Economics

The Income Gap's Credibility Gap

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A new study from the Cato Institute's Alan Reynolds argues that income inequality is exaggerated:

Tax changes induced thousands of businesses to switch from filing under the corporate tax system to filing under the individual tax system. Corporate executives switched from accepting stock options taxed as capital gains to nonqualified stock options taxed as salaries. The huge growth in tax-favored savings plans, such as 401(k)s, has resulted in billions of dollars of investment income disappearing from tax returns. Meanwhile, studies of inequality that are based on tax return data usually exclude transfer payments, which results in exaggerating the shares of income received by those at the top by ignoring growing amounts of income at the bottom.

[…]

In sum, studies based on tax return data provide highly misleading comparisons of changes to the U.S. income distribution because of dramatic changes in tax rules and tax reporting in recent decades. Aside from stock option windfalls during the late-1990s stock-market boom, there is little evidence of a significant or sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth over the past 20 years.

Of course, there's also the question of whether income inequality is really something we ought to worry about , anyway.

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  1. We should worry about the income gap if we’re worried about the quality of society we have. Robert Anton Wilson recognized the benefits of balance:

    “The Democratic Socialism which by learning to co-exist with free enterprise, has permanently improved life in Europe, Canada and most of the industrial world, outside the U.S.” (http://hostgator.rawilson.com/trigger2.html)

  2. As libertarians, we shouldn’t worry too much about income inequality that is merited. Some, however, is undoubtedly due to unmerited behavior – such as rent-seeking by corporations, lawyers taking advantage of a legal system that doesn’t force losers to pay,
    medical practitioners scamming the medicare system, and executives getting their buddies onto the board in order to approve huge compensation packages “under the radar” of stockholder oversight. It is all these unmerited examples that the media is going to focus on and stir up populist resentment against all wealth. As Libertarians, we need to be quick to oppose practices – whether by government or individuals or corporations – that put unearned wealth into the hands of some.

  3. One thing that always puzzled me about the income-gap worriers.

    Why should it matter to me if my neighbor is X2, X10 or X100 richer than me?

    If my neighbor doubles his wealth overnight, all else being equal, how am I any worse off?

    If it is wrong for me, acting on my own, to rob him of some of that wealth in the name of “social justice” why is it OK for a large mob of people to do so – so long as they call it government?

  4. “We should worry about the income gap if we’re worried about the quality of society we have. ”

    Care to elaborate? At least a little bit?

  5. Assuming income inequality is real and growing, we should worry about only insofar as (1) it serves as a pretext for more statism and/or (2) it leads to civil unrest.

  6. “The Democratic Socialism which by learning to co-exist with free enterprise, has permanently improved life in Europe, Canada and most of the industrial world, outside the U.S.”

    I wonder if it is ever mentioned that most of that benefit has been archived at the expense of US tax payers in the constructions and deployment of our military over the past 70 years.

    It is not as if Europe and Canada and Japan are successful because they redistribute wealth from their rich to benefit their poor…they are redistributing wealth by taking it from everyone in the US and spending it on golden cradle to grave social programs for their citizens.

    But I should not even bother…it is not as if the left here that masquerades as libertarians will ever understand the fungibilty of money.

  7. If my neighbor doubles his wealth overnight, all else being equal, how am I any worse off?

    You feel bad about yourself.

  8. tarran,

    People assent to live peacefully and lawfully in society to the degree that they perceive themselves to have a fair shot. If people don’t perceive it this way, they’re not going to live by the rules, whether this means corruption in their professional and public duties, black-market economic activity, or subversion and revolution.

    People respond to incentives. If they have not incentive to respect your life, liberty, and property, they won’t. If there is sufficient opportunity for most people to get ahead by living peacefully and lawfully, they will. If there is not, they won’t.

  9. I’ve been thinking lately that it would be good policy, and consistent with libertarian principles, to increase estate and inheritance taxes (e.g. on all estates over $50k) if by doing so we can decrease income taxes (and to decrease overall government taxing and spending, of course), for the following reason: the natural right of a dead person to control his property, and the natural right of his heirs to property they did not earn, is on far shakier ground than the natural right of a living person to the use of the fruits of his own labor. A beneficial incidental effect of such a policy is that it would naturally be quite progressive, reducing the disparity between those who start life with a silver spoon in their mouths and those who don’t. Those towards the bottom of the income ladder, who barely have enough to get buy, will have to pay less of what they do earn in taxes (since they likely will not have any estate when they die) than those who have been successful enough to amass an estate and leave something for their heirs. This income tax relief at the bottom of the economic ladder would hopefully lessen the perceived for government welfare programs, etc. I, for one, would rather be taxed when I’m dead than when I’m alive.

  10. Excellent points on the creation of wealth through 401(k) plans by those in the lower quintiles of income.

    IMO, income earners are divided into quintiles so as to facilitate the implementation of harsher taxes. Why not divide the taxpaying population into tenths instead? Because that changes the picture entirely showing that the bottom 50% of income earners pay no income tax at all.

  11. “I wonder if it is ever mentioned that most of that benefit has been archived at the expense of US tax payers in the constructions and deployment of our military over the past 70 years.”

    Indeed. The Canadian and European welfare states existences have been enabled by living under US military protection for decades.

