Sluggish Wage Growth Not Surprising Given the Slack in the Labor Market
The top line story coming out of today’s jobs report should be about wages. Nominal wage growth remains sluggish—far too slow to set a time frame for raising interest rates, or even start a conversation about it. For more on that, see the most recent monthly wages figure and quarterly data and this explainer.
Job growth, meanwhile, has been solid, but not strong. The unemployment rate is still slowly moving in the right direction. But, we are still far from the economy we had before the great recession began. At the rate jobs were added in October (214,000), it will be 2018 before we return to 2007 normalcy.
The employment-to-population ratio for prime-age workers is a great measure of the economy—and a favorite of my predecessor—which captures a variety of different labor market components. The employment-to-population ratio (or EPOP) is simply the share of the population with a job. This allows us to sidestep the issue of whether potential workers are in the labor force—though we know there are still a lot of missing workers out there (5.75 million at last count). Also, when we restrict our attention to prime-age workers (25-54 years old), it serves the important purpose of avoiding confounding changes in employment that are not due to labor market conditions, but are instead due to longer-run structural factors, such as baby boomers hitting retirement age.
From the figure below, it is clear that jobs are returning—EPOPs have been on the rise. Growing shares of prime-age workers are getting jobs. That is good news, but it’s clear how far we have to go—look at the sharp drop in the EPOP during the great recession. Then, it is clear that we are slowing climbing out, but we have far to go.
Economy Adds Jobs but We Need to Raise America’s Pay
In the BLS report this morning, overall jobs numbers were solid and the unemployment rate continued to show signs of improvement. However, the unfortunate downside of this morning’s release is that wage growth has continued to be sluggish. Average hourly earnings of all employees on nonfarm payrolls and average hourly earnings of production and nonsupervisory employees on private nonfarm payrolls saw 2.0 percent and 2.2 percent growth, respectively, over this last year.
Despite fears from some inflation hawks, the fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant pickup in nominal wage growth in recent years. Wage growth is far below the 3.5 percent rate consistent with the Federal Reserve Board’s inflation target of 2 percent, and far below the 4 percent rate that could easily be absorbed for a while to restore labor’s share of national income from its current historic lows.
This lackluster wage growth is a clear indicator that there’s still considerable slack in the labor market. With so many Americans looking for work—and millions more who would be looking for work if job opportunities were stronger—employers simply don’t have to offer wage increases to get and keep the workers they need. It’s a positive sign that the economy is growing, but it’s simply not enough for workers to feel the effects in their paychecks.
Year-over-year change in nominal average hourly earnings of all private nonfarm employees and private production/nonsupervisory workers, 2007–2014
| Month | All private employees | Production/nonsupervisory workers |
|---|---|---|
| Mar-2007 | 3.6% | 4.1% |
| Apr-2007 | 3.3% | 3.8% |
| May-2007 | 3.7% | 4.1% |
| Jun-2007 | 3.9% | 4.1% |
