Publications

Multiplier Effect, October 21, 2011

I study the distribution of wealth and income here at the Levy Institute, so I read the first five hundred words of Robert Samuelson’s Washington Post column on inequality (“The Backlash against the Rich,” October 9th) with interest and approval. But I knew it couldn’t last. Once Samuelson gets beyond description and attempts explanation and analysis, he is clearly out of his depth.

Samuelson turns his gaze to the proposal to raise income taxes on those with incomes above a million dollars, whom he refers to as “job creators”—a Republican Party talking point that Samuelson repeats uncritically. He makes two mistakes in citing a paper [Working Paper No. 589], written by my colleague Ed Wolff, in which the distribution of assets for the top 1% of households by wealth (total assets minus total debt) is compared to the distribution for the bottom 80%. First, Samuelson seems to assume that those people who own privately held businesses are small business owners. Second, not all of the people in the top 1% of household wealth are households making more than $1 million a year in income.

In Ed Wolff’s paper we see that the wealthiest 1% of U.S. households in 2007 held more than half of their net worth in “unincorporated business equity and other real estate,” and only 26% in financial assets such as stocks, mutual funds, bonds, etc. It is clear that Samuelson is translating the former category as “small and medium-sized companies.” This could be an honest mistake. But it is a mistake. There is no evidence in Ed Wolff’s paper that the top 1% contains all (or no) “small business owners.” Just that they hold twice as much wealth in privately held businesses as in publicly traded businesses. And as Kevin Drum of Mother Jones put it, “[w]e’re talking about people who earn upwards of a million dollars a year, after all. You don’t get that from taking a minority stake in your brother-in-law’s auto shop.”

If we actually look at those U.S. households receiving $1 million or more in income (using the 2007 Survey of Consumer Finances, as Ed Wolff does), we are talking about 0.37% of households. In terms of the composition of their assets, the picture is pretty much the same for them as for the wealthiest 1% of U.S. households. But only 24% of the top 1% of household wealth are in the million-dollar income club. If you look at the bottom 99.6% or the bottom 80%, the picture is very different. While the average net worth for the millionaires is $23.5 million, the rest of us have just under $445,000, and the bottom 80% have less than half that.

Even if you assume that all those people making a million or more in income are small business owners (stop laughing now, I’m trying to make a point), where is the evidence that raising income taxes on the wealthy will prevent them from creating jobs? There is no evidence. Here are the facts: Clinton raised the top rate to 39.6% and employment expanded by more than 20% during his presidency, while Bush the Younger lowered top rates and saw only a 2.3% increase in employment during his eight years. This is correlation, not causation, of course, but certainly no evidence for the claim that raising top rates is a job-killer.

Samuelson might appeal to logic, perhaps. But logic must deny the appeal. There is no valid logical argument, merely this: (1) raise taxes; (2) ???; (3) fewer jobs. There is, however, a case to be made in support of raising taxes on those with high incomes. Raising income taxes will increase the incentive to use profits to invest in the business (thereby increasing business-owners’ wealth) rather than as income. Which one of those options creates more jobs?

More importantly, Samuelson misses the elephant in the room in his discussion of the possible reasons for the increase in inequality over the last 30 years: public policy. Beginning with Ronald Reagan and continuing through Bush the Elder, Clinton, Bush the Younger, and right through to Obama, public policy has shifted more and more toward the benefit of the wealthy. In just about every sphere of public policy that impacts the economy, there has been an almost unilateral shift from policies that help workers to policies that help employers. From agricultural subsidies and embargoes that favor agribusinesses, to free trade policies that help manufacturers to move their plants to the location of the lowest bidder, and labor policies that have enabled the rollback of union power almost everywhere except the public sector itself, the policy landscape has looked ever more appealing to the wealthy and ever more bleak to the worker.