Would a significant increase in the top income tax rate substantially alter income inequality?

by John Quiggin on October 5, 2015

Yes.

This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion.

The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.

The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.

What does this mean? Two things:

(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.

It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.

The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.

{ 62 comments }

1

Vance Maverick 10.05.15 at 7:19 am

Why do we care how much goes to the ultra-rich, given that by construction there are so few of them? The quintiles, whatever their flaws, contain multitudes.

2

reason 10.05.15 at 7:43 am

Vance Maverick,
did you actually read the post? Do you actually live in the real world, where people like the Koch brothers try to control politics?

3

reason 10.05.15 at 7:45 am

(P.S. In case Vance Maverick can’t draw inferences, the post noted that redistributing money just from the very rich to the poor would have a substantial impact on poverty. But maybe Vance Maverick likes poverty.)

4

bad Jim 10.05.15 at 7:48 am

No, the ridiculous excesses of compensation of top executives needs to end.

If we’re not going back to confiscatory levels of taxation for insane levels of compensation, perhaps we could at least not let companies deduct salaries in excess of, say, a million dollars as expenses. Stock grants ought to be expensed, and capital gains from options escrowed for a number of years. Our tax system seems to endorse the strong form of the efficient markets hypothesis, which experience has shown to be nonsense.

Taxing wealth is difficult, perhaps politically impossible. Reducing its rate of accumulation might be a little easier.

5

P O'Neill 10.05.15 at 8:15 am

The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.

But doesn’t this also highlight a second real question, which is how much should go to the ultra-poor?

6

Lee A. Arnold 10.05.15 at 10:08 am

I am about to get angry. This study looks at the effects of simply redistributing the income. But since higher top marginal rates would ALSO reduce budget deficits, it would reduce the upward-redistribution of taxpayer money to bondholders, who are almost entirely in the upper quintile. Which amounts to about a trillion US$, per decade. (No doubt Brookings will come out with another useless paper arguing that this isn’t nominally so, under present low interest rates. Because this is apparently the level of intellectual argument being issued from that place.) Higher top rates would ALSO give a lot more people the idea that their country is fair, and this moral expectation improves individual performances, as economists studying “preferences” already figured out, about 350 years ago.

7

RichardM 10.05.15 at 10:13 am

‘Inequality’ bundles together two rather different things; this can be sometimes politically useful, but just as often problematic.

One is the welfare of the minority of people in western societies who are ‘failing to flourish’. The other is the political power of the very rich.

Any metric that aggregates together those two very different, and more or less logically unrelated problems , is not going to give you much usable information about either of them. Doctors would be stumped if they were only given information in the form of a single ‘healthiness’ metric along the lines of (white blood cell count * height)/heart rate.

8

reason 10.05.15 at 10:24 am

RichardM
Yes, this is a very good point. A single measure, is bound to give a flawed view of the issues involved, independent of what measure is chosen. But it is none the less true, that the simple approach suggested would make some improvement in outcomes in both the specific issues you mention.

9

Gareth Wilson 10.05.15 at 10:34 am

If you overturned Citizens United, and lowered the hard money limit to $20, that would go a long way towards limiting the political power of the very rich. But it wouldn’t be taking any money from them at all. Actually, they’d keep more of it. So what’s the real problem, money or power?

10

reason 10.05.15 at 11:07 am

Gareth Wilson
Money OR power? Money IS power.

11

rwschnetler 10.05.15 at 11:45 am

12

reason 10.05.15 at 12:14 pm

All taxes come ultimately out of rents. Very big incomes are mostly rents. Tax more and redistribute – trying to target it too precisely, probably won’t work.

13

BenK 10.05.15 at 12:24 pm

Gini not telling you what you want to hear? Proclaim it flawed and look for some other magic mirror.

You can decide who will be your ultra-rich and whether they will hold their wealth directly or through organizations they control (including the government). Will it be the company managers (CEOs and their ilk), the company owners, the government officials, organized crime, or somehow some other group? These rich will hold power/wealth. They may be somewhat under the law and distinct from its organized function, or they may directly control the law as well. When ‘redistribution’ via taxation is a major economic force, it leads directly to the wealth, power, and the law sitting in one set of hands all at once.

This is self-evidently problematic, but does not appear a problem to those who presume they will take the reins when power is shifted. Everyone who recommends such a course of action and does not expect to take the reins is a dupe.

14

The Raven 10.05.15 at 12:56 pm

Perhaps it would be best if there were no ultra-rich?

Nah.

15

Vance Maverick 10.05.15 at 1:26 pm

[Following up late, due to timezones]

I’m actually quite sympathetic to soaking the rich. In the argument of this post, though, the last line comes as a surprise. I can see that the ultra-rich have a lot of money, which can do good if redistributed. But to say that their wealth is the “real question” calls for much more support.

16

Trader Joe 10.05.15 at 1:39 pm

Two points:

1) Part of the problem in trying to tax and redistribute is that in practice this never seems to actually happen. Either the tax proves to be avoidable and accordingly doesn’t raise all that much revenue or the incremental tax revenues don’t actually find their way to helping people at the lower end of the income scale. The most recent US tax raise is an example of the latter, I’m sure there are plenty of others.

