Posts Tagged ‘income’

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As regular readers know, I’ve been warning for years that growing economic inequality puts the existing order—both economy and society—at risk.

Well, as it turns out, the 700 or so “experts” surveyed by the World Economic Forum have finally woken up to that fact.*

According to the Global Risks Report 2017 (pdf),

“Growing income and wealth disparity” is seen by respondents as the trend most likely to determine global developments over the next 10 years, and when asked to identify interconnections between risks, the most frequently mentioned pairing was that of unemployment and social instability. . .

The slow pace of economic recovery since 2008 has intensified local income disparities, with a more dramatic impact on many households than aggregate national income data would suggest. This has contributed to anti- establishment sentiment in advanced economies, and although emerging markets have seen poverty fall at record speed, they have not been immune to rising public discontent – evident, for example, in large demonstrations against corruption across Latin America.

I think they’re right: high and still-rising inequality creates the conditions for growing unemployment and and profound social instability.

But that’s where the agreement ends. Clearly, the view of the Davos folk is that “their” order is put at risk by growing inequality. The Brexit vote and Donald Trump’s election—not to mention the unexpected success of Bernie Sanders’s campaign and the rise of “fringe,” anti-mainstream political movements around the world—are threatening to upend existing economic and social institutions.

For the rest of us, the “risks” posed by growing inequality actually represent an opportunity—to imagine and enact alternative institutions and thus a radically different economic and social order.

 

*Although the Davos understanding of the problem of inequality is more than a bit strange. One of the so-called experts in a session on inequality, “Squeezed and Angry: How to Fix the Middle-Class Crisis,” is none other than hedge-fund billionaire Ray Dalio.

 

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Mainstream economists and economic commentators continue to invoke the so-called “dignity of work” to criticize the idea of a universal basic income.

It’s an argument I’ve dealt with before (e.g., here and here). As I see it, there’s nothing necessarily dignified about most people being forced to have the freedom to sell their ability to work to a tiny group of employers. The idea may be intrinsic to capitalism—but that doesn’t mean it contributes to the dignity of people who work for a living, especially when they have no control over how they work or what they produce when they work.

Matt Bruenig, to his credit, suggests an alternative argument against the critics of a universal basic income:

these writers dislike the fact that a UBI would deliver individuals income in a way that is divorced from working. Such an income arrangement would, it is argued, lead to meaninglessness, social dysfunction, and resentment.

One obvious problem with this analysis is that passive income — income divorced from work — already exists.

Bruenig is making a distinction between income related to work and income that comes from other sources—passive or not-work—which represents a fundamental divide within contemporary society.

As is clear from the data in the chart above, very little of the income (15 percent in 2014) of the bottom 90 percent of Americans stems from not-work (and, even then, most of their apparently not-work income is actually related to previous work, in the form of pension incomes). However, for the tiny group at the top, most of their income (59 percent for the top 1 percent, 75 percent for the top 0.01 percent) is related to not-working (and, of course, most of their work-related income is based on sole proprietorships and elevated executive salaries). In other words, most of their income represents a claim on the extra work performed by others.

So, when critics of a universal basic income rely on the “dignity of work” argument, what they’re really doing is reinforcing the idea that most people can and should derive dignity from working for a small group of employers. At the same time, critics are presuming there’s no loss of dignity for the tiny group at the top, those who have managed to capture most of their income from sources related not to their own work, but the work of everyone else.*

Where’s the dignity in that?

*Now, it’s true, as Noah Smith observes, “many rich people believe that investing constitutes work.” But spending a few minutes a day reading the business press and examining alternative investments does not constitute work—at least as most people understand what it means to work. Or are those rich people referring to the fact that they hire a whole host of other people, from financial advisors to accountants, to do the actual work of managing their not-work investments?

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Neil Irwin is right: “Poor and working-class Americans have fallen behind over the last generation, receiving few of the gains of an expanding economy.” So, he wants to devise a tax plan to change that.

The problem is, Irwin only looks at raising the income of the bottom 20 percent of families to where they would be if they shared equally in the gains since 1979.

So what would it all cost? The Tax Policy Center crunched the numbers: The policy would deplete federal coffers by $1.02 trillion over a decade.

That is serious money.

Sure, it’s serious money. But it’s only the tip of the iceberg. By my calculations (illustrated in the chart above), national income per adult and the average income of the bottom 90 percent (both in 2013 dollars) were almost equal in 1970. But national income per adult has risen a whopping 87 percent since 1970, while the average income of the bottom 90 percent has actually fallen, by 6.7 percent.

