The Price of Inequality: How Today's Divided Society Endangers Our Future (52 page)

35.
See Susan Fleck, John Glaser, and Shawn Sprague, “The Compensation-Productivity Gap: A Visual Essay,”
Monthly Labor Review
,
January 2011, pp. 57–69. Movements in the share of labor (or labor compensation) in national income are also affected by changes in sector composition and government wage policies.

36.
Which means that if the firm makes losses, the most that a shareholder can lose is the amount he has spent on his shares. By contrast, with unlimited liability partnerships, a partner can lose not only his original investment, but much more.

37.
A takeover battle occurs when some outside firm tries to buy enough shares to get control of the firm and displace existing management.

38.
The notion that management may not pursue the interests of shareholders—that there is, in modern America, a separation of ownership and control—was advanced by A. A. Berle and G. C. Means,
The Modern Corporation and Private Property
(New York: Macmillan, 1932). An explanation for this separation, in terms of costly and imperfect information, was provided by J. E. Stiglitz, “Credit Markets and the Control of Capital,”
Journal of Money, Banking, and Credit
17, no. 2 (1985): 133–52. There is a large subsequent literature on these topics. See, e.g., Aaron S. Edlin and Joseph E. Stiglitz, “Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies,”
American Economic Review
 85, no. 5 (December 1995): 1301–12; and Andrei Shleifer and Robert W. Vishny, “A Survey of Corporate Governance,”
Journal of Finance
52, no. 2 (June 1997): 737–83.

39.
John Bogle, the founder of Vanguard Group, an investment management company that manages approximately $1.6 trillion in funds, in his comments on Bebchuk and Fried,
Pay without Performance
.
The Bogle quotation is from p. 483 of a review and summary of Bebchuk and Fried by Henry Tosi in
Administrative Science Quarterly
50, no. 3 (September 2005): 483–87.

40.
Australia has such legislation. Our corporate executives fought even a “say in pay” provision that would have not been binding on corporations. Shareholders are supposed to “own” the company, but our corporate officers somehow think it’s right that the owners have absolutely no say in the pay of those who are supposedly working for them.

41.
In manufacturing the decline in the share of wages was from a peak in excess of 65 percent at the beginning of the century to 58 percent in 2010; for business income as a whole, from 63 percent in 1990 to 61 percent in 2005; but it then fell further, to 58 percent by mid-2011. One has to treat the data with some caution. The data at the top are distorted by the fact that bankers’ (and other CEOs’) compensation is treated like any other wage, when in fact it’s part of the rents they garner from their positions. To the extent that pay at the top is so distorted, what is going on is in fact not well described by a conventional demand and supply model.

42.
In 2010 a woman’s median wage was 80 percent of a man’s, up from 62 percent in 1979; the median wage among African Americans and Hispanics is 80 percent and 70 percent, respectively, of that among white people.

43.
There is a huge literature on labor market discrimination; see, e.g., Joseph G. Altonji and Rebecca M. Blank, “Race and Gender in the Labor Market,” in
Handbook of Labor Economics
, ed. Orley C. Ashenfelter and David Card, vol. 3, pt. C (New York: Elsevier, 1999), pp. 3143–259. (Of course, there is also a feedback loop in “statistical” discrimination—differences in education, too, are a result of discrimination.) See note 47 in this chapter for further discussion of statistical discrimination.

44.
See, in particular, the Nobel Prize–winning economist Gary Becker’s
The Economics of Discrimination
(Chicago: University of Chicago Press, 1957).

45.
Of course, for a long time, Jim Crow laws reinforced market processes of discrimination. Inadequate public education ensured that those from certain groups began life with a handicap–and that problem continues today.

46.
See, e.g., Dilip Abreu, “On the Theory of Infinitely Repeated Games with Discounting,”
Econometrica
56, no. 2 (March 1988): 383–96. See also George A. Akerlof, “Discriminatory, Status-Based Wages among Tradition-Oriented, Stochastically Trading Coconut Producers,”
Journal of Political Economy
93, no. 2 (April 1985): 265–76.

