Tag: Income Inequality

Inequality Is Exploding, Except That It Might Not Be

 

A long piece in The Economist about inequality research (“Economists are rethinking the numbers on inequality”) ends with this question: “Will this flurry of new research change people’s minds about inequality?” Well, maybe some change among some academics, probably not much among most activists or politicians. As for the latter, too much of the current political environment seems driven by the idea that massive inequality signals “late capitalism” and the end of the American Dream as we know it. Mostly on the left, but also on the populist right.

But even if minds are hard to change, perhaps strong evidence can at least make certain beliefs less strongly held. Has income inequality surged to record levels? As the below chart shows, adjusting for taxes and transfers finds the income share of America’s top 1 percent “has barely changed since the 1960s,” The Economist points out. From the piece:

Elizabeth Warren’s Unconstitutional Wealth Grab

 

As part of her populist presidential campaign, Senator Elizabeth Warren has unveiled a proposal for an annual wealth tax of 2 percent for ultra-rich families whose net worth is between $50 million and $1 billion. That tax would increase to 3 percent for families whose net worth exceeds $1 billion. The tax is on top of many other taxes to which such a family would be subject, including, presumably, the progressive ideal of a 70 percent income tax as well as state and local taxes. The wealth tax would even apply to people whose net worth has declined during the past year so long as they remain above the stated threshold. Cumulative taxes could easily exceed 100 percent of income. That result is not an unanticipated bug but rather an essential feature: Warren wants to mandate greater income equality through tax policy, even if it means leveling down, not up.

In a future column, I shall address the economic ramifications of this proposal. But for now, I turn to the question of the constitutionality of this novel wealth tax. On that topic, Senator Warren offers in support two short letters signed by sixteen prominent American constitutional law scholars that vouch for the constitutionality of her plan.

One letter relies on a 2018 Indiana Law Journal article by legal scholars Dawn Johnson of the University of Indiana and Walter Dellinger, of Duke University, entitled “The Constitutionality of a National Wealth Tax.” Johnson and Dellinger claim that the Supreme Court’s 1796 decision in Hylton v. United States, which sustained an annual tax on carriages as an “indirect” tax, is a decisive precedent for upholding Warren’s proposal. The second letter relies on a 1999 article by Yale Professor Bruce Ackerman that claims that “the key decision” of Knowlton v. Moore (1900), which upheld a state inheritance tax, provides constitutional support for the Warren wealth tax. Both letters reject the view that her wealth tax is a “direct” tax that must be apportioned among the states. Neither addresses a second important issue in American constitutional law—whether any tax can be so confiscatory that it counts as a taking of private property.

Elizabeth Warren’s Theory of America’s ‘Freeloading’ Billionaires

 

Sen. Elizabeth Warren says she wants “billionaires to stop being freeloaders.” It’s a statement akin to the idea that billionaires need to “give back” to society. Which is not how I immediately think about the wealth inequality issue. Surely Microsoft co-founder Bill Gates didn’t begin to “give back” or generate value for society only when he began “giving back” via the Gates Foundation to boost education and reduce global poverty. Society benefited from his role in revolutionizing home computing, generating massive wealth for retirement plans everywhere, and creating hundreds of thousands of jobs over the decades.

Oh, and Gates became superrich in the process. And he should pay taxes. Lots of them. Does he or other wealthy Americans pay anywhere near enough? Warren and many Democrats don’t seem to think so, (although paying for new spending does seem to be the primary concern here). Thus the talk of a wealth tax or a higher top income tax rate. There’s less talk on the left, however, of possible tradeoffs from such ideas. A wealth tax would certainly be a theoretically powerful — though difficult to administer and possibly unconstitutional — way to break up or diminish concentrated wealth. (Many nations that have tried them have since abandoned them.) But there is another side of the story. My AEI colleague Alan Viard notes that wealth taxes of the sort Warren advocates “would be a drain on the pool of American savings, [which] finance the business investment that in turn drives future growth of the economy and living standards of workers.” Something to consider at a time when the American economy faces historically low economic growth due to demographics and low productivity.

Another thing to consider: Most of the value created by entrepreneurial innovation isn’t captured by the entrepreneur. And that’s under the current tax system. In the 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement,” 2018 Nobel laureate William Nordhaus concludes “that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”

On this week’s episode of Banter, Brookings Institution Senior Fellow Richard Reeves discusses his book “Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It.” The book argues that the top 20 percent of income earners in America are increasingly passing their status to their children, reducing overall social mobility for the bottom 80 percent. “Dream Hoarders” received considerable attention upon its release in 2017. Check out the links below for more information including a review of the book by AEI Director of Economic Policy Studies Michael Strain.

Learn More:

Amity Shlaes joins Seth Barron to discuss the competing goals of economic growth and income equality, and to take a look at how American presidents in the twentieth century have approached these issues.

Polls show that support for income redistribution is growing among younger generations of Americans, but such policies have a poor track record of achieving their goals. As Shlaes writes in her feature story in the Winter 2018 Issue of City Journal: “Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight.”

