Taxes – Impact on Income Inequality

“These jobs are goin’ boys and they ain’t comin’ back” Bruce Springsteen “My Hometown”

Review of Robert Reich’s 2013 Documentary “Inequality for All” – part 3 of 4

Two economists, Piketty and Saez have studied US income tax rates over the past one hundred years. Their graph of income inequality looks similar to the iconic Golden Gate Bridge with its two peaks occurring in 1928 and 2007, right before the biggest economic crises in the US.

Golden Gate Bridge stock photo

From this study, Robert Reich can conclude that:

Income inequality correlates directly with lower taxes on the rich and higher taxes on the middle class

Yes, history shows that the lower the tax rates for the wealthy, the higher income inequality in the US becomes. The higher the tax rates on the wealthy, the lower income inequality becomes.

In the 1950s, President Eisenhower, a Republican, levied a 91% tax rate on the wealthy during what Reich views as the “golden age” for the middle class. President Reagan dropped that rate to 28% in the 1980s, and our government deficit rose drastically, until President Bill Clinton balanced the US budget in the late 1990s.

During the Clinton presidency there was a brief feeling of well-being which quickly disappeared in this century. As Reich has said in his book, Supercapitalism, the winners back in the 1990s were US consumers who could buy goods more cheaply and the investors who profited from the booming stock market.

But as wages declined and less taxes could be paid by the middle class, both workers and government coffers were the losers. Presidents G.W. Bush and Obama both saw the US government deficit soar during their time in office.

Most wealthy people today pay far less tax than 28%. Capital gains tax for investors is only 15%. Mitt Romney is an example. Romney tells us he paid 14% on his hedge fund income. Another example is by an entrepreneur in San Francisco who says he paid 11% on an eight figure income.

When he noted that his secretary paid a higher rate than he did, Warren Buffett paid only 17%.  Buffett said his office workers averaged around 30% in federal taxes.

Most Americans are paying 30% income tax. These higher tax rates add to the feeling of the middle class that we’re working harder and “going nowhere”.

Reich summarizes the results when less taxes are paid by the wealthy:

Government deficits go up. College tuition rises and negatively affects the availability of education for workers.

State governments lose federal money and have to cut services or raise taxes.

Lack of government spending money on infrastructure construction and repairs negatively impacts corporations, workers and consumers.

These things affect the well-being of all of us.

My comments:

I agree with what Reich says. My biggest objection to Robert Reich’s brand of liberal economics is that it doesn’t go beyond the United States.

Reich himself points out in his documentary that we now live in a global economy. He asked his class of students in 2013 to say which country was most involved in the production of the new Apple iPhone.

The students in Reich’s Wealth and Poverty class at UC Berkeley voted for China.

Reich gave them a very different answer: Japan (34%), Germany (17%), South Korea (13%), United States (6%), and China (3.6%).  China was at the end of the assembly line; Chines assembled the pieces others made.

Various other countries around the globe made the remaining 27%  of the iPhone pieces. Many. many countries around the globe were involved in creating Apple’s iPhone .

This examples shows that the assembly line, invented in the 1890s by an American named Frederick Winslow Taylor has now gone global.

I would add that at the end of the 20th century and first decade of this century, the American auto manufacturing industry had a similar structure, but only on a continental basis.

The big three US autoworkers assembled cars in Detroit. The components of their cars came from outside Michigan – in particular, several Southern states, northern Mexico, Canada, and finally California. Source: Who Really Made Your Car? Klier & Rubinstein 2008

This suggests a parallel reason for the decline of the Michigan economy, and in particular Detroit after the Great Recession of 2008. That event decimated Detroit and the American auto industry.

It resulted layoffs and plant closures everywhere else. Visteon, Lear, and Dura, three of the largest US auto parts suppliers along with several others declared bankruptcy in 2009.

The global manufacturing assembly line now is much broader and more fragmented than it was only a decade ago!

But there’s a difference from back then. When I worked in a factory, education wasn’t required. Assembly line work was routine (and boring!) Yet white men who had factory jobs made high wages, more than other workers. That’s because they had unions.

Today we have robotic devices for doing routine work, and Americans can’t or won’t compete with low-paid foreign factory workers. Thus, I agree with Reich about education.

Unless American workers have sufficient education and training to compete with Japanese, German, Korean, workers, etc., we won’t be able to bring back high-wage jobs to this country.

Current economic theory whether liberal or conservative, doesn’t seem to take into account the global economic changes of the past two decades.

Our economics is still based on the notion of a closed national economy, an idea first promulgated by Adam Smith in 1776 and then expanded on by John Maynard Keynes in the early 20th century.

But there are hints in foreign news media we are not alone in the world with our economic struggles.

British economist, Martin Wolf, in the Financial Times article, “Economic ills of the UK extend well beyond Brexit” echoes Reich’s thesis by suggesting UK workers are in the same boat as US workers.

The UK has high income inequality and declining real wages, while middle-class wages have risen in more prosperous European nations like France and Germany.

I have to ask—why aren’t we creating a new field for the study of global economics to look at wages and job creation for this century?

Next time: Income Inequality – Impact on Democracy

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