We Can Begin to Tackle Income Disparity

Here’s a headline in a recent Business Week story that gives a snapshot look at what happened in corporate America from 1990 to 1995:

“CEO pay +92%, Corporate Profits +75%, Worker Pay +16%, Worker Layoffs +39%.”

The highest-paid CEO in America earned more than $65 million in 1995, with 30 executives earning more than $11 million each. The story might have added that consumer prices rose 17% over that period, so workers had no real gain at all.

The headline describes a picture that is becoming all too clear. The rich are getting richer--much richer--and the poor are getting poorer. Those in the middle are struggling to stay afloat and frequently sinking. And, reinforced by the huge rise in the stock market, the distribution of wealth and income, including capital gains, has become even more unequal than by the personal income measure, which excludes capital gains.

Labor income has also been distributed in an increasingly unequal fashion. College graduates have been gaining significantly. Those with merely high school diplomas have been getting nowhere, and income for school dropouts has been a disaster.

To be fair, all this is partly a phenomenon common among advanced industrial countries, but research indicates that the condition is probably worst in the United States. The political reaction ranges from denial to ideologically driven assertions that it is all for the best and any effort to make income less unequal will only hurt the economy and make everybody worse off.

Neither response is appropriate. The market system does many things very well, but economists have long pointed out that there is no necessary justice in income distribution. How to improve it is a tough problem, but there are things to be done.

For instance:

* For those executives at the top, although they are only the tip of the iceberg, it might be a good idea to remove all tax deductibility for annual compensation in excess of $1 million. This wouldn’t stop the high pay, but it might make it a bit more costly, so stockholders would have an incentive to exercise more restraint. And it would give Uncle Sam a bit more money to help out elsewhere.

* Instead of moving to lower taxes on capital gains, we should move to make them effective. Capital gains are a major source of income for the very rich but are currently taxed at a maximum rate of 28% only to the extent that they are realized--and not at all if passed on in an estate. Taking into account the delay of taxation until realization or its complete avoidance, the effective rate has been put at about 7%. We should institute full taxation of real capital gains, eschewing those relating only to inflation, as they accrue.

But all this is just leveling off the top and, while understandable from the standpoint of fairness, it does not get to the heart of the problem: improving the lot of the bottom and the vast middle.

On the tax side, what we need here is a considerable expansion of the earned income tax credit, which rebates some or all of the tax paid by low-income workers or gives cash refunds when the credits exceed tax liabilities. Although labeled the best anti-poverty program ever by President Reagan, the EITC is a major target of current Republicans.

President Clinton has expanded it substantially, but more needs to be done, particularly in the way of ensuring that low-income workers do not lose such benefits as food stamps, low-rent housing and Medicaid as the credit raises after-tax incomes and enables them to get off welfare.

We should also promptly raise the federal minimum wage, which, at its current $4.25 an hour, is at a 40-year low in real terms. Clinton’s proposal to raise it in two steps to $5.15 is similar to a measure passed in 1989 with overwhelming congressional support, including that of Senate Majority Leader Bob Dole (R-Kan.), the presumptive GOP presidential nominee. The latest proposal, however, is apparently opposed by many Republicans even though the increase would bring the minimum only, when factoring in inflation, to where it was in 1956.

In fact, a bigger increase is in order. The dogmatic claim that raising the minimum wage would cost jobs is contradicted by a number of major studies showing that past increases have brought little or no job losses, and in some cases appear to have increased employment.

Fundamentally, we have to give all of our population the tools to earn high incomes and the opportunity to do so. It is well established that incomes are correlated with education. That is becoming all the more true in the technologically advancing Information Age. Every chance to go to college and university should be given to our young, through major government scholarships and tax benefits.

Here again, Clinton has made some modest proposals, but they have gotten nowhere in the senseless wrangling over “balancing” the budget. What a contrast with the huge GI Bill of Rights that gave generous support to millions of Americans in pursuing higher education after World War II. That, by the way, was instituted with a federal debt more than 100% of our gross domestic product, compared with a current debt that is half of GDP. We should implement a new, equally generous education bill of rights now.

We should also promote extensive apprentice programs and other measures bringing schools, students and employers together. Programs that can promise high school graduates jobs with a future will encourage students to stay in school to take advantage of them. For those losing their jobs or trying to improve them, we should have vouchers that would pay for training and retraining, a proposal supported by Clinton and many in Congress, but at this time also bogged down.

We should also have major investment in public infrastructure. This would not only offer well-paying jobs as the investment is undertaken, it would also permit the rebuilding of safe, clean cities with fast, convenient urban-suburban transportation that would offer access to good jobs for all of our citizens over the long term.

And finally, on those worker layoffs that threaten so many, even as they raise the stock prices of their companies, appeals to the humanitarian and long-run interests of the firms may help a bit. But rather than plead with corporate executives to ignore the bottom line, the improvement of which is after all their raison d’etre, we should change the rules by which it is calculated.

Layoffs of workers have a cost to society, in terms of all of the workers’ loss of future income and in the increases in unemployment insurance expenditures, retraining expenses and welfare and other public outlays. Firms should feel perfectly free to lay off workers in the goal of greater profit, but only as long as they offer full, appropriate severance pay and/or taxes to the government to compensate for those costs.

This short list won’t solve everything, but it is a start.