Riffing on the blogosophere’s many riffs on this wonderful Robert Samuelson column in which it is explained that
the poor and middle class do have powerful advocates. To name three: the AARP for retirees; the AFL-CIO for unionized workers; the Center on Budget and Policy Priorities for the poor.
we find Drum noting
The top 400 taxpayers, a group so rich and elite that I’d need scientific notation to properly represent their proportion of the population, have doubled their share of income in the past decade or two but have decreased their tax burden by nearly half. Nice work! As you can see, Warren Buffett wasn’t exaggerating when he said his secretary paid a higher tax rate than he does.
Which refers to one of the most remarkable trends of recent history, of which Lane Kenworthy has the best graph, in which incomes shown “include government transfers and subtract taxes”:
There’s some discussion over which comes first, the political polarization of recent years or the income polarization of recent years. Krugman says [in the pdf linked here] “it looks as though the political polarization is the lead on the economic changes”—which is to say, people don’t vote Republican/Democrat because they’re rich/poor, rather, the rich have gotten richer because of Republican policies.
The Edge of the American West 
38 comments
December 16, 2008 at 1:45 pm
Masson’s Blog - A Citizen’s Guide to Indiana » Income Disparity Rising
[…] Disparity Rising By Doug This strikes me as a […]
December 16, 2008 at 1:53 pm
Stinky
(1) Is there anything inherently wrong with income inequality? Or with increasing inequality (without respect to the tax burden)?
(2) The top n% is not a static group of people.
(3) I seem to recall, the total taxes paid by decile almost follow a power-law. And that the top 40% of taxpayers by income pay more than 80% of all taxes; that fraction’s been increasing since watergate.
(4) It seems like you’d expect the top 1% to grow away from the middle 60 & bottom 20 (where’s the rest, btw?) anytime the overall income grows.
(5) Political polarization correlates to economic status in “poor” states but not in rich, coastal, “elite” America.
“the rich have gotten richer because of Republican policies”—this is a good thing, right, we want to get richer and “the rich” isn’t a static set of people, but just the slice off the top for any given period. If the implication is that the “rich are getting richer, but the poor are getting poorer” that’s only in relative terms—if the pie is getting bigger fast enough even a smaller slice of the pice %-wise is still more pie.
December 16, 2008 at 2:03 pm
Vance
It seems like you’d expect the top 1% to grow away from the middle 60 & bottom 20 (where’s the rest, btw?) anytime the overall income grows.
I think you left out the argument here.
December 16, 2008 at 2:15 pm
kathy a.
yes, there is something really inherently wrong with such obscene disparities in income — particularly when so very many people are struggling even to supply the basics to their families, and when the richest are growing still richer not by their own labor, but by the fortuity of being rich and having policies that favor the concentration of wealth.
December 16, 2008 at 2:18 pm
Matt W
Is there anything inherently wrong with income inequality? Or with increasing inequality (without respect to the tax burden)?
There is a book about this question. I can’t say I’ve read it. I have read some of the evidence that inequality kills people dead.
The top n% is not a static group of people.
But it’s more static the more unequal America is.
December 16, 2008 at 2:30 pm
BP in MN
“the rich have gotten richer because of Republican policies”—this is a good thing, right, we want to get richer and “the rich” isn’t a static set of people, but just the slice off the top for any given period
Even if there were evidence that Republican policies lead to overall faster growth (the opposite seems to be true) it remains true that the very rich are a small slice of the country; what’s good for them isn’t necessarily good for the rest of us.
The problem with the Bush “boom”, for example, is that median wages actually declined; the vast majority of people weren’t doing any better. Given the choice, I’d much rather see, for example, 1.5% GDP growth with most of the gains going to the bottom 60 percent of earners than 2.5% growth with gains concentrated at the top.
December 16, 2008 at 2:38 pm
Stinky
Vance, if we keep the same income distribution but multiply the overall income by some factor then the differences between us will scale too. Say our income doubles every day, so you get $2 on day one and I get $1; on day two you get $4 and I get $2. My income has doubled, but so has our income disparity.
