The Gray Line Of Stagnation And Why Income Inequality Should Matter To Hillary Clinton

Brad Plumer of Wonkblog published a piece today (“The shocking truth behind the saddest chart in Congress”) that readers of this blog will find all too familiar. It was accompanied by this chart:

Keep an eye on that bottom line, that depressing gray line that represents, quite likely, everyone reading this post. Think about all the colorful activity above and all the stagnation that defines the movement of that dreary gray line at the bottom.

Then think about the next presidential election. Many of us believe it is too late for anything meaningful to be done during the Obama administration about trying to make that bottom gray line as dynamically active as those colored lines above it. Improving the economic lot of the bottom 90% of Americans is not even on the radar screen for the Republicans who now effectively have control of the legislative branch of the federal government, as well as control of many governorships and state legislatures around the country.

But if I were Hillary Clinton, who most certainly is going to run in 2016, I would make that 90% my priority. In every speech, in every interview, in every op-ed she will write or every Tweet she will peck out between now and then, my focus would be on that 90%, that gray line of stagnation.

Wonkblog’s Dylan Matthews also published an interesting chart a couple of months ago:

Read this amazing paragraph that Matthews included with the graphic:

Until the 1970s, the bottom 90 percent had actually seen its income grow more than any other income group. The income gap was shrinking. But the ultra-rich quickly reversed that trend. In 2007, the top 0.01 percent had an average income almost seven times that of 1917; the average income of the bottom 90 percent had barely tripled. The country has grown more unequal, not less, since then. And, interestingly, the 90-99th percentiles all saw their average income grow faster than all but the tippy-top of the top 1  percent. The divide between the rich and the rest isn’t the only gap growing, in other words. The gap between the ultra-rich and the merely rich is growing, too.

Again, look at that graph. That red line representing you and me and most people in America was, from about 1940 through the early 1970s, on top of the stack. We did all right as a country, didn’t we? We did all right as a country with that red line on top, wouldn’t you say? And that red line of 90 percenters was on top of that deep blue line of the richest-of-the-rich until the 1990s. What happened to thrust that blue line of wealthy folks so high into the sky?

In 1997—with a Clinton in the White House—capital gains taxes were reduced from 28% to 20%, via the Taxpayer Relief Act of 1997, which was one of the largest tax cuts in history (the child tax credit and some other items meant to lure Democrats was a part of the mix).

The bill was sponsored in the House by Republican John Kasich (now the right-wing extremist governor of Ohio) and was opposed by some among my contingent of bellwether liberal legislators: Bernie Sanders (in the House at the time), Barney Frank, Elijah Cummings, Ed Markey (now running for John Kerry’s senate seat in Massachusetts), and Henry Waxman. Sadly, only eight Democrats in the Senate voted against final passage of the bill (the late and great Paul Wellstone was one of them).

Bill Clinton, Hillary’s husband, signed it into law, saying, among other things, that he had reservations about the capital gains tax cut component of the law:

I continue to have concerns that the across-the-board capital gains relief in H.R. 2014 is too complex and will disproportionately benefit the wealthy over lower- and middle-income wage earners.

Well, those “concerns” turned into reality fairly quickly, as the graph above demonstrates, especially since Republicans, via George W. Bush’s signature in 2003 (part of the infamous “Bush tax cuts”), further lowered the capital gains rate for the wealthiest Americans from 20% to 15%.  Just what effect have these insanely low tax rates had on income inequality? As Wonkblog’s Dylan Matthews says, a lot:

If you don’t look at capital gains, the top 0.01 percent only captures 3.15 percent of income in the United States. That’s about a third smaller a share as when capital gains are included. That suggests that capital gains income is exacerbating the income inequality problem.

Here’s my point: Hillary Clinton, running in 2016, can use the issue of income inequality as a nationwide campaign to not only win the White House, but, at least as important as far as I’m concerned, win control of the House and Senate for Democrats, which would be the only way she could effectively govern and do a damn thing about income inequality.

