The Road Back to 1929: Historic income shift to benefit the wealthy

Accelerating Income Shift: 2001-2004 

The roughly 100 million taxpayers who make up the solid core of the U.S. working class who have jobs or who live off of pensions and social security, earn no more than $76,000 a year in annual income from all sources. They are the 80 percent of the taxpaying households in the country with annual incomes below that figure. They own less than six percent of the total stock shares in the country and that is largely tied up in their pension plans. They earn their income almost exclusively from hourly wages, by working overtime or double jobs or by having other family members enter the workforce to supplement their  household income. 

Since 2001, working class families with a median income of $43,000 watched as their annual income fell $1,500 over the past three years, a drop of 3.4 percent. Those earning less than the $43,000 median experienced an even greater decline of 6.0 percent since 2001. 

The shift in national income since 1970 and the accelerating decline in working class family incomes since 2000 were not always the case. From 1947 to 1973 the median household income rose each year about 4 percent on average. That gain was roughly equal to the annual average 4 percent gain in productivity during that same period. 

But from 1973 on the growth of U.S. workers’ real incomes has been flat or declining despite the continued rise in productivity between 1973-2000 and the accelerating productivity gains from 2001-2004. From 1973-2002 workers received only one-third of the total gains in productivity; for the past four years, 2001-2004, with productivity rising on average 4 percent per year—twice the yearly rate compared to the “boom” years of the late 1990s—with real wages falling and virtually none of the gains. Output per person in the U.S. is the highest in the industrialized world, in fact more than 10 percent higher than output per person in the next closest advanced European economy. 

As one well-known business columnist from the New York Times reported recently, “The benefits of productivity gains and economic growth are flowing to profits, not worker compensation. The fat cats are getting fatter, while workers…are watching the curtain come down on the heralded American dream.”  

There are several major explanations for this massive, historic shift in incomes. It didn’t happen by accident or coincidence, but was the result of conscious policies, planned and implemented in the corporate boardrooms, in Congress, and in the executive halls of government. 

Looming large among the various causes are the so-called “Free Trade” policies from Presidents Reagan through Bush, that have resulted in the loss of five million high paid, mostly unionized jobs in the manufacturing sector since 1980 and their partial replacement with much lower paid service, part-time, and temporary work. 

In addition, there’s the successful corporate lobbying strategy aimed at holding down the minimum wage. With few adjustments over the past 25 years, the minimum wage today in real terms has declined by more than 30 percent.  

The de-unionizing of the U.S. work force has also played a major role in holding down wages and thus workers’ incomes. The decline in union membership in the private sector to less than 10 percent compares to a percentage nearly twice that at the start of the Reagan years. That decline in union “density” is a major reason why real hourly wages are less today than they were in 1979, and still continue to fall. 

Unions as an effective force for raising hourly wages will likely weaken further, as they are being forced today in contract after contract negotiation to focus by necessity on maintaining health benefits in lieu of wage increases. In the process, they are being locked into longer and longer term contract agreements, often five and six years or more, in exchange for maintaining health benefits demanded by their members. The consequence is a ticking incomes time bomb. As inflation rises over the term of these extended contract agreements, the minimal if any negotiated increases in wage rates will mean hourly real wages in the near future will likely decline even faster than during 2001-2004. 

When combined with intense political pressure to prevent any increase in the minimum wage, with the Bush administration’s current efforts to end overtime pay for millions by means of executive order, with the continuing corporate practice of exporting high pay manufacturing jobs overseas, and with the growing trend to replace full time jobs with part time and temporary employment—the continuing decline in real hourly wage rates in the U.S. raises serious doubts about the ability of the U.S. economy to generate incomes sufficient to sustain consumer spending and consequent job creation. A chronic, self-sustaining downward spiral of incomes may now be emerging in the U.S., with serious consequences for the U.S. economy in general. 

To offset the stagnation and decline in their hourly wages, working class families the past two decades have resorted to two alternatives. The first has been to take on additional part time jobs, working more overtime or by having  other family members take jobs. 

The other major solution undertaken by U.S. workers to offset the decline of family incomes has been to assume a massive increase in personal credit and indebtedness. U.S. families are now $9 trillion dollars in debt, 40 percent of which was taken on in just the last four years; $2 trillion of which is credit card debt. 

