The growing gap
from David Ruccio
The growing gap between those at the top and everyone else has been both a condition and consequence of the pattern of capitalist growth in the United States since the mid-1970s.
Uwe Reinhardt shows this with the chart at the beginning of this post.
Reinhardt bases his analysis on a recent study by Anthony Atkinson, Thomas Piketty, and Emmanuel Saez [pdf]. They show that most of the income growth in the United States from 1976 to 2007 has been captured by the top 1 percent.
The ability of those at the top to capture most of the income growth since the mid-1970s explains a large part of the inequality that emerged during that period—and, of course, the crisis that erupted in 2008.
It also means, when it comes to the deficit and debt debate, we have witnessed an explosion of “tax capacity” at the top, which can be tapped to restore and expand social programs for the rest. Atkinson et al. are clear about this:
we can ask whether increased taxes on the top income group would yield appreciable revenue that could be deployed to fund public goods or redistribution? This question is of particular interest in the current U.S. policy debate where large government deficits will require raising tax revenue in coming years. The standard response by many economists in the past has been that “the game is not worth the candle.” Indeed, net of all federal taxes, in the United States in 1976 the top percentile received only 5.8 percent of total pretax income, an amount equal to 24 percent of all federal taxes (individual, corporate, estate taxes, and social security and health contributions) in that year. However, by 2007, net of all federal taxes, the top percentile received 17.3 percent of total pretax income, or about 74 percent of all federal taxes raised in 2007. Therefore, it is clear that the surge in the top percentile share has greatly increased the “tax capacity” at the top of the income distribution. In budgetary terms, this cannot be ignored.
But it is being ignored, to the benefit of those at the top and to the detriment of everyone else, who are at the bottom of the growing gap.*
* A few members of the French and German elite have called for higher taxes on themselves and other rich citizens.
Some possible reasons for the difference between GDP and household income, the extent to which these reasons are important differs from country to country:
A. GDP is gross, disposable income is net. As write-offs increased in GDP (computers have a short life span), this means that the difference between gross and net increases
B. Net income or transfers paid to ‘abroad’ have to be distracted from or added to GDP to obtain income (important in i.e. Ireland!).
C. part of ‘total income’ are retained profits (profits which are not paid to owners of (small) companies or shareholders). If ‘retained profits’ increase, the difference between GDP and disposable income increases
D. When average household size decreases, (USA 1970: 3,1; 2009: 2,6) the number of households increases faster than population and income per household increases less fast than GDP per capita . For many countries, this alone accounts for an 15-20% difference since 1970.
E. Part of income goes to the government (which helps to pay for ‘government consumption’ which in fact is ‘public consumption’: roads owned by the government, medical insurance in some countries, education, wars fought abroad…
This shows (as people live in households) that GDP per capita is not a very apt metric to investigate prosperity. When household sizes decline more houses and, to an extent, cars are needed, which shows up as an increase in GDP per capita (‘paid and imputed rent’ of existing houses increases, write-offs). It does not necessarily show up as an increase in income per household as ‘housing’ per household does not necessarily increase. Generally, income per household increased much, much less than disposable income per capita in western countries, post 1970 (see graph 1 here for the Netherlands:http://www.huizenmarkt-zeepbel.nl/pdf/wonen-als-last.pdf)
GDP is a very important metric – as it’s the accounting key-stone which combines expenditure, income and production. It’s not a measure of prosperity (let alone happiness or something like that). Disposable income per household is a better metric to investigate changes in (monetary) prosperity (including ímputed rent’ of owner occupied dwellings, which is a crude way to measure the monetary value of non-monetary income from these dwellings).
This is very good. And re Taxes: As we will remember, with the Greenspan commission and the shift onto the payroll tax, this median household income actually overstates the returns in disposable income to households. That is, the progressive income tax was reduced, and the regressive payroll tax was expanded. Or am I wrong about that?