Income growth shares over time

Any other ideas?

By your reasoning… raise the top rate of income tax to 100% and redistribute the money into well-paid publicly funded jobs.

@3: Well, if we’re fantasizing about solutions that are politically impossible anyway, we might as well close those loopholes and crack down on tax-sheltering behavior, too.

But I think what we really need is more bargaining power for workers, i.e. revival of unionization. Or something even more radical like mandatory profit-sharing: what if every corporation were required to distribute 50% of its profits to its workers, per capita, and the other 50% could be retained or paid out as dividends to the shareholders? (We could eliminate the corporate income tax at the same time, either replacing it with other taxes or treating the distributions to workers as taxable.)

I don’t know why Saez picked 1970, but to me it looks like the inflection point on the graph coincides with the administration of one of the most anti-union and anti-worker presidents in American history, Ronald Reagan.

Although it’s hard to say because the graph shows income and not income share, so (e.g.) the economic growth that occurred during the Clinton administration coincides with growth in the absolute income of the top 1%.

Also, failure to use a log scale makes it hard to read any line but the top one because everything else is crammed into the bottom half-inch (and hard to see any trends from the earlier years except for the biggest, i.e. Great Depression).

“I don’t know why Saez picked 1970,”

He didn’t. The graph is interactive – you can pick any two points you like and see what happened between them.

Tim Worstall assumes that the amount of money people have post redistribution will have zero effect on their future pre tax and pre redistribution incomes. That is an absurdly radical proposition and I would like to see some evidence of that. All the research indicates that if the masses get more money (even if it is post redistribution), they eventually get more of the economic pie (pre redistribution) as well.

“All the research indicates that if the masses get more money (even if it is post redistribution), they eventually get more of the economic pie (pre redistribution) as well.”

That’s not what the graph above is showing us really, is it? There’s absolutely more redistribution now than there was in 1917 after all…..

So we cannot tax people more, redistribute more, to change this distribution, because we’re not counting the taxing and the redistributing in the first place.

And yet, as we see, tax and redistribution policies nevertheless correlate very strongly with changes in the distribution. An amazing coincidence, that.

If you raise tax rates on the very rich, they will report a lot less taxable income. E.g., they will take more of their income as non-taxable fringe benefits, they will borrow against appreciated assets rather than report capital gains, they will engage in tax shelters which don’t make sense at marginal rates of 39% but do make sense at higher marginal rates.

So? It still seems to have been better from a wage standpoint to have been in the bottom 90% back when the rich were hiding their money from marginal rates far in excess of 39%. Or even microscopically in excess of the current top marginal rate.

These changes will not decrease inequality in consumption, security, or power, but they will reduce measured income inequality

So?** If there’s no point to using progressive taxation and labor-friendly laws to decrease actual inequality, but at least incomes for the bottom 90% will go up rather than down, why not do it anyway? (Hint: the logical extension of your argument, which is that we might as well not tax rich people at all because they can afford tax shelters, was stupid back when George W. Bush used it, and hasn’t become less stupid in the meantime.)

**I mean, as someone with occasional Luxemburgist sympathies, I’m still bothered by persistent inequality in security and power even under a progressive taxation regimen, but I strongly suspect that y81 is not calling for a revolution by the working class as a remedy.

Interesting: although no one seems to like that very much when the banks do exactly that.

I didn’t know the banks divided their bonuses equally so that every teller, customer service representative, and janitor received the same bonus as the CEOs. (For that matter, the bonuses themselves were notoriously not that well correlated with profits.)

Well, actually, they probably outsource their janitorial (which is something that would have to be looked at in formulating a profit-sharing rule; off-books employees should share too, but then you have to legally define them), but you get the point.

but you get the point

That would be a first…

Emmanuel Saez and Thomas Piketty respond to concerns raised by Alan Reynlolds – similar to Tim’s – here: http://elsa.berkeley.edu/~saez/answer-WSJreynolds.pdf. A relevant quote:

Our measure of income is cash market income defined as gross income reported on tax returns less government transfers such as Social Security or Unemployment Insurance. Personal income is a broader measure of income which also includes non-cash market income such as fringe benefits from employers, imputed rent for homeowners, under-reported income (due to tax evasion) but also government transfers such as Medicare, Social Security. Conceptually, it makes more sense to focus either on market income (before deducting taxes and including transfers) or on disposable income (market income net of taxes and including transfers). We chose to estimate inequality based on (cash) market income but it would certainly be interesting to estimate inequality based on disposable income as well to assess the effects of government taxes and transfers on inequality. The official concept of personal income is not appropriate for either computation because it mixes market income with transfers but does not subtract taxes. Alan Reynolds points out that transfers have increased since 1980 but taxes on high incomes have decreased substantially. Actually, we have estimated that the average Federal tax burden on top 1% families has decreased from 44.4% in 1980 to 30.4% in 2004. The decrease in taxes at the top outweighs the increase in transfers at the bottom. Therefore, the top 1% disposable income share has most likely more than doubled since 1980.

Shorter: http://tinyurl.com/4vd5z2v

“I strongly suspect that y81 is not calling for a revolution by the working class as a remedy.”

My concerns are entirely epistemological, not axiological. I am calling for skepticism about using tax data to measure incomes. Over the past forty years, people in the lower tax brackets have received an increasing share of their income in the form of non-taxable health care benefits, while, as I noted, lower marginal tax rates have encouraged the rich to take more of their compensation in taxable forms.

I think survey data is more accurate than Saez’s tax return-derived data. I realize that most surveys don’t have large enough sample sizes to supply accurate information about the top 1% of the population, but I think Saez underrates the problems with using tax return data to obtain a portrait of that sub-population.

Kieran, thats some deliciously devious phrasing of possible implausible hypotheses.

y81
“Other ideas? If you raise tax rates on the very rich, they will report a lot less taxable income. ”

It’s amazing how loudly the right repeats that mantra, while even more louding opposing such tax increases (in fact, fighting hard for tax cuts).

If they actually believe that, they wouldn’t do it.

Hektor Bim 02.10.11 at 3:18 pm

“Tim Worstall assumes that the amount of money people have post redistribution will have zero effect on their future pre tax and pre redistribution incomes. That is an absurdly radical proposition and I would like to see some evidence of that. All the research indicates that if the masses get more money (even if it is post redistribution), they eventually get more of the economic pie (pre redistribution) as well.”

In addition, the financial elites will have less available money to bribe politicians to further secure more money to bribe politicians……

Am I the only one who finds a problem with #21’s assertion that lower income individuals are getting an increasing share of their income as non-taxable health benefits? Like “income” that’s prespent for costs over which they have no control.

How about the oil people getting an increasing share of their income in military expenditures to make sure their overseas sources remain secure?

I’m with Tim Worstall in being annoyed about the perennial prevalence of inequality analyses that ignore transfer income.

“the bottom 90 percent of the income distribution typically chose not to partake of annual increases in total income”

If you have a given level of consumption that satisfies, and some of the means of securing that consumption is handed to you through welfare payments/subsidies etc., then you may rationally choose to decrease effort toward securing wage income.

A rare instance of a statement that’s not quite as blatantly absurd as intended by the speaker. It is indisputably true of at least some individuals.

@stubydoo:

Annoyed you may be, but Piketty and Saez have good reason to make the choices they do (see link 19 above). And they are not going to bang their head and say “Doh! why didn’t we think of the transfer income?” Plus, they do say this (repeating myself):

Actually, we have estimated that the average Federal tax burden on top 1% families has decreased from 44.4% in 1980 to 30.4% in 2004. The decrease in taxes at the top outweighs the increase in transfers at the bottom. Therefore, the top 1% disposable income share has most likely more than doubled since 1980.

Personally I get annoyed about the perennial prevalence of critics who don’t want to think hard about the problem, but are looking for a way to dismiss what results can be properly measured.

Steve @32 – yes but it still means that what you’re measuring is annual wage income (plus realised capital gains FWIW). It doesn’t tell you whether or not someone is recieving increasing benefits from the nation’s prosperity. Just because someone accumulates a small amount of wages in a year doesn’t mean they’re stuck in a low-paid-job poverty grind. That’s something I know from personal experience.

tomslee,

Your link @19 is about the top 1%, and I do not disagree with it. But my post (and Kieran) were focussed on the bottom 90%. Since I actually support increased transfers as a remedy for the poor (but of course certainly not for everyone in the bottom 90%), a measure that actually registers any progress that my preferred policy makes towards its goal makes more sense (and is not by any means unavailable).

