https://au.news.yahoo.com/thewest/a/28612924/pressure-s-on-the-middle-class/
Pressure’s on the middle class Shane Wright Economics Editor June 30, 2015, 7:44 am Share Share
[h=4]Shane Wright: Pressure’s on the middle class, trickle-down effect - The West Australian[/h]
The trickle-down effect is dead. So says that “bastion” of socialism and “class envy”, the International Monetary Fund.
While the research released last week by the respected IMF is unlikely to change the entrenched views of those who believe equity doesn’t matter or that high-flyers should be put on unemployment-level wages, those of us who like a bit of evidence in their policy development should take it on board.
The IMF’s most worrisome finding was the squeeze on the global middle class.
It’s hard to ignore just how important the emergence of a true middle class has been to the economic health of the globe since the end of World War II.
Without this middle class, the development of a range of sectors (from education to tourism to consumer retailing) would be unimaginable.
Robert Menzies’ famous Forgotten People radio address of 1942 is a celebration of this group of people which, until recently, grew in both size and economic importance.
But according to the IMF, a series of changes — technological and policy — are “squeezing” middle income earners. This had translated into a rise in the number of low income people (who are getting by on government handouts) and a smaller lift in those at the top of the income pile.
This inequality, the fund found, is causing real economic damage. The notion that boosting the top means more for all —the classic trickle-down effect — doesn’t really exist.
“If the income share of the top 20 per cent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth,” the IMF found.
“The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels. “Raising the income share of the poor, and ensuring that there is no hollowing-out of the middle class is actually good for growth.”
The IMF pinpointed technology as one of the biggest factors in the decline of the middle class. There is a wealth effect from having great skills but if you don’t have those type of skills (such as in IT) then you miss out on wage growth or on a job altogether.
At the same time, “economic rents” including incomes paid to company chief executives are accruing to “the top end of the income distribution”.
That mirrors separate research released by the OECD last week that warned further growth in the financial sector would actually hurt economies. It found the wage growth of those high up in finances was well ahead of wages growth in other parts of the industry and the entire economy.
The IMF’s findings are a real challenge for those who argue boosting the top helps the bottom. It’s not just the fund’s researchers turning up some uncomfortable truths. Important empirical work by Owen Zidar, a former staff economist to the US Council of Economic Advisers, shows the connection between the lowest paid and the overall health of the economy.
Professor Zidar released research this year looking at the impact of income tax changes across the US at Federal and State level over two decades.
What he found was simple. You get better economic outcomes, particularly in terms of employment, with tax cuts to those with middle or low incomes. “The stimulative effects of income tax cuts are largely driven by tax cuts for the bottom 90 per cent and that the empirical link between employment growth and tax changes for upper-income earners is weak to negligible,” he wrote.
While many business groups including the WA Chamber of Commerce and Industry back cuts to the top marginal tax rates, they rarely dwell on those at the bottom.
It’s hard to mount a productivity argument for cutting top marginal tax rates. A person earning more than $180,000 (that’s 2 per cent of the population) is not going to be “incentivised” into working harder or more productively.
These people are already working hard — and getting well paid for their efforts.
Those backing cuts for these people are now arguing they need them because of international competition or because there is such a wide gap between the top marginal rate and the company rate. In other words, the well paid are likely to scam the tax system to reduce their overall tax.
Last week the Bankwest Curtin Economics Centre made its own contribution to the debate on inequality. Rather than focus on income, the centre’s research looked at savings — and the disparity between the haves and have nots is even starker.
The best-paid 20 per cent of the country have average savings of $1.3 million, which includes their superannuation. The bottom 20 per cent — just $6000.
The graphic on this page gives you an idea of just how those with the biggest savings compare with those with very little in the bank.
One of the most interesting aspects of the research was how high income savers have got to that point.
Assets held in tax-advantaged trusts grew 87 per cent between 2005 and the current year. It was the fastest growing asset class, better than money sunk into a business (up 80 per cent) and much better than shares (up 63 per cent).
The disposable income of this group grew just 14 per cent (and deposits are up 35 per cent).
That points to a real issue in this country and in many parts of the developed world. We’ve become very smart at using and abusing the tax system, and are pouring more resources into that use and abuse.
While the richest 20 per cent of the community have about a third of all income, they hold three-quarters of total savings.
Centre director Alan Duncan said low income earners were holding big debts against very low savings, putting them at financial risk.
Not that this avalanche of evidence will sway those who are stuck in their political ruts. Labor-Liberal, Left-Right, business-union are too entrenched to even countenance there are issues that deserve proper policy solutions.
We’ve got a political class that argues in sound bites with almost no intellectual rigour and too much of a media class that laps it up and reports policy debates as if they were football matches.
What’s trickling down to voters, those with jobs and those who are trying to create jobs is beyond the pale.
