The Trillion Dollar Income Shift, Part 2


art 1 of this article showed
how even conservative estimates reveal that income inequality in
the U.S. today has reached extremes not seen since the 1920s. More
than $1 trillion a year in relative income is now being shifted
annually—from roughly 90 million middle and working class families
to the wealthiest households and corporations. 

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,
including an 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 the most significant. 

Corporate lobbying and electoral strategies also underwent a fundamental
overhaul as new ways began to emerge that re-defined how the corporate
elite functioned within the Republican Party. In the late 1980s,
other changes also took place altering how corporate interests functioned.
New legislation and laws, executive orders, U.S. government rule
making, federal agency decisions, etc., subsequently followed the
new political landscape, assisting the implementation of new corporate
policies and practices then emerging at the shop floor. 

There has been a long-term continuity in the new policies and practices
that emerged after 1978-1982. 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 towards dismantling the post-World
War II retirement system, and encouraging job market restructuring. 

During George Bush senior, 1988-1992, the emphasis shifted to policies
more strongly promoting U.S. corporations’ foreign 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, once again tax cuts for corporations and the
wealthy became the pre-eminent policy focus while further expanding
“free trade” assumed a 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. Not
surprisingly, the income inequality gap accelerated at the fastest
rate during the Bush period, 2000-2006. In addition to tax and trade-driven
income inequality, under George W. Bush other new income-shifting
policy initiatives were launched as well in 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 tax, trade, wage and benefits policies were being
implemented top down between 1980-2006, 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, more than 44 million
of the 137 million employed workforce in the U.S. are now part-time,
temporary, and contract workers earning 60-70 percent of the pay
of full-time workers and typically 20 percent of the benefits. 

New industry driven de-unionization policies also launched in the
1980s have resulted in the decline of union membership from 22 percent
of the workforce in 1980 to barely 7 percent 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 jobs—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 retiree health benefits; reduction of paid vacation and other
paid time off; and other similar company-driven cost reduction measures. 

The two approaches—corporate policy changes at the company-industry
level and government policy changes—worked in close concert
with each other. For example, government 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. 

Estimating the Income Shift 


able 1 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 percent) every quarter for the last three and a half years
to more than $1.4 trillion; or that CEOs and the top 5 managers
of U.S. 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 percent
(1.1 million) households have grown their share of total national
income reported to levels of 20-22 percent of total national income,
levels not seen since the late 1920s. 

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 10 million or so of the 90 million
working families due to the 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 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
that 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 U.S. 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 U.S. corporations amounted to about $700 billion—that
was only what was publicly admitted at the time. 

A third and even more opaque category of profits consists essentially
of unknown profits (from domestic U.S. 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 $250 billion in the mid-1980s. It is
reasonable to assume that at least $4 trillion of that $7 trillion
is held by U.S. 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 conservative 7 percent rate of return). Discounting the
additional $300 billion in interest, $200 billion never gets reported
to the IRS and is therefore never counted as income of the wealthiest
households or corporations. 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. 

income shift 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 percent
of these cuts are accruing to the wealthiest 20 percent households
and largely in turn to the highest income groups within that 20
percent. Should the Bush tax cuts be made permanent, the amount
will grow to $11 trillion, again with the highest income groups
receiving the lion’s share of the cuts and income. Additional
corporate tax cuts amounting to more than $1 trillion were also
passed under Bush 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 policies from Reagan through Bush Jr. have
served to shift income to the wealthy from the partial 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. Not included 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 


rom the foregoing it is clear
that there is, at minimum, a $1$1.5 trillion shift in relative income
occurring annually today. Even assuming the possibility of some
double counting in the income categories in Table 1, the amount
of income shifted annually as a 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 evasin, and the record tax cuts to the
wealthy. 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 combined, the result is a total income shift
of at least $1 trillion annually. 

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 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 2007early 2008—an increasingly likely
prospect—the income shift will further accelerate as it always
does during recessions. The outlook and probability is high that
the income inequality gap in the U.S. will continue to grow even


Rasmus is the author of

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