Prebuttals, part 2

by John Quiggin on June 13, 2012

The facts about inequality in the US, and increasingly in other developed countries, are now so clear-cut that the defenders of the status quo have little solid ground left on which to stand. So, they are mostly confined to arguments that have already been effectively rebutted. As new talking points emerge, it’s become increasingly easy to pick them out before they are fully formed and have a prebuttal ready.

That’s the case with data showing that income inequality arises mainly from differences in current incomes* rather than from inheritance. As I pointed out a couple of months ago, the absence of large inherited inequalities is a logical consequence of the fact that the distribution of income in the postwar generation was relatively equal.

Sure enough, here’s the prebutted talking point, stated by John Cochrane[1], who asserts

There are a lot of facts: the widening distribution comes from a skill premium, not inherited wealth.

He goes on with some older points, long rebutted

It’s new people getting rich, not the old rich keeping more money. It’s pretax income, not the rich keeping more money.  Consumption inequality is much less than income inequality. And so on.

In reality, income mobility is falling not rising, and the tax system has become less progressive not more. And I’ve dealt with the consumption inequality point here and here.

fn1. This is a bit disappointing to me. In his technical work in finance theory, which overlaps with mine, I’ve found Cochrane to be admirably precise in his analysis and sensible in his comments on the critical issue of the equity premium. But his contributions to the broader public debate over the past few years have been very poor (of course, there are plenty who say the same about me).

  • As JW Mason points out in comments, much of the growth in income for the rich has taken the form of capital gains rather than higher salaries. Piketty and Saez rank income-earners based on income net of capital gains, which obscures this fact.

{ 53 comments }

1

hartal 06.13.12 at 3:40 am

The black/white gap in wealth has widened, and is (I believe) significantly a result of differences in inheritance, which can be traced significantly to discriminatory housing policy after WWII.
Let’s look at what is common sense for many Americans who are simply libertarians.

To the the extent that one’s wealth is seen to have been accumulated without an injustice towards anyone else, then one is understood to have the right to bequeath it as one pleases; the heir also receives the inheritance without having committed an injustice to any concrete other. There is no injustice in the intergenerational transmission of wealth.

And if one’s own high income has been achieved without violation of the prevailing juridical norms, i.e. without any injustice to any particular concrete other, then his income is also understood to be justly his.

American libertarian sensibilities are, in other words, based on a narrow juridical and individualized conception of justice. There is no room for a conception of social justice.

I have in mind here some distinctions Raymond Plant has made in his book on neo-liberalism.

2

John Quiggin 06.13.12 at 3:47 am

“The black/white gap in wealth has widened, and is (I believe) significantly a result of differences in inheritance,”

I think that’s right – the point was raised last time around. Of course, in terms of the central argument, this is an exception that proves the rule. The black-white division is one of the few where inequality, broadly defined, was worse in the postwar decades than it is today, so it’s unsurprising that inequality in inherited wealth is a significant source of current inequality in this case.

3

Matt McIrvin 06.13.12 at 3:58 am

“It’s pretax income, not the rich keeping more money. Consumption inequality is much less than income inequality.”

Aren’t those two sentences directly contradictory? “Consumption inequality is much less than income inequality” is another way of saying “the rich keep more money”. Unless he’s not defining “rich” by income.

4

hartal 06.13.12 at 4:04 am

Wealth Gaps Rise to Record Highs Between Whites, Blacks and Hispanics
Twenty-to-One

By Rakesh Kochhar, Richard Fry and Paul Taylor, Pew Research Center’s Social & Demographic Trends
July 26, 2011

The median wealth of white households is 20 times that of black households and 18 times that of Hispanic households, according to a Pew Research Center analysis of newly available government data from 2009.

These lopsided wealth ratios are the largest since the government began publishing such data a quarter century ago and roughly twice the size of the ratios that had prevailed between these three groups for the two decades prior to the Great Recession that ended in 2009.

5

hartal 06.13.12 at 4:27 am

In the passage below Raymond Plant brilliantly states the Hayek/Nozick critique of social justice. That critique, coupled with (or strengthened by) social distance from the minority poor, has such power that there is little real criticism of pornographic income and wealth inequalities in the name of social injustice.

Here is Plant in his chapter The Critique of Social Justice in his book Neo Liberal State

Those who believe in social justice endorse the idea that a just economy is one which produces a pattern of distribution which reflects the preferred distributive principle – merit, equality, or need, for example. The role of government is to use its power intelligently to produce outcomes that approximate to the pattern. Social justice consists of securing that pattern as far as possible. The alternative view, central to neo‐liberalism, is that justice is not about patterns but about process. If we have a system of voluntary exchange in a free market and each exchange is uncoerced, then the outcomes for all via that proviso are to be accepted – just that, not as fair or as just because that implies an intentional outcome. The outcome will not embody any pattern but the uncoerced nature of the individual exchanges which have led to that outcome (p. 89 ) secure its legitimacy. Now, of course, the critic will immediately fix on the argument that in fact the process is not fair, nor are all exchanges uncoerced because in terms of the starting points of the process individual’s resources and holdings will be vastly different. These differences in their turn will mean that the rich will be able to coerce the less well off in respect of employment contracts and other forms of exchange.