Both solutions—working more hours and taking on more debt—appear to be approaching their limits. Family hours worked fell by 5.5 percent, or 173 hours a year, from 2000 to 2003 reversing the hours and income gains of the late 1990s. In addition, the rate at which spouses are entering the workforce to supplement family hours of work has declined sharply in the last decade. 

Exacerbating the overall income shift is the record surge in executive and management compensation. In the early 1980s typical U.S. CEOs earned about 40 times the pay of their average employee. Today, they earn more than 400 and, in some surveys, as much as 500 times. The surge in income at the top levels of corporate management has filtered down to a lesser, but still significant, extent for second-tier management as well. Apart from executive compensation, capital incomes in general have soared the past 15 years with booms in the stock and bond markets, real estate, and foreign investment. 

Turning the Tax System On Its Head: 1970–2000 

Perhaps the biggest reason for the historic shift in shares of national income has been the radical re-structuring of the tax system in the U.S. from Reagan to Bush. The restructuring has raised the total burden of taxation on working class families while lifting it dramatically on the rich and very rich. 

It is no coincidence, for example, that the top income tax bracket in 1970 was 70 percent and today is only 35 percent. Similarly the tax rate on capital gains, from which the rich earn virtually all their income, was 28 percent as recently as 1987, but today is only 15 percent. Similar reductions in tax rates for dividends, estate taxes, and property taxes for the wealthy have also been implemented, while tax shelters have proliferated and IRS audit rates for the rich have declined. 

Three decades ago the corporate income tax produced 20 percent of all federal revenues; today it produces only 7 percent. In 2000, according to IRS data, 63 percent of all companies in the U.S. reported they paid no corporate tax from 1996 through 2000 on revenues totaling $2.5 trillion. The effective tax rate for the 37 percent of companies that did pay some taxes in 2002 was only 12 percent, compared to 18 percent as recently as 1995. 

Foreign tax shelters for companies and individuals abound. In 1983 offshore tax havens sheltered $200 billion. Today $5 trillion. Of 370,000 corporations registered in Panama, only 340 bothered to file income tax reports in the U.S. According to a study by the Federal Reserve Bank of New York, U.S. deposits in the Cayman Islands tax haven amount to more than $1 trillion and are growing by $120 billion a year. 

In contrast, the payroll tax rate, which all working class people in the U.S. must pay, has been raised since 1983 to the current 12.4 percent and the income on which it is levied has been raised year after year to nearly $90,000. Since the 100 million core working class Americans earn well less than $90,000, they pay the payroll tax on all their annual income. For millions, the payroll tax reduces their take home income more than their income tax payment. The payroll tax constitutes 40 percent of all federal tax revenues today, when it accounted for only 10 percent of such revenues before 1980. 

Politicians declared with much fanfare in 1983 that an increase in the payroll tax was necessary to save Social Security. In 1992 Congress passed a rule to put the social security surplus created in a “lock box.” But the “lock box” has been broken into every year and the $1.4 trillion surplus it generated since 1983 is gone—to pay for federal budget deficits to finance wars and tax cuts for the rich. 

Now Bush, Federal Reserve Chair Alan Greenspan, and others are loudly telling the U.S. worker that Social Security is in danger once again and without sufficient funds. The retirement age must be raised and benefit levels cut. Ironically, it was the same Greenspan who in 1983 headed the Presidential Commission to “save Social Security,” led the charge to raise the payroll tax, and assured everyone that Social Security would now be safe for a century to come once the payroll tax was raised. 

As one listened to the debates in recent months between Bush and Kerry about how to pay for minor fixes to a crumbling health care system, it is worth noting that single payer universal health care could be provided to all Americans by simply requiring that the wealthiest 10 percent of taxpayers pay the same 12.4 percent payroll tax rate as everyone in the U.S. now pays on all their income. 

That simple reform would generate annually more than $300 billion in revenue. An additional $100 billion a year could supplement this if Congress stopped “borrowing” from the Social Security Trust Fund and honored its own “lock box” rule. The two sources produce a combined total of $400 billion a year, yielding a sum more than enough to cover single payer health care for all. 

