America's richest have seen the top tax rate on their income drop by half since 1980. They must feel, suggests a just-published analysis of tax cheating data, they deserve a bigger discount. We have the story in this week’s Too Much.

We also have the scoop on an in-depth new report that looks at income and wealth distribution in 30 of the world’s top democracies. The most unequal of these nations? Move over, Turkey and Mexico, the United States is closing fast!

Few U.S. news outlets have given this alarming new inequality study much attention. But that’s understandable. They’re simply too busy. Somebody has to cover all those Presidential campaign claims that wealth in America needs absolutely no redistributing.

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In tough times, Senator John McCain told a New Hampshire rally last week, “the redistribution of wealth is the last thing America needs.” Alaskans might disagree. This year, every single resident of Alaska — no matter how young or poor or productive — will receive a $3,269 check from the state. A family the size of Alaska Governor Sarah Palin's household will receive $19,416. Alaska has been “spreading the wealth” ever since a 1976 state constitutional amendment created a special fund that invests at least 25 percent of the rentals and royalties Alaska gets from letting oil companies operate on state-owned land. Most of the earnings from these investments go directly to state residents. Any state, says the U.S. Basic Income Guarantee Network’s Karl Widerquist, could follow the Alaska model. Explains the political scientist: “Alaska has oil wealth; other states have mining, fishing, hydroelectric, or real estate wealth.”

New York has become the world’s ninth most unequal city, says a new UN report, and other top U.S. cities — Atlanta, New Orleans, Washington, and Miami — are sporting gaps in income and wealth as wide as the divides in the urban Third World. The UN-Habitat agency report released last Thursday compares 120 urban centers. The economic inequalities the study found, says agency executive director Anna Tibaijuka, have “a direct impact on all aspects of human development,” everything from health to education. Inequality, she adds, exacerbates social unrest, in the process diverting “public and private resources from social services and productive investments to expenditures for safety and security.”

On matters economic, Bob Zagame must like to look at the bright side. Last week, in the midst of the greatest global financial collapse in generations, this Australian auto dealer opened a brand-new luxury car emporium in Melbourne. His new $30 million auto palace will offer the Southern Hemisphere’s widest selection of motor cars from Ferrari and Maserati. Zagame already has a two-year waiting list for Ferrari’s latest convertible. The sticker price: $450,000. Neville Crichton, the Ferrari distributor for Australia, couldn’t be more tickled. Notes the importer: “I think there are people that are out there who are reluctant to show off their wealth at the moment, but there are many others that are happy to show it.”

Is there honor among thieves? Maybe. Among investment bankers, on the other hand, a sense of entitlement appears to have the upper hand. Despite the financial crisis, say survey results released last week, two-thirds of the financial pros at six top global banks — Barclays Capital, Deutsche Bank, Goldman Sachs, Merrill Lynch, UBS, and Credit Suisse — are still expecting bonuses this year. And over half these power-suits are expecting this year’s bonuses to run at least as high as last year’s. Many of those who don’t get the bonuses they expect, says attorney Julie Morris of the London-based Russell Jones & Walker, will probably be suing. Their hero: James Keen, a manager at Commerzbank who lost his job three years ago when the bank shut down his trading desk. Keen had pocketed bonuses of $3.85 million in 2003 and 2004 and claimed he was owed a similar bonus for 2005. He won his case . . .

Merrill Lynch power-suit Peter Kraus is losing his job, too — as the bank’s strategy chief — but he isn’t suing anybody. Kraus will walk away with as much as $25 million, the Wall Street Journal reports, when Bank of America finishes gobbling up Merrill later this year. Not bad for four months of work. Kraus, a former Goldman Sachs exec, only joined Merrill in September, right before the banking giant started going belly-up. What about the anti-golden parachute provisions in the bank bailout bill Congress passed last month? Not a worry for Kraus. The bailout’s CEO pay restrictions will only apply to the top five execs at Merrill, an exclusive club that doesn’t happen to include Kraus.

Quote of the Week

“We need to cut back compensation in this industry.”
Ken Lewis, the Bank of America chief executive who has pocketed $213 million in pay since becoming the bank’s CEO in 2001, The Herald, October 23, 2008

New Wisdom
on Wealth

Linda McQuaig, Maybe the rich are the problem, Toronto Star, October 21, 2008. If extreme inequality leads to speculation, as the evidence suggests, then “meaningful solutions may have to go beyond re-regulation, and include a return to higher taxes on the rich.”

Sarah Anderson and Sam Pizzigati, Rewrite bailout rules on CEO pay, Seattle Post-Intelligencer, October 21, 2008. Urges Congress to place “real executive pay limits on all the financial institutions that get our taxpayer dollars.”

Paul Campos, Wealth on move — to the rich, Rocky Mountain News, October 21, 2008. The last 30 years, explains this University of Colorado law prof, have seen “an astounding generational transfer of literally trillions of dollars from nine out of 10 Americans to the super rich.”

Who's Cheating Uncle Sam?

Back in 2005, IRS officials released a major new report on the “tax gap,” the difference between what Americans owe in federal income tax and what they actually pay. The next year, an IRS update to the data in the original analysis put that gap at a stunning $345 billion a year.

