Academy Award-winning filmmaker Alex Gibney presents his take on the gap between rich and poor Americans in Park Avenue: Money, Power and the American Dream. Gibney contends that America’s richest citizens have “rigged the game in their favor,” and created unprecedented inequality in the United States.

Park Avenue: Money, Power & the American Dream is an article on Inequality.org.

What makes us happy? A simple question. In America, we’ve been asking it ever since 1776, the year we declared for “life, liberty, and the pursuit of happiness.”

Back in those days, Americans hoping to encourage happiness had little more than guesswork to go by. Today we have help: a new science of happiness, with years of research findings.

John de Graaf, the executive director of the Seattle-based Take Back Your Time and the co-author of What’s the Economy For, Anyway? has done as much as any American to share what this science has to offer. I caught up with de Graaf last week for an exchange on the factors that make for happiness — and how inequality impacts them.

John de Graaf

Until recently, we’ve pursued happiness without any real knowledge of what actually makes people happy over the long run. Jefferson, Washington, Adams, and Franklin all believed that government ought to be working to increase happiness, but in their day how to go about doing that amounted to guesswork at best.

Now we have a new and robust science of happiness to draw from, and this science has shown us that happiness has many dimensions besides the economic growth we usually focus on. Our undue focus on GDP, this research helps us understand, may well undercut other aspects of life more important to happiness.

In fact, beyond a certain level of GDP — about the current GDP of Portugal — we have no evidence that countries become happier as they become richer.

We do have evidence, and a great deal of it, that other factors — reduced stress and greater leisure time, good health and social connections — do contribute to greater happiness. And so does the opportunity to do meaningful work and live in a democratic society that fosters trust and personal safety, with access to education, arts, culture, and nature.

In the United States today, our unrelenting focus on economic growth, on higher incomes, above all else jeopardizes all these factors that make for greater happiness, as Italian economist Stefano Bartolini points out in his important new book, Manifesto for Happiness, soon to be published in English by the University of Pennsylvania Press.

Indeed, Bartolini shows that our greater economic growth rates in the United States, as compared to Europe, don’t actually reflect any greater economic dynamism. They reflect our shrinking ability to meet the basic needs that make and keep us happy.

The longer hours we work, for instance, reduce our social connections, a central foundation of happiness. To compensate for the resulting loneliness, we buy more stuff. These defensive purchases, in turn, add to our national GDP. Higher GDP numbers create a sense that we’re wealthy. In fact, we’re impoverished on the things we value most.

Enormous increases in inequality have come with this economic growth. Small happiness gains for the rich have been more than offset, since 1980, by larger losses in well-being for the poor and middle class. All this inequality greatly increases social distrust, a development totally toxic to happiness.

Greater equality and a greater attention to our non-material needs — especially the need for leisure time — would go much further toward increasing American happiness than our current strategy of fostering an economic growth whose benefits go almost entirely to those already at the top.

People work harder and smarter, mainstream economists theorize, when they have a shot at becoming wealthy. What incentives do you believe inequality actually creates in real life?

The chance to gain great wealth does operate as an incentive for some, but certainly not all people. Our current U.S. economic model gives some of us the opportunity to become fabulously wealthy while reducing social mobility — and, in the process, de-incentivizing work — for many more of us. More equal societies such as Denmark show almost three times more social mobility than we do.

Some say we must do more in the United States to “make work pay.” But we need to see “pay” in a far more comprehensive frame. Work can “pay” more by delivering significantly more leisure time for workers, as work does in Europe. People actually work harder and smarter when their workplaces have limits on their work time and extend them longer vacations.

Good health, better pension benefits, more opportunity for purposeful work, growth on the job, social connections — all these incentives can and will work if we pay attention to them.

Happiness research shows that people often believe more money will make them happy, when instead they need more time. I’ve written about Amador County in California, a place where workers at first became furious at having their working hours and salaries cut, but then two years later voted 71-29 percent to remain on the shorter hours at less pay rather than return to their former hours and pay. We have many cases of this sort of thing.

At what point do greater amounts of personal wealth stop adding to our sense of personal well-being?

Our pursuit after more personal wealth stops adding to our well-being when this pursuit impedes our ability to take the satisfaction that comes from leisure time, purposeful work, and all the other quality-of-life dimensions mentioned above.

When we gain personal wealth at the expense of these dimensions, our personal well-being suffers. When a whole society pursues personal wealth for the few at the expense of these dimensions for the many, that entire society suffers. That’s what we see in America today.

We see more as well. Our ever-greater piling on of personal wealth is threatening to leave future generations a barren planet. We’re already exhausting the world’s resources and waste sinks more rapidly than they can naturally replenish. If everyone on earth were to suddenly adopt the American consumer lifestyle, research from the Global Footprint Network shows us, we would need five planets to provide the resources and absorb the wastes.

We simply cannot grow on like this. We must find a different approach to well-being for the sake of the future.

What does the research tell us about the factors that do make people feel happier?

In a broad sense, perhaps a third of happiness comes from genetic factors. That is, some people are just born with a better disposition. Perhaps another third of happiness comes from personal attitudes and behaviors.

We know, for example, that people who behave materialistically and choose a job just for the money, rather than for intrinsic pleasure a job may bring, tend to be less happy. We know it truly is better — for our happiness — to give than to receive. In general, people who behave altruistically, who show compassion and kindness and tolerance to others, who practice mindfulness, all tend to be happier.

Finally, perhaps a third of happiness — more in very poor countries — represents a response to the conditions of life, to poverty, ill health, lack of access, dictatorship, overwork. Inequality exacerbates all these problems and seriously dampens happiness.

Contrary to conventional political opinion in the United States, lower taxes do not lead to happiness. All the world’s happiest countries — Denmark, Sweden, Norway, Finland, the Netherlands — have high taxes and high levels of social and economic equality.

A great deal of happiness research rests on opinion surveys. Do we have any indicators for happiness more robust than survey results?

Survey results tend to be quite robust, actually. But we also have evidence from brain wave studies that show what sorts of behaviors make people happier. We understand the importance of altruism and compassion through these studies.