There is, however, a ready response to this sort of argument. The first is to do with initial holdings. To argue that those should be justly arranged in order to ensure that the subsequent processes of exchange are fair presupposes that the initial set of holdings possessed by an individual is itself the result of an intentional process and subject to moral critique in respect of social justice. However, assuming that initial holdings and acquisitions are acquired without injustice towards identifiable individuals as the result of fraud or coercion, then the initial holdings of an individual are not susceptible to assessment in terms of social justice or injustice. In the same way as the ‘pattern’ of income and wealth emerging from market transactions is neither just nor unjust so is the pattern of initial holdings. We cannot regard a process of market exchange leading to a particular aggregate outcome as unjust because starting points are also unjust. Only if they arose because of coercion or fraud would this be so. Indeed, in the view of a thinker such as Hayek we do not need a theory of initial holdings at all. What we have to do is to ensure the negative rule of law – protecting the person from injustice in the sense of coercion by others – is in place and then whatever resource an individual starts with is legitimately held. Although the outcome is the same in this respect Hayek differs somewhat from Robert Nozick who in Anarchy, State and Utopia develops a sophisticated account of justice in acquisition and justice in transfer.

6

Lee A. Arnold 06.13.12 at 5:18 am

Cochrane also writes, “We need to remind people of econ 1, that who pays the tax and who bears the burden of a tax are often radically different. “Corporations” never pay taxes, they pass taxes on either to customers, workers, or investors.”

Will somebody please explain why this is so? Why do we not say the reverse, that the incidence is upon business firms, through wage demands? I can understand the power arguments that the wage demands might be stymied, but I don’t understand how the more basic assertion is necessarily true. Corporations certainly avoid penalty fines for environmental infractions. It appears as if they do feel pain.

7

Tim Worstall 06.13.12 at 6:12 am

“Will somebody please explain why this is so?”

The basic contention is that a tax, any tax at all considered simply as a tax, means that the wallet of some live human being somewhere gets money taken out of it.

This is true whether it is a corporation writing the check on profits, a retailer sending in the sales tax or VAT, an income tax, a social security charge, airline passenger duty, carbon tax, inheritance tax, whatever.

This doesn’t mean that any of these are bad places to collect taxes from (nor good ones either). Only that who actually gets their wallet lightened isn’t necessarily the person or entity writing the check.

8

John Quiggin 06.13.12 at 6:26 am

I thought I’d commented already along the same general lines as Tim. If a tax is not passed on to consumers or suppliers, including workers, it must reduce the surplus going to the company, which either flows as profits to shareholders or is creamed off as rent by senior managers. So, as Tim says, a live human being pays in the end. This is what Mitt Romney was trying to say with”corporations are people”

OTOH, companies do appear, much of the time, as if they are purposive actors independent of the ever-changing set of shareholders and managers, and as such they react to taxes in much the same way as humans do.

9

Martin 06.13.12 at 8:40 am

Dr. Quiggin, John,

I don’t know much about how income mobility is measured so correct me if I am wildly off-base here, but isn’t the only way to measure income mobility over time by following the same people? If that is true, doesn’t that rather tell a story of the past 20-50 years rather than a story of how income mobility is for the present generation? Couldn’t declining income mobility then be the result of those post-war policies (i.e. the welfare state as a poverty trap)?

I want to try to wrap my head around it, but I have difficulty seeing what the persuasive argument is that post-depression and post-war policy increased income mobility and why ‘neoliberal’ policies decreased income mobility. It seems to me that it is ridiculously difficult to establish causality over such long stretches of time. It therefore sounds to me as the claims that milk or meat is good/bad for your health. I know there are people who have a vested interest in either – financially or morally – and that it is really difficult to tease out the health outcomes over such long stretches of time with such variety in behaviour and the different channels through which it could affect health.

10

GiT 06.13.12 at 9:02 am

A defense I observe often is what I’ve come to think of as the “longitudinal demographic change” canard, which in its most vulgar form reduces to Austrian hyperventilating about the evils of “aggregates” and “collectivist” thinking.

Its planks include:

1. Immigrants: or, the global poor are dragging us down! (more of those suspicious foreign folks means more people with little to no wealth and low income, ergo increased inequality)
2. Family/Household Restructuring: or, won’t someone please think of the children, and the traditional nuclear family! (changes in family structure cause of those damn hippies and uppity women are leading to smaller households, so household wealth and income is becoming more unequal between traditional and single/single parent households.)
3. Lifecycle Effects: or, there are no stable classes! (comparing cross-sectional data of income strata does not pick out the same individuals – individuals go through lifecycles where they go from the bottom whatever% to the top whatever%. Everybody is both poor and rich – just at different times. There are no wealthy or poor people, just old and young. Blame things on the baby boomers being at their peak income/wealth age bracket – just on the cusp of retirement)

Annoying things to deal with insofar as they each have some truth to them, but not enough truth to change anything about the overall picture of inequality. Perhaps good things to have “prebuttals” for.

11

Roger Gathman 06.13.12 at 9:52 am

“We need to remind people of econ 1, that who pays the tax and who bears the burden of a tax are often radically different. “Corporations” never pay taxes, they pass taxes on either to customers, workers, or investors.”

Interestingly, prices only respond to supply and demand and institutionalists are foolish until prices respond to taxes, and organizations become pricemakers. This is the excellent thing about economics: it is so flexible!

12

John Quiggin 06.13.12 at 10:03 am

“I have difficulty seeing what the persuasive argument is that post-depression and post-war policy increased income mobility and why ‘neoliberal’ policies decreased income mobility.”

Most simply, if incomes are fairly equal, a modest increase in income will move you a fair way up the income distribution. But it’s also clear that access to education became more equal in this period and has since become less equal.

13

chris 06.13.12 at 12:14 pm

But it’s also clear that access to education became more equal in this period and has since become less equal.

