Saturday, December 10, 2011

More data about the Top 1% and income inequality

Finally catching up on issues of the WSJ that have been sitting around this week and found this piece from Dec. 6, to be quite interesting: ["Tax Rates, Inequality and the 1%"].
While one might find anything written by a fellow from the Cato Institute suspect, there are a few nuggets of truth in here that are worthy of further analysis. 
First, the share of income increased by the Top 1% post 1979 seems to not be as drastic as first thought, especially when looking post 2007. It's 11.3 percent not 17 percent, according to Alan Reynolds' analysis.

The Top 1%, according to the IRS, earn about $380,000 a year. In other words, they are good doctors, good lawyers, good and bad executives and CEOs, and money flippers on Wall Street who have a lot of money to flip around and earn a lot of money from flipping it around. It should be no surprise that their share of the income increased during the last 30 years by 11 or 17 percent. If you think back to 1979, most everyone probably has more income and wealth, even when figuring inflation, than they did in 1979. So these kinds of increases should not be surprising at all.

Second, in looking at the capital income chart, you'll see great increases in income when capital gains taxes are cut (currently 15 percent). This increase in income creates more taxes, based on the economic activity. This, however, is one of the big things we should be talking about when talking about tax reform. The argument over the income tax rate is a smokescreen. More progressives and liberals are obsessing over 35 vs. 39.5 percent, and totally ignore capital gains. The real benefit to "the rich" are gains made when flipping their money around, not their salaries. At the same time, admittedly, their salaries, especially the lower earners of the Top 1%, determine how much money they have to flip around. As example, if you're making $400,000 and you're taxed at 30%, you're giving the government $120,000. If your rate goes up to 40%, you're giving the government $160,000. That extra $40,000 is taken out of the private sector economy. Let's say, for an example, that the $400K person invested that money instead of gave it to the government and it doubled. The government would get 15% of the $40,000 - $6,000 - and there would economic activity generated too.
But as with everything in life, each action has a reaction. If one aims to hurt the rich, going after capital gains is the way to do it. But that will also harm economic growth which harms everyone because there is less money in the pool for innovation, investment, job creation, etc. It might create more money for government, but that doesn't create wealth or sustainability for the person who is having her money taken away or the society at large.
Having said all that, my personal philosophy is that we need comprehensive tax reform and then we need to leave well enough alone and stop tinkering with things. People and businesses should know what their three year, five year, and 20 year tax outlooks are, so they can adjust accordingly. There should also be a return to import tariffs, a form of revenue generation the federal government consistently relied on up until a couple of decades ago.
There also needs to be a restructuring of the size of the federal government, starting with defense cuts and foreign entanglements and working down. One of the most disappointing things about the Obama Administration is the failure to live up to the campaign promise that every single government line item would be analyzed and eliminated if deemed unnecessary. There is so much waste, fraud, and abuse in the system, it's unfathomable. There are layers upon layers of federal government employees who do nothing but put a drain on the future of the country, both now, with their often overpaid incomes and later, with their pension and retirement benefits, a multi-trillion dollar catastrophe that is coming soon.
Then, after reforming taxes and restructuring the government, there should be a laser beam focus on paying down the national debt and sustaining Social Security for the X-er generation.
Lastly, obsessing about what "the rich" make or don't make is a waste of time in my mind and doesn't bring our country to true solutions. As well, as has been repeatedly shown, you can take all the money from the rich - every last penny - and still not filled the holes. And, it's not the government's money to take anyway. Let's try and work together to find solutions, instead of creating and fomenting jealousy and divide.


Mark de Zabaleta said...

This confirms that the Pareto 80/20 rule is met. 20% of the population controls 80% of wealth!

Mark de Zabaleta

nygrump said...

Income is a different conversation than wealth. The struggle is over land. Wealth has gravity - the more you have the more you attract. Mayor Bloomberg's wealth while in office went from 4 billion to 19 billion, in a blind trust, allegedly. Did your savings increase like that over the past 8 years? My conclusion is the billionaires are making moves to destroy the United States, and their lapdog puppet politicians are going with the program in order get tasty teenage(and younger) whores.

rameez said...

Nicely Blog...This confirms that the Pareto 80/20 rule is met. 20% of the population controls 80% of wealth!