The wealth concentration engine (part 1 of a series)

How US Federal fiscal policy concentrates wealth upward.

Written 2023-05-22 - “The Ike Street Journal – the weekly diary of the American nightmare”

This week I’ll tackle a subject that I’ve mentioned in passing before – the relentless upward concentration of wealth in the US over the past 40-odd years. In that time, while the US economy has grown decently and US asset markets (stocks, real estate, bonds, etc.) have risen dramatically, the benefit has flowed almost exclusively to the wealthier part of the population; much of the lower and middle part is stagnant or worse off compared to 40 or 50 years ago. Moreover, I believe this isn’t a partisan issue; the Democrats and Republicans have both worked toward this end.

To repeat my preemptive clarification when I mentioned this previously, I’m not saying the Democrats and Republicans are the same. The two parties are allowed to disagree on some subjects (the war on Christmas, various permutations of transgender issues, illegal immigration, abortion, etc). However, on the important stuff (endless war and concentrating wealth upward), they are expected to work together, and this expectation has been very effectively fulfilled over the past four decades.

I think of the wealth concentration mechanism as a finely oiled two-stroke engine, with alternating Republican and Democratic strokes. So, this week I’ll look in a little more detail at the operation of this engine, along with the important lubricating role the mainstream media plays. This is a timely subject due to the current debt limit crisis; hopefully this piece can provide a useful longer-term perspective.

Unfortunately I won’t be able to cover the full operation of the wealth concentration system in a single piece, since it operates through quite a few different areas – for example, fiscal policy (taxing and spending), monetary policy (the Federal Reserve), trade, and health care. So, in this piece I’ll deal with US Federal fiscal policy – taxing and spending.

The Republican stroke of the wealth-concentration engine is straightforward – enact tax cuts for rich people, enabling them to accumulate wealth faster. The media role here is secondary, since it would probably not be viable to come out directly in favor of tax cuts for rich people. However, the media does play a rearguard role in blunting public disgruntlement; for example, it might repeat without comment assertions that the tax cuts for rich people will actually lower the deficit through higher economic growth (though this has never happened), or it might sprinkle in the occasional story arguing it’s really not productive to tax the rich since even if we confiscated everything Bezos and Musk own, it would only cover the deficit for a few minutes.

The Republican-tax-cuts-for-rich-people process has proceeded since the Reagan administration, and has reached a truly mind-boggling level – probably beyond what was thought possible when the process began. Starting with the obvious – federal income taxes – the top marginal income tax rate was lowered from 73% to 28% in the Reagan years. There was then a brief and anomalous burst of responsibility in the Bush 1 and Clinton years, when the rate rose to 39.6%, before commencing a series of small cuts to the current 37%.

However, income taxes are only part of the picture. For poorer people, payroll taxes (Social Security and Medicare) are a large piece of the tax bill. The combined (employee + employer) rate for payroll taxes has risen from 12.26% in 1980 to 15.3% currently. Furthermore, 12.4% of the current rate only applies up to a ceiling (currently $160,200), above which no tax is collected – so the effective rate is much higher for poor people than rich ones.

Finally, rich people tend to make much more of their income from capital gains and dividends than poor people, particularly given the rip-roaring rise in asset markets over the past 40 years. The current maximum rate on this type of income is 20%.

The net result is that, even without use of any tax-related finagling, many rich people pay a substantially lower overall rate on their federal taxes than much poorer people! Truly, an accomplishment that few could have dared to dream of at the start.

Now let’s look at the Democratic stroke of the wealth-concentration engine. This one is trickier, as you might expect given the putative Democratic role as advocate for the working class. The way it works is as follows. Sometime during the Democratic time in power, a sudden alarum is raised over an imminent severe crisis caused by the huge and growing budget deficits (that in turn were largely caused by the tax cuts for rich people in the previous stroke of the engine). The media plays a crucial role here, in playing up the gravity of the crisis, in arguing the need for bipartisan compromise to tackle the crisis, and, finally in lauding the spirit of responsible bipartisanship and compromise when a deal is miraculously reached to avert the crisis.

What gives the game away is the nature of the “compromise.” For, the compromise is comprised in very small (if any) part of rolling back any of the tax cuts for rich people enacted in the Republican part of the cycle and in very large part of cutting spending that mostly goes to the bottom half. So, considering both strokes of the engine, we’ve moved a large chunk of money to the rich, and subsequently extracted it from the poor.

Following the compromise, and some arduous times, the deficit is brought under some control – just in time for the next (Republican) stroke of the engine.

And so, with the current debt limit brouhaha we’ve now arrived at the crisis point of the Democratic stroke of the wealth concentration engine. Let’s see what develops from here …