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Nov 23, 2009 Too Much Weekly: The Prosperity Promise

Click here to read the Too Much weekly edition, as emailed to readers on November 23, 2009.

This Week in Too Much

You don’t have to dig particularly deep, in the United States today, to find some striking similarities between today’s virulently anti-Obama “Tea Party” crowd — and the pols like Sarah Palin who egg them on — and the media darlings who birthed the “Tax Revolt” phenomenon back in the late 1970s.

The Tax Revolters burst onto the national scene amid an inflation-battered economy. They blamed “big government” for what ailed America, and they offered a simple remedy: cut taxes, everywhere. Lower taxes, they promised, would get average Americans back on track.

The Tea Party zealots have, like the Tax Revolters, also coalesced in tough economic times. They attack “big government,” too. They and their political enablers even make the same promises about taxes. What they don’t do: talk about how those original Tax Revolt promises worked out.

In this week’s Too Much, we do, with the help of two just-released studies that document just how revolting — for average Americans — the Tax Revolt has turned out to be.

Greed at a Glance

Glenn TiltonWhy can’t America’s biggest corporations fully fund their pension systems? They’re too busy, a new Government Accountability Office report suggests, stuffing executive pockets. Between 2002 and 2006, says the GAO, United Airlines chose not to make $1 billion in required contributions to United’s employee pension fund. Over the same period, United CEO Glenn Tilton and two top fellow execs pocketed $7.6 million in retirement benefits and $55.5 million in total comp. Overall, over a five-year period, 40 top execs at 10 major corporations took home $350 million in pay while underfunding their employee pensions by $11 billion . . .

The online auction house eBay made a billionaire out of CEO Meg Whitman. Now another Web auctioneer is hoping billionaires will make a mega millionaire out of him. Quintin Thompson’s new BillionaireXchange online auction site offers the super rich down a bit on their luck a private online space for unloading their excess real estate, antiques, super-cars, and yachts. The site has just launched after a 10-month test that ended up moving $180 million in assets. What’s the site’s attraction? Many overextended deep pockets, says Thompson, have been seeking a spot where they can trade down “discreetly and privately so that they don’t have to deal with the shame and or embarrassment of downgrade.”

Philip GreenBritish retail tycoon Philip Green doesn’t embarrass easy. The shameless billionaire, the Times of London reports, “has thrown at least three £1 million-plus parties in the past year.” That’s over $1.6 million per party — in the middle of a Great Recession. At the first party, this past June, guests “entered by walking up a £200,000 white carpet.” At the second in August, Green flew his guests to Capri for a serenade — by superstar singer Julio Iglesias — aboard the $33 million Green family yacht. At the third, a birthday bash for American Idol judge Simon Cowell, the party-goers ate soup with Cowell’s name spelled out in pasta shapes . . .

Reality TV shows, as the hit movie Slumdog Millionaire dramatized last year, draw huge audiences in India. India imports, for the most part, popular reality TV franchises from elsewhere. But Indian producers have just launched a brand-new reality TV concept of their own. The new show, The Big Switch, has 10 rich Indians living 24-7 in a Mumbai slum for an entire month. The rich — amid plentiful filth and dirt — compete for points shining shoes at railway stations and hawking cheap goods at traffic lights, just like Mumbai’s real poor. Each rich contestant has a poor partner, who stands to win 1 million rupees, about $21,600. The show’s early success hasn’t surprised Indian TV exec Zarina Mehta. Explains Mehta: “When you bring in people from the richest strata and put them with the poorest of the poor, it makes for great television.”

In India, over 40 percent of the population lives on less than $1.25 a day. Ten million of those poor would have to work over 60 years each to match the combined fortune of India’s 100 richest. This Indian top 100, Forbes related last week, now together hold $276 billion in assets, “over $100 billion more than the $170 billion total net worth of their Chinese counterparts.” The United States still boasts the world’s richest 100. Their total wealth: $775 billion. Thirteen of India’s top 100 owe their fortunes to the pharmaceutical industry.

Quote of the Week

“Taxes ought to be based on people’s ability to pay them, which means that the share of income paid in tax should rise as income grows, not fall sharply, as is the case in Texas.”
Matthew Gardner, executive director, Institute on Taxation and Economic Policy, Dallas Morning News, November 19, 2009

Stat of the Week

By a 57-36 percent margin, Americans favor “increasing income taxes paid by people who earn more than $250,000 a year” to help pay for health care reform, says a new AP poll conducted by Stanford University and the nonpartisan Robert Wood Johnson Foundation. The House-passed reform bill adds a surtax of 5.4 percent to the income tax bills of families making over $1 million a year. The pending Senate version of health care reform would raise the Medicare payroll tax on annual wage income over $250,000 from 1.45 to 1.95 percent.

