Evidence continues to grow about the persistence of deepening inequality in our society as beltway politicians consider raising the minimum wage.
A recent study shows that the economic recovery has only benefited the wealthy.
That means 99 percent of families are unlikely to see their living standards improve anytime soon without tax fairness and other changes in public policy like raising the minimum wage.
Average real income of families grew modestly from 2009 to 2011, according to University of California economist Emmanuel Saez. In January, Saez updated his study “Striking it Richer: The Evolution of Top Incomes in the United States,” to include 2011 estimates.
So, although the economy is officially recovering from the Great Recession of 2007-2009, the gains are not being distributed equally.
While the top 1 percent of families saw their income grow by 11.2 percent during 2009 to 2011, the bottom 99 percent actually experienced a decline of income of 0.4 percent.
“Looking further ahead, based on the US historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back,” Saez writes.
So, without changes in government policy on taxes and regulation, we can expect the wealthy to continue to benefit from economic growth while everyone else stays in place or falls behind.
“The policy changes that are taking place coming out of the Great recession (financial regulation and top tax rate increase in 2013) are not negligible but they are modest relative to the policy changes that took place coming out of the Great depression,” Saez writes. “Therefore, it seems unlikely that US income concentration will fall much in the coming years.”
With economic inequality at Great Depression levels and United States facing possible European-like austerity triggered by $1.2 trillion in automatic spending cuts, it’s time for a dramatic overhaul of our tax system.
To begin with, the government should look at raising capital gains taxes. Besides reducing inequality, a higher capital gains tax would provide the government with substantial additional revenue.
A new study shows how capital fueled inequality in recent years.
The study, cited by blogger Greg Sargent of The Washington Post, concludes that income from capital gains and dividends are the primary cause of the rise in inequality during a recent 15-year period. Thomas Hunderford of the non-partisan Congressional Research Service did the study, which covers 1991 to 2006.
“The reason income inequality has been increasing has been the rising income going to the top one percent,” told Sargent in an interview. “Most of that has come in capital gains and dividends.”
A New York Times editorial on Feb. 21 points out that the new top income tax rate of 39.6 is “historically low.” The editorial also noted that nearly $1.1 trillion in annual deductions, credits and other tax breaks disproportionately benefit the affluent—and cost more each year than Medicare and Medicaid combined.
A financial transactions tax would ensure a steady flow of revenue to the federal government, putting an end to the deficit hysteria that led to the sequestration, which calls for slashing $1.2 trillion over 10 years.
The banks and speculators have been able to accumulate trillions of dollars in unspent reserves thanks to the Federal Reserve Bank’s effort to stimulate the economy since the 2008 crash. Certainly, the financial sector won’t be crippled by a financial transactions tax.
A 1 percent tax on stock and bond trades and a 0.1 percent on derivative trades would bring in $750 billion in revenue each year, according to Ellen Brown, an attorney and author of 11 books, including “Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free.”
On Feb. 28, the day before the $1.2 billion sequester was to go into effect, Sen. Tom Harkin (D-Iowa), Sen. Sheldon Whitehouse (D-RI) and Rep Peter DeFazio (D-OR) proposed a financial transactions tax directed at speculators. It would bring in $352 billion over 10 years by taxing trades by three cents for every $100. Eleven European nations have adopted a financial transaction tax.
In addition to greater tax fairness, President Barack Obama’s proposal to raise the federal minimum wage to $9 an hour would be a significant step in helping to address inequality. Obama’s proposal reflects government’s appropriate role of correcting the injustices of the free-market economy.
Economists cite the drop in value of the minimum wage as one of the major factors explaining the declining and stagnating incomes that have walloped the poor and middle class over the past 30 years.
The decline of the minimum wage has hurt the standard of living of millions of Americans and immigrants by forcing them to take on second and even third jobs to get by.
The reduced value of the minimum wage also hurts the economy by curtailing the purchasing power of the working poor. Compared to higher-income groups, the working poor spend a greater percentage of their increases in their disposable income.
The Republican arguments against the minimum wage are particularly offensive given that Obama’s proposal is very modest—even inadequate, according to liberal and leftist critics.
Only 5.2 percent of hourly workers, or 3.8 million workers, are paid minimum wage or less. Although the percentage of the work force paid the minimum wage is not that high, the minimum wage provides a benchmark for setting the pay rates of millions of low-wage workers.
The last increase in the minimum wage occurred in 2009.
The minimum wage would now be $21.72 an hour if it had increased at the same rate as productivity since its real value peaked in 1968, according to a 2012 study of the Center for Economic and Policy Research. The CEPR study also found that the minimum wage would be $10.52 an hour if it had kept up with inflation since then. Obama’s proposal would peg increases in the federal minimum wage to the rate of inflation.
Apart from the technical arguments in favor of increasing the minimum wage, the government should boost it from $7.25 to $9 an hour simply because that’s the right thing to do.
As Obama said in his State of the Union Address: “Today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we've put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That's wrong.”
As conservatives continue to promote deficit hysteria and demand deep cuts in government spending, it’s time we examine more closely the public policies—such as the erosion of the minimum wage and years of tax breaks for the wealthy--that brought us here.
We face a manufactured crisis that could be remedied rather painlessly if only the politicians who claim to be the defenders of working families had the will to do it. Tax justice and a higher minimum wage would be good for the economy, help provide more revenue for the government and address the inequality that is undermining our standard of living.