47.
This is another example of the notion of reflexivity discussed in chapter 5. Psychological phenomena, where individuals’ perceptions are affected by their beliefs, reinforce the result—a phenomenon also discussed further in chapter 5. For a discussion of statistical discrimination, see Edmund S. Phelps, “The Statistical Theory of Racism and Sexism,” 
American Economic Review
 62 (1972): 659–61. For a discussion of the kinds of discriminatory equilibrium just described, see Joseph Stiglitz, “Approaches to the Economics of Discrimination,”
American Economic Review
6, no. 2 (1973): 287–95; Stiglitz, “Theories of Discrimination and Economic Policy,” in
Patterns of Racial Discrimination
, ed. G. von Furstenberg et al. (Lexington, MA: Lexington Books, 1974), pp. 5–26; and K. J. Arrow, “The Theory of Discrimination,” in
Discrimination in Labor Markets
, ed. O. Ashenfelter and A. Rees (Princeton: Princeton University Press, 1973).

48.
See M. Bertrand, D. Chugh, and S. Mullainathan, “Implicit Discrimination,”
American Economic Review
95, no. 2 (2005): 94–98.

49.
These studies are often called “audit” studies. See M. Bertrand and S. Mullainathan, “Are Emily and Greg More Employable Than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination,”
American Economic Review
94, no. 4 (September 2004): 991–1013; and J. Braucher, D. Cohen, and R. M. Lawless, “Race, Attorney Influence, and Bankruptcy Chapter Choice,”
Journal of Empirical Legal Studies
(forthcoming).

50.
See D. Pager, “The Mark of a Criminal Record,”
American Journal of Sociology
108, no. 5 (2003): 937–75; and Devah Pager,
Marked: Race, Crime, and Finding Work in an Era of Mass Incarceration
(Chicago: University of Chicago Press, 20007).

51.
Center for Diseases and Control, “Deaths: Preliminary Data for 2009,”
National Vital Statistics Reports
59, no. 4 (March 2011): 16.

52.
In 2009 a typical Hispanic had wealth of only $6,325, while, as we noted in chapter 1, a typical white had $113,149. Four years earlier a typical white household had “only” ten times that of blacks. About a third of Hispanics (31 percent) and blacks (35 percent) had zero or negative net worth in 2009, compared with half that number (15 percent) for whites. (In 2005 the numbers were 29 percent for blacks, 23 percent for Hispanics, and 11 percent for whites.) Pew ResearchCenter, “Wealth Gaps Rise to Record Highs between Whites, Blacks, and Hispanics,” July 26, 201.

53.
For more discussion of discrimination see chapter 4.

54.
See Tax Policy Center: Urban Institute and Brookings Institution, table available at
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213.
Most of the benefits of the Bush tax cuts went to those at the very top—two-thirds to the top quintile, one-third to the top 1 percent.

55.
Theoretically, the effect of lower taxes on savings is ambiguous because while higher tax rates reduce the return to savings, they force those who are attempting to save for a particular target—like retirement or financing the college education of their children—to save more. (More formally, economists say that there are income and substitution effects that pull in different directions, with ambiguous net effects.) From the perspective of national savings, even if the tax cut in capital gains induced more private savings (which is dubious), it increases the federal deficit. It is particularly unlikely that the gain in private savings is so great as to offset the latter effect.

56.
As chairman of Clinton’s Council of Economic Advisers, I was actively involved in the debate over lowering capital gains, actively opposing it: it was inequitable, the gap between how capital gains and other returns to capital were taxed was distortionary, and the alleged benefits were illusionary. Particularly objectionable was extending the preferential treatment (under both Bush and Clinton) to investments that had already been made. In these cases it was hard to argue that there was any “incentive” benefit to offset the adverse distributional consequences.

57.
D. Kocieniewski, “A Family’s Billions, Artfully Sheltered,”
New York Times
, November 26, 2011, available at
http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?pagewanted=all.

58.
CBO, “Trends in the Distribution of Household Income between 1979 and 2007,” October 2011. Data is for 2007. Numbers vary from year to year.

59.
These numbers refer to capital gains and dividends subject to tax. From Joel Friedman and Katherine Richards, “Capital Gains and Dividend Tax Cuts: Data Make Clear That High-Income Households Benefit the Most,” Center on Budget and Policy Priorities, January 30, 2006.