In 1981 Ronald Reagan gave $758 billion, then a record, in tax cuts targeted largely to the wealthy. Capital gains taxes were again cut under Reagan in 1987, from 48 percent to 34 percent, and the top rate of the income tax lowered from 50 percent to 28 percent. A new Alternate Minimum Tax was added which, originally intended for the wealthiest, now threatens to become another major tax burden on the  working class. 

Under George H.W. Bush and Clinton the shift in incomes and taxes continued, but at a slower pace. Tax rates were raised in 1990 and 1993, but tax loopholes and individual tax shelters were added back in by the dozens. Tax rebates were given to workers in order to assist recovery from the 1991-93 recession. But the latter were temporary and never structured as fundamental changes to the tax system, such as have occurred under Reagan and now Bush. In Clinton’s second term, in 1997, another major capital gains tax reduction was enacted. 

All this was followed by Bush’s massive tax cuts totaling more than $2 trillion between 2001 and 2004, accruing largely to the top 1 percent and 5 percent of taxpaying households. 

Phase 1: Slash Taxes for the Rich 

At the heart of the Bush tax cuts were the major Tax Cut Acts of 2001 and 2003, the lion’s share of which addressed capital incomes—reducing the top tax brackets for the income tax, lowering the capital gains tax rate for stock sellers, and reducing taxes on dividends and on estate taxes for high income payers. Less well noticed, however, were other tax cuts sandwiched in along the way which provided an additional host of industry-by-industry tax breaks for corporations, as well as individuals, all carefully buried in other legislation passed by Congress or by presidential executive order or rule changes. Working class families were thrown a few tax crumbs in 2001 and 2003 in the form of one time rebates, small adjustments to the child care credit or marriage penalty, and the like. 

To ensure passage by Congress, Bush and corporate lobbying friends cleverly “backloaded” the $2 trillion giveaways so most would take effect after 2004. So the biggest impact of these tax cuts for the rich are yet to come.  

It is projected that of the more than $100 billion of the tax cuts set to take effect in 2005, 73 percent will go to the top 20 percent of tax payers. The remaining 80 percent with incomes of less than $76,400 a year will share the 27 percent left. Those with incomes over $1 million a year in 2005 will receive a tax cut of $135,000 a year. All those with incomes less than $76,400 will get about $350 on average. 

The Brookings and Urban Institute’s Tax Policy Center estimates the annual transfer in income to the rich and super rich flowing from the Bush 2001-2003 tax cuts is $113 billion a year. 

Phase 2: Roll Back Corporate Taxes 

While Bush’s tax strategy from 2001 through 2003 was to get personal incomes taxes reduced (reduce top tax brackets, cut capital gains, dividends, estate taxes, etc.) for wealthy friends and campaign contributors, in 2004 the Bush strategy shifted. Henceforth the goal was not only to make personal tax cuts for the rich permanent, but to add further tax cuts for their corporations. 

For years conservatives have railed against “double taxation” of the rich—aimed first at their companies and then at their incomes derived from those same companies. What the Bush record shows, however, is that the U.S. is now experiencing a new policy of “double reverse taxation”—record tax cuts for the rich as individuals followed by further tax cuts for their companies.  

In August 2003 Bush publicly declared he would seek no further tax cuts. However, within days Bush supporters in the House of Representatives immediately proposed an additional $128 billion in corporate tax cuts. Not to be outdone, supporters in the Senate proposed a six month “tax holiday” for U.S. corporations that had accumulated $400 billion in foreign profits on which they had not bothered to pay any U.S. taxes. Instead of enforcing the existing law to pay the required 35 percent corporate tax rate on the $400 billion, the Senate offered a new rate of only 5.25 percent if companies would only “bring their money back.” The corporate beneficiaries of this extraordinary Congressional largess included oil and gas refiners, movie studios, technology and pharmaceutical multinationals, and engineering companies like Halliburton. The Senate message to corporate America thus was clear: the way for corporations to get bigger tax cuts was to shift more investment, jobs, and profits offshore and use that as a barter chip to get tax cuts in the U.S. 

No fewer than three separate corporate coalitions have been lobbying for their preferred versions of corporate tax cuts, bidding up a Congress stumbling over itself trying to satisfy all corporate comers. 