Education is a red herring. It can move an individual up the income distribution, but it won’t change the distribution itself. Either you live in a nation that pays a living wage to janitors, bus drivers, and other inglorious jobs, or you don’t; education can enable an individual to move out of the bus driver class, but can’t abolish the class itself. If everyone in your society has a postgraduate degree, then your janitor has a postgraduate degree; but he’s still a janitor, someone has to be.

14

OneEyedMan 06.13.12 at 12:24 pm

@Matt McIrvin
I’m not seeing the problem. Say everyone saves nothing (aggregate C= aggregate Y). When you have progressive taxation that is spent on transfers. Consumption for those with low incomes will be greater than incomes while those for the high incomes will be less than income. That means that relative to the distribution of income the distribution of consumption is scrunched in toward the center.

Now add savings and the typical assumption (empirically observed) that high income people save more of their income. This further reduces the consumption of the high income more than the low income in just the same way as the progressive tax further scrunching the consumption distribution.

The wrinkle is that having accumulated wealth what happens when they ultimately consume it? My understanding is that the marginal propensity to consume out of wealth is actually lower than the marginal propensity to consume out of permanent income. This means that capital gains income is reinvested at a higher rate than income is saved, further compressing the consumption distribution. I find that MPC result odd. I would expect wealth to be wealth and consumed with the same pattern. Even if the MPCs were identical then this result would hold because higher labor income -> higher wealth -> higher total income -> lower fraction consumed pretax and still lower aftertax.

15

Josh McCabe 06.13.12 at 1:05 pm

The United States actually has one of the most, if not the most, progressive tax systems in the world. See Prasad and Deng (2009). The measure you use is for taxes AND transfers. I would consider my comment nitpicking if so many on the left had not devoted so much time to blaming rising inequality on stuff like the Bush tax cuts. In reality, its our transfers that are regressive.

16

Martin 06.13.12 at 1:08 pm

@John Quiggin

“Most simply, if incomes are fairly equal, a modest increase in income will move you a fair way up the income distribution. But it’s also clear that access to education became more equal in this period and has since become less equal.”

Okay but if let’s say expected income is a function of effort such that:

E[y] = a*e + epsilon

then an increase in effort can result in a higher income if there is a higher return to effort or “a” is higher in countries with less income mobility.

I take it however that your argument is then one of where differences in “a” across individuals are mostly explained due to inequality in access to higher ed, whilst Cochrane’s argument is that it is due to difference in “a” across individuals without inequality in access to higher ed?

17

MPAVictoria 06.13.12 at 2:35 pm

“If everyone in your society has a postgraduate degree, then your janitor has a postgraduate degree; but he’s still a janitor, someone has to be.”

This is an important point that I feel is forgotten too often by many people on the left. Not everyone can be an ad executive or a lawyer. Some people are going to have to dig ditches and pave roads. Education may be very beneficial to individuals but it will never be a cure for inequality for the population as a whole.

18

Bruce Wilder 06.13.12 at 4:04 pm

John Cochrane’s political polemics are a distressing contrast to his technical work, because in his technical work, he’s concerned with the mechanics and dynamics of functional relationships, and in his polemics, he wishes only to push certain moral imperatives.

[Cochrane:]“We need to remind people of econ 1, that who pays the tax and who bears the burden of a tax are often radically different. “Corporations” never pay taxes, they pass taxes on either to customers, workers, or investors.” is a rather shrill insistence on moral imperatives, the reference to Econ 1 notwithstanding. With all due respect, neither Worstall @ 7 or Quiggin @ 8 do much to rescue the analysis of tax incidence from the quaqmire of morally loaded language.

Tax incidence is about how taxes affect economic behavior, and ultimately the distribution, not of money per se, but of economic welfare. Lee A. Arnold @ 6 points out the obvious: Corporations do behave as if avoiding taxes matters.

In actual analysis of tax incidence — not to be confused with Cochrane’s moral hysteria — one reasons from presumptions about elasticity of demand and about economic rents. The general proposition is that economic rents are being taxed — or should be taxed, at least, in the sense of being the ultimate object of taxation. Since any large business corporation is a large business corporation precisely because it has succeeded in capturing some substantial source of economic rents, it follows, in common sense language, that corporations do indeed pay properly designed taxes, aimed at transferring economic rents to public purposes.

19

Bruce Wilder 06.13.12 at 4:27 pm

There’s something seriously with the center-left’s approach to issues of income inequality, when so little of the focus of critical analysis is on the effects financialization of the economy. We are watching wholesale transfers of wealth in the on-going GFC and talking about . . . inheritance taxes and tax-and-transfer effects. Really?

The risk-free rate is approaching negative territory, and credit-card interest rates are north of 20%. I’ve seen ads for loans at 100+% — aimed at the victims of payday lenders, where the rates are 400%. People are losing their jobs and their houses — Greece and Spain and Italy are in danger of losing their sovereign democracy and large chunks of public property and commonwealth.

Are these developments unrelated to income inequality? Too hard to comprehend? Too minor?

Cochrane brings up the “skills premium” — the evidence that educational attainment is related to income inequality. Never mind that educational attainment is just a proxy for class. Has anyone noticed that advanced education now comes at the price of debt peonage in the U.S.?

Cochrane denies that business corporations ultimately pay taxes, invoking notions of tax incidence. In the U.S., corporations often don’t pay much in taxes in the purely nominal and conventional sense — many view it as a serious scandal. There was a time when the U.S. corporate income tax was 50%, and substantial amounts were collected. Such a tax served to blunt the incentives of rentiers to extract rents.