Happiness is, in a sense, a subjective feeling, and the best way to measure these feelings may well be through subjective surveys. On the other hand, well-being is a more objective state, and here we need solid data on real conditions of life. Here we want to measure life expectancy, not whether people are personally happy with their health.

I like the model proposed by Enrico Giovannini, Italy’s new minister of labor and social policies and former chief statistician. He uses objective factors to measure well-being , but understands that a higher level of objective well-being doesn’t always make people happier. Good conditions of life need to combine with “happiness skills”— social connections, generosity, and the like — to produce subjective “happiness” or life satisfaction.

The small Himalayan nation of Bhutan measures all of these things in its very robust Gross National Happiness Index. Bhutan has brought happiness scientists from many nations together to help shape its public policies, and Bhutan’s GNH Index takes into account dozens of objective and subjective variables to determine whether citizens have “sufficiency” in the conditions of life and happiness.

In the United States, the Happiness Initiative is doing work along similar lines, and I’m happy to have been associated with it.

Are other peoples significantly happier than Americans? What are they doing that Americans aren’t?

Scientists measure happiness in two key ways, through life satisfaction and daily affect, how individuals come across in everyday encounters.

Americans do reasonably well when it comes to overall life satisfaction, ranking 14th in the Gallup Healthways Survey and about 20th in the World Values Survey. But these scores, while not bad, still run well below those of the world’s happiest countries, the Nordic nations and the Netherlands, and significantly so, from 7-10 points in a scale of 100.

These other countries all have much more equality than the United States. People in them have among the shortest working hours and best work-life balance in the world — we have in the United States about the worst among rich countries.

These other nations also discourage the flaunting of wealth and encourage social connection through their urban design. They focus on bicycle travel rather than automobiles. They have far greater social mobility and much stronger social safety nets.

The data — see particularly The World Happiness Report — also show that the standard deviation for happiness scores is much narrower in these countries. That means that happiness spreads more widely throughout the population.

Another important consideration: the happiness of children. U.S. children rate themselves 26th happiest out of the 29 rich countries that UNICEF surveys. Dutch children rank first, with Nordic children all in the top 10.

Finally, Americans have a great deal of positive daily affect. We are generally cheerful and smile a lot, with much of this a cultural norm. But, on the other hand, we also score high in negative affect, in sadness, anger, anxiety, and especially, according to Gallup, stress.

We understand you have a particular basketball game you’d like to see?

When I was in Bhutan earlier this year, I spoke with its king about his love for basketball. He’ll be in the United States next year, in June. He’s 33 years old, a good basketball player, and a delightful individual. In Asian countries, they call him “Prince Charming.” The king expressed interest in playing with President Obama, saying he knew that Obama likes the game and plays well. I’d like to see this happen.

Such a game could generate widespread press attention to the concept of Gross National Happiness, a notion first recognized by this king’s father. Add a few celebrities and NBA stars to the game and you have an international event of great interest, but one which can get people talking about the concept of measuring “equitable and sustainable well-being and happiness” instead of GDP, as Bhutan will propose to the United Nations next year.

You travel and speak widely across the United States. Do you see signs that Americans would like to change the trajectory of our daily economic lives?

Well, certainly many people are despairing about our immense American levels of inequality. Unfortunately, most of us don’t know much about how dismally we also rank among rich countries in so many quality-of-life categories. We’re “dead first” in mortality, as Dr. Stephen Bezruchka at the University of Washington puts it, with the shortest life span among rich countries.

Many Americans — after getting pounded by over 30 years of anti-tax and fundamentalist free-market ideology — also have little understanding of how growing corporate power has left America much less equal and productive than we were as a society in the years right after World War II. These Americans blame the government instead, and some even feel giving banks, corporations, and the wealthy even more power will solve our problems.

And many people believe that even if they don’t feel happy themselves, they would be far less happy if they lived any place else. Conservative analysts have created this ridiculous idea that Europeans live worse off than we do simply because their GDPs rise less rapidly, when, as Stefano Bartolini has shown, our high GDP reflects economic decay, not dynamism.

Other Americans seem to believe that we have no alternative to the status quo if we want “the economy” to thrive. But they never stop to ask, as Dave Batker and I try to do in our new book, What’s the economy for, anyway? They accept the notion that we’re here to serve the economy. But the economy should be serving us.

That said, I do see many signs of hope. When I speak to audiences across the country, even to Rotary groups in small conservative towns, people respond well to the points I’m making here and tell me they wish what I’m saying would be taken more seriously.

Part of what troubles me is that I run into so many people who had great faith in President Obama to bring about change and now feel even more discouraged than before. They praise the President’s efforts on health care and his general concern for workers and the middle class, but bemoan his coddling of Wall Street.

At the state and local level, I see many good signs — the local food, currency, and cooperative enterprise movements, the passage of sick and family leave bills in cities and states, the growing support for the Happiness Initiative in many communities and on many campuses, the development of Genuine Progress Indicators in Maryland and Vermont, the recent trip of the Governor and First Lady of Oregon to Bhutan to observe that nation’s work on the happiness front. I find these all wonderfully positive signs.

Can a modern society with a top-heavy distribution of income and wealth ever become happier without challenging that distribution?

That’s an easy one with a one-word answer: No!

This interview was originally conducted for Too Much, the Institute for Policy Studies weekly on excess and inequality. Sign up here to receive Too Much in your email inbox every Monday.

Satisfaction and Smiles in an Unequal World is an article on Inequality.org.

By Salvatore Babones

Since the Global Financial Crisis of 2007 inequality has been rising faster than ever before, according to a new report from the Organization for Economic Cooperation and Development.

According to the OECD, “inequality has increased by more over the past three years to the end of 2010 than in the previous twelve.” Things were already pretty bad in 2007, but inequality in America today exceeds the records last reached in the 1920s.

The United States has the fourth-highest level of inequality in the developed world, trailing only Chile, Mexico, and Turkey. That is to say, if you consider Chile, Mexico, and Turkey to be “developed” countries.

