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Income Inequality

According to research in several disciplines, the extreme disparities of wealth and power that exist in our country are corroding our democratic system and public trust. They are leading to a breakdown in civic cohesion and social solidarity, values that have always been significant in American society, as well as in Christian teachings. 

Recently, in his exhortation "Joy of the Gospel" (2013), Pope Francis sharply criticized growing income disparity, unfettered markets, and idolatry of money, and he warned that these are leading to a new tyranny. While Catholic social teaching has never required complete income equality, it has frequently made clear that inequality should be evaluated in terms of certain moral principles:

  • Ability to meet the basic needs of people in poverty
  • Ability to increase the level of participation by all members of society in the economic life of the nation.

These norms establish a strong presumption against extreme inequality of income and wealth as long as there are poor, hungry and homeless people in our midst. They also suggest that extreme inequalities are detrimental to the development of social solidarity and community.

Solidarity (which is what Catholic Social Teaching urges us to practice) is characterized by people taking responsibility for one another and caring for each other. But it is difficult for solidarity to exist when people do not know each other and do not share institutions that transcend differences in class, culture and ethnicity.

More than nine million households in the U.S. live behind walls in gated communities, similar to statistics in polarized communities such as Mexico and Brazil. It is startling to note that more than one-third of new housing starts in the southern U.S. alone are in gated communities). As a result there is more opportunity for fear, distancing, misunderstanding, and uncaring individualistic behavior than in solidarity.

As people become more individualistic, we see some withdrawal of support from community institutions that uphold the common good. As wealth concentrates in fewer hands, some pursue narrower, more selfish interests and use their wealth to lobby for policies that weaken community institutions and increase their own wealth.

Effects of Growing Income Disparity

Income disparity has several ill effects on a society, among them an erosion of social mobility and equal opportunity, the latter two being traits the U.S. has always prided itself on. Research across the industrialized OECD countries has found that Canada, Australia, Denmark, Norway, Sweden and Finland provide much more opportunity for mobility than the U.S. The U.S. is now among the least mobile of industrialized countries in terms of earnings.

During times of great inequality, there is also disinvestment in the public sector -- less support for education, affordable housing, public health care and various safety net programs. In 1964, a time of relative equality, there was greater concern about poverty; in fact, the U.S. launched the War on Poverty then to further reduce disadvantage. When services deteriorate and the wealthy no longer participate, it leads to a decline in political support and resources, which, in turn, leads to a cycle of further disinvestment.

Unfortunately, what has been happening in our country over roughly the past 30 years bears a strong resemblance to the era of the "robber barons" in the late 19th century. In 1979, the top 1% of people in this country earned 8% of the national income. In 2010, the wealthiest 1% of households owned 35.6% of all private wealth. That is a tremendous change! There are many reasons for this increase, but one of the foremost is that income from investments, largely held by those in the top 1%, has been higher, whereas income from work and wages has stayed flat.

Sasha Abramsky, in his 2013 study, “The American Way of Poverty: How the Other Half Still Lives,” observes that we struggle to find the language to talk about inequality because the depth of American poverty must be seen not only as a problem in its own right, but also as a sign that something is dreadfully wrong with our democracy itself.  One of Justice Louis Brandeis’s famous sayings comes to mind: “If democracy becomes plutocracy, those who are not rich are effectively disenfranchised.” 

As if things weren’t bad enough, Tyler Cowen, in his 2013 study, “Average Is Over: Powering America Beyond the Age of the Great Stagnation,” predicts a greater split in income in the future due to the rise of mechanized intelligence (an ever-faster internet, artificial intelligence and computer programs that can quickly perform vast data calculations), which means that the economy will be passing along most of the higher rewards to a relatively small cognitive elite who have mastered these machines. High-income earners of tomorrow will be those who complement the speed and power of machines.

Who Are the Wealthy?

