After I finished writing this post, I found these very useful tables here. They help triangulate the class structure and are more helpful at the beginning of my piece than at the end.
BIG GAINS IN THE NEOLIBERAL ERA have largely been cornered by the wealthy. We may even have been underestimating the true wealth of the ultrarich by a factor of 2 because the truly wealthy hide nearly half their wealth in offshore secrecy jurisdictions. I have hitherto emphasized paying attention to the very top of the distribution—the 0.1 percent—because the concentration of material resources in the hands of oligarchs is a significant threat to democracy. Indeed, ultraconservative billionaires are behind the insurgency that used to be called the GOP.
But that is not the end of the story. The main driver of regional polarization is the two-tier polarization of the US economy into a high-productivity tradable sector that accounts for just 2 percent of new jobs but a third of new value added and a low-productivity non-tradable sector. Affluent, college-educated workers have managed to corner all the wage gains over the past generation due to their near-monopoly on jobs in the former. The rest have seen their incomes stagnate and their share of the national pie shrink.
Figure 1 displays the share of pretax income of the top 1 percent of income earners. We see that vertical income polarization has returned to levels last achieved in the roaring twenties. But affluence in America goes deeper. Not everyone in the 99 percent has lost ground in the neoliberal era. Those in the top 20 percent—roughly speaking, families earning six-figure incomes—have done relatively well. Figure 2 shows the share of the next 19 percent of income earners. We see that their share of the national pie has increased slowly but steadily over the past two generations.
Rational public finance would see the government lean against the inequity of the market. Through progressive taxation, tax credits, subsidies, and spending targeted at less fortunate families and regions, fiscal policy ought to be used to ensure a more equitable distribution of the national economic pie. Congress can’t stop talking about making life easier for hard-working Americans. In reality, as we shall see, tax giveaways largely benefit the affluent.
Figure 3 presents a top-level breakdown of the non-discretionary federal budget. Medicare, social security, and the military consume two-thirds of the US budget. But the largest component by far, accounting for a third of the budget, is “tax expenditures”—technical jargon for tax credits, subsidies, and other giveaways that is fiscal spending in all but name.
In the current fiscal year, tax expenditures account for nearly $1.5 trillion. The biggest of these giveaways is exclusion of employer contributions for medical insurance premiums and medical care, which will cost the public purse $2.7 trillion over 2016-25, according to the US Treasury. Preferential treatment of unearned capital gains (which are taxed at 15 percent instead of the 35 percent charged on earned income) will cost a cool $1 trillion over the same period. Exclusion of imputed rental income will cost $1.2 trillion, and the mortgage interest deduction will cost $950 billion. (All these numbers are from here.)
Who benefits from these giveaways? Figure 4 shows the distribution of the beneficiaries. The affluent, the top 20 percent of income earners, get 51 percent of all tax expenditures. The rest is split regressively among the lower classes.
If we drill down further, we find that some of these giveaways are much less regressive than others. For instance, one-half of the $66 billion earned income tax credit goes to the lowest quintile and 95 percent of the $59 billion child tax credit goes to the bottom 80 percent. The employer-sponsored health insurance exclusion is somewhere in the middle. Two-thirds of this supermassive $258 billion giveaway goes to the bottom 80 percent. Pension contribution, capital gains, local taxes and the mortgage interest deduction are much more regressive. Some 94 percent of the $83 billion capital gains giveaway ends up in the top quintile, as does two-thirds of the $140 billion pension contribution exclusion.
Figures 5 and 6 drills down into the most regressive giveaways. We have not included the $17 billion carried interest giveaway to ultrarich hedge fund managers and other such long-running scandals. But the picture that emerges is not pretty. The top quintile gets the vast bulk of the giveaways for capital gains, state and local taxes, mortgage interest, charitable contributions and capital gains exemption at death. All in all, the top quintile cornered $446 billion of the $873 billion given away in 2013, according to the Congressional Budget Office.
Beyond the regressive distributional impact, these giveaways distort incentives and harm the economy in various ways. For instance, Weicher notes that the mortgage interest deduction (MID),
…encourages taxpayers to pay for homes with debt rather than with cash or financial assets, causes wasteful and unproductive misallocation of physical and financial capital, and distributes benefits disproportionately to upper income households. Furthermore, the MID results in less economic productivity, reduced labor mobility and greater unemployment, depressed real wages, and a lower standard of living. The MID is so damaging to the economy that nearly every economist believes that “the most sure-fire way to improve the competitiveness of the American economy is to repeal the mortgage interest deduction.”
A truly progressive politics will have to take on not just the rich but the affluent as well.