In Focus

Our Tax-Cut Legacy: A Sobering Look Back

In 1978, in a ballot-box stunner, voters in California enacted an unprecedented cap on property taxes known as Prop 13. Within a few short years, almost half America’s states had followed suit with tax cuts and caps of their own.

In 1980, at the national level, this “Tax Revolt” surge would carry Ronald Reagan into the White House. One year later, a pliant Congress would give President Reagan the biggest across-the-board federal tax cut in U.S. history.

Tax relief had become, in the wink of an eye, America’s most potent political creed. Tax cutting and capping would go on to dominate the nation’s political discourse for the next three decades, an entire generation.

What do we have to show for all this cutting and capping? Last week, researchers offered up two new studies that offer up a useful assessment.

The first, funded by the Social Security Administration, looks at the wealth of American families. That wealth, the Tax Revolters assured us, would start amassing again once taxpayers yanked “big government” out of our pockets.

The second new study zeroes in on state and local taxes. After years of tax revolting, this Institute on Taxation and Economic Policy report asks, who exactly is paying taxes at the state and local level? Who has benefited the most, in tax terms, from the Tax Revolt the Tea Party zealots are now so fervently seeking to extend?

The answer: The rich have benefited the most. The Tax Revolt that began back in the late 1970s has, in state after state, let the affluent off the tax hook.

In fact, notes the new Institute on Taxation and Economic Policy analysis, “nearly every state and local tax system takes a much greater share of income from middle- and low-income families than from the wealthy.”

In the entire United States, this analysis adds, “only two states require their best-off citizens to pay as much of their incomes in taxes as their very poorest taxpayers must pay, and only one state taxes its wealthiest individuals at a higher effective rate than middle-income families have to pay.”

America’s most affluent 1 percent now pay, on average, just 6.4 percent of their incomes in state and local taxes. But they actually pay even less than that, since they can deduct their state and local taxes from their federal tax bill. The state and local tax burden on America’s rich, after taking this offset into account, drops to 5.2 percent.

Middle-income families — to be precise, those families who make up the middle fifth of America’s income distribution — pay, after the federal offset, 9.4 percent of their incomes in total state and local taxes.

America’s poorest families pay even more. Tax collectors take 10.9 percent of the incomes of households in the nation’s bottom 20 percent, more than double the share they take from the incomes of the nation’s top 1 percent.

The Institute on Taxation and Economic Policy paper, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, covers non-elderly households. Incredibly, the study details, some states “ask their poorest residents — those in the bottom 20 percent of the income scale — to pay up to six times as much of their income in taxes as they ask the wealthy to pay.”

Now you could argue that none of this matters. The Tax Revolters, after all, didn’t claim that their tax cutting and capping would have low- and middle-income people paying taxes at a lower rate than the rich. They claimed, instead, that massive tax cuts, taken as an amorphous whole, would help just about everybody get considerably richer.

That hasn’t happened, as Brookings Institution researchers Barry Bosworth and Rosanna Smart document in a paper just published by the Boston College Center for Retirement Research, with funding support from Social Security.

Bosworth and Smart “explore the consequences of the housing price bubble and its collapse for the wealth of older households.”

Along the way, the two investigators dive into the overall family wealth data the Federal Reserve has been collecting since the early 1980s. Tapping into another federal data set, they bring the family net worth picture up-to-date for 2009.

For low- and middle-income families, their numbers tell a depressing story.

All American households — poor, middle, and rich — have lost wealth since the subprime mortgage collapse and last fall’s financial meltdown. On average, since 2007, Americans have lost 26 percent of their total net worth.

But low- and middle-income households under age 50 haven’t just lost a big chunk of the wealth they held in 2007. These households have actually lost all the wealth they had gained since 1983, the first year with Federal Reserve family wealth data available.

Back then in 1983, the bottom third — by income — of U.S. families under age 50 had an average $24,000 in net worth to their names, as measured in year 2000 dollars. The housing bubble helped boost this bottom-third average net worth to $27,000 in 2007.

Today, in the wake of that bubble’s collapse, researchers Bosworth and Smart put average bottom-third net worth at just $17,000, in those same year 2000 dollars.

