As President Obama seeks to address the roots of inequality in America as he pushes for raising the minimum wage, some economists are calling for the U.S. government to reform the tax code to achieve greater economic parity.
Harvard Professor Lawrence Summers, former economic adviser to President Obama from 2009- 2010, recently wrote an editorial on Sunday in the Washington Post in which he called for changing the tax code to help curb inequality.
Summers said the United States may be on course to becoming a “Downton Abbey” economy and cited a number of causes for the inequality gap in the United States.
Some of the inequality causes he cited include “sharp increases in the share of income going to the top 1 percent of earners, a rising share of income going to profits, stagnant real wages, and a rising gap between productivity growth and growth in median family incomes.”
Summers explained that the U.S. tax code allows a far larger share of the income of the rich to escape taxation than the poor and middle class at a time when the ratio of corporate tax collections to the market value of U.S. corporations is near a record low due to a variety of loopholes.
“For example, last year’s stock market growth represented an increase in wealth of about $6 trillion, with the lion’s share going to the very wealthy. It is unlikely that the government will collect as much as 10 percent of this given the capital gains exemption, the ability to defer unrealized capital gains and the absence of any tax on gains on assets passed on at death” Summers wrote.
According to new economic data released in January 2014 from Oxfam, in the U.S. the top 1 percent captured 95 percent of post-recession growth since 2009, while 90 percent of Americans became poorer.
Many of those top 1 percent gains were made by business executives and stockholders who profited from the stock market climbing to near record highs since 2009, fed by an accommodative monetary policy from the Federal Reserve that helped to drive interest rates and inadvertently brought more liquidity to global stock markets.
Rising Productivity and Stagnate Wage Growth
Although U.S. productivity is on the rise across the towns of America, it has not meant an increase in wages for the average American worker.
Nonfarm labor productivity, which measures output per hours worked, registered a 3.2 percent increase in its annual rate during the 4th quarter of 2013, according to the Labor Department, while the third quarter of 2013 saw an upwardly revised 3.6 percent rate increase.
The increase in fourth quarter productivity combined with stagnating U.S. wage growth has led to a 1.6 percent decline in labor costs at a time when many corporations are using their profits to benefit stockholders through stock buybacks instead of boosting pay for their workers or creating more jobs.
As corporate profits are increasing, real wages are stagnating.
Wages hardly increased in 2013 which saw an increase of only a 1.9 percent, or 0.4 percent adjusted for inflation.
According to the Center for Budget and Policy Priorities, median income for working-age households (headed by someone under age 65) slid 12.4 percent from 2000 to 2011, to $55,640 during the same period when the American economy grew more than 18 percent.