    Of course the original quote you were responding to about “Democratic Socialism” “permanently improving life” in Eurpope, etc. is patently absurd to begin with.

  12. Those towards the bottom of the income ladder, who barely have enough to get buy, will have to pay less of what they do earn in taxes

    John, those people don’t pay any income tax now.

    Aside from that, I have a right to dispose of my meager holdings at my death or before hand in any way I choose. THAT actually would be in keeping with libertarian principles.

    Now, if you are faced with an oppressive and immoral tax system you should work toward a neutrality that favors nobody. No social engineering through taxation.

  13. The libertarian quadrant is theoretically divided in half between left and right, if one looks at a Nolan Chart. Those in the libertarian quadrant to the right of center tend to sympathize with Randian objectivism, and even a Darwinian economic approach. Thus, income inequality means nothing to them other than more incentive to get ahead.

    Those of us to the left of center find Randianism elitist, and see no contradiction between freedom and equality (recognizing that there is not and never will be any such thing as pure equality in a market society, but we can move towards it.) In fact, we find libertarianism more progressive than socialism, as it stimulates a small business sector by reducing barriers to entry (creating more jobs and giving the poor an alternative to welfare dependency or pawning for a corporation), enforces property rights (reducing environmental degradation and holding polluters fully responsible for the costs they inflict upon society) and improves education and healthcare (school choice, competition the health insurance industry, etc.). Of course, libertarianism opposes war, the war on drugs, government abuse and state corporatism, and supports immigration, personal freedom and human rights. But the values of the left and the means of libertarianism are actually as compatible if not more so than the values of the right.

    Whether or not we should care about economic inequality is a question of values that each half of the libertarian quadrant would answer differently. The moderate left section of the libertarian quadrant is the closest descendents to the classical liberals, whose economic progressivism is often ignored. Economic progressivism was the justification Adam Smith made for capitalism, and that the left chooses to ignore the progressive benefits of capitalism in favor of perpetually failing state solutions shows why the Left needs to understand economics.

  14. “IMO, income earners are divided into quintiles so as to facilitate the implementation of harsher taxes.”

    And they never point out the fact of income mobility in that the set of individiuals in any given quintile at any point in time is not the same set of people measured at a different time.

    When the columnists and talking heads start talking about income quintile variations, they invariably give the impression that everybody in the lower quintiles are stuck there forever.

  15. Those in the libertarian quadrant to the right of center tend to sympathize with Randian objectivism, and even a Darwinian economic approach.

    I would place myself as a sympathizer….but is it OK that every time i try to read an Ann Rand novel I get the sudden urge to gouge my eyes out or do i have to cut up my membership card?

  16. When the columnists and talking heads start talking about income quintile variations, they invariably give the impression that everybody in the lower quintiles are stuck there forever.

    They also give the impression that even those who stay in the lower quintiles are not enjoying ever improving life styles.

    What ever happened to that digital divide that the left was bitching about 5 years ago? and why can’t i buy a $10,000 ipod that is 9,800$ better then what the poor people can get for 200$?

  17. just more apologetics for the tranfer of wealth from the bottom to the top, should anything else be expected from the Cato Inst.? It’s about taxes, yall, not about how much your neighbor has(or doesn’t). As long as the bottom keeps forking it over to maintain the infrastructure for the operations of the “gentry”, YES, there is inequality. The poor cannot mobilize upward when they continue to get taxed while the wealthy hide their incomes and are given the red-carpet by the government. Of course you won’t agree with a word of this due to the facts that the indoctrination and insulated existence of the middle and upper classes causes de facto blindness to reality and I don’t use fancy words like “quintile”.

  18. They also give the impression that even those who stay in the lower quintiles are not enjoying ever improving life styles.

    Every day, I drive by a many small, poorly-kept houses that have one or more satellite dishes. The working poor have enough disposable income to watch dozens of channels of digital entertainment. That must indicate some level of forward progress.

  19. “They also give the impression that even those who stay in the lower quintiles are not enjoying ever improving life styles.”

    That is true too.

    The whole “issue” of income inequality is a political contrivance designed to play on/whip up the envy of some people in order to further the power of the politicians flogging it – like John Edwards.

    Huey Long was doing the same thing back in the 1930’s.

  20. “The poor cannot mobilize upward when they continue to get taxed while the wealthy hide their incomes and are given the red-carpet by the government”

    Meanwhile, back in this universe, the top 50% of income earners pay 96% of the federal income taxes and the bottm 50% pay 4%.

  21. People assent to live peacefully and lawfully in society to the degree that they perceive themselves to have a fair shot. If people don’t perceive it this way, they’re not going to live by the rules, whether this means corruption in their professional and public duties, black-market economic activity, or subversion and revolution.

    People respond to incentives. If they have not incentive to respect your life, liberty, and property, they won’t. If there is sufficient opportunity for most people to get ahead by living peacefully and lawfully, they will. If there is not, they won’t.

    I think I agree with you about those points, which have nothing whatsoever to do with income equality.

    Firstly, if my neighbor doubled his wealth by injuring me, it is the injury which needs to be addressed. If my neighbor doubles his wealth because he has invented some gizmo making his farm twice as productive, then he has not hurt me. For me to take his wealth on the grounds that he possibly could have gotten it by hurting me is a profound injustice. If I forc him to give me money because he fears I will kill him if he does not, then I have hardly contributed to making a just, peaceful society. Forcible redistribution of wealth destabilizes society and makes justice less certain.

