Banta writes: "The difference between the extremely rich - the top 0.1% - and all the rest of us has turned into something with the potential for destroying the fabric of our society and reducing our democracy to a hollow shell."



Occupy protesters warn of class war ahead. (photo: AFP)

For Class Warfare, There's the 1%, and Then There's the 0.1%

By Henry Banta, Nieman Watchdog

he problem of income inequality has at last become a subject for political discussion. Commendable as this is there is something misleading about the current discussion that the press needs to help correct.

There is a point where sheer magnitude can change the fundamental nature of a thing – when something becomes so big, so large, so immense, that it morphs into something very different from all else that otherwise would be in the same category. The staggering growth in the wealth and income of the top 0.1% is just such a thing. It is not just bigger than the gap between the 1% and all the rest, it is so big that it presents a vastly different set of problems.

I'm not suggesting that the difference between the top 1% and the other 99% is not a problem or even that the differences between the top 5% or even top 10% and all the rest of us is not a problem. They are very serious problems. But the difference between the extremely rich – the top 0.1% – and all the rest of us has turned into something with the potential for destroying the fabric of our society and reducing our democracy to a hollow shell.

This is not a new idea. Some time ago David Cay Johnston (who won a Pulitzer for his tax reporting) suggested that the really important gap was not between the top 1% and all the rest of us, but rather between the top 0.1% and everyone else. Indeed, looking at the gap between the top 1% and all the rest is misleading because it hides how insanely large a share is taken up by this tiny 0.1% – even when compared with the share of the bottom half of the top 1%.

All this is not to say that the gaps within the bottom 99% are unimportant. They are, of course, a big deal, but in no way are they as big a deal as the gap at the top. Talking about it in the same way obscures the enormity of the gap at the top. Johnston shows that the disparity within the top 0.1% is actually greater than the disparity within the remaining 99%:

"In 2009, the income entry point for being in the top 1 percent was slightly less than $344,000. . .The median income taxpayer – half made more, half made less – made slightly less than $33,000 that year (and their average adjusted gross income was under $15,300, or less than $300 per week). The median income taxpayer would need 10.6 years to earn as much as someone at the low end of the top 1 percent.

Using 2010 estimates, Emmanuel Saez (University of California) reports that the average income of those 140,550 families in the top 0.1% was $2,802,020. Within this tiny fraction income is even more highly concentrated; the top 15,617 families in the top 0.01% had an average income of $23,846,950. (Editor's note: The New York Times ran a profile of Saez on April 16th.)

Again, none of this suggests that the broader issue of inequality is not important. It goes to the basic values of economic opportunity and fairness that are the ultimate justification and moral foundation of our market system.

Unfortunately a large part of the upper class has opted out of the world that most Americans live in. Perhaps Charles Murray (Coming Apart: The State of White America, 1960-2010) is right when he identifies a new upper class that lives apart in affluent upscale neighborhoods with people much like themselves in terms of income and education. They send their children to private schools, never serve in the military, and almost never come in contact with people who do not have at least a college education. He may be right in seeing the increasing isolation of this class as a serious problem, but what Murray may be wrong about is its power – certainly relative to the very top.

There are at least three things that distinguish the lower ranks of the well-off from the very rich, the top 0.1%. First, the very rich are uniquely able to dramatically affect the political process. The current Republican primary season has given us a spectacular demonstration. Without Sheldon Adelson's wealth (about $24.9 billion, according to Forbes) how long would Newt Gingrich have been able to keep his campaign alive? The bottom part of the top 1% may be rich but how many can buy TV time to promote their own causes and candidates? How many can hire scores of lobbyists to promote their own legislation? How many can afford battalions of consultants and lawyers who can endlessly parse the economic opportunities available in a global market? How many can use off-shore financial institutions to avoid taxes? The corridors of power are uniquely the territory of the very rich.

Second, about 60% of the income of the top 0.1% comes from the corporate and financial worlds. The sources of income for those a notch or two down from the very top seem to be far more persified than those at the top. This lower end of the scale appears to include very successful physicians, lawyers, corporate middle managers, entrepreneurs, sports figures – people whose wealth and income may be in multiple millions, but not billions. In contrast, those with the very highest incomes come from the top ranks of corporate management and finance. What is most notable about this group is that their income has absolutely exploded over a very few decades without a decent explanation.

Perhaps an argument can be made that the wealth and income of those below the top 0.1% represent the rewards of success. But this argument has a hollow ring when made for the very top. The enormous increase in top management compensation has defied all efforts to relate it to performance. In several articles on wealth in the Washington Post, Peter Whoriskey (June 13, 2011, June 23, 2011, Sept. 22, 2011, Dec. 5, 2011) reported, among other things, that executive compensation in major firms has roughly quadrupled since 1970s. No compelling reason has been offered as to why virtually all the benefit of the economy's increase in productivity should go the very top while middle class wages stagnate. After the financial crisis of 2007-8 the financial sector's claim to its massive share of the GDP is nothing short of ludicrous.

This issue of the income source is often ignored by those who would confuse the question of the astronomically rich with the ordinary rich. In a recent op ed piece in the Wall Street Journal, Phil Gramm and Steve McMillin attributed the growth of inequality to changes in the tax code that reduced the personal rate below that of the corporate rate, creating an incentive to turn what otherwise would have been corporate income into personal income. They also attribute it to Reagan's promotion of a golden era of entrepreneurial enthusiasm. But this explains very little regarding the inequality at the 0.1% level.

The third important aspect of this monstrous skewing of income to the very top is that dealing with it may present an insurmountable difficulty for anyone who thinks that it is a problem that public policy should address. The conventional approaches to inequality, education and tax reform are plausible enough in the context of the 99% versus the 1%, but the concentration at the very top presents a special problem. Education is hardly relevant; except in very rare cases it is implausible that the top 0.1% owe their wealth and income to superior education. As to tax reform, it most certainly could provide a solution. But tax reform on the scale necessary to make a dent in the position of the top 0.1% would have to be on a massive scale, restoring a degree of progressivity not seen since Eisenhower. The Tax Policy Center notes that the top 0.1% received 38% of all capital income in 2011.

The pursuit of better education and modest tax reform has broad appeal. As a means of restoring some measure of economic mobility they are essential, and in a political sense they are also safe. They are not likely to trigger cries of "class warfare;" indeed they can be used to avoid confronting the problem of the very rich. Three things will be necessary to face this problem. First, real progressivity must be restored to the tax code. This requires very steep rates at the very top, and it requires the elimination of the vast opportunities for avoidance or evasion in off-shore tax havens.

Second, and perhaps more importantly, the question of corporate governance must be honestly addressed. Corporate boards of directors must be discouraged from incestuously and unconscionably wasting resources on extravagant management compensation. Finally, the sheer scale of the financial sector must be reduced. At present the financial sector is able to suck far too much out of the economy for the service it provides – both in terms of money and talent. It can do this because of insanely generous tax treatment and the excessively permissive regulatory environment it currently enjoys.

None of this will be easy. The very rich are unlikely show any remorse over their success in accumulation a massive share of the nation' wealth. They can be counted on to defend their wealth and income with all the means at their disposal. Those few who get 38% of the nation's capital income are likely to consider its taxation as a matter of strong personal interest. Harold Meyerson in the Washington Post describes the vehement outrage from Wall Street in response to the modest efforts of the Obama Administration to reign in the most egregious misconduct.

One can only imagine the political war that would follow any serious effort to restore the middle class to its previous position. The Supreme Court's decision in Citizens United has provided the super rich with an awesome arsenal of weapons that they will not be reluctant to use.