THE DISTRIBUTION OF INCOME IN THE USA
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Econ2301--DISCUSSIONBOARD2--Unit2--rev.2018.docDISCUSSION BOARD # 2—Unit 2: THE DISTRIBUTION OF INCOME IN THE USA
Opposing Views
While much of the discussion that takes place about economic issues is somewhat theoretical and abstract, when the conversation turns to money and individual income, it suddenly becomes much more personal. This all begins at a very early age when we realize that money can bring the things that we want.
Most of our experience with money is very much at the micro level. We see what we earn and we also see what it will buy. It is not a common thing to think much about the broader questions at the macro level. How is income really distributed in this country? How does our tax policy influence that distribution? Even more importantly, is this a question that we should worry much about or does the free market always allocate income and wealth in an efficient manner? If you think back to Unit 1, the free-market view is that those who are more efficient and inventive will be rewarded with more income. Of course, it was also assumed that perfect competition existed and markets could not be influenced in any way by vested interests.
During the semester, we are looking at two major macroeconomic problems that currently exist—instabilty, which we deal with using fiscal and monetary policy (unit 3)—and the distribution of income and wealth. The latter is more abstract but is contributing to a number of problems—even instability.
I would ask you to consider these questions. The same guidelines that we have used for the other discussion boards will apply.
QUESTIONS: (discuss these fully)
1. What does “progressive taxation” mean? What is your opinion about the role of government regarding taxation? Should we worry about taxes that have a regressive effect on the taxpayer?
2. As a society, should we worry about the distribution or income or simply allow market forces to make that determination. What do you think would happen if there was no attempt to influence the distribution of income and wealth…would the distribution: stay the same…become less concentrated…become more concentrated in the hands of fewer people?
3. We hear many politicians suggesting that lowering taxes will always increase economic growth, create more jobs and ultimately mean more tax revenue. Is this true?
4. Does “trickle-down economics” really work? If we allow those at the top of the income ladder to make more and more, does that trickle down to those at lower income levels and increase the number of jobs?
5. Regarding the recent changes in tax law…what is your opinion. Will these changes be beneficial to the economy or a detriment? Does the new law still favor those at the top?
6. What is your opinion about the distribution of wealth—which is much more disparate than income. Should we be concerned that so few have an investment in the system?
7. What is government’s role in the overall distribution of income and wealth?
Here are a few links and articles to get you started.
http://www.cbsnews.com/stories/2010/09/26/sunday/main6901893.shtml
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NPR Report—Who wins with the new tax law
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For Two Economists, the Buffett Rule Is Just a Start
Don Feria/Getty Images for The MacArthur Foundation Awards, left; Paris School of Economics
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WASHINGTON — High earners who are worried that this year’s Tax Day will be the last one before their rates rise have more than just the White House and Washington to blame. They can also look to two academically revered, if publicly obscure, left-leaning French economists whose work is the subtext for the battle over tax fairness.
Emanuel Saez and Thomas Piketty have spent the last decade tracking the incomes of the poor, the middle class and the rich in countries across the world. More than anything else, their work shows that the top earners in the United States have taken a bigger and bigger share of overall income over the last three decades, with inequality nearly as acute as it was before the Great Depression .
Known in Washington and the economics profession by the of-course-you-know shorthand “Piketty-Saez,” the two have been denounced on the editorial page of The Wall Street Journal and won mention in White House budget documents.
Mr. Saez, a professor at the University of California, Berkeley, has won the John Bates Clark Medal , an economic laurel considered second only to the Nobel, as well as a MacArthur Fellowship grant. Mr. Piketty , 40, of the Paris School of Economics, has won Le Monde’s prize for best young economist, among other awards.
Both admire, even adore, the United States, they say, for its entrepreneurial drive, innovative spirit and, not least, its academic excellence: the two met while re-searchers in Cambridge, Mass. But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes.
“The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”
As much as Mr. Piketty’s and Mr. Saez’s work has informed the national debate over earnings and fairness, their proposed corrective remains far outside the bounds of polite political conversation: much, much higher top marginal tax rates on the rich, up to 50 percent, or 70 percent or even 90 percent, from the current top rate of 35 percent.