The United States has the fourth-highest level of inequality in the developed world, trailing only Chile, Mexico, and Turkey.

The OECD report measures inequality using a statistic called the Gini coefficient. The Gini coefficient runs from a minimum of 0 (perfect equality) to 100 (total inequality). Different countries have different ways of calculating Gini coefficients, but the OECD implements the same method across all countries to create comparable figures.

America’s Gini coefficient, as calculated by the OECD, stands at 38. Most developed countries have Gini coefficients that run much lower. The United Kingdom (35) is the developed country that comes closest to the United States, followed by Australia (33), Canada (32), France (30), Germany (29), Belgium (26), and Denmark (25).

No other developed country comes close to matching the levels of inequality that have arisen in the United States over the last forty years.

Another measure of inequality reported by the OECD tracks the 90/10 ratio. This is the ratio of incomes at the top (90th percentile) versus the bottom (10th percentile) of the workforce.

A typical professional with a postgraduate degree has an income that is higher than about 90 percent of the rest of the population. A typical unskilled worker has an income that is higher than about 10 percent of the population.

As a result, the 90/10 ratio is, roughly speaking, the ratio of what professionals like doctors and lawyers earn to what cleaners and fast food workers earn.

Not surprisingly, the United States also has the fifth-highest incidence of poverty.

The United States has the third-highest 90/10 ratio in the OECD. In the United States, successful professionals make roughly 16 times as much as unskilled workers.

To put this in numbers, while a mail room attendant at a major law firm may make $20,000 per year, a partner in the same law firm may make $320,000 per year.

Among OECD countries, only Mexico and Turkey have higher 90/10 ratios than the United States. The average 90/10 ratio across all OECD countries is 9.4. In Canada, just across the border, the ratio is 9. In other words, American professionals make 16 times as much as their office cleaners. Canadian professionals make 9 times as much.

In most European countries, 90/10 ratios hover in the range between 6 and 8.

Not surprisingly, the United States also has the fifth-highest incidence of poverty in the OECD, after Chile, Mexico, Turkey, and close U.S. ally Israel. All told, the United States now shows higher levels of inequality and poverty than such crisis-hit countries as Greece, Portugal, and Spain.

The global financial crisis has affected the whole world, but the ensuing Great Recession has been a surprisingly selective recession.

Well-off Americans  — those in the top 7 percent — have seen their wealth expand by 28 percent in recent years.

Economies may have stagnated since 2007 across the North America, Europe, and Japan since 2007, but not for the rich. The rich have continued to get richer. Forbes reports that 2013 rates as a record year for billionaires and their fortunes.

Well-off Americans  — those in the top 7 percent — have seen their wealth expand by 28 percent in recent years, according to a study from the Pew Research Center, while the rest have seen their wealth drop.

The Great Depression of the 1930s saw a different story. Back then, nearly everyone suffered. Of course, in the 1930s the poor suffered much more than the rich, but rich people ended up much worse off in 1939 than they had been in 1929. Maybe that’s why they were so keen to do something about it.

In today’s Great Recession the rich seem much more complacent. They can afford to be. We’re not experiencing a recession for the rich, only a recession for the rest.

This week’s OECD report shows that America isn’t the only country experiencing rising inequality in a time of economic stagnation. Inequality rose in 27 out of 33 countries the study spotlights. The difference: Inequality in the United States had already reached a record high in 2007.

The report ends with an ominous warning. The OECD’s new statistics only cover the period up through 2010. Things have likely gone, the OECD suggests, from bad to worse since then. The United States has certainly seen no let up in pressures on ordinary people and the poor.

Things have likely gone, the OECD suggests, from bad to worse since 2010.

We may not know how to restart economic growth, but we know how to fight inequality. We can raise the minimum wage, increase taxes on investment income, expand public education, and make it easier for workers to join unions. We can start now. We don’t have to wait for the next OECD report to show that America remains at the bottom.

OECD: Inequality Rising Faster than Ever is an article on Inequality.org.

Not everyone would be surprised by this question. Marxist economists have long argued that capitalism will collapse due to rising inequality. Their argument in a nutshell is that inequality will rise to the point where workers can no longer afford to buy the products they are producing. With no customers, the economy will stagnate, leading to crisis and collapse.

Many orthodox economists also argue that inequality is bad for growth. High inequality encourages rent-seeking: it becomes more profitable to make money by moving to a higher-paid position in the economy than by increasing one’s own productivity. So for example industrial firms invest in finance, because that’s where the big rewards are. A few individuals get rich while the economy as a whole stalls.

There are many other variations on the idea that inequality is bad for growth. Of course, there also exist unreconstructed neoliberals who cling to the notion that inequality is good for growth. Despite all the evidence of the last forty years they still argue that inequality creates incentives that encourage people to work harder and be more productive.

Unfortunately for everyone in this debate, there is no empirical evidence whatsoever that economic inequality has any effect on economic growth. Personally, I am convinced that inequality is bad for growth. But I can’t prove it. The data give no clear answer either way.

One thing I can prove, however, is that inequality makes a small number of people incredibly richer and a large number of people much poorer. In the United States, for example, ordinary Americans are about half as well off as they would be if America had the same level of inequality today as it did forty years ago.

Inequality makes a small number of people incredibly richer and a large number of people much poorer.

Rich Americans, on the other hand, are fantastically richer than they would be if America had the same level of inequality today as it did forty years ago. Exact numbers are hard to come by, but the figure is in the range of 20 times as rich. The rich have done very well from rising inequality.

Rising inequality since 1973 has essentially meant a vast transfer of income and wealth from the lower 80% or 90% of Americans to the top 1% or 0.1% of Americans.

Americans with JDs, MBAs, and MDs are about as well off today as they would have been had inequality remained at 1973 levels. Everyone below that level is worse off than they would have been. People without college degrees have been hit especially hard: they are worse off in absolute terms. They have actually seen their incomes decline since 1973.