She should begin with Bill Clinton’s rather muted and understated warning in his signing statement in 1997 that the tax-cut law would “disproportionately benefit the wealthy over lower- and middle-income wage earners,” then move on to attack Republicans for the 2003 tax cut (she voted against it), and, finally, base her campaign on moving the trajectory of that sad, gray line that represents nearly the entire American electorate. The ridiculously low tax on capital gains, which overwhelmingly benefits the wealthy, is the perfect vehicle to make the case that America needs a come-to-Jesus moment over the growing disparity between the rich and poor in our country.

In other words, she should run for president not just because she has a very good chance of becoming our first female chief executive, an amazing achievement in itself, but because if she can do something to move that gray line of stagnation she will be the people’s champion in the vein of a Franklin Delano Roosevelt and go down in history as something more than being the first President of the United States without a Y chromosome.

And, even as conservative pundits and politicians are trying to pin blame on her for the the tragedy in Benghazi, she should start talking about these income inequality issues today.

19 Comments

  1. The rise of income inequality is indeed a serious concern with implications, bad implications, for the very fabric of American culture, but I’m not at all sure that raising the capital gains tax rate will help that much. I am in favor of doing it, even though that would negatively affect me personally since half of our savings are in mutual stock funds. But in thinking about that, I realize that the capital gains tax only comes into play if you sell the stock, or when your mutual fund sells some in the process of “management”. If you don’t sell, you don’t pay tax except on a stock’s earned income. Further, if the capital gains rate is increased, it seems to me that investment would veer toward stocks that pay dividends rather than reinvest earnings for growth, and would probably have some negative effect on jobs.

    I can think of one other area that could be tapped: the federal inheritance tax. If Hillary were really serious about the problem she probably ought to push to bring the cap down from it’s present $5 million to say, $1 million. That almost happened this year and it’s no coincidence that it’s one of the few things that got “fixed”. The GOP will complain about this affecting “small businesses” and causing the breakup of family farms, and they would be right. But what’s really at issue in the inheritance game, seems to me, is just how much of a financial boost ought to be given by one generation to the next. If it’s too much, then we’re into “dynasties”, something that’s been prevalent among European upper-crusts for a long time. Don’t look now, but dynasties are already here in America – you can find a list by surveying the customers of Ivy League and other top universities.

    What this is, whether capital gains or inheritance or whatever, is, unfortunately, class warfare. I think this has always been a menace (think plantation owners in the ante-bellum South) and the only reason it hasn’t wrecked American society before now, I think, is war. War, the old kind of war, WW II war, brought all classes together and caused pols to work together. That kind of war is absent now. No more drafts. No more Cold War threatening a nuclear winter. Now we employ young mercenaries and high-tech proxies in a struggle where victory is defined not as survival of the nation but as the absence of any attack at all. Now class warfare is out in the open. ‘Taint pretty.

    Sorry to be so pessimistic – I hope someone can shine a better light on this.

    Like

    • Jim,

      I think one of the factors that plays heavily in the income gap issue is what we used to call loyalty.

      You and I were brought up in a culture that said if you work hard and keep your nose clean, you will be rewarded along the way. Our employers generally recognized our efforts and we got not only got merit raises, but promotions – climbing the ladder to success. It was a mutual admiration society with mutual loyalty. This was especially true for utility companies, banks, retailers, and, yes, government, including education and the military. But, if you screwed up, you were fired. If you were trapped in a certain level of competence, you weren’t let go. But neither were you going to get very high on the ladder. Even in that case, the reciprocal employee-employer loyalty continued.

      The changes in the capital gains tax may have helped the rich get richer, but that does not explain why the income of the average Joe and Jill stayed flat after the 1970’s. Many reasons are offered of course: the expanded use of technology to increase productivity, the shift in emphasis from stakeholders to stockholders, the decrease in the quality of education, and the rise in unemployment and underemployment.

      But the real kicker is globalization – sending jobs overseas that undermines jobs at home. Loyalty thus become passe; no longer a valued ethic in business. It has become yet another American value that has become marginalized, if not replaced, by the almighty dollar.

      Dr. Samir Naim-Ahmed in his April 21, 2007, essay, “Human Rights And Globalization,” wrote:

      “[With globalization] Everything has to be dealt with as a market commodity judged by its economic value rather than its social value.