The two economists argue that even Democrats’ boldest plan to increase taxes on the wealthy — the Buffett Rule , a 30 percent minimum tax on earnings over $1 million — would do little to reverse the rich’s gains. Many of the Republican tax proposals on the table might increase income inequality , at least in the short term, according to William G. Gale of the Tax Policy Center and many other left-leaning and centrist economists.
Conservatives respond that high tax rates would stifle economic growth, at a minimum, and cause some businesses and high-income workers to flee to other countries. When top American tax rates were much higher, from the 1940s through the 1970s, businesses could not relocate as easily as they can now, say critics of Mr. Piketty and Mr. Saez.
“I materially disagree with the idea you can raise a marginal tax rate to 70 percent and not have an impact on economic growth,” said Ike Brannon, an economist at the American Action Forum. “It’s absurd on its face.”
But Mr. Piketty and Mr. Saez argue that history is on their side: Many countries have higher tax rates — and the United States has had higher tax rates — without stifling growth or encouraging the concentration of income in the hands of the very rich.
“In a way, the United States is becoming like Old Europe, which is very strange in historical perspective,” Mr. Piketty said. “The United States used to be very egalitarian, not just in spirit but in actuality. Inequality of wealth and income used to be much larger in France. And very high taxes on the very rich — that was invented in the United States,” he said.
Mr. Saez added, “Absent drastic policy changes, I doubt that income inequality will decline on its own.”
The two economists’ project of mapping income inequality started two decades ago, when Mr. Saez was teaching at Harvard and Mr. Piketty teaching down the road at the Massachusetts Institute of Technology.
Their innovation was to measure American income inequality historically. Existing data went back only to the 1970s. Tedious archival research at the Internal Revenue Service allowed them to stretch the data all the way back to 1913.
Once they had collected the data, the computation was easy. They figured out the benchmark for various income levels — the top 10 percent, top 1 percent and top 0.1 percent of earners, for instance — and calculated what share of income each group took each year.
What they found startled them. As in other industrially advanced countries, income inequality in the United States fell after World War II , a period that economic historians call the “Great Compression,” and remained stable through much of the 1970s.
But then inequality started increasing again, with the top 1 percent of earners drawing a bigger and bigger share of overall income. Their graph showing the trend became well-known: a deep U, with inequality as acute today as it was just before the depression.
When they first published their work, income inequality was mostly off the political radar screen, thanks to the 1990s boom, Mr. Saez said.
“Growing inequality was not perceived to be an issue because the economy was growing fast and even the incomes of the 99 percent were growing significantly,” he said.
But the deep downturn of the last few years, and Mr. Obama’s election, brought the issue back to the fore. Peter R. Orszag, the former Obama budget director, has said the Piketty-Saez work “helped to point the way for the administration in its pledge to rebalance the tax code.”
A more recent analysis based on Piketty’s work.
For Two Economists, the Buffett Rule Is Just a Start
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For Two Economis
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By ANNIE LOWREY
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They have found that the trends have mostly continued. From 2000 to 2007, incomes for the bottom 90 percent of earners rose only about 4 percent, once adjusted for inflation. For the top 0.1 percent, incomes climbed about 94 percent.
Graphics
· Graphic: Income Earned by the Wealthiest
· Graphic: Who Gains Most From Tax Breaks
· Graphic: Whose Tax Rates Rose or Fell
Related in Opinion
· Op-Ed Contributor: The Buffett Rule: Right Goal, Wrong Tool (April 16, 2012)
Warren E. Buffett: Stop Coddling the Super-Rich (August 15, 2011)
Readers’ Comments
Readers shared their thoughts on this article.
The recession interrupted the trend, with the sharp decline in stock prices hitting the pocketbooks of the rich. But the income share of 1 percent has since rebounded. Data that the two economists released in March showed that the top 1 percent of earners got nearly every dollar of the income gains eked out in the first full year of the recovery. In 2010, the top 10 percent of earners took about half of overall income.
That has led the two economists to renew their calls for higher rates on the rich. Along with Peter Diamond, an emeritus professor at M.I.T. and a Nobel laureate, Mr. Saez has estimated the “optimal” top tax rates for the wealthy — getting the most revenue from those most able to surrender it — to be between 45 and 70 percent.
