Trying to prevent an increase in tax rates on the richest 1% of Americans looks to me like a losing strategy for the Republicans.
Let me begin with what should be an indisputable fact: income inequality in the United States has been significantly increasing over the last generation. The new report from the Congressional Budget Office recently highlighted by Menzie has a lot of evidence in support of that statement.
Here is some more evidence of the trend. In 1987, 106 million Americans filed tax returns reporting a positive value for adjusted gross income (AGI). The total income for the 53 million households in the bottom half of the distribution sums to $440 billion, which was 15.6%
of the total of $2.8 trillion for all 106 million returns– half the filers had less than 16% of the income. That percentage is plotted as the yellow line in the graph below. It has been trending down over the last 15 years, with the bottom 50% only having 12.8% of the income in 2009.
 |
The turquoise line in the graph above is the share of AGI accounted for by the top 1%. During 1987-1995, the top 1% had almost as much total income as the combined income of the bottom 50%. Since 1995, the share of the top 1% has climbed to where the top 1% now earn significantly more than the bottom 50% combined. Despite the noticeable dips in the recessions of 2001 and 2007-2009, in 2009 the top 1% accounted for almost 17% of all the income reported.
Throughout this period, the U.S. has had a progressive income tax structure– the rich pay a higher percentage of their income than the middle class. And because the incomes of the rich have gone up faster than the middle class, their share of income taxes collected has risen significantly. In 1987, of the $369 billion collected in income taxes, only $22 billion, or 6%, came from the bottom half of those tax returns that had reported a positive AGI. By 2009, the share of income taxes paid by the bottom 50% had fallen to 2.25%, as indicated by the yellow line on the graph below.
 |
For comparison, the top 1% in 1987 accounted for about 25% of all federal income tax dollars collected in 1987, and for almost 37% in 2009, as indicated by the turquoise line in the above graph.
The top panel in the graph below shows how the average federal income tax rate for different percentiles has changed over time. The richer households have always paid a higher income tax rate. The income tax rate for the lowest quintile has declined since 1990, while that for the top 1% first rose and then was cut, being today back about where it was in 1990.
 |
However, the income tax is not the only source of revenue for the federal government. Social Security and Medicare contributions are also significant. Because the former only apply to the first $106,800 in income, the percentage of income paid in Social Security contributions actually falls as your income rises. As currently implemented, U.S. federal income taxes are progressive, whereas our payroll taxes are regressive. The middle panel above shows the average payroll tax rates for different percentiles. The middle class (21st to 80th percentile) has consistently paid a higher average payroll tax rate than the rich, and the gap has increased as the incomes of the latter grew faster than those in the middle.
The combined effect of income and payroll taxes still remains modestly progressive, as seen in the bottom panel above. The net effect of current federal taxes is to slightly reduce the inequality in after-tax income, as seen in the Lorenz Curve below.
 |
The period in which the top 1% have realized a growing share of after-tax income has not been very favorable economically for the American working class. I have a hard time pointing to ways in which typical Americans could be claimed to have benefited by the growing inequality.
Furthermore, given the size of America’s fiscal challenges, it is simply inconceivable to me that the country would ever agree to spending cuts of the magnitude that by themselves could return us to a sustainable fiscal path. Whether you think it’s a good idea to increase taxes on the wealthy or not, a pragmatist would acknowledge that it is inevitable.
I am therefore puzzled that the Republicans have chosen to draw a line in the sand on the question of raising taxes on the top 1%. The Republican position looks like a loser politically, is intellectually and morally difficult to defend, and puts them in a battle whose outcome is already known.
So why fight it?
Am I incorrect interpreting the Emmanuel Saez data presented on this site that the bulk of the inequality has occurred in the top fraction of the top 1% of earners? Would “equality” be better served by increasing the rate on the top fraction rather than on the entire top 1% cohort?
“Why fight it?”
Because they believe by fighting the battle they will be able to portray President Obama as a liberal socialist, and therefore win more independent swing voters in the upcoming election. That strategy seemed to work well in the 2010 mid-terms. Why not see if you can ride the bet through 2012?
I’d like to see the “all federal taxes” plot with all the payroll taxes included (the part paid in the name of the company).
