The five pillars of the growing inequality in the U.S.

Published on Intrepid Report, by Rodrigue Tremblay, December 18, 2012.

On November 6, 2012, American voters chose not to entrust their central government to ultra-conservative billionaires and their candidates, and they rejected their anti-government, low taxation and no regulation ideology. 

One reason may be that there is a perfect storm brewing in the United States in the direction of an ever greater income and wealth inequality. However, a majority of Americans are beginning to understand that the ultra-conservative ideology and the government policies it generates play a large role in the fact that a minority of very rich people are getting richer while a majority of poor and middle income people are getting poorer.

Recent studies indicate that over the last thirty years, in the United States, the rich have been getting richer at the same time that the poor and the middle class have become poorer … //

… First – The ideology of an open world market and the free movement of capital and companies:

  • Once the principal comparative advantage that the United States used to have over other national economies was its large domestic market. An economic principle states that “economic specialization is a function of the size of the market.” Indeed, when producers can mass produce, this results in economies of scale, with unit costs going down and productivity going up.
  • However, the U.S. government gave up a large chunk of this comparative advantage when, pressured by large banks and large corporations, it accepted free trade and free capital movements with some developing countries, including communist China.
  • This policy has allowed U.S. firms to out-invest and to outsource their production to low-wage countries under the cover of the ideology of world free movement for capital. This was advantageous to the CEOs of these banks and companies, but it severely disadvantaged the American working class. What’s more, outsourcing companies could take advantage of the U.S. tax code and not pay any tax on their foreign earnings. The U.S. central government and U.S. state governments have suffered as a consequence.

Second – A broken immigration policy:

  • Not only did the U.S. government allow American companies to export their capital and technology abroad, but its immigration policy of letting in poorly trained and/or low wage foreign immigrants also has had the effect of keeping down the wages of low-skilled American workers in many industries.

Third – A tax code skewed in favor of the very rich:

  • The overall fiscal crisis in the United States is the result of low economic growth, of a declining share of corporate tax revenues and of huge tax cuts for the very wealthy. Lower effective taxation for large corporations and for the very wealthy individuals who can park part or all of their financial wealth abroad, has allowed them to avoid domestic taxation. These taxation loopholes combined with huge public deficits are at the very root of the U.S. fiscal crisis.
  • Indeed, corporate tax revenues in the U.S. are at a 40-year low as a share of Gross Domestic Product (GDP). Presently, this ratio is close to 1 percent. In the 1950s, it was around 6 percent of GDP. This is because large American corporations have become “expert at avoiding taxes” by shifting production to low-wage countries and by shifting profits to low-tax countries.
  • Sycophant media sometimes point out that the U.S.’s top corporate tax rate is 35 percent. However, they fail to report that the real amount American corporations actually end up paying to the government is much lower, sometimes as low as4 percent or less. This is the result of various deductions, write-offs, and other accounting tricks that allow corporations to legally reduce their tax burden. As for the taxation of very high incomes, legislators should at the very least consider adopting Warren Buffett’s rule for tax fairness. Indeed, according to the Buffett Rule for tax fairness, no household making over $1 million annually should pay a smaller share of their income in taxes than middle-class families pay.

Fourth – The housing crisis, the financial crisis and the Fed’s policies to shore up large banks:

  • The 2005 housing crisis and the subsequent financial crisis that unfolded after 2007 has hurt the American middle class badly. Not only millions of Americans lost their homes through bank foreclosures, but most everyone else suffered huge losses in their home equity and saw their net worth severely reduced.
  • Add to that the fact that savers and retirees have been crushed by a Fed policy of negative real short- and medium-term interest rates that have reduce interest income, a policy designed primarily to shore up large nearly insolvent, and close to bankruptcy, American banks.

Fifth – The waging of foreign wars financed with debt:

  • The very rich in the United States are inevitably at the forefront when it comes to supporting U.S. foreign wars of aggression abroad, but they are usually most reluctant to pay for such wars with the required tax revenues. Moreover, not only do such foreign wars increase the federal fiscal deficit, they also increase the U.S. trade balance deficit and they put pressure on the U.S. dollar … //

… (full longer text).

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