    The things you cite, corruption and black markets are all symptoms of governments intervening in societies. Black markets occur when legitimate trade like prostitution or drug pushing are outlawed. Corruption tends to occur when people are prevented from opening shops etc. They bribe to officials getting in their way. Again the problem is the existence of these artifical roadblocks, not the fact that there are haves and have-nots.

    Even the corruption wherein a politically connected person can get away with manslaughter is more a symptom of the injustice of one organization claiming a monopoly on law-giving and enforcement.

    Free market systems are quite able to handle corruption such as kickbacks and embezlement. They only become unmanageable when people are deprived of the freedom to avoid the corrupt person.

    Rather than punishing rich people as class enemies, on the grounds that they might oppress poor people why not address the actual crimes that are committed?

    Certainly inequalities in wealth generally arise when one group of people use violence to line their pockets. They also arise when people are allowed to earn their living however they wish, some people are more productive so they end up with more stuff.
    Using violence to deline the pockets of everyone who is arbitrarily wealthy, whether guilty of violent self-enrichment or not, does not make the society more peacable. It merely makes it more violent.

  22. Meanwhile, back in this universe, the top 50% of income earners pay 96% of the federal income taxes and the bottm 50% pay 4%.

    To be fair, 75% of earners pay more in their payroll taxes than they do in income taxes. Yes, this is a comment the progressive nature of the income tax. But it is also a comment on the utterly regressive nature of Social Security.

  23. I don’t get caught up in worrying about the inequality numbers as an attack on free markets because we don’t have anything like them. The libertarian response is, “We don’t care about inequality as long as the inequality is justly acquired. Due to the amount of unjust acquisition, we can’t defend the current system as the result of just acquisition.”

    – Josh

  24. I think class war, economic populism, whatever you want to call it today, is stupid and harmful and economically illiterate. That being said, big deal – lots of people agitate in favor of stupidass ideas and provably false theories all the time. What pisses me off – really PISSES ME OFF – is when this bilge is spewed by filthy rich assholes like John Edwards or Al Gore or, and especially, Michael Moore. I can accept a certain level of hypocrisy in everyone – it’s impossible to live a completely hypocrisy-free life – but I will not accept that such a thing as a “rich populist” is possible. If John Edwards wants me to listen to his “two americas” blather – cos honestly, I’ve never bothered yet – he first has to divest himself of his wealth. And I always knew Michael Moore was an asshole butl, but I resolved never again to read anything by or about him after I read about the speech he gave some time back, to a crowd of, I assume, middle class and working class folk, about how the evil Republicans have screwed everything up so that the system is completely rigged against the non-rich, and sorry folks, you’ll never get rich, you just won’t, cos working people can’t go out and make fortunes in America anymore, they just can’t, economic opportunity no longer exists in America. Except, of course, for Michael Moore. And John Edwards. And every asshat in Hollywood. Douchebags.

    Sorry. What was this about? Income gap?

  25. First off, the CATO paper is correct, but a complete red herring. If you are using tax returns alone to determine “income inequality”, you are indeed a fool. I personally don’t know anyone who would do this except for certain types of progressives/socialists, and I’m pretty sure no one is listening to them. So the CATO paper is really just a matter of misdirection, and a bit of snake oil misdirection at that, worthy of National Review standards, but not CATO.

    But, as towards whether anyone should care about the topic, let me offer you a case study that I had the oppurtunity to be involved with well over ten years ago in the banking industry, and described by one of the “Chicago Boys” who had researched it for the bank in question:

    It revolved around a minor wire transfer position. The position was an incredibly boring and simple job, when this particular Bank had first opened the office in the late fifties, the determining factor had been set not by the job difficulty but by the “trust factor”, as the position required an extremely trusted individual. Between the late fifties and the early nineties when the following occurence happened the job lost nearly 75% percent of it’s value to inflation, and was now a minimum wage position. The CB econimist (using bank records) believed the average senior executive’s salary during the same period (adjusting for inflation, deposits and profits of the institution) grew by approximately 300%.

    The incident was simply an international criminal approaching the min wage transfer monitor and recruiting them for multi-million dollar transfer scheme. It was caught due to a late night working executive for a CC company in Europe, who was just incidently reviewing relevant transfers for a completely unrelated problems.

    Although everyone was caught in this instance, the CB econimist felt that he saw the fingerprints of a dozen other “capers” across the the ten years of transfer data he had seen. Due to the shared risk nature of the situation, and the fact of what a small percentage a few million is when you are handling billions, he felt that this particular scenario had happened a number of times in the recent past.

    The position is back to it’s original rating based on trust worthy behaviours. However, the CB told me that he believed that the american banking system may have cost itself as much as a hundred million over 15 years to save itself a few thousand in the labor costs.

    I happened to mention this to a friend who now works for the bank, that bought out the bank this happened to. He works in the same division. The position is min wage again. And, is still a security risk.

    Wage in-equalities that are due to the market are part of the market, the question is:

    Are there income in-equalities developing in this nation that have nothing to do with the market, but rather are based on Gov/Corp hybrids and power inequalities that are actually damaging the market?