It would also be interesting to look at the “all federal taxes” as a percentage of individual incomes. Would the total be progressive or regressive?
JDH Why fight it? Well, because over the last 10 years the very rich have been able to win most of the battles and they have a major political party that’s ready, willing and able to carry their water for them…not to mention spray pepperjuice for them as well. And let’s cut to the chase here…quite frankly we have a very dumb electorate.
It would be less galling if the top 1% (and really just the top 0.1%) had actually added real value to the economy equal to their earnings. But that’s clearly not been the case. Appropriating rents is not quite the same thing as adding value. In 2008 those same masters of the universe actually destroyed value and were rewarded for their incompetence, bailed out by the taxpayer and are now whining about having to pay higher taxes to clean up the mess that they created. That’s the part that galls me. If someone actually adds $10M in real value to the economy, then I’m fine with that person taking home $10M; but too many of these clowns at the top are not all that talented and not all that irreplaceable.
It may well be a delaying action. After every year that they can hold the line is another year that the income of the rich can be socked away as capital. And gains on capital are taxed at a lower rate. And the more people pay attention to income taxes, the less attention the pay to capital gains, where the truly wealthy make most of their money.
I’d be happy to see more revenue from the 1% via closing loopholes.
Raising rates? We already have higher corporate tax rates than the rest of the world, and higher capital gains tax rates than many of our competitors. Let’s not go overboard and kill investment and production.
The Republicans have made their line in the sand at statutory tax rates, not effective tax rates.
The dirty secret on the Democrat side is that there’s not that much money to be gotten from taxing the 1%. You could take 100% of everything they earn and it wouldn’t fix the deficit, to say nothing of what it would do to investment, production, and GDP. If you want to raise real money via tax hikes, you’re going to have to hit the middle class hard.
and 2slugbaits is right, but the very rich have two major political parties carrying their water… and tax rates are the least of their worries. Taxes are nothing compared to owning Congress and getting rich from crony capitalism. See Jack Abramoff’s recent tell-all column.
If Congress gets a tax increase, it will never get around to speding cuts or government waste reduction.
What I get out of the CBO numbers, many of which are charted above, is that the tax system is progressive in that higher income taxpayers pay a higher percentage of their total incomes than taxpayers in lower percentage bands. Once the system has meet that criterion, it becomes a question of how much?
I have heard a great many politicians say that abstractly defined groups of people are not paying their “fair share” of taxes. However, I have never heard any of them advance a recursive method of determining what a fair share is. I would welcome any enlightenment they or anybody else might provide on this subject.
Even the Buffett Complaint (I pay a lower rate than my secretary) is poorly specified. First Buffett does not count the income and taxes of his C-corporations in the calculation the way CBO does, nor did he disclose his and her returns, which might allow us to understand why the situation occurred. Until that information is disclosed, speculation is useless.
Further, the waters are completely muddied by reification of the abstractly specified, e.g. 2slugbaits above who attacks “those same masters of the universe”. the one thing I am sure of is that any percentile defined group changes composition over the years. My guess is that the top X% is more volatile than lower brackets. At the very top the individuals will likely be people who have sold a very large investment that took years to create or build, or people who have reached the tops of their professions or careers and who will only have a few years at the top.
If it makes 2slugbaits feel any better, almost all of the executives who ran banks that were bailed out in late 2008 lost their jobs on that account in very short order.
Finally, The evidence available to me is that changes in marginal tax rates do not impact tax collections.
http://politicalcalculations.blogspot.com/2011/09/biggest-driver-of-us-government-revenue.html
http://politicalcalculations.blogspot.com/2011/09/obama-vs-america-2012-spending-edition.html
http://politicalcalculations.blogspot.com/2011/09/why-hiking-top-income-tax-rate-wont-fix.html
.
I really have no complaint with any particular statistical category. I imagine the abstract concept called the top 1% really enjoys lording it over the lowly category called the bottom 20%. The fact that virtually no human beings spend an inordinate amount of time in any particular category is irrelevant when demagogues can concentrate only on the abstract categories and let people imagine those belonging to them. I am in the bottom 99%. I can see how some would find it irresistible to gang up, grab the pitchforks, and just take that 1% that was probably stolen from us anyway and have a grand party with it for a day or two. When the hangover wears off, then what?