      “So governments find themselves in a very paradoxical situation. If they try to abide by UN human rights agreements which they signed, they would be violating the globalizations agreements, which they also signed! and they would be criticized or even penalized for this violation ( by cutting the aids offered to them by international institutions ), and if they try to abide by globalization agreements they would be necessarily violating the human rights agreements and would be criticized for that in the human right reports and the UN statistics on human development would show them lagging behind in indices of human development!!

      “Transnational corporations which are steering the economic globalization are not at all directed by ethical or humanitarian principles . The maximization of profit is the major if not the only driving force for all their activities .

      “[Therefore, what is needed is] a government which is capable of making economy in the service of man instead of making man a victim and a slave for the market economy.”

      So at the end of the day, maybe what we have here is just socialism versus capitalism; with socialism losing badly. If so, then maybe we all just need to take a deep breath and remember the wisdom of Winston Churchill: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

      Herb

      Like

      • Herb,

        I agree, globalization is probably the most significant of all the economic changes that have affected income disparity. Using scientific progress and computer reverse-engineering, it has changed almost every product except services into commodities where quality is no longer a prime factor in marketability. Quality for everything from cars to computers to t-shirts is uniformly high, and therefore, price determines sales and labor pay is depressed to the lowest level.

        So, I’m agreeing with you and Naim-Ahmedas far as globalization goes but rather than thinking Churchill’s statement still applies, I think it has so changed economics from what it was in Churchill’s time that socialism ought not be the anathema it was. A compatible mix of capitalism and soicalism is, I submit, the only way the modern world can avoid a new Guilded Age. Capitalism works great in an economy made up of small businesses, but it stinks in one made up of giant, unregulated corporations and banks. J. K. Galbraith was, I believe, one of the first to describe this clearly.

        Jim

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        • Jim,

          Good points, as always. We have clearly gotten to the point where capitalism and socialism need to be redefined against this new paradigm of everybody chasing the buck but those who don’t are losers, takers, the 47%, etc.

          It’s also confusing because we’re mixing apples with elephants. Capitalism is a system of economics, whereas socialism is a system of governance. In most European countries, plus Canada, Australia, and Japan, there is a mix of the two. In some places, like Germany, it works swell. Other places like Greece, not so much. Just something to keep in mind.

          Now, about the estate/inheritance tax. . . I’m totally against any public policy whereby the government profits off an American citizen’s death. Furthermore, there is no Constitutional justification for it. On the contrary, the estate tax is a confiscation of property in violation of the 5th amendment which ends with the phrase, “nor shall private property be taken for public use, without just compensation.” Of course, the courts, including SCOTUS, have chosen to ignore this little pearl, just as they have ignored other parts of the Constitution. They call it a transfer tax. or gift tax, or even a capital gains tax.

          So, I side with the conservatives on this one. But I could go with the capital gains tax using the property values at the time of death as the basis with any future profits from the sale of those assets taxed at capital gain rates (which I also believe should be the same rate at the income tax.)

          I also agree that government interference in trying to determine or set some artificial standard to “equalize” income levels is a bridge too far. At least for me. That’s something only Karl Marx could love.

          Here again is yet another fixable problem. But Congress is out to lunch. As usual.

          Herb

          Like

          • Herb,

            Your stance on the inheritance tax is interesting. Now, speaking of your excellent point about the 5th amendment, we are, I think, into philosophy and, dare I say it, religion? Consider this question: If the owner of property is dead, then from whom would the government be taking it? Careful. I have come to know your thinking. 😀

            Jim

            Like

        • Jim,

          Well, damn. I just poured a scotch and was settling into my big Lazy-Boy to watch 60 Minutes, when I decided to check my email. And there you are giving me this poser: “If the owner of property is dead, then from whom would the government be taking it?” Good point, I said to my dog. Why didn’t I think of that??? I then began to roll through possible retorts, thereby missing what I’m sure was a good 60 Minutes program.

          Anyway, I winnowed my possible responses down to one. (You’re welcome.) Property, including realty and personalty, carries a title and the title may be formal or implied. Let’s say you come across a dead guy laying on the sidewalk. While waiting for the police, you check his wallet and find $1.000. Now it just happens that you need $600 for something, so you relieve the dead guy of that amount, leaving him with $400, and nobody’s the wiser.

          Now, since the guy is dead, does taking the $600 constitute robbery? I say it does. He did not relinquish or transfer title to you by prior agreement, and there was no extant financial transaction involved to which he was a party, being dead and all.

