99%
The Occupy Wall Street movement has introduced a new cultural idiom: the 1% versus the 99%. It’s effective because it’s simple; it resonates with the anti-authoritarianism of the left and the anti-elitism of the right; and it points directly to inequitable distribution of wealth as a key problem in the American system.
But it is simplistic. It suggests that the problem is simply income inequality, which pits the avarice of the few against the covetousness of the many, as some op-ed writers believe. The problem is not just haves and have nots. It’s the disequilibrium, the mathematical, social, and structural forces that are continually widening the wealth gap and threaten to fracture or eliminate the American middle class.
The mathematical forces are the easiest ones to describe. Basically, in your household budget,
Surplus = income – ( fixed expenses + taxes + debt payments + discretionary expenses)
For much of the 99%, this number is actually negative. Stagnant wages and the compounding interest of credit card debt are actually taking families backwards. A significant expense like a hospital stay, auto accident, or natural disaster can wipe out all savings and lead to bankruptcy, homelessness, and poverty. This is how almost a third of America lives: in a poverty trap.
Those who have succeeded in small business or risen in their careers so to escape the credit card trap may have a surplus, and with that surplus they can save and invest. Perhaps they can save up for a down payment and buy a house, maybe have a CPA do their taxes and find some deductions that save them money. Auto and health insurance keep them from being wiped out by an unexpected event. These families can invest in a 401(k) for retirement and get a solid 10% per year appreciation on it. This is the middle class ideal, but a poor job market and the rocky housing market have made this riskier in this recession.
The next echelon, though, is where wealth starts to accumulate. Not only do incomes rise, but the tax rate is only negligible higher and the fixed expenses are constant, so managing the discretionary expenses allows much more surplus for investment–like a rental property, for instance. Plus, slightly higher fixed expenses in the form of regular doctor visits, auto and home maintenance, etc. reduce the incidence of expensive illnesses and accidents.
You can see how this plays out. The mathematics of the relationship between credit card interest rates and investment return rates create a knife edge that divides those who will get richer from those who will get poorer. And while conservatives like to say that hard work and discipline (controlling income and discretionary spending) are the tests of character that divide the rich from the poor, the truth is that starting out on the right side and being lucky are much more important.
This is the argument for progressive tax brackets, and why the wealthy should pay a higher percentage of their income, and the poor should pay nothing. It’s because taxation can bring equilibrium to this equation and slow the widening gap. With no taxes (or credits), the poor may have a small surplus to invest and possibly reach the middle class. And even Eisenhower-era top bracket taxes won't make the rich poorer; they just compensate for the logarithmic effects of income opportunities.
Those who argue that a flat tax is a fair tax miss this mathematical fact. A flat tax accelerates the fall into poverty of the lower middle class by increasing fixed expenses so that a surplus is impossible, and it falls into the noise of the fixed expenses of the wealthy and simply shifts the floor, but not the steepness, of the logarithmic wealth curve. It would cut the middle class in two.
You can also see the effect that social services have on the wealth gap. Once a family on the not-wealthy side of the divide is hit with unemployment, catastrophic loss, or significant medical expenses, it can be impossible for them to ever regain their standard of living—the compounding debt makes any setback permanent. Again, for the wealthy, the same economic event has a very different effect; the investment income keeps on generating wealth and they can regain their former level fairly quickly. That’s why a single-payer healthcare system, paid out of general income taxes and insuring basic healthcare at the same level for all, would have little noticeable effect on the wealthy (who can and will always pay as much as they want for their health) but could literally save hundreds of thousands of lives of people who die because they cannot afford basic healthcare or insurance. We have death panels today: they're insurance companies and banks.
As income increases, fixed expenses become irrelevant and even discretionary spending is in the noise because people who have in excess of $50 million can't really spend it fast enough to offset the income (a hundred thousand dollars a week). And that income does not come from wages. It comes from capital gains, investment funds, bonus payouts, and windfalls from mergers and acquisitions, and investment opportunities not available to retail investors, all of which is taxed at a rate lower than ordinary income.
Of course it’s a myth that the CEO who makes 185 times the average worker’s pay earns it by working 185 times as hard—it takes almost no work at all. The classic phrase is that they’re “making their money work for them;” the economic term is “rent-seeking.” The increasing wealth of the 1% comes largely from the 99%: the mortgage, credit card, and auto loan interest, the gap between corporate profit growth and wage growth, the arbitrage on the ups and downs of the 401(k) accounts of the majority of Americans is the almost effortless source of wealth for the 1%.
Which is why the political power of the wealthy is the greatest cause of income inequality. Through the personal power to influence politicians, the media power to control the public discourse, and the financial power to fund the election campaigns of pliant candidates, the wealthy are driving the public policy discussion towards social structures that benefit them directly. It’s not just the poppycock that decreasing taxes on the wealthy leads to job creation (it doesn’t); it's the falsehood that market forces are more efficient than governmental bureaucracy, so Social Security, Medicare, health insurance, education, welfare, prisons, even poverty relief should be privatized instead of collective.
The more economic activity that is funneled through the “free market,” the more the 1% can collect in rent-seeking off of the 99%, and the greater the wealth gap will grow.