In France, François Hollande, the Socialist who may well succeed Nicolas Sarkozy as president, wants to raise the top marginal income tax rate to 75 percent, calling earnings over a million euros “impossible.” A candidate yet farther on the left suggests a top rate of 100 percent.“The debate in Washington is between the Bush-era and Clinton-era tax rates,” said Mr. Diamond, whom Mr. Obama nominated to the Federal Reserve and Republicans blocked. “Our finding is that the debate should be between the pre-1986 Reagan tax rate, which was 50 percent, and the rates that existed from Johnson until Reagan,” which were higher.
“Thirty percent is three times smaller than the 91 percent of Roosevelt,” Mr. Piketty said, responding to the Buffett Rule proposal and referring to the presidency of Franklin D. Roosevelt, who engineered the New Deal. “And inequality is greater than in the time of Roosevelt.”
Now living many time zones apart, Mr. Piketty and Mr. Saez update their work with frequent e-mails, Skype conversations and data-sharing through Dropbox.
Distribution of Wealth:
http://www.economist.com/blogs/democracyinamerica/2012/08/inequality
The next link and article represents a more conservative political/economic view and would be more representative of the traditional Republican view.
http://www.youtube.com/watch?v=WrtoSx-NbLQ&feature=fvw
Gramm and McMillin: The Real Causes of Income Inequality
Any analysis of taxes paid in high tax-and-spend countries shows that the U.S. has the most progressive income tax system in the world.
By PHIL GRAMM AND STEVE MCMILLIN
In the stagnant days of the Carter administration, when inflation was approaching 13.5% and interest rates were peaking at 21.5%, income was more evenly distributed than in any period in 20th-century America. Since the days of that equality in misery, the measured income of the top 1% of income tax filers has risen over three and a half times as fast as the income of the population as a whole.
This growth in income inequality is largely the result of three dynamics:
1) Changes in the way Americans pay taxes and manage their investments, which were a direct result of reductions in marginal tax rates.
2) A dynamic shift in the labor-capital ratio, resulting from the adoption of market-based economies around the world.
3) The flourishing of economic freedom and technological advances in the Reagan era, which were the product of lower tax rates, a reduced regulatory burden, and an improved business climate. These changes have not only raised the measured income of the top 1%, they benefited the nation and the world.
While income distribution has become a source of protest and political debate, any analysis of taxes paid in high tax-and-spend countries shows that the U.S. has the most progressive income tax system in the world. An inconvenient truth for the advocates of higher taxes on America's rich is that big governments in developed countries are funded not by taxing the rich more than the U.S. does, but by taxing everybody else more.
In 1986, before the top marginal tax rate was reduced to 28% from 50%, half of all businesses in America were organized as C-Corps and taxed as corporations. By 2007, only 21% of businesses in America were taxed as corporations and 79% were organized as pass-through entities, with four million S-Corps and three million partnerships filing taxes as individuals. By reducing personal tax rates below the level of the corporate rate, the Tax Reform Act of 1986 dramatically influenced how entrepreneurs structure businesses.
This has had a profound effect on what is now measured as the income of the top 1%, since a significant amount of what is now declared as personal income is actually income from businesses that are now taxed as individuals.
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David Gothard
In 1986, just 5.6% of the income of top 1% filers came from business organizations filing as Sub-chapter S-Corps and partnerships. By 2007, almost 19% of income declared on tax returns filed by the top 1% came from business income. A significant amount of income that critics claim is going to John Q. Astor actually is being earned by Joe E. Brown & Sons hardware store.
The reported income of the top 1% also significantly increased as tax rates on capital gains were lowered, first under President Bill Clinton and then under President George W. Bush. At a top tax rate of 28%, realized capital gains were 2.5% of GDP and made up 17.7% of the income of top 1% filers. As the top tax rate fell to 20% in 1997 and 15% in 2003, realized capital gains rose to 4.6% and then to 5% of GDP. The percentage of the income of top 1% filers coming from capital gains grew to 26% in the 1997-2002 period and 28.1% during 2003-07.
By reducing the penalty for transferring capital from one investment to another, these lower tax rates increased the mobility of capital. High-income taxpayers sold more assets, declared more income, and paid more taxes.
Similarly, when the tax rate on dividends fell to 15% in 2003, dividend income for the top 1% grew 178% by 2007 to make up 5.6% of the income of these filers. In 2007, immediately prior to the recession, capital gains and dividend income combined was equal to the amount of salary, bonus and exercised stock options earned by the average top 1% filer.
