Widening income gap endangers vulnerable in US and Jamaica

Last week, I pointed to the political-economic conundrum that is stymieing policymaking in critical areas where Americans need to carry out reforms if they are to maintain their dominance in the global economy.

Ideological cleavages are now widening to an extent that policy reforms in social welfare, energy, infrastructure development, and America's fiscal budget are stalled. Underneath, the increasing incoherence between politics and economics in the United States is a growing income disparity at levels that go back to the days of the Great Depression.

Generally, the highest levels of income inequality are recorded in developing countries where the 'Gini coefficient' - an economic indicator of inequality - usually stands well above those of developed countries. But in recent years, inequality has so increased in the United States that it has now slipped into the company of developing countries with a coefficient in the mid-2000s, just less than Jamaica, on par with Uruguay, but higher than Ghana. America has also become far more unequal than the countries of the European Union and the United Kingdom since the 1970s.

concentrated income

The raging debate between the Democrats and Republicans on the measures to be taken to deal with America's fiscal and debt problems has highlighted just how income has become highly concentrated since the mid-1970s. In countering Republicans' resistance to the rolling back of tax cuts for the wealthiest Americans, the Democrats have pointed to some startling statistics. First, whereas the top 0.1 per cent of income earners accounted for 2.5 per cent of personal income in the United States in 1975, by 2008 their share had risen fourfold to 10 per cent. And the top one per cent now rakes in 20 per cent of total personal income.

An overriding factor driving this income disparity is how the benefits of large productivity increases in America's economy have been distributed in the past 30-odd years. While corporate executives have, in some cases, seen their pay packets increase tenfold, hourly wage rates across some industries have actually declined somewhat as the unionised workforce has shrunk and trade unions have lost their bargaining power. Compensation levels garnered by executives, especially in financial companies, were spectacular in the bubble years leading up to 2008.

Overall, the result is that the fruits of productivity gains have gone disproportionately to capital and the professional classes. Further, as wages have stagnated in the aftermath of the recession, income inequality in America has most likely widened. On top of the disparities in incomes, tax breaks excessively favour high-income groups in America. Millionaires and billionaires so structure their financial affairs to maximise the benefit of the tax breaks that they end up with effective tax rates far below those of the average worker.

Republicans seem prepared to defend the status quo in the negotiations on a fiscal and debt-reduction package. With an ideological fervour not seen since the end of the Cold War, they have ruled out reform measures that would shift the burden of taxation modestly to the highest-income groups - measures that would substantially increase revenues. In other words, one of the traditional policy tools used to tackle income disparities is being ruled out even in the face of an impending fiscal crisis.

debt limit increased

It is still too early to say how this struggle will play out as the deadline for the raising of the debt limit of the US government approaches. Politically, the Republicans may feel that given the usual opposition to tax increases, and with unease about the economy, rising public opinion will be in their favour. Democrats, on the other hand, will be calculating that with tax increases ruled out, the spending cuts to popular social services that would be needed would be so great as to stir a backlash against opponents. In uncompro-misingly defending the status quo, the Republicans may also end up pushing the global financial system to the edge.

Jamaicans have been asked to review the Green Paper on tax reform tabled by the finance minister in the Budget Debate. The proposals involve a further shift to greater reliance on GCT, which would mean that lower-income groups that spend a greater share of their income on consumption would typically be more affected. This is likely to be the case even if the GCT rate is reduced.

These proposals require careful consideration, particularly in a context where the number of households falling below the poverty line has increased significantly since the downturn in the local economy. Jamaica's 'Gini coefficient' would also have increased in the last few years. Jamaica's greatest priority is to generate strong growth with rising employment, but this should not be disconnected from sensitivity to issues of equity in taxation and otherwise.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.