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Wealthy Investors and the Rate of Job Creation by Robert W. Merriam |
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November 7, 2011
The wealthy elite of the
United States, those who run our corporations, successful businesses and
those who excel in the financial sector, have always demonstrated how
ability, dedication, and hard work can succeed in America. And many
have given back to their country, adding significantly to our society
through gifts, foundations, and trusts.
Most Americans have no beef with the financial success of outstanding individuals – as long as that success did not impede their own hard-working struggles for financial sufficiency and security. From the end of World War II through 1980 workers at all income levels saw their incomes increase through the years. The boats of all workers were lifted by the rising tide of the American economy.
Then a funny thing happened on the way to the banks: from about 1983 until 2010 there were global changes in transportation, communication technologies, and overseas labor and the average national hourly compensation rose only 8% and hourly wage 7% while the national productivity rose more than 80%. Despite this miserly gain for the lower and middle classes, the top 20% of earners gained 55% during those thirty years. From 1983 until 2004 because of tax cuts for the wealthy and weakening of labor unions, 42% of the increasing national wealth went to the top 1% if earners and 94% went to the top 20%!
Interestingly, during the high tax years from after World War II and until 1980 the share of national incomes taken by the top 1% showed the greatest variations. Just before the market crash of 1929 the top 1% were taking 24% of national incomes. During and after World War II, taxes on the wealthy went up, to 88 – 94% to pay for the war, then slowly come down and remained at 70% until 1980. During those high tax years (and stricter regulation on financial firms), our enormous national debt was reduced to reasonable size while the economy hummed along, GDP increasing by 233%. The extreme disparity of income also changed: the share of the national income of the top 1% of earners went from 24% down to 7 – 10%, a much more egalitarian outcome.
Then President Reagan tried a new tax philosophy which gave the top 1% a boost on the way to their banks. He lowered the upper marginal tax on the wealthy from 70 to 28% and the percent of the nation’s income for the top 1% increased from 10 to 16%. Through the presidencies of G.H.W. Bush and Bill Clinton upper marginal taxes crept up to 39.6% but the share of national income for the top 1% still went up to 22%. President G.W. Bush again lowered the upper marginal tax from 39.6% to 35% and by 2007 the share of national income for the top 1% went up to 23.3%, almost as high as it was before the 1929 stock market crash. Note that the economic crashes of 1929 and 2007 were both preceded by massive inequality of income between top earners and the rest of the nation (and by relatively loose regulation of financial institutions).
Few economists or politicians would argue that high income and wealth inequality is good for a nation or its economy. Yet, despite the history related above, Republicans today maintain that increasing taxes for the wealthy is out of the question in trying to reduce the national debt. They argue simply that increased taxes on the wealthy would stifle economic activity and the commercial innovation on which most of the country’s increase in productivity depends. The undocumented assertion of Republicans is that removing some capital from the control of wealthy people would depress the startup support of new and promising businesses, a crucial aspect of a growing economy. They offer no public evidence to support this.
Direct evidence of their assertion would come from the relationship between the marginal tax rate on wealthy individuals and the rate of new job growth. If their taxes go down, the rate of ‘new’ jobs in the nation should go up and vice versa. The Census Bureau has released a massive study, the Longitudinal Business Database, that tracks 23 million businesses and number of jobs from 1977 to 2009.
Examination of this data shows that from 1977 to 2009 the rate of job creation each year has a general trend downwards, starting at a rate roughly 7.5 in 1977 and declining with variation to a value of about 4.2 in 2009, a drop of about 40%. During the same period the upper marginal income tax of the highest earners also dropped from 70 to 35% in several incremental decreases, a 50% decrease. The Republican expectation would be an upward trend of new job creation as taxes go down. The data show the exact opposite: as taxes go down, the rate of job creation also goes down over those 32 years.
An analysis of the wealth distribution of the top 1% of American earners by Dr. G.W. Domhoff at the University of California, Santa Cruz indicates how the top 1% invests its assets. As of 2011 they own 62.4% of American’s business equity, 60.6% of financial securities, 38.9% of trusts, 38.3% of stocks and mutual funds, 28.3% of non-home real estate, and 20.2% of deposits. Most of these investments have nothing to do with start-up businesses and job creation but represent common ways by which capital can increase wealth. The top 1% also probably invests in angel and venture capital opportunities that help start-up businesses, but not exclusively because many investors in lower income cohorts, as well as family and friends, are known to help start-up ideas get off the ground.
The historical information presented here does not support Republican claims that taxes on wealthy individuals suppress job creation. In fact, just the opposite seems to occur. The record shows that the great economic growth that occurred after World War II when marginal taxes were 92 -70% was accompanied by higher ‘new’ job creation as well as higher growth in GDP. So raising taxes on our more wealthy compatriots would probably have little effect on job creation and could accomplish at least two beneficial things: help reduce the national debt and reduce the economic inequality in possession and uses of American capital. If Republican leaders have good reasons for their inflexible stand against higher marginal taxes, they should make them known to the public as soon as possible.
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