| Jul-2007 | 3.4% | 4.1% |
| Aug-2007 | 3.5% | 4.0% |
| Sep-2007 | 3.2% | 4.1% |
| Oct-2007 | 3.3% | 3.8% |
| Nov-2007 | 3.3% | 3.9% |
| Dec-2007 | 3.1% | 3.8% |
| Jan-2008 | 3.1% | 3.9% |
| Feb-2008 | 3.0% | 3.7% |
| Mar-2008 | 3.0% | 3.8% |
| Apr-2008 | 2.8% | 3.7% |
| May-2008 | 3.0% | 3.7% |
| Jun-2008 | 2.7% | 3.6% |
| Jul-2008 | 3.0% | 3.7% |
| Aug-2008 | 3.3% | 3.8% |
| Sep-2008 | 3.3% | 3.6% |
| Oct-2008 | 3.3% | 3.9% |
| Nov-2008 | 3.6% | 3.9% |
| Dec-2008 | 3.6% | 3.8% |
| Jan-2009 | 3.5% | 3.7% |
| Feb-2009 | 3.5% | 3.7% |
| Mar-2009 | 3.2% | 3.5% |
| Apr-2009 | 3.2% | 3.3% |
| May-2009 | 2.8% | 3.1% |
| Jun-2009 | 2.7% | 2.9% |
| Jul-2009 | 2.6% | 2.7% |
| Aug-2009 | 2.4% | 2.6% |
| Sep-2009 | 2.3% | 2.7% |
| Oct-2009 | 2.3% | 2.6% |
| Nov-2009 | 2.1% | 2.7% |
| Dec-2009 | 1.8% | 2.5% |
| Jan-2010 | 2.0% | 2.6% |
| Feb-2010 | 1.8% | 2.5% |
| Mar-2010 | 1.8% | 2.3% |
| Apr-2010 | 1.8% | 2.4% |
| May-2010 | 1.9% | 2.6% |
| Jun-2010 | 1.8% | 2.5% |
| Jul-2010 | 1.8% | 2.5% |
| Aug-2010 | 1.7% | 2.4% |
| Sep-2010 | 1.9% | 2.2% |
| Oct-2010 | 1.9% | 2.5% |
| Nov-2010 | 1.7% | 2.2% |
| Dec-2010 | 1.7% | 2.0% |
| Jan-2011 | 2.0% | 2.2% |
| Feb-2011 | 1.8% | 2.1% |
| Mar-2011 | 1.8% | 2.1% |
| Apr-2011 | 1.9% | 2.1% |
| May-2011 | 2.0% | 2.1% |
| Jun-2011 | 2.1% | 2.0% |
| Jul-2011 | 2.3% | 2.3% |
| Aug-2011 | 1.9% | 2.0% |
| Sep-2011 | 1.9% | 2.0% |
| Oct-2011 | 2.1% | 1.7% |
| Nov-2011 | 2.0% | 1.8% |
| Dec-2011 | 2.0% | 1.8% |
| Jan-2012 | 1.7% | 1.4% |
| Feb-2012 | 1.9% | 1.5% |
| Mar-2012 | 2.1% | 1.7% |
| Apr-2012 | 2.0% | 1.8% |
| May-2012 | 1.8% | 1.4% |
| Jun-2012 | 2.0% | 1.5% |
| Jul-2012 | 1.8% | 1.4% |
| Aug-2012 | 1.9% | 1.3% |
| Sep-2012 | 2.0% | 1.4% |
| Oct-2012 | 1.5% | 1.3% |
| Nov-2012 | 1.9% | 1.4% |
| Dec-2012 | 2.1% | 1.6% |
| Jan-2013 | 2.2% | 1.9% |
| Feb-2013 | 2.1% | 2.0% |
| Mar-2013 | 1.9% | 1.9% |
| Apr-2013 | 2.0% | 1.7% |
| May-2013 | 2.1% | 1.9% |
| Jun-2013 | 2.2% | 2.0% |
| Jul-2013 | 1.9% | 2.0% |
| Aug-2013 | 2.2% | 2.1% |
| Sep-2013 | 2.0% | 2.2% |
| Oct-2013 | 2.2% | 2.3% |
| Nov-2013 | 2.2% | 2.3% |
| Dec-2013 | 1.9% | 2.3% |
| Jan-2014 | 2.0% | 2.2% |
| Feb-2014 | 2.1% | 2.5% |
| Mar-2014 | 2.1% | 2.3% |
| Apr-2014 | 2.0% | 2.3% |
| May-2014 | 2.1% | 2.4% |
| Jun-2014 | 2.0% | 2.3% |
| Jul-2014 | 2.0% | 2.3% |
| Aug-2014 | 2.1% | 2.5% |
| Sep-2014 | 2.0% | 2.2% |
| Oct-2014 | 2.0% | 2.2% |
Note: Wage target consistent with Federal Reserve Board's 2 percent inflation target and 1.5% labor productivity growth assumption. Light shaded area denotes recession.
Source: Authors' analysis of Bureau of Labor Statistics' Current Employment Statistics, public data series.
What to Watch on Jobs Day: Nominal Hourly Earnings
On Friday, the Bureau of Labor Statistics will release the October numbers on employment, unemployment, and nominal wages. Consensus forecasts are that that unemployment rate will hold steady, while total employment continues to rise, likely adding over 200,000 jobs. If job growth continues on this trajectory, it will likely keep on the front burner debates over just how much “slack” remains in the labor market, and whether the Federal Reserve should begin raising rates sooner or later.
But the most reliable indicator of slack at this point is not employment growth or unemployment—it’s the nominal wage series. The numbers on nominal wage growth from the Employment Situation, and other related government data, are likely to be the single most important indicator driving the Fed’s decisions in coming months.
