Great article about "the top 1%"
It is an article of political faith on the left today that "the rich are getting richer and the middle class is getting left behind." But before we accept this claim as a matter of faith, we should ask a few questions.
Whenever anyone talks about how the top X% of the population earns Y% of the income, we should ask: top X% of *whom*? Households, individuals, or tax returns? Income as measured *how*? Those who would gloss over these issues commit the crime of lying with statistics, as the following article by Alan Reynolds explains.
http://www.opinionjournal.com/extra/?id=110009398
One of the main sources we have for this data is tax returns. Unfortunately, "economic income" and "taxable income" are only loosely correlated with each other. For example, right now, you can earn about 5.1% on your money in Vanguard's taxable money market fund, or 3.4% in their California municipal money market fund. So, anyone in the upper tax brackets, like the 33%+9.3% or 35%+9.3% tax brackets, is much better off putting their money in the tax-free muni fund. This would cause their taxable income to decrease even as their economic income has increased.
Or, to take another example mentioned in the article: both my Roth IRA and my 401(k) investments have gained about 20% in value year-to-date (after subtracting out the increase in account value due to my annual contributions). This is certainly real economic income, but that gain isn't showing up on my 2006 tax return. The 401(k) gain will probably show up as income in my tax return circa 2040 or even later, while the Roth IRA gain will *never* show up in *any* tax return, *ever*, unless the tax laws on Roth IRAs are changed.
Of course, this is small beans next to the big one: corporations and the treatment of business income. High income earners frequently get a large fraction of their income from their business. Depending on how I structure my business (sole proprietorship, S-corporation, or C-corporation), the tax consequences are radically different. In the first two cases, the business income shows up as personal income on personal income tax returns. In the latter case, it shows up first on a corporate tax return, and then later may show up (possibly at a much later date) as capital gains or dividends on a personal income tax return. To the extent that rich people reincorporate their businesses as S-corporations, it is natural to expect that their taxable income will increase. That is, you have simply shifted income around between "personal" and "corporate" income, even though the impact of this shift on economic income is comparatively small.
Since Piketty and Saez excluded capital gains income from their main time series (!), it is not at all surprising to see that rich people's "personal" income increased dramatically after the 1986 tax reform law, which made S-corporations far more attractive than they were previously tax-wise.
The reality is that people change their behavior as tax laws change, moving money around to try to avoid taxes. If you do not take this into account when looking at the numbers, you will probably draw extremely faulty conclusions. Anyone who shows you a comparison of income shares pre-1986 and post-1986, for example, had better take those behavioral shifts into account, or they, too, will be "lying with statistics." Even worse are comparisons of pre-1981 and post-1986. It is too easy to forget that before Ronald Reagan the top personal income tax rate was 70%, and when he left office, it was 28%! To think that people didn't change their behavior between those two eras, when they went from keeping 30 cents on every dollar to 72 cents on every dollar they earned, is simply implausible.
Reynolds puts it best:
The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other.
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I have a better test
The next time you are at Wal-Mart check the parking lot to see how many Range Rovers and Lamborghinis you can find.
qui tacet consentire
Interesting
that the viewpoint of the article and your post comes from the perspective OF those that have more. This is the perspective that the media often takes.
Everything is weighted through the lens of an upper middle class perspective.
If you want the working poor to be more sympathetic to your figures, than start funding public education instead of complaining that they don't understand statistics 101.
From JIm Webb's article
While you may choose to put blame for the widening gap between the rich and poor on a tax code, there is no denying that the gap exists.
If it continues unchecked it is a formula for political unrest. We saw the beginnings of that in the last election.
The key is understanding that most of the information that is shoved in our faces from traditional news sources comes from the perspective of the generically white upper middle class, who pays their credit cards on time, has a bank account, and a savings account, and a 401K and can pay a tax lawyer to manipulate their wealth.
It is the economy, stupid.
I'll give you credit as some of what you say is true,
but nothing there disputed that the top (2-5% actually) have made just about all the economic gains made under this administrations policies.
We progressives feel this is unwise economic policy. If you cut out 95 - 98% of the working people in this country from the hope they will be able to raise their standards of living, you are asking for anarchy to come through the door.
Case in point...Goldman Sach's CEO Lloyd Blankfein, was just awarded a $53.4 Million bonus
. Now, we progressives aren't against bonuses, nor are we against those companies who make more money, giving more to their employees. But we progressives aren't alone when we see a 53.4 M figure and feel it's obscene. It's wrong on so many levels that it craves a revolution that none of us really want, but those in the top fail to see that that is exactly what will happen if they continue to be so tone deaf.
Not to worry though. I'm sure that top 2% will sleep comforatably tonight knowing that you will be there to protect them from the seething masses.