  26. “To be fair, 75% of earners pay more in their payroll taxes than they do in income taxes.”

    Social security taxes, unlike regular federal taxes are supposed to entitle one to receive some benefit back in return in the future. And the social security benefit formula has been structured to be “progressive” in that those lower on the income scale get a greater benefit relative to the dollars in taxes they pay into the system than those on the upper end of the income scale do.

    Payment of income taxes, on the other do not entitle those paying it to get anything back and a lot of the services that tax revenue funds is used by the bottom 50% of income earners who are not paying any income taxes.

  27. “People assent to live peacefully and lawfully in society to the degree that they perceive themselves to have a fair shot.”

    Fair shot at what?

  28. As a relatively young attorney trying to make it in solo practice, I don’t make a lot of money but pay a good percentage of what I do earn in taxes, so that I’ve found it quite difficult to set aside sums for financial security and to get me comfortably through those times when business is slow. I don’t live extravagantly. Maybe I would sympathize less with my tenuous efforts to maintain my standard of living if I lived in a mansion and drove an expensive sports car rather than the very modest home and car I do live in and drive. It irks me to no end to write those big checks to the IRS, when I need that money not to buy a boat but make the mortgage payments and pay off the student loans. So I’m all for drastic tax relief starting with and particularly for those just trying to earn a decent living. (Granted, what annual income level that might represent might be in the eye of the beholder and the size of his family — $30k, $50k, $100k?) I don’t see it as social engineering. A certain amount of tax money has to come from somewhere (and if government could just be limited to its legitimate purposes that amount would be a lot less). If fortune blows my way so that my business takes off and someday I actually have a lot of money, then tax if you have to what I give away during my lifetime and after my death (or more precisely, tax those who have received from me such an unearned boon). Such taxes would still suck, but would suck a lot less than the taxes on my current efforts to establish some financial security and a greater likelihood that I will someday actually have money to give away.

  29. Well John, that is essentially the problem. It is difficult to get ahead when you’re forking over huge chunks of cash every quarter. Henry Ford amassed his capital in an era when there were no social security or payroll taxes that you and I find so onerous.

    The solution is not to shift all the tax liability to somewhere else or to someone else’s wallet, but to reduce the tax liability and allocate it among the populace in a proportional basis.

    I don’t see it as social engineering

    The tax code IS used precisely for social engineering on a fairly grand scale. That’s why your mortgage interest payment is deducted from your taxable income. If you have kids, that’s why you get a big fat thousand dollar per head tax credit for each (dollar for dollar).

    Disclaimer: I’m not advocating the flat tax or the national sales tax necessarily either.

  30. THANK YOU, GILBERT MARTIN for raising the point that the whole idea of an “income gap” is SMOKESCREEN if it ignores income mobility and people’s ability to move from lower to higher levels of income.

    Older folks will remember that the Reagan ‘Eighties were bemoaned as the era when “the rich got richer and the poor got poorer,” which was bullshit. The possible ranges of income widened, but people are not permanently assigned to one particular income niche.

    Press reports rarely bother to mention what ought to be obvious-that the poorest fifth in 1979 and the poorest fifth in 1989 are not the same class of individuals. Census figures indicate that real income in a given quintile changes by no more than I percent from one year to the next, whereas annual turnover in the composition of the quintiles is 20 percent to 40 percent. Thus the commonly reported statistics on income distribution do not measure the economic fate of individuals over time. They measure changes in the value that the market places on various productive functions — various “offices” in the economy that are occupied by different people at different times.

    The real question of fairness is whether individuals are free to exploit the opportunities available to them in the effort to improve their condition. A mixed economy like ours places many constraints on such freedom, from the income tax to the regulations that control entry into many businesses and professions. But longitudinal studies that follow individuals over time show there is still a great deal of social mobility. The Treasury Department’s Office of Tax Analysis analyzed a random sample of people who filed tax returns during the decade from 1979 to 1989. Only 14 percent of those in the bottom quintile in 1979 remained there 10 years later; everyone else had moved up the income ladder as they got older. Indeed, more of them (15 percent) made it all the way to the highest quintile than remained at the bottom.“Gekko Echo,” Reason, Feb. 1993

    If you are in the poorest ranks, but you have a better shot of joining the top ranks than staying poor, that sounds like a pretty fair shot to me.

    So are people more, or less, economically mobile today than they were during the ‘Eighties?

  31. S/B social security, payroll, or income taxes……

  32. What I’m all for is scrapping the whole income tax concept to begin with.

    Government has by law reserved the provisioning of certain goods and services unto itself but the way I see it, fairness in financing those goods and services is conceptually no different than it is in the private sector.

    Nobody complains that McDonalds is being “regressive” in charging a poor person the same price for a quarter pounder that it does a rich person. They both received the same product and paid the same price. Nothing at all “unfair” about that. In fact, people would consider it outragous if McDonalds tried to emulate the government and demanded to know the income of each customer so it could charge each one a “progressively fair” price. They would go out of business in short order.

    Government activities, to the greatest extend possible, should also be funded on a user fee basis. One’s income level should have nothing to do with it. One’s income level is not a service provided to them by the government.

  33. I wonder what the bottom 50% earns compared to the top 50%, when one factors in the dollar value of the welfare, SS, etc that the bottom 50% recieves.

