Is Rising Inequality Reversible?

New figures came out at the end of march showing that income inequality in 2005 reached the highest levels since the 1920s. By coincidence, presidential hopeful Rudy Giuliani that same day declared his support for the flat tax and received the endorsement of Steve Forbes. That the current front-runner for the Republican nomination could believe it was in his political interest to call for an end to progressive taxation says a lot about how far his party has to go in recognizing one of the central economic and moral challenges of our time.

Although the basic story of growing economic disparities has become depressingly familiar, the latest report on trends in income is so shocking that it ought to serve as a political wake-up call. During 2005 (the most recent year for which data are available), total income reported to the Internal Revenue Service rose by 9 percent, but all the gains went to the richest tenth. Income for the other 90 percent of Americans declined by 0.6 percent.

In fact, income growth has become so concentrated that the 300,000 Americans who make up the top .1 percent collectively received as much income as the 150 million Americans in the lower half of the distribution.

Like studies of global warming, reports of rising income inequality have elicited a characteristic sequence of responses from the right. First comes denial. Then, as the data accumulate, conservatives insist that, alas, nothing can be done -- at least not without such great costs as to be counter-productive.

Yet, like Giuliani, they often propose to do something about inequality: make it worse. The flat tax is a particularly egregious example. Besides doing away with progressive tax rates, it would eliminate taxes on dividends, interest, and capital gains and shift the burden to labor.

Already, from 1980 to 2004, taxes paid by the top 1 percent fell from 44 percent to 30 percent of income. The flat tax would cut taxes on the super-rich even further, while raising rates for working- and middle-class families who depend on wages for their livelihood.

And the flat tax is hardly atypical of conservative policy ideas. Social Security privatization would increase disparities in income among the elderly. Individual health accounts would exacerbate economic disparities between the healthy and the sick by imposing on the sick more of the costs of their own care. So much of the conservative economic agenda has the underlying message "You're on your own" that Jared Bernstein of the Economic Policy Institute calls it "YOYO economics" -- an apt term, because if Republicans who have embraced these ideas succeed in carrying them out, Americans would be jerked around a lot harder by the economy's ups and downs.

But can Democrats make any difference? Let's look at the record.

Although there has been a long-term trend toward rising income inequality, the two parties have affected that trend in opposite ways. From 1948 to 2001, there were five Democratic and five Republican presidents. According to research on pretax income by the political scientist Larry Bartels, every Republican administration saw an increase in income inequality: Incomes rose more slowly for families at the 20th percentile than for families at the 80th (near the top). In contrast, income inequality declined during four out of five Democratic administrations (all but Jimmy Carter's).

The main explanation for these differences in pretax income, Bartels argues, was macroeconomic policy. Economic growth was 30 percent higher and unemployment 30 percent lower under Democrats than under Republicans. Tight labor markets benefited lower- and middle-income families more than those at the top.

These patterns understate the differences in the impact of party control because living standards also depend on policies toward taxes and noncash benefits not reflected in pretax income. Republican policies have boosted the after-tax income of people at the top, while Democratic tax and transfer policies have spread prosperity to the less-affluent.

What would the elements of a shared-prosperity agenda look like today? Economic policies that promote full employment. A higher minimum wage. Labor laws that protect workers' rights to organize. Health insurance for all. And a rollback of the Bush tax cuts. The rise in inequality since the 1970s may not be wholly reversible, but it can at least be stopped.

Instead of "You're on your own," an agenda for shared prosperity expresses the opposite idea: "We're in this together." That should not be a partisan proposition. Republicans have to see that a shriveled prosperity cannot be an enduring basis for a winning politics.

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