A Tribute to Occupy Wall Street: Income Inequality

OCCUPY WALL STREET

Strolling around in the city a few days ago, I passed by a familiar sounding place: "Zuccotti Park". I knew I had heard the name before, but I was unsure from where. Trying to recall, it finally came to me: Zuccotti Park was where the Occupy Wall Street movement began protesting a little over a year ago. For anyone who might have forgotten about it, let me refresh your memory.

In September 2011, a group of activists occupied Zuccotti Park in Lower Manhattan's financial district in protest of some of the major issues facing America: reckless behavior of many financial institutions that caused the 2007-2008 financial collapse that led to the recession, corporations’ strong monetary influence in our political system, and the country's rising income inequality, to name a few. Though comprised of a disorganized, often nutty bunch of common-folk, OWS became an important component of the nation's political discourse. As its popularity grew, OWS demonstrations spread to other cities like Chicago and Los Angeles and even to international cities in Europe and Asia. With their message catching on, OWS was here to stay. Or so it seemed.

After months of waning protests, mayors of occupied cities grew tired of OWS groups obstructing private and public property, whereupon police were sent in to clear out the campsites. That was a major blow to the already struggling movement, which ultimately faded from the public eye, to the point that the "Zuccotti Park" allusion almost eluded me when I passed by.

OWS may be gone, but the issues it sought to publicize are not, and they are as urgent as ever. In tribute to OWS, I would like to turn your attention to one issue that I already referenced: income inequality.

INCOME INEQUALITY

It's almost undeniable that since the late 1970's, there has been a growing income disparity between the country's highest income earners, especially the top one percent, and everyone else. Numerous studies have proven so, including a report published in 2011 by the non-partisan Congressional Budget Office (CBO).

Using data collected from the Internal Revenue Service (IRS) and the Census Bureau, the CBO calculated the growth of average after-tax household income among the country's various income groups from 1979 to 2007. It found that the average income of the lowest twenty percent of earners rose by about 18%, the middle sixty percent rose by about 40%, and the highest twenty percent rose by approximately 65%. Now compare those figures to the increase in the top one percent's average after-tax household income: 275%.

Consequently, the top one percent's share of all national income increased from 8% in 1979 to over 17% by 2007, while the rest of the top twenty percent's share remained virtually unchanged, rising from 35% of the nation’s income to 36%. In contrast, the middle sixty percent's share of total national income dropped from 50% to 43% during the same time period, while the lowest twenty percent's share fell from 7% to 5%.

This large income disparity was due to a growing dispersal of household market income across the population. Each source of market income, labor income, business income, capital income and capital gains income, became more concentrated toward the top twenty percent of income earners, with their market income's composition shifting from mainly labor income in earlier years to capital gains income in later ones. There are many theories regarding why market income dispersed the way it did, including changes in the tax code, globalization, and technological labor-saving advancements.

Either way, the remaining 80 percent's share of market income shrunk during that time. In 1979, they received around 60% of total labor income, 33% of all capital and business income and 8% of all capital gains income. By 2007, however, they received 50% of total labor income, 33% of all capital and business income and only 5% of capital gains income.

Thus, the CBO concluded that since 1979: "The share of income accruing to higher income households increased, whereas the share accruing to other households declined." In other words, over the past thirty years, the highest income earners became richer while the rest of the country became poorer, which has led to our current state of massive income inequality.

Sadly, income inequality, referring to wealth in addition to income, has only worsened since the recession. According to a recent New York Times article, "income inequality has soared to the highest levels since the Great Depression." Because the middle and lower class rely on the value of their homes as their primary source of wealth, when the housing bubble burst and house values declined, their wealth was decimated and has remained that way. On the other hand, because the markets have been doing better since the recession, higher income earners have gained back all that they lost when the market crashed and then some. Citing a new study, the article states that: "the top 1 percent of households now holds a larger share of overall wealth than the bottom 90 percent does."

ECONOMIC THREATS

Something must be done to balance the income distribution. Massive income inequality like ours poses serious economic threats. The International Monetary Fund published a report in 2011 in which they concluded that income inequality is a primary cause of slow economic growth. While some income inequality is necessary for a well functioning market economy, too much of it can be devastating.

One reason is because income inequality creates a weak demand for society's goods and services as most people in the middle and lower class spend all of their income on only the most essential items. Such limited consumer spending results in higher unemployment, a more stagnant economy and, interestingly, even more income inequality. Joseph Stiglitz, a Nobel laureate in economics, put it well in a recent New York Times op-ed: "We’re in a vicious cycle […]. Increasing inequality means a weaker economy, which means increasing inequality, which means a weaker economy." He further explains that the only reason why this cycle has not yet occurred after the recession was because the Federal Reserve stepped in and lowered interest rates, which kept consumer spending afloat; otherwise, the economy would have been much worse off.

