David Cay Johnston

The aftermaths of the Great Recession and the Great Depression produced sharply different changes in U.S. incomes that tell us a lot about tax and economic policy.

The 1934 economic rebound was widely shared, with strong income gains for the vast majority, the bottom 90 percent.

In 2010, we saw the opposite as the vast majority lost ground.

National income gained overall in 2010, but all of the gains were among the top 10 percent. Even within those 15.6 million households, the gains were extraordinarily concentrated among the super-rich, the top one percent of the top one percent.

Just 15,600 super-rich households pocketed an astonishing 37 percent of the entire national gain.

The different results in 1934 and 2010 show how a major shift in federal policy hurts the vast majority and benefits the super-rich.

NEW POLICY BOOSTS THE RICH

Starting in 1933, government policy aimed to improve the lot of the vast majority through such policies as massive government-financed jobs and construction programs. But since 1980 policy has focused on helping the already rich get richer still with such policies as lower taxes and fewer audits.

The updated figures illustrating income changes, all in 2010 dollars, come from analysis of the latest IRS data by economists Emmanuel Saez and Thomas Piketty.

Saez received the 2009 John Bates Clark Medal, awarded to the economist under 40 who has made the greatest contribution to that field, and a 2010 MacArthur genius grant.

Their data expands on what I reported first last fall – median pay fell in 2010 to its lowest level since 1999.

Saez and Piketty show that the vast majority’s average adjusted gross income, of which wages are just a part, was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000.

Most shocking? The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.

At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.

We should expect this pattern of concentrated gains weighted toward the very top to continue unless we change our policies.

Saez shows that the top one percent’s share of real income growth is increasing with each economic expansion and it matters not whether the president is a Democrat or Republican. The top one percent enjoyed 45 percent of Clinton-era income growth, 65 percent of Bush-era growth and 93 percent of Obama-era growth, though that is only through 2010.

While markets are a factor, I think the evidence makes clear that government policy is at the core of the differing fortunes of the vast majority and the super-rich.

Inaugural addresses of Franklin Roosevelt and Barack Obama bring this into sharp focus. Both spoke of the need for restoring confidence, while denouncing greed and irresponsible conduct. Roosevelt in 1933 specified “callous and selfish wrongdoing” by bankers abusing a “sacred trust.” Obama vaguely referred to the “consequence of greed and irresponsibility on the part of some.”

Roosevelt said that “our greatest primary task is to put people to work.” Obama, again less specific, spoke of government that “helps families find jobs at a decent wage.”

Roosevelt brought in trustbusters, reformers and even an expert at Wall Street manipulations to implement policies benefiting the vast majority.

FINANCIAL INSIDERS

By contrast, while Obama called Wall Street executives “fat cats,” he surrounded himself with financial insiders with the exception of Elizabeth Warren, the Harvard bankruptcy expert now seeking election to the U.S. Senate. His administration has failed to prosecute the central figures in the frauds that created our economic distress.

Government policy can change again and for the better. We can create a growing economy with widely shared prosperity.

We need to increase spending on education and research to maximize returns from human capital. We need to create jobs rebuilding our decaying infrastructure so people and goods move efficiently. We need to honor markets, letting mismanaged banks and insurers receive their just desserts in U.S. Bankruptcy Court.

We need to adjust our focus away from financial sector profits to people. We need to reform taxes to discourage capital withdrawals and offshoring and, instead, encourage reinvestment of profits at home.

If we don’t, the vast majority will see their incomes go on eroding slowly while those at the top enjoy an ever-larger share of national income and wealth. The inevitable result will be economic, political and social instability – not a pretty picture for anyone.

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

The U.S. tax debate tends to focus on the top 1 percent — their share of income taxes and their tax rates. Anti-tax groups encourage this focus, now embraced by the Occupy demonstrators on Wall Street and across America.

Problem is, the top 1 percent is a very misleading measure of who pays federal income taxes. It mixes doctors and billionaires, masking the taxes paid by the middle class and the affluent.

Everyone seems to know that about half of Americans paid no income taxes in 2009 and that the top 1 percent paid about 37 percent of the income taxes.

But how many people know that households making less than $75,000 collectively paid more federal income tax than those making $1 million or more?

Or that income taxed at the next-to-lowest rate, 15 percent, brought in more government revenue than all capital gains taxes plus the two top brackets, which apply only to the top 2 percent of earners?

Or that almost half of the top 1 percent made less than $500,000? Or that five out of six made less than $1 million?

The fact is that the government relies far more on the bottom 99 percent than the top 1 percent for federal income taxes.

In 2009, the income entry point for being in the top 1 percent was slightly less than $344,000. To most Americans that is an unimaginable deal of money. But let’s put that in perspective.

DISPARITY AT VERY TOP
The median income taxpayer — half made more, half less — made slightly less than $33,000 that year (and their average adjusted gross income was under $15,300, or less than $300 per week). The median income taxpayer would need 10.6 years to earn as much as someone at the low end of the top 1 percent.

Far greater disparities exist within the top 1 percent.

The top 1 percent includes people who made many hundreds of millions of dollars and perhaps some with incomes of more than $1 billion, official government data will show when it is released in two years.

Economically, those just entering the top 1 percent have nothing in common with those in the top tenth of the top 1 percent. Someone at the entry point for the top 1 percent would need 29 years to make $10 million, and more than 2,900 years to make $1 billion.

The point is that while all those in the top 1 percent are certainly well off, the vast majority still go to work every day.

Almost half of the top 1 percent, or 1.4 million taxpayers, make $344,000 to $500,000. More than 1.1 million make $999,999 or less.

The bottom half of the top 1 percent rely on salaries for about two-thirds of their income. They get modest income from capital but rely mostly on their labor, giving them more in common with Joe Sixpack than Warren Buffett.

ONE IN A THOUSAND
A much better measure than the top 1 percent would be the top tenth of 1 percent. The government does not break out this group, but Emmanuel Saez, a University of California economist, and others have.

The Saez analysis of tax return data shows that through 2008, the top one-in-a-thousand taxpayers had average income in recent years that ranged between $5.2 million and $7.5 million annually. Just investing that much in corporate bonds will produce enough interest income to keep someone in the top 1 percent.

Furthermore, inside the top 1 percent, those with the highest incomes pay the lowest tax rates.

The top 1 percent paid an average income tax rate of 24 percent in 2009, IRS data shows. That is almost exactly the rate paid by those making $500,000 to $1 million. Those who made $1 million to $10 million paid a higher rate, 26 percent. But those making more than $10 million paid a significantly lower rate, 23.3 percent.

The top 400 taxpayers paid a much lower rate. On an average income of $270 million each, their effective federal income tax rate was 18.1 percent in 2008, the latest year for which we have IRS data. A single worker earning less than $90,000 pays a higher rate than that.

In a country with more than 300 million people, 400 taxpayers is a minute number. Yet those 400 made 1.3 cents out of every dollar of the country’s total adjusted gross income, almost doubling their share of national income since 2002.

Continuing to focus on the top 1 percent will mislead us about who pays federal income taxes. That focus should be on the middle class and the upper middle class, and then on the top tenth of 1 percent. And on whether our tax system is helping create wealth and jobs or destroying them.  (Editing by Kevin Drawbaugh)