Now, the whole of U.S. economic policy seems to be rapid disinvestment to fund rentier incomes. Do we think that might have something to do with increasing income inequality, not to mention the actually falling incomes of the bottom 70% of the income distribution?

I just do not understand the reluctance to tie income inequality to the predatory economic conduct of rentiers. At its core, the economic is a meta-bargain. The developed world, led by the U.S., is moving into decidedly negative-sum game territory, where the welfare of the vast majority is actually reduced, in order to fund the wealth of the 1/10th of 1% This development should provoke sharp, incisive comprehensive analysis, backed by moral fury. Where is either?

20

Bruce Baugh 06.13.12 at 5:20 pm

Bruce Wilder (let’s call the rest of them Bruce, too, just to keep things straight): Paul Camps over at Lawyers, Guns, And Money – in the blogroll to our right – has been doing some excellent writing and excellent supporting research about the school debt peonage problem with regard to law school. Like a lot of folks, I’ve always thought of law school as one of those over-the-bar things: if you can do that, you’ve just about guaranteed got it made, you’re in the upper echelons. It turns out this isn’t the case, and hasn’t been for some time. His writing, synthesizing an ever-growing body of statistics, individual accounts, debates with administrators, and the like, is just riveting.

I’ve commented sometimes with a tidal metaphor. I was born in 1965 and grew up in a white professional-class household – Dad was an engineer at NASA, but he and Mom had both grown up in the Depression, and Mom in particular had hard real experience of poverty and made sure we had context to appreciate the advantages of our situation. When I was growing up, it looked to me like the kinds of advantages we had were spreading out to people in classes and ethnic groups that had been denied them in the past. It wasn’t smooth or easy and sometimes it got outright reversed by forces of reaction, but there was this rising tide of opportunity. It turns out that I was seeing America right at the point where the tide’s as high as it’s going to get and fluffing around a bit before starting to recede, except that this social tide is being by human effort.

Paul is chronicling the realization of a whole social stratum that they’ve been lying on drying sand for some time now, the ocean going ever farther from these places their predecessors used to swim.

21

Lee A. Arnold 06.13.12 at 6:00 pm

Tim Worstall #7: “…who actually gets their wallet lightened isn’t necessarily the person or entity writing the check.”

Oh for heaven’s sake, I understand the basic contention well enough. I just find this a very odd sentiment to suddenly bring out as some sort of explanatory principle of how economics is to draw its lines in the sand. Because, isn’t that true of everything? If the flows of money are circular, and each person’s spending is another person’s income, and so on and so forth, then why do economists persist with fatuous intonations of this particular rhetoric about taxes on corporations? (Is it the fear of bad treatment of labor? of the threat of incorporation in lower tax domains? of the flight to tax havens?) Because the one thing it surely is NOT, is basic econ 101, unless it is meant as only one example of a general principle that invalidates the real-world application of many other things in the text, such as deadweight loss… Has anyone ever studied the fact that many economists restrict their discussions of things to the first transaction, and claim scientific value from it, except when they don’t want to, e.g. when they want to say instead that corporations don’t really pay taxes? Shouldn’t we encourage Cochrane to drop the phrase “It’s pretax income, not the rich keeping more money” as another same exercise in wrong incidence, another splitting of hairs, when the real point is he should move to “dynamic scoring” of inequality or some other such inclusive circular-flow notion of inequality’s compounding effects? Because isn’t it true, as Krugman wrote in the column Cochrane condemns, that the Ryan budget will snatch food from the mouths of babes — true, for precisely the SAME methodological reason that corporations don’t really pay taxes?

22

SamChevre 06.13.12 at 6:07 pm

I just do not understand the reluctance to tie income inequality to the predatory economic conduct of rentiers.

That, as actually observed, that doesn’t seem to be the problem?

I know rural east Tennessee well. The big drivers of economic distress are:
1) The textile industry moving off-shore in search of cheaper labor.
2) Coal mining becoming less labor-intensive.
3) Gas prices going up and up and up.
4) Tobacco consumption going down.

None of those have anything much to do with “financialization.”

23

Witt 06.13.12 at 6:09 pm

the widening distribution comes from a skill premium, not inherited wealth.

Except that the skill premium is itself partially the result of unequal distribution of social capital. If your parents went to college, the odds that you’ll be able to prepare better, get into a better college, and persist and complete a degree are higher than for your peers whose parents did not go to college.

24

JW Mason 06.13.12 at 6:15 pm

data showing that income inequality arises mainly from differences in current incomes rather than from inheritance

Again, I have to point out that this is largely an artifact of the nonintuitive way Piketty and Saez way that Piketty and Saez define income fractiles, not a feature of the data itself.

They define top 1%, 0.1%, 0.001% etc. based on income excluding capital gains. Since a large and increasing fraction of capital income comes from capital gains rather than interest and dividends, due in large part to the shift from dividends to stock repurchases in distributions of corporate profits, this definition overstates the share of wage and salary income in the top fractiles.

Piketty and Saez report that the share of capital income in the incomes of the top 0.01% averaged 70 percent before World War I, compared with less than 30 percent in the period since 1980. But if you treat capital gains like other income, the fall in the share of capital income in the income of the 0.01% is much smaller — it goes from about 75 percent to about 65 percent.

Of course capital income and inherited income are not the same, but it’s worth being clear that the evidence that the rich “earn” their money is not as strong as it is sometimes made out to be.