Despite fears from some inflation hawks, the fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant pickup in nominal wage growth in recent years.
The figure below shows year over year nominal wage growth from a variety of data sources.
Quarterly wage series, 2000Q1–2014Q3
| Average hourly earnings of production/nonsupervisory workers | Average hourly earnings of all private employees | CPS-ORG median* | ECI, wages and salaries, all private workers | ECEC, wages and salaries, all private workers | |
|---|---|---|---|---|---|
| Jan-2000 | 3.7% | ||||
| Apr-2000 | 3.8% | ||||
| Jul-2000 | 3.8% | ||||
| Oct-2000 | 4.2% | ||||
| Jan-2001 | 4.1% | ||||
| Apr-2001 | 4.0% | ||||
| Jul-2001 | 3.7% | ||||
| Oct-2001 | 3.3% | ||||
| Jan-2002 | 3.0% | 3.5% | |||
| Apr-2002 | 2.7% | 3.6% | |||
| Jul-2002 | 2.9% | 3.1% | |||
| Oct-2002 | 3.1% | 2.6% | |||
| Jan-2003 | 3.2% | 2.9% | |||
| Apr-2003 | 2.9% | 2.4% | |||
| Jul-2003 | 2.6% | 2.9% | |||
| Oct-2003 | 2.0% | 3.1% | |||
| Jan-2004 | 1.7% | 2.6% | |||
| Apr-2004 | 2.0% | 2.8% | |||
| Jul-2004 | 2.1% | 2.6% | |||
| Oct-2004 | 2.5% | 2.6% | |||
| Jan-2005 | 2.6% | 2.7% | 3.1% | ||
| Apr-2005 | 2.6% | 2.5% | 3.0% | ||
| Jul-2005 | 2.7% | 2.3% | 1.6% | ||
| Oct-2005 | 3.0% | 2.5% | 2.9% | ||
| Jan-2006 | 3.4% | 2.5% | 3.4% | ||
| Apr-2006 | 3.9% | 2.8% | 3.3% | ||
| Jul-2006 | 4.1% | 3.1% | 4.7% | ||
| Oct-2006 | 4.1% | 3.2% | 3.4% | ||
| Jan-2007 | 4.1% | 3.5% | 3.4% | ||
| Apr-2007 | 4.0% | 3.6% | 3.4% | 3.1% | |
| Jul-2007 | 4.1% | 3.4% | 3.3% | 2.1% | |
| Oct-2007 | 3.8% | 3.2% | 3.3% | 3.1% | |
| Jan-2008 | 3.8% | 3.1% | 3.2% | 3.1% | |
| Apr-2008 | 3.7% | 2.8% | 3.1% | 3.3% | |
| Jul-2008 | 3.7% | 3.2% | 2.9% | 3.9% | |
| Oct-2008 | 3.9% | 3.5% | 2.6% | 3.7% | |
| Jan-2009 | 3.6% | 3.4% | 1.8% | 2.0% | 2.9% |
| Apr-2009 | 3.1% | 2.9% | 1.3% | 1.6% | 2.5% |
| Jul-2009 | 2.7% | 2.4% | 1.2% | 1.4% | 1.6% |
| Oct-2009 | 2.6% | 2.1% | 1.4% | 1.4% | 0.2% |
| Jan-2010 | 2.5% | 1.8% | 1.0% | 1.5% | 0.7% |
| Apr-2010 | 2.5% | 1.8% | 0.8% | 1.6% | 0.7% |
| Jul-2010 | 2.4% | 1.8% | 0.4% | 1.6% | 1.2% |
| Oct-2010 | 2.2% | 1.8% | -0.1% | 1.7% | 1.2% |
| Jan-2011 | 2.2% | 1.9% | -0.2% | 1.6% | 1.4% |
| Apr-2011 | 2.1% | 2.0% | 0.2% | 1.6% | 1.4% |
| Jul-2011 | 2.1% | 2.0% | 0.7% | 1.7% | 1.2% |
| Oct-2011 | 1.8% | 2.0% | 0.6% | 1.6% | 2.5% |
| Jan-2012 | 1.5% | 1.9% | 0.6% | 1.9% | 2.0% |
| Apr-2012 | 1.6% | 1.9% | 1.6% | 1.8% | 2.3% |
| Jul-2012 | 1.4% | 1.9% | 1.5% | 1.8% | 2.3% |
| Oct-2012 | 1.4% | 1.8% | 1.8% | 1.8% | 0.9% |
| Jan-2013 | 1.9% | 2.0% | 2.8% | 1.7% | 1.1% |
| Apr-2013 | 1.9% | 2.1% | 2.3% | 1.9% | 1.0% |
| Jul-2013 | 2.1% | 2.1% | 2.3% | 1.9% | 0.9% |
| Oct-2013 | 2.3% | 2.1% | 2.0% | 2.0% | 2.2% |
| Jan-2014 | 2.3% | 2.1% | 1.5% | 1.7% | 2.4% |
| Apr-2014 | 2.3% | 2.0% | 0.4% | 1.9% | 2.7% |
| Jul-2014 | 2.3% | 2.0% | 0.7% | 2.2% |
Note: Wage target consistent with Fed 2% inflation target and 1.5% productivity growth assumption. CPS-ORG median is a six-month moving average.