Unlike the effect of inequality on growth, the effect of inequality on income distribution is not theoretical. It is direct and incontrovertible. High inequality means that many must do with less in order that some can have more. That’s not a theory of inequality. That’s the definition of inequality.

So to the inequality and growth debate, I say: who cares? If something is bad for 80% or 90% of the population, does it really matter whether or not it is also bad for growth? Isn’t it bad enough that it is bad for 80% or 90% of the population?

No one really knows how to promote economic growth. Everyone has their pet ideas — including me. But if we knew how to promote growth, would be doing it already. Everyone likes growth.

On the other hand, we know exactly how to reduce inequality. We can raise the minimum wage, increase taxes on investment income, expand public education, and make it easier for workers to join unions. Most of all, we can tax the rich at a higher rate and use the income generated to invest in making life better for everyone.

The inequality and growth debate is a red herring. It just doesn’t matter. The problem is inequality, and its solution is simple. It may not be easy to get rich people to give up some of their enormous gains of the last forty years, but it’s straightforward. Tax them. And use the proceeds to make our country — and our world — a better place for all.

Inequality and Growth is an article on Inequality.org.

When I visited my brother in London a few years back, I toted a suitcase packed with tennis balls. I paid New York City’s 8½ percent sales tax to help my brother’s tennis-mad family avoid the UK’s 20 percent value-added tax, or VAT, Europe’s big brother to our sales tax.

In the last 40 years, mostly at Republican initiative, many U.S. states and localities have dramatically increased sales taxes at the expense of property taxes. Only four states, Delaware, New Hampshire, Oregon and Montana, have no sales taxes; southern states generally charge the most.  Arizona tops out with a combined state and local rates up to 13.7 percent.

Europe’s VAT, introduced by France in 1954, is a national tax. European Union “tax harmonization” rules require member countries to charge a minimum of 15 percent; most EU members charge over 20 percent. Hungary wins with 27 percent.

Sales taxes are simply terrible taxes.

So far the United States has resisted a national VAT, despite support from both right (businessman Steve Forbes) and left (economist Robert Frank). That may change with the expansion of sales taxes on Internet sales.

The U.S. Senate has just passed the Marketplace Fairness Act, enabling state governments to make Internet companies like Amazon collect sales taxes from their customers — just as local businesses have long done. Is this truly a victory for tax fairness? While Grover Norquist, the Heritage Foundation, and other extreme anti-tax ideologues continue to oppose the measure, many Republicans are waffling.

Many good liberals positively jump with enthusiasm.

“It is nothing short of amazing to me that this proposal is controversial,” writes New York Times business columnist Floyd Norris writes. “What this would do is make tax compliance easier and provide badly needed revenue — from their own citizens — for struggling states and cities. It would also mean that local merchants — the ones who pay property taxes — would find it a little easier to be competitive with Internet merchants.”

Alas, Floyd Norris misses the big picture: Sales taxes are simply terrible taxes. As Europe’s gasping economy sinks into another recession, I think there’s good case that the VAT aggravates the damage of misguided austerity policies.

Europe’s national ‘value added tax’ may be aggravating the damage of misguided austerity policies.

As most of us know, sales taxes are “regressive.” That is, when sales taxes are “passed on,” they fall harder on poorer customers than on richer ones. That’s why many states exempt food and medicine, as does New York, except for restaurant food. But sales taxes are also “passed back” onto retailers and service providers. In fact, sales taxes are shared between customers and retailers in inverse proportion to their ability to shop or sell elsewhere.

It’s the “passed back” portion of sales taxes that do the most damage, because — unlike profit taxes — they take a bite from gross revenues before expenses. Moreover, a uniform tax rate does not mean uniform impact. As Anatole France wrote, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.” Sales (and VAT) taxes fall hardest on small, labor-intensive retailers, with high volume and low profit margins.

Consider two New York City businesses: One is a furniture store; the other is a Sabrett’s hot dog cart. Assume for simplicity the “passed back” portion of the 8 ½ percent sales tax is 5 percent. The furniture store invests $9,000 a year in an inventory of sofas, which it sells for $10,000, earning a $1,000 before-tax profit. A 5 percent sales tax is $500, half of profit, and 5.5 percent of the $9,000 investment.

The hot dog cart invests $200 a day in buns, dogs, and labor. It earns $210 a day, or $76,650 a year in sales and $3,650 in profit. A 5 percent sales tax collects $3,833, wiping out profit and amounting to 1916 percent of the $200 investment! Moreover since most of the cost of the cart is labor, the tax adds 5 percent to the 18 percent or so in payroll taxes!

In short, sales taxes kill small businesses — precisely the kind of businesses that provide the most jobs per dollar invested. And by killing competition, sales taxes may drive prices up by more than the tax rate.

Sales taxes kill small businesses, precisely the kind of businesses that provide the most jobs per dollar invested.

Sales taxes are also insidious — it’s always so tempting to politicians to raise them another quarter cent, and hope no one notices. Up to now, the threat of tax competition from neighboring states and localities has kept those politicians in check. That is, as long as customers can easily shop elsewhere, most of the tax will be “passed back” onto merchants —whose complaints will make politicians think twice about increases. The European VAT has crept so high precisely because shoppers can’t avoid it by crossing borders. (Tennis ball smuggling isn’t cost-effective).

In recent years, the rise of effectively untaxed internet sales has helped check increases of state and local sales taxes. If the Marketplace Fairness Act passes the House, it will release that check on sales taxes and lubricate our way towards European-style VAT taxes! “Fairness” shouldn’t mean raising sales taxes on internet merchants, but reducing them on local businesses. For once, though for the wrong reason, Grover Norquist is right.

Grover Norquist Is Right to Oppose Internet Sales Taxes is an article on Inequality.org.

The third in an Inequality.Org series on the giant pools of assets in America that produce income not currently subject to taxation.

By Bob Lord

The plush new Goldman Sachs tower in Manhattan: Average taxpayers helped foot the bill.