But left unclear in this IRS data dump: Who exactly is cheating at tax time?

Now we know.

America’s tax cheats, says an analysis of IRS data that surfaced last week, come disproportionately and overwhelmingly from the ranks of America’s rich.

Americans who make between $500,000 and $1 million a year underreport their incomes by a whopping 21 percent. That’s triple the 7 percent “misreport” rate of taxpayers who make between $30,000 and $50,000 and well over double the 8 percent cheating rate by taxpayers between $50,000 and $100,000.

The raw data behind all these stats originated in the IRS tax gap research, an undertaking that examined 45,000 randomly selected returns from 2001. In the paper that went public last week, two analysts — IRS economist Andrew Johns and the University of Michigan’s Joel Slemrod — have broken the data from this massive audit effort down by income level.

The IRS original reports on the 2001 “tax gap” data included no income-level analysis. The IRS did release data, in these reports, on the categories of income that go underreported, data that help explain the new finding that the wealthy do most of the nation's tax cheating.

Average Americans get most of their income from wages, salaries, and tips. Only 1 percent of this income goes unreported, IRS investigators found in their original research.

Rich Americans, by contrast, collect huge chunks of their annual income from capital gains and business ownership. Business income went unreported by 43 percent in 2001, capital gains by 12 percent.

The newly published income-level analysis from Joel Slemrod and Andrew Johns does offer up one head-scratcher of a stat: America’s very richest — those who make over $1 million a year — show lower cheating rates than taxpayers in the $500,000 to $1 million range. But Slemrod told Forbes last week that he’s not particularly “comfortable” with that finding.

The super rich, the Michigan economist went on to explain, were likely exploiting tax shelters in 2001 that the later IRS audits simply did not detect.

Indeed, Forbes points out, the federal government is now suing the Swiss banking giant UBS “for the names of 18,000 wealthy Americans it believes may have had unreported Swiss bank accounts.”

So what do the new tax cheating numbers, in the end, tell us about the contemporary United States? The United States has become even more top-heavy than the best of the official inequality statistics would have us believe. The best stats use income data from tax returns. These returns, last week’s revelations make clear, don’t tell us everything we need to know.

The rich, in other words, are grabbing off substantially more of the nation's wealth than we ever imagined.

Spreading Wealth, Living Safer

Growing Unequal? Income Distribution and Poverty in OECD Countries. Organization for Economic Co-operation and Development. October 2008. 310 pp.

Some things in life just happen naturally. Water, for instance, always seeks its own level, no matter where in the world you may be. “Free market” ideologues like to think the distribution of income and wealth works the same way.

Free the free market from “government intervention,” these ideologues assure us, and the resulting distribution of treasure will be as natural — and appropriate — as any social phenomenon can be.

In reality, of course, distributions of wealth never just “happen” naturally. All modern societies face sets of fundamental core questions. Their answers determine in whose pockets wealth ends up sitting.

Societies grapple with these core questions over and over. Should we let our already rich and powerful do whatever they want or limit their behaviors? Should we guarantee every child a real chance at fulfillment and success? Should we tax income from labor at the same rate as income from wealth?

No two nations answer questions like these in the exact same way. No two nations, consequently, sport the same exact distribution of income and wealth. Some nations, the Paris-based Organization for Economic Co-operation and Development announced last week in a major new report, keep wealth spread around broadly. Others let wealth concentrate.

Growing Unequal? — the new report from the 30-nation OECD — documents these differences with an avalanche of detail. Every page, every chart, every table brims with evidence of just how unequal the world’s most significant democracies have become.

The OECD researchers have measured this inequality against a variety of yardsticks. But the yardsticks all tell the same basic story. Of the OECD’s 30 members — the major nations of Europe and North America, along with Turkey, Japan, South Korea, New Zealand, and Australia — the United States repeatedly ranks among the most unequal.

One example: The top 10 percent of Americans, after adjusting currencies to equalize purchasing power, rank first on income in the OECD 30. They pocket more income than any other nation’s top 10 percent. The bottom 10 percent of Americans, meanwhile, rank 20th in average income. Poor Americans take in 20 percent less income than the overall OECD average.

Americans at the “90th percentile” of the income distribution — that is, people who make more than 89 percent of the population — make on average just about six times what Americans at the 10th percentile make.

In Denmark, Sweden, and Norway, people at the 90th percentile average less than three times the income of people at the 10th.

"Rich households in America have been leaving both middle and poorer income groups behind,” notes the OECD. “This has happened in many countries but nowhere has this trend been so stark as in the United States.”

America’s deep inequality, Growing Unequal? posits, has consequences. Low-income people become middle- and high-income people more often in more equal countries. And, the new OECD study adds, excessive income inequalities go hand in glove with higher crime rates and lower life expectancies.

Joe the Plumber, are you listening?

Stat of the Week

Over half the American people — 51 percent  — favor “heavy taxes” on the rich to redistribute wealth, according to a Gallup poll conducted this past April, the most recent Gallup survey that has quizzed the public on attitudes toward taxing the wealthy. In 1939, near the end of the Great Depression, only 35 percent of Americans gave Gallup the same answer.

Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org.