Facts vs. feelings
A single article can only cover so many things -- but the data quite clearly show that this oft-repeated claim is completely false. The reality is that the Bush tax cuts have made the tax code *more* progressive, not less: http://www.taxfoundation.org/publications/show/1941.html
How can this be? Simple. The new 10% tax bracket; the marriage penalty reduction; the doubling of the child tax credit; and so on. People with an AGI in the $15-25K range used to pay positive taxes, and now they pay negative taxes!
You may "feel" that it's obscene, but so what? Feelings are not an appropriate basis for making government policy decisions. These decisions should be made based on objective facts, not subjective feelings.
How about
creating misleading propaganda to create an alternate reality, what kind of lie is that? The rich are getting richer faster under Bush and everyone else is getting squeezed. And no amount of playing with statistics can negate that.
More data
You may be interested in browsing this site (run by the archdiocese of St. Paul - not an especially socialist organization).
101 Questions
First the super wealthy created a bunch of think tanks to sell the ideas of Friedman-like (both of them) economic theories. Now they have recruited parts of the media to tell us that the rich are not really as rich as we think they are.
Why does this remind me of the story about the man caught in bed with his mistress by his wife. "Who are you going to believe me, or your lying eyes?" Actually Tom Delay and Newt Gingrich both used variations on this to explain away some of their more problematical business relationships.
--- Policies not Politics
Fair points
Of course it's legitimate to point out that the current tax laws need to be taken into account when evaluating income. I think it might also be true that the rich-vs-poor frame is not particularly helpful. From a middle-class perspective, the issue is balancing needs (health care, housing, education, etc) with affordability -- it doesn't really matter to a middle class family how much some CEO makes, they are concerned with their own problems. If government (or, I guess, some private agency) were able to efficiently assist those with middle-class or lower incomes to meet their needs, then I would wager a lot of the class-war rhetoric would go away. The problem arises when middle-class America sees government jumping through hoops to assist the wealthy but not doing much to help your average family -- I think the focus on the rich-poor gap isn't an expression of creeping socialism so much as a statement of dissatisfaction with the level of governmental work on behalf of the non-rich.
In other words, the best way to eliminate the obsession with how much the rich are making is to ensure that the middle-class (and poor) make "enough" to get by, with the aid of various governmental (and private) programs.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
Who doesn't suffer from the games of the rich?
For starters, the people who write about it.
A Rich Man's Game
As I mentioned above. All the prognostication written from a generic middle class well to do white man's perspective. Cutting taxes, cutting prices, keeping prices low..... etc.
Yes that would work! We could cut CEO compensation, and demand that lawyers take a cut in pay. Keeping prices low would be achieved.
This is a delightfully refreshing article written by Froma Harrop, short and to the point, and for once written from a different perspective.
It is the economy, stupid.
That's odd...
I favor the elimination of the H1B visa cap. Such a move would directly *increase* the amount of competition for my own job.
Glad to see you back
Isn't there some kind of marker like total earned income that could serve as a marker to gauge the income differences between rich and poor?
Quick question: if there was a widening gap between rich and poor, would you see that as a problem, and how would you address this problem?
Reply
The reality is that it is *extremely* difficult to measure this kind of stuff precisely, and that to compare today's incomes vs. the incomes of even 30 years ago is basically impossible. A significant fraction of our present national consumption is spent on products that literally did not exist in any form 30 years ago.
Example: I just bought a new cell phone that weighs 3.5 ounces, and yet (even totally ignoring that I can use it as a phone, a web browser, a camera/camcorder, or a portable music player) can be used to watch TV just about anywhere in the US. The quality of the video greatly exceeds any TV from 30 years ago, and the number of TV stations available is more than an order of magnitude higher. And good luck finding a TV that weighed 3.5 ounces in 1976!
And yet, somehow, this device is priced to be quite affordable to middle-class folks.
(I shouldn't even mention that the computing power of that 3.5 ounce phone is comparable to a million-dollar supercomputer from 1976...)
How am I supposed to fit the existence of this product into a single number called "income"? You can't.
The salient point is that on many *objective* metrics, the American poor of 2006 are better off than the American rich of 1976. (I assure you, I'd rather be driving a 2006 Hyundai than a 1976 Cadillac!)
If we wanted to study things objectively, I would say the right way to do this is as follows. Compare a given person's standard of living today vs. the standard of living enjoyed by their parents at the same age, vs. the standard of living enjoyed by their grandparents at the same age, and so on.
Don't use dollars or any form of currency in the measurement. Instead, stick to objectively, scientifically measurable criteria. For example -- how many square feet is their residence, and how many square feet per person in the household? Do they have phone service? Color TV? Cable TV? Air conditioning? Heating? What is their life expectancy? Etc.
Do *NOT* compare people at different ages. Of course people who are 45 are richer than people who are 25.
Do *NOT* compare immigrants vs. natives, unless you also compare immigrants against their parents in their home countries. There are a lot of immigrants in the ranks of the American poor -- but we should never forget that those immigrants, though poor by our standards, are in many cases living in splendor by the standards of their home countries!
