasons.

Today’s growing income inequality is not about insufficient skills, education, or personal contributions to national productivity. It’s about the political struggle over the distribution of the gains since 1980 and the new policies, corporate and government, that have been ‘cutting out’ the 90 million households from sharing in gains.

Media Pundits Right and Far Right

While the above view holds center stage, less sophisticated explanations of the causes of income inequality—and its solutions—have also entered public debate from the near and far right of the political-economic spectrum.

Representative of the various factions in the current debate on the far right—conservative think tank spokespersons, Wall St. Journal editorialists, or Cable news media pundits—assume typically one of three basic positions: either outright denial of any existence of an income gap, selective citation of the most conservative government data to lower the magnitude of the gap, or else they argue that ‘globalism’ and other mysterious ‘market forces’ beyond the control of any individual (CEO), organization (corporation) or even country (U.S.), are the root cause of growing income inequality.

Typical of this far right perspective are the views of Cato Institute economist, Alan Reynolds, who attacks the IRS data and conclusions of mainstream economists, Thomas Picketty and Emmanual Saez (reviewed in Part 1 of this series) based upon that data. The work of Picketty and Saez shows, in particular, the extreme shift of income to the wealthiest 1% households since the late 1970s. But Reynolds attempts to deny outright the overwhelming evidence of the income shift. He simply redefines the IRS data by adding categories of additional income to workers’ share and by removing income from the share of income of the wealthy. He then uses the most conservative gove

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