Trick or Trickle?

Over the past few years, the enormous share of income claimed by the very rich has become one of the hottest of political issues. (See “Economic Injustice for Most,” Commonweal, August 13, 2004.) Much of the data documenting the income shifts has been collected by two economists, Emmanuel Saez, of the University of California at Berkeley, and Thomas Piketty at the École Normale Supérieure in Paris. Their study is based on analyses of the entire database of personal federal income tax returns.

The primary revelation from the Saez-Piketty research has been how much of the nation’s income gains have gone to a tiny group of the very richest people, a fact that had been obscured by the much broader groupings produced by Census Bureau samples. Saez and Piketty have recently updated their research to include 2005 tax filings, which confirm that the trend toward greater income concentration has grown even more pronounced.

The figures are startling. Since 1980, a period of prolonged stagnation in inflation-adjusted median incomes, the income share of the bottom 90 percent of families has fallen by about 17 percent (see Figure 1). Even the very upper–middle class folks in the 90–95 income percentiles barely kept their shares constant, while the top one-thousandth and top ten-thousandth have more than doubled and tripled their shares. The top ten-thousandth, fewer than fifteen thousand taxpayers, now collect 3 percent of all personal income.

Figure 2 shows what a historic development this has been. Not since 1928, hardly the proudest year in American economic annals, has the share of the very richest been so high. One can read a lot of history in this chart. The great fortunes of the very rich were hit hard by the Depression and the advent of progressive taxation. Then, in the aftermath of the industrial buildup for World War II, unionized workers won broad improvements in working conditions, wages, and job security. The view that the 1950s and ’60s were an economic golden age is more than mere nostalgia. It may have been the moment of fairest income distribution in the nation’s history.

Beginning in the 1970s, that postwar dispensation came undone under the twin assaults of oil-producing countries and global competition. Aggressive entrepreneurs took over American corporate leadership, and largely restored competitiveness and technical leadership. But working families paid most of the price—in falling inflation-adjusted wages and the loss of crucial health and pension benefits and any vestige of job security.

While many of the wrenching economic shifts of the early recovery period may have been justified, the record of the last decade has been one of sheer acquisitiveness. Supply-side, or “trickle-down,” economists justify income inequality for its role in fueling investment. But, as Figure 3 shows, in the recent past, business investment has stagnated even as corporate profits have soared.

What are companies doing with their profits if they are not investing them? By happy coincidence, the Bush administration and the Republican Congress slashed taxes on dividends so companies can return more of their cash piles to their shareholders. And what do the wealthy do with their rivers of cash? Well, as the economist Austan Goolsbee has recently shown, with the exception of a few billionaires like Bill Gates and Warren Buffet, they give relatively little of it away. But they generously fund political campaigns to ensure that their tax preferences keep on coming, and that their share of the country’s income stream continues to grow.