Income inequality explained? Or how tax policy subsidizes low wages (and employers)

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Peter Nixon at dotCommonweal draws attention to a graphic at the blog of the American Enterprise Institute, where the author purports to show how the income of the bottom 20 percent of earners actually haven't fallen in the past 30 years, despite all the evidence to the contrary. Over at The Atlantic, Derek Thompson uses the AEI post as an illustration of how we see what we want to see in "the numbers." Nixon sees the difference an illustration of our political moment, particularly why the top 40 percent who have prospered, and the middle 20 who have been treading water, can't seem to drum up solidarity for the bottom 40, who are sliding into poverty.

What I see is a lot of smoke and mirrors. The AEI graphic shows that wages for the lowest 20 percent have dropped by an astonishing one third since 1979; once you account for changes in household size (households have gotten smaller) and public support ("transfers") such as the earned income tax credit and the cost of health insurance, the earnings of the bottom 20 percent have "risen" by 26 percent. (The top 5 percent saw an increase of 63 percent, and they were already starting with a much higher number.) Of course, that says nothing about spending power (the effects of inflation) or the increase in the monetary "value" of health insurance, which in no way should be thought of as "income." There's also no definition of what a "household" is": Dual earner? Single earner? I'll bet there are a lot more dual earner households now than in 1979.

What is clear to me is that, for the most part, government subsidies (the earned income tax credit especially) are just barely making up for that 33 percent wage loss the bottom 20 percent have sufferred since 1979. In other words, the government is directly subsdizing low wages, and therefore directly subsidizing employers by allowing their wage costs to actually go down by one third; the AEI blog makes no mention of whether these numbers are inflation-adjusted (if they are not, that makes it much worse). But the bottom line is, if you cut further from the government support that keeps the bottom 20 percent afloat, already struggling people are going to get poorer.

The big question, though, is: Why have wages for the bottom 20 percent dropped so drastically since 1979? Oh yeah, that's the beginning of the decline of union membership and collective bargaining. In other words the poorest workers have been more and more at the employers' mercy, with the government increasingly relied on to cover the actual cost of labor.

What's clear to me is that the system is completely gamed: The wealthy benefit from relatively low rates of taxation, especially the ridiculous capital gains tax of 15 percent, while also getting a back-door subsidy from government assistance to the working poor, which in effect makes up for depressed, non-union wages.

Case in point: Walmart is now entering the Chicago market. It's first round of commercials compares a grocery receipt with one from Jewel, the local union grocery story. Walmart savings: 20 percent on a single receipt. Just where do you suppose that savings comes from? Jewel's parent company is enormous and can leverage the same product discounts Walmart does. The "savings" is labor costs, pure and simple. In other words your dollar discount on a 12-pack of soda is taken straight from the paycheck of a worker. So if you shop at Walmart, you are subsidizing the race to the bottom, as well as subsidizing Walmart's poverty wages--and so are your tax dollars.