Source: Author's analysis of Bureau of Labor Statistics' Current Establishment Survey, Current Population Survey (CPS), Total Economy Productivity (unpublished), Employment Cost Index (ECI), and Employment Costs for Employee Compensation (ECEC).
As you can see in the figure, even quarterly wage measures exhibit a fair amount of volatility. Taken together, however, it is clear that wage growth is far below the 3.5 percent rate consistent with the Federal Reserve Board’s inflation target of 2 percent, and far below 4 percent rate that could easily be absorbed for a while to restore labor’s share of national income from its current historic lows. It’s clear that Fed policymakers should continue its low interest rate policy until the wage data really turns around. For a longer analysis of the Fed target and what to watch for in upcoming months on wage growth, see this earlier explainer. On Friday, we will continue to track any changes in monthly nominal wages and put them in broader economic context.
Myths and Facts About Corporate Taxes, Part 4: Should We Just Scrap the Corporate Tax Code?
This post is the latest in a series that has aimed to question the conventional Beltway wisdom about the supposed harm to the economy inflicted by the corporate tax code. Today, we’ll take on the idea that’s long been fermenting on the right, but now increasingly popping up in more mainstream outlets, to abolish the corporate tax code entirely. While there are reasons the idea of ceasing to tax corporations makes sense, the idea’s proponents have underestimated its drawbacks.
Getting rid of the corporate code entirely has some intrinsic appeal. Because corporate taxes are ultimately paid out of individuals’ pockets, it can seem desirable to tax these individuals directly—without dealing with all of the exemptions, credits, loopholes, and deductions in the corporate code, not to mention the “tax avoidance industry” such provisions support. This could potentially be a more efficient way to raise the same amount of revenue. However, there are three main obstacles that stand in the way of getting rid of the corporate code entirely.
- The corporate tax code is a progressive revenue raiser. While the corporate code only brings in about 10 percent of federal revenue, that’s still $315 billion in 2014. It’s also really progressive; the lowest fifth of earners pay about 0.9 percent of their income in corporate income tax, while the top 0.1 percent of earners pay 9.7 percent. According to the Congressional Budget Office, about four-fifths of corporate income is held by the top fifth of the income scale, and about half is held by the top 1 percent. Thus, as Jared Bernstein points out, “Unless we could replace it with higher taxes on those same households… scrapping or even just lowering the corporate tax rate would increase after-tax income inequality.” Raising that kind of revenue from the same sources, in the absence of a corporate income tax, is tougher than it may seem. The plan cited by the New York Times’ Josh Barro would replace the corporate tax by taxing individuals’ capital gains at ordinary income tax rates—a proposal long favored by progressives—and that would still only make up half of the lost revenue.
- Unintended consequences. As we’ve seen this year in Kansas’s experiment with eliminating corporate taxation, the unintended consequences are enormous. For instance, if corporations don’t pay taxes, but people still do, what would stop individuals from simply incorporating themselves for tax reasons—thus paying no taxes until their “corporate” earnings are distributed? (Kansas lost out on almost $300 million of revenue over a two-month period this year, for just this reason.) This maneuver would be just the tip of the tax avoidance iceberg if the corporate code were abolished. Getting rid of the corporate tax code and its myriad opportunities to evade taxes would not necessarily result in a system that’s harder to game.
