The Trillian Dollar Income Shift, Part 1




F

or
three decades, from 1942 to the mid-1970s, 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.
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 free and public colleges and universities
nearly so. Unions represented 25-35 percent of the work force and
typically 60 percent or more in key strategic sectors like construction,
manufacturing, and transport. The tax burden for workers rose relatively
slowly while corporations and the wealthy still paid a fair share. 


Then, after three decades, the hourglass of history was inverted.
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 of the 1920s leading up to the Great Depression.
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 the U.S. to corporations and the wealthiest non-working
class households. 


Today’s widening income gap has finally begun to penetrate
the periphery of public debate. 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 Street Journal

—all
acknowledge to one degree or another the growing inequality of incomes
in the U.S. 



Shifting Income to the Wealthiest 



I

ncome
inequality in America today is not, as one might assume, about the
upper 20 percent or even the 10 percent wealthiest 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 percent
households (the very rich)—even the top 0.1 percent (extremely
rich) and 0.01 percent (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 percent 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 percent make up 1.4 million households. They now
receive between 19-21.5 percent of the annual gross domestic product
(GDP) of the United States, depending on the source cited. That’s
up from 8 percent in 1980. Today’s 19-21.5 percent also represents
a nearly full recovery of the roughly 22 percent share of national
income the top 1 percent 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 percent today
also hold more than 35 percent of all assets and wealth of the country—about
$17 trillion. They own 51 percent of all stocks and 70 percent of
all bonds, own homes worth more than $3 million and have a net worth
of $6 million. The bottom 50 percent of all households, nearly 60
million families—all working class—in comparison own only
2.5 percent of the country’s total assets and wealth.



The 0.1 percent extremely rich, 140,000 households, did even better
than the top 1 percent and the 0.01 percent mega-rich, only 14,000
households, did better than they. 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 percent in income the past five years alone. Below the median,
37 million workers and their families now live below the U.S. government’s
official poverty level and 16 million of them earn less than $9,800
for a family of 4. Even workers above the median have done poorly.
Except for a few years in the late 1990s, 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 percent in the most recent year, 2005, according to the 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 percent of the U.S. GDP—that’s more than a trillion
dollars—and the highest percent 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.” 



The $1.09 Trillion Low-End Estimate 



T

he
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 percent of GDP, a decline from
50.0 percent in 2001 and 53.6 percent in 1970. Furthermore, as the
U.S. government estimates, “each percentage point now equals
about $132 billion.” In other words, the roughly 8.3 percent
drop 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 it 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 24 million
upper-class households—about 40 percent of which would go to
the wealthiest 1.4 million families. 


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 somewhat less direct terms, the new
secretary of the U.S. Treasury, Henry Paulson, an ex-Goldman Sachs
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 a growing popular discontent of millions
who hear every day from Bush and 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. 



The Limitations of Government Data 



D

ebate
and discussion on income inequality in the U.S. today almost always
refer to one or more of four government data sources: the U.S. Census
Bureau, the Congressional Budget Office, and surveys by the Federal
Reserve Board and the Department of Labor. Except for one source,
the Congressional Budget Office (CBO), they all conveniently do
not estimate the income of the wealthiest 1 percent 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 percent) 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
the 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
percent 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 percent, but unfortunately grossly overestimates
working family incomes and correspondingly underestimates wealthy
households’ income by arbitrarily defining 65 percent 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. 




Collectively
all 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 and Cyprus in Europe 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 U.S.-originated
tax avoidance and sheltering, but it is probably safe to assume
at least 60 percent, 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. 


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. 



Ignoring the Corporate Role 



M

ost
of the income held by the top 1 percent 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
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 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 the U.S. have increased their share of corporate
income by more than 100 percent, from around 5 percent of profits
to more than 10 percent of profits. 


However, 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 which was retained. In 2005 pretax profits were $1.35 trillion
and about $460 billion was retained. The percentage of retained
profits in recent years, in other words, is about one-third of total
pretax profits. That one-third exceeds the long-run historic average
by about 40 percent. That excess over the long-term average, at
least $180 billion a year, should be considered part of non-working
class income that has been shifted from workers to non-working class
households and is being held in escrow, as it were, by corporations
for future distribution. 


None of the current discussion on the widening income gap considers
the corporation’s role in the shift of relative income shares. 



The Saez & Picketty Analysis 



A

n
interesting first step in this 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
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 and Saez focus primarily on the evolution of incomes of
the wealthiest 1 percent families over the 90-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 percent—i.e.,
a leveling of income differences between the wealthy and the rest,
between 1942-1970, followed by a reversal and growing income inequality
after 1978 once again. Their second fundamental finding is that
incomes within the top 1 percent are concentrated and skewed strongly
to the upper levels—the 0.1 percent and 0.01 percent of those
top 1 percent households. Other than some suggestive data for income
inequality in the UK, the wealthy 1 percent owners of capital incomes
elsewhere in the industrial world have not experienced the same
major shift in incomes 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 percent of
all incomes in 1929, the income of the wealthiest households falls
to 15.56 percent of total income in 1932, remains in the 16 percent
range during the Depression, then falls again sharply at the start
of World War II in 1942 to 13.44 percent of total incomes. That
decline continues from 1942 on for nearly 3 decades until 1970 when
it stabilizes at only 9.09 percent. It then remains flat in the
9 percent range throughout the 1970s reaching a low of 9.06 percent
in 1978. Thereafter the long, steady climb in income for the wealthiest
1 percent begins anew, continuing for nearly 30 years from 1978
up to the present, at which point the wealthiest 1 percent 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 percent within the top 1 percent, and even more so for the wealthiest
0.01 percent within that 0.1 percent. 


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. Roughly the same picture prevails today, with
the top 0.1 percent earning about half of the total income of the
top 1 percent and the top 0.01 percent earning in turn about half
of the top 0.1 percent households’ income. The incomes of the
wealthiest 14,000-140,000 families are therefore driving the reversal
of income shares of the past 30 years, as well as the current widening
income gap. (This overall picture is represented in Table 1.) 


The data also shows that the incomes of the wealthy 1 percent 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 percent
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. 


Given the foregoing analysis of the income inequality gap from above,
the fundamental question becomes 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 and Saez don’t
thoroughly address, despite their otherwise historic work. 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 after 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. 


In a later-published version of their work, Picketty and 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.
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 percent during the 1940s, as Picketty
and 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. 



T

oday’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. 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? 


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 the policies responsible for it,
once again at the forefront of agenda. An opportunity exists to
begin to do something about it. It remains to be seen, however,
what will actually be done with the brief window of opportunity.
Will the next few years represent a repeat of the similar transition
period of 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 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. 


Part 2 of this article will identify and quantify the leading corporate
policies since 1980 that have played a central role in the shift
of more than $1 trillion annually from the incomes of the 90 million
working class families in America to the wealthiest households and
corporations.



 





Jack
Rasmus is the author of



The War At Home: The Corporate
Offensive From Ronald Reagan To George W. Bush



(2006).