    – R

  34. Personally, I don’t care how much a person makes. I just don’t have the class/money envy that some people have and that I’m more concerned with what’s in my own wallet than someone else’s.

    If these people really did care about the inequities in our society they shouldn’t be pointing out the income gap, they should be pointing out the amount of resources one uses.

    If one uses more resources regardless of class, the more one should pay in taxes. If you use less, then the less you should be taxed.

  35. Yeah, but can you imagine the beuracratic nightmare?

    – R

  36. Yeah, but can you imagine the beuracratic nightmare?

    Depends. If they government was in charge, then probably a big mess. If common folk was in charge and we just did a national sales tax of X percentage. Not that hard.

  37. To anyone who thinks that you can have a wide disparity between top and bottom–look at history.

    The rich should think of the payment of progressive taxes as insurance against the peasants hanging them from lampposts.

  38. So, one thing that has been happening over the past quarter century is that people at the bottom quintile (or even richer, I think) have been having relatively slow growth in real wages. Median incomes over tha past several years have even been stagnant in real terms, for instance.

    If income inequality has been steady (and the apparant rise is an illusion of the tax code), wouldn’t that mean that even the rich haven’t been benefiting much from the economic policies of the last quarter century or so?

    I mean, one thing that was “nice” about the 90’s was that, even if inequality was growing and the poor were not getting better off, at least GDP was growing quickly. Sure, this caused rising inequality, but the average was going up.

    If the increase in inequality was illusory, that means either the poor were getting better off in ways we weren’t measuring (something I think the CATO report does not advance. I am aware that the official poverty statistics are all messed up, but if anything transfers to the poor have been about steady since Reagan, not growing. right?), or the growth in income at the top was somehow illusory (which the CATO report seems to support). However, if the income growth at the top was illusory, how was the average income (GDP per capita) increasing if the median wage wasn’t increasing?

    Seems like this is a circle that needs to be squared. These three things seem to be mutually inconsistent:

    stagnant median real income (or 1st quintile income)
    increasing average real income.
    Steady “inequality.”

    One of these would have to be false, right? But doesn’t the CATO paper suggest that all of these are happening at once? Something smells queer about this.

  39. As for why we should CARE about inequality: I think when you live in a democracy you need to worry about a bunch of grumpy, anti-free traders getting upset about the wealthy. This does not have to be an Oktober Revolution type thing. Upset people who feel pissed about plutocrats can hurt the nation in all sorts of great ways without rising up against us. Restrictions on outsourcing, trade restrictions, profit caps . . . who knows what else some clever politician might come up with. Once the electorate gets in the habit of regulating those things, who knows what they’ll move onto next.

    Of course, for a libertarian, I suppose we should worry about how much of the inequality is “natural” and how much arises from government policies restricting entry, or distributing rents inequitably. We can worry about that all we want. The crazy populists who use huge wealth disparities to gain control of the central government will not worry about these things. I have spoken to these people at conferences, and they do not think of things this way.

  40. “Of course, there’s also the question of whether income inequality is really something we ought to worry about, anyway.”

    I remember when I was a kid and some authority figure tried to impose whatever rule on me, at first, when I was real young, I used to try to discuss the rule. I’d question whether it was really good for me or all of us, blah, blah, blah. But as I got older, I started to realize that those discussions were usually just a waste of time, that it was much more effective to just express disdain.

    …disdain for the people in authority, disdain for believing that they knew what was best for me, and disdain for believing that they knew what was best for all of us.

    Maybe we get run over, sometimes, ’cause we’re trying to be civil to those who would do us in. Maybe there shouldn’t be an appropriate response to the question: “Should people be allowed to keep what they earn?” …rather, maybe the most appropriate response is “Fuck you.”

    If politics is more a reflection of culture, then, as a libertarian, maybe more important than voting for the LP, maybe I should do what I can to promote a feeling of intolerance for those that would threaten our rights and liberties. I think it’s important to make those that presume to know what’s best for society, to make them aware that they’re hated and despised, at least by some. If I had to choose, I think it might be better that they felt despised rather than come to understand some intellectual argument.

    I suspect many refrain from supporting bigoted policies in public not because they have no bigoted proclivities of their own, but because bigotry is socially unacceptable. If only talk of what to do with other people’s property, because of the owner’s earnings, was treated socially like talk of manipulating people’s rights because of ethnicity or orientation, …

  41. ….. the bottom 50% of income earners pay no income tax at all…..

    Where does this lie come from? -look at the tax table on the 1040 EZ form (for earners under 100k who don’t itemize) they pay taxes not just FICA taxes either
    10-15% of 20-30k hurts a lot more than 40% of 200k
    and passbook savings interest is taxed at a higher rate than capital gains

    As for the bottom 50% benefitting more from the services they receive-please explain

    if an EIC passed which lifted the bottom quintile above the income level qualifying for food stamps we would be deafened by the howls of protest from agribusiness grocers and the processed food industry.

  42. About income mobility. I am no expert, but the last paper I read about this (in the late 90’s) reached the conclusion that income mobility (the probablility that someone in the bottom quintile of the income distribution is able to get out of that quintile over some period of time) is becoming less important.

