Extreme Inequality

Starting a Strategic Conversation

Washington, D.C.July 16, 2007

AFL-CIO Institute for Policy Studies Center for Corporate Policy Essential Information

We livein extreme times.

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A sign of our times:Extreme sports

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Pushing the envelope

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Inside the Beltway, we don’t play extreme games

Maybe we should.

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We could ‘tailwhip’ Longworth

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Or maybe we could try something really extreme

. . . like taking on extreme inequality

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How extremely concentrated has wealth in the United States become?

$16.8 trillion $15.3

trillion

Top 1% Bottom 90%

Total net worth, 2004

Source: Federal Reserve Board, January 2006

Does not include total net worth of the Forbes 400

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How did our wealth become so extremely concentrated?

Source: Congressional Budget Office, 2006

78%

-15%

Top 1% Bottom 80%

Change in share of national income,1979 - 2004

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No one who’s anyone in American political life now disputes inequality.

Not even the President.

‘The fact is that income inequality is real; it's been rising for more than 25 years.’

George W. BushState of the Economy addressNew York, January 31, 2007

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So what can we do to reverse this extreme concentration of wealth?

The conventional wisdom:

Not much

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Our reigning wisdom

To give America’s bottom 80% in 2004 the same share of the nation’s income they received in 1979 “would have required transferring $664 billion from the top 1% of households to the bottom 80%.”

“No one would suggest this is feasible or even desirable . . .”

We can’t turn the clock back on inequality

Treasury Secretary Lawrence Summers

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So are we doomed to wander forever in Ronald Reagan’s America?

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In public policy circles today

We discuss the absence of wealth, or poverty, not wealth’s concentration.

We talk about lifting up the bottom.

We ignore the top.

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Should we swallow this conventional wisdom?

Or has inequality in the United States grown so extreme — and dangerous — that we need to look beyond convention?

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The reality we must faceInequality matters.

Who says?A generation

of researchers.

Environmentalscientists

Psychologists

Economists

SociologistsEpidemiologists

Political scientists

Demographers

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The more wealth concentrates

The more children in poverty

The slower an economy grows

The longer the daily commute

The shorter the lives that everyone — rich, poor, and middle — live

The more corrupt politics become

The costlier the median-priced home

The fewer dollars charities receive

The less leisure time The lower the voter turnout

The less generous the social safety net

The higher the homicide rate

The less efficiently business enterprises operate

The more environmental degradation

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The research bottom line

It’s important to lift up the bottom.

But if we’re ever going to have a more cohesive, democratic, healthy society, we can’t let people at the top keep distancing

themselves from everybody else.

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Can public policy address concentration at the top?

Narrow the gaps between CEO and worker pay

Cap the executive pay corporations can deduct from taxes at 25 times what workers receive

Address the inheritance of wealth

Reform the estate tax to include a more progressive rate structure

End incentives for executive over-compensation

Deny government contracts to companies that overpay executives

Raise the top marginal federal income tax rate

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Top marginal tax rates, today and yesterday

35% 39.6%

91%

15%20%

25%

2007 2000 1957

Taxes on ordinary and capital gains income

Ordinary Capital Gains

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$900 $950

$1,300

$1,400

$1,700

$17 $45 $97

$213

$398

$770

$46 $46 $53 $59 $72

$276

$34 $35 $51 $60 $112

$291

Who’s enjoying today’s rates?

Sports CEOs Private Equity Hedge Funds

Taxed mostly at 15% capital

gains rate

The Blackstone Group

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What are we rewarding?

Hard work and innovation should certainly be fairly rewarded.

But rewards have gone far beyond what almost anyone would consider ‘fair.’ $3.2

million

$25.8 million

1957 2005

Richest 0.01%Income, in 2005 dollars

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Back to the future

891 times

179 times 175 times

882 times

1928 1955 1980 2005

Gap between the average income of the top 0.01%

and the average income of the bottom 90%

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Americans once believed . . .. . . that smart societies do not let wealth concentrate in a precious few hands, but instead tax the wealthy to invest in opportunity for all.

‘In many countries of the free world

private enterprise is greatly different

from what we know here. In some, a

few families are fabulously

wealthy, contribute far less than they

should in taxes, and are indifferent to

the poverty of the great masses of the

people . . . A country in this situation is

fraught with continual instability. It is

ripe for revolution.’

Dwight D. EisenhowerNational Automobile

Show Industry Dinner,

Detroit, October 17, 1960

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Democracy vs PlutocracyDwight Eisenhower, like

most Americans of his day, had a world view shaped by decades of

debate over grand accumulations

of private wealth,a debate that had been

raging ever since Robber Baron fortunes

first appeared on the American scene.

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The Good Society CreedIn those debates, our progressive forbears advanced a systematic critique of concentrated wealth.

Wealth and power, progressives argued, go inseparably together.

In any society where wealth concentrates, so will power.

And societies where wealth and power concentrate never nurture policies that help average people.

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Who preached this creed?We’re not talking radicals at the political margins.

We’re talking immenselypopular figures in the mainstream

of American political life.

