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Tax Loophole Exploitation Exacerbates Income Inequality in US

Income inequality isn't only unfair; it's bad for the economy

Submitted by: Michael Shank

Posted: Nov 13, 2011 – 11:27 PM EST

Tags: tax, occupy wall st, economy, poverty, sustainability


By Michael Shank

The fact that America's biggest companies paid no federal taxes may come as no surprise to Washington. The report released earlier this month by nonprofit groups Citizens for Tax Justice and the Institute on Taxation and Economic Policy shows that 30 of the top 300 companies paid no taxes at all or used loopholes to end up with negative tax rates. Washington's own utility company – Pepco Holdings – paid the lowest, at nearly minus 58 percent, with GE coming close second at 45 percent.

The significance of this study is not lost on any of the Occupying protesters nor should it be lost on any of the Super Committee members in Congress as they deliberate on deficit reduction tactics that may include a reform of the tax code.

It's time for a more distributive tax system. The fact that companies are paying no taxes when America's working families are still struggling to winter what Fed Reserve Chairman Ben Bernanke continues to recognize as a failed or failing recovery is a prime example of what is exacerbating income inequality in America.

Income inequality is the hot topic of late and rightly so. Three reports in the last 10 days show this issue isn't going away anytime soon. The UN Human Development Report shows that while the United States remains the fourth best country in the world to live, after adjusting for internal income inequality it drops it into 23rd place. And the report by the Congressional Budget Office showed that in the last 30 years US government policy failed to equally distribute wealth, enabling the richest in America to grow their income 15 times faster than the poor and shifting more than 80 percent of all US income wealth to the top 20 percent of earners. Additionally, a report by the US Census office showed pervasive income inequality throughout the US, with Washington DC and NY State and City ranking the highest in the gap between the rich and the poor.

No one is under the illusion that the majority of America is doing well. In fact, Americans have recently learned they have the highest poverty rate since World War II (one in six Americans living below the poverty line) and the highest youth poverty rate (one in five young people, with Hispanic youth suffering most). Last month also concluded multiple "Made in America" tours by the congressional black and progressive caucuses who were responding to the cry of the unemployed, which is only getting louder and more desperate. More recently, the Warren Buffet-inspired tax debate, regarding whether millionaires should pay at least the same tax rate as the common worker, has surfaced fractiously, pitting President Obama and Democrats against most Republicans. Underlying these recent trends, the US still maintains one the highest income inequality rates among all wealthy countries.

How vexing it is to witness America's inability to push for policies that could ensure more economic equality. Paradoxically enough, many Americans believe they are already in the middle-upper tier of income earners or will eventually end up there. This inspires a reluctance to enact policies that would more equitably balance economic burden sharing. America's increasing poverty rates may finally change this dynamic as two-thirds of Americans support raising taxes on the rich according to a NYT/CBS poll.

America's past penchant for income inequality, however, is not financially sustainable, let alone morally excusable or philosophically justifiable by capitalists who claim this to be inherent in the system. This is where UK economists Richard Wilkinson and Kate Pickett's data from the British bestseller, The Spirit Level: Why Greater Equality Makes Societies Stronger, is useful.

It shows that with income inequality comes with a host of health and social problems. The higher a country's income inequality, the higher its infant mortality rates, obesity rates, homicide rates, illiteracy rates, mental illness rates, teenage births, incarceration rates, drug addiction rates, social immobility and lower life expectancy. In other words, the bigger the gap between a nation's rich and poor populations, the greater dysfunction in that nation's society.

It may come as no surprise to some that America has the highest income inequality among the entire rich world. The gap was developed largely in the last 30 years, exacerbated by tax policies that benefited the rich at the expense of the poor. It became increasingly difficult for Americans to get ahead, get insured, get educated and get a job, all of which helps with getting respect. Consequently, the bulk of America's economic growth over the last 30 years has gone to the top one-hundredth of 1 percent, who make $27 million annually per household, leaving 90 percent of American households to subsist on roughly $30,000 a year.

Name a rich country and our inequality rates beat them by a long shot – though it's hardly something to brag about. We also have the highest rates of homicide, infant mortality, teenage births, drug addiction, mental illness, incarceration, social immobility and illiteracy. Name the social ill and we excel at it.

These health and social problems wreak financial havoc on our society—not only in terms of lost productivity and potential, but also in terms of costs associated with containing the violence, healing the sick and fixing the dysfunction. With each homicide, for example, the Centers for Disease Control and Prevention calculate that the economy loses $1.65 million in medical costs, loss of lifelong employment and economic productivity costs. With each prisoner, the US spends on average $35,000 per year for a total of $80 billion annually for its correctional system. Add to this the total cost of lost productivity of the incarcerated, which is another $97.7 billion. And don't forget violent crime, which cost America $94 billion in 2009.

Given these enormous costs to America's economy, advocates of income equality must have a seat at the congressional budget Super Committee's table, as it continues to convene on cost cutting, and must push for policies that promote equal opportunity, health, education and poverty alleviation. Reduce income inequality and you reduce the rates of every kind of social malaise that are draining our federal, state and local budgets and services. Eradicate both and you have a certain moneymaker for America – a wise and worthwhile move for a country that just raised its debt ceiling.

About Michael Shank

Michael Shank is the US Vice President for the Institute for Economics and Peace. Follow the Institute on Twitter at

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