 | June 13, 2011 |
| THIS WEEK | |
How low can they go? Taxes on the rich, that is. Last Tuesday saw the tenth anniversary of the first George W. Bush tax cut for the rich, and, to honor the occasion, former Minnesota governor Tim Pawlenty doubled down. Pawlenty, a leading “serious” candidate for the GOP 2012 Presidential nod, proposed a tax cut for the rich that makes George W. seem a Republican Robin Hood. Pawlenty wants to eliminate federal taxes on all dividends, all interest income, all grand fortunes left to heirs, and all capital gains from wheeling and dealing on stocks and other assets. Pawlenty also wants to chop the tax rate on ordinary income over $375,000 from 35 percent, the current rate, to 25 percent. In 2008, America’s 400 highest-income taxpayers — average income, $270.5 million — paid just 18.1 percent of their incomes in federal taxes. If Pawlenty’s tax cut went into effect, Citizens for Tax Justice calculated last week, the top 400 tax rate would plummet to an astoundingly minuscule 4.7 percent. Pawlenty, says one reporter, is “essentially daring” his GOP rivals to try to out-cut him on the tax-cut front. Will they try? If they do, they’ll likely echo Pawlenty’s rationalization for rewarding the rich. This week, in Too Much, we apply that rationalization to some reality the rationalizers would rather we ignore. | |
| GREED AT A GLANCE | |
 Private tutors have been helping rich kids get an extra edge on college SATs for years. But the tutoring arms race, the New York Times reports, is escalating. Wealthy parents of students at exclusive private schools are now routinely paying top dollar for tutors who can help their teenagers rack up A's in demanding high school courses. One family of means with a student at New York’s Riverdale Country School — annual tuition, $38,800 — paid $35,000 earlier this year for a tutor who covered just one class. New York’s premiere tutoring firm, Advantage Testing, currently charges up to $795 for a 50-minute session. This extra help, notes the Boston Globe's Kara Miller, is erasing American education’s remaining meritocratic pretensions. Asks Miller: “How can average low- or middle-class students possibly compete with years of science, English, and SAT tutoring?”  Not too many angry shareholders showed up in Toronto last week for the annual meeting of the Harry Winston Diamond Corp. Business could hardly be better at this international retailer. Harry Winston luxury jewelry sales, in 2011’s first quarter, jumped 26 percent. What’s driving the uptick? Harry Winston’s top retail exec, Frederic De Narp, has a candid answer: growing inequality. Notes the retail chief: “There is an enormous concentration of wealth around the world.” To make the most of that concentration, Harry Winston will soon open two new outlets in Shanghai, the latest watering hole for the global super rich. Our company, De Narp promises, will be “positioned to fulfill the dreams of this high-end clientele.” Three academic researchers are ramping up their advocacy for a plan that leverages the public purse against excessive corporate executive pay. The three — Harvard’s Richard Freeman and Douglas Kruse and Joseph Blasi of Rutgers —detailed earlier this year how U.S. tax rules have average taxpayers subsidizing executive excess. Corporations can currently deduct whatever “incentive” pay they pay their executives off their corporate taxes. Congress, the academics argue in a new Nation piece, ought to only allow tax deductions for executive incentives when corporations award as much incentive pay “to the bottom 80 percent of their workforce as they do to the top 5 percent.” | |
| INEQUALITY BY THE NUMBERS | |
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| IN FOCUS | |
Tim Pawlenty's Dive into 'Deep Doo-Doo' One of the three 'serious' candidates for the 2012 Republican White House bid says the tax cuts for the rich he's proposing will expand America's 'entrepreneurial' class. What does history say?Last week, in a “major policy address,” GOP Presidential hopeful Tim Pawlenty called for a massive tax cut that would save Americans who make $1 million or more a year, Washington tax experts estimate, an average $288,800. One listener in Pawlenty’s audience, a University of Chicago student, had a question for the former Minnesota governor. How could Pawlenty, the student asked, justify still another round of tax cuts for the wealthy? Pawlenty, a savvy pol, never missed a beat. “Set aside whether the wealthy benefit or not,” Pawlenty urged the student. “The real measure of this proposal is: Is it going to generate, in a transformative, significant way, more jobs for more people