Other folks here also worry about the middle class being screwed, but my perspective is a little different. There is certainly a lot of serious affluence floating around in that bottom 90%.

I’ve seen such graph for a decade now (I had the chance to witness the stunt Piketty pulled to first access French data); it puzzled me like many here. On aspect is the orders of magnitude at stake: tax redistribution are an order of magnitude below the inequalities at stake here. It is even more obvious when considering the better paid extremes. Just afterwards, I was taught about ‘new tools’ in Corporate Finance, ERPs and Transaction costs economics. Since, I’ve been convinced that the distribution is actually the result of technological innovation that increased productivity but that, also and mostly, allowed companies to grow beyond any reasonable measure, allowing to revenues to concentrate into less managers or far larger structures. A correlation with structure size was actually one of the first thing Piketty did, back then. So far, I’ve have hardly any success with the idea, but it matches the orders of magnitude better than the marginal tax rates.

If the discussion is political, and about “resolving the issue,” massive redistribution would be at stake, well beyond what could be accepted as tax rate. It would therefore have to take form of a plan to give employees equity; such plans have been riddled with abuse, mostly levering employees’ lack of coordination. I think we can move pass that, opening the capital of the most modular teams, as independent entity, first—as I’ve explained elsewhere.

Between 1950 and 1971, the bottom 90% SHARED 70% of the growth.

Between 1971 and 2008, ALL growth went to the top 10%; income for the bottom 90% even declined.

So, as far as indeed only income as defined here is concerned, the difference principle was met when Rawls was writing TJ, but it wasn’t between its publication and now…

If you have a given level of consumption that satisfies, and some of the means of securing that consumption is handed to you through welfare payments/subsidies etc., then you may rationally choose to decrease effort toward securing wage income.

Compare this with:

If you have a given level of consumption that satisfies, but none of the means of securing that consumption is handed to you through welfare payments/subsidies etc., then you may rationally choose to decrease effort toward securing wage income.

Which may also be true. Perhaps every person currently waged, fearful of losing his or her job, is already making maximum effort. But I seriously doubt it. And so I don’t see that state transfers are necessary for disincentivisation.

James Kroeger @42
Yes!

Long time no see – where have been?

And aren’t such policies- gov spending, progressive taxation- heavily dependent on union involvement in electoral politics/lobbying?

Yes. That’s one of the reason movement conservatism deliberately set out to destroy unions in the first place, and also one of the reasons the US’s Overton window has lurched so far to the right after they succeeded. There’s nobody speaking for workers in any kind of organized way anymore.

Income distribution is a very political issue; but the desirability of a tight labor market is *also* a very political issue. (Especially if you’re balancing it against inflation. These days there’s not much balance going on — 9% unemployment is more politically acceptable than 5% inflation, let alone 9% inflation.)

chris, 47:

Income distribution is a very political issue; but the desirability of a tight labor market is also a very political issue. (Especially if you’re balancing it against inflation. These days there’s not much balance going on—9% unemployment is more politically acceptable than 5% inflation, let alone 9% inflation.)

More ‘balance’ is obtainable, but only if the educated class loses some of its irrational fear of inflation.

Worrying about how much money they are really getting from their financial investments has turned many of the wealthy into inflation ‘hawks.’ They embrace the notion that they are privy to a rather sophisticated understanding of how fiat-money-based-economies really work, but they are actually quite clueless.

Yes, it is true that—in an economy blessed with price-inflation—nominal gains in income do not guarantee that any improvement in purchasing power has actually been achieved. But it is also true that—generally speaking—inflation is always and everywhere harmless when it comes to the purchasing power of the general population. (Yes, those on fixed incomes would be likely to ‘lose out’, but that is a problem that is incredibly easy to fix.)

Generally speaking, in an inflationary economy, it is not possible for prices to rise to levels that consumers cannot afford. In most markets, suppliers charge the highest prices that the market will bear. It they charge more than their customers can afford, then their products will go unsold, forcing them to lower to prices that are, again, affordable.

If/when that happens, what happens to the inflation? Dropping prices are the only sign that some people are losing out.

As long as every effort is being made to produce goods/services/experiences and bring them to market, then it just isn’t possible to do any better. It doesn’t matter what the ‘numbers’ say; you will only be able to get ahead if you can increase your nominal income relative to everyone else.