25

Frank in midtown 06.13.12 at 6:35 pm

CAPITALISTS WIN! COMMIE’S LOSE! HAPPY DAYS ARE HERE AGAIN! That horrible distraction is over, now foward back to 1928! No more recognizing social costs, hurrah! No more worker power, hurrah! All freedom and no fairness, ’cause if it’s free that’s fair enough, and if it’s fair it can’t be free, hurrah!

26

Bruce Wilder 06.13.12 at 6:40 pm

Bruce Baugh @ 20

Yes, everyone named Bruce — and everyone from Australia. Monty Python, as it were.

I have read LGM with interest.

The Tide metaphor is exactly the kind of weak-minded thing, which I was protesting. I understand that there’s a long-cycle aspect to what’s happening, and I don’t minimize that, but the sharp and cutting edge is a well-honed blade, wielded with deliberate cruelty and irresponsibility. It’s policy implemented by and for actual persons, not a natural phenomenon.

27

Plume 06.13.12 at 6:54 pm

The concept that the business tax forces a hit on workers, consumers and so on is a pretty vicious piece of blackmail. “Raise our taxes and we’ll just pass it along in cuts to workers and price increases to consumers.”

Actually, as we’ve seen, tax CUTS for the wealthy and for business have obviously not resulted in the reverse. Which should be the case if the above were true. As in, if tax increases would cause worker salaries to drop, tax CUTS should cause them to go up.

Obviously, as wages for the rank and file have fallen since 1973, while taxes for the rich and for businesses have plummeted, that aint the case.

The 1% just pockets the tax cuts. They don’t increase wages. They don’t reduce prices for consumers. They just keep the new government subsidies all for themselves.

It’s time to call them on their blackmail. And if they do go through with it, fine. Then we use government to compete directly against them, provide better value for customers and higher pay for workers.

For example: Expand the VA all across the country. Offer health care through the VA to every American. Supplement it with Single Payer for what the VA can’t do. At the VA, hire scads of nurses and doctors and end “fee for service.” They make a good salary, we wipe out their student debts and they can go to VA teaching schools to increase their knowledge base, certs, degrees. For free.

The private sector could NOT compete with that, and it would be a nice warning to them. If you screw over the public, you’ll get public competition which can kick your azz every single time. Non-profits have lower overhead and can pay better rank and file wages, as they don’t have their monies sucked up to the top for multi-million dollar prima donnas. And they don’t need to steal money from workers to pay shareholder profits.

If the private sector plays nice, the public sector doesn’t try to compete with them. If they don’t, they get the full impact of the massive advantage granted to a large, public, non-profit entity.

Beyond all of that, it’s pretty sad that taxation is considered just something the government does. In reality, when capitalist suppress or reduce wages, they’re essentially “taxing” their employees, and given the fact of a forty year era of this, no amount of government taxation comes close.

28

Bruce Baugh 06.13.12 at 7:40 pm

Bruce: Well, yes. I’ve also quoted my Mom (81 this year) saying that she finds American politics crueler than any time since she was a girl, and more so now than in the ’30s some ways. We have a governing consensus that will choose pain, and a lot of it, over any chance that The Wrong People will ever get to enjoy success, security, comfort, any of that. It’s abominable – and depressing. I’m probably going to have to start blocking a bunch of political blogs soon, to avoid lapsing back into the suicidal depression I’m sometimes prone to. (And it’s not like I don’t already know who I can’t vote for in good conscience.)

I never intended the tide image to be comprehensive, and I’m open to alternatives.

29

Bruce Baugh 06.13.12 at 7:40 pm

Bruce: Well, yes. I’ve also quoted my Mom (81 this year) saying that she finds American politics crueler than any time since she was a girl, and more so now than in the ’30s some ways. We have a governing consensus that will choose pain, and a lot of it, over any chance that The Wrong People will ever get to enjoy success, security, comfort, any of that. It’s abominable – and depressing. I’m probably going to have to start blocking a bunch of political blogs soon, to avoid lapsing back into the suicidal depression I’m sometimes prone to. (And it’s not like I don’t already know who I can’t vote for in good conscience.)

I never intended the tide image to be comprehensive, and I’m open to alternatives.

30

leederick 06.13.12 at 8:51 pm

“Corporations” never pay taxes, they pass taxes on either to customers, workers, or investors.”

Surely this is the wrong way round. Companies collect revenue from customers, pay expenses to workers, then produce their accounts and then calculate profits and corporation tax. The tax is a logical consequence of relationships with customers, workers, and investors. You can’t pass it on if the other guy gets to make the first move.

31

Data Tutashkhia 06.13.12 at 9:00 pm

If they could pass it on to customers or workers, they would’ve done it already, taxes or no taxes.

It’s not like they think: ‘oh! $3 billion profit and no taxes! I’m satisfied!’ vs. ‘oh! 30% taxes on my $3 billion profit! that’s unacceptable! I need more profit to offset the taxes!’ They simply think, always: ‘I need more profit, dammit!’

32

Bruce Wilder 06.13.12 at 11:54 pm

BB: “We have a governing consensus that will choose pain, and a lot of it, over any chance that The Wrong People will ever get to enjoy success, security, comfort, any of that. “

I don’t disagree, but I think that summary packs too tightly.

We do have a governing consensus. We also have a plutocracy, and that consensus looks to be bought and paid for rationalization. And, that consensus does choose “pain” and “shared sacrifice”, which doesn’t involve any pain or sacrifice for the 1/10th of 1%. Quite the contrary, they get bailed out of their irresponsibility. And, yes, demagogues make populist appeals, leveraging resentment, to secure a margin of popular support for the plutocratic agenda of upward redistribution of income, while liberals and progressives offer abstractions and betrayal. If we want to overcome the resentments of those, who are being screwed worst, and motivate them to support progressive, liberal or even revolutionary politics, we’d better have a concrete and specific devil, and be able to link that devil to hte daily experience of being nickeled and dimed to death.

