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Income Inequality, Historians, and Democracy In The U.S.

April 2, 2007

It pays to read the business section. In this case, it pays to to see how one perhaps isn’t getting paid. On the heels of stories from two weeks ago about Lawrence Small and the Smithsonian, below are excerpts from a New York Times‘ story on current income inequality in the United States. This piece is not directly related to Small or the Smithsonian, but it does address issues underlying that story. Here goes (all italics are mine):

– “Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows. The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.”
– “While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent. The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.”
– “The top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.”
– “Prof. Emmanuel Saez, the University of California, Berkeley, economist who analyzed the Internal Revenue Service data with Prof. Thomas Piketty of the Paris School of Economics, said such growing disparities were significant in terms of social and political stability. ‘If the economy is growing but only a few are enjoying the benefits, it goes to our sense of fairness,’ Professor Saez said. ‘It can have important political consequences.’ “
– “Last year, according to data from other sources, incomes for average Americans increased for the first time in several years. But because those at the top rely heavily on the stock market and business profits for their income, both of which were strong last year, it is likely that the disparities in 2005 are the same or larger now, Professor Saez said. He noted that the analysis was based on preliminary data and that the highest-income Americans were more likely than others to file their returns late, so his data might understate the growth in inequality.”
– “The disparities may be even greater for another reason. The Internal Revenue Service [IRS] estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures.
– “Because the incomes of those at the top have grown so much more than those below them, their share of total income tax revenue has risen despite the reduced rates. The analysis by the two professors showed that the top 10 percent of Americans collected 48.5 percent of all reported income in 2005.”

—————————-

It’s quite intriguing that the IRS, perhaps the most fastidious organization in the world, especially concerning collections, is asserting that wage-earning women and men report their income more accurately than those holding capital (public and private investors – the rich). An unsurprising but still interesting corollary is that businesses in no way neglect the accurate reporting of wages on their low and middling workers. So, the investor class not only short shrifts earners in that wages have been slow to rise over the past 20 years, but they also cheat (1) the government by not paying their fair share of taxes and (2) their workers (again!) by being more scrupulous with wage earners’ taxes than their own!

The IRS, therefore, seems to be supporting the generalization that the poor and middling classes are more honest than the rich. I’m sure history holds exceptions to this state of things, but the generalization is there for the taking.

How does this affect education? Tremendously, of course. Professors Saez and Piketty’s sentiments about “fairness” come into play here. If wage earners, for instance, in the bottom and middle portions of the scale feel they’re being overtaxed and underpaid, they’ll be more likely to inaccurately report property holdings. This will directly undermine the local tax bases of schools.

What of income inequality in history? I hope that historians of the United States are realizing the magnitude of today’s distribution inequalities. Why? This affects whether they are asking, in turn, the relevant questions of history. We need to read more studies, whether new or reprinted, on the consequences income inequality in eras such as the Gilded Age and the Roaring Twenties.

Today’s historians can help citizens see the full potential for social disruption in situations of income inequality. But with what particular issues can historians be of service? Here’s an example: Although today’s top-earners (provided they’re reporting honestly) certainly pay more taxes in absolute terms, their extra wealth controls the flow of money in government via both lobbyists and campaign contributions. Since no mandate of a democracy or republic can be put into effect without money, holders of capital control the direction of policy through their influence. What existing histories show these effects? Do more of these histories need to be written?

The extra wealth of the capital class also determines the flow of money in charities and not-for-profits through boards of directors. Think of the consequences of the charitable “contributions” of the Gilded Age’s Andrew Carnegie and Andrew Mellon. T.J. Jackson Lears has in a recent dual-book review. Many of today’s universities and colleges are controlled by boards of directors. Who make up these boards? Generally the rich.

In the final analysis, unequal income distribution undermines democracy. With fewer stakeholders in control of wealth, less effort needs to be put into conciliating all concerned parties. Once the wants and needs of the rich are satisfied, the needs and wants of wage earners become inconsequential. Only the ethics of current and past capital classes in the U.S. prevent a breakdown of social order. But the IRS has documented (above) that the ethics of today’s rich are in question!

If the trend toward income inequality isn’t reversed, the voices of the middling and working-classes will become drowned in pools of money – ironically – from the rich.

Am I being too alarmist? Perhaps. But I do firmly believe that historians can help. – TL

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3 Comments
  1. No Tim, I don't think you are being too alarmist. This is all part of a trend that has been speeding up since the mid 1990s. Not just the rich getting richer, but the Super Rich taking the bulk of the gains. What do you do with your millions after you have three houses, etc? Well, I'm reminded of the Noah Cross in the movie China Town. When asked why he needed all that land and money, he said “the future.” To control the future.

    The fact that mainstream economists (including ex-Treasury Secty Rubin) are getting alarmed by the current level of income inequality suggests that it has finally gotten so out of hand that it threatens the continued profits of the very folks who enjoy the benefits. And so, we'll get “Capitalism with a Human Face” if we're lucky.

    There is good data at the Economic Policy Institute: http://www.epinet.org/

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  2. Anonymous permalink

    I agree with you that these problems are serious and that history points to the outcomes of such disparity time and time again, but I do have a couple of quibbles with some of your analyses (namely, the romanticization of the poor & demonization of the rich).

    In particular, I wonder if the rich don't accurately report their lower-paid workers incomes because a) if the worker correctly reports their income but the owner doesn't, it makes it very easy for the IRS to note a discrepancy and/or b) the manager wishes to ensure the lower earner correctly receive all future benefits (Medicare, Social Security, etc.) and thus must enter the wages earned accurately.

    Either way, there may be a rationale there that goes beyond your second assumption that they are merely cheating their wage earners twice. It's safe to say the wage earners are getting cheated once, but twice might be stretching it.

    As a larger disagreement, I would definitely not agree that the “the IRS, therefore, seems to be supporting the generalization that the poor and middling classes are more honest than the rich.” Other plausible generalizations include:
    a) the poor simply do not cheat because to do so would be more costly. A rich person is more likely to afford an audit than a poorer one, even if the dollar amount taken is larger in the case of the rich person.
    b) There are loopholes in tax laws that allow the rich more opportunities for underreporting than are allowed to the poor. If the poor had access to these loopholes, do you truly believe they would not use them?

    -Alexis

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  3. Toby – Thanks for the link, and for the reminder about Secretary Rubin's endeavors.

    Alexis – If I'm demonizing the rich, it's only the super rich. With the money comes increased responsibility. Ignorance of this higher responsibility puts both themselves and society in peril.

    I should add that I did ~not~ say that capitalists do not report their workers' incomes correctly, but rather that the rich scrupulously report their workers' incomes while being cavalier with their own own assets. Because of the amounts of money involved, errors with the rich shortchange public coffers more than errors with the poor.

    I agree with you, however, when you assert that it is proportionately more costly for the poor to cheat than the rich, and that loopholes invariably aid the rich more because of the quantities of money involved. The rich need to penalized heavily when they under-report and hide assets. This might dissuade more of them from shortchanging the common good.

    As for the romanticization of the poor, I admit some guilt in this regard – but not too much. I've seen the disturbing, disabling effects of poverty first hand via family and family friends in rural Western Missouri. Poverty degrades the mind as much as the body, and it's the former that concerns me as much as the latter. The rich (and intellectuals) of America are right to lament the ignorance of the poor, but they're wrong to blame that ignorance on the internal merits of the poor. Spreading the wealth enables the poor to realize their intellectual poverty and do something about it. But I should halt this part of my thread, because I'm departing too much from my original post and your comments. My only point with this digression is that I do not overly romanticize poverty.

    Thanks to you both for the comments. – TL

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