People often wonder exactly how much income and/or wealth someone needs to have to be included in the top 1% in the U.S. Edward Wolff of the Levy Economics Institute of Bard College has spent several years researching the issue of inequality in this country and responds to this question by noting that the mean household income of the top 1% is $1,318,200 and their mean household financial wealth (non-home) is $15,171,600 (median income is not given).  His analysis continues -- the top 1% of households, as of 2010, owned 35.6% of U.S. wealth, and the next 19% (the managerial, professional and small business stratum) had 53.5%, which means that just 20% of the people owned over 89%, leaving only 11% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth, the top 1% of households has 35% of all privately held stock, 64.4% of financial securities, and 62.4% of business equity.

The IRS has reported that 95% of income gains reported to them since 2009 have gone to the top 1% of filers. However, these figures underestimate the amount of inequality because the IRS data include only what is reported to them (e.g. social security, salaries/wages, pensions, dividends and capital gains from the sale of stocks and other assets). They do not include other sources of income (e.g. income kept in tax shelters). Income disparity data like this have led the Federal Board of Governors’ member Sarah Bloom Raskinto to say in May 2013: “The large and increasing amount of inequality in income and wealth, which has been an ongoing phenomenon for decades may have exacerbated the [recent economic] crisis and I think more research is required to determine whether it may also pose a significant headwind to the recovery from the crisis for years to come.”

A recent study by Citizens for Tax Justice examined whether our present tax code, including all federal, state and local taxes, was as progressive as many people think. Their analysis shows that it is indeed progressive for the bottom 80% of tax filers, but progressivity slows down quite dramatically for the top 20%, so that the top 1% -- those who take in $1.3 million per year on average -- pay an effective rate of only 30.8%, scarcely more than those in the 80th percentile.

Between 2001 and 2010, the U.S. borrowed almost $1 trillion to give tax breaks to the top 1% of the wealthiest citizens of our country. These tax breaks reduced the top income tax rate, cut capital gains and dividend taxes, and eliminated the estate tax, our nation's only levy on inherited wealth, all of which benefitted a very small segment of U.S. population.

A recent study by the Institute of Policy Studies (as well as Robert Reich's film "Inequality for All") makes clear that many of those who are exceptionally wealthy are the heads of corporations. The ratio of CEO compensation to average US worker pay was 325 to 1 in 2011 and 350 to 1 in 2012, up from 42 to 1 in 1980. Interestingly, the Securities and Exchange Commission (SEC) in September 2013 has established a rule as part of the Dodd-Frank bill that will require corporations to report the CEO-average worker ratio each year beginning in 2015.

Effects of Income Inequality

The lobbying agenda of many corporations includes corporate deregulation, weakening of environmental laws, special tax treatment and loopholes, weakening of worker health and safety rules, and blocking expansion of public health and food safety oversight.

A 2011 study by Citizens for Tax Justice found that 280 of the most profitable corporations had dodged taxes on half of their profits over the previous three years. Thirty of the companies paid no taxes and received substantial subsidies between 2008 and 2010, despite combined pre-tax profits of $160 billion, and 78 paid no federal corporate income tax during at least one of the three years. The average effective rate for all 280 companies between 2008 and 2010 was 18.5%, far less than the statutory corporate income tax rate of 35%. "These 280 corporations received a total of nearly $223 billion in tax subsidies," observed Robert McIntyre, Director at Citizens for Tax Justice and lead author of the report. "This is wasted money that could have gone to protect Medicare, create jobs and cut the deficit."

Income disparity slows the economic recovery of everyone, according to a January 2014 study by Barry Cynamon and Steven Fazzari, economists with the Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis. The study says that stagnant income for the bottom 95% of wage earners makes it impossible for them to consume as they did in the years before the downturn. By examining the connection between consumer debt, household spending and rising inequality, the study shows that the debt-to-income ratio rose nearly 12 times as much for those at the bottom as for those at the top between 1980 and 2007. But that borrowing spree ended with the recession and these tapped- out consumers (who represent more than half of the nation’s overall economic activity) have little or no savings to sustain their lifestyles, leaving them with next-to-nothing to draw on or to borrow. That fact is a major problem for the larger economy.