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People like Louis Brandeis Supreme Court justice, 1916-1939

“We can either have democracy in

this country or we can have great

wealth concentrated in the hands

of a few. But we can't have both.”

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People like Joseph PulitzerCrusading newspaper publisher

“(A)lways oppose privileged classes

. . . never be afraid to attack

wrong, whether by predatory

plutocracy or predatory poverty.”

St. Louis Post-Dispatch, 1907

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People like Teddy RooseveltU.S. President, 1901-1909

“(T)he prime object should be to

put a constantly increasing burden

on the inheritance of those

swollen fortunes which it is

certainly of no benefit to this

country to perpetuate.”

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People like Franklin RooseveltU.S. President, 1933-1945

“Great accumulations of wealth cannot be justified on the

basis of personal or family security. Such inherited economic

power is as inconsistent with the ideals of this generation as

inherited political power was inconsistent with the ideals of

the generation which established our country.”

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The consensus: No more John D’s

Walter Lippmann, America’s top pundit, on the 1937 death, at 97, of America’s first billionaire

“*John D. Rockefeller+ lived long enough

to see the methods by which such a

fortune can be accumulated outlawed by

public opinion, forbidden by statute, and

prevented by the tax laws . . . sentiment

has turned wholly against the private

accumulation of so much wealth."

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A much less dominant richThe top 1% share of national income

in the United States, 1913 - 1978

17.96%

23.94%

8.86%

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With the rich less dominant . . .Politics, in the mid 20th century, actually spoke to working family needs.

Legislation significantly impacted people’s lives.

GI Bill

FHA home loans

Medicare

Food Stamps

Occupational Safety and Health Act

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Enter the mass middle classPublic policies in the mid 20th century created a America

that boomed for Americans at every income level.

Up 116%

Up 100%

Up 111% Up 114%

Up 99%

Up 86%

Bottom Fifth

Second Fifth

Middle Fifth

Fourth Fifth

Top Fifth Top 5%

Real family income growth,1947 - 1979

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The Great Public Policy U-Turn

The top 1% share of national income in the United States, 1913 - 2005

23.94%

8.86%

In mid 20th century America, public policies shared wealth.

Over the last 30 years, public policies have concentrated it.

21.83%

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Exit the mass middle classThe more concentrated our nation’s wealth,

the less lives have improved for average Americans.

Up 116%

Up 100%

Up 111% Up 114%

Up 99%

Up 86%

Down 1%Up 9%

Up 15%Up 25%

Up 53%Up 81%

Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Top Fifth Top 5%

Real family income growth,1947 – 1979 vs 1979 - 2005

1947-1979 1979-200537

Average Americans are going nowhere fast

$361.02

$535.25 $581.67 $561.74

$514.24 $508.43 $544.81 $543.65

1947 1967 1973 1979 1989 1995 2000 2005

Average weekly earnings, 2005 $

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Should we start the century over?If we simply erased the Robin-Hood-in-reverse policies

of the George W. Bush years, would we be back on track?

„I believe people are fed up with the

policies of the past six years. So many

people I talk to just want to hit the restart

button on the 21st century and redo it

the right way. And I agree with them.‟

Senator Hillary Clinton, May 29, 2005

Undoing the Bush years would reverse just one-sixth of the growth in inequality since 1979.

Brookings Institution, June 2007

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We need to be bolder

Source: Institute on Taxation and Economic Policy Tax

Model, May 2007 (preliminary)

One Modest Proposal

Set New Top Tax Rates

50% on annual income from $5 million to $10 million

70% on income over $10 million

Number of households impacted

38,410

Share of U.S. households

0.03%

Estimated revenue in 2008

$105,000,000,000

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Dare we tax the super-rich?Wouldn’t they just find loopholes?

Wouldn’t they just take their money and run?

Wouldn’t the economy tank, if rich people had less money available to invest?

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The argument: Higher rates never work. The rich always exploit loopholes.

68.4%

41.4%

21.9%

1943 WW II 1967 Vietnam 2004 Iraq

Actual share of income taxed, 25,000 highest-income Americans

Yes, the rich do find loopholes. But top rates make a difference.

Top statutory marginal rate

94%

Top statutory marginal rate

70%

Top statutory marginal rate

35%

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The argument: The rich will take their money and run if they face higher taxes.

The rich don’t need higher rates as an excuse to take their money offshore. They already do.

Tax haven abuses currently cost U.S. taxpayers

“$40 to $70 billion dollars each year.” U.S. Senate Permanent Subcommittee on Investigations, August 2006

Tax havens can be closed.

Senators Carl Levin and Norm Coleman

have introduced an eight-point plan to close them.

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The argument: Without rich people investing, the economy will tank.

Capital formation doesn’t require wealth to be concentrated in the pockets of a few plutocrats.

Institutional investors — like pension funds — make for a powerful investing engine.

Our current concentration of wealth fuels the ‘speculative reshuffling of the ownership of corporations.’ $72.9

billion

$524.9billion

$1.5trillion

1983 1994 2006

Total annual dollar value

of U.S. mergers &

acquisitions

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The real question: Dare we not tax the super-rich?

