By Colin McAuliffe (@ColinJMcAuliffe)
New York congresswoman Alexandria Ocasio Cortez made a splash with her proposal to restore the top marginal tax rates on income to levels from the 1960s. In a recent interview on Martin Luther King day, she argued that a society where some can accumulate billions in wealth while others are denied their basic needs such a healthcare is an immoral one. The data clearly show that we have the ability alleviate poverty, but poverty persists nonetheless. Further, while the wealthy have been able to capture increasing proportions of income and wealth, extreme poverty has gotten worse in the US. Regardless of one’s own perspective on morality, it’s impossible to justify this on moral grounds.
As we have noted before, after tax corporate profits as a fraction of the national gross value added, which is the value of all goods and services produced in the country, have been rising. From the 50’s through the mid 70’s, about 2 cents of after tax profits were generated from one dollar of goods and services produced. By 2017, this figure exploded to 10 cents on the dollar. This generated enormous wealth in the form of stock values and income in the form of dividends and capital gains, which mostly accrued to those who were already very wealthy. Over the same time period, the share of wealth held by the top 0.01% of households also shot up.
The wealth captured by those at the top did not trickle down, however. In fact, extreme poverty in the US as measured by the World Bank in terms of per person daily income at $1.90, $3.20, and $5.50 per day (in 2011 dollars) has been increasing at an alarming rate. Despite the widely celebrated progress in global poverty reduction at the $1.90 level, the US appears to be sliding backwards. Extreme poverty rates approximately doubled from 1980 to 2016.
While the number of American enduring these third-world levels of deprivation has been increasing, the relative cost of eliminating extreme poverty has been going down. We use the Current Population Survey (CPS) to estimate how much money would need to be paid to cover the deficit between a family's income and a given poverty level, and then add this up over the whole population. We refer to this as the poverty income deficit. We should note, using the CPS introduces some methodological challenges since many extremely poor families will forget or refuse to report income they got from programs like Temporary Assistance to Needy Families (TANF). This simply means that we will tend to overestimate the extra income needed to end poverty. If we use the simple estimates of extreme poverty rates from the CPS and compare to the World Bank estimates (which use more sophisticated methods and data), we find that we may be overestimating the income deficit for extreme poverty by as much as a factor of 2. Even with our high-ball estimates, the income deficit extreme poverty at the $5.50 level has never exceeded two tenths of a percent of the national income at any time since the 80s.
In fact, over the same time period that corporate profits and wealth accumulation at the top 0.01% went through the roof, the poverty income deficit as a percentage of national income went down or at least held steady. Even if we add in the official US poverty line of $21.70 per person per day (in 2011 dollars), the poverty income deficit is less than the passive capital income taken by the top 1% wealthiest households. This has been the case for decades. The poverty income deficits at extreme poverty levels barely even register on this plot since they are so small compared to the passive income of the wealthy.
As we mentioned in last week’s post on a similar topic, these passive incomes are already taxed, in part to offset existing anti-poverty programs . However, these results give a clear picture of who the economy is designed to serve. Each year, the economy produces large amounts of surplus value which are taken by the wealthy while millions of people remain unable to obtain their basic needs. It’s important to note that this does not have much to do with the relative productivity of the wealthy vs the poor. The wealthy own most of the assets which legally entitle them to take large portions of the surplus value created in the economy, while the poor don’t own those assets.
There is a wide array of potential solutions to this, and perhaps the most obvious is to increase the tax rates on top incomes and to subject households with large accumulations of assets to a wealth tax to offset more expansive anti poverty programs. This is an essential component of a broader project to make the economy work for everyone, which could also include other ideas such as income pre-distribution through policies that increase labor’s bargaining power, worker ownership of capital, common ownership of wealth, and using public resources to directly provision certain basic needs. According to the conventional wisdom, these ideas are more radical than inflicting extreme poverty on millions of people so that a few others can accumulate runaway levels of wealth.
The immorality of this state of affairs should be clear: it’s within our ability to put an end to a great deal of suffering, but, instead, the economy in the US is designed primarily to generate wealth and passive incomes for people who are already rich. As time goes on, we have become more capable of creating a world that lets everyone thrive, which makes the fact that we have chosen not to create such a world a more egregious wrong.
Colin McAuliffe (@ColinJMcAuliffe) is a co-founder of Data for Progress.