Lower tax rates made dividend-paying stocks more attractive to high-income investors and made dividend payouts more attractive for companies that would have previously retained those earnings or bought back their stock. Capital trapped in companies with below-market rates of return was redeployed and the entire economy benefited.
All of this has had a huge impact on the measured income of the top 1% and the growth in income inequality. This impact can be estimated by examining what would have happened to the income of the top 1% if tax rates had not been lowered and these economic transformations had not occurred.
If the share of income coming from businesses, capital gains and dividends had remained at the levels before the tax rate changes of 1986, 1997 and 2003 respectively, the income of top 1% filers would have been 31% lower in 2007. The growth in income since 1979 for top 1% filers would have been only 2.5 times as large as the income growth of all taxpayers—not 3.6 times as large.
More businesses would have remained C-Corps and been taxed as corporations, fewer assets would have been sold and thus fewer capital gains would have been declared, and fewer dividends would have been paid. All of this would have lowered the income declared by the top 1%. Economic growth would have been lower and aggregate measured income of all taxpayers would have fallen, but the distribution of income would have been flatter.
The growing participation of China, India, Brazil, Russia and Turkey in the world economy has also affected income inequality. The vast expansion of labor engaged in world commerce has raised the return on capital and reduced the relative return on labor. The share of income flowing to capital—both traditional and human capital such as education and training—has risen.
In relative terms, the return to unskilled labor has fallen. Short of a crippling reversal in world trade, which would reduce the value of both labor and capital, this effect will dominate world markets for the foreseeable future. Since high-income Americans own more capital and have higher levels of education and training, their incomes have grown faster than everyone else's.
The flowering of talent from the expanded freedom and technological progress ushered in by the Reagan era has also played a role. Inequality is a natural result of the expansion of liberty and the development of new technology and new products. Henry Ford, Andrew Carnegie, Sam Walton and Bill Gates caused the income distribution to become more uneven, but they enriched the world.
To vilify success and the rewards it garners is an assault not just on capitalism but on liberty itself. As Will and Ariel Durant observed in "The Lessons of History" (1968), "freedom and equality are sworn and everlasting enemies, and when one prevails the other dies . . . to check the growth of inequality, liberty must be sacrificed."
Nowhere is the political debate over income inequality more detached from reality than the call for the top 1% of American income earners to pay their "fair share." The Organization for Economic Cooperation and Development (OECD) data on the ratio of the share of income taxes paid by the richest taxpayers relative to their share of income show that the U.S. has the world's most progressive tax burden.
The top 10% of earners in the U.S. pay 35% more of the income tax burden than in Sweden and 22% more than in France. These figures—from the 2008 OECD publication "Growing Unequal?"—include all household taxes imposed on income at the federal, state and local level, including social insurance taxes.
In an eternal irony unique to large welfare states, it is the expansion of government in the name of the poor and middle class that always costs poor and middle-class families the most. When the U.S. collects 16.1% of GDP in income taxes, the top 10% of taxpayers pay 7.3% and the other 90% pick up 8.9%.
In France, however, they collect 24.3% of GDP in income taxes with the top 10% paying 6.8% and the rest paying a whopping 17.5% of GDP. Sweden collects its 28.5% of GDP through income taxes by tapping the top 10% for 7.6%, but the other 90% get hit for a back-breaking 20.9% of GDP.
If the U.S. spent and taxed like France and Sweden, it would hardly affect the top 10%, who would pay about what they pay now, but the bottom 90% would see their taxes double.
Since OECD members have significantly higher consumption taxes on average than the U.S., the total tax burden of bigger government is even more heavily borne by lower-income citizens in developed nations than these numbers suggest.
The real and alarming message in these OECD numbers is that there appear to be limits in the real world to how much tax blood can be extracted from rich turnips. With much higher marginal income-tax rates, countries that are clearly willing to soak the rich have proven to be incapable of doing so.
Proposals to raise taxes on high-income Americans in the name of "fairness" not only threaten economic growth. The experience of nations with large governments shows that this argument is simply a red herring for a massive tax increase on middle-income Americans.
In the end, taxing is about feeding government, not redistributing wealth. What nation ever set off on the road to big government promising to tax middle-income workers, and what nation ever got big government without doing it?
Mr. Gramm is a former Republican senator from Texas and senior partner of U.S. Policy Metrics, where Mr. McMillin, a former deputy director of the White House Office of Management and Budget, is also a partner.
