Thursday, November 17, 2011

The Inequality Within the Top 1%

This article tells us how the share of income going to the top 1% is accomplished. It is due to a marriage between Wall Street and Corporate America. The top executives in corporate America receive most of their compensation in stock options. (This shift in compensation happened in the 1980's.) The value of the stock options grows by pleasing Wall Street. Pleasing Wall Street is very simple. They want to see revenue and profit growth. Corporations can do that by cutting costs and by purchasing other companies. Wall Street especially likes it when they can arrange the sale of one company to another. Wall Street also has an influence on CEO selection that is not well understood. Corporate boards, which also benefit from stock appreciation, hope that their selection of a new CEO will please Wall Street and boost the stock price.

This article also points out that the income gap between those in lower regions of the top 1% and those at the very top is by far the widest inequality gap in America. Those at the top of the pile have also benefited from changes in tax policy. Taxes on gains from capital gains and dividends have been cut in addition to a reduction in the top marginal tax rate. Those at the bottom of the top 1% are in the same tax bracket as those at the top, and the tax rate for the top 1% is not much higher than it is for the middle class. That is why Warren Buffet complained that his secretary had a higher tax rate than he did. Most of his income comes from capital gains and dividends.

If we wanted to reduce income inequality in the US, the easiest way to do it would be to eliminate the use of stock options in executive compensation and to tax capital gains and dividends at the same rate as earned income. In other words, we need to eliminate the changes in policies that began in the Reagan era.

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