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It’s Wages, Stupid! Progressive Tax Reform Alone Will Do Little to Close the Gap Between Haves and Productive Have-Nots

Stagnating real wages for low- and middle-income earners is the ultimate source of the widening US income gap.

(Photo: 401(K) 2012 / Flickr)

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The key to reducing income inequality and assuring general prosperity, Petrella argues, is to tackle the widening wage-to-productivity ratio and assure everyone a living wage.

While President Obama and Congressional Republicans fiddle with so-called “fiscal cliff” negotiations, the working class burns.

Central to the budgetary impasse is an all-too-predictable partisan discrepancy over how best to handle the impending expiration of the Bush-era tax cuts. Whereas the Obama administration seeks to extend the 2001/2003 tax cuts for middle-income taxpayers only, Republicans insist that they must remain intact for all, including the most affluent. Political cheap shots aside, the debate illustrates a fundamental battle over competing visions for correcting widening levels of income inequality in the United States.

Here’s some context for the deliberation: In 2001, the Bush administration reduced income-tax rates across the board. They scaled back the top marginal rate from 39.6 percent to 35 percent. Moreover, they cut the 36, 31, and 28 percent brackets by three percentage points each. And the 15 percent tax levied against the lowest-income earners was split into two sub-brackets to include a new 10 percent classification. Then, in 2003, President Bush eliminated the long-term capital-gains tax on individuals and couples in the two lowest marginal income brackets and dropped the 20 percent capital-gains tax bracket to 15 percent. The legislation also set in motion a plan to reduce the estate tax from 55 to 35 percent on estates valued at $5 million or more over the course of five years.

Though the expiration of Bush-era cuts would be fairly progressive, with the largest subsequent increases in taxes disproportionately affecting high-income families and individuals, our national obsession with tax-centered solutions to our so-called “fiscal cliff” problematically diverts attention from the ultimate source of widening income inequality in the United States: stagnating real wages for low- and middle-income earners.

Fiddling with tax rates – though nominally helpful for reducing income inequality in the short-term – represents an imaginary resolution to a more pressing challenge: ensuring that wages keep pace with gains in worker productivity.

Surging income inequality is fundamentally attributable to the grotesque divergence of pay and productivity for low- and middle-income workers since the mid-1970s. Though wages and productivity rates tracked evenly from 1948-1972, according to the Bureau of Economic Analysis (BEA), hourly compensation for low- and middle-income workers has grown less than half as fast as gains in productivity since the mid-1970s. Beginning in the mid-1970s, employers began taking advantage of historically high levels of surplus labor by suppressing wages. US labor shortages, which were a mainstay of the national economy since at least the formal abolition of race-based slavery, all but disappeared in the mid-1970s as a result of emerging automated technologies, the growth of outsourcing, the introduction of women into the “formal” labor market, and the passage of pro-immigration statutes in 1964.

The widening chasm between productivity and pay helps to explain why in the third quarter of 2012 after-tax corporate profits achieved a record share of the GDP – while total wages simultaneously plummeted to their lowest-ever GDP ratio.

From 1979-2007, the after-tax income of the top 1 percent of income earners grew 13.5 times as fast as the after-tax wages of the bottom 20 percent of workers. But here’s the catch. The pre-tax income of the top 1 percent grew at nearly an identical rate – 13.9 times as fast – as the bottom 20 percent of workers over the same period of time. These data suggest in exceptionally clear terms that a regressive tax system isn’t the primary driver of our nation’s widening levels income stratification.

Yes, demanding that everyone “pay their fair share,” as goes the fashionably vague leftist mantra, is certainly not a bad idea, but the single most enduring impediment to shared prosperity is stagnating wages for low- and middle-class income earners.

Quite simply, most of us aren’t getting paid enough relative to our productivity levels.

That employment gains during our so-called economic recovery (2010 Q1 to 2012 Q1), for instance, “have been concentrated in lower-wage occupations, which grew 2.7 times as fast as mid-wage and higher-wage occupations,” is of grave concern.

If we’re truly serious about reducing income inequality, then we must tackle the widening wage-to-productivity ratio before we begin fiddling with taxes. Strengthening collective bargaining rights and agitating for living-wage legislation – more than any other factor – are crucial for re-establishing a robust linkage between worker productivity and pay, and ensuring shared, non-debt-financed prosperity for all.

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