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July, 2007



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Addressing Inequality: An Idea Whose Time Has Come
By Dmitri Iglitzin and Steven Hill

When pets are poisoned by imported pet food, U.S. Attorneys are fired for political reasons, or student loan providers are found to have been offering kickbacks to universities to receive "preferred lender status," Congress gears up hearings and vows quick legislative action.
An even greater scandal, however, does not appear to have gained the interest of legislators. That scandal is the great and rapidly growing disparity of both wealth and income among Americans.

According to the most recent government figures, 37 million Americans are living below the official poverty line of $19,971 a year for a family of four, and the number of poor people in America has increased by five million over the past six years. More than 90 million Americans, close to a third of the nation, squeak by on incomes that are less than twice the official poverty line.

Meanwhile, the gap between rich and poor has grown to alarming proportions. Currently the top 10% of income earners in the United States own 70% of the wealth and the wealthiest one percent own more than the bottom 95 percent, according to a Federal Reserve Study. In 2005, the top 300,000 Americans collectively enjoyed almost as much income -- 21.8% -- as the bottom 150 million Americans, more than double their share of income in 1980.

The ratio of average CEO pay to worker pay in the U.S. shot up from a 301-to-1 in 2003 to 431-to-1 in 2004. The average CEO now earns $11.8 million per year versus a paltry $27,460 for the average worker, earning substantially more in one day than the average worker earns all year.

Adding insult to injury, taxpayers actually subsidize these bloated CEO salaries. The federal government gives tax breaks to corporations for those salaries, to the tune of hundreds of millions, if not billions, of dollars.

We used to call this by another name: The Gilded Age.

Oddly, for a country founded in part on the principle that "all men are created equal," economic inequality has become a third rail of American politics. No one dares touch it out of fear of being accused of inciting "class warfare."

But we've reached a point where it is crucial that our nation get over this passivity. The "land of equality" is a very unequal place, and government has a role to play in restoring another fine American value: fairness.

A small but largely symbolic first step would be for Congress to pass the Income Equity Act, which would deny corporations a tax deduction for payments of excessive compensation (defined as pay greater than 25 times the pay of the company's lowest full-time worker). If the Income Equity Act were passed, corporations could still pay CEOs whatever they wished, but taxpayers would no longer be subsidizing excessive salaries. The law would create some downward pressure on top-level executive salaries, while also saving taxpayers hundreds of millions of dollars given to corporations as tax breaks for those salaries. Beyond the Income Equity Act, more substantive would be a fix to Social Security's dirty little secret favoring the rich: wage income above $94,200 per year is completely untaxed by Social Security. While a low wageworker pays 6.2% of his income to Social Security, a CEO earning $1 million dollars pays only 1% of his salary into the system. Only 83% of all wages currently are subject to social security taxes, so this would increase annual social security revenues by about 20%, or $100 billion per year, keeping the Social Security trust fund solvent. Lifting the cap on the amount of income which is taxed for Social Security should be a no-brainer.

Other proposals also have merit, such as increasing the minimum wage, providing childcare for working parents, paid parental leave, universal health care and lowering the cost of higher education. But the easiest way to remedy inequality is simply to reimpose higher income tax rates. Current rates are extremely low, historically-speaking. In 1954, a year not usually seen as a high point of "tax and spend government," the maximum tax rate was 87% of taxable income. The "Reagan tax cut," the Economic Recovery Tax Act of 1981, lowered substantially this top income tax rate to 50%. Five years later the rate was lowered again, to 28%. It is no coincidence that the years since 1986 have brought us such a dramatic increase in wealth disparity.

Given the importance of the issue, it is long past time for our political leaders to put aside the scandal du jour and take some urgently needed action to reverse the nation's current trends toward greater economic inequality, and the social upheaval which will inevitably follow.

[Dmitri Iglitzin is a labor law attorney with the firm of Schwerin Campbell Barnard & Iglitzin, in Seattle, Washington, and is an Affiliate Professor of Law at the University of Washington School of Law. Steven Hill is director of the political reform program of the New America Foundation and author of "10 Steps to Repair American Democracy" (]

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