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An attack on inequality

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"For all the political and economic uncertainties about health reform," writes David Leonhart, "at least one thing seems clear: The bill that President Obama signed on Tuesday is the federal government’s biggest attack on economic inequality since inequality began rising more than three decades ago."

A big chunk of the money to pay for the bill comes from lifting payroll taxes on households making more than $250,000. On average, the annual tax bill for households making more than $1 million a year will rise by $46,000 in 2013, according to the Tax Policy Center, a Washington research group. Another major piece of financing would cut Medicare subsidies for private insurers, ultimately affecting their executives and shareholders.

The benefits, meanwhile, flow mostly to households making less than four times the poverty level — $88,200 for a family of four people. Those without insurance in this group will become eligible to receive subsidies or to join Medicaid. (Many of the poor are already covered by Medicaid.) Insurance costs are also likely to drop for higher-income workers at small companies.

Finally, the bill will also reduce a different kind of inequality. In the broadest sense, insurance is meant to spread the costs of an individual’s misfortune — illness, death, fire, flood — across society. Since the late 1970s, though, the share of Americans with health insurance has shrunk. As a result, the gap between the economic well-being of the sick and the healthy has been growing, at virtually every level of the income distribution.

This is, in my judgment, the right way to reduce inequality. The government isn't very good at getting elbow deep in the economy and telling corporations how much they should pay their workers. It's one thing to set a minimum wage, but a whole other to decide the appropriate ratio between median worker pay and executive compensation.

The government is pretty good, however, at changing economic outcomes. And that's what's happening here. The tax code mediates between the economy we have and the society we want. The fact that the former is wildly unequal does not mean the latter need to follow along.

Graph credit: Center for Budget and Policy Priorities.

By Ezra Klein  |  March 24, 2010; 11:07 AM ET
Categories:  Inequality  
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Comments

In this context, John Quiggin's 2007 paper "The Risk Society: Social Democracy in an Uncertain World" remains interesting. http://cpd.org.au/sites/cpd/files/u2/JohnQuiggin_The_Risk_Society_CPD_July07.pdf

Posted by: bdballard | March 24, 2010 11:28 AM | Report abuse

That is probably the biggest source of confusion that I have regarding conservatives. Income has continued to pool among the people on top for decades. It doesn't look like it's leveling off or reaching some naturally ideal plateau. At some point why doesn't everyone think that this is a problem?

Posted by: MosBen | March 24, 2010 11:29 AM | Report abuse

"The government isn't very good at getting elbow deep in the economy and telling corporations how much they should pay their workers."

True. But unions are.

You want to stop middle-class wage stagnation? Want to see productivity gains shared with more than just the rich? Change the laws to let more people join unions.

Reagan's legacy isn't just the deficit and lower marginal tax rates--it's also breaking the air traffic controller's strike. He basically said that people demanding a fair day's wage for a full day's work would have a much harder time getting what they deserved.

It's been growth of inequality and middle class wage stagnation since then.

Posted by: theorajones1 | March 24, 2010 11:39 AM | Report abuse

Random question: Under the new law, if you're purchasing in the exchanges, can you use your government subsidy to fund your HSA? Or would it just go to subsidizing your HSA premium? Or neither?

Posted by: msh31 | March 24, 2010 11:41 AM | Report abuse

Using the PATCO strike as an example of anything meant to lead to favorable views of unions is probably a bad idea. Using air traffic controllers as an example of downtrodden labor is also probably a bad idea. Airline pilots in the environment of the past decade, maybe, but not controllers.

Posted by: bdballard | March 24, 2010 11:47 AM | Report abuse

The other great way to reduce inequality is to empower workers. EFCA, for instance.

It's about empowering people to fight for themselves, instead of having policy people determine those things.

I know, today's young white collar folks don't get unions. I know, you saw 'on the waterfront'. But, the reality is -- absent unions, the working class will continue to shrink. (Though, I'm very glad they won't die for not having a job offering HC anymore!)

