INCOME INEQUALITY

My campaign for the Democratic Party nomination for the White House in 2020 focuses on confronting and defeating four threats to our nation. The fourth on my list is dangerously high levels of income inequality. Below, you can read my thoughts on this topic. This is not meant to be an exhaustive list of policies that I will pursue to overcome this threat. It is, instead, a primer on how I think about this danger and some of the most important steps we must take to defeat it. I hope you will take some time to read my thoughts here and to respond with your own. Together, we can defeat this threat. – Alan Howe

In my town hall meetings on the economic future of our nation and on income inequality, I show a slide from Go Banking Rates, which does an annual survey of Americans on the status of their savings accounts. In the 2017 survey, 39-percent of Americans reported that they did not have a savings account at all. Some 18 percent had $1,000 or less in a savings account, and 12-percent of respondents reported that they had between $1,000 and $4,999 in a savings account. In the 2016 survey, a similar total of 69 percent of Americans split between 35 percent with $1,000 or less and 34 percent with no account at all.

Any family with $1,000 or less in a savings account (most American families) are just one economic setback away from living in a real-time financial crisis. A car accident, a disease requiring hospitalization and medication, a busted hot water heater or furnace, a large increase in the cost of home heating oil…the potential tragedies are endless. The protection, that little bit of savings, is finite. For so many families, when this cushion is gone, it is almost impossible to get back. Those who crossed the threshold of $1,000 and entered another category in the chart above are quite often barely safer. Rising from $950 to $1,050 is better, but it is hardly safe and secure.

In September of this year, the US median household income was just $61,372 (https://fred.stlouisfed.org/series/MEHOINUSA646N). That means half of all US households make less than that, many make much, much less. After taxes, this income does not provide enough for families to build up a safety net. The chart above makes it clear that far too many families, more than half of all households, have not been able to build a cushion to protect themselves from economic setbacks that become financial crises. We can do better. The bottom 69-percent of American earners and savers will be the priority of my administration. The top one-percent? Not a chance. They are fine. They have gained the most from this nation and its economy, and they are in a position to give the most back. They are not doing that now, but in my administration, they will. My campaign is directed at fighting back against four grave threats to our nation. Number four on that list is dangerously high levels of income inequality (https://howe2020.org/4-threats/). High levels of income inequality lead to severe economic instability and disruptions that hurt everyone, especially those at lower income levels and those who have little savings. A layoff can drain a savings account at a hazardous rate and lead families with inadequate savings into deep debt. Those layoffs come with the recessions caused by income inequality. High levels of income inequality preceded the Great Depression. High levels of income inequality preceded the crash of 2000 and the Great Recession of 2007-2009. Income inequality is at historically high levels as the share of income captured by the top one-percent of earners shows below. This is a danger to our national economy and to everyone’s personal economy.

The financial prospects for those in the bottom 69-percent of US earners have not improved for decades. Their income is stagnant while incomes for the highest earners continue to rise. The top earners have been able, with the help of Republican political allies, to secure a share of the nation’s income that used to go to the hard-working American family.

We can fix this. We can help those at lower-income levels and reduce the risk posed by high levels of income inequality.

Strong Communities – Strong Nation

Before we talk about how we defeat the threat from income inequality, we need to discuss the value of our communities and the value of a dollar in our communities. Typically, we track the strength and weakness of the US economy, and that of all nations, by tracking “gross domestic product.” GDP is a measure of dollars changing hands. In the US economy, the three largest components of US GDP are, in ascending order, government spending (about 17 percent), business investment (about 18 percent), and consumer demand (about 69 percent). “Alan, that totals 104 percent.” Yes. Rounding numbers contributes to that. Also, our trade deficit counts as a deduction from the total.

While the GDP is a very incomplete measure of the economic health of a community or a nation, it has importance. For example, when GDP is declining—when we are in recession—we see job losses. That matters for workers, our communities, and the nation. When GDP is growing—when the number of dollars changing hands is increasing—we see job growth. We want and need more dollars changing hands in our communities to create jobs. More dollars mean more consumer demand. More consumer demand attracts more business. More business means more jobs.

I live in Cumberland County in Pennsylvania. This county has the fastest growing population in PA. That is creating more demand. We see that in more business and more jobs. From April to August in 2017, three new restaurants opened here in Carlisle, the county seat, within a stone’s throw of each other. More than a year later, all three are still open and still employing workers. Only that growing demand can support that outcome.

