Inequality

The Oft-Repeated Lie About Warren Buffet’s Secretary’s Tax Rate

For last night’s State of the Union Address, President Obama invited Warren Buffet’s secretary, Debbie Bosanek, to sit in the First Lady’s box during the speech and specifically promised in that speech to support tax changes in order to mend the injustice Buffet claims occurs allowing him to pay the lowest tax rate of anyone in his office, including his secretary. This line of attack is doubtless partly designed to pave the way millionaire Barrack Obama to make populist attacks on multi-millionaire Mitt Romney during the upcoming presidential campaign. Romney is, after all, very, very rich, and his income comes primarily from investments.

David Leonhardt at the NY Times asks both right-leaning economist Greg Mankiw and the left leaning Center on Budget and Policy Priorities to comment on this alleged tax injustice. Mankiw makes a fairly reasonable case that the reason capital gains are lower is that investment income is based on corporate profits and corporate profits have already been taxed. Companies would have more profits to pass on to investors (either as dividends or in the form of being worth more) if they didn’t pay corporate taxes, and so the tax on investment income is set lower to avoid this “double taxation”. Chuck Marr of the Center on Budget and Policy Priorities must know the facts aren’t on his side, because instead of answering the question he provides a canned response about income inequality and how tax rates are lower than in the ’70s. The column is worth a read.

However, there’s another issue here which I think is worth pointing out. Progressives writing on this issue usually act as if billionaire investors such as Warren Buffet are all paying right around 15% (the capital gains rate) in taxes — Buffet claims that he pays 17.4% — and that “middle class Americans” are paying the top marginal income tax rate of 35%. Continue reading

Increasing Inequality and Winner-Take-All Economics

One of the mildly worrying economic trends of the last thirty years has been the increasing gap between rich and poor in the US. Many policy analysts conclude that this is the clear result of not following whatever policies they advocate, and thus demand quick action. However, as a recent OECD study shows, most countries have seen increases in inequality since 1980:

Given that countries as varied as Israel, Germany, New Zealand, Sweden and Finland have all seen increases in inequality of similar or greater scale (though not to the same absolute level, since they started lower) to that of the US over the last 30 years, it seems hard to imagine that it is simply a matter of US tax or social safety net policy which is the cause of the trend. Continue reading

Do The Wealthy Pay Their Share?

Having linked last week to some discussion on whether the US is really becoming “Of the 1%, by the 1%, for the 1%”, I was struck by this chart, which I saw a link to this morning, over at Carpe Diem, showing top marginal income tax rates versus percentage of income tax paid by the top 1% of earners since 1980.

However, I thought it would be a lot more interesting if the chart showed the percentage of total income earned by the top 1%, and also showed the total federal tax liability (including Social Security and Medicare) rather than the just the income tax. Luckily, all this information is available easily on line. (Percent of taxes paid. Percent of total income. Historical tax tables.)

Here’s the chart I produced with that data:

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Responding to Stiglitz on Inequality

There’s a Vanity Fair piece on income inequality by Nobel Price-winning economist Joseph Stiglitz, “Of the 1%, by the 1%, for the 1%”, which has been cited again and again in the commentariat lately, and it’s a frustrating piece because of the extent to which is makes logical leaps or simply distorts reality. Scott Winship of The Empiricist Strikes Back does a good job of going through the piece and addressing it point by point, including taking on a few of the talking points which are increasingly becoming things “everybody knows” in the wonk community but which don’t actually mean what they seem to.

One of the problems with our modern society’s fixation on “data” is that people, even very educated people who should know better, often fixate on a given metric (for example, the claim that “While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.“) without taking the time to dig into what we can discover of the realities that underlie that measure. Sometimes those realities do not fit with the ideological picture which makes the original metric so appealing. (Winship’s responses to the just quoted claim, both in the main article linked above and in this older one, are fascinating.)

Definitely worth a read.

Inequality, Heritability and the American Dream

Ever since people finished identifying “the American Dream” — the idea that in the US in particular and the New World in general somehow allowed people to escape the hidebound social structures of the Old World and better themselves via their own efforts — people have been worried that it is on the point of dying. Americans continue to show an an unusual degree of belief in the ability those who work hard to better themselves by their own efforts. For instance, in the 1999 International Social Survey, 61% of Americans agreed that “people get rewarded for their effort”, whereas only 41% of Japanese agreed, 33% of British and 23% of French. This belief has actually increased in recent decades. In 2005 the New York Times reported that while in 1983 only about 60% Americans agreed that “It is possible to start out poor, work hard and become rich” by 2005 nearly 80% of Americans agreed with that statement.