Check out union workers, how many of them died for lack of health care? Not many. That's because labor is the only realistic avenue for working people to have a shot.

Posted by: rat-raceparent | March 24, 2010 11:48 AM | Report abuse

"Random question: Under the new law, if you're purchasing in the exchanges, can you use your government subsidy to fund your HSA? Or would it just go to subsidizing your HSA premium? Or neither?"

This law destroys HSAs.

Beginning in 2011:
Consumers can no longer use HSAs and FSAs to purchase certain items, including most over-the-counter medication prescribed by physicians. The penalty for making non-qualified purchases with an HSA increases to 20%.

And with the required plan medical loss ratio, the law essentially bans the high deductible plans that are sold in conjunction with HSA. So when Obama said you can keep your plan, we wasn't exactly honest. but to be fair, he probably doesn't consider HSAs and high-deductibe plans to be a health insurance plan.

Posted by: NoVAHockey | March 24, 2010 11:53 AM | Report abuse

Read Katz and Goldin's "The Race Between Education and Technology". They make a convincing argument that income inequality has emerged primarily as a result of educational stagnation in America. The nice thing about fixing the problem with better education is that it appeals to notions of fairness based both on "people who produce more should make more" and "everyone in America should be able to make a living".

Posted by: jeffwacker | March 24, 2010 12:09 PM | Report abuse

Exceptionally basic -- so basic that I'm embarrassed to ask it -- question: why is income inequality wrong? And I mean this from an economic or governing perspective, and not from a moral perspective. I suppose it creates some sort of instability in the polis, right? Any paper or article on this would be helpful.

Posted by: chiesq | March 24, 2010 12:16 PM | Report abuse

chiesq, I can't supply you with the articles you asked for, but I think a modification to your question is necessary. Few, if anyone, thinks income inequality is a problem in and of itself. Most people who believe it is a problem are focused either on the degree of the inequality or the fact that the inequality has been increasing and doesn't look like it's stopping any time soon.

Posted by: MosBen | March 24, 2010 12:24 PM | Report abuse

The main problem with income inequality (in my opinion) is that it leads to socioeconomic stratification and stagnation. As the top accumulates more money, it accumulates more power -- which is largely used to make sure that those in charge remain in charge and those that have the most continue to have the most.

If there was wide disparity, but also lots and lots of churn, I for one would be less opposed.

Posted by: gilroy0 | March 24, 2010 12:47 PM | Report abuse

You do realize that the top 1% of earners pay over 40% of income taxes, the top 5% of earners pay over 60% of income taxes , the top 10% pay 71%, the top 25% pay 87% all the way down to the top 50% of earners pay over 97% of income taxes. That means almost half the earners in this country don't pay a dime in income taxes. No wonder so many people are so enthusiastic about their "free" Obamacare. In other words 50% of society is subsidizing the other 50% government services. In a capitalistic society in general the higher your earnings the higher your productivity and the higher your worth to society. With some exceptions of course for inherited wealth. A lot of those higher income folks are also small buiness owners who employ a lot of those workers that make society go. So when you talk about the disparity of incomes and how we need to artifically lower that disparity by taxing the crap out of high earners remember a lot of them are your employers and they might just take their marbles and go home.

Posted by: RobT1 | March 24, 2010 12:58 PM | Report abuse

It is well established that the ratio between the lowest paid and highest paid employees in any given company has gone up dramatically during the same forty year period that has seen income per capita go down in real dollars for the bottom 80 percent of the country. It is hard to believe that this trend has had no impact whatever on growing income inequality. The way I conceptualize the trend is that of monopolists or oligopolists acting on a microeconomic scale. The control group of any given corporation cherry-picks directors, who, in turn, set the salaries for the control group, and those salaries are economically inefficient (i.e., not the price that anyone would pay in a truly open and free market). I believe that it is an appropriate role for government to police monopolists and oligopolists pursuant to the Sherman Act and other anti-trust legislation. Their behavior is anti-competitive and a perversion of the capitalist system. I see no reason to make exception for corporate executives, treating localized employment markets as monopolist create markets for goods. If we can identify deadweight loss in other markets, I do not understand why we cannot here, and actually have the government set an economically-tested rate for an appropriate lowest salary to highest salary ratio.