Compare that with two other places in Pennsylvania that I visited as part of my campaign for the now replaced 11th Congressional District: Plymouth and Hazleton. Plymouth has a declining population. It is losing restaurants and businesses. The tax base is shrinking, and the borough had to have a painful pubic debate over whether it should close a fire station and raise taxes a little to support its police force or keep the fire station and raise taxes more to support adequate police. Hazleton had a similar problem for decades until an influx of Hispanic and Latinx residents finally reversed both the population and economic declines. More customers with money to spend and money for taxes has saved the city.

Therefore, the principle we all must support in our communities is that every dollar that comes into our community is essential in generating more demand. It does not matter if that dollar comes into the community from an increased salary or a food- or housing-assistance program. It does not matter if it arrives in the hands of a seventh-generation American or a resettled refugee. For more economic growth, we need more dollars creating more consumer demand. If we act to reduce those dollars—if, for example, we try to keep immigrants out or try to cut government support or fight against unions or against increases in the minimum wage—we hurt the economic prospects of our communities.

We depend on our communities. They are more than where we live. A vibrant, growing community provides us opportunities to satisfy our needs, our wants, even our dreams. A depressed community provides no opportunities. A depressed community crushes dreams. We have recovered nationally from the Great Recession. However, many communities are not sharing in that recovery. We acted to raise our national economy. Now, we must work to raise the economies of our communities. While we can restore the national economy and leave communities behind, no effort to restore local economies can fail to help our nation. Fixing income inequality helps our local economies. Fixing income inequality helps everyone.

Fixing Income Inequality

Jonathan Tepperman, managing editor of Foreign Affairs, writes in The Fix: How nations survive and thrive in a world in decline about Brazil’s program to alleviate poverty: Bolsa Familia. Recognizing that the biggest challenge for the poor is the obvious lack of money, the Brazilian government provided a stipend to the poorest families of the equivalent of $65 per month. Besides the humanitarian benefit that comes from alleviating the suffering of poor families, the economic benefits were dramatic. Each real (the Brazilian currency) distributed in the program created an economic benefit of 1.78 realis (plural of real). This is not unique to Brazil. Families that are living paycheck-to-paycheck with unmet needs and abundant unmet wants are far, far more likely to spend any increase in income than would a family making much more than the median annual US household income (currently $61,372 as noted above). Money invested in the poorest families creates the greatest economic activity as it changes hands repeatedly on its way up the economic ladder. Money invested in the top of the economic ladder goes nowhere and generates no economic activity. The former grows US GDP and creates jobs. The latter only increases privately held wealth among the already wealthy.

Consider then, the 2017 Republican tax cut law. The vast, vast majority of these cuts went to businesses and to the highest income earners. The top tax bracket, which affects income above $600,000 was reduced by the Republicans from 39.6 percent to 37 percent. The lowest tax bracket, which affects everyone with taxable income, was increased from 10 percent to 12 percent. No economist should be surprised that these cuts generated no real increase in national GDP. Job growth did not increase. Personal wealth for the wealthy increased, but I have not met a person on the campaign trail who says they were lifted out of poverty by this plan or who climbed from the working class to the middle class. This is not the first time that Republicans have suggested that if the wealthy got more money somehow you will get more, too. They have been wrong every time.

We need to repeal and replace the 2017 Republican tax cut law. Rather than higher tax rates for the working class, we need higher rates for the wealthy and lower rates for those working hard every day to make ends meet. Additional tax brackets that begin at $1 million, $2 million, $5 million, and $10 million at increasing rates can more than make up for reductions at lower levels—well deserved and necessary reductions that will drive up consumer demand and lift both local and national economies.

You will note from the income inequality graph above that we experienced relatively lower levels of income inequality from 1940 until 1981. During this period, our national economy grew very well, and we became the strongest nation in the world, winning World War 2, putting men on the moon and rovers on Mars, and winning the Cold War among other accomplishments. Since 1981, we have heard increasing concern about America’s decline. People argue that we cannot “afford” the things we could afford in decades past, that we cannot do what we used to do. That is nonsense. We simply have impoverished our government under Republican policies, and that is holding us back.