December 16, 2008 at 2:48 pm
jazzbumpa
According to Senator Bernie Sanders, the richest 400 taxpayers have increased their wealth by $600 billion dollars during the Dubya administration. With that kind of wealth-flow dynamic, the top few percent is going to be an *extremely* static group of people.
By my math, that $1.5 billion each. I, on the other hand had three small raises in seven years.
The reason the rich pay more taxes is they have all the wealth. Again, according to Sanders, the top (I forget what fraction of a percent) either own more or have more income (I was driving and couldn’t take notes) than the bottom 50%.
Isn’t it also true that for people at the poverty level, the standard of living has actually been declining at 1 to 2% per year, for decades? (not sure where I got that.)
And isn’t it true that gross income disparity is a contributing factor to severe economic downturns?
I skimmed the Samuelson article. Is there any single point in it that is not a naked assertion, a gross distortion, nor an outright lie?
December 16, 2008 at 2:54 pm
Vance
Stinky, but in that example our income shares remain constant — proportionally, the disparity is the same. Eric is pointing out (and it’s not original with him) that in the real world, income shares have grown more unequal recently.
December 16, 2008 at 2:55 pm
Stinky
kathy, that’s not an inherent problem with income disparity. imagine a situation where the disparity is even greater than it is now but the poor are not struggling, they are well off; is that situation preferable? if so, then disparity per se isn’t a problem.
December 16, 2008 at 3:11 pm
Matt W
that’s not an inherent problem with income disparity.
You’re putting a lot of weight on the word “inherent.” Even if it were possible to design a situation of increasing inequality in which very many people were struggling to get along and the vast majority of people were seeing their real incomes stagnate while the very very very richest piled up boodle, that’s not the increasing inequality we actually have. The kind we have is the kind that kills people dead.
December 16, 2008 at 3:13 pm
Stinky
jazzbumpa, I can think of one of those taxpayers (Bernie Madoff) that won’t be in the top 400 next year :)
Plus, we don’t know the richest 400 taxpayers are the same as the 400 highest-earners. These are likely different groups of people, which is what Warren Buffet was talking about. He probably pays the same top rate as his secretary on income (if she’s compensated well), but a lower overall rate because he’s making his money on capital gains. So overall he pays less; there’s nothing wrong with that, he’s got capital at risk and the policy says putting capital at risk is worth promoting.
“…they have all the wealth…”
people aren’t taxed on wealth until they die. and if they’re well-off enough to have to worry about it, they’ll create a vehicle for getting their assets into their offsprings’ hands without too much pain.
“… the poverty level…”
the biggest problem facing the poor is obesity.
“…gross income disparity is a contributing factor to severe economic downturns…”
sure seems to be right now, huh?!
“…any single point in it that is not a naked assertion…”
I wouldn’t want to go up against the AARP or AFL-CIO on any issue I cared about. I agree with his basic point: everyone hates all the evil lobbyists and congressmen—except their own. But other than that…
December 16, 2008 at 3:19 pm
Matt W
Top 400 Taxpayers: Sources of Income 2005
“Number one source of income is Capital Gains, which accounts for more than 50% of their income in 2005.”
Moron.
December 16, 2008 at 3:25 pm
Stinky
Matt, if everyone were paid exactly the same amount and it was more than sufficient to live on, they’d just worry about some other ranking system. Look at public universities with their (somewhat) fixed salary scales—all of a sudden office-space, parking spaces, and h-factor are the cause of ulcers, anxiety, and irritable bowel syndrome. Prestige proxies for salary when salaries are fixed.
December 16, 2008 at 3:28 pm
Stinky
I don’t understand the moron comment, Matt. I guess I should have differentiated between “income from wages” and “income from capital gains”?
December 16, 2008 at 3:30 pm
Stinky
Or do you mean that the 400 wealthiest (which I take to mean highest-net-worth) also paid the most taxes on income (from wages and capital gains)?