Posted by: rawlsian | March 24, 2010 1:06 PM | Report abuse

@G0: If there was wide disparity, but also lots and lots of churn, I for one would be less opposed.

Well there has never been a society that had wide wealth disparity and much if any social mobility. Just look at Mexico or most of latin and south american countries. The vast majority of those countries are de facto ruled by oligarchies that tend to be hereditary. This is the region of the world with the biggest income disparity. Coincidence?

Posted by: srw3 | March 24, 2010 1:15 PM | Report abuse

RobT1 - you are aware that there are taxes other than income taxes, aren't you? I've seen your talking point many times and it never mentions anything but income tax.

Posted by: tl_houston | March 24, 2010 1:15 PM | Report abuse

Rawlsian,
What you said was absolute gibberish.

Posted by: novalifter | March 24, 2010 1:16 PM | Report abuse

@ RobT1 : Even if the rich pay the majority of income taxes that are moderately progressive, their total tax burden as a % of income is still much less that the other 90% of people. Poor and middle class people the vast majority of the regressive taxes, sales, FICA, medicare, taxes, fees (a kind of tax) for vehicle registrations and other services (building permits, commercial licences, etc.)

As Warren buffet said, "I pay a smaller % of my income in taxes than the person that cleans my office at night."

So no I don't feel the least bit bad about wealthy and oligarchs paying the majority of income taxes.

And where are the rich going? Will they really renounce their citizenship and move to Monaco? I think not.

Posted by: srw3 | March 24, 2010 1:22 PM | Report abuse

novalifter, my point is that the markets are not determining executive pay. Market failures are determining executive pay. You get an efficient price where supply meets demand, which requires true competition on the supply side. If there is only one supplier in town, he can set whatever price he wants, as long as there is some demand for the product, by manipulating supply. Executive pay, in today's marketplace, is like this model. Those supplying executive labor, i.e., corporate executives, have too great an influence over who gets to be on boards of directors, i.e., those who decide what those executives are paid. If you could set your own salary, wouldn't you pay yourself more than what your work is worth? Well, that is what is happening across the country today. The erosion of corporate governance has led to economically inefficient executive salaries. These people are taking advantage of market failures they have created, and, through increasingly flattening taxes, they have been able to retain an ever-increasing amount of their ill-gotten gains.

Posted by: rawlsian | March 24, 2010 1:56 PM | Report abuse

"The academic literature on inequity is brimming with anecdotes on how the wages of the poor are stagnant while wage growth is primarily clustered around high-wage workers. But these studies tend to count only cash “take-home” pay. Writing in the National Bureau of Economic Research, researchers found was that (non-cash) health benefits substitute for (cash) take-home pay. When total income is considered, the poor and middle-class wages have not been stagnating, as many suggest."

* Between 1995 and 2008, the lowest 10 percentile of workers (aged 25-61) wages only rose 1.93%. But when total compensation is included, the increase was 12.28%.
* During the same period, the highest 10 percentile of workers (aged 25-61) wages rose 10.48%. But when total compensation is included, the increase was 11.67%.

http://papers.nber.org/papers/w15811
http://www.john-goodman-blog.com/high-wage-workers%E2%80%99-wages-not-outpacing-wage-workers/

Posted by: staticvars | March 24, 2010 2:22 PM | Report abuse

Srw3,

Warren Buffett actually does pay more in taxes than the person who cleans his office at night. In the year he said that, I believe Buffett mentioned his effective tax rate was 17.7%. This implies a lot of capital income.