If you own a municipal bond, you pay no federal income tax on the interest income the bond delivers to you. As of December 31, 2011, America’s municipal bond balance totaled over $3.7 trillion. The tax exemption on the interest income from that balance cost the federal treasury an estimated $37 billion in 2012.

Why do we exempt from taxes the income from a pool of assets that represents over 5 percent of our aggregate national wealth? Defenders of the tax exemption for municipal bond interest have traditionally maintained that the exemption benefits state and local governments, not bondholders. To some extent, that’s correct. With the interest on municipal bonds not subject to federal tax, states and localities can in theory attract buyers for their bonds without having to offer as high an interest rate as the market demands for corporate bonds of comparable risk.

That’s because if you sit in the top marginal income tax bracket, as most municipal bond investors do, you’ll willingly invest in a municipal bond that offers you less interest income than a taxable bond of comparable risk — if what you save in taxes at least matches how much more the higher-interest taxable bond puts in your pocket.

So if the top marginal federal income tax rate stands at 40 percent and a corporate bond of comparable risk has a market interest rate of 5 percent, a state or one of its subdivisions should be able to find investors for bonds that pay interest at only 3 percent.

But theory, in the real world, has some problems. First, as the New York Times recently reported, some municipal bond offerings — the so-called private activity bonds — finance private development projects. The benefit from the tax exemption these bonds carry goes to private developers, not state and local governments. Among the projects financed through private activity bonds: the Goldman Sachs headquarters in Lower Manhattan, an edifice financed with $1.6 billion of tax-exempt bond proceeds.

Overall, the Bipartisan Policy Center estimates, private activity bonds overall will cost taxpayers $50 billion over the next decade.

The second, and more fundamental, problem: The rationalization for the municipal bond interest exemption assumes we have one bond market. In the real world, we have two markets, one for taxable bonds and one for tax-exempt bonds. These two markets attract entirely different groups of investors.

The taxable bond market — corporate bonds, mortgage-backed bonds, and treasury securities — dwarfs the tax-exempt bond market in size. The players that dominate this taxable bond market? We’re talking pension plans, IRAs, 401(k) plans, foreign investors, banks, and insurance companies.

Some of these players, like pension funds, don’t face taxes on their earnings. Others, like banks and insurance companies, pay taxes on their bond interest earnings at quite low rates. How can banks and insurance companies end up paying taxes on their interest income at these low rates? These taxable entities only face taxes on the interest income they receive that causes their gross income to exceed deductible expenses.

Think of it this way: For each staffer a bank employs at a cost of $50,000, the bank can hold a $1 million taxable bond paying interest at 5 percent and not incur a tax burden.

The tax-exempt bond market, on the other hand, primarily attracts wealthy individuals, taxpayers whose incomes place them in the top federal income tax brackets. These individuals invest in municipal bonds either directly or through mutual funds.

To be sure, the two bond markets do have some overlap. Banks and insurance companies, for instance, do invest in tax-exempt bonds. But the semi-separateness of the markets tends to narrow the spread between tax-exempt and taxable bond interest rates.

Here’s how this dynamic works. If the market rate on taxable bonds momentarily increases, purchasers of municipal bonds have an incentive to move into taxable bonds. They’ll get a better return on these taxables, even after they pay the taxes due on the interest income.

The issuers of municipal bonds have to react to this market reality if they want to sell bonds. They have to offer an interest rate high enough to keep municipal bond investors from fleeing. The end result? The interest-rate spread between taxable and municipal bonds remains modest.

On the other hand, if the market interest rate for taxable bonds momentarily decreases, the great majority of taxable bond purchasers have no incentive to move into the municipal bond market. After all, they’re not paying any or much tax on their interest income anyhow. Municipal bond issuers, if they want to attract corporate bond investors, have to keep offering attractive interest rates.

As a result, the spread between the market interest rate on municipal bonds and the market interest rate on taxable bonds winds up to be narrower than the spread needed to equalize the after-tax return to top-bracket individuals.

Another factor also narrows the interest-rate spread between taxable and municipal bonds. The market for municipals includes some individuals who don’t sit in the top tax brackets. These individuals don’t benefit as much from the municipal bond tax exemption as wealthier individuals. They’re looking for bonds that pay interest at a rate as close as possible to the rates taxable bonds offer. If they can’t find municipals with these rates, they’ll flee the municipal market. To satisfy these less wealthy individual investors, to keep them from fleeing, municipal bond issuers have to keep their interest rates closer to the rates paid on taxable bonds.

All these market dynamics wind up creating a situation where tax-exempt bonds will often hand wealthy individuals a substantially higher return than the after-tax return on taxable bonds. These wealthy taxpayers, in short, get a windfall.

How much of the revenue loss from the tax-exemption for municipal bond interest goes to this windfall for high-income taxpayers? The Center for American Progress recently estimated that windfalls for the wealthy make up 20 percent of the $37 billion annual revenue loss from the tax-exemption for municipal bond interest.

That’s a giveaway of $7.4 billion per year, or $74 billion over the next decade, to our wealthiest taxpayers. But this $74 billion does not include the cost to taxpayers of the exemption for private activity bonds. That sum brings the total cost to taxpayers of the municipal bond tax exemption tens of billions higher.

Yes, most of the benefit from the municipal bond tax exemption flows to state and local governments. But the same benefit could be delivered to state and local governments through a direct federal subsidy of a portion of their interest expense.

A subsidy along these lines would leave states and local governments in the same position, fiscally, as they find themselves in under the current system, without conferring an undeserved multi-billion dollar windfall upon wealthy taxpayers, developers, and folks like our friends at Goldman Sachs.

Read the first article in this series: Retirement Vehicle or Giveaway to the Rich?

The second article in this series: Looting the Treasury to Benefit Big Insurance

Bob Lord, a veteran tax lawyer and former congressional candidate, practices and blogs in Phoenix, Arizona.

Tax-Free Municipals: An Unnecessary Giveaway is an article on Inequality.org.

The 79-year-old corporate gadfly Robert Monks, the former top federal regulator over America’s pension system, earlier this year opined that Corporate America operates “for the personal enrichment and glorification of its manager-kings.”