The republicans are correct. It is a matter of principle. The democrats are also correct. It is very easy to stir up a majority of the remaining 99%, especially the less educated ones, about how that 1% doesn’t deserve what they have and what they have will fix all of our problems if only we got our hands on it when nothing could be further from the truth.
You are correct also. Why fight it. Those guys and gals simply won’t pay the taxes anyway. They have plenty of shelters already in place for this purpose which is why Buffet can say what he says. They simply transfer the money they don’t want to pay taxes on into their foundations which remain in their control. However, pandering to tyrants never quenches their appetites. Ever.
2slugbaits apparently is the person in the position to make the correct determination of exactly what everybody contributes and what everybody gets as well as the perfect metric to measure ‘real value’ with. We should make him king. Why let markets decide outcomes when, in a democracy, voting the outcomes would be far more satisfying to most people. Ain’t that what democracy is all about anyway? Make everyone the same?
Walter Sobchak One way to determine a fair tax rate is to invoke a Rawlsian principle. That’s something that Saez did in one of his early papers on optimal income tax rates.
As to mobility across income boundaries…sorry, but the empirical evidence says that you’re quite wrong. Those at the top remain at the top. Virtually all of the interquintile movement is at the margin of each quintile.
As to those poor down-and-out investment bankers that lost their jobs in 2008…well, those that did typically took home nice parachutes. But I’ll be sure and remember their unfortunate plight this season and throw in extra Krugerrand into the red kettle to help them out. I know they have it tough. They might even have to settle for a domestic pinot noir this Thanksgiving.
“Why fight it ?” You might as well ask why Germany doesn’t just go ahead and bail out Greece. First erroneous policies must change, then funding may be provided. In this I agree with @Herb_Lepp.
Ultimately taxes are going up on the top 1% and most likely for a good part of the middle class as well -’cause that’s where the money is (Obama isn’t honest enough to admit that – he’d rather harp on “millionaires and billionaires” and obsess for a several weeks about whether 5 or 7 year depreciation for planes is appropriate – that’s leadership for you – Simpson who? apparently he missed that report).
Just as relevant a question is why are the Democrats trying the continuation of the current system of entitlements? Without a doubt they will bankrupt the country if left in their current state and the longer we wait the bigger the problem we have to solve. The manner in which government spends tax revenue needs to adjust to the present realities of demographics, the shape of the today’s economy, and the competitive realities that we face in the global marketplace. The continued defense of this status quo make the Democrats look reckless and out of touch.
What is need is a negotiation that combines element of these two topics to produce a government that is appropriated sized, and one that spends money consistent with the needs of the current state of the economy. There are not enough adults on either side of the conversation at present.
I would love to see you take up the question I have proposed.
Have you waded through Saenz and Diamond’s paper on optimal tax rates. I read it once but it will take more to understand the nuances. One point that leapt out was you need an extremely high elasticity coefficient of .9 to believe today’s top rate of about 42% counting all taxes is optimal. Using a middle of the road coefficient, they come up with a range of, as I remember, 48% to 72%.
I’m looking for a way of explaining this paper in plain words because the conversation about it is completely misguided; people can’t understand the paper discusses optimal marginal rates and that means a rate which doesn’t distort behavior.
I need to read the paper more carefully to understand how they relate the welfare of the rich to the poor. I want to be sure I’m not missing something that tilts their model toward higher rates.
2sb 10:51, I love it when you say things that actually make sense.
I agree there’s a lack of realism on the Tea Party side. We’re going to spend some money on the Federal level. So we need to fund it. Put Federal spending at 20% of GDP, and then raise taxes to that level. But otherwise, the notion that raising taxes will permanently fill the budget hole is just fanciful. If that were true, the European economies would all be in surplus, and they’re not. They’re just broke at a higher level of government spending.
Now, if we aligned the incentives of politicians to maximize growth and minimize debt, then, yes, raise taxes all you want.
I strongly believe our tax system needs to be more progressive, but I think the focus on income tax brackets is misguided. We probably should do away with the capital gains tax and tax it as income.
Also, I’m not so sure about the idea of getting rid of the corporate tax. This would cause a move back toward a culture of business perks and people using corporate accounts for personal benefit.