But capital income is taxed first at the corporate level, at an average rate of 29.3% in 2007 per BEA data. So instead of Buffett's perceived income tax rate of 15% on capital, it was actually more like 39.9% (100 - (100 x 29.3%) = 70.7, 70.7 - (70.7 * 15%) = 60.1). The actual rate depends on the profitability of the companies he owns - could be more or less depending (some of it could be foreign as well). At the end of the day, a lot of Buffett's tax bill was paid by someone else on his behalf.

Also, part of buffet's tax is paid in inflation tax (both directly and capital gains paid on inflated asset prices).

Assume you hold a corporate stock which appreciates at 10% per year and pays a 2% annual dividend, the after tax portion of which is reinvested at the start of the following year, and that inflation is 3%. By my calculations, the reduction in inflation-adjusted value as a direct result of taxes is equivalent to a 23.3% tax on the investment's real total return (this is the difference in real purchasing power between having taxes on 15% tax rates on capital gains and dividends as opposed to no taxes on capital gains or dividends). Run the same numbers assuming 2% appreciation rather than 10%, and the effective tax rate on real total return was 86.4%.

I will say that I agree with most people that private equity and hedge fund compensation is labor income and not capital income, and should be taxed as labor income.

Posted by: justin84 | March 24, 2010 2:27 PM | Report abuse

Staticvars, your point is well-taken. If the study you cite counts the economic value of healthcare conferred upon workers, may I also assume that it counts stock-options, which ultimately are subject to capital gains taxation instead of the income tax? Or does it exclude such compensation, as do many of the posts above, elegizing the plight of the wealthy in America, who, though they may pay a great share of income tax, shoulder an increasingly smaller percentage of the overall tax burden in this country?

Posted by: rawlsian | March 24, 2010 2:33 PM | Report abuse

In looking at that chart I noticed that the share of pre-tax income going to the top 1% soared in the mid 1980s - right about the same time as the 1986 tax reform - with the highest earners taking in an additional 3%-4% of pre-tax income.

The same thing occurs in the 1920s - the top marginal rate fell from 73% in 1921 to 25% in 1925, and suddenly we see soaring pre-tax income.

In the mid 2000s, there were several prominent trends in business, notably the surge of private equity and hedge fund activity which are taxed at 15%.

The 1990s surge (and 1928/1929) is probably in part a reflection of capital gains from the tech boom.

I'm wondering then how much reporting has to do with the apparent increase in pre-tax income going to the top 1%. The powerful surges in the mid 1920s and mid 1980s suggest at least some of the increase pre-tax income is due to a decrease in tax evasion.

When the marginal tax rate is 91% (not even counting other taxes imposed at other levels of government), the return to tax avoidance / evasion is 1,011.1%. Each dollar you don't report or can avoid reporting in taxes increases your take home pay from 9 cents to 100 cents. With a top rate of 50%, that drops to 100.0%. With tax rates at 28%, the return to evasion is just 38.9%. At a rate of 15%, it falls once again to 17.6%.

Of course, I'm not going to deny the obvious trend of CEO compensation gains rapidly outpacing those of regular workers - there has been an increase in inequality over the last 20-30 years. I'm just wondering if some of that increase in inequality isn't simply the result of reducing extremely strong disincentives to report income.

Posted by: justin84 | March 24, 2010 2:44 PM | Report abuse

Rawlsian,
Again, you are not making a whole lot of sense. Executive pay is not the result of a market failure, it is a market outcome. It might not be an outcome you like, but it still is an outcome. You need to bone up on your labor economics before you say these things.