Middle-income households under age 50, meanwhile, held an average net worth of $50,000 in 1983. The current net worth of this middle third, after adjusting for inflation: $45,000.

Older households in the bottom and middle income thirds — those over age 50 — have, to be sure, seen their after-inflation net worths increase between 1983 and 2009. But these households have lost at least 22 percent of the wealth they held in 2007. As older families, Bosworth and Smart note, they now “have less time to recover.”

That recovery may take some time.

Back in the middle of the 20th century, governments in the United States routinely taxed the rich to pay for the programs that built a vibrant middle class. The Tax Revolt that began three decades ago, by demonizing taxes, gave the rich a free ride and gutted those programs.

That demonization today continues, with politicos beholden to that rich cynically fanning the Tea Party flames. They don’t care who gets burned. The rest of us should.

In Review

Understanding the Rot at the Top

Stewart Lansley, Unfair to Middling: How Middle Britain’s Shrinking Wages Fueled the Crash and Threaten Recovery. A Touchstone Extra pamphlet, published by the Trades Union Congress. London, November 2009.

Terrence McDonough and Jason Loughrey, Hierarchy of Earnings, Attributes, and Privilege. Published by the Irish Congress of Trade Unions, TASC, and the Social Sciences Research Centre. Dublin, November 2009.

All around the world today, in nations big and small, the conventional wisdom now recognizes unbridled financial speculation as a clear and present danger. Wild wheeling and dealing, most all commentators seem to agree, has dealt our global economy a wicked bashing.

But where did those wheelers and dealers get all that money for their speculation? And why did so many average people rush to borrow so much, at such horrible terms?

These sorts of questions, in our mainstream political discourse, tend to get short shrift. The British and Irish labor movements are now endeavoring to change that. They’ve each just published pamphlets that aim to help people understand just where speculative binges come from — and how we can prevent them.

Unfair to MiddlingBoth pamphlets, in the process, come to the same conclusion: We can’t understand why our global economy has crashed without understanding how the unequal distribution of income and wealth has always and will always set off speculative frenzies.

Over the last 30 years, these new pamphlets note at the outset, average working people in Britain and Ireland — and much of the rest of the world, too — have been receiving less for their labors, those who employ them more.

A big deal? You bet. Stewart Lansley, the author of the British labor movement’s new Unfair to Middling, calls this continuing imbalance a basic underlying driver of our “current financial turbulence.”

With less income coming in, as Unfair to Middling explains, average people can’t afford to get by — without going deep into debt. Their debt, in turn, enriches financial firms. Profit rates in the financial sector skyrocket.

Those high returns, naturally enough, attract more and more investment into the financial sector from the rich.

“With rates of return on financial engineering exceeding those on manufacturing investment,” Unfair to Middling relates, investing for long-term success quickly gives way “to short-term, fast-buck, deal-making.”

The ever wealthier wealthy, to make matters worse, manipulate “their growing political muscle to ensure weak financial regulation by the state.” That sets the stage for disaster, as entire economies come to revolve around “historically low average real wages, a growing concentration of earnings at the top, and a rising dependence on debt.”

Not good, agrees the new analysis on the same dynamics from the Irish Congress of Trade Unions. High levels of inequality, this Irish analysis notes, lead “to stagnant consumer demand and high levels of indebtedness.”

Reduced levels of demand, the analysis continues, lower the returns that companies that produce real products and services can offer investors. The result: Investors with excess cash turn “increasingly to financial speculation.”

And that only drives income and wealth gaps wider, creating deep problems for society that go well beyond a sluggish economy.

Recent scholarly research, the Irish labor paper points out, has documented the negative impact of these wide gaps on everything from mental illness and life expectancy to educational test scores and murder rates.

On all of these yardsticks, the paper notes, “a country’s performance declines as inequality rises.”

Last week, at the news conference to release this new labor paper, Ireland’s top labor leader stressed that getting inequality shrinking will take sustained and decisive government action — at both ends of the economic spectrum.

Sums up that leader, David Begg, in his foreword to the new Irish labor inequality paper: “Preventing excessively high incomes and concentrations of wealth at the top is as important as pulling up the incomes at the bottom.”

New Wisdom on Wealth

Katrina vanden Heuvel, Real Simple Economics, The Nation, November 18, 2009. A look at the burgeoning Common Security Club movement that’s working to build a new solidarity economy.

Martin Wolf, Tax the windfall banking bonuses, Financial Times, November 19 2009. Banker bonuses ought to be taxed heavily because today’s big banks have become the recipients of “the largest business subsidies ever.”

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