The State of Working America

A new book out of the Economic Policy Institute compares the American economic model with those of 19 other industrialized countries:

A chapter from the forthcoming book, The State of Working America 2008/2009 by Lawrence Mishel, Jared Bernstein, and Heidi Shierholz, makes these economic comparisons. It finds that among its economic peers, the United States takes home the gold in two categories: productivity and per capita income. But unfortunately, in crucial events that define the winners and losers in American society – poverty, inequality, and work hours – the U.S. is far from medal contention.

“The message here for other countries is ‘Think twice before emulating the U.S. model,’” said Shierholz, the author of this chapter. “Many peer countries have caught up with or surpassed U.S. productivity while achieving much lower levels of poverty, inequality, and unemployment.”
[…]
U.S. per capita income, second only to Norway, comes from the collective hard work done by many hands – U.S. employment rates rank in the top half of its peer countries. But increasingly that wealth comes from working longer hours. The average annual hours of work in the United States, at 1,804, are higher than in any of the other countries in this group.

For all its wealth, the United States has the highest overall poverty and child poverty levels as measured by the share of households that receive 50 percent or less of the median income in each country. The U.S. rate is over three times as high as in Finland, the country with the lowest level (5.4 percent) – and the highest level among its peer countries. The high level of inequality in the United States is underscored by the growing gap between those in poverty and the top income earners. Currently the top one-tenth of a percent of the population collects 8.1 percent of the nation’s income.

Working longer and harder to pay more for basic necessities with effectively less money:

The cost of living, led by the soaring cost of gasoline and food, is rising at the fastest rate since the recession of the early 1990s, the government said on Thursday, handing a de facto pay cut to the American worker.

The report, from the Labor Department, offered quantitative proof of what Americans have been feeling for months: almost everything costs more, even as they have less money to pay for it.

Prices of a wide range of common products in the Consumer Price Index were 5.6 percent higher last month than they were in July 2007, the sharpest annual increase since January 1991.

Much of the increase has been driven by the immense run-up in gasoline prices. But food, beverage and transportation costs are also significantly higher than they were a year ago.

The higher prices have made many workers’ wages effectively worth less.

In July, rank-and-file workers — those in production or nonsupervisory roles — earned 3.1 percent less than they did a year ago, after adjusting for the rising cost of living.

That doesn’t mean everyone is having hard times. Corporate profits are recession-proof. And they don’t trickle down:

First, U.S. corporate taxes are in line with the rest of the world’s, according to a recent U.S. Treasury report. The effective tax rate on equipment financed by equity is 24 percent, the same as the G-7 average. The rate on equipment financed by debt is minus 46 percent, meaning that the government actually subsidizes these investments rather than taxing them.

Second, corporate gains are not trickling down to workers. Corporate profits are now near all-time highs: In 2005, they exceeded 13 percent of the economy for the first time since 1966. But the median household income fell by $963 between 2000 and 2006, even after inflation. …

A March, 2006, article in the Wall Street Journal‘s Market Watch section examined the paradox of corporate profits surging to their highest levels in four decades while the share of national income going to wage and salary owners dropped to their lowest levels in that same amount of time:

For all of 2005, before-tax profits totaled $1.35 trillion, up from $1.16 trillion in 2004 and just $767 billion in 2001.
Meanwhile, the share of national income going to wage and salary workers has fallen to 56.9%. Except for a brief period in 1997, that’s the lowest share for labor income since 1966.
“It’s a big puzzle,” said Josh Bivens, an economist for the Economic Policy Institute. “If this is a knowledge economy, how come the brains aren’t being compensated? Instead, the owners of physical capital are getting the rewards.”
Despite the flood of cash coming in the door, corporations are investing comparatively little in expanding their operations. Capital spending has been below average, especially considering the strength of the economy, the level of profits and the special tax breaks given to boost investment.
Of course, the biggest tax break of all is when you make gobs of money but don’t pay any taxes at all:

The Government Accountability Office (GAO) released a new report today showing that an average of two-thirds of companies operating in the United States paid no federal corporate income tax from 1998 – 2005. That’s right, I said none. Zip. Zero. Nada.

The report was requested by Sens. Byron Dorgan (D-ND) and Carl Levin (D-MI) as a follow up to a similar report GAO did in 2004 in which they found similar levels of tax liability reported on corporate tax returns from 1996 through 2000. In fact, in 2004, GAO found that domestically controlled companies and foreign controlled companies “reported tax liabilities of less than 5 percent of their total income, an estimated 94 percent and 89 percent, respectively, in 2000.” Wow. Upwards of 90 percent of companies paid at most 5 percent in federal income taxes in 2000, despite the corporate income tax rate being 35 percent.

While you digest that little tidbit (or maybe choke on it), let me tell you about transfer pricing, which is at the heart of these GAO reports and a long time thorn in the side of Sens. Dorgan and Levin, who I guess think corporations should pay taxes. The recently released GAO report defines transfer prices as “the prices related companies, such as a parent and subsidiary, charge on intercompany transactions.” So in complex corporate structures, a company can charge itself essentially for goods and services (and even things like trademarks and copyrights). This can lead to a lot of shennanigans by companies to make it look like they have zero tax liability even when they don’t.

Not to suggest that there can’t be perfectly legitimate explanations:

Yet there isn’t very good information about how much of the drastically low tax liability of companies is due to perfectly legal corporate tax credits or operating expenses and loses, and how much is due to fancy accountants’ efforts to cook the books. But that didn’t stop the Senators from claiming this was all part of the evil corporate plan. A press release from Levin’s office quotes him saying that this report makes it clear “that too many corporations are using tax trickery” to avoid paying their fare share.

Unfortunately for Levin, that’s not what the report shows. In fact, GAO says explicitly on page two:

As agreed, we did not attempt to determine whether corporations were abusing transfer prices. Nor did we attempt to determine the extent to which this abuse explains any differences in the reported tax liabilities of FCDCs and USCCs.

Instead, Levin should have said what the report does show. Either corporations are breaknig the law to lower their tax liability, OR their actions are perfectly legal and our current tax structure allows for most corporations to pay hardly any taxes. Either way, something needs to be changed – and soon – to hold corporations accountable for paying their fair share.

We’ll all wait for that. But not with baited breath.

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