across this country?” Pawlenty, naturally, believes his tax cutting will do just that — by widening the ranks of what he calls the “entrepreneurial class.” “There’s about 5 percent of the country that is our entrepreneurial class, the people who start businesses, form capital, deploy capital, add employees, build buildings, invent things, conduct research, commercialize it, and the like,” Pawlenty explained. “If that 5 percent becomes 6, 7, 8, or 9 percent, we’ve got a very bright future,” he continued. “And if that 5 percent becomes 4, 3, 2, or 1 percent, we are in deep doo-doo.” Clear enough. Giving the wealthy tax breaks, Tim Pawlenty believes, extends “entrepreneurial” wherewithal beyond our richest 5 percent. And we all benefit, he maintains, when that next “6, 7, 8, or 9 percent” do better. Can we test this notion, this claim that tax cuts for taxpayers at the top pay off big in expanded entrepreneurial energy? Turns out we can. If cutting taxes on America's richest really helps extend “entrepreneurial” wherewithal beyond our richest 5 percent, then folks in that “6, 7, 8, or 9 percent” should have done just splendidly over the past 30 years, a span of time that has seen taxes on America’s rich drop to their lowest level in generations. Did these folks do just splendidly? The numbers, please. In 1980, the year before President Ronald Reagan began lavishing tax cuts on America’s rich, those taxpayers just outside the top 5 percent — the folks statisticians describe as sitting in the 90th to 95th percentiles of our income distribution — averaged $97,687 in income, after we adjust for inflation. In 2008, the most recent year with IRS figures available, this same group averaged $127,184, a 30.2 percent increase. In other words, after three decades of Reagan and Bush tax cuts for our wealthiest, taxpayers just outside the top 5 percent saw their entrepreneurial wherewithal increase all of 1 percent a year. Not a particularly impressive increase. And this exceedingly modest increase becomes even less impressive when we compare the three decades since 1980, a time when tax rates on rich people fell, to the three decades before 1980, a time when taxes on rich people ran consistently high. Between 1950 and 1980, average incomes in the 90th to 95th percentiles jumped from $49,646 to $97,687, a 96.8 percent increase, after taking inflation into account — over triple the income boost this income cohort has seen since 1980. So who has benefited significantly from all the tax cuts for the rich since 1980? That’s phrase that question a little differently: Who’s buried in Grant’s tomb? The rich — surprise, surprise — have benefited the most significantly from the past 30 years of exceedingly generous tax giveaways to the rich. Since 1980, University of California economist Emmanuel Saez has detailed, the inflation-adjusted incomes of America’s top 1 percent have increased 166.5 percent, from $426,906 to $1.14 million. But incomes in the upper reaches of that top 1 percent have soared even faster. Taxpayers in the top 0.1 percent have seen their incomes jump 288.9 percent since 1980. And taxpayers in the top 0.01 percent have seen their incomes skyrocket 402.8 percent, from $5.4 million in 1980 to $27.3 million in 2008. This top 0.01 percent, over these same years, has quadrupled its share of America’s national income. In other words, that “entrepreneurial” wherewithal that Tim Pawlenty so prizes isn’t spreading out beyond the top 5 percent. It’s concentrating within the tippy top of the top 1 percent. We have moved into what Tim Pawlenty might call “deep doo-doo” territory. And Pawlenty, incredibly, wants us to step even deeper in it. Pawlenty's tax plan, if ever enacted, would erase all federal taxes on the capital gains, dividends, and interest that pour into rich people’s pockets — and, just for good measure, drop the top tax rate on rich people’s ordinary cash income down to 25 percent, a 10-point drop from the current 35 percent and a 66-point drop from the 91 percent top rate in effect 50 years ago. Center for American Progress tax expert Michael Linden is dismissing Pawlenty's new tax plan as “sheer fantasy.” But this fantasy plan could well become reality. Not one of Pawlenty's GOP rivals, after all, has yet disavowed it. | |
| IN REVIEW | |