The facts of the predatory economy are well-known. The facts of rapid economic decline are familiar. Yet, here we are discussing, not the concrete details of how income inequality is created amidst disinvestment and financialization and globalization in a nation in economic decline, its public infrastructure visibly aging, its educational attainment falling, wages and even, in many places in the country, life expectancy falling, not how billions and trillions are stolen, or extracted from millions of victims, but airy and abstract notions.

33

Martin Bento 06.14.12 at 4:29 am

Although I’m sympathetic to the idea, I’m a little concerned at the significance given to mobility within deciles. Since the deciles are relative, the same number of people must move down as up, so mobility is a measure of churn that doesn’t necessarily tell you if living standards are going up or down. The biggest increase in mobility must come from major disruption. What has happened to income mobility in Japan since the Tsunami? Must’ve increased a lot. Many people at all points were plunged to the bottom. An equal number at the bottom must have been pushed up, even with an absolute decline in income, since there is only room for 10% in the bottom ten percent. That would create a ripple effect up the other deciles. I am concerned that people not be fated to remain where there parents were. Certainly, I would not have benefited from such a scenario. But this seems entirely too crude a measure.

34

gavinf 06.14.12 at 5:15 am

G’day Bruce @ 32

Well said mate.

Bruce

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Martin Bento 06.14.12 at 9:51 am

in 33, I meant “mobility between deciles”

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Tim Worstall 06.14.12 at 11:43 am

@21 “If the flows of money are circular, and each person’s spending is another person’s income, and so on and so forth, then why do economists persist with fatuous intonations of this particular rhetoric about taxes on corporations? “

Because it’s only the set up for asking the interesting question. If corporations don’t pay the corporate income tax then who does?

That answer generally being some combination of the shareholders in lower returns and or the workers in lower wages*. Lovely shouting matches are had over what the split/weighting is. That shouting coming from the empirical estimates used for elasticities and so on. But the general background theory is that it depends upon the relative mobilities of capital and labour in and out of the taxing jurisdiction.

In an entirely closed economy it would be the shareholders entirely bearing the incidence. The more open the economy the more the workers do. It does amuse me that Adam Smith’s only use of “invisible hand” in WoN tells us why shareholders (or returns to capital) will never bear 0% of the burden. I also like Stiglitz’s point that the total incidence of the tax can be well over 100% of the revenue raised.

* It is not the workers in the particular company being taxed that get the lower wages: it is all workers in an economy which has a corporation tax. Because the taxation of the returns to capital lowers the post tax return to capital (pretty obviously) leading to some domestic capital being invested outside the tax jurisdiction (or foreign capital not coming in). Other things equal, more investment is what raises average productivity and average wages are indeed determined by average productivity across an economy.

The solution is one global tax system: making, in this sense at least, the global economy a closed one and thus capital bearing all of the incidence of capital taxation.

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michael e sullivan 06.14.12 at 1:16 pm

Plume@27: “The concept that the business tax forces a hit on workers, consumers and so on is a pretty vicious piece of blackmail. “Raise our taxes and we’ll just pass it along in cuts to workers and price increases to consumers.”

Actually, as we’ve seen, tax CUTS for the wealthy and for business have obviously not resulted in the reverse. Which should be the case if the above were true. As in, if tax increases would cause worker salaries to drop, tax CUTS should cause them to go up.”

I don’t think there are any serious economists that believe income and capital gains tax incidence falls primarily on anyone but the individuals being taxed.

It is *corporate* taxes that tend to have incidence fall elsewhere, and I believe that it is primarily the consumer who ultimately faces most of the tax in most cases. It’s different for every industry, but in relatively free and competitive industries with typical product demand curves, this result essentially has to happen. In a competitive industry profit for everybody essentially reduces to earnings on capital. If you make more profit than somebody else, it’s because you have more invested, or workers/managers with higher skills (social capital). What happens when there is a shock to profits by having them taxed higher? Well, everybody is already earning exactly the minimum profit that won’t involve people disinvesting or getting out of the business, so they will try to pass it on to customers. If demand is relatively inelastic, customers will share the whole burden. If demand is highly elastic, then it will shrink. In that case, generally firms will lay off to preserve margins, and the workers take it on the chin. The key here is that there is no excess profit to grab in a competitive industry — so shareholders don’t take the hit, either workers or customers do.

But note that the only people who ever suggest that income or capital gains tax incidence somehow falls on anybody but the individual being taxed, are people who are trying to fleece you. This is not something you will hear from the Delongs, Krugmans and Yglesiases of the world, it is something that will be *suggested*, but rarely stated outright, by right wing hacks.

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Barry 06.14.12 at 1:20 pm

Lee A. Arnold 06.13.12 at 5:18 am

” Cochrane also writes, “We need to remind people of econ 1, that who pays the tax and who bears the burden of a tax are often radically different. “Corporations” never pay taxes, they pass taxes on either to customers, workers, or investors.”

Will somebody please explain why this is so? Why do we not say the reverse, that the incidence is upon business firms, through wage demands? I can understand the power arguments that the wage demands might be stymied, but I don’t understand how the more basic assertion is necessarily true. Corporations certainly avoid penalty fines for environmental infractions. It appears as if they do feel pain.”

Pull out an Econ 101 book, and look up the section on taxes. IIRC, the single most important fact for an individual/entity is what proportion they can pass on, and what proportion they have to eat. This second proportion is rarely zero.