The Income Inequality Obsession

 

One of the great political divides in the United States concerns the role of the state in redressing income inequality across individuals and groups. Recently, the outspoken conservative commentator Dennis Prager noted that in one representative debate during the 2016 presidential campaign, the words, “Wall Street”, “tax,” “inequality,” and “wealthy” were used 59 times by Democratic candidates. In contrast, “ISIS,” “terrorism,” “free,” “debt,” “liberty,” and kindred terms gathered a scant 10 mentions.

The choice of words reflects legislative priorities. As Michael Tanner of the Cato Institute observes, the Democratic position resonates broadly in the electorate given the increasing inequality of wealth. By noting the diminishing marginal utility of wealth, progressives hope to increase social welfare by taxing the rich in order to support the poor. Today, the top 1 percent of taxpayers, who earn just under 20 percent of total individual income, also pay just under 40 percent of all individual income taxes. So ironically, redistribution programs depend on continued successes at the top. In light of the relatively low economic growth and prolonged wage stagnation of recent years, what price is presently paid for the increase in social equity?

Right now, the Republican tax reform will take minor steps to reduce tax progressivity. The GOP’s policy does not stem from any deep conviction that richer individuals pay higher rates because they receive greater services from government. Quite the opposite: Government expenditures have moved smartly in the opposite direction, toward income and wealth transfers through Social Security, Medicare, Medicaid, unemployment insurance, food stamps, and more. There have also been declines in infrastructure spending, which benefits rich and poor alike.

Member Post

 

I’ve been a free-rider on this site now for much longer than an introductory period, and perhaps more notably, my own podcasts have proven from time to time to be essentially responses to various things I’ve found here. In short, fairness and self promotion both suggested that I join. For my first post, here’s my […]

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The Hidden Virtues of Income Inequality

 
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Norwegian Cruise Line’s newest ship Escape features a private area for the wealthy named “The Haven.”

There is little doubt that income inequality is one of the great issues of our time. A new front has opened in the battle over whether the richer and the poorer should have differential access to various forms of common facilities.

Member Post

 

The minute I find out a famous actor is the son/daughter/brother/sister of another famous actor, my respect for them drops 25%*  Pictured is Jack Quaid, star of The Hunger Games and Vinyl. and son of Meg Ryan and Dennis Quaid. Having seen very little of his work, I can’t comment too much on his acting. (I […]

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More on Housing, Inequality, and Economic Growth

 

twenty20_ed1a3b03-c953-4f77-ae69-d5b73c72acc8-e1460750194459As I wrote in my latest The Week column, inequality worriers should take a hard look at what’s happening in US cities. Turns out poorer Americans who live in some of the country’s most unequal places, such as New York and San Francisco, have some of the best longevity outcomes.

Researchers speculate that “low-income individuals who live in high-income areas may also be influenced by living in the vicinity of other individuals who behave in healthier ways.” Behaviors were found to correlate more closely with longevity than access to health insurance. As I also noted, “Economists on the left and right have begun to deeply examine how zoning regulations and other regulatory barriers artificially inflate home prices in some high-income cities.” Including such as New York and San Francisco.

Other research also suggests more of us living in these high productivity cites would boost overall economic growth. White House economist Jason Furman:

The Toxic Populism of the Democrats

 

Bernie SandersAs his campaign roars into New York State, Bernie Sanders has been on a roll. He has won eight of the last nine primary contests, most recently the ones in Wisconsin and Wyoming. His impressive performance has emboldened him to take on Hillary Clinton in her adopted home.

Sanders has attracted wildly enthusiastic audiences by pushing his program of economic populism. He loudly proclaims that, unlike Clinton, he has never received support from Wall Street or corporate interests—and that his impressive financial support comes from tens of thousands of small contributors, each of whom shares his vision. If elected president, he points out, he would be held accountable to these supporters and will make good on his program that includes massive tax increases largely targeted at the super rich.

The effectiveness of his campaign is measured by the extent to which it has forced Hillary Clinton, not a person of deep principle, to veer sharply to the left in order to secure the nomination, after which, if successful, she will have to lurch back to the center in order to gain the presidency. He is the populist hero. She has become his pale imitator.

Link Between Health and Income Not What Most Assume

 

040516ShealthSo there’s a major new study out that looks at health inequality. Among the findings are that (a) the very rich live a lot longer than the very poor, and (b) geography matters. From the Health Inequality Project:

The richest American men live 15 years longer than the poorest men, while the richest American women live 10 years longer than the poorest women. The gaps between the rich and the poor are growing rapidly over time. The richest Americans have gained approximately 3 years in longevity since 2000, but the poorest Americans have experienced no gains. … Life expectancy varies substantially across cities, especially for low-income people. For the poorest Americans, life expectancies are 6 years higher in New York than in Detroit. For the richest Americans, the difference is less than 1 year.

But health inequality is one thing, income inequality another. And the relationship might not be what many might automatically assume:

Worried about Income Inequality? Get Government Out of the Way.