          The same principle holds with the property in an estate of a dearly departed. Even in the absence of a will or a personal trust, the relatives cannot take what they want out of the deceased home, much less the bank accounts. It’s a judge who decides how the estate is distributed, which is to say, who gets title to what – probate.

          It is my opinion, then, that the government has no claim (complelling interest) against an individual’s estate because it is barred by the “takings” clause of the 5th Amendment. And a statute to the contrary does not override the Constitution. So, if the government wants to take title to the property of a dead citizen, then the Constitution needs to be amended accordingly.

          At least that’s my story and I’m sticking to it.

          Herb

          p.s., Does this confirm what you thought was my thinking?

          Like

          • Herb,

            Does this confirm what you thought was my thinking?

            Nope. The 5th Amendment says, emphasis mine, ” . . . nor shall private property be taken for public use without just compensation.”

            My computer dictionary defines “private” as “belonging to or for the use of one particular person or group of people only . . ”

            Knowing your position on religion then (which is the same as mine) and accepting that the word “private” refers to a person and not a corpse, I thought you might revise your opinion. So, doesn’t it come down to whether a corpse is still a “person”?

            I am reminded of a passage in Mitchner’s “Centennial”, I think it was, wherein he described how the Native Americans handled this. When a brave died, his neighbors simply came to his tepee and divided up his belongings amongst themselves, first-come, first-served. Similar to my suggestion, no?

            By the way, they solved the widow problem as well – she was left to die in the elements, having no status as a human being without her man. That part I’m not advocating. 🙄

            Jim

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          • And by the way, Herb, your dead guy analogy? I don’t see how that precludes any kind of adjustment in the inheritance laws, it simply means the tribe can decide on the rules. I see this as also true relative to the 5th amendment, otherwise any inheritance would be unconstitutional, wouldn’t it?

            Like

          • Make that “. . . any inheritance tax would be unconstitutional, wouldn’t it?”

            Like

            • Jim,

              Well, the whole issue does sort of revolve around semantics doesn’t it? The Framers probably put the “private” in there to distinguish the type of property. Of course, the takings provision is used all the time for eminent domain. If the city of Joplin wants to put a sewer line through your living room, they have to compensate you for the “taking” of your living room, not to mention the rest of your house.

              On the other hand, neither the city nor the state and federal governments have a right to take that very expensive and original Van Gogh you have hanging on the wall without paying for it. And that includes your heirs. But, again, that’s just my opinion.

              In any case, we’re probably at an impasse here. There are other arguments I could use to make my case that an inheritance/estate tax is a “taking” by the government. But I think I’ll just let it go. Besides I want to watch the 60 Minutes show I recorded last nite.

              Herb

              Like

          • Herb,

            I’m afraid I can’t agree with your “work hard and keep your nose clean” and “you will be rewarded along the way” view of historical business/labor arrangements. The history of the labor movement, for instance, would tell a different tale. Globalization is just another way for business to exploit labor, that’s all. I can confidently predict, though, that some day, perhaps long after our children’s grandchildren are dead, the exploitation will be addressed by the exploited. Hopefully it won’t be like a French Revolution but more like an American one, but as the world’s workers grow a bit wealthier and wiser, they will refuse to settle for the crumbs they are offered. Once the upward pressure on wages and benefits is world-wide, globalization will cease being a way to exploit the working class.

            In any case, socialism is also an economic system, properly understood, and, sure there should be a proper mix of the two economic systems, depending on the times and the places and the culture.

            As for the inheritance tax, I made my position clear in blogs past (I’m a huge fan), but I do want to address your Fifth Amendment argument, which begins with what I would (respectfully, believe it or not) consider a ridiculous premise:

            I’m totally against any public policy whereby the government profits off an American citizen’s death.

            This view of the inheritance tax is not quite as bad as saying that taxation equals theft, but it is close. “Profits” off a death? No, the government is executing (what I consider to be proper) social policy for the public good by seeing to it that wealth is not concentrated in the hands of a few families here and there. That’s all that is going on. Taxation is not profit taking, my friend.

