Imagine a train, traveling through time, where every year was another station. The sign on the front of the train read “Prosperity.” When it got to station 1966, the conductor announced that 90 percent of the people on the train had to get off. They would need to walk the rest of the way.
That train is called America. Those people who have been walking all this time, (in other words, our conterparts) haven’t gotten very far. In fact, according to Pulitzer Prize winning economic journalist, David Cay Johnston, our prosperity, in terms of annual income, grew by only $59 after adjusting for inflation.
What about the folks who stayed on the train? Over the same 45-year period, their income grew by $116,071, an increase of 84 percent. The train, it would seem, arrived at its destination with time to spare and with everyone left on-board quite comfortable. Meanwhile, those 90 percent who walked watched their share of the nation’s income drop from 67 percent to 52 percent.
How could this happen in America, the land of opportunity? How is it that since 1978, CEO pay grew 127 times faster than the pay of that of ordinary workers? Back in 1978, CEO’s made 26.5 times more than the average worker. That sounds like a lot, doesn’t it?
But by 2011, according to the Economic Policy Institute, that number grew to 206. That means that the average worker now has to work roughly nine and a half months, to earn what his or her CEO earns in one day. Did CEO’s really get that much better? Do they work that much harder? Nobody disputes that it’s a difficult job and that they deserve to be paid well for doing it. But how much is enough?
Indeed, the level of income inequality in the country now rivals that of places like Pakistan and Ivory Coast. According to the CIA data book, inequality in the U.S. is now roughly double that of Sweden and other European countries. How did this happen? What made us get off the train?
It’s true that during this period, productivity soared, largely through the use of technology. But virtually none of those productivity gains, worker productivity gains, went to the workers. According to Johnston, the huge disparities came, not from CEO’s working harder “but the shift of income from labor to capital and changes in federal income, gift, and estate tax rules.”
In other words, much of the increased earning power at the top has come, not from wages, but from the money that is earned by money. When you have money it’s easy to make more money by investing it. And since the estate tax has been all but erased, those at the top can now pass their status along to their heirs, and those heirs no longer need to earn it.
In 1965, the top income tax bracket was lowered from 77 percent to 70 percent. It stayed there until 1982 when it dropped to 50 percent. Today it is 39.6 percent. The 60s and 70s were a period of widespread prosperity for all. Estate taxes more or less followed suit, minus an exemption that first hit $1 million in 2002.
But the biggest driver by far was the cut in the capital gains tax, which allows the wealthy to amass enormous fortunes from their investments, while paying next to no tax on them. Until 1996, earners paid tax on capital gains at the same rate that they paid on all their other earnings. So if you were highly paid, you paid a lot of tax on money that you earned with your money. Now everyone, even billionaires, pay the taxes on their capital gains at the lowest possible rate, 10 percent, which is the rate that someone earning less than $9,000 per year would pay on their earnings. Besides being patently unfair, this negligible tax rate does little to discourage speculation and risky investment. If a rich person was considering a risky investment, the fact that he would need to pay just under 40 percent tax on his profit might give him pause to think twice before trying it. As a result, we have not only inequality, but far less stability in our financial markets. The meltdown in 2008 was largely the result of this kind of reckless speculation.
So, it’s unfair, but what can we do about it?
Well, the first thing is to recognize that these unfair laws were put in place by people in Congress we elected. We have the ability to change the people who are in Congress and have them change the laws of the land, but we need to start paying attention and we need to become informed and we need to exercise our rights as citizens.
Robert Reich, in his brilliant book Aftershock, which traces the origins of this scam, quotes Marriner Eccles, who was the Chairman of the Federal Reserve, during the FDR administration. Eccles had come to realize that, “men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that reinforced those rules and in conditioning the attitude taken by people as a whole toward those rules. After I lost my faith in my economic heroes, I concluded that I and everyone else had an equal right to share in the process by which economic rules are made and changed.”
Social justice is a key element of sustainability. We can’t have one without the other. This needs to be fixed.
[Image credit: Gilkò: Flickr Creative Commons]
RP Siegel, PE, is an inventor, consultant and author. He co-wrote the eco-thriller Vapor Trails, the first in a series covering the human side of various sustainability issues including energy, food, and water in an exciting and entertaining format. Now available on Kindle.
Follow RP Siegel on Twitter.