Another study (“The Equality of Opportunity Project”), released in January 2014, led by Harvard’s Ray Chetty, states that one thing has stayed constant: people who are poor today have the same odds of staying poor in adulthood as their grandparents did. Advances in opportunity provided by expanded social programs have been offset by other changes. Increased trade and advanced technology, for example, have closed off traditional sources of middle-income jobs. Thus, a person’s parents and how much they earn are more consequential for young people today than ever before. Mobility is stuck at a low rate, at least compared with other wealthy nations, such as Canada, Denmark or Sweden. These findings are likely to set off a new round of debate over mobility and inequality or, alternatively, focus attention on other issues, such as problems with the tax code.

Appearing on Moyers and Company on January 6, 2014, Thomas Volscho, a sociologist at the City University of New York and author of a study published in the “Journal of Politics,” explained how congressional gridlock operates to benefit the wealthy. The findings suggest that Congress, especially the Senate, has a strong bias toward maintaining the status quo, and when there’s already a lot of inequality, a self-reinforcing pattern emerges. Since the very design of the Senate makes it hard to get things done, Congress’s inability to pass legislation that could change the situation gets worse. So the rich become richer at the expense of everyone else. This study is part of a growing body of research into how politics and inequality are intertwined.

Income Disparity Relies on Disproportionate Political Influence, Unfettered Market Capitalism and Unfair Tax Policies

The wealthy gain and retain their wealth using a variety of tools:

  • Large campaign contributions to powerful politicians, giving them special access
  • Owning a disproportionately large share of media outlets and the ability to influence the media through public relations and communications firms
  • Being part of Wall Street-funded pro-free-market think tanks, research organizations, advocacy groups and associations such as the U.S. Chamber of Commerce and the Business Roundtable, which have armies of lobbyists who support their positions
  • Low taxes on income from wealth (capital gains taxes were 39% in 1979 and 15% in 2012)
  • Free trade and other policies that have: boosted stock prices; enabled companies to divert jobs to countries with low wages, few worker protections and weak environmental standards; and allowed companies to pay low wages to their U.S. workers
  • Unlimited inheritances (estate taxes were eliminated in 2010; returned in 2011 at a diminished rate only on wealth inherited over $5 million)
  • Weak environmental regulation and enforcement, especially in the extractive industries, to enable short-term windfalls
  • Expansion of offshore tax havens
  • Tax subsidies for corporations and on various luxuries of the wealthy, such as corporate jets (from 99 to 1, Chuck Collins, 2012)

The admonition in the encyclical “Populorum progression” makes it clear that “no one is justified in keeping for his exclusive use what he does not need, when others lack necessities. It is unacceptable that citizens with abundant incomes from the resources and activities of their country should transfer a considerable part of their income abroad purely for their own advantage, without care for the manifest wrong they inflict on their country by doing this.” And Americans' innate sense of fair play reinforces the concept.

“Faithful Budget, 2014” speaks eloquently to the issues raised in the preceding sections: "...our nation has allowed too much injustice and greed to govern our current economic structures. Instead, we seek to increase equity and equality in this nation. We are alarmed at the growing economic divergence between rich and poor, creating permanent inequalities that are neither just nor socially sustainable. Over the past thirty years, tax policy has been used to perpetuate rather than address these inequalities" (p. 23).

There are numerous reforms that would begin to address the growth in income disparity over the last 30 years, from paying workers a "living wage" (a reform that is gathering momentum in many American cities and counties) to reducing the influence of money in politics, to reining in CEO compensation. But one of the highest priorities is to redesign our current tax system to ensure a more progressive tax code, where all members of the community carry their fair share of the responsibility, not only to meet the immediate needs of the economically marginalized but also to simultaneously reduce our nation's deficits. We are concerned with the common good, right relationships among all people, a just working of the economy. and a balanced approach to deficit reduction.

"Within a country that belongs to each one, all should be equal before the law, find equal admittance to economic, cultural, civic and social life and benefit from a fair sharing of the nation's riches." Octogesima adveniens