    That is, the income quintiles are more and more like classes in the traditional sense: once poor, always poor; once rich always rich is becoming more and more true. That said, it is still not very true (I don’t remember the numbers exactly).

    These qualitative statements pertain to comparisons over the broad sweep of the twentieth century, I think. Income mobility is on the decline, but still is much higher in America than in, say, Europe. I believe that the statistics were made by comparing father’s incomes with son’s incomes. I do not remember where the researchers got there data, how it was constructed or who the researchers were. So, take all of this with a grain of salt.

    Of course, the question is whether this decrease in income mobility is due to structural changes in the economy (move to services and away from manufacturing), changes in government policy, regulatory capture or what. You would have to know WHY this was happening before you could even begin to develop even the slightest incling of an opinion as to what (if anything) you would like to advocate doing about it.

    I think that most people would agree, though, that decreasing income mobility is an undesirable outcome of whatever process has been taking place (sons of plutocrats may disagree with this statement).

  43. Every notice how the same people who bemoan income inequality are the ones who bemoan superstores like WalMart which allow lower income people to buy good that are almost on par with rich folk?

    Maybe we should just listen to our betters and let them decide who earns what, who can buy what at where, and why none of us know enough to be able to make our own choices.

  44. Long article in Economist some time back looking at income mobility in US and discovering it had definitely gone down.

    Start up poor, end up poor. Start rich, end up rich.

    Turns out even the UK had more income mobility.

  45. Ever notice how many of the upper 50% enjoys income and wealth from State protected business models, professional licensure,resticted skilled/ educated immigration, monetary policy,tax policy, jobs restricted to expensive credentials etc.?
    Class warfare is a 2-way street.

  46. “….. the bottom 50% of income earners pay no income tax at all…..”

    “Where does this lie come from?”

    IRS statistics show that 96% of all the federal individual income tax DOLLARS collected come from the top 50% of income earners. About 4% of the tax DOLLARS collected come from the bottom 50% of income earners.

    The bottom 50% of income earners are using a lot more than 4% of the government provided services that the total DOLLAR pool of taxes collected are paying for.

    Therefore, the top 50% of income earners are paying for the government services that they use themselves and also for most of the services being used by the bottom 50% of income earners.


  47. To be fair, 75% of earners pay more in their payroll taxes than they do in income taxes. Yes, this is a comment the progressive nature of the income tax. But it is also a comment on the utterly regressive nature of Social Security.

    The SS tax is regressive, but the benefits are not. A person making $45k a year gets a lot more SS benefits for their money than a person making $90k a year, even though the person making $90k a year pays twice as much SS tax. The person making $200k a year pays only a little more SS tax than the $90k person, and pays no SS tax (they still pay the 1.45% Medicare tax) on the top $100k of their salary, but that’s hardly unfair since they don’t get greater benefits.

  48. The most authoritative data on wealth distribution in the US is the triennial Survey of Consumer Finances commissioned by the Federal Reserve Board.

    Here’s the distribution of net worth by percentile in 2004 dollars:

    20th
    1995: $12,300
    2004: $13,200 (+7.3%)

    50th
    1995: $70,800
    2004: $93,800 (+32.5%)

    75th
    1995: $197,800
    2004: $328,500 (+66.1%)

    90th
    1995: $469,000
    2004: $831,600 (+77.3%)

    Here’s the comparison for income in 2004 dollars:

    20th
    1995: $15,100
    2004: $18,900 (+31.8%)

    40th
    1995: $28,100
    2004: $33,900 (+20.6%)

    60th
    1995: $48,600
    2004: $53,600 (+10.3%)

    80th
    1995: $73,800
    2004: $89,300 (+21.0%)

    90th
    1995: $101,100
    2004: $129,400 (+29.0%)

  49. Ever notice how many of the upper 50% enjoys income and wealth from State protected business models, professional licensure,resticted skilled/ educated immigration, monetary policy,tax policy, jobs restricted to expensive credentials etc.?

    Ever notice how libertarians are against all those things as well? Feel free to peruse the archives of this website (there have been great articles on licensing, credentials, tax policy, etc. that a google search using site:reason.com and the keyword will help you find) instead of thinking I am unilaterally launching a class warfare bomb.

  50. Gilbert,
    Well you provided citation to the “lie”.
    The lower 50% do pay taxes. They don’t make as much so they don’t pay as much-makes sense taxes are based on a percentage of income even without the progressivity.

    I was not referring to all government expenditures as serices but specifically targeted benefit /services. Flood insurance on the beach house, dredged channel for the yacht,soil conservation payments on the quail plantation all of the financial and monetary subsidies that make your hedge fund pay-that sort of thing.

    Any idea what the toal percentage of income of ALL taxes paid is Federal(including FICA-count the full 16&) State Local Excise etc by class/quintile?

  51. jf,
    Yes hard core libertarians ARE against these
    (why I cited them as examples).
    Not everyone who identifies as libertarian is against these things however. Supporters of unrestricted low skilled immigration are not calling for open immigration across the board.
    I would say more libertarians support total drug legalisation than support an end to State protected professional licensure nad credentialism.

  52. Bob,
    Social Security is regressive for demographics-hey this is a libertarian board let us say INDIVIDUALS- who do not live long enough to collect it. SS can be viewed as a transfer payment from African American males to old White and Asian ladies.

