It’s not hard to see that current policy reforms pushed by the Abbott government are tilted towards the very rich. Axing the carbon and mining tax while keeping popular tax breaks such as dividend imputation, negative gearing and capital gains tax concessions mainly serve the very wealthy.
It is a natural stance of conservative governments to want to lower corporate and personal tax rates. But making it easier for the very wealthy to reduce their marginal tax rate does not help the overall economy, and the American example shows just how dangerous the consequences can be.
Growth and Inequality
Government sets the rules by which the market functions. All of these rules are necessary in order to construct a free market. The real question is who do these rules benefit? And who do they hurt?
Over the last thirty years, the structure of the economy shifted, and many of the rules governing the market began to shift as well.
It is a mystery of sorts as to why inequality has widened in America as the economy has grown. Economic growth and productivity has been largely exponential over the last 50 or so years. That is a big success story. However if you look at the average hourly earnings of production workers, it continued to rise until the late 1970’s – and then something changed. Wages flattened, and so began a gap between growth and wages.
In America, the late 1970s saw the beginning of a technological revolution. Production began to move abroad. Financial markets were beginning to become a little bit more powerful, and there were moves to deregulate. When you connect the dots, all of these begin to look like they are connected the widening inequality.
Labour unions were on the decline – and that decline mirrored almost exactly the decline in the middle class’s share of national income. The hard part is stepping back and seeing the big picture.
The Decline of Unions
Many people look back and say that the decline of unions in the Union States is attributed to Ronald Reagan when he took on the air traffic controllers in 1981. He threatened to fire almost 13,000 workers if they refused to call off an illegal strike. There is no question that following that incident, there was a major scale attack on unions. Employers tried to prevent unions from forming more aggressively than before, and fought to bust the unions that were already there. But maybe they did so because they thought they had to in order to maintain their competitiveness given so many other companies that were non-union.
But the underlying reality is that if workers don’t have power, they don’t have a voice. Inevitably, wages and benefits start eroding. If you have a company that is dependant on shareholders, there is growing pressure on that company to show better and better profits and higher share prices. That is a foundation of capitalism and isn’t necessarily a bad thing, but what that means is that inevitably, there is greater and greater pressure to push wages and benefits down to the minimum.
Big companies are not designed to create good jobs. They are designed to make profits. And this is now entrenched. The head of the company General Electric (GE) is on the American Jobs Council. Ironically, GE creates more jobs abroad then it has been creating in the United States. So who is taking care of the average worker as the very wealthy gain more capital all over the world? As those same people gain more and more political power? The answer is nobody.
Of all developed nations today, the United States has the most unequal distribution of income and wealth by far, and it is surging to an even greater inequality. One way of looking at and measuring inequality is to look at the earnings of the people at the top, versus the earnings of the people in the middle.
The typical American male worker in 1978 made around $48,000 per annum, while the average person in the top 1% made $390,000. Fast forward to 2010, the male worker earned just $33,000, while the person at the top earned almost double what he made in 1978. Today, the richest 400 Americans have more wealth then the bottom 150 million put together. To put that in perspective, 400 people have more wealth then half of the entire American population.
Explaining The Rise In Inequality
The underlying issue turns out to be two interrelated things: globalisation and technology.
We hear the word globalisation on an almost daily basis. Rarely has a word gone from obscurity to meaninglessness without any intervening period of coherence. It is a concept that we all inherently understand but would struggle to explain. Perhaps nowhere is there a better example of this phenomenon than the iPhone – an astounding piece of technology that is a direct beneficiary of globalisation.
Where do most of your dollars go when you buy an iPhone? You might predict mostly to the United States, because that’s where the company that makes the product is based, and maybe to China, because that’s where it’s manufactured. But where your money actually goes turns out to be a surprising enterprise. Only 6% goes to the United States, and 3.6% goes to China.
Now the iPhone is assembled in China. But the assembly is of pieces that come from all over the world. That means that most of your dollars end up in Japan, South Korea and Germany, where those parts come from, and not in the hands of the workers who make them.