Discussions about government spending dwell far too much on accounting and far too little on policy.
It is hard not to assume that the purpose of focusing on the accounting is to hide the real world implications of the budget decisions (itself a screen for spending cuts) behind the abstract facade of numbers.
2slugbaits
“It would be less galling if the top 1% (and really just the top 0.1%) had actually added real value to the economy equal to their earnings. But that’s clearly not been the case….If someone actually adds $10M in real value to the economy, then I’m fine with that person taking home $10M; but too many of these clowns at the top are not all that talented and not all that irreplaceable.”
“As to those poor down-and-out investment bankers that lost their jobs in 2008…well, those that did typically took home nice parachutes.”
Got any statistically sound evidence to support your whining? I bet all you got is a few anecdotes, or as someone with the statistics acumen that is acquired by all those that have evolved beyond neanderthal N = 1.
Why do people who own more scarce resources (like oil, land, gold or Intel stock) do relatively better than those who own less scarce resources (like unskilled labor)?
It is because of expanding money supply. Even in Weimar Republic, at the time of vastly expanding money supply, industrialists did much better than the rest of the population.
Ironically, the same people who cannot stop complaining about increased income inequality, also the ones who demand faster and faster increases in money supply…
One that is worth noting, that has been highlight by many leading economists is that in times economic retraction, there are many factors at play that skew the relatively simple measure of taxes paid by each percentile. Stiglitz has made it very clear that top earners are usually very well invested, and the income is less likely to be hurt compared to the other percentiles. This doesn’t mean they do no suffer economic damage in other ways not quantified by income and not recoverable by tax credits. They might suffer huge portfolio or equity losses that reduce there assets by much higher percentages than the average person would see their overall net worth decline.
This loss of capital in many ways is more damaging to over all economy than the loss of income taxes by the middle class. They raw amount the middle percentiles pay is relatively small no irregardless. But the retraction of the Capital and Asset Base of our Economy has much longer implications for sustained economic growth.
The simple measure of taxes paid per percentile needs to be interpreted with a careful lense becuase just shuffling ratios is not always a solid framework for meaningful policy.
“The Republican position looks like a loser politically, is intellectually and morally difficult to defend, and puts them in a battle whose outcome is already known.”
I am puzzled by this statement. Prof. Hamilton’s analysis doesn’t touch upon the political issues associated to changes in taxation analysis, and is certainly silent on morality of taxation, or on normative principles to guide optimal tax rates. All that is left is an “intellectual” argument (lato sensu). Inequality has increased, and this is tautologically bad. Implicit in this argument is that, the less equal we are, the more we should tax. I think this argument should be made explicit though. As it is, it is just self-righteous.
An adversary of targeted tax increases may observe that AGI income for the top 1% exceeds that of the bottom 50% by 2-3 points (vs. parity in 1985-95); i.e., it has increased from 13% to 17%, a change of 30%. The share of income taxes for this quantile of the population has gone from 25% to 37%, a 48% increase. For the bottom 50% of the population, a relative income decrease of 14% (from 15% to 13% of total income) corresponds to a much larger decrease in income tax contributions: 63% (from 5.5% to 2%). It seems that the progressivity of our income taxation has actually increased, or at least has not decreased; which is consistent with this finding of the OECD, as reported by the Tax Foundation (http://www.taxfoundation.org/blog/show/27134.html).
I am not particularly fond of this line of reasoning either, though. I think that, by presenting a collection of selective statistics, prof. Hamilton and others advocates of even more progressive taxation are trivializing a complex issue, which is primarily an ethical one. What is the justification for taking away wealth from the infamous 1%? Do they owe a debt to society? Have they unjustly earned their income? Or is redistribution justifiable on utilitarian grounds? All valid lines of attack. Showing a couple of 20-years time series and pointing at the slopes is unworthy of such a good econometrician.
