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Debate over tax policy continues, income disparity grows

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The Congressional Budget Office released its October report last week titled Trends in the Distribution of Household Income Between 1979 and 2007. The report cites a growing, and startling, divide of income inequality between the top income earners and everyone else. Income for the top one percent grew by 275% while income for all other groups rose only 65% or lower. The report also notes that business income and capital gains grew faster than labor income. To the right is a graph from the report illustrating wage growth per income distribution.

The CBO releases this report as the tax policy debate in Washington grows more contentious. The two parties aggressively oppose each’s plans as Democrats want to raise taxes on top income earners while Republicans want to lower taxes. Democrats reference the CBO’s report to defend increasing the tax burden for the wealthy. Republicans, however, argue that targeting any income distribution hurts the economy and, furthermore, sensationalize the Democrat’s plans as class warfare.

Paul Ryan made this charge at the Heritage Foundation. “This just won’t work in American,” he said. Class is not a fixed designation in this country. We are an upwardly mobile society with a lot of income movement between income groups.” Michael Steele defended Ryan’s claim, on MSNBC’s Politics Nation, that the top 1% bracket “is not static” and that “you can earn your way into it.”

Republican tax policy, in general, reflects an economic view which stresses individual responsibility. The belief is that you can measure someone’s ambition by their level of success. In the words of Presidential hopeful, Herman Cain, “Don’t blame Wall Street, don’t blame the big banks. If you don’t have a job and you’re not rich, blame yourself.” Essentially, in this view, you are ultimately responsible for your own economic status.

Whether you agree or disagree, our culture is one that expects hard work to be rewarded. The American sense of exceptionalism stems from the idea that our free-market culture lacks oppressive economic barriers, essentially granting everyone equal opportunity. However, this may not be the case anymore. Below is a graph from the Economic Policy Institute relating productivity to compensation.

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The rising line of productivity shows how American’s have been working harder than ever. Compensation, on the other hand, has flat-lined which means people are getting paid less for doing more work. In short, hard work no longer promises the kind of success we expect.

In fact, recent research by Isabel Sawhill from the Brookings Institution and John E. Morton from the Pew Charitable Trusts shows how the U.S. no longer is the socially mobile giant it used to be. According to the report “Data on relative mobility suggests that people in United States have experienced less relative mobility than is commonly believed.” In fact, the U.S. trails several other highly industrialized countries in social mobility. Below is a graph from the report:

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Canada as well as other European countries, such as France and Germany, are more upwardly mobile than the U.S. So, while income for the top one percent grows disproportionately to the rest of America, people can expect to work harder with less reward. How did this happen to the American economy?

A major reason for this is that top income earners have used their wealth to project a great deal of power in politics. Since the 1970s, policy changes have shifted the political balance of power towards the wealthy as Congress cut taxes for top income earners as well as eased taxes on capital gains. The chart below illustrates the tax burden per income group.

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Other factors include changes in labor policies which made it harder for unions to organize workers, again tipping the balance in favor of the business sector. Let’s not forget how government policies have also deregulated financial markets allowing banks to expose homeowners to heinous risks while rewarding managers extravagantly.

These are structural restrains thrusts upon the American economy. The U.S. Income disparity doesn’t reflect an idle workforce – it reflects policies that favor some groups over others. Our elected officials must realize this and design the right kind of tax policy – one that ends favoritism for the wealthy.

Unfortunately, many of the plans put forth by the current 2012 candidates don’t do this. Their plans propose flat tax policies which will cut taxes for the rich and shift the tax burden to the poor and middle class. Herman Cain’s 9-9-9 plan is incredibly regressive taking as much from the poor and middle class as it does the rich, leaving anyone who isn’t rich worse off. Rick Perry’s plan does much of the same; top income earners will choose a 20% flat tax while the poor and most in the middle will continue to pay their current rate. Perry’s plan also eliminates taxes on capital gains and estates as well.

What we call the American Dream, the belief that hard work can propel you from humble beginnings to great success, now belongs to much of Europe and Canada. We can fix this, though, with the right kind of legislation. But, first, we need a new understanding of personal responsibility. Yes, the individual is responsible for their own level of success. However, asymmetry in the business sector and a government slanted towards business can also negatively affect the playing field. If America really wants to dismantle economic barriers, government needs to shift its priorities to protecting the workforce and ending its favoritism for the wealthy.

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