2) When you look at the most eggregiously wealthy – Gates, Buffett, Ellison etc. its invariably true that a substantial portion of their wealth is the value of shares they accumulated within a business that remain unsold and accordingly, there is no taxable event upon them with which to tax and redistribute. The simplest of all of possible tax dodges is to, at some point in life, but these shares within a charitable trust which usually remains within the control of the donors family. Gates and Buffett have both done this with large portions of their wealth, as have many others.

The point being, unless one is prepared to contrive a way of taxing appreciation (which obviously fluctuates with underlying value) it becomes very difficut to “tax away” wealth differences. Certainly higher tax rates capture the current income portion of these earnings and thats a start, but you couldn’t begin to build a redistribution scheme on the back of that alone – its simply too easy to dodge.

17

jake the antisoshul soshulist 10.05.15 at 2:18 pm

Money is power, or at the very least, it buys access to power. The Koch brothers et al seem completely unabashed by their attempt to buy the government. Not that it is a new thing, but that they are so overt in their intentions seems relatively new.
Recently, I have heard a lot from the Tea Party right about Crony Capitalism. The theme being that “big government” is a partner, if not the senior partner with “big business”. That regulation is designed to benefit large corporations against the interests of small business. And that government should be shrunk to the extent that it can no longer be of assistance to “big business.”
They do not seem concerned at all with the power vacuum that woud relult from the reduction of government. I assume that they believe that vacuum would be filled by individuals and small business. I suppose one question would be if power is a zero-sum game. The elites certainly have always treated power as if it were zero-sum.

I suppose that to an extent I am more concerned about inequality of power than I am economic inequality. But wealth and power are so inseparable, we cannot address one without addressing the other.

18

Anarcissie 10.05.15 at 3:02 pm

It seems to me that the money of the poor is different from the money of the rich. When poor people want to get money, they must work, and thus their money is connected to labor and the things that labor produces. The rich, on the other hand, can borrow money at low or no interest and use it to speculate on largely positional or fictional items like real estate, equities, collectables, and so on, so it is mostly disconnected from labor. The apparent value of money depends on the suffering of the poor (labor), enforced by limiting the amount of money they can get for their work, but as one goes up to the upper realms of class it becomes more and more fictive or imaginary. If one now moves some of that fictive money from the rich to the poor, the money of the poor must decline in value, that is, one will observe inflation. This would be concretely realized by landlords raising rents, physicians and lawyers raising fees, and purveyors of goods and services sold to the poor increasing their prices. To inhibit inflation (which would produce political trouble), money must be kept away from the poor and they must continue to suffer. (Under present conditions.)

19

Marshall 10.05.15 at 3:16 pm

I wrote a longer response to the Brookings thing here, making essentially the same point as Quiggin (but with more numbers):

http://steinbaum.blogspot.com/2015/10/how-much-would-increasing-top-income.html

20

Marshall 10.05.15 at 3:28 pm

That’s some other Marshall, any who care.

21

jake the antisoshul soshulist 10.05.15 at 3:28 pm

@19.
Interesting if true. But would the Fed not have to increase the money supply for actual inflation to occur?
But that supports my contention that the wealthy eventually get back the redistributed wealth through rent seeking. If the scenario of increased rents/prices were true, they would get back with interest. Which would indicate there is something behind anti-redistribution other than redistribution itself.

22

Landru 10.05.15 at 3:36 pm

While I am thoroughly disgusted by the current excesses in income and wealth inequality, I’m not a big fan of re-distribution schemes as the mainspring of improvement. Better, more durable, and more important, than soaking the rich would be to uncover and correct the warped system that allowed for such flagrant over-concentrations of wealth/income in the first place.

Re-distribution by taxation & transfer may seem appealing, in that it has an immediate effect on the bottom line and is nominally straightforward to implement. But to me it has the long-term drawback of distracting us from the real and important question, which is how did things get to this point? What are the mechanisms by which wealth and income become so wildly unbalanced compared to people’s actual productive contributions? This is what economists should be studying and examining, and what progressives and activists should be trying to change in the longer term.

In my view, explicit re-distribution schemes add momentum to the sentiment, that vastly distorted inequality is not so bad since we can just “claw back” the ill-gotten gains; and this takes the spotlight off where it should be. Politically, it also amounts to conceding the fight before you even start: by not challenging the legitimacy of the current scheme, and establishing that those gains of the super-rich are in fact ill-gotten, re-distribution will always look like mob rule rather than a re-establishment of fairness, and will not gain the sympathy of the middle class.

This, in fact, is my biggest problem with conventional economics on the whole, including JQ’s new “Two Lessons” scholarly work as it is being previewed here at CT. They all start from the proposition that free markets, free exchanges, etc., are a reasonable first approximation to an economy, and once that is understood then we are equipped to examine “market failures” as a more nuanced epicycle on the main system. To me, this formulation contains, and thus implies, exactly the proposition that rich people want everyone to hold in their hearts unthinkingly: which is that, for the most part people get the compensation they deserve for the effort/effectiveness they put in, and failures are a higher-order correction to this main behavior. Subscribing to this perspective gives up the progressive fight before it begins, in my view; as well as being just factually wrong, and missing a great deal of the fabric of human life. Discussing re-distribution through taxation is, then, ultimately a disappointment to me, as it is taking place at a way-station that is already a good ways down the wrong road.

