Meadville Tribune


March 3, 2014

How to fix the inequality of wealth? Develop an educated and trained population

If you haven’t already heard, you will hear soon about the “inequality of wealth” in America. The concept is that the pool of wealth in America is concentrated in the hands of 1 or 2 percent of the population and the rest of us are left with the balance. Everyone, regardless of politics, agrees with this assessment. Remember that we are talking about trillions of dollars and even a small percentage represents a whole lot of money.

How is it that this huge divide occurred? It’s a complex question and there might be answers that most of us can only imagine, but here are a few simple things to consider. The gulf between the super rich and the rest of us grows in times of bad economy because the working man may not be working, hence no creation of wealth on the bottom end. The very rich have the ability to scoop us some bargains in a bad economy and develop even greater assets.

The difference between the two groups began to worsen or become steeper, if you will, during the Bush administration but has become even more exaggerated during the Obama administration as the unemployment rate has been at nearly all-time highs and wealth formation for the working people has tanked with employment woes. What makes matters worse is the thinning of the middle class.

The middle class was populated by workers who had jobs in American manufacturing industries, most notably the auto and steel industries. Additionally, these manufacturers created spinoff employment for thousands of jobs for suppliers that produced goods and services for them. Unfortunately, those jobs perished in the global economy and our workers were originally replaced by the Japanese, Koreans and Chinese.

Now, those employees have been supplanted by the Vietnamese, Indians and other third world venues. Some of the automaking jobs have returned to the U.S., but at rates far lower than the Big Three paid their employees. Additionally, the bar has been raised for technical better-paying jobs here and, in most cases, they go partially unfilled because the skill sets aren’t available for the remaining more technical positions.

So, with the shrinking middle class there is a proportional decrease in spending on durable goods and services. For practical matters, the diminution of the middle class is bad for our economy in the short and long run, and that doesn’t take into account the human costs of sliding down the economic totem pole. Remember also, the middle class members pay a fair amount of taxes that supports all sorts of governmental activities, including food stamps and other programs for our unfortunate citizens. There are a lot of reasons, then, to make sure the middle class stays healthy and robust, for everyone’s interest, including the upper 1 or 2 percent of the hyper rich.

Now that we have established this, what probably won’t work and probably will work? Raising the minimum wage to the levels I have heard, $10 or so an hour, is not a short- or long-term solution. Only 1 to 3 percent of the population is currently getting the minimum wage for full-time employment. Most minimum wage employees are part-time, teenage or retired workers and not primary wage earners.

Of course, the $3 increase is better than nothing and will help them, but for the economy as a whole, the effect will be negligible. Don’t get me wrong; if you want to raise the minimum wage to $10 per hour on humanitarian levels that’s OK, but certainly on no other level. Even a $3 increase doesn’t raise a single wage earner to the “livable” wage that we hear thrown around a lot.

Additionally, the increase may lessen the number of teenagers and part-timers who are hired as employers reevaluate their staffing needs. Further, as labor costs rise, the push for automation to replace manpower grows concurrently. Oh, if you arbitrarily raise the minimum wage to a “livable” wage without a concurrent increase in worker productivity, you will bankrupt nearly every small local employer who hires these workers. How about changing the tax code to force a distribution of assets from the very rich to the very poor?

On the face of it, that seems inequitable since most of the very rich have earned their wealth through legitimate means and just turning it over to someone who hasn’t earned the money, just doesn’t seem quite right. Of course, this also creates a disincentive to work hard in both the very rich and the very poor.

The top 1 percent of our taxpayers pay about 80 percent of the total tax revenue. I guess you might adjust their taxes upward, but even if they paid 100 percent of the tax liability, that’s not enough to finance our deficit spending government and their rates would be at an astronomic level; why work or why not find a legitimate tax haven?

I would like to see the tax code adjusted, though, and that would involve corporations. I’d like to see the practice of intra-corporate transactions controlled. Now, our multi-national corporations sell goods and services to their various foreign divisions from American counterparts. Since the American tax rate on corporations is much higher than some foreign countries like Ireland, for example, the American divisions sell goods and services at a loss to their foreign counterparts. Any profit generated within the corporation has in essence been sent to a foreign, less expensive taxing authority. The tax loss is kept in the U.S. and here, while the tax rate is much higher, the corporation has no tax liability since it has sold its products or services to the foreign division at a loss. This stinks, but is perfectly legal and explains why almost every American-based multi-national corporation has some foreign branch in a less expensive tax jurisdiction.

How to stop it? Reduce corporate taxes to compete with foreign governments. A little less of something is far better than a whole bunch of nothing. Let’s say an American based corporation has $2 trillion sitting in offshore accounts begging to come back here for product development and capital investment. Say the corporate tax level was cut to a flat 10 percent, that would be what, $200 billion in tax revenues. Additionally, and more importantly, it would generate a pool to be spent in the economy and job creation and a feeder system to replenish our beleaguered middle class.

Going forward, the flight of American corporate profits would be stopped and more spending here would increase. Even the corporations which don’t have foreign divisions would have less incentive to find loopholes to hide profit and more incentive to reinvest in our home towns.

Of the $200 billion returned to our treasury, I’d like to see a large portion go to subsidizing all educational and job training endeavors of all of our citizens. Any child, for example, whose parents meet low-income criteria should have the benefit of a subsidized education in any four-year college, community college, trade school or technical training program. Corporations or businesses spending money on employee or staff development should receive federal and state tax credits. Since a larger portion of the population will be able and willing to fill more technical positions, the available number of potential employees for the lower positions will narrow and, as a consequence of their smaller number, the wage scale for those positions will increase. In North Dakota, so many laborers are in oil and gas jobs; the starting wage at a fast food restaurant is $15 per hour.

One last point: The pool of wealth in America is not finite. It expands and some portion of it is available to all of us. To get our piece, it is necessary to have some talent, some hard work and some good fortune. Any one of those three components can slide and the result can be equally good or bad. Because someone has a disproportionate amount of the pool doesn’t mean that a part of it is unavailable to us.

I agree that the education remedy is hardly a short-term answer, but it is a long-term fix that will extend for generations. An educated and trained population ultimately will fill the middle class and they will be the consumers that drive the prosperity for all of us, rich and poor alike.

Gary DeSantis is a Meadville resident and author of a recently published book titled “The 6th Floor.”

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