Social Question

ETpro's avatar

What should the income inequality of the USA be?

Asked by ETpro (34202 points ) November 10th, 2011

Back in the Guilded Age of no regulations, often flat taxes, and pure laissez-faire capitalism (including the casino capitalism brand on Wall Street), income and wealth inequity kept rising till, in 1928, the top 1% of Americans owned 40% of the nation’s financial wealth. We all know what happened when Casino Capitalism collapsed Wall Street in 1929. As Herman Cain would have us believe, 25% of all Americans suddenly became lazy bums and decided they would rather be homeless and starve than work. Clearly, in his mind, Obama used a time machine to transport himself back to 2007 and cause the recession. Who knows? Perhaps the Great Depression was his fault too.

Oh well, regardless of who crashed the economy, it was wrecked in 2007 and although it’s been patched up to the point it’s drivable again, we have yet to come anywhere close to knocking out all the dents and giving it a shinny new coat of paint. What else happened in 2007? Income and wealth disparity again hit a high. The top 1% held 42% of the nation’s economic wealth, up from 33% in 1979.

Interestingly, the Great Depression and high marginal tax rates used to finance WWII and the Marshall Plan reduced the income and wealth gap to an all-time low in the 1950s and 1960s. Government accomplished this flattening of inequality through a highly progressive tax system. For instance, during Eisenhower’s administration, the rate was 90% on income above $400,000 per year. Of course, $400,000 was a boatload of income in those pre-inflation days. The 1950s and 60s were also America’s greatest period of growth, and both millionaires and the poor moved upwards on about the same slope. Inequality stayed flat, in other words. We built the world’s greatest middle class in the years after WWII and up to 1980. and created a crop of millionaires and billionaires as well.

In 1980, Ronald Reagan launched us on the conservative revolution. He advocated a far flatter tax system. He cut the top rate from 70% to 28%. This did stimulate a sluggish economy at the time, but it also reversed the curve of the national debt. We’d been steadily reducing debt as a percent of GDP from the end of the war till Reagan’s “trickle-down economics” came along. Reagan tripled the national debt! in his 2 terms in office. If you don’t click any other link here, click this one and watch the video.

Now we face a clear choice. The CNBC Republican debate last night made it crystal clear that everyone on that stage, with the possible exception of Jon Huntsman, are supply siders. Their plan to fix the economy is to shift more tax burden to the poor and middle class, and drastically cut taxes for the top 1% who they call the “job creators.” Democrats want to do the opposite, shifting more of the tax load to the 1%. Republicans think 42% of America’s wealth isn’t enough for the top 1%. Democrats think it’s too much. What do you think? What is a healthy level of wealth inequality, where there is ample incentive to innovate and reward for entrepreneurship, but those who carry out the rich man’s trash and keep his sewers free from human sludge can earn a living wage too?

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30 Answers

Simone_De_Beauvoir's avatar

I think it should lessen and at the expense of the rich. Shocker.

jrpowell's avatar

I still think there should be a law that the top earner at a firm can make no more than 20 times that the average wage in the company is.

Dennis Kucinich actually proposed a similar law about a decade ago. Shocker: it went nowhere.

Linda_Owl's avatar

The owners of large companies that employ many people, should make very good money, but the money they make should not be obscenely larger than their average workers. Unfortunately CEOs are pulling down salaries that are obscenely large when compared to the average worker. And these CEOs are prone to closing down companies here in the US & moving these companies to various other countries where they pay the average worker even less than they were paying the average workers in the US. One has to wonder why this level of greed is so acceptable to these individuals. They do not seem to realize that people are so interconnected that wealth & health & economic stability go hand-in-hand. This situation is going to have to change or society in the US is going to collapse.

Ron_C's avatar

I can think of absolutely no reason for the people that caused the problem not to pay for it. We need an additional bracket or to on the progressive tax scale. Also all capital gains over 200K should be taxed at the same rate as other income. That takes care of the people that inherit their money and hedge fund managers. Further we need to re-instate the wall between investment and commercial banks and add a transaction fee to slow down speculation and short sells. We need to turn the Stock Market back into an investment enterprise instead of a casino.

Further, U.S. companies moving overseas need to loose all tax breaks and supports and insure that corporations are treated as business expediencies instead of people. The revolutionary war was fought as a result of unfair corporate practices, we need to limit the life and privileges of corporations especially international ones.