60.
See James B. Steward, “Working All Day for the IRS,”
New York Times
,
February 17, 2012, available at
http://www.nytimes.com/2012/02/18/business/working-all-day-for-the-irs-common-sense.html?pagewanted=1&ref=jamesbstewart
(accessed March 3, 2012).

61.
See “Richest 400 Took Record Share of Capital Gains during Market Meltdown Year,”
Forbes
,
May 11, 2011.

62.
Ethan Pollack and Rebecca Thiess (based on data from CBO and IRS): Economic Policy Institute, “Taxes on the Wealthy Have Gone Down Dramatically,” April 14, 2011. The famous investor Warren Buffett even called for higher tax payment in his op-ed in the
New York Times
, saying that the very wealthy people like himself pay lower tax rates than the middle class, thanks to special tax categories for investment income. “Stop Coddling the Super-Rich,”
New York Times
, August 14, 2011, available at
http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html
(accessed March 2012).

63.
Conservatives, with their obsession with incentives, should have worried about the peculiar incentives to which having a zero tax rate on inheritances for one year might give rise.

64.
And some, like GE, actually get money back from the government. See David Kocieniewski, “G.E.’s Strategies Let It Avoid Taxes Altogether,”
New York Times
,
March 24, 2011. Its success is based both on effective lobbying for tax provisions that benefit it and on effective exploitation of tax provisions (which it can do, with a tax department of almost one thousand). Multinationals like GE often shift income around, so that it appears that more of their profits originate in low taxed countries. (In the case of GE, e.g., in recent years 46 percent of its revenues originate in the United States, but it claims that only 18 percent of its profits do.) A U.S. Government Accountability Office (GAO) study found that 55 percent of U.S. companies paid no federal income taxes during at least one year in a seven-year period it studied. See GAO, “Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998–2005,” June 2008, available at
http://www.gao.gov/new.items/d08957.pdf
.

65.
Corporate income tax revenue accounted for 30 percent of total government receipts in 1954 and had declined to 9 percent by 2010. See Tax Policy Center: Urban Institute and Brookings Institution, table available at
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=203.
At $191 billion in 2010, corporation tax was equal to 1.3 percent of the nation’s GDP; internationally corporate income tax revenues in OECD countries averaged 2.8 percent of GDP in 2009, the latest year for which statistics were published. See
OECD (2011), Revenue Statistics 2011
,
OECD Publishing, available at
http://dx.doi.org/10.1787/rev_stats-2011-en-fr
(accessed March 2, 2012).

66.
See “Microsoft Outlines Quarterly Dividend, Four-Year Stock Buyback Plan, and Special Dividend to Shareholders,” Microsoft press release, July 20, 2004, available at
http://www.microsoft.com/presspass/press/2004/jul04/07-20boardpr.mspx
(accessed March 2, 2012).

67.
According to an IRS study in 2008, during 2004–05, 843 corporations brought into the United States almost $362 billion of their overseas profits, at the special 5.25 percent tax rate, a savings (over the normal tax they would have had to pay) of more than $100 billion. See Melissa Redmiles, “The One-time Received Dividend Deduction,” 2008 IRS, available at
http://www.irs.gov/pub/irs-soi/08codivdeductbul.pdf
. The Levin report released on October 2011 studied the top 15 corporations claiming the largest qualifying overseas dividends under the 2004 American Jobs Creation Act; it found that after repatriating $155 billion, these firms firms reduced their overall U.S. workforce by nearly 21,000 jobs, and their R&D spending slightly decreased after the tax break. See Permanent Subcommittee on Investigations, Senator Carl Levin, “Repatriating Offshore Funds: 2004 Tax Windfall For Select Multinationals,” available at
http://levin.senate.gov/download/repatriating
-offshore-funds.

68.
It is understandable why there is less redistribution at the state level. States have to compete for people and firms.

69.
Housing subsidies lower it by .9 percentage points, the Supplemental Nutrition Assistance Program lowers it by 1.7 percentage points, and the school lunch program by .4 percentage points. See U.S. Census Bureau, “The Research Supplemental Poverty Measure, 2010,” issued November 2011.