We're Now Number 77 in Income Inequality (Tied With Turkmenistan)

06/09/2010 06:37 pm ET | Updated May 25, 2011

On Food and Cooking: The Science and Lore of the Kitchen can all too easily numb, but occasionally a few very simple numbers are worth pondering a bit more closely than others. Like these three:

The United States now ranks number 77 out of 142 countries in the United Nations Human Development Report's latest estimates of income inequality--tied with Turkmenistan, Tunisia and Georgia.

In the 2009 OECD review of the 30 most advanced nations, the United States ranked 27th---ahead only of Mexico, Turkey and Portugal.

Over the last quarter-century, IRS data indicate that the top one percent of American taxpayers increased their share of the nation's total pre-tax adjusted gross income from 10 percent in 1980 to 23.5 percent (in 2007).

These are not routine numbers. Yes, of course, we know there is great inequality in the nation. But something is going on here that is quite extraordinary. Consider the following bit of arithmetic:

If the top one percent had not increased its income share from 10 to 23.5 percent in recent years, then the bottom 99 percent would obviously still have a 90 percent income share. Quite clearly, the top one percent has somehow been able to capture huge amounts that would normally have flowed to the bottom 99 percent.

If the federal government -- instead of the top one percent -- had taxed away that 13.5 percent of income from the bottom 99 percent over this period, it would have been deemed an extraordinary outrage.

The top one percent was, of course, taxed on what it took in, but in practice--after accounting for various deductions and loopholes--only at an effective rate of approximately 25 percent (including state and local taxes.) In 2007 they kept roughly $900 billion of the $1.2 trillion they gained in that year alone.

If the federal government had collected this entire amount in taxes, it could have used $900 billion to offset a large share of the 2009 budget deficit of $1.4 trillion. If it were to capture amounts in this range annually for the next ten years it would dramatically reduce our current (and growing) $13 trillion national debt. Alternatively, of course, the funds could be used for health care, schools, new energy technologies and created much-needed public or private sector jobs. Or, quite simply, the amount taken from the bottom 99% could be returned in appropriate tax cuts.

A good part of the income bonanza received by the top one percent derived from the recent unusual financial sector gains: The top one percent owns more than half of all stocks, bonds, and mutual fund assets; the bottom 90 percent own less than 10 percent. When the value of equity in homes and other assets are added in, the top one percent also owns more than the entire bottom 90 percent.

It is difficult to argue that such shares, to say nothing of major changes in the distribution of income like those recorded in recent years, have anything to do with a commensurate contribution that might merit extraordinary compensation. Indeed, as the revelations of the financial crisis have so dramatically shown, often top dollar bonuses went to bankers and brokers who did little more than move financial paper at huge taxpayer cost.

Building on the Nobel Prize-winning work of Robert Solow (and of Edward Denison), Lew Daly and I have recently pointed out that in general not only do income shares of the kind that flow to the top one percent have little to with what anyone has actually done to deserve; rather the flows are largely traceable to technologies that ultimately either were paid for by the public, or, more importantly, that derive from our collective inheritance of scientific and technological knowledge.

Unfortunately, our national discourse is focused almost entirely on different questions. A new presidential panel -- the National Commission on Fiscal Responsibility and Reform -- has begun meeting to try to find ways to cut spending and increase taxation at the margins. We are told nothing else can be done. Moreover, given our unwillingness to increase taxation, we can be sure that if changes occur, the big cuts will impact the same 99 percent at the bottom who have already lost huge shares of income to those at the top.

The challenge posed by our Turkmenistan levels of inequality is to somehow jolt ourselves out of our usual complacency to open a very different dialogue. It is time to stop looking away as we tinker around the margins and the one percent continues on its merry way. Top marginal tax rates, we might remind ourselves, stood at 91 percent during the presidencies of both Democrats and Republicans (Truman and Eisenhower). Contrary to those who argue significant taxation must impede economic growth, these high tax rates coincided with the postwar boom, the period of greatest economic growth in all of American history.