Note that corporations spend lots of money to avoid taxation (even industry-wide taxes).
They don’t behave as if they could simply pass them along.

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Barry 06.14.12 at 1:22 pm

Chris: “Education is a red herring. It can move an individual up the income distribution, but it won’t change the distribution itself. Either you live in a nation that pays a living wage to janitors, bus drivers, and other inglorious jobs, or you don’t; education can enable an individual to move out of the bus driver class, but can’t abolish the class itself. If everyone in your society has a postgraduate degree, then your janitor has a postgraduate degree; but he’s still a janitor, someone has to be.”

True. And one of the striking characteristics of the New Deal society was just that many more people were paid a living wage.

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Bruce Wilder 06.14.12 at 3:11 pm

michael e sullivan: “It is corporate taxes that tend to have incidence fall elsewhere, and I believe that it is primarily the consumer who ultimately faces most of the tax in most cases. . . in relatively free and competitive industries with typical product demand curves, this result essentially has to happen. . . . What happens when there is a shock to profits by having them taxed higher? Well, everybody is already earning exactly the minimum profit that won’t involve people disinvesting or getting out of the business, so they will try to pass it on to customers. . . . The key here is that there is no excess profit to grab in a competitive industry—so shareholders don’t take the hit, either workers or customers do.”

I don’t know what you imagine, when you say, “corporate taxes”. If it is the value-added tax, then your analysis makes some sense. Property taxes, licensing fees, excise taxes — each require their own analysis. If it is a corporate income tax, as seems probable from your reference to profits, then your analysis is completely specious nonsense.

The large bureaucratic business corporation, at which the corporate income tax is squarely aimed, is not going to exist in “free and competitive industries”. I’m wondering if you can work out why. The key concept is “economic rent”, the portion of factor income above and beyond what is required to bring the factor into its current or “best” use.

Just in general, though, I’m also thinking that you simply do not understand the mechanics of how an income tax works. By its nature, it doesn’t have an effect on the unit product margin. Income taxes take a fraction of profits, after expenses. So, if an investment project has a positive net present value pre-income-tax, that same project will still have a positive net present value, post-income-tax. For a perfectly certain outcome, it reduces the net to the capitalist, but cannot, by definition of a profits tax, switch the net from positive to negative. For an uncertain outcome, a refundable income tax changes the risk in a way that is actually generally favorable to the business firm’s decision-making.

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Lee A. Arnold 06.14.12 at 6:24 pm

@Barry#38–Again, I may have put it the wrong way, but I understand the arguments about corporate income tax incidence.

Actually, the textbooks have differing discussions of it: I am sitting here with Baumol & Binder (2nd ed., 1982), Lipsey, Steiner, Purvis (7th, 1984), Case & Fair (6th, 2002), Krugman & Wells (2nd, 2009), and I can run and dig three or four more intro textbooks out of the boxes in the garage. Because that’s what kind of nut I am.

The first thing you will learn by reading them is that it is a big discussion, and no one textbook gets it all. Only one of them mentions Harberger for example. There are labor/capital ratios and substitutabilities, and ROI, and whether there is perfect competition, monopoly, or monopolistic competition, and there are concerns to specific industries, and on and on.

So, let’s boil it down to a sort of general statement that has at least a LITTLE precision to it: “Corporations never pay taxes,” as Cochrane writes (although almost all of the textbooks will tell you that they DO INDEED pay some of the corporate income tax, but let’s go for his absolutist statement here, though we shall soon be admonished by Cochrane himself that “economists should insist on precise language”) — but NOT because “they pass taxes on either to customers, workers, or investors,” as Cochrane explains. Let’s say instead that “corporations never pay taxes” because: Corporations are institutions, and actors have free entry and exit into institutions (and sometime forced entry and exit), and they may or may not have a voice in that, i.e. be able to change the institution of the corporation, (and/or the institution of the tax). So certain people or groups may get clobbered with the tax, or not. (This would also cover, I think, all the reasons given in the comments above.)

But wait a minute! This applies to fiscal policy as an institution, just as well! Christie, Ryan, Romney, et al. are proposing things which not only have consequences for people who may or may not be able to exit the institution, and may or may not have a voice in it. Monies are fungible and personal budgets are harmed. Also, if you didn’t already know it, you might suppose, if the discussion about corporate taxation is any indicator at all, that taxpayers will have some concerns.

Yet the U.S. public deficit issue is phony — there is no immediate crisis; the primary budget goes back into balance 5 or 10 years after the recession ends; then you can roll over the debt while paying it down; after then, Social Security is a stable percentage of GDP going out 50 years; and the only problem is the rising cost of private medical care, which determines the cost of public care. And there is a “worldwide savings glut” that isn’t being mopped up anywhere.

And sure enough, the “fiscal phonies” don’t have a real plan, because it is IMPOSSIBLE to have another real plan. What are they going to do, throw grandma out on the street? It is a joke. It already is what it is.

So what else can it be, other than the “fiscal phonies” are serving the interests of their “financial backers”? Yet Cochrane takes exception to this.

But this is to be EXPECTED, if you follow the same logic of why corporations don’t pay taxes: because a burden is to be transferred. Of course investors and financial backers won’t like it. And we know that they have voice. In the U.S., money is free speech and the Citizen’s United decision for example amped up the microphone.