Income inequality also leads to political inequality, which itself endangers the economy in two ways. As the income disparity widens, major corporations and high income earners gain even more political influence than everyone else, thereby enableing them to ease financial laws and regulations for their own prosperity. Such deregulation would likely cause another financial crash just as it did a few years ago when financial institutions were overleveraged in risky investments, like sub-prime mortgages, without any government oversight.

In addition to deregulation, the wealthiest would also surely lobby for and receive major tax cuts, as they did during the Bush administration. Among the government programs that would surely be harmed due to the lost revenue, as they were after President Bush cut their taxes, would be Pell grants, which financially help many young people attend college.

Here we touch on another threat posed by income inequality, which political inequality would only worsen. In a tough economy like ours, income inequality prevents millions of middle and lower class young people from attending a four-year college due to financial limitations. Without a college degree, most of their potential for contributions to future economic growth will go unfulfilled. Therefore, cutting Pell grant funding would further devastate future economic growth as even more young people would enter the workforce without a college degree.

POLICY SOLUTIONS

Therefore, any effective solution to income inequality would need to combat these economic threats by implementing both a more equitable tax system as well as greater educational investments.

Any combination of closing loopholes, raising income tax rates or increasing capital gains rates on the wealthiest Americans would not simply curtail political inequality, but would also raise much needed revenue for government programs and instill more fairness in the tax code. Numerous proposals have already been offered.

For instance, earlier this year, President Obama proposed the "Buffett Rule," which would require those earning over $1,000,000 in annual income to pay at least 30% in federal income taxes, which is approximately the same rate paid by the middle class. Officially called the "Paying a Fair Share Act of 2012," the plan's more popular name was derived from the billionaire investor Warren Buffett, who complained how under the current tax system his secretary pays a higher tax rate on her income than he does on his. It is estimated that the Buffett rule would generate around fifty billion dollars in revenue over the next ten years. Though not a significant number, the "Buffett Rule" would create more fairness in the tax code and raise revenue for the albeit smaller, yet important government programs that Republicans so earnestly wish they could fund but are just too pinched for cash to support, like Sesame Street, for example.

Now, before I start hearing shrieks of "class warfare" and how such tax hikes would devastate "job creators," an increase in taxes for the most affluent Americans is not only necessary but has been a long time coming.

First of all, the top income earners have had it pretty well over the last fifty years. Aside from their income increases since the late 70's, according to a report issued by the White House this year, the top 0.1 percent of earners’ average payroll and income tax rates have decreased from 51% to 26% since the 1960's – a 50% drop! This is far below the highest effective income tax rate of 35%. The reason those at the top pay such a low rate is because most of their income is from capital gains and dividends, which are taxed at 15%. Throw in a few other tax deductions, and you have Mitt Romney's recipe for paying 14% worth of income tax on $21 million over a two year span. In contrast, the middle class's tax rates have remained virtually the same during that time – 14% in 1960 to 16% in 2010.

But more importantly, the notion that raising taxes on the top income earners would reduce job creation is simply false. Too much taxation can definitely impede economic growth by squeezing small business owners, but these employers are not the wealthiest and the wealthiest are not these employers.

Take the Buffett Rule again, only those who make at least $1,000,000 dollars a year would pay more tax, which excludes most small businesses. And even the successful ones who do earn $1,000,000 would not be affected because the tax only applies to people who are not already paying a 30% rate. Typically, this only includes investors whose income comes from financial investments. But no matter the plan, small businesses would not be taxed much higher because over taxation would be a major threat to them.

But it would not be a major threat to the highest income earners, which the Buffett Rule and similar plans do target. Many believe that taxing the wealthiest would harm job creation because they assume that high taxation would prevent rich people from investing in the market, which would stop capital loans that would be used to start up businesses and hire employees. Personally, I don't buy it. Even if rich investors were to become unable to earn as much through investments as they previously could, why would the allure of profitable investments suddenly fade away? Furthermore, what would they do with the money – go splurge?! No, they would still invest to make the greatest possible profit, and capital would still be available for entrepreneurs who need it.

But don't take my word for it. Roberton Williams of the Tax Policy Center agrees, as he commented: "I think there’s general agreement among economists that it [higher taxation] doesn’t change behavior all that much. At the margin, there’s always somebody who’s going to move across the line. But I’ve seen no economic evidence that there will be a lot of people on that margin getting out of investment if taxes go up.”

Through a more balanced tax code, we would then also have more funds available to invest in K-12 education, increase Pell grants, and better the student loan program even more than President Obama has already done. Young students will be able to receive their college degrees and contribute to the country's future economic growth.

Income inequality has been dragging America down for too long, and poses even more harm to us in the future. But the two components outlined above are both necessary and possible solutions to fix it.