Chye-Ching Huang and Chad Stone:

Income Concentration at Highest Level Since 1928, New Analysis Shows : Average pre-tax incomes in 2006 jumped by about $60,000 (5.8 percent) for the top 1 percent of households, but just $430 (1.4 percent) for the bottom 90 percent, after adjusting for inflation, according to a new update in the groundbreaking series on income inequality by economists Thomas Piketty and Emmanuel Saez. Their analysis of newly released IRS data shows that in 2006, the shares of the nation’s income flowing to the top 1 percent and top 0.1 percent of households were higher than in any year since 1928...

Gene Sperling http://www.harrywalker.com/articles/Sperling_FinancialTimes_Jan2006.pdf:

How to reform a winner-takes-all economy: Two of President George W. Bush’s economic goals... will be to convince anxious American workers that they should not lose faith in an open, global economy and that they should support tax reform that moves the US closer to eliminating all taxation on investment. What must be recognised, however, is the growing degree to which these two policy goals are in conflict. While the president is essentially right to stress that we cannot turn our back on open markets and globalisation, his rhetoric and policy framework ignore the increasing winner-takes-all and loser-loses-all tendencies in the US economy.

Last year, the wealth of the richest 400 Americans climbed to nearly double the 1982 level as a share of US gross domestic product; but we also saw those suffering losses taking steeper falls. Jacob Hacker of Yale University has found that when US families suffer a drop in income, they face 40 per cent declines on average. At the same time, Lawrence Katz, the Harvard economist, has documented the increasing polarisation in the US labour market as earnings grow at the high end while opportunities for middle-class jobs dry up.

Such extreme gains and losses are often due to significant differences in education or skill but as Robert Shiller, the Yale economist, has written, the unpredictability, speed and vastness of global markets have also enhanced the role of luck, or slight timing advantages, in determining who falls into the winners or losers circles.

Consider twin brothers with equivalent education and work histories, who each took good jobs six years ago--one, fortunately, with Google, the other, less fortunately, with Lucent. Since the investment community was still betting on Lucent in early 2000 and Google was just getting established, it is hard to say that skill led one worker to $2m in stock options and the other to a pink slip and a job retraining programme.

Even though such differential outcomes can seem unfair to many, this is a price we gladly pay for a free market economy. Our progressive tax system has been part of the way the US has balanced the desire for a free economy with the values of equity. Yet, eliminating taxation on investment income exacerbates--not moderates--winner-takes-all outcomes.

Consider our brothers. If the one at Lucent finds a new, $60,000 a year job, he could pay about 25 per cent in federal taxes (including payroll taxes). Yet, under Mr Bush’s tax policy, if his twin at Google can find a solid 6 per cent return investing his $2m, he can make at least $120,000 a year while paying a lower 15 per cent tax rate. If we move closer to Mr Bush’s vision of zero taxes on dividends, capital gains and inheritances, the Google twin could watch his gains accumulate tax-free year after year and then pass on his wealth to an heir, tax free.

Moving the US tax code in this direction is wrongheaded on both economic growth and value grounds. Progressive taxation is critical to marshall the resources to ensure that those who end up at Lucent or Delphi have the support and education to get second and third chances in the global economy. Without a greater cushion against falls in the global economy, workers may opt to take less risk on their future, just as entrepreneurs would risk less if they thought a single bankruptcy would land them in debtors prison.

Furthermore, a tax system that eases the Google’s tax-free wealth accumulation but forces his brother to pay higher taxes on income earned through labour betrays American values that honour the hard work of the middle class over policies that perpetuate an economic elite. A better tax reform plan would prevent the most privileged Americans from paying lower taxes on their investment than typical families pay on their wages, while encouraging savings and wealth creation for struggling workers. We could start by ending our current system of giving those in the highest tax brackets more than twice the tax deduction of typical workers and creating a flat tax incentive for savings â€“ a 30 per cent credit for everyone. More important, we should provide automatic matching credits for moderate income workers to save--essentially creating a universal 401(k) plan for retirement savings accounts for all Americans.

So if the president really wants to build support for greater openness in the economy, he needs to focus on tax reform that expands the winners circle, not reform that expands the current winners fortunes.

The writer, a former national economic adviser to President Clinton, is a senior fellow at the Center for American Progress and author of The Pro-Growth Progressive (Simon & Schuster)