A quarter-century from now, what sort of America do we want to see?

23.94% 21.83%

The top 1% share of national income in the United States, 1913 - 2030 27%

8%

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A last word: Plutarch on plutocracy

Isn’t it time we started talking cure?

“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”

Plutarch, ancient Greek historian

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ReferencesSlide 8: Total Net Worth, 2004. Source: Arthur B. Kennickell, Currents and Undercurrents: Changes in the Distribution of

Wealth in the U.S., 1989-2004, Federal Reserve Board, January 30, 2006. Table 11a. Available online at http://www.federalreserve.gov/Pubs/FEDS/2006/200613/200613pap.pdf

Slide 9: Change in share of national income, 1979 – 2004. Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2004, December 2006. Available online at http://www.cbo.gov/ftpdocs/77xx/doc7718/EffectiveTaxRates.pdf

Slide 17: A comprehensive introduction to the research on the social, economic, and political impact of income and wealth concentration appears in the 2004 book, Greed and Good: Understanding and Overcoming the Inequality that Limits Our Lives by Sam Pizzigati (Apex Press). The text now appears online at http://www.greedandgood.org/

Slide 21: Sports: Jonah Freedman, The 2007 Fortunate 50, SI.com. Available online at http://sportsillustrated.cnn.com/more/specials/fortunate50/2007/index.html. CEOs: Ellen Simon, Hundreds of CEOs top $8.3M pay mark, Associated Press, June 9, 2007. Available online at http://www.usatoday.com/money/companies/management/2007-06-09-ceopay_N.htm?loc=interstitialskip. Private equity: Henny Sender, How Blackstone Will Divvy Up Its IPO Riches, June 12, 2007. Available online at http://www.equilar.com/NewsArticles/061207_wsj.pdf. Hedge funds: Alistair Barr, Simons, Griffin, Lampert earn over $1 bln in 2006, MarketWatch, April 24, 2007. Available online at http://www.marketwatch.com/news/story/simons-griffin-lampert-earn-more/story.aspx?guid=%7B55DBE196-3461-495D-8B27-DE4CA6C5641D%7D

Slide 22: Richest 0.01%. Income, in 2005 dollars. Source: Emmanuel Saez and Thomas Piketty, Income Inequality in the United States, 1913-1998, Quarterly Journal of Economics, 2003. March 2007 update of tables and figures available online at http://elsa.berkeley.edu/~saez/

Slide 23: Gap between the average income of the top 0.01% and the average income of the bottom 90%. Source: Analysis of data from Saez and Piketty March 2007 update.

Slide 33: The top 1% share of national income in the United States, 1913-1978. Source: Saez and Piketty.

Slide 34: Real family income growth, 1947-1979. Source: Source: Analysis of U.S. Census Bureau data in Economic Policy Institute, The State of Working America 1994-95 (M.E. Sharpe: 1994). Available online, through Inequality.org, at http://www.demos.org/inequality/numbers.cfm

Slide 35: The top 1% share of national income in the United States, 1913-2005. Source: Saez and Piketty.

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ReferencesSlide 37: Real family income growth,1947–1979 vs 1979-2005. Source: U.S. Census Bureau, Historical Income Tables, Table F-

3. Available online, through Inequality.org, at http://www.demos.org/inequality/numbers.cfm

Slide 38: Average weekly earnings, 1947-2005, in 2005 $. Source: Economic Policy Institute Datazone. Available online at http://www.epi.org/content.cfm/datazone_dznational

Slide 42: Actual share of income taxed, 25,000 highest-income Americans. Source: For 2004 tax data, Internal Revenue Service Statistics of Income Tax Stats: Individual Statistical Tables by Size of Adjusted Gross Income. Available online at http://www.irs.gov/taxstats/indtaxstats/article/0,,id=96981,00.html. For the 1943 data, Fritz Scheuren and Janet McCubbin, Individual Income Tax Shares and Average Tax Rates, 1916-1950, Statistics of Income Bulletin, Volume 8, Number 3, Winter 1988-89. For the 1967 data, Janet McCubbin and Fritz Scheuren, Individual Income Tax Shares and Average Tax Rates, 1951-1986, Statistics of Income Bulletin, Volume 8, Number 4, Spring 1989. The “top 25,000” figures round off actual average rates paid by the highest 23,730 incomes in 1943, the highest 27,066 in 1967, and the highest 24,440 in 2004.

Slide 44: Total annual value of U.S. mergers & acquisitions. Sources: Thomson Financial Securities Data, Mergers & Corporate Transactions Database. Available online at http://www.allcountries.org/uscensus/882_mergers_and_acquisitions_summary.html . Statistical Abstract of the United States 2004. No. 741. Mergers and Acquisitions-Summary: 1990 to 2003. Available online at http://www.census.gov/prod/2004pubs/04statab/business.pdf

Slide 45: The top 1% share of national income in the United States, 1913-2030. Source: Saez and Piketty, for data through 2005.

For updates on extreme inequality in the United States — and the campaigns against it — check the online weekly, Too Much, published by the Council on International and Public Affairs. Available online at http://www.toomuchonline.org/

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