23

Roger Gathman 10.05.15 at 3:47 pm

I’d imagine that the best way to limit inequality is to tax with inequality in mind – thus, expropriate income that is over some multiple of medium income – say, 20 times medium income – and the same with wealth. That’s how you get less inequality.

24

marcel proust 10.05.15 at 3:53 pm

there’s no simulation of behavioral responses which might have indirect effects

This seems like an important throwaway line.

Once people get used to high marginal tax rates, how hard would executives and financiers strive to wrench huge amounts of money out of the firms for which they work? Would they be less unwilling to share some of the revenues with lower paid employees? Would it be possible that the social or corporate order of the pre-Reagan period might begin to return, where it is accepted that vast differences in wealth are at least a bit unseemly? Of course, simulations cannot get at this, but if you believe in the importance of incentives, as suppy siders seem to, this could have a big effect.

Why, we might even be able to reduce inequality at a rate of 4%/year, and with higher tax rates, perhaps as much as 6%/year. ;)

25

que_es 10.05.15 at 3:56 pm

“The point being, unless one is prepared to contrive a way of taxing appreciation (which obviously fluctuates with underlying value) it becomes very difficut to “tax away” wealth differences. Certainly higher tax rates capture the current income portion of these earnings and thats a start, but you couldn’t begin to build a redistribution scheme on the back of that alone – its simply too easy to dodge.”

This is not hard to do. You would simply treat gratuitous transfers during lifetime and at death as what are called “realization events” in tax parlance. This means that gifts and inheritances of appreciated assets would be treated the same as sales, triggering tax on the gain measured by the difference between fair market value and the donor’s basis. The problem is that the moneyed interests have taken this obvious solution off the table.

We also need to get rid of the unlimited charitable deduction against the estate and gift taxes. This would prevent oligarchs like Gates and Buffett from escaping tax at death by “donating” their wealth to “charities” their families control. This, also, will not happen. These people are “philanthropists” after all. Bill Gates extracts rents from everyone through his monopoly and then he’s happy to use a taxpayer subsidy to put himself in charge of using a portion of those rents to save the human race.

As a not unrelated aside, recommended to all is Paul Theroux’s piece in the Sunday NYT about the hypocrisy “lifting people out of poverty.”

End of rant. It must be Monday.

26

SamChevre 10.05.15 at 5:23 pm

We also need to get rid of the unlimited charitable deduction against the estate and gift taxes.

An alternative, which I’ve thought about long enough to be fairly sure it would work, is to increase the required spending from an endowment of any form to the level that it is expected to last only 50 years–basically, re-invigorate the law against perpetuities. At the same time, make transfers from one non-profit to another be subtracted from the second non-profit’s spending for that calculation. (So gifts go away after awhile.)

27

Bruce B. 10.05.15 at 6:18 pm

Sam, that’s the kind of thing that keeps me reading comments: smart, and not something that would have occurred to me but immediately makes me think, “Yeah, if a plan doesn’t have something like that, it’s clearly not going to get all the job done.”

28

JLV 10.05.15 at 6:20 pm

Sorry, but this is incredibly ill-informed. The Gini coefficient may not be perfect, but at least it satisfies the principles of transfers.

If you taxed away ALL of the income from the bottom 10% and redistributed this to the remaining bottom 99%, any ethical measure of inequality should increase. The top 1% share doesn’t budge.

29

que_es 10.05.15 at 8:07 pm

“increase the required spending from an endowment of any form to the level that it is expected to last only 50 years–basically, re-invigorate the law against perpetuities”

This seems to make sense. But it won’t happen either. Private foundations need only spend 5% and efforts to subject public charities such as elite universities to a similar rule have fallen flat. As for the perpetuities problem, states are falling all over themselves to attract trust money by eliminating their rules against perpetuities as respects donative trusts.

30

Matt 10.05.15 at 8:52 pm

Perhaps it would be best if there were no ultra-rich?

Agreed. I recently wrote elsewhere that societies would generally be better off if billionaires no longer existed at all, much as we’re better off without kings presuming to rule by divine right.

Ending billionairehood doesn’t require — and probably shouldn’t rely on — specific “no billionaires” laws. By analogy: nobody in the USA has ever become a trillionaire, even though there aren’t specific “no trillionaires” laws. Instead, a combination of anti-trust action and quite ordinary taxes has prevented anyone from ever accumulating such an outsized fraction of ownership power. I’d be happier if those anti-accumulative forces were strengthened until the Western billionaire* were an endangered species. Extreme wealth accumulation is a threat to democratic government itself, not just a misallocation of resources that could provide much more benefit to poorer people.