Too harsh a judgment? Hardly. Current standard corporate operating procedures only make sense if we acknowledge that America’s biggest private enterprises have essentially become the private preserve of an elite executive class.

Historian and political economist Gar Alperovitz: “We may now be well into the prehistory of the next American revolution.”

How else to explain today’s most routine corporate behaviors? The endless rush to mergers that create little more than chaos in newly consolidated workplaces. The ongoing corporate refusal to invest significantly in research and development and employee training. The billions of dollars corporations spend to “buy back” company shares of stock on the open market.

All these moves leave corporations less equipped to succeed in the long term. But all these moves generate multiple millions, sometimes even billions, in the here and now for the corporate executives who make them.

Corporations, of course, have always done well by the executives who run them. But a half-century ago the United States had institutions that kept this enrichment within somewhat reasonable bounds. Trade unions acted as a brake on executive greed grabs. A progressive tax system — with rates as high as 91 percent on income over $400,000 — discouraged the greed grabbing in the first place

But both these institutions — trade unions and progressive taxes — have atrophied over recent decades. Income and wealth, without these institutional checks in place, have concentrated at America’s economic summit. Below that summit, daily life for average Americans has become ever more insecure.

The United States has slid into a “systemic crisis.”

The United States, in effect, has slid into what University of Maryland historian and political economist Gar Alperowitz calls a “systemic crisis.” For the nation’s vast majority, America has simply stopped working. Daily life has turned into an ever-faster treadmill. And no real relief looms anywhere on the near horizon.

In this dreary environment, an understandable disillusionment — with our political leaders — runs deep. So does a decapacitating cynicism. Why bother struggling against an unjust status quo when nothing ever changes?

Historian Alperovitz has a new book out that aims to rouse us from this suffocating political stupor. In his new What Then Must We Do? Straight Talk about the Next American Revolution, he endeavors to show that societies in “systemic crisis” can change. Revolutions do happen. Indeed, he suggests, “we may now be well into the prehistory of the next American revolution.”

Just what does Alperovitz mean by that? In any social order, he explains, political power reflects the ongoing distribution of wealth. Meaningful change only begins when that existing distribution starts coming under challenge.

Alperovitz sees the challenge needed today as much more than any single campaign for a candidate or cause. He has something deeper in mind: an “evolutionary reconstruction” of our society, a decades-long shift that aims to democratize wealth, to build “a community-sustaining economy from the ground up.”

Pie-in-the-sky fantasy? We already, Alperovitz stresses, have the seeds of an alternate, wealth-democratizing economy in place. Well over 100 million Americans belong to credit unions and co-ops. Ten million Americans labor in worker-owned enterprises. Millions more Americans live in municipalities where public institutions generate electric power — or even provide Internet service.

Meaningful change only begins when an existing distribution of wealth starts coming under challenge.

Alperovitz envisions a steady expansion of wealth-democratizing institutions like these. Over time, over decades, the people these institutions touch begin to see from their daily experiences that alternatives to our dominant corporate status quo do exist. They begin to hold “clear ideas” about what can be done.

In times of acute crisis — say another banking failure — people with clear ideas about democratizing wealth won’t let their tax dollars bail out billionaires. They’ll demand public banks. They’ll carve away at private corporate power, bit by bit.

What Then Must We Do? mixes these intoxicating visions of a future yet to be with concrete descriptions of wealth-democratizing efforts already underway all across the nation, from Cleveland and Chattanooga to Portland and Sacramento.

These descriptions can surprise. One example: In Texas, the heart of red-state America, Dallas has opted to build a city-owned convention center hotel. Quips Alperovitz: “Everyday socialism, all the time, American-style.”

The pages Alperovitz has penned here hold a promise that goes beyond the compelling clarity of his prose. National networks are already working to advance his strategic vision, efforts like the community wealth-building initiative of the Maryland-based Democracy Collaborative and the New Economy Working Group, a center for both local and global thought and action.

America, Alperovitz reminds us, has become the wealthiest nation in the history of the world. The nation’s annual income, if divided equally, would be enough to bring each family of four $200,000. We can, in other words, do far better for average Americans than we do today. Why not try?

A Promising Path for Pummeling Plutocracy is an article on Inequality.org.

By Sam Pizzigati

A generous federal tax loophole has average taxpayers subsidizing CEO pay excess.

Last week, federal unemployment benefits for the 400,000 Californians out of work since last fall dropped almost 18 percent, a $52 cut out of an average $297 weekly check. Similar cuts have already started rolling out in other states.

In all, 3.8 million long-term unemployed Americans will on average lose near $1,000 each by September 30, the date that ends the 2012 federal fiscal year.

The direct cause of all these cuts: the “sequester,” the $85 billion in federal austerity budget reductions that kicked in this past March 1.

Who deserves the “credit” for this meat-axe sequester? Credit the power suits who occupy Corporate America’s loftiest executive suites. These top corporate executives — organized in groups like “Fix the Debt” and the Business Roundtable — have been lobbying relentlessly for deep cuts in federal spending.

Only significant cutbacks in programs near and dear to average Americans, these executives proclaim, can save the nation from debt disaster.

But these same top executives, says a new report released last week, are actually running up the federal debt — purely to enrich themselves.

CEOs are running up the federal debt purely to enrich themselves.

The giant firms these execs manage, details this new report from the Institute for Policy Studies and the Campaign for America’s Future, “are exploiting the U.S. tax code to send taxpayers the bill for the huge rewards they’re doling out to their top executives.”

How huge do these rewards go? UnitedHealth Group CEO Stephen Hemsley, a “Fix the Debt” endorser, pulled in $199 million between 2009 and 2011.

A convenient federal tax loophole — in place since 1993 — let UnitedHealth deduct $194 million of that windfall compensation on its corporate tax return. That deduction, in turn, saved UnitedHealth — and denied the federal treasury — $68 million, enough to extend full federal unemployment benefits for the rest of the 2013 fiscal year to over 65,000 jobless Americans.