            As for your claims that the Supreme Court has it all wrong, well, take that up with the Constitution, which essentially (and necessarily) made the power to tax a supreme power that trumps all others. In Billings v. United States (1914), the Court put it very nicely:

            It is also settled beyond dispute that the Constitution is not self-destructive. In other words, that the powers which it confers on the one hand it does not immediately take away on the other; that is to say, that the authority to tax which is given in express terms is not limited or restricted by the subsequent provisions of the Constitution or the Amendments thereto, especially by the due process clause of the Fifth Amendment.

            In 1916, via Brushaber v. Union Pacific, we find this:

            So far as the due process clause of the Fifth Amendment is relied upon, it suffices to say that there is no basis for such reliance, since it is equally well settled that such clause is not a limitation upon the taxing power conferred upon Congress by the Constitution; in other words, that the Constitution does not conflict with itself by conferring, upon the one hand, a taxing power, and taking the same power away, on the other, by the limitations of the due process clause.

            Thus, the inheritance tax has nothing to do with the Takings Clause. Neither does progressive taxation, which could also be subject to your constitutional conception of the Takings Clause. In short, it would be dumb of the Founders to write a Constitution that gave the federal government the power to tax but then allowed someone to claim that the Takings Clause prohibited the government from collecting taxes.

            And, by the way, I don’t advise you to not pay your taxes (which, given your presumably large income–Scotch?–is certainly subject to some progressivity!) based on your Takings Clause theory and hope to test your theory in court before you have to cough up the dough. Because the feds have that one covered too:

            The Fifth Amendment prevents the federal government from taking property without due process of law. U.S. CONST. amend. V. Due process generally includes a right to notice and an opportunity to be heard. The Supreme Court has held that the procedures contained in the Internal Revenue Code fully satisfy the due process rights of taxpayers. See Phillips v.  Commissioner, 283 U.S. 589, 595-99 (1931) (“The right of the United States to collect its internal revenue by summary administrative proceedings has long been settled. Where, as here, adequate opportunity is afforded for a later judicial determination of the legal rights, summary proceedings to secure prompt performance of pecuniary obligations to the government have been consistently sustained.”). The argument that due process requires a hearing before tax has to be paid or can be withheld from wages is frivolous.

            As usual, I’m just trying to be helpful, Herb, my man. Just trying to keep you out of the hoosegow.

            Duane

            Like

  2. ansonburlingame

     /  May 12, 2013

    To all,

    Jim raises the same point that I have made several times herein. If income distribution is so bad in America today what SHOULD be done about it. Jim, it seems is frustrated trying to find such a way. I also believe that changing Capital Gains and Inheritance taxation would do little to really impact such income distribution issues. Jim almost seems to have acknowledged that thought and as well points out at least one big downside of changing inheritance taxation, the family farm issue. Such families may be “land rich” but for sure, many are not wealthy in terms of how much money they have. And yet they would have to literally sell the farm to pay taxes if “Granpa” died.

    Almost all “liberal” ideas to fix income distribution, make it more equitable, is to rob Peter to pay Paul, through taxation. I reject such schemes, out of hand. Taxes should fund the various governments, not be used as a tool to rob one to pay another, by and large.

    Bottom line for this conservative is thar WEALTH must be EARNED through production of goods and services that can ultimately be sold, for a profit (make more money than is put in the system to begin with). That does NOT mean I call for starving all the poor in the land, etc. Of course there must be a safety net of some magnitude. But such a safety net should PROTECT the poor, not try to make them “wealthy” in terms of material acquisitions (big screen TVs and cell phones anyone?)

    Everyone should have money to “live”. But how well they should live if they cannot produce, well is not that a part of entitlement arguments today?

    With that in mind, does not the term “a rising tide lifts all boats” become applicable?

    As well some believe the distribution of IQ is “unfair”. Well try to change that curve using the force of government!!! Smart people that work hard will always make more money that low IQ and “lazy” people. No way government can change that law of “nature or economics”, at least in a free country.

    Anson

    Like

    • Anson,
      Just to clarify, I suggested an upward adjustment of the inheritance tax because I thought it could make some difference in income inequality. You have, as you often do, reinterpreted what I said to fit your own viewpoint. Breaking up the “family farm” might seem unfair but I hope you and other readers can see a different viewpoint, that maintaining a heritable right to such property through government protections can be seen as unfair to others because it enables dynasties. Breaking up farms at death would mean that new generations would have to start from a more-level playing field.