If we want to make up that gap, it’s going to cost much more than $1.02 trillion. In fact, it would take about $5.6 trillion—equal to the amount of the tax cuts President-elect Donald Trump wants to shower on wealthy individuals and large corporations—just to close the gap for one year.*

Now that’s serious money.

And it doesn’t begin to make up for all the pay working-class Americans have lost since 1970.

The only way to close the gap and to compensate working-class Americans for the pay they’ve lost over recent decades is to not to tinker with the tax system (or, for that matter, close the trade deficit, boost economic growth, or attempt to protect the safety net), but to change the existing set of economic institutions—by giving workers a real say in how the extra income they create gets distributed.

 

*My back-of-the-envelope calculation (90 percent of tax units times the gap between national income per adult and average income of the bottom 90 percent) is for 2013.

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The total income reported on the top 400 individual tax returns rose 20 percent in 2014, according to Internal Revenue Service (pdf) data released last Thursday.

The figures reveal the concentration of earnings at the summit of the income distribution, in a club that required $126.8 million of adjusted gross income to enter. That tiny group, out of nearly 150 million tax returns in 2014, took home $175.5 million on average (that’s in 1990 dollars) and 1.3 percent of total U.S. adjusted gross income.

President-elect Donald Trump and the Republicans who control Congress have promised to lower the taxes on this group. First, they plan to repeal Obamacare and its taxes, which would bring the long-term capital gains rate down to 20 percent. A potentially even bigger benefit for the top 400 will come from  Trump’s proposal to slash the tax on corporate income from 35 percent to 15 percent. That rate would also apply to at least some of the “passthrough” income from S Corporations and partnerships that is reported directly on individual income tax returns and is now taxed at a top rate of 39.6 percent.

A lower rate for passthrough income would disproportionately benefit the über rich, just as the lower rate on capital gains does. In 2014, the top 400 earners reported 1.3 percent of all adjusted gross income in the U.S., but 2.94 percent of all partnership and S corp net income, and 10 percent of capital gains taxed at a lower rate.

We know the top 400 will benefit enormously from those tax changes. But we won’t be able to measure it, since the IRS also announced it would no longer release data on the top 400, which it has compiled going back to 1992. Instead, future reports will focus on the top 0.001 percent, which included 1,396 households for 2014.

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The Guardian reports that “white and wealthy voters gave victory to Donald Trump.”

Of the one in three Americans who earn less than $50,000 a year, a majority voted for Clinton. A majority of those who earn more backed Trump.

Yes, that’s right, according to the CNN exit polls (as in the top chart above). Both parties received majority support from their traditional income bases.

But, in comparison to 2012 (in the bottom chart, also from CNN), the movement was in the opposite direction: Clinton lost considerable support from low-income voters (from Obama’s 60 to her 52 percent) and didn’t gain enough from higher-income voters (up from 45 percent in 2012 to 47 percent in 2016) in order to defeat Trump.

In the end, as Thomas Frank has explained, American liberals are the ones who put Trump in the White House:

The American white-collar class just spent the year rallying around a super-competent professional (who really wasn’t all that competent) and either insulting or silencing everyone who didn’t accept their assessment. And then they lost. Maybe it’s time to consider whether there’s something about shrill self-righteousness, shouted from a position of high social status, that turns people away.

The even larger problem is that there is a kind of chronic complacency that has been rotting American liberalism for years, a hubris that tells Democrats they need do nothing different, they need deliver nothing really to anyone – except their friends on the Google jet and those nice people at Goldman. The rest of us are treated as though we have nowhere else to go and no role to play except to vote enthusiastically on the grounds that these Democrats are the “last thing standing” between us and the end of the world. It is a liberalism of the rich, it has failed the middle class, and now it has failed on its own terms of electability. Enough with these comfortable Democrats and their cozy Washington system. Enough with Clintonism and its prideful air of professional-class virtue. Enough!

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Inequality may be the “defining challenge of our time.” But you wouldn’t know so from Monday evening’s presidential debate, in which neither candidate directly addressed the issue.