December 16, 2008 at 3:38 pm
jazzbumpa
“… the poverty level…”
the biggest problem facing the poor is obesity.
Shit. I thought it was having to chose between buying groceries and paying medical bills. Losing your house is pretty trivial, too. Thanks for straightening me out on that.
“…gross income disparity is a contributing factor to severe economic downturns…”
Sure seems to be right now, huh?!
That was pretty much my point. Yes.
December 16, 2008 at 3:52 pm
Barry
What always amazes me is the bootlickers. Have any discussion on economic inequality, and some fanatic lickspittles show up. And they always post voluminously, like they’re getting paid for it – the funny thing is, they’re doing it for free.
December 16, 2008 at 4:23 pm
Stinky
Being a bootlicking moron, I’m going to finish this off. Then I’ll go away.
Shit. I thought it was having to chose between buying groceries and paying medical bills.
I was being glib—and trying not to “post voluminously”, although strangely enough I am getting paid for this. As a society we’re rich enough that no-one need starve. Food stamps and medicaid benefits are available to the impoverished. However, the quality of the food and care that are readily available to the urban and rural poor is extremely low. Combined with poor general education and physical education and a lack of safe, public spaces and that leads to obesity and the complications thereof, including diabetes, infertility, heart disease, and cancer. As a society we created an abundance of wealth that has lifted everyone above what would have been considered base subsistence-levels, only to end up with a significant number of people who are still malnourished and prone to die early.
As for losing one’s house to foreclosure, I guess I don’t think of that as a problem that’s unique or common to the poor.
December 16, 2008 at 8:12 pm
Matt W
Stinky, I mean that when someone talks about the top 400 taxpayers — that’s what it says in the original post, you can scroll to the top of the page — they don’t mean “The 400 people who pay the most tax on wages.” And no one but a moron could possibly think they mean “The 400 people who pay the most tax on wages.” So when you invoke Buffett on the difference between capital gains and wages as part of an argument that the top 400 taxpayers aren’t the 400 wealthiest people, you’re either being a moron or deliberate obfuscating the point. (This is the original reference, FWIW; people reporting over $100 million of adjusted gross income, and no, it’s not the same 400 every year, but every single one of those people is really goddamn wealthy.)
And you’ve been deliberately obfuscating the point the whole time. It’s obfuscating the point to talk about an imaginary increase in inequality that’s due to everyone doubling their income when there’s a graph in the original post that shows that the increase in inequality we have is nothing like that. It’s obfuscating the point to talk about income mobility when the U.S. has much less income mobility than more egalitarian societies, though I’m pretty sure you’re ignorant in good faith about that. It’s obfuscating the point to make the totally evidence-free assertion that “if everyone were paid exactly the same amount and it was more than sufficient to live on, they’d just worry about some other ranking system” when I’ve provided, you know, actual evidence that income inequality has deleterious health effects in the U.S. compared to actually existing countries that have less inequality (and no one was talking about paying everyone the same anyfuckingway, look at the left side of that graph). It’s obfuscating the point in a particularly niggling semantic way to argue about whether inequality is inherently bad in some strong sense when people are talking about inequality as it manifests itself in the U.S. And it’s double-super-obfuscating the point to glibly say “the biggest problem facing the poor is obesity” as if it’s somehow responsive to a point about the suffering of the people at the poverty level, when you yourself admit that (granting this point for argument) this is because the quality of food and care available to the poor is very bad.
Do come back if you’re interested in a discussion about income inequality as it actual exists in the United States and has been increased drastically over the last three decades. If you want to obfuscate, feel free to do it where I can’t see you.
December 16, 2008 at 8:31 pm
Vance
strangely enough I am getting paid for this
I guess I’ll take you at your word, S, though it seems like the sort of thing one wouldn’t confess if it were true.
December 16, 2008 at 8:53 pm
urbino
(1) Is there anything inherently wrong with income inequality? Or with increasing inequality (without respect to the tax burden)?
