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Economic Inequality is the Core Problem

Delusional prosperity is the problem.  One terrible aspect of the American economic system that never gets enough attention is called economic inequality, which is essentially an unfair, unjust bias built into the system that channels a huge fraction of the nation's income and wealth to a relatively small, elite fraction of the population.  It is something that is actually measured by the government and others.  There has been rising economic inequality for many years.

To be clear, it is possible to have economic growth and considerable national wealth creation without economic inequality.  This happened in the post-World War II period, which means that all economic strata were able to experience increased income and wealth creation.

Eventually a turning point happened that is best understood by a corruption of the political system by a rich Upper Class as well as many corporate interests.  They were able to promote public policies that promoted economic inequality so that the rich got much richer and everyone else started to suffer, even though there was economic growth and national wealth creation.  Obviously, some tax policies promote economic inequality.

In our current economic meltdown it would be terrific if there was more attention to addressing public policies that attack economic inequality.

Here are some incredible data that shows what has happened over time.

The IRS reports on the top 400 U.S. tax returns.  In 2006 the average income of this group was $263.3 million.  Little of top 400 income comes from actual wages and salaries, just 7.4 percent in 2006.  The income of the super rich comes overwhelmingly from wealth, not work, such as capital gains - income from the sale of assets America's deepest pockets already owned.  This supplied nearly two-thirds, 63 percent, of the top 400's 2006 income.  Many millions more came from dividends and interest payments.  In all, the top 400 reported $105 billion in income in a single year.

Here is what's important: They paid a mere 17.2 percent of that in federal income tax, a smaller share of their income than the rich right below them ended up paying in tax.  In 2006, America's top 1 percent - taxpayers with at least $388,806 in income -paid federal income tax at an average 23 percent rate.  Millions of ordinary Americans actually pay more in federal payroll tax - for Social Security and Medicare - than they do in federal income tax.  If you take these payroll taxes into consideration, the top 400 pay federal taxes at a lower rate, as billionaire Warren Buffett likes to joke, than their receptionists.  Indeed, in 2006, he paid 17.7 percent of his income in taxes while his secretary, who made $60,000, paid 30 percent.

Now consider 1955, when America's top 400 collected on average, in dollars inflation adjusted to 2006 levels, $12.3 million in income each, which clearly is an amazingly tiny fraction of the over $263 million in average income the top 400 reported in 2006.  Here is another profound difference between the 1955 and 2006 top 400s, a tax difference.  In 1955, the top 400, after exploiting every tax loophole they could find, paid 51.2 percent of their incomes in federal tax, almost triple the 17.2 percent tax rate on the 2006 top 400.  That much higher tax rate did not deter people from working hard, inventing stuff or starting new ventures to make big money.

If the 2006 top 400 had paid taxes at the same rate as the top 400 in 1955, the IRS would have collected another $90 billion in revenue in that one year.  Think about that.  Think about what could have been collected over many years if the superrich did not have such a tax advantage.  Think about that in the context of our incredible national debt.  One use of all that incredible untaxed wealth was to maintain control of the political system.  Billions and billions of dollars have been piling up in the pockets of America's richest class, so that even in this current economic meltdown they still have enormous wealth.

Attacking economic inequality could take many forms, including better tax policies, such as much, much higher tax rates on the richest people, and, as now being discussed, curbs on the obscene incomes of CEOs and others in the private sector.

As to the Obama administration, consider these facts: Mary Schapiro who is the new chair of the Securities and Exchange Commission received way over $1 million from two companies for deferred compensation and a lump sum payment of over $7 million from another entity.  The new Treasury Secretary who was a tax dodger received over $400,000 in severance from the Federal Reserve Bank of New York.  The new Attorney General received $1.3 million in severance pay from his former law firm.

My point is that we have a plutocracy running the nation that is bipartisan and the elite, powerful people are also overwhelmingly exceptionally rich.  Which means that we are unlikely to see effective, new public policies that attack economic inequality.  In turn, this means that most of the nation's income and wealth will continue to flow to relatively few people as out middle class continues to merge into a large Lower Class.  This is not the change many of us have been waiting for.  For far too many years we have had nothing but delusional prosperity and that is likely to continue, unless there is more public uproar about achieving economic justice not just economic recovery.

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Joel S. Hirschhorn has succeeded as: a full professor, University of Wisconsin, Madison; a senior staffer, U.S. Congress (Office of Technology Assessment); head of an environmental consulting company; Director of Environment, Energy and Natural Resources, National Governors Association; now an author and consultant. Recent books are: Sprawl Kills - How Blandburbs Steal Your Time, Health and Money, and Delusional Democracy - Fixing the Republic Without Overthrowing the Government. He has published hundreds of articles in newspapers, magazines, journals and on many web magazine sites. He has given hundreds of talks at a wide range of conferences worldwide. He focuses on American culture, politics and government, and health issues.