*In, say, 1995 constant dollars

31

Marshall.peace 10.05.15 at 10:08 pm

I don’t see ultra-rich nearly as problematical as ultra-poor. I hear the normative level of social satisfaction in humans is achieved at household incomes well south of $100k; beyond that your concerns change is all. If everyone were up there, I don’t see a problem with ultra-richness per se; maybe some after-the-revolution paradise would still have a social-ecological need for them. Capitalism requires people to be the owners of the factories, some of which are very large. The problem isn’t that factories have owners, it’s that the owners our society has are abusive. Not sure that can be fixed with a change of tax policy. However, encouraging news: Arrive le Jacquerie! (pardon my French)

32

Marshall.peace 10.05.15 at 10:27 pm

That last was supposed to be a link: Arrive le Jacquerie!. And sorry about the duplicate post on the wrong thread. No more operating machinery for me today.

33

John Quiggin 10.05.15 at 10:55 pm

JLV, your comment makes no sense to me. Under your proposed change, the Gini would move a bit, but the 99/10 ratio would go to infinity.

Trader Joe (and some others): It isn’t true that this never seems to happen. Even though there was substantial avoidance, the progressive tax systems of mid-C20 greatly equalized post-tax incomes. Of course, market incomes were also less unequal then, and that’s an important factor. The fact that we need to start from a more equal position is a central element of my Two Lessons book – I’m surprised that Landru reads it the other way.

BenK, since you’re parroting Pareto (possibly at such distance that you don’t realise it), you might like this piece on how his thinking led him to support fascism.

34

derrida derider 10.06.15 at 1:36 am

The last line in the post nails it – its all a product of just how skewed the distribution is. Mind you, John has a much stronger case with the US distribution – the most skewed in the developed world, and probably not far off being the most skewed in the world full stop.

And yes, people should simply stop quoting Ginis. It’s a rotten summary measure – not only is it insensitive to the tails of the distribution, it is highly non-linear (to be precise, not additively decomposable) which means:
1) small differences in the number can mask big differences in actual inequality, and vice versa.
2) you can’t separate out the groups within the population that drive changes in it.

If you want a single index of inequality (and of course any single number will have problems) better to use Thiele, CoV or (best of all because it makes you choose an explicit normative parameter) Atkinson.

35

Anarcissie 10.06.15 at 1:43 am

jake the antisoshul soshulist 10.05.15 at 3:28 pm @ 22 —
I don’t know that the rich would really care much about moderate redistribution, Welfare, etc. (using something of real value), since the working class and petite-bourgeoisie would be made to pay for it. But it’s hypothetical anyway.

Since much of the money supply is fictive, it can be enlarged or contracted practically by imagining that it has been enlarged or contracted — as long as it is kept away from the poor, whose labor (suffering) is necessary to maintain its appearance of value.

36

Bruce Wilder 10.06.15 at 4:39 am

VM: Why do we care how much goes to the ultra-rich, given that by construction there are so few of them?

RM: ‘Inequality’ bundles together . . . the welfare of the minority of people in western societies who are ‘failing to flourish’ . . . [with] the political power of the very rich . . . two very different, and more or less logically unrelated problems . . .

M.P: I don’t see ultra-rich nearly as problematical as ultra-poor.

OP: (there’s no simulation of behavioral responses which might have indirect effects)

There’s something about “inequality” as the label for issues of income and wealth distribution that seems to encourage both highly abstract thinking and a kind of semi-dissociation from the mechanics of income and wealth distribution.

Most people know there’s some sort of behavior involved. There’s a kind of gingerly concern about what (complex) relations may exist between great wealth and dire poverty. Should we renounce our resentful envy of the very rich, on the grounds that the gains of a Steve Jobs do not come unambiguously from the oppression of the masses: this is not a drone-like feudal lord extracting an agricultural surplus at the point of a sword — this is the guy, who gave us the iPhone.

Politically, high marginal rates of tax were accomplished at mid-20th century from existential threats to the survival of the nation-state. It was solidarity, and the felt dependence of elites on the masses, especially needed to staff the Fordist technologies of process manufacturing and war by mass mobilization, that led to social insurance and social medicine. It was a solidarity, which followed, in historical sequence, on a good deal of mass mobilization with a more revolutionary intent: for example, labor strikes that led to legendary violence, revealing the essential hostility between elites and the working classes. People who had not enough to get by, knew enough to get angry.

It does seem to me that, politically, in the absence of a solidarity of some kind (patriotism, ethical religion?) that embraces elites and enlists the better angels of their natures, the masses, so to speak, would have to get at least somewhat organized and very, very angry.

If one sees the accumulation of wealth as both causing increasingly predatory economic arrangements, with the income that funds wealth increasingly coming from predatory or parasitic economic structures and behaviors, then there’s some foundation for feeling righteous anger. Spread that around, and attach it to some policy measures that attack unjust and destructive arrangements, and maybe, there’s some prospect of organizing a power in the land.

Take from the 1% and give to the 10% leaves out the voting and non-voting majority. I can see in the abstract how that works mathematically. I don’t see it working politically. And, frankly, I’m skeptical about whether simply giving money to the bottom 10% works sociologically. The bottom 10% — the bottom half, even — have problems, not just a shortage of funds. Go to an AA meeting sometime.

One of the problems for economists is that, for some unaccountable reason, they have a lot of trouble giving up the idea that capital is a stock that produces income proportionately (though subject to diminishing returns) or in adapting to the idea that money is a real thing and wealth is money (not to be confused with a stock of [productive] capital).