Revealed: The Secret Behind Executive Excess Kelly Shue, Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers, Harvard University, February 2011.  Here’s how CEO pay setting really works: Top corporate execs, feeling pretty full of themselves, jaunt off to their college reunions only to discover that their old business school buddies are taking home millions more than they are. Once back home, these now-disgruntled chief execs twist arms and whine until their corporate boards recognize their true value — with new pay deals that jack up their already lavish compensation. Apologists for CEO pay excess will, of course, scoff at this deeply unflattering description of executive suite reality. Show some evidence, their rebuttal might go, before you impugn the integrity of CEOs and corporate boards of directors. Now we have the evidence. Harvard researcher Kelly Shue, in a brilliantly conceived new academic paper, has compellingly documented just how powerfully a “peer influence” in no way related to either skill or performance impacts what corporations pay their top executives. Shue has extracted that evidence out of her own Harvard backyard, from a database of Harvard Business School grads who have gone on to become top executives at the nation’s top 1,500 corporations. Harvard, as Shue points out, “has historically been a major educational producer of executives.” Harvard Business School grads have another attraction for researchers. They all belong to easily identifiable peer groups. The Harvard Business School, ever since 1949, has assigned all students into sections, and section members spend their entire first year together in the same classrooms. By graduation, section members have formed life-long bonds. After graduation, notes Shue, they renew these bonds at alumni reunions held every five years, “extravagant four-day celebrations consisting of formal galas and panel discussions, as well as section-based tents and parties.” Shue has tracked the impact of these reunions on executive pay. She finds, and her paper shows, “evidence of strong peer effects in executive compensation.” Her most fascinating finding: the “pay for friend’s luck” phenomenon. In a nutshell: A top exec in one industry gets a big pay boost thanks to some “shock” in that industry, something like a sudden rise in global oil prices in the energy industry. The executive pals of the lucky exec, who work in industries that haven’t experienced that “shock,” end up with significant pay boosts, too. This “evidence of pay for friend’s luck,” Shue observes, helps show that “relative compensation within a peer network directly affects compensation.” “In other words,” she explains, “executives are paid for more than firm performance and even industry performance; they are paid for lucky shocks in their social networks.” In effect, we don’t have “pay for performance” in the upper reaches of Corporate America. We have pay for pals. | |
Quote of the Week
“It absolutely drives me crazy when I hear John Boehner and the Republicans say our country is broke, and therefore we have to cut expenses, If our country is really, really broke, then it cannot afford to continue to give tax breaks to people like me.”
Paul Egerman, founder of eScription Inc. and a member of Patriotic Millionaires for Fiscal Strength, on the tenth anniversary of the first Bush tax cut, June 7, 2011
Stat of the Week
The U.S. Securities and Exchange Commission usually receives no more than a handful of letters from average Americans when the agency asks for comments on proposed regulations. But over 10,000 Americans, reports Bloomberg, have sent in letters on the SEC’s new proposals on executive bonuses under the Dodd-Frank Act, “almost all of them condemning Wall Street pay.”
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Sarah Anderson, Cut Wall Street Down to Size With a Financial Speculation Tax, Nation, June 8, 2011. Just a 0.25 percent tax on every financial transaction would raise $150 billion a year and discourage speculative excess.
Chrystia Freeland, Getting by Without the Middle Class, Reuters, June 9, 2011. With America's wealth concentrated at the top, “U.S. business is learning to get by just fine, thank you, without middle-class U.S. consumers.”
Chuck Collins, Pawlenty's Tax Proposal Caters to the Richest Americans, Common Dreams, June 9, 2011. What activists can do to reverse tax giveaways to the rich.
Ben Baumberg, Justifying unfairness. Inequalities, June 10, 2011. A survey of the latest research that explores why people accept the inequities around them.
Paul Krugman, Rule by Rentiers, New York Times, June 10. Policy makers are essentially responding only to the needs of America's rentiers, those who derive most of their income from their assets.
Edward Cuddy, America en route to fiscal disaster,Buffalo News, June 12, 2011. An emeritus historian zeroes in on today's greatest challenge: “to save our democracy from plutocracy — government by the rich.”
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