- If you win the race to the bottom, you’re still at the bottom. While scrapping the corporate tax code would represent a “victory” in the international race to the bottom, it would undoubtedly be short-lived, as other countries would certainly react by slashing or zeroing their rates as well. This would be like a game of prisoner’s dilemma in which each suspect ratted out the other and everyone ended up in jail for a long, long time. (Jail in this case would be a hypothetical world in which multinational corporations paid no tax to any country at all.) Currently, every developed country levies a corporate income tax. They may tax different kinds of income and at different rates, but these taxes still exist throughout the world because they provide governments with revenue that would be hard to replace by switching to another tax system.
New Wages and Salaries Data from the Employment Cost Index Show Yet Again It’s Not Quite Time To Declare Mission Accomplished
This morning, the Bureau of Labor Statistics released the 2014 third quarter data from the Employment Cost Index (ECI). Total compensation and wages and salaries for the private-sector workforce both rose 0.7 percent. This is the second straight quarter of faster-than-average growth since the recovery from the Great Recession began. While this is absolutely a move in the right direction, we shouldn’t declare “mission accomplished” in spurring decent wage growth. The figure below shows the year-over-year growth rates of wages from a variety of measures: the ECI, hourly wages of all workers and hourly wages of production and nonsupervisory workers (the latter two from the monthly payroll survey, which will be updated again in a week).
There are two clear trends to note from the graph. First, all the series move fairly consistently with each other over time. In the third quarter, they all measured between 2.0 and 2.3 percent. Second, these growth rates are still far lower than the growth rates in 2007, when the wage growth ranged from 3.1 percent for all workers in the payroll survey to 4.1 percent in the ECI.
Year-over-year growth rates of wages, 2002–2014
| Date | ECI*, all workers | CES**, production/nonsupervisory workers | CES**, all workers |
|---|---|---|---|
| 2002-01-01 | 3.5% | 3.0% | |
| 2002-04-01 | 3.6% | 2.7% | |
| 2002-07-01 | 3.1% | 2.9% | |
| 2002-10-01 | 2.6% | 3.1% | |
| 2003-01-01 | 2.9% | 3.2% | |
| 2003-04-01 | 2.4% | 2.9% | |
| 2003-07-01 | 2.9% | 2.6% | |
| 2003-10-01 | 3.1% | 2.0% | |
| 2004-01-01 | 2.6% | 1.7% | |
| 2004-04-01 | 2.8% | 2.0% | |
| 2004-07-01 | 2.6% | 2.1% | |
| 2004-10-01 | 2.6% | 2.5% | |
| 2005-01-01 | 2.7% | 2.6% | |
| 2005-04-01 | 2.5% | 2.6% | |
| 2005-07-01 | 2.3% | 2.7% | |
| 2005-10-01 | 2.5% | 3.0% | |
| 2006-01-01 | 2.5% | 3.4% | |
| 2006-04-01 | 2.8% | 3.9% | |
| 2006-07-01 | 3.1% | 4.1% | |
| 2006-10-01 | 3.2% | 4.1% | |
| 2007-01-01 | 3.5% | 4.1% | |
| 2007-04-01 | 3.4% | 4.0% | 3.6% |
| 2007-07-01 | 3.3% | 4.1% | 3.4% |
| 2007-10-01 | 3.3% | 3.8% | 3.2% |
| 2008-01-01 | 3.2% | 3.8% | 3.1% |
| 2008-04-01 | 3.1% | 3.7% | 2.8% |
| 2008-07-01 | 2.9% | 3.7% | 3.2% |
| 2008-10-01 | 2.6% | 3.9% | 3.5% |
| 2009-01-01 | 2.0% | 3.6% | 3.4% |
| 2009-04-01 | 1.6% | 3.1% | 2.9% |
| 2009-07-01 | 1.4% | 2.7% | 2.4% |
| 2009-10-01 | 1.4% | 2.6% | 2.1% |
| 2010-01-01 | 1.5% | 2.5% | 1.8% |
| 2010-04-01 | 1.6% | 2.5% | 1.8% |
| 2010-07-01 | 1.6% | 2.4% | 1.8% |
| 2010-10-01 | 1.7% | 2.2% | 1.8% |
| 2011-01-01 | 1.6% | 2.2% | 1.9% |
| 2011-04-01 | 1.6% | 2.1% | 2.0% |
| 2011-07-01 | 1.7% | 2.1% | 2.0% |
| 2011-10-01 | 1.6% | 1.8% | 2.0% |
| 2012-01-01 | 1.9% | 1.5% | 1.9% |
| 2012-04-01 | 1.8% | 1.6% | 1.9% |
| 2012-07-01 | 1.8% | 1.4% | 1.9% |
| 2012-10-01 | 1.8% | 1.4% | 1.8% |
| 2013-01-01 | 1.7% | 1.9% | 2.0% |
| 2013-04-01 | 1.9% | 1.9% | 2.1% |
| 2013-07-01 | 1.9% | 2.1% | 2.1% |
| 2013-10-01 | 2.0% | 2.3% | 2.1% |
| 2014-01-01 | 1.7% | 2.3% | 2.1% |
| 2014-04-01 | 1.9% | 2.3% | 2.0% |
| 2014-07-01 | 2.2% | 2.3% | 2.0% |
* Employer Cost Index
** Current Employment Statistics
Note: All series are for private sector workers.