 

bureaucracyRent-seeking comes in many shapes and forms. From “Make elites compete: Why the 1% earn so much and what to do about it” by Jonathan Rothwell at Brookings:

For lawyers, doctors, and dentists— three of the most over-represented occupations in the top 1%—state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the “professional” job tasks for less pay. Here are three illustrations:

— The most common legal functions—including document preparation—could be performed by licensed legal technicians rather than lawyers, as the Washington State Supreme Court decided in 2012. These workers could perform most lawyer-like tasks for roughly half the cost. Unsurprisingly, legal groups opposed it. A few brave souls from the Washington State Bar Association board resigned in protest, and issued this statement:  “The Washington State Bar Association has a long record of opposing efforts that threaten to undermine its monopoly on the delivery of legal services.” Proportion of lawyers in the top 1%? 15%.

Knowledge Base for Sanders Supporters: Understanding Income Inequality

 

The 2008 Economic Crisis spawned two, very different reactions in our ideologically-bifurcated nation. The first was the birth of the Tea Party following Rick Santelli’s impassioned speech from the floor of the Chicago Mercantile Exchange. Santelli’s disgust at those who irresponsibly took out loans they couldn’t repay — and the banks and government that underwrote such moral hazards — sparked a wildfire that drove the Democrats from control of the House in 2010 and proved decisive in wresting control of the Senate from Harry Reid in 2014.

No, the US Economy Is Not a Rigged Game

 
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Steven N. Kaplan and Joshua Rauh

In a 2014 a16z podcast from the Andreessen Horowitz venture capital firm, economist Larry Summers clearly analyzed the inequality theories of Thomas Piketty, author of the best-selling Capital in the Twenty-First Century. While Summers thinks Piketty’s description of “what” is happening is important, he is skeptical of the “why” of perpetually rising wealth inequality — particularly Piketty’s assertions about rates of return on capital and savings. These are criticisms which many other economists have since offered and expanded upon.

A Silicon Valley Investor’s Bold Essay in Praise of Income Inequality

 

Graham-cover3Venture capitalist Paul Graham has written a lengthy essay on the value of increasing income inequality — at least the kind that comes from founding startup firms that generate consumer-relevant value. Here is some of it:

Since the 1970s, economic inequality in the US has increased dramatically. And in particular, the rich have gotten a lot richer. Some worry this is a sign the country is broken. I’m interested in the topic because I am a manufacturer of economic inequality. I was one of the founders of a company called Y Combinator that helps people start startups. Almost by definition, if a startup succeeds, its founders become rich. And while getting rich is not the only goal of most startup founders, few would do it if one couldn’t. …

I’ve become an expert on how to increase economic inequality, and I’ve spent the past decade working hard to do it. Not just by helping the 2500 founders YC has funded. I’ve also written essays encouraging people to increase economic inequality and giving them detailed instructions showing how. …

Look at the Markets. Look at the Economy. Are Income Inequality and Immigration Our Two Biggest Issues?

 

RTX216VP_clinton-e1452185958451In my new The Week column, I highlight the weakness of three key policies — tax increases, raising the minimum wage, and universal preschool — in Hillary Clinton’s anti-inequality agenda. But the bigger point is that Clinton should focus more intently on policies to boost economic growth, rather than redistribute it. After all, it looks like the US economy (again) didn’t grow much more than 2 percent last year, according to official stats — with 2016 looking like more of the same. Even worse, right now it looks like a recession is more likely than a growth spurt.

William Galston makes a similar point in the WSJ, arguing that early in the Clinton campaign, “she delivered a well-crafted speech outlining her strategy for creating strong, sustained and inclusive growth. … Since then, however, she has been busy immunizing herself against attacks from the left, pursuing transactional politics with the Democratic Party base.” In short, blame Bernie.

But things aren’t much better on the GOP side. The Republican presidential contest has been dominated by immigration — but not, unfortunately, on how to increase immigration to boost growth. What mostly passes for pro-growth policies are unaffordable. across-the-board tax cuts. Indeed, many plans lose the most revenue on the bits that would theoretically produce the least amount of GDP growth.

Why Raising Taxes on the Rich Doesn’t Reduce Inequality

 

shutterstock_107787821_RichTaxThe progressive/left-wing response to the new Brookings study on inequality is obvious, right? From “Would a significant increase in the top income tax rate substantially alter income inequality?”:

The high level of income inequality in the United States is at the forefront of policy attention. This paper focuses on one potential policy response: an increase in the top personal income tax rate. We conduct a simulation analysis using the Tax Policy Center (TPC) microsimulation model to determine how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as 50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution.

The resulting effects on overall income inequality are exceedingly modest. That such a sizable increase in top income tax rates leads to such a limited reduction in income inequality speaks to the limitations of this particular approach to addressing the broader challenge. To be sure, our results do not speak to the general desirability of a more progressive tax-and-transfer schedule, just to the fact that even a significant tax increase on high-income households and corresponding transfer to low-income households has a small effect on overall inequality.