Wealth can be a bad thing. In the U.S., at the margin, wealth is a bad thing for the society and for the political economy, and not just because money buys (votes and) politicians. Wealth that transforms a savings-and-loan into a pay-day lender? Bad thing. A politics that puts executives from the pay-day lender on the board overseeing the government agency protecting consumers from financial fraud and exploitation? Bad thing.

Privatizing public schools to create opportunities for “entrepreneurs” to run charter schools? Bad thing. Making college students rely on loans for higher education financing (and taking away bankruptcy protection)? Bad thing.

I could make a long list of “bad things” which all had the characteristic that what drives them is financial wealth restructuring a productive activity in a way siphons offs funding for financial “assets” while arguably doing something for “efficiency” or investment, while actually undermining productivity and social welfare.

Let’s have pet insurance. Or dental insurance. (Or Obamacare.) What could go wrong? Someone buys the patent for a life-saving drug and increases the price 5x?

A couple of people have mentioned the very large amounts paid to the chief executives of large corporations. I don’t suppose we should concern ourselves with indirect effects of behavioral responses. Executives assembling very large corporations combining strategic direction of related businesses: a bank and a real estate appraiser, or an insurance company and an investment bank; television network and a production company; a movie studio and a cable tv provider in order to siphon away the rents that might otherwise have driven competitive behavior into gigantic salaries, justified by corrupt accounting and fly-by-night schemes to make the numbers for boards of cronies. Maybe an insurance company and a hospital and a doctor’s practice and a specialist performing diagnostics? What could go wrong?

Of course, Obama would praise the Masters of the Universe as savvy business people. If their enormous incomes trouble us, we can surely inch up the marginal income tax rates and use it to fund an insurance scheme that will quiet the extractions of a medical establishment feeding at the trough of runaway costs.

GINI or any other measure of inequality is not a sufficient statistic, if it does not give us some more concrete idea of the extent to which the rich(er) are getting rich by making most of us poorer. It is not how great is inequality in a purely mathematical sense that will motivate us politically, it is how much inequality weighs. The top of the pyramid may be small, but how much does it weigh?

37

reason 10.06.15 at 7:58 am

JQ @34
“Of course, market incomes were also less unequal then, and that’s an important factor”

Maybe market incomes were less UNEQUAL because net incomes were less unequal. Economists like to ignore them, but there are positive feedback effects, not just negative feedback effects.

38

reason 10.06.15 at 7:59 am

oops – placed the emphasis wrongly – the key word was actually BECAUSE.

39

SamChevre 10.06.15 at 10:59 am

Bruce Wilder @ 37

If one sees the accumulation of wealth as…

This gets to one of the tricky, but important, points about inequality. If the concern is about inequality of wealth, and especially if it is about self-perpetuating inequality of wealth (which I think is important), then a focus on income inequality has the undesirable side-effect of stabilizing the distribution of wealth.

I am distinctly unconvinced that maintaining the dominance of the Rockefeller, Ford, etc fortunes is a desirable result of social policy.

40

reason 10.06.15 at 1:09 pm

Sam Chevre @40

Seems you are ill-informed. More wealthy people generally have HIGHER incomes, so higher income inequality makes wealth inequality worse. Sorry to burst your bubble.

41

reason 10.06.15 at 1:10 pm

P.S. In the longer term of course, it is a semantic point whether inheritances should be considered income.

42

Trader Joe 10.06.15 at 1:22 pm

“It isn’t true that this never seems to happen. Even though there was substantial avoidance, the progressive tax systems of mid-C20 greatly equalized post-tax incomes. Of course, market incomes were also less unequal then, and that’s an important factor. “

I’m sure the data says this is true about market incomes being less unequal, but its far from clear that the bottom 10% were in fact any better off. Indeed subsequent legislation in the ’60s in ’70s (in many countries, not just U.S.) suggest poverty was viewed as a significant problem despite the heavy taxation of upper incomes and the potential for sizeable transfers. Said more susinctly, incomes may have been more equal, but were the bottom 10%ers really better off on a relative basis? Inherently difficult to quantify, but political actions suggest no.

I’d add that, the mid-c20 was a time when governements didn’t fund deficits with borrowing and certainly didn’t borrow to fund social spending (maybe they should have)- I would expect if any current government somehow managed to show the gumption to raise a truly progressive tax regieme, that even faintly resembled those found in the mid-c20, the added tax revenues would be directed to simply funding the health and social programs as already exist – which are almost universally in deficit, rather than extending meaningful new benefits. Perhaps new benefits would follow in-time, but time usually works against high-tax rates.

