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Robert J. Samuelson: Income inequality behind current backlash against the wealthy

Published: Tuesday, Oct. 11 2011 12:00 a.m. MDT

Carol Gay, of Brick, N.J., holds a sign saying "Tax the Rich," as several groups including the Peoples Uprisings, October2011 Coalition, and Occupy DC, "occupy" Freedom Plaza in Washington, Thursday, Oct. 6, 2011. The groups held signs against war and "corporate greed."

Associated Press

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WASHINGTON — The context for Occupy Wall Street and proposals to tax the rich — "rich" being constantly redefined — is the broader issue of economic inequality. For years, liberal politicians, academics and pundits have complained about growing inequality, but their protests barely resonated with the public. When most people are doing OK, the fact that some people are doing better does not arouse much anger. No more. When many people do worse, or fear they might, the rich inspire resentment and envy. Glaring inequalities that once seemed tolerable become offensive.

By and large, Americans regard the rich the way they do the poor. There are the "deserving" and the "undeserving." The deserving pioneer new technologies, manage vibrant businesses or excel at something. Few resent the wealth of Bill Gates or Oprah Winfrey. By contrast, the "undeserving" rich succeed through self-dealing or activities lacking broad social value.

What's happening now is that more rich are being disparaged as "undeserving." Blamed for the financial crisis, Wall Street types top the list. During the 1990s stock market boom, about half of Americans agreed that "people on Wall Street are as honest and moral as other people," reports the Harris Poll. This year, only 26 percent think so.

Corporate CEOs stir similar ire. With 9 percent unemployment, languishing stock prices and stagnant wages, CEO pay raises smack of cronyism with compliant directors. When Hewlett-Packard recently fired CEO Leo Apotheker after 11 months with a $13 million severance package, the disconnect between pay and performance was especially astonishing.

Beyond these familiar scapegoats, what can we say about growing economic inequality? Here are three generalizations.

First, the increase has been stunning. From 1945 to the late 1970s, the richest 10 percent of Americans accounted for about 33 percent to 35 percent of total income, including capital gains (mostly stock profits), estimate economists Emmanuel Saez and Thomas Piketty. By 2007, their share was 50 percent — equivalent to the late 1920s. Most of the gain went to the richest 1 percent, whose share rose from about 10 percent in 1980 to 24 percent in 2007.

Second, it's a global phenomenon. In a 2008 study, the Organization for Economic Cooperation and Development found that inequality had increased for 17 out of 22 countries over two decades, though conditions vary dramatically by country. In Sweden and Denmark, the richest 10 percent have incomes about five times greater than the poorest 10 percent. In the United States, the ratio is 14-1. The OECD average is 9-1. Mexico has the highest, 27-1.

Finally, most of America's rich — however defined — don't escape taxation. In 2007, the richest 10 percent paid 55 percent of all federal taxes, estimates the Congressional Budget Office. The richest 1 percent paid the lion's share of that: 28.1 percent of federal taxes. The average tax rate on the top 1 percent was 29.5 percent. Similarly, the richest 3 percent account for 36 percent of charitable contributions.

Whatever the cause, inequality is a new political fault line. Just last week, Senate Majority Leader Harry Reid, D-Nev., proposed a 5.6 percent surtax on those making more than $1 million to pay for President Obama's $447 billion jobs program. What could be easier? Millionaires are few in number (about 534,000, says the Tax Policy Center). They're increasingly unpopular, and they can afford it.

The trouble is that the wealthy don't fit the stereotypes: They aren't all pampered CEOs, hotshot investment bankers, pop stars and athletes. Many own small and medium-sized companies. Half the wealth of the richest 1 percent consists of stakes in these firms. That's double their holdings of stocks, bonds and mutual funds, according to figures compiled by economist Edward Wolff of New York University. Reid would pay for Obama's jobs plan by taxing the people who are supposed to create jobs. Does that make sense?

The backlash against the rich is the start of debate, not the end. However measured, the rich are besieged; the attacks almost certainly will intensify.

Robert J. Samuelson is a Washington Post columnist.

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