Adirondackwannabe's avatar

I saw an interesting article a few weeks ago. The “wealthy” however you want to define them claim they pay too high income tax rates. The article looked at all taxes, FICA, Medicare, sales tax and property taxes. Factoring all taxes in compared to overall income, the average “wealthy” taxpayer pays in at a 7 percent rate. The “middle class” pays in an average of 20.7 percent rate. I’ll have to look back through the archives to see if I can find the article.

wonderingwhy's avatar

Similar to @johnpowell I see no justification for a top salary to not be reined by spread. I’d base it on the median salary for the company and cap it at 10x. For incentivizing, tier based (time with company and position), profit distribution – again with a cap on spread (similar things can be done with stock, retirement plans, bonuses, etc).

Clearly, that’s just one piece of the puzzle, there would be a lot of details to work out and other components to address, but something along those lines.

Or, if that’s too much trouble, just bump that rate back up to 70%, normalize income to stop minimizing things like capital gains, and eliminate everything aside from charitable write-offs.

ETpro's avatar

@Adirondackwannabe According to a recent poll, 65% of the wealthy think that those making over $1 million a year should pay a hogher tax rate then they currently do. Note that Warren Buffet is right, the average tax rate among the top 1/10th of 1% is just 24.3%, which is lower than the typical middle income worker pays.

Adirondackwannabe's avatar

@ETpro I saw Buffet’s comments. I believe his tax rate was something like 17.4 percent. The maximum tax on capital gains and qualified dividends is 15 percent. If you’re a wage earner with a taxable income over $68000 your marginal tax rate is 25 percent.

wundayatta's avatar

Does the market really know what’s good for it?

We can’t answer that question unless we can decide what measure to use to answer that question.

One traditional measure is profits this quarter. If you focus on short term profits you may forgo or even destroy profits in the long term. Or if you focus on long term profitability, you may not make that much money now, but may make a whole lot later. So should we measure things by annual profit? Profit over five years? Ten years?

How do we keep good leaders around if we don’t compensate them over the short term? How do we keep them accountable for their mistakes and successes?

Do we want to measure their success in terms of number of hires and standard of living of employees?

Will the free market regulate the wage differential? It seems to me that in theory, it should. If having a well-educated and employed society make companies more profitable, then firms should reward leaders who do the most to create profitable conditions for the company. If it doesn’t matter, then there is nothing that could be done to regulate it. There are always ways around regulations. You could sell off the part of the company that has all the low paid workers, or spin them off into separate service businesses and then hire them to do the work they’ve always done.

Or CEOs will head off to other parts of the world where they don’t care about these things. Or the corporations will reincorporate overseas. I don’t know.

In any case, I have no idea what is the right ratio. If people are willing to pay for it, then it seems right to me. I don’t think any of us has any business telling someone else how valuable another person’s work is. If that were the case, then let me tell you, I am worth twenty of the rest of you… in salary, anyway!

I just don’t know how to answer this question. I really don’t.

ETpro's avatar

I just stumbled on a priceless (punn intended) video about the best possible tax plan, 0–0-0.

rojo's avatar

Can someone tell me why capital gains is taxed at a lower rate than wages?

rojo's avatar

everything over an income of $500,000.00 should be taxed at a rate between 90 and 100 percent.

plethora's avatar

@rojo Just curious. If you were making $500,000 and you were offered an additional $100,000 to work 4 additional hours per day, would you take it? Assuming the taxation you advocate above?

rojo's avatar

Probably not, but I do not personally believe that anything anyone does is worth more than 500k a year so nothing more that I could do would justify the addl. 100k

plethora's avatar

@rojo Great Answer. So you would deprive the needy by not working more and generating $90,000 for their needs.

And entertainers who make a cajillion bucks should stop performing. Same for those damn football players and baseball players and basketball players, so many of whom are minorities. And then there are the college football coaches like Nick Sabin who makes $4Mil and Les Miles who makes nearly as much. Shutdown the sports programs for sure.

Guess I could go on and on, but you get the point.

rojo's avatar

Seriously @plethora do you think anyone of the folks you mentioned would quit doing whatever it is they are doing? It seems to me that the choice is you can make 500k or you can work at McDonalds for a lot less but hey, it is your choice.

rojo's avatar

@plethora As for me not providing for the needy, It would seem that you have not taken into account the taxes paid on the initial 500k? They also need to contribute do they not? I do not expect you, me or anyone else to have to take up all the slack.

Judi's avatar

I think that the middle class should have at least 50% of the wealth. I have no data, but my gut tells me that’s what it would take to support a healthy economy.