The loophole UnitedHealth so lucratively exploited lets companies deduct off their taxes every dollar of “performance pay” they shovel into their executives’ personal pockets. UnitedHealth, of course, hardly stands alone here. All American corporate and banking giants play the “performance pay” game.

The 90 giant firms that belong to “Fix the Debt” play the game particularly well. Between 2009 and 2011, the deductions these 90 claimed for top executive “performance pay” added at least $953 million — and maybe as much as $1.6 billion — to America’s national debt.

‘Fix the Debt’ CEOs play the pay-for-performance game at taxpayer expense.

The U.S. tax code’s exceedingly bountiful “performance pay” loophole has its roots in an earlier epoch of American public outrage at excessive CEO pay. Back in 1992, Bill Clinton campaigned against over-the-top executive pay in his drive for the White House. Congress, just months after Clinton’s inauguration, would go on to pass legislation that lawmakers hailed as a check on CEO excess.

The new law allowed corporations to deduct off their taxes no more than $1 million in compensation per executive. But the law had a huge escape hatch. Firms could exempt any “performance-based” pay from the $1 million limit.

The predictable result? An explosion of “performance-based” compensation, particularly in the form of stock options, an explosion that would keep CEO pay soaring. CEOs had been averaging 42 times U.S. worker pay in 1982. By 1992, the gap had jumped to 201 times. The average gap today: 354 times.

The “performance pay” loophole, the new Institute for Policy Studies and Campaign for America’s Future report stresses, has served “as a critical subsidy for excessive compensation.”

“The larger the executive payout, the less the corporation pays in taxes,” the report explains. “And average taxpayers wind up footing the bill.”

The more U.S. corporations pay their top executives, the more they can deduct off their taxes.

That footing would end if legislation Representative Barbara Lee from California has introduced ever became law. Her Income Equity Act would deny corporations a tax deduction on any executive compensation that runs over 25 times the pay of a company’s lowest-paid workers or $500,000.

Interestingly, the Affordable Health Care Act enacted in President Obama’s first term sets a $500,000 cap, effective this year, on how much health insurers like UnitedHealth can deduct for executive compensation.

With this cap now law for health care execs, notes the new Institute for Policy Studies and Campaign for America’s Future report, “taxpayers won’t have to worry so much about their hard-earned dollars going to subsidize fat paychecks for CEOs like Stephen Hemsley of UnitedHealth.”

“But,” sums up the study, “taxpayers may want to wonder why — at a time of scarce government resources — their tax dollars are subsidizing fat paychecks at any American corporate giant.”

Hypocrites with Fat Wallets: CEOs Want It All is an article on Inequality.org.

In fact, sales of Bentleys (average price around $300,000) are up 60% this year in the United Kingdom, according to a report in the Guardian newspaper.

Bentley sales are also up 35% in the United States.

To put this in perspective, the US economy grew by just 2.2% in 2012. The UK economy grew even less: 0.2%, according to statistics from the International Monetary Fund.

How can sales of super-luxury cars grow at super-fast rates during a recession? The answer is simple: it’s not a recession for everyone.

The last five years have been one of the best times in human history to be rich, and an even better time to be super-rich. The plutonomy — the economy of the super-wealthy — has been growing by leaps and bounds.

Unfortunately, most of us don’t live in the plutonomy. In the realonomy where ordinary people work (or don’t work) things have been much tougher.

The difference is striking. Consider that all-American company, General Motors. According to data compiled by Automotive News, GM sales are up 10% so far this year. Not bad.

But GM famously offers a brand for every level of consumer. Chevy sales are up just 6%. Buick sales are doing better, up 23%. And Cadillac sales? You guessed it: up 37%.

Acura sales are outpacing Honda sales. Infiniti sales are outpacing Nissan sales. Lexus sales are outpacing Toyota sales. In fact, the only company where the mass-market brand is growing faster than the elite brand is Ford — and that’s only because Ford doesn’t separate Ford car from Ford truck sales.

Of course, it’s the more expensive trucks that are leading Ford to higher profits.

The fact is that times are not tough for everyone. Times are tough for low-income people, unemployed people, farmers, and the elderly. For high-income professionals times are pretty good.

For corporate leaders, hedge fund managers, and CEOs, happy days are here again.

The fact is that times are not tough for everyone. Times are tough for low-income people, unemployed people, farmers, and the elderly.

So the next time you hear that times are tough and belts need tightening, ask yourself who’s saying that times are tough and whose belts it is they want to tighten. Changes are it’s a highly-paid corporate lobbyist who’s saying that times are tough … and it’s someone else’s belt that needs tightening.

American national income per person is now just about back at 2007 levels. The losses of the Great Recession have been made up. In a very real sense, every American could be doing just as well as in 2007.

The reality is that America’s plutonomy is doing fabulously better than in 2007, while America’s realonomy flounders along at rock bottom. The Great Recession hasn’t meant so much the destruction of wealth as the transfer of wealth. The poor have gotten poorer and the rich have gotten richer, leaving the whole country right back where it was.

Except that the country as a whole is now even more unequal than it was in 2007.

We have to ask ourselves: how unequal should a country be? Was the America of 2007 really just too equal for our taste? Were there simply too few Bentleys on our roads in 2007?

Or was the America of 2007 already dangerously unequal — in which case the America of 2013 is even worse?

Personally, I find it hard to believe that 2007 America was a dangerously equal communist worker’s paradise. If you think that 2007 was about right, then you agree that we need to correct the country’s income distribution to bring down our grotesque level of inequality. If you agree with me that America was already grotesquely unequal in 2007, then we have that much farther to go.

Should we have a Bentley tax? Perhaps not. But we should have a seriously progressive income tax that restores some sanity to our economy and our income distribution. Until we do, America will keep moving backwards as the rich get richer and the poor get poorer.

But then, we’ve been moving backwards for forty years now. Working Americans reached their highest income levels in 1973. We have a lot of lost ground to make up. As of 2013, we haven’t even started. That more perfect union is going to be a long time coming.

