Recently under the comments of a previous post I was referred to as a "Debbie Downer", so in response I have decided to write a post that does not pertain to homophobia, war or genocide.
I was recently forwarded an article last week entitled Tax Cuts for the Wealthy: Appearances v. Reality. The premise of this article argues that even though taxes on the wealthiest one percent of Americans has steadily dropped since 1980 from 70% to the 23.3% today, the total percentage of the tax burden paid by the wealthiest one percent has risen. The author claims that this is suppose to demonstrate that those who argue against tax cuts for the wealthiest Americans “at some point must decide what really matters to them -- the appearance of soaking the rich by imposing high statutory tax rates that may cause actual tax payments by the wealthy to fall, or lower rates that may bring in more revenue that can pay for government programs to aid the poor?
But the underlying purpose of tax cuts is not to get more money for the government, the purpose is to increase economic growth for all Americans, and that was the reasoning that Bush and other presidents before him have used to explain why tax cuts are necessary. But it is impossible to see whether or not they were successful in their endeavor without looking at the disparity between the richest and the poorest, they are intrinsically connected and to look at one without looking at the other is impossible.
My argument is that the article’s thesis is flawed because it fails to take into consideration the increase wealth disparity that has occurred over the past 25 years. The fact that tax cuts have resulted in more revenue from taxes doesn’t really mean anything except that the tax cuts benefited the wealthiest Americans and had no real effect on the poorest Americans or the average American.
If the goal of tax cuts was simply to increase government revenue then that would be fine, but that has never been the reason for implementing tax cuts, and by looking at the data and increases in wealth historically throughout the past 25 years it is obvious that tax cuts have benefited the wealthiest Americans while doing little for the average American.
While the divide between the wealthiest and the poorest has continued to grow, there has been no real significant change for the average American. Adjusted for inflation the average annual income from 1970-1998 has only increased 9.3% over the past 30 years, from $32,522 to $35,864, compared to an increase of 395% for the wealthiest Americans. (Gutman)
The article’s thesis argues that people who are critical of tax cuts and argue that they only benefit the wealthiest Americans are wrong. When in actuality you can see that over the past 25 years the wealthiest Americans have reaped almost all of the economic gains. Many who support tax cuts argue that when the economy grows that everyone benefits, but this data shows that only the wealthiest people benefit and everyone else basically stays the same. The argument that a rising tide (economic growth) raises all boats does not hold true. The data proves that a rising tide only raises the yachts that are able to take advantage of it and the average American does not benefit. (Click here for more data concerning wealth and income inequality)
Now let me give an example. If you line up the wealthiest 1 percent in a line starting with the richest and working your way down based on wealth, you will see that over the past quarter century the line up has not really changed, what has changed is that the amount of wealth these individuals have gained has increased at an amazing rate. While at the same time the benefits of a growing economy have yet to benefit the average American, therefore demonstrating that although tax revenue from the wealthiest 1% has increased with tax cuts, the actual economic well being of the average American has failed to grow at even close to the same rates, thus the tax cuts are still just a sell out to the wealthiest Americans.
Now I am aware of the counter argument to all of this which was very well stated by a conservative friend of mine, and for reference later in this post I will refer to this as the “conservative argument”. He wrote, “Tax cuts for the wealthy benefit the poor more than they do the wealthy. A rich person will be rich whether you take 90% or 20% of their income. However it is what you do not see at the surface of this scenario that benefits the working class and the government. The rich person has no incentive to build a factory when the income generated from the factory will be taxed at a high rate. What is seen is the high tax rate, what is unseen is the economic activity that is not generated. With a lower tax rate the rich person will have incentive to build a factory. The rich person benefits with a profit, the workers get jobs and income, and the government collects taxes on the factory income and from the workers.”
I understand this argument and I am not arguing that expansion of business does not occur. What I am arguing is that the expansion rate of business is not at all in line with the enormous increases in the concentration of wealth.
Here is how I see the problem. Take for example Wal-Mart, last year their net income increased 8% to $7.64 billion. Now Wal-Mart took some of that additional income and invested it in opening new stores, which under the “conservative argument” creates new jobs and helps the poor. But at the same time they created new jobs that did nothing to decrease the divide between the poor and the rich. Instead it created jobs that still offered full-time wages that were barely enough to live on. So yes according to the “conservative argument” it did create new investment, the problem was that the investment only created new jobs that required people working them to stay at a low economic level.
Then compare that to Costco. Last year Costco increased their net income by 13%. With this increase they plan to open 30 new stores in 2006 creating numerous new jobs. Thus they are following the “conservative argument”. The interesting thing about this is that Costco pays wages that are 40% higher then Wal-Mart and they provide affordable healthcare coverage to 90% of their full and part-time workers. Add onto this that Costco has a turnover rate that is five times lower then Wal-Mart and that they promote almost 100% from within. Therefore a company that offers good wages keeps their workers and then promotes their workers up, therefore giving every worker the ability to move up income brackets and live a more prosperous life. This sounds great.
The problem with this, according to many Wall Street analysts, is that by having Costco offer such high wages and benefits they are taking away from money that should be going back to shareholders in the form of increased investment in expansion projects or dividends. However, if Costco would follow the advice of analysts they would be perpetuating the problems of an increasing divide between the wealthy and the poor since most of those who are investors and shareholders are already in the upper percentage of wealth. But by continuing their current strategy they are actually helping to fill the gap between the poor and the rich, while at the same time operating a profitable and competitive business.
That is how I think this issue needs to be addressed. I am not necessarily arguing that we should hike the hell out of taxes on the wealthiest Americans, I would actually be in favor of cutting taxes if that was coupled with legislation that also forced companies to adopt wage and promotion policies like Costco is currently using. The problem is that most companies are not following this policy at all and instead strictly adopt a policy that makes increasing shareholder wealth the main priority and ignoring the stakeholders and society in general who are not shareholders. And when the priority is increasing shareholder wealth at the cost of workers and the general public then the policy only perpetuates the disparity of wealth between the poor and the rich.
I am too cynical to think that companies would be willing to adopt these policies strictly because of market pressure, so that is why I think that there needs to be legislation that forces companies to do so. I would argue that something has to be done or else in 30-50 years the distribution of wealth in this country will be similar to current distribution in Latin American countries, and I don’t know anyone who thinks that would be a positive thing.
So those are my arguments, but I am by no means an expert on anything I just spoke about so please chime in all of you loyal PePers and let me know what you think.