  53. I would say more libertarians support total drug legalisation than support an end to State protected professional licensure nad credentialism.

    So long as those licenses and credentials are distributed privately and voluntarily obtained I don’t have a problem with em.

    Anyway if you are hearkening back to the Realtors min-service requirements and you think it is real estate agents who are pushing for greater legislated liability to sales persons then i think you live in the same alternate universe that Ed lives in.

    yeah it is the massage parlors who want to require two years of collage to get a license…give me a fucking break.

  54. So long as those licenses and credentials are distributed privately and voluntarily obtained I don’t have a problem with em.

    Any problem with the State preventing you from providing the same or similar service by force
    if you lack the license/credential (assuming you do not fraudelently claim to hold it)?

    I refer to laws against practising law medicine
    land surveying hair braiding manicures etc.
    I think Hawaii requires you to have a license to repair automobiles-not a business license.

  55. Supporters of unrestricted low skilled immigration are not calling for open immigration across the board.

    That is not my experience at all. As someone who often finds himself arguing the side of open immigration, I can think of no time in the past that a self-declared libertarian has said, “I’m for unrestricted immigration for the unskilled but not for the skilled.”

  56. I refer to laws against practising law medicine
    land surveying hair braiding manicures etc.
    I think Hawaii requires you to have a license to repair automobiles-not a business license.

    and as we all know there is exactly zero pressure outside those professions to require them to get certified by the state…whatever.

  57. SS can be viewed as a transfer payment from African American males to old White and Asian ladies.

    Evidence for this can be found in a study by the Urban Institute.

    As a sample, the difference in the rate of return between a male high school dropout and a male college grad due to the progressive benefits paid by social security is 0.94, in favor of the dropout. The difference between their rates of return due to the fact that the former dies sooner is 1.28, in favor of the college grad.

  58. Amazing. An actual discussion. Jennifer must be doing her nails.

  59. So based on the data from the Urban Institute study if we up the retirement age to 70 Rich old people will have underclass slaves paying their greens fees and dry cleaning bills. Whoops! Forgot how Social security works for a second-no future tense on the transfer payment.
    They already do!

    So much for the earlier posters who don’t count FICA as a tax because of the supposed progressive benefit to the poor.

  60. re Jennifer
    She is probably frantically trying to find something that will pass the court’s dress code for jurors -yet can be ruined by her sordid slog through the ghetto to do her civic duty as an unpaid conscript of our “justice” system.
    Be sure to scan your news feed tomorrow morning-keyword jury nullification-as she might well be arrested if she brings educational flyers.

  61. On the subject itself, the whole issue of pay inequality is bread and butter for the class warfare warrior, fueled by the usual take on economics by the general public, that my neighbor can only increase his wealth at my expense.

    More to some of the comments, my biggest problem with upper case L, libertarians is that they are suicidal in their ideology. Yes, I am for the legalization of drugs, but I think it’s looney to make that the head line banner.

    State enforced monopolies via licensing and credentials are a much larger threat to our daily liberties than whether or not marijuana is made legal, but it just doesn’t have that rebel without any sense kind of romance.

    P.J. O’Rourke had a short interview in the Wall Street Journal the other day where he compared card carrying Libertarians to kamikazes diving at ships of reason, or something along those lines.

  62. “….that my neighbor can only increase his wealth at my expense…..”

    Well if he is a card carrying member of AFSCME
    the statement is true!

    I believe it was linked on Reason that federal civilian employees now average twice the total compensation of full time private sector employees

    it was a long understood idea in our society that public sector employment offered security
    good benefits and a relatively generous early retirement as a tradeoff for somewhat less pay than a comparable position in the private sector.
    Not anymore public employees are now an economic elite compared to their privately employed peers.

  63. Gilbert Martin,

    [i] In fact, people would consider it outragous if McDonalds tried to emulate the government and demanded to know the income of each customer so it could charge each one a “progressively fair” price. They would go out of business in short order.[/i]

    Many businesses charge a “progressively fair” price all the time and do well at it. Excepting Saturn, identical cars will drive off dealerships for different prices, representing different levels of profit to the company, as a function of the customer’s ability and willingness to pay. Until the internet, airlines would charge wildly different prices (again as a function of the customer’s ability and willingness to pay) for adjacent seats. Discounting marketing programs (coupons, etc) are another way businesses can apply “yield management” and get their product in the hands of people who might not otherwise been able to pay full price. Private colleges have a great degree of discriminatory pricing power at their disposal as well (athletic and merit scholarships?). Yes, it’s more subtle than setting price based on directly asking your income (though I go back to the car dealership credit check as the exception that proves the rule). But it’s false to assert that progressive pricing would get a company bankrupted out of the market.

    On the issue of user fees, how do you feel about the following:

    Every dollar in public securities receives the same amount of services from the SEC each year. Every person does not; every transaction (stock sale) does not. (Whether it’s better to call it on a per-dollar or per-share basis, I’m not certain – could go either way). Do you believe that it’s fair and reasonable for SEC oversight and enforcement functions to be paid out of an annual asset tax charged agains total stock market capitalization? If not, why not?