But the Obama administration seems to be in full gear—with an op-ed piece by chair of the White House Council of Economic Advisers Jason Furman and an extensive report by the Council of Economic Advisers (pdf)—celebrating its own “historic achievement in reducing inequality.”*

Tax changes enacted since 2009 have boosted the share of after-tax income received by the bottom 99 percent of families by more than the tax changes of any previous Administration since at least 1960. President Obama has also overseen the largest increase in Federal investment to reduce inequality since the Great Society, largely reflecting the coverage provisions of the Affordable Care Act (ACA) and expanded tax credits for working families.

And the results? Together, the changes in tax policy and the ACA provisions will increase the share of after-tax income received by the bottom quintile in 2017 by less than one percentage point and reduce the share received by the top 1 percent by all of 1.2 percentage points.

That’s something, it is true, but it does not reverse the spectacular growth in inequality the United States has witnessed in recent decades (when the share of income captured by the top 1 percent rose from 9 percent in 1971 to 22 percent in 2015), and it doesn’t even touch the even-more-dramatic inequality in the distribution of wealth (such that in 2013, the last year for which data are available, families in the top 10 percent of the wealth distribution held 76 percent of all family wealth, families in the 51st to the 90th percentiles held 23 percent, and those in the bottom half of the distribution held no more than 1 percent).

So, what’s the problem? We already know, thanks to a 2015 Brookings Study (pdf), that the effect of changes in top individual tax rates (including a redistribution of all new revenues to household in the bottom 20 percent of the income distribution) are “exceedingly modest.”** And, of course, changes in tax rates on income have little if any effect on the unequal distribution of wealth.

The fact that the current administration can cite its own policies as a “historic achievement” just confirms how little other administrations have done to moderate growing inequality in the United States over the course of the past three decades.

They also confirm the fact that, unless and until the United States decides to tackle the issue of wealth ownership and the resulting unequal market distribution of income— especially the ability of the tiny group at the top to capture and invest for their own sake the enormous surplus created by everyone else—it’s clear that economic inequality will remain the “defining challenge of the next generation, too.”

 

*The same issue has been taken up on the other side of the pond, about whether the last Labor government did anything to reverse “the rise of inequality seen under the previous Conservative administration.” According to the data cited by Simon Wren-Lewis, the best that can be said is Labor did not continue the previous rise in inequality, although it certainly didn’t reverse it.

**Here’s the authors’ conclusion:

In this analysis we have simulated the effects of increasing the top income tax rate under three possible reforms: (a) raise the top individual income tax rate from 39.6 to 45 percent; (2) raise the top individual income tax rate from 39.6 to 50 percent; and (3) raise the top individual income tax rate to 50 percent for income greater than $1 million for joint filers, $750,000 for single filers. We calculate the resulting change in income inequality under these scenarios 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, with changes in the Gini coefficient of less than 0.01.

That such a sizable increase in the top personal income tax rate leads to a strikingly limited reduction in overall income inequality speaks to the limitations of this particular approach to addressing the broader challenge. It also reflects the fact that the high level of U.S. income inequality is characterized by a wide divergence in income between higher-income households and those at the middle and below.

 

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Niall Ferguson, Harvard’s incorrectly political ignorant gay-bashing bloviating right-wing infotainment war-crimes-apologist historian, finally gets something right.

In explaining the “fight isn’t going as planned” for Hillary Clinton, Ferguson writes:

Last week, Clinton’s supporters seized on new economic data from the Census Bureau showing that median household income rose by more than 5 percent in real terms last year. Poverty is down. So is the number of Americans without health insurance. So is unemployment.

All this seems like grist to the mill of a campaign that essentially promises continuity. Yet there is a problem. Take another look at those figures for inflation-adjusted median household income. Yes, it was $56,500 last year, up from $53,700 the year before. But back in 1999 it was $57,909. In other words, it’s been a round trip — and a very bumpy one indeed — since Clinton’s husband was in the White House.

Telling Americans that they are nearly back to where they were 17 years ago and then expecting them to be grateful looks like a losing strategy. When two thirds of Americans — and even higher percentage of older white voters — say the country is on the wrong track, they are not (as Democrats claim) in denial about the Obama administration’s achievements. They are saying that the country is on a circular track, and has been since this century began.

Not surprising given his track record, Ferguson gets the rest wrong—arguing, for example, that one kind of stimulus (Trump’s proposed tax cuts for the wealthy) will work while the other kind of stimulus (Clinton’s government expenditures on infrastructure) won’t.

But his major observation about the failure of the Clinton strategy—that “Telling Americans that they are nearly back to where they were 17 years ago and then expecting them to be grateful”—is substantially correct.