Yes. Leaving aside the moral arguments, history strongly suggests that large and/or increasing income inequality leads to, oh, let’s call it political instability.
December 16, 2008 at 9:16 pm
jazzbumpa
Matt –
Remind me to never piss you off.
December 16, 2008 at 10:10 pm
eric
I think Matt is right, and I think if Stinky wants to argue in good faith he can, but if he doesn’t, he can go away, please.
Also is this—“trying not to “post voluminously”, although strangely enough I am getting paid for this”—really true? You’re being paid to troll? If so, then super-duper please go away.
December 17, 2008 at 2:52 am
Stinky
Hello again.
“getting paid for this” == posted on company time, not that I was literally getting paid to post.
the 400 people who pay the most taxes ≠ the 400 wealthiest taxpayers:
I’m not trying to be clever or attempting to obfuscate. Wealth is net worth; one’s assets minus their liabilities. Income is the financial gain one makes over some period of time. One’s wealth after n time periods is their initial wealth plus the sum of their incomes for each time period from 1..n. It would be coincidence if for some year the 400 people with the most wealth also had the greatest change in wealth (income) and paid the most in income (from all sources) taxes.
I’m not sure if that’s any clearer. Say Bill has a starting net worth of $10 and Larry has a starting net worth of $5. Bill has $1 in taxable income, Larry has $4 in taxable income. Larry is the top taxpayer, but Bill is the wealthiest taxpayer.
I take Buffet’s point to be that the tax code is messed-up when the effective tax rate on his income is lower than the effective rate on his secretary. Clearly they operate under the same progressive tax system and his overall income and tax bill are higher than his secretary’s. But the bulk of his taxes are from capital gains which are taxed at a rate lower than the top marginal rate on income.
The imaginary doubling I came-up with is just the simplest example that came to mind about how inequality scales—thinking aloud about the intuition that absolute inequality in income should increase even if relative inequality stays the same; not that its apropos to the graph or reality, but that intuitions about how things scale can be misleading.
Dr. Rauchway, I apologize if you think that I’m trolling or arguing in bad faith.
December 17, 2008 at 3:17 am
Stinky
Matt W, the question of inherency is important because it defines the range of available solutions and establishes a sort of “moral context” for thinking about the system—in comparing two alternatives, how should they be ranked if one provides more egalitarian outcomes but everybody is a little worse off? If outsize returns are inherently bad, then a system that allows for/promotes them has to be worse than a system that eliminates/reduces them even if, overall, everybody is better off.
I think this is an interesting question because the existing income tax system seems very confused about what it’s trying to achieve. Payroll taxes are levied up to a fixed level of income, then they go away! Capital gains are taxed at a rate lower than (the highest rate on) wages. Overall, the highest earners pay the bulk of the tax burden, yet its still unfair and inegalitarian. Policy seems to oscillate between fairness and utilitarianism, resulting in a hodge-podge that is itself a brake on both.
December 17, 2008 at 4:36 am
Matt W
Welcome back, and thanks for being more serious.
the 400 people who pay the most taxes ≠ the 400 wealthiest taxpayers:
But the point is that they are, necessarily, extraordinarily wealthy (unless they have an addiction to Faberge eggs), and that as jazzbumpa says a situation where the 400 richest anybody increases their worth by $600 billion during Bush’s reign is not going to be one where the very top of the income distribution is very mobile. Which was jazzbumpa’s point. And anyway, there’s a lot of empirical data on this: The U.S. does not have a lot of income mobility compared to other, more egalitarian countries. (You may have heard of a Treasury Department study apparently showing a lot of mobility: what it really showed is that people graduate from school, or get raises in their jobs, or retire.)
I take Buffet’s point to be that the tax code is messed-up when the effective tax rate on his income is lower than the effective rate on his secretary. Clearly they operate under the same progressive tax system
–well, one component is progressive, but there are also flat and regressive components, so it’s less progressive than you might think, and of course this example shows that at the top it’s not progressive at all–
and his overall income and tax bill are higher than his secretary’s. But the bulk of his taxes are from capital gains which are taxed at a rate lower than the top marginal rate on income.
