School of Public & Environmental Affairs Podcast Series
In today’s challenging economic times, people are more than ever aware that the top one percent of American earners control around 40 percent of the country’s wealth. Spurred, among other things, by such stark income inequality, the headline-grabbing Occupy Wall Street movement pointed the finger directly at the world of high finance, blaming CEOs bankers, and others for creating a world where the rich get richer, and everyone else struggles.
But according to SPEA researcher and economist Brad Heim, income inequality is more complicated. “A lot of people think the very richest people consist of a bunch of investment bankers and some CEOs, and that’s about it. And there are a lot of them up there, about 60% of the top income slice. But that means you have 40% that aren’t in any of those positions--you have doctors and lawyers, you have people that work for universities, some farmers and so on.”
The causes of income inequality, too, Heim says, are often misunderstood and wrongly blamed on nefarious financial doings. Instead, larger forces, like globalization, play important roles. “As transactions costs of doing things in other countries has decreased, that’s served to have lower skilled people competing with people in developing countries for manufacturing and service type jobs, call centers and things like that, and so that’s created downward pressure on their wages.”
At the very high end of income inequality, though, technology and globalization don’t tell the whole story, Heim says. Surprisingly, his research has shown while income inequality has increased in recent years in English-speaking countries, the same has not occurred in non-English speaking first-world nations. Why? Heim suspects the trend has to do with lucrative compensation practices for executives and supervisors in the United States. To test his hypothesis, in a recent study Heim matched IRS tax data with people’s occupations.
“What we found was that about 40% of those within the top one tenth of 1% and slightly less of that for the top 1% were executives, managers or supervisors, people to which those executive compensation stories would apply, and about 20% of people at very top were in financial professions,” Heim says.
Unlike many politicians and protesters, Heim does not view income inequality as objectively bad. Rather it’s a logical and even necessary consequence of capitalism. “To the extent that increasing income inequality leads to social unrest, if people start rioting in the streets in Greece or Italy because of increased income inequality then it could be a problem,” Heim says. “But increased inequality per se I don’t think is necessarily much of a problem. It provides an incentive for people to work harder and to spend a lot of time at work and develop new products and services that consumers might be interested in, and part of the reason you do all that work is there might be a payoff at the end of the day, and if that payoff is large it’s going to lead to an increase in income inequality.”
Furthermore, Heim says, the often-discussed strategy of hitting the wealthy with higher taxes will ultimately do little to close the income-inequality gap. Because while taxes have been raised and lowered over the past three decades, Heim notes, income inequality has increased regardless. “And so if the point of higher taxes is to clamp down on income inequality, it’s ultimately going to be working around the edges,” Heim says. In order to counteract increases in concentration at very top you would really have to sock those people with very high tax rates.”
In any case, Heim says, higher taxes on the rich would affect not only those in the cross hairs of Occupy Wall Street, but also many others. “To the extent that ire is targeted at Wall Street guys making lots of money, any changes in tax policy, depending on you how structure it based on income, is not just hitting the people you think have profited unjustly during the recession but is also hitting different people in different professions, business people and other types. I think that’s something that’s lost in the debate about high income people.”