Source: EPI analysis of Bureau Labor Statistics' Employer Cost Trends and Current Employment Statistics
The fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant and sustained pickup in nominal wage growth in recent years. Employers still don’t seem to have to offer big wage increases to get and keep the workers they need, when hiring rates and net job creation remain far slower than what’s needed to generate healthy labor market outcomes.
Who Among African Americans is Counted in the Labor Market and in the Voting Booth?
Next Tuesday is Election Day. For months, get out the vote campaigns have been under way in communities across the country and the public has endured an endless stream of political ads and robocalls intended to bolster typically sluggish voter turnout during midterm elections. Arguably, the biggest risk to people showing up at the polls on Tuesday is a basic disbelief that their individual vote counts or will do much to change the status quo. On one hand, voters might feel justified in holding this view given that neither party has said (or done) much this election cycle to address growing economic inequality and stagnant living standards, issues that have been top of mind for most Americans for at least the past six years. In fact, the most vocal public figure on this issue in recent months has been someone we didn’t elect – Fed Chair, Janet Yellen.
Just in case reports of strong job growth and declining unemployment this year have lulled our elected leaders into a false sense of security about the public’s level of concern over the economy, they should be reminded that counting matters. Since January of this year, the U.S. economy has added an average of 227,000 jobs per month and the unemployment rate has fallen from 6.6 percent to 5.9 percent. But, according to EPI’s monthly measure of “missing workers,” if job opportunities were significantly stronger, there would potentially be an additional 6.3 million people either working or looking for work and the unemployment rate would be 9.6 percent.
A few years ago, sociologists Becky Petit and Bryan Sykes brought to light an important way in which counting matters when it comes to measuring African American progress. Specifically, Petit and Sykes called into question the accuracy of social and economic indicators used to gauge how well different groups within American society are doing. Most of these indicators are based on the civilian non-institutionalized population. While this is a term few people give any thought to, by definition it excludes people who are in jails, prisons, mental institutions, nursing homes or on active duty in the Armed Forces.
Yes, GDP Is Up. But the Recovery Hasn’t Broken Through.
This post originally ran on the Wall Street Journal‘s Think Tank blog.
The Commerce Department’s Bureau of Economic Analysis reported Thursday that gross domestic product–the widest measure of U.S. economic activity–grew at an annualized rate of 3.5% in the third quarter. For the past six months GDP has been growing at a rate of 4.1%. If sustained, this would clearly constitute the recovery shifting into a higher gear.
Sadly, there’s not a lot of evidence that it will be sustained.
For one thing, even with the expansion in the two most recent quarters, growth so far in 2014 has averaged just 2%. Much of the growth in the past six months likely represents bounceback from the 2.1% contraction in the first 3 months of this year.
Myths and Facts About Corporate Taxes, Part 3: Are American Companies’ Profits Trapped Overseas?
After dispelling some unwise conventional wisdom about corporate taxes (first that American corporations pay the highest tax rates in the developed world, and then that “tax reform,” as commonly defined by Congress and businesses alike, would be either sound policy or good politics or both), here’s another tired idea that needs to be put to bed: Taxing American multinationals’ overseas profits when they return home “traps” money overseas and is a leading cause of the American corporate code’s “anti-competitiveness.”