      This is in fact the heart of the matter, I think, and it goes to culture. Do we promote fairness through government or do we allow economies of scale to build dynasties, in effect, a form of royalty? I do realize that this runs counter to the common perception of equal access to the so-called American dream, but as in the discussion Herb and I had about globalization below, the rules have changed and the goal posts have moved. I would like to see a public discussion that might change such memes. Jim

      Like

  3. ansonburlingame

     /  May 13, 2013

    Jim,

    I have no idea how to do so, but to make you point on inheritance tax changes one should “run the numbers”, fairly. Make the changes suggested and how much does federal government revenue go up and what percentage of the population make it go up?

    X $Billion (annually) and Y% would be the answer it would seem. My “guess” is on a macroscopic level the number of $Billions would be relatively small as would the percentage of taxpayer, almost all of those taxpayers wealthy one (including “land wealth”)..Robbing Peter (small % of taxpayers) contribution more to government that is relatively onnerorous on them.

    Then consider how that extra money would be used? Any suggestions on that point?

    Then compare that effect (changing inheritance taxes) to the federal revenue enhancement and who pays to the extra to say 5% growth in GDP instead of the current 2.5%.

    For sure in the first case (a few pay a lot more) to the second one (everyone pays a little more) would seem to show the growth in the economy outweighs to robbing Peter to pay Paul approach. As well by breaking up a large chunk of wealth producing land into small chunks, one must consider the effects as well on changes to GDP, I would think.

    Just look what happened in Zambia (Rhodesia) when such policies were enacted.

    Anson

    Like

    • Nobody, least of all I, said that the inheritance adjustment would solve the problem by itself. I simply contend that along with some adjustment of the capital gains tax, it would help. “A journey of a thousand miles begins with one step.” As for comparing the U.S. to the Rhodesia situation, that’s watermelons to lemons. Rhodesia was a sad, dry, land-locked country primed for racial strife and the land confiscated was not from the dead but the living. And anyway, I am under no illusion that any legislator will take my suggestion seriously. I am presently working on my own family’s dynasty because I am a realist.

      Like

      • Jim,

        As I know you know, I am in complete agreement with your position on the Inheritance tax and appreciated very much your contributions above. My arguments aimed at Herb, also above, pretty much have the benefit of demolishing (in a friendly way, of course) that Takings Clause theory of his, as well as keeping him from succumbing to the temptation to test his theory by not paying his taxes. I am, at heart, a public servant and will, even in retirement, remain one. Perhaps he will thank me by sending me a bottle of his finest Scotch, post-haste.

        Duane

        Like

        • Duane and Jim,

          Jesus, I’m being double teamed. I mean, I like to stir things up, but now I’ve got all this additional research to do to make my case; not to mention having to address some new challenges that you guys have brought up. Of course, whether you accept my arguments or not is another matter.

          Anyway, given my current time constraints, it will be awhile before I’m able to put together a pithy retort or two for you two. So please be patient. Plus, I’m definitely going to need some more scotch!

          Herb

          Like

        • I think Herb may yet come around to our way of thinking, Duane. He’s a cerebral guy and scotch is known to have a salutary effect on the humors. 🙂

          Like

  4. ansonburlingame

     /  May 14, 2013

    To all three of you,

    The government can tax just about anything it choses to tax, but it must do so democratically, in my view. I seriously doubt that the “taking clause” will prevent onerous and unfair taxation as well. One could make the same argument and did so, I suspect, before we changed the Constitution to implement the income tax. All is fair in love, war and politics, but where might makes right in war at least, majorities make right in democratic politics.

    If we held a national VOTE to make drastic changes in the inheritance taxes, I suspect “take all we can from those rich people” would be the outcome. But to pass such changes legislatively in America, well Congress and the President have to do it. Good luck on that count, today, legislatively making drastic changes to inheritance tax laws and if I owned a family farm I would thank God for the filibuster and the GOP majority in the House, for sure and not worry about other “fat cats”.

    I also note that none of you addressed my question about how changing inheritance tax law MIGHT affect growth in GDP!

    Anson

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