Here is a chart of privately held wealth in the United States. As a nation, we never have been as wealthy as we are now. We have allowed the accumulation of wealth—now over $100 Trillion and almost entirely in the hands of the very wealthy and little, as described above, in the hands of the bottom 69 percent—that equals five times our annual GDP and five times our national debt. This rise in personal wealth, held almost entirely by the richest among us, occurred immediately after Ronald Reagan began cutting taxes on the wealthy. He cut the rate on the top tax bracket that affected only the highest earners from 70 percent to 50 percent and then to 28 percent. (It had been restored to 39.6 percent before the Republicans cut it to 37 percent in 2017.) Where has this policy of tax cuts for the wealthy taken us? We have 585 billionaires in the United States and millions of hungry children. There is another consequence shown in the chart below. The lowering of income inequality in 1940 and rise of our nation’s power and esteem came after the rise in tax rates on the wealthiest earners. Fixing income inequality through higher taxes on the highest earners solves more than just income inequality.

On tax policy, income taxes are important but not the sole area that must be changed. The payroll taxes deducted from employees’ paychecks to support Social Security also need a “correction.” Workers who make less than $128,400 per year—the vast majority of workers in the United States (remember, half of US families make less than $61,372 each year)—give up a full 6.2 percent of every dollar they make. However, there are no taxes on any dollar above that amount. This cap ensures that no employee pays more than $7,960.80 per year on payroll taxes regardless of how much they make. In 2016, Mark Wahlberg made $68 million. Nonetheless, he was required to pay only $7,960.80 like everyone. Your rate is 6.2 percent. Wahlberg’s was 0.0117 percent. Members of Congress make at least $174,000 per year. They give up only 4.58 percent of their salaries in payroll taxes. They decided that there is a cap on income. They decided that that cap is less than they make. They decided what the percentage of pay workers will surrender for Social Security. They decided that you will pay 6.2 percent. They decided that they would pay only 4.58 percent. This is not remotely fair to you.

We can ease everyone’s worries about Social Security funding by ensuring that everyone pays the same percentage on every dollar they make. Wahlberg’s contribution would be around four million, not less than $8,000. Members of Congress would give up $10,788 instead of $7,960.80. Better, removing the cap likely will mean that we can lower the percentage rate while fully funding Social Security for decades into the future. A cut from 6.2 percent to 5 percent, for example, will lower the tax bite for the median US household making $61,372 from $3,805 to $3,068. That extra $737 is money that family can spend in the local economy, helping local businesses and creating local jobs.

Taxes are important, but with lower tax rates, we need higher paychecks both to replace some of the revenue lost to those lower rates and to benefit families and communities.

We raised income for families and created our middle class by organizing into unions and by providing federal support for those unions. Individual workers are at an extreme disadvantage with their employers. Management organizes and holds down wages as well as it can. Labor must organize to get reasonable, humane wages and benefits. Republican across the nation are striving to pass “Right to work” laws. Those laws represent a belief that companies should get your work for less. Republicans are working with those companies to cheat you. We must support unions and ensure that workers get the wages and benefits they deserve.

We also must ensure that all workers get enough pay that they need not rely on federal benefits to survive. The national minimum wage must be raised over the course of the next several years to the inflation-adjusted equivalent of $15 per hour in 2016 and then indexed to the inflation rate so it no longer will lose purchasing power. It is an outrage that highly profitable companies pay their executives tens of millions of dollars every year and pay the rest of their employees so little that you must provide your federal and state tax dollars to help them eat. We can stop that outrage.

That said, we must support our families, friends, and neighbors who are not able to fend for themselves. Following a change in the tax brackets that shifts the tax burden higher up the income ladder and provides relief for those at the bottom, we must ensure that we are helping those who need help. Remember that every dollar that comes into your community helps generate local demand. Take the Supplemental Nutritional Assistance Program (SNAP, or “food stamps”). SNAP does not become money until it reaches your local grocery store. Many stores in high-poverty areas depend on SNAP to keep their prices down and their doors open. If SNAP is reduced or ended, your local store might have to raise prices, costing you more. Or, it might have to go out of business, causing you to drive farther and spend more to feed your family.

Raising taxes on the wealthy, cutting taxes and raising pay for working-class and middle-class Americans, and supporting Americans who need help all lower income inequality and improve the lives of everyone, from your local community to our nation.

We are in this together. We are a nation.

I once read that the wealthy in ancient Greece did not segregate themselves into gated communities. They lived side-by-side with everyone and let their contributions to their community and nation be their point of pride rather than taking pride in a grand home. I am not wealthy. I was born in a working-class family in one of the poorest regions of upstate New York. I was an enlisted member in the Air Force, not an officer. And, I live now in a working-class neighborhood in Carlisle, Pennsylvania. This is my street.

Click here to download Alan’s PDF on Income Inequality