One corporate lobbying group, the Coalition for Fair International Taxation, led by General Electric, sought to reduce the foreign profits tax. A second, led by Boeing and Microsoft—called the Coalition for U.S. Based Employment—lobbied for a $60 billion permanent reduction in the corporate tax rate, from 35 percent to 32 percent. A third, led by Hewlett-Packard, pushed for the one year “tax holiday” noted above. All have been major exporters of U.S. jobs offshore; ironically each argues their tax cut proposal is the way to create jobs at home. By mid-year 2004 all three groups ended with nearly everything they each sought in the combined tax cut legislation currently up in the House and Senate for a vote. 

And the pork barrel got even larger as other special interests and lobbyists jumped on board. A parallel $31 billion tax cut for oil and energy companies, which failed to pass in November 2003 by only 2 votes in Congress, was resurrected as a $19 billion add-on to the general corporate tax cut by mid-2004. More than $10 billion was added for the Tobacco companies. Other special interest provisions have been thrown in for the wine industry, aerospace, and the child tax credit extended to families with annual incomes up to $309,000 by right wing tax radicals in the House of Representatives. By summer 2004 the various corporate and special interest tax cuts proposed amount to $155 to $170 billion, depending on the House or Senate versions. 

Initially the Bush legislative strategy in 2004 was to hold “hostage” those modest provisions (child care, marriage penalty, 10 percent bracket, etc.) of the 2001 and 2003 laws that would benefit working families. Bush insisted the provisions for the rich and super rich would have to be made permanent for the next 10 years first. Otherwise, he declared, he would veto any bill. 

However, as the drums of the November 2004 elections approached, in July 2004 Republican leaders in Congress attempted to cut a deal with moderates permitting a two-year extension of the modest provisions in the general tax cut laws passed in 2001 and 2003. This would have allowed the immediate extension of the child care credit, the marriage penalty, and other relatively minor benefits affecting working families, granting the working class about $27 billion of the $100 billion in tax cuts scheduled for 2005. But the White House intervened at the last moment in July and prevented the Congressional compromise, insisting that Bush’s 2001 and 2003 tax cuts for those with capital incomes must be extended for a minimum of five years or else no deal. 

By the end of September, however, the power of the corporate tax lobby was increasingly felt on Capitol Hill. Not willing to tolerate further delays, or to wait until after the elections to pass the corporate tax cuts in a lame duck session of Congress, they demanded the de-coupling of the $27 billion in cuts for working class families (marriage penalty, child care credit, etc.), in order to move the corporate tax provisions forward posthaste before the November election and the October adjournment of Congress. The Bush administration backed off its previous position insisting on linkage. Congress obliged. 

The way now lay clear, while they still had the votes, to pass the various corporate tax cut measures before adjournment. The outcome in October, in a session of Congress extended for the sole purpose of passing the bill before the November elections, was 700 pages of legislation containing hundreds of tax cuts for corporations, including a provision eliminating the obligation of corporations under current law to pay $42 billion of taxes on $500 billion of offshore profits. The total value of the corporate cuts are still not exactly known and will take weeks to sort out, but are likely in the $140-$160 billion range—$73 billion in personal cuts for the wealthy in 2005 and another roughly $140-$160 billion for their corporations. More than $2 trillion total over the course of a decade. 

Don’t expect the recent waves of personal and corporate tax cuts to stop there. The next phase has already begun to appear. 

Phase 3: Eliminate Taxes on Capital Incomes 

At the top of the Bush agenda in a possible second term is restructuring the entire tax code; new tax proposals to undermine social security and union negotiated pension and health plans; and perhaps a national sales tax to totally replace the income tax. 

George Bush and corporate America are intent on eliminating taxes on all capital incomes. Nor do they care if record budget deficits are the result. Many of their more right-wing friends, including those in Congress, actually want larger deficits. They see chronic, record deficits as producing the budget crisis necessary to use as an excuse to privatize Social Security and dismantle what remains of the Roosevelt New Deal programs of the 1930s.  

Their economic revolution will turn the clock back to the 1920s, the road back to 1929. A road for working class Americans filled with potholes of declining wages, few retirement guarantees, extended hours of work at straight time pay, a virtually non-existent minimum wage law, weak and ineffective unions, and an end to progressive taxation that interferes in any way with the uninterrupted expansion and growth of the incomes of the rich and super rich.