43

Roger Gathman 10.06.15 at 4:11 pm

In terms of the justice of the thing, it seems to be a no brainer to reduce the wealth of the wealthiest in the west by some considerable amount. A billionaire whose wealth is reduced to the tens of millions suffers about, oh, a micron of the injustice doled out daily to the poor soul who spends another day in solitary in the torture complex known as the American penal system.
It seems to me that tying taxation to some standard ratio of degrees of inequality is the best way to tax to bring about greater equality, but much more should be done to the system. That “more” was outlined long ago by the progressives at the turn of the 20th century. There are reforms to make that are still valid. For instance, all interstate companies should be registered with and obey federal law, rather than hqing in states and applying state law (which is how we so subtlely got to the point where credit card companies can charge usurious rates). More radically, we should question the way “market” capitalization differs from “real” capitalization – assets and earnings. This used to be a hot issue – the issue of watered stocks. It is no longer an issue at all. This is a pity, because allowing a firm’s stock to assume any price in the market creates vast rentier profits and produces the kind of thing that leads to business cycle catastrophe, without really having a benefit for people below the top ten percentile. The progressive proposal, which was to force the stock to approximately equal assets and earnings at the end of the year seems to me to have a lot of merit. As well, the legal structure that allow the vast shadow banking system should be radically reorganized to suppress it. It seems to me that the controversy and argument about taxing is to an extent a red herring. It isn’t the best or only tool to create a more equal society. It is one tool. A much more progressive regulatory regime is another. Another would be substantially bulking up the power of labor, by, say, requiring every employee to join a union, making that as mandatory as it is mandatory for doctors to be licenced by the state. The discourse on taxing should, in other words, be contextualized more.

44

Marshall.peace 10.06.15 at 5:45 pm

BW: financial wealth restructuring a productive activity in a way siphons offs funding for financial “assets” while arguably doing something for “efficiency” or investment, while actually undermining productivity and social welfare.

Good point about productivity. Family-type horticulture is way more productive per acre than industrial farming … try supporting yourself on 5 acres of chemically-fertilized soybeans. Generally crafts are always going to be able to take advantage of local conditions better than consolidated enterprises, although the social power of consolidation rules, whether appropriate or not. In some cases it would seem to be appropriate (as Toqueville); the accumulation of social wealth must be a social good. Jealousy of what is mostly just different is a terrible thing: many very rich people work way harder and in a style I have no wish for; I’d rather go camping. OTOH Solidarity is a good thing that we need more of and since the current stock seems to be vanishing upwards, into the top 10%, 1%, 0.1%, it seems we will have to grow it from the bottom. Somehow. Won’t happen without some “disruption”, I expect.

We’ve been here before: Augustus is said to have personally owned the Roman Empire, in more or less the modern sense. Didn’t last.

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Roger Gathman 10.06.15 at 6:48 pm

45: I have to disagree with this: “Jealousy of what is mostly just different is a terrible thing: many very rich people work way harder and in a style I have no wish for; I’d rather go camping.” I’m not sure what function working hard is playing here. I am pretty certain that rich people, on the whole, work much less hard than the working poor. Try holding down two jobs without a spouse and raising your two kids. Even if wealth were a matter of hard work, it is doubtful that hard work is the reason for the pay differential. Lee Raymond, the former CEO of Exxon, made 144, 473 dollars per day. Over a week, he made around 1,011,885 dollars. Now, this data comes from when he was 65 years old. I am not that old, but I know that I spend at least half and hour during the day in the bathroom, draining my bowels and such. In seven days, given this figure, that three hours and a half. Which would mean he was rewarded about 54,000 dollars for bathroom time. The maid or janitor that cleaned up the old man’s toilet in the Exxon building probably made 10 000 dollars less than that, if the janitor or maid was lucky enough to be paid union scale. In my opinion, there is something seriously wrong in a society that pays Lee Raymond more to take a shit in a week than the median household makes in a year.
Of course, one either has a republican spirit about concentrated power or one doesn’t. The modern day monarchists don’t. And they are getting the society they want. But I don’t think that society is going to benefit the many, who would absolutely love to go camping, too.

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Peter Thom 10.06.15 at 7:07 pm

Those who ‘believe’ that tax policy cannot change market driven inequality should consider these data points: US GINI coefficient before taxes and transfers, iow the measure of market driven inequality is the 10th worst among OECD countries. After taxes and transfers we enjoy the second worst inequality among same. The average improvement between both measures for the OECD is .163, while ours in the US is .119. We do the worst job through tax policy to ameliorate inequality, measurably so. Saying we cannot improve inequality through tax policy is like saying we can’t reduce gun-related deaths through firearms regulation, both examples of a kind of learned helplessness that has arisen since trickle down economics started waving its magic wand.

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Anarcissie 10.06.15 at 9:19 pm

reason 10.06.15 at 1:09 pm @ 41 —
Possibly Sam Chevre @40 was noting that a high income tax for the wealthy, in a context of leaving already acquired wealth in the possession of those who have it, would appear to the likelihood that the latter will be overtaken by more effective acquirers and thus stabilizes the financial configuration (and thus the social and political configurations) of the upper orders.

Of course this assumes those more effective acquirers will not find ways around the taxes, and that money doesn’t have the fictive character I attribute to it, so that it has some firm, transparent relation to value and labor — which one may doubt.

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SamChevre 10.07.15 at 12:47 am

Anarcissie reads me correctly: one notable thing about the 1930 to 1970 time period is how stable the group of the wealthiest people and institutions is.