And yet, those who study inter-generational income mobility have been increasingly worried in recent decades that despite American’s belief that people can work hard and get ahead, that it is becoming increasingly difficult for people to actually achieve this in the US. In a lengthy report by the liberal think thank Center for American Progress, Tom Hertz of American university brings together a number of the recent studies on intergenerational income mobility in the US as compared to other countries, showing how people who are born into the lower income quartiles in the United States are less likely to reach the top levels of income than in other countries such as Germany, Sweden or Denmark. Continue reading

Is The US Destroying the Middle Class?

With a certain frequency, commentators see fit to worry as to the extinction of the US middle class. One among these, it seems, is one Edward Luce, who composed a piece on “The crisis of middle-class America” for the Financial Times. The piece profiles two families making about $70k/yr each, and worries as to the future of them and families like them. Both are, by coincidence, families of loyal Democrats, and the piece sports the requisite concerns about the potential dangers of tea party barbarians howling at the gates of the US order.

I feel myself in an odd position in regards to such stories. The particular definition of “middle class” picked for the story is a family income threshold which five years ago was frustratingly above our families income, and which now is embarrassingly below it. In this regard, I recognize myself to be uncharacteristically fortunate. However, having recently made a good deal less than this (and coming from a family which never exceeded such a total, even adjusting for inflation) I feel that I have some familiarity with the sort of middle class world being discussed — while I can’t escape the feeling that this seems a very squalid and foreign world to the Financial Times writer.

Added to this sense of class conflict is that Luce seeks to build up his story with juxtapositions of facts which sound like they mean more than they do. Continue reading

Inequality: Can't Live With It, Can't Live Without It

In my last post I looked at the question of how to calculate the just or living wage, using figures from Father Ryan’s classic text A Living Wage brought up to date by adjusting for inflation. Commenter Restrained Radical, however, thinks that in merely adjusting for inflation I was being too stingy:

Adjusting for inflation isn’t necessary the best way to adjust Fr. Ryan’s figures. Real GDP per capita grew faster than inflation. In other words, Americans got wealthier. Using Fr. Ryan’s figures today adjusted for inflation would be appropriate if real GDP per capita was stagnate for 89 years. In 1919, GDP per capita was $805. If you only adjust for inflation, that would be $9,897 today. That’s somewhere between Cuba and South Africa. So $6.15/hour would be an appropriate living wage for a family of 5, in Cuba.

If instead we adjust for unskilled labor wage increase (4.24% annualized since 1919), $1,400 to $1,500 then would be $56,388 to $60,416. That’s probably closer to what Fr. Ryan had in mind.

In 2008, median household income in the United States was $52,029. If Restrained Radical’s interpretation is correct, then it would seem Father Ryan was advocating a kind of Lake Wobegon society, where everyone has the right to an above average income.

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Income Gap Narrowing

A year into the economic downturn, the much decried income gap has narrowed.

The deepest downturn in the U.S. economy since the Great Depression may finally shrink the gap between the very best-off Americans and everyone else.

If so, it won’t be by lifting up the bottom. It will be by pulling down the top.

Over the past 30 years, chief executives, Wall Street bankers and traders, law-firm partners and such amassed ever-greater incomes, while the incomes of factory workers, teachers, office managers and others in the middle grew much more slowly. In 2007, the top 1% of U.S. families accounted for 23.5% of all personal income in the U.S., according to economists Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics. That was a level not seen since the Roaring Twenties.

The top 1%’s share appears to be falling fast. Mr. Saez and other economists expect income going to the top 1% of taxpayers — currently, those with about $400,000 a year — will drop to somewhere between 15% and 19% of all income by 2010. That still would leave income distribution more top-heavy in the U.S. than in many other countries.
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On The Question of Inequality

There’s been some discussion of inequality in posts and comments here recently. I have ambitions to write a series of the particular challenges I believe our country is facing in regards to inequality in a modern high-skill-based economy, but given recent discussion I’d like to open with something fairly open-ended.

John Henry pointed out that the Catechism of the Catholic Church addresses the question of equality to some extent in its section on Human Solidarity:

1935 The equality of men rests essentially on their dignity as persons and the rights that flow from it:

Every form of social or cultural discrimination in fundamental personal rights on the grounds of sex, race, color, social conditions, language, or religion must be curbed and eradicated as incompatible with God’s design.40

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