ETpro's avatar

@rojo I have to side with @plethora on this one. And he will confirm we rarely agree on questions of tax and politics. For a time the Scandanavian countries tried taxing at 100%. It led to a massive migration of wealth out of the countries. Not good for anyone. The highest we have ever taxed in the US was at 92% in the darkest days of WWII. Every single American understood that was what it was going to take to rapidly rebuild the Pacific fleet and not have Japanese dive bombers flying over LA and San Francisco. And even then, the rate didn’t kick in till an individual had earned $200,000. In 1945, you could live like a monarch on $200,000 a year. Only keeping 10% of earnings above that was a small price to pay for keeping America safe from defeat by the Axis powers. And we continued relatively high taxes till we rebuilt the country and transitioned the war factories into civilan use. With all of Europe, Russia, China and Japan in ruins, we were the factory for the whole world. Everyone profited, from the lowliest workers to the loftiest of the rich.

The Laffer curve may be a joke, but the bell curve isn’t. In taxation, there is some rate or combination of rates that produces the maximum possible revenue. When you aren’t facing eminent demise as we were in WWII, raise rates too high and you suppress innovation. Capital begins to look for greener pastures. Revenues tumble. Set it too low, and you also see revenue fall off. The best tax system is one that takes no more money out of the economy that is needed to do the things government should legitimacy do, and is just progressive enough that there is plenty of incentive to innovate and work hard, but plenty contributed by the best and the brightest so that the people who do vital tasks like garbage collection, sewer maintenance, and janitorial service can live in dignity. Who knows, if they have enough income to send their kids through school, which one might father the next Albert Einstein or Steve Jobs?

rojo's avatar

@ETpro Perhaps 100% is too high but it should be somewhere above the 50% mark. I agree with you about the government taxes/revenue but Capital has already begun to look for greener pastures (China, India). Something I recently read indicated that corporate America had already written off Main Street America as their main source of increased profits and so did not care one way or the other about the American Economy. I think you are beginning to see that in the marketplace now. But, not to get too far sidetracked, the original question was about income inequality and if you assume the median income is around 25k then I do not thing that drawing the line at a 20 to 1 margin is excessive.

ETpro's avatar

@rojo I’d actually bet that the current rates are fine, except for capital gains, which should be taxed exactly as any other income is, whether the investor is on-shore or off. Just get rid of the incredible rats-nest of deductions and tax credits that apply almost exclusinvely to the very wealthy. A top marginal rate of 39.6% was enough to turn the debt curve downwards in Bill Clinton’s administration, and we had the rats-nest of deductions then. Simplify the tax code, and leave the important deductions like mortage interest on the first $250,000 of a home loan, the child tax credit, education and a few essentials that apply to most all of us. Take out all loopholes we have to be rich to qualify for. I think that alone would put us on sound financial footing.

If that’s not enough, there probably should be one additional bracket applying only to taxable income over $1,000,000 a year.

wonderingwhy's avatar

@ETpro there are some rates I’d like to see pushed up now, but I’d be perfectly happy delaying that if it meant doing exactly what you mentioned – getting rid of the deductions and credits – and see what the balance sheet looks like after. I agree, it would likely cover a significant gap. Since you had a lot of links in your OP here’s an article to add to the collection that talks a bit about some of the legal corporate dodging.

wonderingwhy's avatar

@plethora If you were making $500,000 and you were offered an additional $100,000 to work 4 additional hours per day, would you take it?

Unless you love what you do or can’t make ends meet on $500k of course not, neither would you, neither would anyone else and you know full well that has nothing to do with taxes.

plethora's avatar

@wonderingwhy It doesn’t? Why not? Seems to me that taking 90% of one’s earnings would most assuredly depress the tax revenue.

Ron_C's avatar

@ETpro I’ve been reading your posts about taxation and think that you should consider running for president. Your take on taxation makes much more sense than the crap the Republicans have been spewing and the Democrats have done nothing but try to placate the Republicans.

Vote for ETPRO!

GracieT's avatar

@Ron_C, I would vote for @ETpro also- I agree with you about his posts making much more sense than anything put out by the political parties.

Vote for @ETPro!

Ron_C's avatar

Hey we’ve got a draft ETpro movement going.

ETpro's avatar

@GracieT & @Ron_C Ha! Thanks, guys. But making more sense than the average politician is a pretty low bar. :-)

I came across an astounding fact today. If we eliminated all the special breaks for the wealthy from the tax code, not only would it be a heck of a lot easier to file your taxes, but the IRS would collect more from the changes than it currently does from the entire tax system. You heard that right. Eliminating the sweet deals for the wealthy would more than double the revenues the IRS collects and would totally close the deficit and produce a surplus with current spending levels!

Ron_C's avatar

Like I said, @ETpro for President!

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