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reason 10.07.15 at 8:37 am

SamChevre @49
And I remember in the same period that Milton Friedman quoted statistics showing that great fortunes were being dispersed within a few generations (arguing that worries about wealth concentration were unfounded – maybe there were will 70% effective marginal tax rates). If like many Keynesians, you think that consumption is a function not just of income, but of wealth, then reducing very high incomes may end up resulting in net dissaving. Maybe looking at few extreme cases (household names) is misleading. Have you some statistics. My impression was that overall social mobility was falling not rising.

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Anarcissie 10.07.15 at 3:10 pm

reason 10.07.15 at 8:37 am @ 50 —
There could be a lot of local churning within the realm of the very rich, while overall social mobility was falling. It might be hard to tell, because as I noted previously there is a significant degree of disconnection between wealth and measures of wealth, like money, in regard to the very rich, and they can keep a good deal of their business hidden anyway.

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que_es 10.07.15 at 3:39 pm

SamChevre: “one notable thing about the 1930 to 1970 time period is how stable the group of the wealthiest people and institutions is”

reason: “I remember in the same period that Milton Friedman quoted statistics showing that great fortunes were being dispersed within a few generations (arguing that worries about wealth concentration were unfounded”

U.S. trusts and estates law has evolved since the period in question in ways that make it increasingly easier to entrench wealth, and thus entrench the power that comes with it. Witness the rise of the spendthrift trust, the dynasty trust, repeal of rules against perpetuities, trust decanting, the gutting of the federal estate tax, and the strongest dead hand of all, the private foundation.

Private foundations live forever. Do we really want Bill Gates’s priorities to have that much influence?

David Rieff in the Nation, referring to private foundations like Gates’s: “for the first time in modern history, it has become the conventional wisdom that private business—the most politically influential, undertaxed, and underregulated sector among those groups that dispose of real power and wealth in the world, as well as the least democratically accountable—should be entrusted with the welfare and fate of the powerless and the hungry. No revolution, not even Fidel’s, could be more radical, and no expectation, no matter how much it was the product of ceaseless promotion in both old and new media, could be more counterintuitive, more antihistorical, or require a greater leap of faith.”

The income and wealth questions overlap but focusing solely on incomes misses much.

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Matt 10.07.15 at 4:59 pm

Private foundations live forever. Do we really want Bill Gates’s priorities to have that much influence?

David Rieff in the Nation, referring to private foundations like Gates’s: “for the first time in modern history, it has become the conventional wisdom that private business—the most politically influential, undertaxed, and underregulated sector among those groups that dispose of real power and wealth in the world, as well as the least democratically accountable—should be entrusted with the welfare and fate of the powerless and the hungry. No revolution, not even Fidel’s, could be more radical, and no expectation, no matter how much it was the product of ceaseless promotion in both old and new media, could be more counterintuitive, more antihistorical, or require a greater leap of faith.”

No, I don’t really think that we want Bill Gates to set up a foundation that runs on forever. Of course the Carnegie Corporation of New York was set up in 1911 and is still going. The Rockefeller Foundation dates from 1913. The Pew Charitable Trusts, 1948. I see the Gates Foundation as continuing a century-old tradition of plutocrats using their loot to set up curiously benevolent institutions that gradually crowd out memories of how the wealth accumulated.

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SamChevre 10.07.15 at 6:11 pm

Private foundations live forever. Do we really want Bill Gates’s priorities to have that much influence?

I do-sort of. That’s why I want a provision that runs private foundations out of funding about as soon as the founder’s priorities run out, unless they are regularly re-funded[1], rather than letting them live forever and be captured by the current elite.

I have less problem with the Gates Foundation than the Rockefeller Foundation.

1) With a slight caveat: I’d like the rule to be “you can’t have perpetual funding and pay high salaries,” since I think there may be things like graveyards or key historic sites that it’s appropriate to fund basic maintenance on in perpetuity.

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Bruce Wilder 10.07.15 at 6:58 pm

Even if the distribution and re-distribution of wealth in the “normal” operation of the economy was essentially random, wealth would tend to be persistent, and above some threshold, may tend to exert a gravitational pull that accretes still more wealth. Once you are “ahead” in the game, the insurance effect of wealth means that you are likely to remain ahead, indefinitely, even in a perfectly “fair game” akin to an endless series of coin tosses (and great wealth usually has sufficient power to make sure it is very unlikely to be a perfectly fair game). So, if you’ve won the lottery, and you don’t go around making crazy big bets subsequently or generally squandering it all, you and your posterity may continue to benefit for generations as a random sequence of smaller gains and losses may leave the legacy of the big win largely untouched.

Death and the vagaries of sexual reproduction may combine with the “creative destruction” of a dynamic economy to erode great wealth, but efforts to conserve wealth and rules that promote re-concentration, like primogeniture and entail, can be quite effective. Possessors of a large fortune have opportunities for portfolio diversification, but more perniciously, they may also have opportunities for rent-seeking and predatory lending, as I noted in a comment above. Great wealth may contain incentives to create and maintain great poverty, as a feedstock.