Why Are Luxury Car Sales Growing at Record Rates — In a Recession? is an article on Inequality.org.

The second in an Inequality.Org series on the giant pool of assets in America that produce income not currently subject to taxation

By Bob Lord

Insurance companies and the wealthy they service have so far squashed attempts to eliminate the permanent life and annuity policy loophole.

Our tax law has several bedrock principles. Among them: We must not elevate form over substance in applying the tax law. Put differently, we must not let taxpayers avoid tax through sheer artifice.

But Congress, unfortunately, has enacted exceptions to our bedrock rules, including a very expensive exception for permanent life insurance and annuity policies.

A little background. Life insurance policies fall into two categories: permanent and term life. With term insurance, you enter into a contract with an insurance company that has you pay a stated amount for the length — the term — of the policy. If you should you die during that term, your heirs receive the agreed-upon death benefit.

Typically, you have the right to renew a term policy, but the cost to obtain the same death benefit increases, for obvious reasons, as you age.

Permanent life insurance essentially combines term life insurance and an investment account the insurance company manages for you. In the early years of a policy, your premium breaks down into two parts. One pays the cost of the term life insurance, and the other funds the investment account.

The earnings on the investment account accrue to your benefit. As you age and the cost of the term coverage increases, the insurance company sets aside a progressively larger portion of your premium to cover that cost, until eventually the term insurance cost exceeds the premium.

At that point, the investment account funds the shortfall in the premium payments. The “cash value” of the policy basically represents the balance of the investment account. Ordinarily, you can terminate the policy at any time and get paid your policy’s cash value.

The federal tax code provides a massive tax break for holders of permanent life insurance and annuity policies.

Annuity policies operate conceptually much like life insurance policies, except they insure the risk of long life, as opposed to the risk of premature death. Like a permanent insurance policy, an annuity policy combines a pure insurance policy and an investment account invested for the benefit of the policyholder.

If the federal government taxed a permanent insurance or annuity policy on its substance, policyholders would face a tax on the earnings on the investment account portion of their policies, just as they would if they purchased term insurance and managed their own investment account.

But the federal tax code provides a massive tax break for holders of permanent life insurance and annuity policies. The earnings these policies generate face no tax. And if policyholders cash their policies in, they get to subtract — for tax purposes — all the dollars they paid in premiums from the cash surrender value of their policies.

In other words, policyholders can avoid tax on the portion of their investment earnings that went to fund the cost of their life insurance or annuity protection.

From the standpoint of tax policy, the preferential treatment of permanent life insurance and annuity policies has no justification. This treatment blatantly elevates form over substance and amounts to one of the largest giveaways in the tax code.

Policyholders actually pay for this massive tax break. They pay their insurance companies. At the outset of any permanent life or annuity policy, policyholders must pass a sizeable fee to their insurance company out of the cash surrender value of their policy.

The insurance industry gets to share in the value of the federal tax giveaway that goes to wealthy policyholders.

The tax benefits that permanent life and annuities provide typically take about ten years to offset the cost of this insurance company fee. Insurance companies also often charge more for the insurance protection component of the policy than would be the cost for pure term insurance.

In effect, the insurance industry gets to share in the value of the federal tax giveaway that goes to policyholders.

How much does this giveaway cost taxpayers overall? According to a Citizens for Tax Justice report, the revenue loss from the deferral of tax on the inside buildup of life insurance policies and annuities runs $270 billion over ten years.

We don’t currently have specific data on the size of the pool of wealth held in permanent life insurance policies and annuities. But we do know from Federal Reserve Board data that the wealthier a taxpayer, the more likely that taxpayer will own a permanent life policy and the greater the cash value of that policy will be.

In 2010, the Fed data show, only 24.1 percent of households in the third quartile of American households — the 25 percent of households that held a net worth right above the national household average — owned a cash value life insurance policy. These households held an average cash value of $17,100 in their policies.

Up in the top 10 percent of American households, by contrast, 36.8 percent held permanent life policies, and these policies averaged $82,700 in value.

Most middle class taxpayers face a top marginal tax rate of just 15 percent. At this rate, the life insurance tax preference doesn’t generate much in the way of tax savings. The lion’s share of the $270 billion tax break from the preferential treatment of permanent life and annuity policies is clearly flowing to taxpayers at America’s income summit.

But not just these wealthy taxpayers. Our tax system, remember, designates the insurance industry as the gatekeeper to the favorable tax treatment of permanent life and annuities and allows insurance companies to charge admission.

Most of the $270 billion tax break from the preferential treatment of permanent life and annuity policies is flowing to taxpayers at America’s income summit.

The bottom line: The federal government will be forfeiting $270 billion in tax revenue over the next ten years to perpetuate an indirect subsidy to the insurance industry and enhance the net worth of wealthy Americans.

How does the size of this giveaway to the wealthy and subsidy to the insurance industry compare to the size of the reduction in Social Security benefits now getting debated in Congress?

The key Social Security change before lawmakers, a switch to the “chained CPI,” will wind up cutting the Social Security benefits average Americans receive by $127.2 billion over ten years, according to the Congressional Budget Office.

Other Americans also receive federal benefits that would be reduced under a switch to a chained CPI approach to calculating inflation. Adding these Americans into the mix would up the total benefit cut to $216 billion over ten years.

In other words, perpetuating the tax break for permanent life and annuity policies will cost more over the next ten years than would the cost of retaining the current cost-of-living adjustment for recipients of Social Security and other federal benefits.

A generation ago, lawmakers considered eliminating the massive tax break for permanent life and annuity policies to fund a cut in income tax rates under the 1986 Tax Act. But intense lobbying by the insurance industry squashed that move.

Today, some 27 years later, Congress is considering whether to slash Social Security benefits, and lawmakers aren’t even considering the elimination of the life insurance and annuity tax break — for our wealthiest — as an alternative.

The first article in this series: Retirement Vehicle or Giveaway to the Rich?

Looting the Treasury to Benefit Big Insurance is an article on Inequality.org.