    Some midcentury progressive once quipped along the lines of “what use do the poor have for a battleship”. It’s a good line, that I’ve had to consider in my thoughts on national assets. I feel that every citizen gets mostly the same utility out of brown-water navy functions (ie, bodily protection from invasion); but capitalists (importers and exporters, bigger oil users, multinational companies, etc) get far more utility, as a sheer function of their size, out of blue-water navy functions. In your mind, how would you allocate the costs for power-projecting military systems?

  64. “Many businesses charge a “progressively fair” price all the time and do well at it. Excepting Saturn, identical cars will drive off dealerships for different prices, representing different levels of profit to the company, as a function of the customer’s ability and willingness to pay. Until the internet, airlines would charge wildly different prices (again as a function of the customer’s ability and willingness to pay) for adjacent seats. Discounting marketing programs (coupons, etc) are another way businesses can apply “yield management” and get their product in the hands of people who might not otherwise been able to pay full price.”

    None of that has anything to do with “progressive fairness” in the political sense of the term. Different prices people pay for cars and such are affected by such things as the buyers knowledge of the market and his ability and or willingness to agressively negotiate.

    As for how to handle financing of government activities on a user fee basis, there is plenty of room for discussion on various mechanisms for how to pay for such things as national defense, but that isn’t the place to start. The place to start is by talking about getting rid of the things that government does that aren’t really services at all but mere transfer payments – social security, welfare, medicare. And those things are where the really big money is at. The US Treasury report on an accrual basis deficit reported a fiscal 2005 federal government deficit of 3.5 TRILLION dollars – with Social Security and Medicare being about 2.74 TRILLION of that.

  65. Senior discounts are a “progressively fair” pricing scheme.

  66. “Senior discounts are a “progressively fair” pricing scheme.”

    Not in the political sense of the word “progressive”.

    My original post about McDonalds was to illustrate what a private sector equivalent of what the government does would look like. The government DELIBERATLY makes higher income people subsidize lower income people – in various ways. In fact, I should have added to the McDonald’s example by having the McDonald’s employees going out on the street and forcibly taking money from people passing by who had no intention of eating at McDonald’s at all in order to finance giving food away to the poor. that is also an equivalent of what the government does.

    Senior discounts are not tied to anyone’s income level. Many seniors in fact are quite wealthy and them getting a lower price on goods than a poor young person would be reverse “progressivity”.

  67. “The government DELIBERATLY makes higher income people subsidize lower income people”

    you make this sound like a secret.

  68. Income inequality is a much different thing than wealth inequality.

    One of ’ems a lot more dangerous than the other.

  69. Not at all.

    I am merely emphasising the point for those who keep trying to claim that the various price differentials that occur in the market for cars, airplane tickets, etc. constitute “progressive” pricing.

  70. well, a number of non profs work on a sliding scale (planned parenthood, various womens’ groups in nyc, etc), which is exactly what you mentioned above – those who pay more subsidize (in part) those who pay less.

  71. Price discrimination in the free market is a fine practice and improves the economic efficiency of trade and services.

    It should not surprise anyone that when the government shakes down its subjects, it, too, practices price discrimination. But in order to standardize the practice, the government is much more formulaic about it: thus, progressive taxation.

  72. “well, a number of non profs work on a sliding scale (planned parenthood, various womens’ groups in nyc, etc), which is exactly what you mentioned above – those who pay more subsidize (in part) those who pay less.”

    That is true – but charities are not “the market”.

    Furthermore, private charities cannot force anyone to contribute to their cause.

  73. “Income inequality is a much different thing than wealth inequality.

    One of ’ems a lot more dangerous than the other.”

    But trying to re-arrange the distribution of either one of them is not pursuant to any ennumerated power delegated to the federal government in the Constitition.

  74. Oh great, back to the “taxation is theft” meme.

    Look, if you guys really believe that, please move to a country that doesn’t have taxes and just shut up about it.

    As far as I can tell, all of you would prefer living under and paying protection money to the Mafia than under a government. After all, they’re a “private, self-organized organization.”

  75. “That is true – but charities are not “the market”.”

    i’m not necessarily talking about charities.

    i’m also talking about businesses which operate as non-profs, or minimal profs as well. i’m specifically thinking of some women-oriented businesses that offer reduced rates to victims of domestic violence and rape, or who have lower incomes, in exchange for their services (food, self-defense, etc)

    the issue of force is of course something else, but since my brain translates “government” into “force” automatically, i may be missing the gist of your larger point.

  76. “And they never point out the fact of income mobility in that the set of individiuals in any given quintile at any point in time is not the same set of people measured at a different time.”

    “SS can be viewed as a transfer payment from African American males to old White and Asian ladies.”

    Based on the comments on this thread, I can only conclude that libertarians believe that income mobility is more widespread than aging.

    A hell of a lot more poor 30 year olds are going to get old than rich.

  77. A hell of a lot more poor 30 year olds are going to get old than rich.

    Which is why if the government is going to “insure” against anything, it ought to be insuring against being poor, not against aging.

    Social Security does not need reform: It needs elimination.

  78. Oh great, back to the “taxation is theft” meme … As far as I can tell, all of you would prefer living under and paying protection money to the Mafia than under a government. After all, they’re a “private, self-organized organization.”

    Except that legitimate and truly private-sector organizations can’t use force you to make you pay whether or not you want their “services.” The government does, just like the Mafia protection racketeers.

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