The Real Problem With Inequality
Now people who are worried about widening inequality are also worried about something else. It’s not upward mobility, it’s not even trust. They are worried about the undermining of democracy. When so many resources, so much money, wealth and income accumulates at the top, there comes the capacity to control politics.
It’s not that people are rich, it’s that they abuse their wealth by lobbying for bail outs, subsidies and taxes that are going to entrench their wealth. That is the reason why the rules have changed so dramatically.
Inequality and top tax rates have had an inverse relationship. When inequality was lowest, top tax rates were higher. When inequality was highest, tax rates on the wealthy went down. Under republican Dwight D. Esenhower, the top marginal tax rate was a massive 91%. No one dared call him a socialist. Under Kennedy they were 91%. 70% under Johnson. 77% under Nixon. 70% under Ford. 70% under Carter.
Taxes on the top were never below 70%, until Reagan, who dropped those taxes on the top to 38%. And those rates stayed low. 28% under Bush senior. 31% under Clinton. 35% under Bush. 35% under Obama. In fact most of the very rich in America don’t even pay close to that rate, because most of their income is in the form of capital gains, which is taxed at 15%.
In the words of Warren Buffet, the taxation system has “tilted towards the rich and away from the middle class in the last ten years. It’s dramatic and I don’t think it’s appreciated.” Mick Romney, former republican presidential candidate, paid just 13% income tax. Eight figure incomes have been documented paying just 11% tax.
We give rich businessmen tax breaks all in the name of job creation and all that ends up happening is the fat cats get fatter. That is the signature feature of the American economy over the last 30 years.
The Job Creator Myth
Contrary to popular mythology, globalisation and technology haven’t really reduced the number of jobs available to Americans. These transformations have just reduced their pay. In the 1970s, a meat packer would typically make an average of $40,000 per year. By 2010, that same job would make you just $24,000. A bank teller would make $28,000 – today he earns $24,000. And it’s not just in wages that we’re stagnating. When you take into consideration the rising costs of rent, health care, childcare, higher education, the medium male salary minus household expenses comes to just $14,000. In the 1970s, that figure was $32,000.
Middle class families, often with two wage earners, are working harder and harder, and are getting nowhere.
Nick Hanauer is a venture capitalist in the United States. He owns one of the largest pillow manufacturers in the world. For him, the problem with inequality is that for a man like him who earns 1000 times as much as the typical American worker, he doesn’t buy 1000 pillows a year. “Even the richest people only sleep on one or two pillows, and industry is suffering because fewer and fewer people can afford to buy the product.” And there lies the problem. Nick “has the nicest Audi you can get, but that’s still only one Audi.”
The rich aren’t spending too much. Paradoxically, they spend too little, and do not generate enough economic activity. Somebody earning 10 million dollars a year doesn’t spend 10 million dollars. They save it. And those savings go anywhere around the world they can make the most money and the highest return. They become part of the global capital market – including a lot of speculative instruments like gold, oil and real estate.
“With the exception of the money I personally invest to start companies, I essentially have no idea what happens to my money.” says Hanauer. “I invest in funds of funds and those hedge funds do god knows what with it. But I do believe that absolutely, most of the returns created isn’t creating any kind of social utility other than creating a return for me.”
Ordinarily, we like saving, saving is good. But when there is so much unemployment and under utilised capacity, we need spending.
The regressive tax system like the one in the United States has become a debate over facts, figures and data. This is a lie that has been sold. When a rich businessman calls themselves a job creator, they are not describing the economy or how it works. What they’re really doing is making a claim of status, privilege, and power.
“If a guy like me is a job creator” says Hanauer, “the centre of the economic universe, the current economic arrangements are righteous and justified. And I know how comfortable this is to believe because I used to believe it.” As Hanauer eventually realised, it’s actually his customers who are the job creators. The rich businessman is not the centre of the economic universe – the middle class is.
America needs to replace trickle down economics with middle out economics. And every place you look on earth where you find prosperity, you find massive investments in the middle class and the poor. Because at the end of the day, they are the true job creators.
The most pro-business thing you can do is help middle class people thrive.
Source: ‘Inequality For All’, Radius/TWC; ABC News