You damn skippy. Which is one driver of our massively increasing inequality. Above you said that the lower capital gains tax rate is fine because the system says that putting capital at risk is worth promoting. Well, putting large amounts of capital at risk has just destroyed the economy, so I don’t think that this is right; capital gains tax cuts aren’t investment incentives and haven’t helped the economy; and if Warren Buffett says (against his own interests) that taxing capital gains at a lower rate is a bad idea, he might be worth listening to.
I think this is an interesting question because the existing income tax system seems very confused about what it’s trying to achieve. Payroll taxes are levied up to a fixed level of income, then they go away! Capital gains are taxed at a rate lower than (the highest rate on) wages.
This is because the tax system, especially under the Republicans, is very responsive to the wishes of the richest people, so we have a system that helps them get even richer. It would be politically impossible totally confiscate the wealth of the poor and hand it over to the rich, but Republicans especially have been very good at promoting inequality.
Overall, the highest earners pay the bulk of the tax burden
That. Is. Because. They. Have. The. Bulk. Of. The. Money. Click on the Drum link — they are taxed at a lower rate than the upper middle class. The top 400 taxpayers are barely taxed at a higher rate than my bracket. No, I don’t think that’s fair.
in comparing two alternatives, how should they be ranked if one provides more egalitarian outcomes but everybody is a little worse off?
Well, Rawls says that inequality is acceptable if it benefits the worst off. I don’t know that I necessarily agree with that, but it’s manifestly clear that the inequality we have is very far from anything that might be acceptable because of benefits it has for the poorest — the increasing inequality hasn’t helped most of the country a damn bit, and in fact hurts us — so we really don’t have to think much about inherency to know that something needs to change. It’s like, when the government is basically picking up random cabdrivers and beating them to death with iron bars, the question of “Would it be morally acceptable to torture a really bad person if a race of all-powerful aliens said that we had to do it or they would burn us to a cinder with space lasers” is a distraction from what’s actually going on. We’re talking about the actually existing inequality.
(Ahem, got a little sidetracked by my annoyance with ticking-bomb scenarios.)
December 17, 2008 at 5:44 am
Nathan Williams
These charts of effective tax rates always make me feel l’m getting scammed, somehow. They tend to show rates in the 20% neighborhood for several middle-to-upper income brackets; that’s solidly where I am, but I’m paying more like 29% (federal only), and I have very simple wage income. Is everyone else with income within a factor of two of mine somehow making most of their money from investments?
December 17, 2008 at 6:51 am
Stinky
Matt, I’m in the same boat as you and Nathan, I wonder how it is possible that folks who make two or three orders of magnitude more money per year than I do pay a lower effective rate. At the same time, I have experienced the other kind of unfairness: having zero adjusted gross income while increasing my net worth.
What would a fair tax system look like? If we assume that for every person p there is a function wp(t) which defines person p’s net worth at time t, then there is an “income” function n(t) = wp'(t) which defines that person’s income (in a common sense kind of way, how much did p net at time t). We’re left with the task of defining rp(…) the taxes-due function for person p at time t. If we put on our Rawlsian veils where we don’t know what kind of p we get to be, we’d like r to (1) generate enough revenue that ∑r(…) over p funds the government, (2) that rp() is fair to p, (3) that ∑r(…) is fair over the set of p.
If we look at the way r(…) is defined now, well we can’t—its thousands of pages of tax code that no one can keep in their head. Even the basic tax rate on wage income is a piecewise function. Its very hard to reason about r in its present form. To be a little meta about it, the complexity of the tax code itself increases unfairness in the tax code.
