June 25, 2011

THERE’S NOTHING NEW, alas, about the increasing gap between rich and poor in America, where the share of national income, including capital gains, claimed by the top 0.1 percent of earners rose from 2.5 percent in 1975 to 10.4 percent in 2008. Still, the details never cease to amaze. In a recent Post report, Peter Whoriskey documented the fact that the average executive’s annual pay has roughly quadrupled since the early 1970s, while average wage income has crept up only 26 percent. No one who cares about the social cohesion of a society premised on the idea that all men and women are created equal can view such statistics indifferently.

The question, though, is what to do about it. Some of the growing income disparity results from long-term social changes or market forces that are either inherently benign or practically irreversible. The statistics partly reflect the spiraling rewards to superstar talent in entertainment and sports. The golden age of U.S. income equality — from World War II to the 1973 Middle East oil embargo — stands out as an exceptional time when American wage workers were still mostly shielded from Asian and European competition.

Corporate executives make up three-fifths of the richest 0.1 percent of U.S. earners, a result of the explosion of executive compensation. Government has a role in fixing this situation, but it’s worth recalling past efforts at regulating pay. In 1993, Congress ended the tax-deductibility of top executives’ compensation above $1 million, except for “performance-based” compensation. The resulting huge shift of executive comp into stock options probably left CEOs better off than before.

But if direct suppression of top pay is problematic, government can at least avoid enabling the upward redistribution of income. Certain policies do just that. After executives, the next largest portion of the top-earning 0.1 percent consisted of the following: lawyers, many of whom make their money guiding clients through the ever-growing forest of legislation and regulation; doctors and hospital executives, who gain from the tax exclusion for employer-paid health insurance; and real estate professionals — can you say “Fannie Mae?”

As Mr. Whoriskey reported, CEO pay rose by a factor of ten at Dean Foods over 40 years during which the company grew into the country’s largest processor and distributor of dairy products. This was also a time of heavy government regulation and subsidy in the dairy industry. Meanwhile, “other entrepreneurs,” the folks we count on for innovation and job creation, account for less than one in 20 members of the top 0.1 percent.

Given the need for federal deficit reduction, now would seem to be an especially opportune time to eliminate the many ways in which government bestows unearned favors on the well-off. Slashing farm subsidies, which disproportionately favor rich farmers, is one obvious idea.

But the really big money is in the tax code, whose regressive provisions — such as the break for employer-paid health insurance; the favorable treatment of capital gains; and the mortgage-interest deduction — blow out the deficit and enable big earners to avoid paying their fair shares. With Washington forced to contemplate cutbacks in programs for the poor and middle class, it is unconscionable millionaires are still allowed tax deductions for mortgage interest on two houses.