The Root Causes of Income Inequality By Lewis J. Walker, CFP(R)

Income inequality is a growing political theme. The issue transcends rhetoric with major implications for investors, tax payers, investors, and wage earners.

Witness presidential candidate Bernie Sanders: “In the United States, we have one of the most unequal wealth and income distributions of any major country on earth. Today the top one-tenth of 1 percent of our nation owns almost as much wealth as the bottom 90 percent combined. Nearly all of the new income growth since the recession has gone to the top 1 percent.” (berniesanders.com)

Consider cries for “fairness,” free college educations, mandatory wage hikes, breaking up big banks and corporations, vastly increased taxes on higher earners and corporations. A 8/7/15 The New York Times op-ed by Peter Georgescu warns, “Capitalists Arise: We Need to Deal With Income Inequality.” Georgescu opines, for the top 20% of American’s “life is pretty good.” But “40% are broke” and the middle 40% squeezed. Real wages have been flat for 40 years while productivity has increased by 80%. Gains from productivity mostly “go to shareholders, not employees.”

If income inequality is not addressed, says Georgescu, we will see oppressive taxes, major social unrest, or both. We could get tax complexities that stifle growth and global competitiveness, more regulations, increased dependency on the government, and attacks on the successful and “rich.” Economist Thomas Piketty urges an 80% tax rate on incomes over $500,000. Hillary Clinton proposes higher capital gains tax rates. Bernie Sanders packs auditoriums calling for a 90% top income tax rate and a 65% top estate tax rate.

On the other side of the divide are those who push pro-growth initiatives favoring a simplified tax code, improvements in education, training, and school choice, dumping anti-growth regulations, and increasing incentives to work within our welfare system. Job creation has been below par since the economic strains of 2008-2009.

The easy money policies of the Federal Reserve Bank, as well as other central banks, decreases the cost of money and spurs risk taking. Low interest rates have benefited those who own assets such as stocks and real estate. Yet politicians who decry the gains in equities and other investment assets forget that it isn’t just the one-percent who participate. They ignore those building wealth via 401(K) plans and other retirement plans, pension funds for workers of all stripes, and small investors in mutual funds who benefit. Torpedo the one-percent and the wealth-creators and investors who supply risk capital and the collateral damage will be immense.

Technology has improved life and decreased costs, while replacing people, both those with low-value skills as well as higher-value white collar jobs. Yes, it’s frustrating. Just as you learn the rules, the game changes. It’s a tale of two citizens...23 year old college graduates with accounting and technology skills finding jobs while 56-year old long-timers are downsized, working at a new job for half the pay, if that.

Don’t ignore the political rhetoric. Our country is dangerously polarized. Young career builders best pay attention to their value proposition in a world getting more competitive, not less. Those building nest eggs in pursuit of financial independence, including business owners and professionals, have a stake in tax policy, how investments are treated, and how competitive the U.S. economy is in relation to the rest of the world. Business has a stake in education and training policies as technically proficient white-collar and blue-collar workers will be in greater need in a high-tech global economy. Retirees with stock, real estate, and other investments, including bonds, depend on healthy vibrant economies to maintain values.

If “capitalism” becomes the enemy, if success and wealth attainment is branded “unfair,” if robbing Peter to pay Paul is a vote getter, the underpinnings of growth will be hobbled. However, there is a growing understanding that growth and jobs are the answer and that an economy with burdensome debt loads weighs on societal progress. We suspect that attempts to employ redistributionist remedies such as punitive taxes and a growing welfare state will not play out and using inequality for political purposes will not find success given the realities of global competition. Joe the Plumber is still out there. Most voters will favor pro-growth policies that increase jobs and allow them to participate in gains.

The inequality conversation has spurred some companies and policy makers to apply the fruits of success, allowing employees to participate more fully along with owners, a good thing. Voluntary fairness beats government mandates and centralized planning every time!

Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services are offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker and Mike Hostetler are registered representatives of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com

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