Requirement (1) isn’t that hard to satisfy (statically, i.e. ignoring changes in behavior from t to t’ based on the cost of r to p), so let’s ignore it. It’s still really difficult to satisfy both (2) and (3). If we base r() on n without considering w, we can choose a flat or progressive system—either could be argued to be fair. But a progressive system based only on income is unfair to pq relative to pm where nq(t) == nm(t) and wq(t) < wm(t), because the marginal utility of q’s dollars is higher than m’s (since m has more to begin with) and increases the unfairness in the aggregate. It seems that r needs to be a function of both w and n, and to satisfy (3) needs to consider each wp relative to the sum total of w. A fair family of functions, r-fairp(t) might tax each p based on the rate at which p’s income is increasing their share of total national wealth.
Once we remove the veil, gaming of the system begins and we have to worry about arguments like Delong’s, the supply siders, and folks who want to use the tax code to change behavior. Linking the effect of tax rates to individual or aggregate behavior is too much for me to contemplate—even what seems rational for one person doesn’t necessarily translate into rational behavior when aggregated.
December 17, 2008 at 6:55 am
Stinky
It would be politically impossible totally confiscate the wealth of the poor and hand it over to the rich
Isn’t that the basis of legalized gambling and cigarette taxes? :)
December 17, 2008 at 8:00 am
Matt W
Nathan, do you have a mortgage or kids? I suspect that might be the difference.
Stinky, that looks like an interesting response. I don’t have time right now to consider all the equations in it, but it does look to me like it’s talking about ideal theory: Can we make things completely fair? Which is a separate question from, can we make them fairer than they are? More later, perhaps, or maybe I’ll just grade.
December 17, 2008 at 8:05 am
dana
The percentages are low across the board, which makes me suspect that what’s being graphed is not the tax rate, but the amount the person pays after deductions.
December 17, 2008 at 8:49 am
Barry
Stinky: “Dr. Rauchway, I apologize if you think that I’m trolling or arguing in bad faith.”
Well, since you said you’re going away, and then came right back, we do have something to judge your faith and honesty on.
December 17, 2008 at 10:14 am
donna
What’s wrong with piling money up in big piles is that it killed the economy. This is the part of economics we don’t talk enough about –that the purpose of even having an economy is to circulate wealth, to encourage productive use of money to make stuff. When it sits in big stinking piles, seeking higher and higher returns for doing nothing, eventually the game ends because the money has become worthless.
See Spain, Rome, etc, or any great empire. Read Rise and Fall of the Great Powers. History teaches this lesson over and over and over again.
December 17, 2008 at 10:39 am
Matt W
since you said you’re going away, and then came right back
Everyone does that. It’s like Internet Rule 45.
December 17, 2008 at 12:27 pm
calmo
You B as much fun as Stinky, Matt.
..and I’m not stayin…first a glimpse of those 400 from Forbes…
What Prizes for the Uglies Pagent, no?
Somehow, I don’t think this set captures the top 400, but only the Notorious 400.
..anybody else think the real rich are hiding in some lower strata (seriously, count the number of Russians…in that 3rd tier economy)…such an audacious argument: the real rich declined to participate in the Forbes Fabulously Filthy.
Anyhow…I just wondered about the arbitrariness of 1% here…whether it was just as good/poor a metric now as it was 10 yrs ago…whether it was as good in an income distribution like Russia’s, or Sweden’s…whether other less round numbers, slightly more sophisticatedly-sliced segments might be more rewarding.
..as we ponder a collapsing global souffle…top heavy looks like, yes.
December 17, 2008 at 4:05 pm
life and taxes « by the wayside
[…] See also here, especially the income […]
December 18, 2008 at 2:49 pm
Chris
the rich have gotten richer because of Republican policies.
Well, I’ll be damned – Republicans actually *can* achieve their goals through government! All this time people have been saying they couldn’t govern just because they let Saudis hijack planes and crash them into buildings and then invaded Afghanistan and Iraq in “retaliation”, or failed to evacuate major cities when there was a well-predicted hurricane, or other stuff Republicans didn’t care about.
When you judge the Republicans’ performance according to their own goals, they achieved them rather well, actually.