Posted by: novalifter | March 24, 2010 2:47 PM | Report abuse

@rawslian

In 2007, the top 1% paid 40.42% of the income tax. The top 10% paid 71.22%. The bottom 50% paid 2.89%. In 2006, it was 39.89%, 70.79%, and 2.99%. In 2005 it was 39.58%, 70.30%, and 3.07%. Going back to 1999, it was 36.81%, 66.45%, and 4%. The tax burden and the tax burden trend are not as you describe.

http://www.ntu.org/tax-basics/who-pays-income-taxes.html

I would guess that the study does not include options specifically, simply because they are not of constant value, except upon exercise, which does not occur in the tax year of their granting. I would imagine that many options granted in the past ten years are underwater. It is also important to remember that all profits associated with the shares of stock those options are connected to is being taxed via the corporate entity, as they do not accrue to the individual.

Posted by: staticvars | March 24, 2010 2:53 PM | Report abuse

That data is 5 years old. I would like to see how the line moved since 2007.

Posted by: lancediverson | March 24, 2010 2:57 PM | Report abuse

Novalifter, it is curious to accuse me of writing "absolute gibberish" and "not making a whole lot of sense," when all you offer beyond personal invective is tautological argument. That an outcome occurs in what you call a free market does not necessarily equate with, practically speaking, a free market outcome. Do you not believe in market failure or inefficiencies? It would seem rather naive this soon after such an historic example of market failure, i.e., an inability for the market to adequately self-correct, to be making such an argument. Neoclassical economic theory only pertains when the assumptions of market transparency and competition actually hold. It is fairly obvious that they are not holding in this area today. You can disagree with me, you can even substantiate your disagreement with me, but your namecalling proves nothing and reflects poorly on your argument.

Posted by: rawlsian | March 24, 2010 3:08 PM | Report abuse

You see, this is why I've always had a problem with the deification of Ronald Reagan. It seems to me if you look at the chart, he was completely wrong about his tax reform saving the country. And yet I still get patted on the head and told I'm Idealist but this is the Revolution that benefits everyone.....eventually. things trickle down slowly. I think since 1986 this have been trickling up!

Posted by: gnessin | March 24, 2010 3:11 PM | Report abuse

staticvars, (a) the tax burden you are talking about is the income tax burden, not what percentage of overall tax revenues each income group pays -- obviously, higher earners pay more income tax because we have a graduated system -- but your comments are not responsive to the overall tax burden, i.e., who pays what percentage of overall tax revenues; (b) as to stock options, the DOW speaks for itself, and flooding Wall Street with liquidity (which I did and do support under the circumstances) has led to a pretty solid rebound to stock prices.

Posted by: rawlsian | March 24, 2010 3:14 PM | Report abuse

@rawlsian,

Another thing to note is that some stock options (the ones exerciseable immediately) are considered regular employment income for tax purposes.

For stock options to receive the capital gains tax rate, they need to be held for several years, exposing the recipient to market risk (as staticvars said, many of these options from '06 & '07 are currently worthless) as well as delaying compensation.

In addition, stock option income taxed as capital gains often gets taxed again due to AMT.

http://www.nceo.org/main/article.php/id/16/

Posted by: justin84 | March 24, 2010 3:16 PM | Report abuse

Justin 84, thanks for the comments. They are informative. I would point out, however, despite the inaccuracy of my comments concerning the tax treatment of stock options, the main thrust of my earlier comment was not about tax treatment, but about lower income bracket wage stagnation. I just was curious whether the study to which staticvars cited, which intended to debunk the notion that such stagnation has been born out, took stock options into consideration when determining whether income has gone up in the upper quintile of income per capita, and to what degree. But, nevertheless, your comments are well-taken.

Posted by: rawlsian | March 24, 2010 3:33 PM | Report abuse

Ezra,

Stick to spinning things you understand. First, how about you show us a graph of after-tax income? Even assuming your warped world view, wouldn't that be a better way to show whether the tax system is taking enough money from people who produce something and giving it to people who produce nothing. Second, you seem to assume income inequality is bad? Why? Should you earn the same thing as a parking-lot attendant? (Hmmm.) What the system should do is encourage social mobility, for poor people to get rich (and for rich to get poor). Your boss Obama is doing exactly the opposite: he is making it harder for people to get rich and easier for them to stay poor. He does nothing to tax the true rich, who live off of lightly-taxed investment income. Maybe that is so that they can have more to give to his campaigns? Oh, and he's adding an entitlement that can only be paid for with inflation (a tax on the poor) or a value added tax (a tax on the poor). But apart from that, yeah, man, spot on!

