The Trillion Dollar Income Shift, Part 2

While the above tax, trade, wage and benefits policies were being implemented top down between 1980-2006, corporate policies and practices further contributing to the growing income inequality gap were being simultaneously overhauled from the bottom up. 

High on this bottom up list was the corporate shift from full-time, permanent jobs to part-time, temporary, and independent contract work. Growing consistently since the 1980s, more than 44 million of the 137 million employed workforce in the U.S. are now part-time, temporary, and contract workers earning 60-70 percent of the pay of full-time workers and typically 20 percent of the benefits. 

New industry driven de-unionization policies also launched in the 1980s have resulted in the decline of union membership from 22 percent of the workforce in 1980 to barely 7 percent in the private sector in 2006. Two decades of corporate job offshoring policies sent millions of high paying, decent benefit jobs in manufacturing, technology, and business professional services overseas, a loss filled with lower paying service jobs—frequently part-time, temp, and contract jobs. Corporate fringe benefits policies shifted fundamentally during the same period, resulting in the dismantling of more than 100,000 traditional pension plans and their replacement with cheaper cost 401K plans; the discontinuance and/or shifting of costs of health insurance plan coverage; widespread unilateral corporate elimination of retiree health benefits; reduction of paid vacation and other paid time off; and other similar company-driven cost reduction measures. 

The two approaches—corporate policy changes at the company-industry level and government policy changes—worked in close concert with each other. For example, government tax, depreciation, and free trade policies provided significant financial incentives to corporations for expanding offshoring of jobs and consequently dismantling and transferring abroad much of the manufacturing sector in the U.S. Government agency rule changes allowed corporations to extract pension fund surpluses for general business use and/or to delay properly funding pension plans. Government bodies like the National Labor Relations Board directly aided corporate efforts to de-unionize while government de-regulation and privatization of entire industries further decimated union membership ranks and undermined union bargaining effectiveness. On the health front, government policy in the form of managed health care under Clinton and consumer driven health care and health savings accounts under George W. Bush, encouraged corporations to more rapidly shift health care costs to workers. 

Estimating the Income Shift 

T able 1 summarizes some of the major shifts in middle/working class incomes that occurred in 2005 as a consequence of accumulated past corporate-government policies. Given the magnitudes of these income shifts, it is not surprising that corporate profits have increased at double digit rates (more than 10 percent) every quarter for the last three and a half years to more than $1.4 trillion; or that CEOs and the top 5 managers of U.S. corporations have increased their total share of national income from around $50 billion a year in 2001 to more than $140 billion a year in just five years; or that the wealthiest 1 percent (1.1 million) households have grown their share of total national income reported to levels of 20-22 percent of total national income, levels not seen since the late 1920s. 

However, policies promoting domestic cost-driven income transfer (from the 90 million households) are not the whole picture. U.S. corporations and wealthy households are able to expand their income additionally from speculative activities and from offshore investment activity as well. And a good part of that income—corporate and individual—never gets reported in the income totals of the wealthiest households in the official data. 

Table 1 categories represent income that passes through the conduit of the corporation. From there it may be disbursed by the corporation to shareholders, senior managers, and CEOs in the form of dividends, interest payment, capital gains, and various forms of deferred and total compensation for senior management. What is not disbursed may be accumulated and expended on corporate expansion (i.e., invested) or held by the corporation as retained profits. Official figures for retained profits by U.S. corporations are now at the level of more than $500 billion a year, now running about $200 billion a year higher than long term historical averages. And those figures only represent retained profits that are reported. 

Largely unreported are additional profits by multinational corporations that get transferred by various accounting means to their offshore subsidiaries and affiliates and then held there as unrepatriated profits for years. The precise totals for such unrepatriated profits are not known, either by the IRS or the U.S. government. A brief glimpse was provided, however, by the investment bank Morgan Stanley in 2005 when it publicly reported that the total in offshore unrepatriated profits held by U.S. corporations amounted to about $700 billion—that was only what was publicly admitted at the time. 

A third and even more opaque category of profits consists essentially of unknown profits (from domestic U.S. or foreign operations) that are diverted to offshore tax shelters and never reported to the IRS. The latest unofficial indication of the level of income held today in offshore tax shelters—which now proliferate from islands in the Caribbean to Cyprus to the Seychelles in the Indian ocean to various locales throughout the Pacific archipelago—is about $7 trillion. That is up from $250 billion in the mid-1980s. It is reasonable to assume that at least $4 trillion of that $7 trillion is held by U.S. corporations and wealthy households, the mix between corporate and individuals essentially unknown. An annual additional net flow of income from the U.S. into such shelters is easily around $200 billion a year, not counting interest earned annually on the $4 trillion already there (which would amount to another $300 billion, assuming a conservative 7 percent rate of return). Discounting the additional $300 billion in interest, $200 billion never gets reported to the IRS and is therefore never counted as income of the wealthiest households or corporations. Such profits and sheltered income should be considered as temporarily undistributed deferred income of wealthy households that will eventually be paid out in subsequent years to those households. 

During George W. Bush’s first term alone, more than $4 trillion in tax cuts were passed. Studies show that approximately 80 percent of these cuts are accruing to the wealthiest 20 percent households and largely in turn to the highest income groups within that 20 percent. Should the Bush tax cuts be made permanent, the amount will grow to $11 trillion, again with the highest income groups receiving the lion’s share of the cuts and income. Additional corporate tax cuts amounting to more than $1 trillion were also passed under Bush and have contributed significantly to the previously noted bulge in corporate retained profits. 

Thus, while corporate level policies have increasingly shielded unreported income from the IRS on behalf of the wealthy in various ways, government tax policies from Reagan through Bush Jr. have served to shift income to the wealthy from the partial sources that are reported to the IRS.     Table 2 shows select categories of income shifted to the wealthiest households and corporations as a result of government tax policies, as well as from corporate-level policies diverting and/or shielding income. Not included are various government direct subsidies to corporations and wealthy individuals, which conservatively amount to additional tens of billions of dollars a year from the U.S. government. 

Concluding Remarks 

F rom the foregoing it is clear that there is, at minimum, a $1$1.5 trillion shift in relative income occurring annually today. Even assuming the possibility of some double counting in the income categories in Table 1, the amount of income shifted annually as a result of policies represented in Table 1 is easily in the $700 billion to $1 trillion range. Added to this must be categories of income in Table 2, which represent underestimations of income accruing to the wealthiest households due to tax sheltering, tax evasin, and the record tax cuts to the wealthy. Even reducing the totals in Table 2 by half yields at minimum $300$400 billion a year in additional income to the wealthy. When Tables 1 and 2 are combined, the result is a total income shift of at least $1 trillion annually. 

The $1 trillion annual shift in relative income is roughly equivalent to the $1.09 trillion reported by the U.S. Commerce Department in Part 1 of this article. It is likely this $1.09 annual income gap will continue to widen in the next few years, since gains from Bush’s capital income tax cuts for the wealthy are projected to increase through 2010 while the policies responsible for shifting working families’ incomes in areas of wages, jobs restructuring, job offshoring, shifts to more part-time/temporary/contract work, health and pension benefits cost shifts, payroll tax diversions, and the like show no sign of deceleration or reversal. Furthermore, should recession occur by late 2007early 2008—an increasingly likely prospect—the income shift will further accelerate as it always does during recessions. The outlook and probability is high that the income inequality gap in the U.S. will continue to grow even further.   

Jack Rasmus is the author of The War At Home: The Corporate Offensive From Ronald Reagan To George W. Bush (www.kyklosproductions.com).