Supply-Side Tax Cut Policies Have Contributed to a Growing Skewed Distribution of Income and Wealth in America

Sep 9, 2010   //   Economy

One of the effects of supply-side tax cut policy that is often overlooked is its contribution to a growing skewed distribution of income and wealth favoring the top 1% of income earners in this country since 1980.  The net effect of this shift has been said to be equivalent to every family in the bottom 80% of wage earners in this country writing on average a $10,000 check every year to the upper 1% of America.  When one examines these figures by the number of families involved there has been a shift of almost $1 trillion dollars/year out of working America. As our economy is largely based on personal consumption (70% of GDP) this policy has worked to weaken the key driver of our economy – the vast majority of working families in America.  Additionally, as the wealthy use the tax benefit to accumulate income producing financial instruments that are taxed at a lower rate than ordinary income, the wealthiest can actually have a lower net tax rate than working America (Warren Buffet himself has objected to having a 17.7% net tax rate on $46 million in income in 2006 where his secretary’s combined rate was 30%).  I issued the following to MSNBC’s The Dylan Ratigan Show on this matter.

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July 22, 2010

I have liked Dylan’s frankness since I first saw him on Fast Money.  This piece involves tax policy and the economy.

The Reagan/Bush supply-side tax cuts are largely responsible for increasing our national gross debt from less than $1 Trillion at end of 1980 to almost $12 Trillion at end of 2009 (what was already on the books).  The impact of this tax cut policy on the economy, however, is largely being missed.

We are a consumption-based economy with personal consumption being the largest contributor at 70% of GDP (but all other components: gross investment, government, and net exports are also consumption based).  Outside of Switzerland, the US has the most skewed distribution of wealth and income than any other industrialized western democracy; the top 1% of America holds over 40% of this country’s financial wealth, the top 5% holds almost 70% and the bottom 80% holds 7%.  Since 1980 there has been a growing divide in income distribution in the US with the top 1% realizing a 7% increase and the lower 80% realizing a 7% decrease.  Supply-side tax cuts have been contributing to this growing divide:  the average benefit to the top 0.3% of America (the millionaire income class) is about $10,000/mo; to the middle 20% of America about $60/mo; and to the lower 20% of America about $1.67/month.  Larry Summers has said that this growing divide in income distribution is equivalent to every family in the lower 80% of America writing a $10,000 check every year to the top 1%; but what does that mean to the economy?  If we examine that figure relative to the number of families involved, it amounts to an income shortfall of almost $1 Trillion/year to the lower 80% of America (this population has a lower savings rate than the wealthy and thus spend more of what they make).  Whereas the wealthy will perhaps spend 25% of tax cut benefits in consumption (figure I have seen) and the poor will return the benefit dollar per dollar into the economy, if income distribution had remained the same and we assume a difference of even one half of that trillion dollars going into consumption, it would today be equivalent to a sizable stimulus package every year for our economy.

The anger I see expressed on the conservative side over the term ‘wealth redistribution’ is unfounded – it is actually smart capitalism.  What better way to invest in the US economy than to take a portion of what the wealthy make (and I speak having been in the top 1% of income earners during the 1990′s) and give it to the driver of the American economy, the consumer, especially those who need to spend it.  This additional money into the economy leads to greater corporate revenue, puts positive pressure on employment and inventory, and should lead (if managed properly) to increased corporate earnings that support higher stock prices.  It seems that everyone does better – and this, in part, is what happened in the 1990′s when we experienced strong economic growth and an unprecedented run in the stock market.

Supply-side tax cut policy has simply failed; the policy is short-sighted and speaks to greed – and it has been around before under another name, ‘Horse and Sparrow” (if you feed the horse enough oats, some of it will pass to the road for the sparrow).  Wealth redistribution is not socialism, it is in my opinion an investment in the American economy - it is smart capitalism.  I personally did quite well by it in the 1990′s.

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