In Europe, the persistence of fortunes with a feudal pedigree are not all that uncommon, and not just in England, where the upper classes consist to a remarkable extent of beneficiaries of the Tudor Dissolution of the Monasteries. A number of landed fortunes managed to survive the upheavals of France following the Revolution, even re-assembling confiscated estates. There are a number of Princely families still in possession of city-center castles, scattered across Germany. Even in the U.S., the fortunes of Mayflower descendants or Californios have a way of seeing thru.

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Niall McAuley 10.07.15 at 9:24 pm

A number of landed fortunes managed to survive the upheavals of France following the Revolution, even re-assembling confiscated estates. There are a number of Princely families still in possession of city-center castles, scattered across Germany.

What number? Are things more or less equal now than before the Revolution?

All this “Oh there’s no point taxing the rich, they just dodge it with clever accountants” stuff is just lack of will. Execute a few billionaires, and the rest will pay up.

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The Temporary Name 10.07.15 at 9:30 pm

Execute a few billionaires, and the rest will pay up.

I wonder what the economic boost is in executing billionaires. If there was a drone strike on, say, a Walton family reunion would the subsequent settling of estates generate enough activity to qualify as a subsidy?

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bob mcmanus 10.07.15 at 9:53 pm

I wonder what the economic boost is in executing billionaires.

I would enjoy it, but probably minimal and not lasting. We got new billionaires in Russia after the Fall.

I would rather than taxing great income or great wealth, tax the 80-90% to as near equality as possible. Thus they have shared interests against the wealthy, and a shared interest in a large commons. In time that social solidarity should politically rein in the top. What, IMO, created the great compression (among other things) was not the top confiscatory rates, but the graduated schedule, such that a 1-5 thousand dollar raise if you are in the next-to-top quintile was not so big a deal.

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Ronan(rf) 10.07.15 at 10:29 pm

http://www.newrepublic.com/article/116462/family-wealth-lasts-ten-fifteen-generations

“Clark uses historical records to track surnames and social status over generations, and finds that rates of social mobility are surprisingly similar—and surprisingly slow— across societies as diverse as feudal England, modern Sweden and Qing Dynasty China. Most social scientists estimate that it takes about three to five generations for a family’s wealth or poverty to dissipate, but Clark says it takes a staggering ten to fifteen generations—300 to 450 years—and there’s not much the government can do about it. According to his calculations, if you live in England and share a last name with a Norman conqueror listed in the Domesday book of 1086—think Sinclair, Percy, Beauchamp—you have a 25 percent higher chance of matriculating at Oxford or Cambridge. If you’re an American with an ancestor who graduated from an Ivy League college between 1650 and 1850, it’s twice as likely that you’re listed in the American Medical Association’s Directory of Physicians.”

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Bruce Wilder 10.08.15 at 1:21 am

Clark’s data are intriguing, but I always stumble over his anti-institutionalism and his eagerness to resort to biological explanations.

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Peter T 10.08.15 at 4:13 am

Not just as BW said. I am intrigued by Clark’s findings, but I don’t wholly trust them. A look at the dataset shows first a number of assumptions replacing actual data and second, no consideration that the main metric (surnames) are, over more than a few generations, less genetic and more cultural. I think Clark is actually tracing the influence of persisting corporate lineages.

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que_es 10.08.15 at 2:46 pm

Clark’s explanations aside, if his findings have any credibility they speak to a need to disable those devices that facilitate wealth entrenchment. The U.S. is moving in the opposite direction. Today’s primogeniture and entail are alive and well in U.S. trust laws that accomplish the same thing under different names.

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Bruce Wilder 10.08.15 at 9:13 pm

N McA: Are things more or less equal now than before the Revolution?

A question that would be impossible to answer with a statistic, even if we had better data.

Ancien regime France, before the agricultural and industrial revolutions as well as the political overthrow of the Capet monarchy, was a society rife with particularism and privilege, on the verge of famine and financial ruin, decrepit in its dominance of Europe. 18th century France was a patchwork of localism; I do not know at what point a majority of the King’s subjects could be said to speak French. To be poor was to be at risk of starvation or any of the diseases that made the cities population sinks. To be really rich had its perks in splendiferous extravagance, but a low technological ceiling.

The Revolution abolished feudalism in law, but the elimination of hated feudal dues had no net effect on land rents. Serfs were rare outside the ironically named Free County (Franche Comte). The destruction of the Church broke existing structures for what we might think of as social welfare functions, and the poorest and least able of the poor suffered as channels for customary charity ceased to exist.

The privileges and status-seeking of the nobilities were corrosive. The old nobility “of the sword” had neither function nor responsibility. The old nobility told themselves a myth, according to which, the nobles were a different race from the stolid peasants. (Martial Franks ruling Gallo-Romans.) The society had become incredibly litigious, with many part-time lawyers pursuing the forlorn hope suits of the villains against the Lords, based on examining ancient charters and grants.

The experience of the shared effort of the nation in arms kindled a nationalism as well as new ideas about the merits of rationalism and the virtues of merit, replacing old ideas about the vital importance of ancestry and religion. (To be French was to be Catholic under the old regime.) The law and administrative practice was thoroughly rationalized.

It is hard to say when the Revolution finished with France. That France was republican was not settled until the advent of the Third Republic. By then, the new industrial economy was changing the scope for the distribution of income in profound ways.

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