The U.S. corporate tax code is unlike many other developed nations’ in that it taxes its multinationals’ profits that are earned overseas. (Taxing profits no matter where they’re made is called a “worldwide” tax system.) However, American corporations may defer payment on these taxes until they bring their overseas profits back to the States in the form of dividends. American corporations are well-versed in ways to use this cash overseas (for example, if classified as “permanently reinvested” in a foreign country, those earnings are exempt from U.S. taxation), and thus avoiding “repatriating” profits and paying taxes owed.
Corporations, and those they’ve managed to bamboozle on this issue, often say that these profits are “trapped” overseas. “Being obligated to pay taxes” is not the same as “trapped.” Imagine that your employer told you he’d love to pay you, but your salary is “trapped” because if you were paid then your employer would be obligated to remit payroll taxes to the Treasury. You would be rightfully skeptical of this “trapped salary” argument. However, corporations routinely trot out this “trapped” line to call for a “repatriation holiday,” during which profits earned in a foreign country could be brought to the United States at a reduced tax rate. (The previous such holiday was granted as a “one-time” deal in 2004, but corporations’ belief that it will be repeated is part of why their overseas cash hoard has grown so large—now up to $2.1 trillion.) Moreover, the anticipated benefits of the one-time tax holiday—increased business investment and hiring here at home—did not materialize; the 15 companies that repatriated the most foreign earnings cut more than 20,000 jobs over the following three years and “slightly decreased the pace of their spending on research and development.” The tax break also cost the U.S. Treasury $3.3 billion in lost revenue.
High-income Households Pay a Large Share of US Taxes—But This Doesn’t Make Our Tax System Progressive
Perhaps the highest priority issue on the conservative agenda is keeping taxes on the highest-income Americans low. Their arguments essentially boil down to claims that raising taxes on “job creators” would doom the economy, and, besides, the government has taken so much from them already that there’s no more left to take.
In the past few weeks, the claim has been making the rounds that the U.S. tax code is already overly progressive, and much more redistributive than those of other developed nations. The line of argument following from this often seems like a tacit—or not so tacit—warning to progressives: If you want to increase public spending you’ll have to raise taxes on the middle class—because the rich just don’t have any more to give—and you’ll get hammered politically for doing so. Therefore, we can’t have any new spending. QED.
The idea that the U.S. tax system is already too progressive pops up every few years, but its persistence doesn’t mean its intellectual underpinnings are reliable. Indeed, the most recent resurgence of this theory is built on a deeply flawed foundation, consisting of a truly terrible measure of “progressivity”—namely, the fact that a relatively large percentage of all U.S. taxes collected is paid by the highest-income filers, relative to our advanced-economy peers.
The Top 1 Percent of Wage Earners Falters in 2013—Was it a Temporary Event?
The release of new Social Security Administration wage data gives us a chance to update our analysis of wage trends for the top 1.0 percent of wage earners and wage groups in the bottom 99.0 percent. There’s some surprising news this year, as top 1.0 percent wages fell, while the remainder of the workforce saw real wage improvements. In the analysis below we review these recent trends, as well as trends during the Great Recession and over the longer-term.
Wage growth from 2012 to 2013
New data for 2013 (Table 1) provide some surprising news: real average annual wages nudged down slightly, falling 0.2 percent since 2012, because wages of the top 1.0 percent of wage earners declined, although those of the bottom 99.0 percent grew. The biggest wage decline was among the top 0.1 percent of earners, whose wages fell 9.0 percent, while the next 0.9 percent saw their wages fall just 1.4 percent. In contrast, the wages of the bottom 90 percent (averaging $32,333 in 2013) rose a modest 0.4 percent (real hourly wages did grow modestly in 2013). Higher wage workers, those earning between the 90th and 99th percentiles of wages (averaging $136,820 in 2013) fared the best, with real wages rising by 2.5 percent. Thus, wage inequality between high and middle/low wage workers grew even though those at the very top—the 1 percenters—actually lost ground. David Cay Johnston wrote on this yesterday. Our analysis goes beyond his reporting by placing earners in percentile wage groups (bottom 90 percent, top 1 percent, etc.) and providing analyses of changes over the Great Recession’s downturn and recovery and the longer-term changes back to 1979.