Middle America Is Fixed in the Candidates' Sights

By , H. Erich Heinemann is chief economist of Ladenburg, Thalmann & Co.

WHO gets what in America will be a key issue in the 1992 campaign. Bill Clinton, the putative Democratic candidate, charges (incorrectly) that 1 percent of US families got more than 60 percent of the $800 billion gain in real after-tax income in the '80s.

Mr. Clinton implies that widening gaps in income were a function of federal tax policy - particularly the 1986 cut in marginal tax rates that passed with overwhelming bipartisan support. If Clinton's innuendos were true, personal savings would have risen. Rich people save a larger share of income than others. The savings rate actually fell.

To the extent that gaps between top and bottom incomes have grown, this is equally true of pretax and after-tax income. Federal tax and spending programs reduce income disparities, not the reverse. Increasing income disparities are largely a function of (1) demographic changes (more single-parent families) and (2) widening spreads between earnings of high- and low-skill workers.

Recommended: How skewed is America's income inequality? Take our quiz.

Democrats are playing on deep-seated frustrations in middle America. The central problem is that for almost 20 years, real after-tax income per worker has grown at a rate of less than 0.8 percent. That growth was about one-third of the rate of increase in real income during the quarter century from 1948 through 1973. Real income per worker is almost 40 percent below where it would have been.

The slowdown in real income per worker is the visible consequence of the most basic challenge facing the US today: How to reverse the nation's long-term slump in the growth of productivity and the standard of living. It is (or should be) little comfort that American workers are the most productive in the world and that US living standards are the highest. Other industrial nations are growing faster.

Both Republicans and Democrats mouth the rhetoric of growth. Should substance follow form, this would be good news. However, if Washington focuses on fiscal equity, and ignores actions to boost investment and productivity, the US may face perpetual slow motion. Politicians cannot redistribute wealth that does not exist.

Clinton says corporate taxes have gone down as a share of federal revenue. His implication is that big corporations (a code word for "the rich") are not paying their fair share. Corporate taxes have diminished in importance, but only because profits have dropped as a share of national income. Effective corporate tax rates have gone up. Pretax operating profits averaged 7.9 percent of national income in the last decade, down sharply from 12.7 percent in the 1960s.

Many factors help explain this decline. The increase in debt in 1980s accounts for some of the shortfall. More critical was a massive buildup in implicit federal taxes on corporate income to pay for health, safety, and environmental laws.

Assuming that these programs are all both desirable and efficient in reaching their stated aims, implicit corporate taxes are not the best way to pay such costs.

First, the business sector accounts for about two-thirds of total private saving and almost all wealth-producing investment. By eroding the profitability of American enterprise, Washington has undercut the incentive for business people to invest in facilities that will boost productivity, real income, and the nation's standard of living.

Second, implicit taxes (mostly mandated expenditures) are almost impossible to measure. No one knows who really pays corporate taxes - stockholders in lower dividends, workers in lower pay, or consumers in higher prices. Congress could make a start by combining corporate and personal taxes (eliminating double or triple taxes on corporate income) and by substituting explicit consumption taxes for implicit corporate taxes to fund health, safety, and environmental regulations. If profits lag as a share of n ational income, so too will investment and living standards.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...