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Lee A. Arnold 06.14.12 at 7:07 pm

Again, I read the column to say, underneath, that people want Krugman to stop being so “shrill”, so they can start agreeing with him. This sentiment has been detectable in various writers for a few years now. It might not work, of course. They still might be prone to the same fudging and blabber and self-cancelling logic. Then other people could attack Paul by saying, “Oh Krugman can’t be right, because this guy who agrees with him has veered off into ridiculous nonsense.” Stuff which Paul would agree is crap, but now he has to go sort it out, too. The thing about being a voice crying in the wilderness, is there is LESS to defend.

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Barry 06.14.12 at 8:27 pm

“Again, I read the column to say, underneath, that people want Krugman to stop being so “shrill”, so they can start agreeing with him. This sentiment has been detectable in various writers for a few years now. “

I don’t believe those people for one f*cking second. They’re the sort of people who rarely (if ever) criticize the right for being shrill. And I’ll bet that in most cases they’re people who maintained that Krugman was wrong, and fell back on ‘shrill’ when it turned out that Krugman was right. And I’ll be further that most of those people *still* give credence to the people who’ve been consistently wrong.

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Lee A. Arnold 06.14.12 at 10:02 pm

Yes, I remember we had to solve this philosophical problem on the elementary-school playground in 6th grade with the empirical rule that “Everybody is, or was, an asshole.”

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Watson Ladd 06.15.12 at 3:52 am

Here’s why corporations don’t pay taxes: A corporation is entirely owned, eventually, by individuals. If the corporation pays a tax, that means a fall in the value of the corporation, which means a decline in the wealth of the individuals. Imagine a jurisdiction that placed a lien on all real property in the jurisdiction of value equal to five percent of the value of the property. Clearly we wouldn’t say “houses pay the tax” but “individuals pay the tax”. Just because the individual doesn’t fork over money directly when a corporation he partially owns is taxed does not mean it is not a real effect, any more then VAT is not payed by the consumer.

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Peter T 06.15.12 at 5:20 am

“A corporation is entirely owned, eventually, by individuals .If the corporation pays a tax, that means a fall in the value of the corporation, which means a decline in the wealth of the individuals.”

1. “Eventually” can be a very long way away.

2. Payment of taxes, falls in value and declines in wealth are not linked by iron rods. Money is a social fiction about real, putative and possible things and acts, not a fixed measure.

So the statement is either vacuous (“society is made up only of actual humans”), or empirically variously true, false or somewhere in between.

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Zamfir 06.15.12 at 7:28 am

Governments can’t collect taxes, because it’s all individuals, eventually.

You can see this in the behaviour of governments: with notably rare exceptions they never try to expand their tax base, or to deepen their ability to collect taxes from that base.

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Data Tutashkhia 06.15.12 at 8:34 am

Think of THE CHILDREN!!! Every dollar the government is taking from me represents, in the end, food taken out of the mouths of my children.

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chris 06.15.12 at 12:04 pm

Other things equal, more investment is what raises average productivity and average wages are indeed determined by average productivity across an economy.

Other things aren’t equal, and the average is an illusion. The actual shape of the distribution is what people live or die by.

Please, name me a first world country that suffers from insufficient investment (except perhaps in public goods, but you’re not going to fix that by *lowering* corporate taxes…) Practically by definition, first world countries have all the investment they need and then some (speculative bubbles). In the current crisis investors sit on their piles of cash because there aren’t enough opportunities to make a profit — because the potential customer base hasn’t had a real income gain in a freaking generation, regardless of the rise in their average productivity.

Economists may be obsessed with how to speed up the development of developing countries like Zimbabwe, and bringing in more global investment may even be a good thing for countries like Zimbabwe (although I find the regulatory/wage/tax race to the bottom a disturbing and possibly self-defeating way to get there), but that doesn’t make all countries Zimbabwe.

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Stephen 06.17.12 at 8:40 pm

GiT @10:

Not that I necessarily disagree with your conclusion, but when you state that Evil Austrians and so forth explain increasing inequality by arguments that reduce (skipping your tendentious rhetoric) to:
1. Immigrants: increasing numbers of impoverished immigrants increases, at least in the short term [fn1], levels of inequality in the recipient community.
2. Household Restructuring: increasing the proportion of single households increases household inequality compared to the time when they were double households.
3. Lifecycle Effects: as people get older, many of them become wealthier.

then you have a problem. As you say, “they each have some truth to them.” So they do: perhaps, a great deal of truth to them. But when you say they have “not enough truth to change anything about the overall picture of inequality” that is something that needs to be proved, not just loudly asserted. Over to you.

FN1: Short- and long-term effect differ. In the UK, admitting substantial numbers of Ugandan Asians – experienced and prosperous business families in Uganda, expropriated and expelled for that reason by the Ugandan African government, arriving in the UK with little capital but much skill and a desire to improve their wealth – had only a temporary effect on UK prosperity. Admitting substantial numbers of unemployable Somalis has not had a temporary effect.

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EWI 06.17.12 at 11:21 pm

The fundamental problem is that you’re dealing with the likes of Tim Worstall here, who can in all seriousness try with a straight face to construct arguments against corporate bribery:

http://www.theregister.co.uk/2012/06/13/bribe_act_will_wreck_foreign_trade/

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EWI 06.17.12 at 11:22 pm

*against the outlawing of corporate bribery/for legalizing corporate bribery

Sigh.

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Oliver 06.18.12 at 12:38 pm

Now, the whole of U.S. economic policy seems to be rapid disinvestment to fund rentier incomes. Do we think that might have something to do with increasing income inequality

The rentiers include retirees. And that sums up the problem. The push for ever higher returns on investment were actually necessary to meet promises for pensions.

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