And look at absolute wealth, not relative wealth or wealth inequality.
Not really.
There are other people who are richer than me. So what? I am not harmed in any way by the fact that other people are richer than me. If anything, in creating their fortunes and building their businesses, they have enriched me!
Likewise, there are other people who are poorer than me. So what? I do not see why it is my responsibility to provide for their well-being. I did not cause their plight. If their life sucks, that is not my fault. In fact, my daily work directly or indirectly improves the lives of millions of people.
A bit of a quibble and some other stuff
You might check the Tax brackets again, People who make all their money, on profits from their money aren't taxed like people who make their money by working every day for it.
The top tax rate on investment income is 15% at the Federal level. It is only the State income taxes that make tax free investments worth while. A point much noted and complained about by charities, and municipal governments as it makes their budgeting much tighter.
Also you are twisting thins a bit as the top rate when Reagan lowered it was 50%. Before Kennedy lowered it, it was 90%. The main change in behavior was that people re-invested their money and paid their employees before, and took it out to spend on themselves after, as there was greater incentive to do so.
Further the math of what you are talking about means that things would be even worse than what has been reported, as by your thinking the income at the very top is under reported while the working stiffs have no such tax diversions. That would mean (and I suspect it is true) that even the critics are under reporting the problem.
There is a very good website on the scope of the problem here and another discussion on what that means here
If you want to accuse others of lying with statistics, you might want to get your own use of them in order.
The Self Made Man is just not admitting where he got all the parts.
Facts
You may want to brush up on some of your facts.
False. Only "long-term capital gains" and "qualified dividends" are taxed at the 15% level. Many classes of investment income do *not* count as "long-term capital gains" or as "qualified dividends". For example, your bank account's interest is taxed as regular income at rates up to 35%. So are most money market accounts. Corporate bond interest payments are taxed as regular income also. So are proceeds from the exercise of nonqualified stock options or from the same-day-sale of incentive stock options. So are dividends from REITs and other corporations who do not qualify for "qualified dividend" status. Note also that qualified dividend status is revoked if you don't meet certain holding periods on the stock. These holding periods can be difficult for mutual funds and ETFs to meet in some cases, so the fraction of qualified dividends is often much lower than you might imagine.
Let's also not forget that many supposedly "tax-free muni bonds" *are* taxable for AMT purposes.
And let's not forget that there are still short-term capital gains, as well as other classes of items such as collectibles (which have their own special tax rate of 28%).
Actually, Kennedy didn't cut it, Johnson did (Kennedy merely proposed the cuts, which were enacted after his death). The Kennedy/Johnson tax cuts took the top rate from 91% to 70%, where it stayed until Reagan.
Reagan cut the top rate first from 70% to 50% in 1981, and then from 50% to 28% in 1986. The top rate went back up to 31% under Bush Sr., then up to 39.6% under Clinton, and then back down to 35% under Bush Jr.
Unclear. The example of 401(k)'s contradicts this claim -- the fact that you can shelter $15K every year in a 401(k) has a negligible effect on someone who makes $500K a year, but is a big deal for someone who makes $100K a year.
Without further evidence, it is hard to draw any definitive conclusions on how the results would differ if we were to measure "economic income".
Absolutely, the rich *are* rich. The question is, are the rich getting richer? And the answer to that question is *not* as clear-cut as some have made it out to be.
401k's aren't for self-employed
If you are self-employed, then there are other vehicles that allow you to save up to 20% or $42,000 in a SEP IRA so your 401k example is inexact at best.
Other facts
Again very large incomes lean to long tern capital gains, those in the mega wealth category can afford this better than even the upper middle class.
Most of the rest don't even have relevant amounts of investment income, and a 15k 401k set aside might be a lot more likely to be found at 500k than 100k who in these days might be hard put to save that much (especially since total savings is negative for the first time since the '30's)
Also below $80k FICA kicks in raising taxes considerably, and even at 100k is still in excess of any percentage gained from 401k. At 500k FICA savings swamps the smaller gains from 401ks.
Below that where +80% of Americans live, things get evermore cut and dried.
In fairly conservative numbers Those making better than 40% of their peers made 1.24 times the inflation adjusted income of 40 years ago **while those making better than 80% of their peers increased by 1.56 times and those at the 95% made 1.76 times what they made 40 years before, those above that would be considerably higher as the curve is a powers curve.
So as the taxes have dropped considerably at the top, the rich are getting very much richer, the poor (at 1.29 times) are not getting much poorer, but the Middle class is having its legs cut out.
**I would quibble strongly with the adjustment as they multiply by 5 (a computer program I have says 5.865) from 1967-2006 while most costs are ten times what I remember,(Bread .25 -2.50 Meat .50-5.00 Volvo 1,500 - 20,000, gas .25- 2.50 rent 25-400 ) but it is a consistent number .
The Self Made Man is just not admitting where he got all the parts.