Posted by: HT12 | March 24, 2010 3:51 PM | Report abuse

Take a look at my book, The Politics of Income Inequality in the United States (Cambridge University Press), for some analysis of political dynamics and reductions in inequality that take place through the market and via more traditional redistribution.

Posted by: nathanjkelly | March 24, 2010 4:17 PM | Report abuse

@ justin84 :Warren Buffett actually does pay more in taxes than the person who cleans his office at night.

As Warren buffet said, "I pay a smaller % of my income in taxes than the person that cleans my office at night."
Master of the obvious. Of course the amount is higher. As you no doubt note I didn't say anything about the absolute amount, it is the effective tax rate as a % of income.

"But capital income is taxed first at the corporate level, at an average rate of 29.3% "

Hey corporations are people too, remember citizens united? Their income going out as dividends or stock gets taxed before they are distributed. This makes perfect sense to me.

Despite your calculations, rich people continue to own stock in great amounts and below median income people don't. If it wasn't profitable to get capital gains by owning stock, I am sure they will move their money elsewhere. And despite this "onerous" tax structure, the income of the top 5% has grown astronomically mostly as a result of capital gains, stock, CDs, etc.

Posted by: srw3 | March 24, 2010 4:55 PM | Report abuse

Srw3,

You said:
"Master of the obvious. Of course the amount [of taxes Warren Buffet pays] is higher. As you no doubt note I didn't say anything about the absolute amount, it is the effective tax rate as a % of income."

While your statement is correct, focus on the context please. My argument was clearly focused on effective rates, not absolute dollar value of taxes.

You said:

"Hey corporations are people too, remember citizens united? Their income going out as dividends or stock gets taxed before they are distributed. This makes perfect sense to me."

Corporations can pay for ads, but ultimately the owners are taxed. It is their incomes which are ultimately reduced by the corporate income tax. You have to count these taxes as taxes paid by the owners of the corporation (e.g. Buffett). It's like the employer share of FICA. That is essentially a tax on the employee that is paid for by the employer without the employee ever needing to know it existed.

You said:

"Despite your calculations, rich people continue to own stock in great amounts and below median income people don't. If it wasn't profitable to get capital gains by owning stock, I am sure they will move their money elsewhere. And despite this "onerous" tax structure, the income of the top 5% has grown astronomically mostly as a result of capital gains, stock, CDs, etc."

I'm not saying it's a bad decision to own stocks. I'm only saying that capital is taxed more heavily - and more fairly - than most people believe. Why do rich people continue to own stock - well there are many reasons. Well, first the rich might not even know how much they are paying (exhibit A, Buffett). Lots of them think they are only paying 15% - but then they forget that the businesses they own are taxed themselves, or that their investments lose value to inflation, or that they pay capital gains tax on inflationary gains. Also, stocks still provide positive returns despite the taxes. If you don't want to blow your entire $5,000,000 bonus on a new house and a few Maseratis to decorate the drive way, you're going to need a savings vehicle and stocks often provide the best long run absolute returns despite taxes.

Posted by: justin84 | March 24, 2010 6:24 PM | Report abuse

@rawlsian
You wrote: "The tax burden you are talking about is the income tax burden, not what percentage of overall tax revenues each income group pays -- obviously, higher earners pay more income tax because we have a graduated system -- but your comments are not responsive to the overall tax burden, i.e., who pays what percentage of overall tax revenues;"

No, you need to read the chart. What I am talking about IS the percentage of overall tax revenues each group pays. The bottom 50% of earners are currently responsible for less than 3% of the income tax.

Posted by: staticvars | March 24, 2010 10:16 PM | Report abuse

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