I thought I would take a moment (re: Herb Lepp’s last point) to agree that it is critical to incorporate the idea that an increase in marginal tax rates does not provide a commensurate amount of revenue in any 1:1 sense. HOWEVER, to argue that there is NO relation between collections and rate movement is an overly aggressive claim. I welcome a more sophisticated specification (I really only performed “back of the envelope” calculations here), but collections among wealthier individuals (measured as the ratio between revenues per filing and the median income) and rate movement is actually decently correlated. At about .57 (1987-2007 period; gross collections & # of returns – IRS; # of HH, median & mean income – Census; marginal rate – tax policy center), this correlation in no way exhausts the explanatory universe, but I think we all recognize that income can be classified in more advantageous ways, and the incentive to do so increases with the marginal rate (to say nothing of other OV’s). Nevertheless, suggesting that we cannot get more revenue by increasing marginal rates is a bit strong. It is also interesting to note that there appears to be a strong learning element, particularly when the rates are increased. Over time, collections “catch up” to discrete shifts in marginal rates.
@Jay- 40% of GDP growth in the aughts was in the financials. They crashed the world economy, then got bailed out. Would you defend those gains as welfare improving?
Steve
the kids are home for thanksgiving. See you next week.
Great questions Jesse! At no point should there be some unfounded attack on any segment of society. It is entirely appropriate to ask whether or not there are broader grounds for taxing the wealthiest among us more than current policy dictates. I would, however, argue that there is little reason to suspect that the returns to the labor at the top of the distribution should have grown relative to the rest of the population as we have seen without a commensurate increase in their economic output. A number of points on this line of incommensurability are expounded upon by Dr. Thoma (http://www.thefiscaltimes.com/Columns/2011/10/11/Tax-Those-Who-Ruined-the-Economy-Its-Only-Fair.aspx#page1). The rationale need not be entirely utilitarian. However, I believe there are utilitarian grounds should one feel inclined to take that route. Our history over the last century casts doubt over the notion that the current dynamic in economic distribution is optimal for growth (this argument is accompanied by a necessary implicit assumption that boils down to growth=choice=good). One could also take the argument that there should be some sort of connection between those advantages that are extracted from society and those which are subsequently repaid. It is quite difficult to argue that the wealthiest among us have not leveraged society’s fruits to a greater degree. This line of argument leaves the rather sticky question of appropriate thresholds for compensation open (which is probably why the analytical argument based on temporal dynamics is so heavily pursued). In any case, these are just a couple seeds that barely scratch the surface.
“I have a hard time pointing to ways in which typical Americans could be claimed to have benefited by the growing inequality”
OK, but I have an equally hard time seeing how the typcial American has been harmed by the growing inequality.
Tax rates are lower across the board, even when including payroll taxes. Payroll taxes are regressive but the SocSec benefit formula is progressive such that those whose lifetime income is in the lower half of the distribution will receive more in benefits than they paid in taxes. If you want to complain that payroll taxes are regressive, then they are universally progressive in every nation. The OECD tax database shows that almost every nation in the OECD caps the amount of income subject to social contributions tax — some like Canada and the UK cap the level far lower than the U.S., closer to the average wage, whereas the U.S. limit is more than twice the average wage.
Effective taxes rates on the bottom 90-95 percent are even lower than advertised because large chunks of capital income can be sheltered in IRA’s, Roth’s 529’s etc. or is exempt entirely from taxation (owner-ocuppied housing). Those tax shelters and exemptions are capped, meaning high earners and the wealthiest cannot shelter the majority of capital gains and capital income. That is also why those households with the highest reported AGI’s tend to receive such a disproportionate amount of capital income — virtually all capital income from the bottom 90 percent is invisible on tax returns
You allude to “the magnitude of America’s fiscal challenges”, but fail to note that most of the fiscal challenges are related to providing social benefits. Hence, the solution should be to increase the amount of social contributions tax collected and/or reduce the level of social expenditure.
Instead, you suggest the only politically and economically viable solution is to pin the bill exclusively on high-earning and wealthy households, hoping that the behavioral response and elasticity of taxable income at the highest MTR’s is small enough to not offset the estimated revenue from attempting to increase effective tax rates.
I’ve worked with government statistics in all of my jobs. You cannot just make shit up and get it past me. 14% of GDP growth in the aughts was in the financials (compared to them being 8.5% of the economy at the beginning of the period)…
http://www.bea.gov/iTable/iTable.cfm?ReqID=5&step=1
Many people were able to consume houses they would not otherwise afforded without the financial sector and used the home ATM to consume more goods that they would not otherwise afforded without the financial sector. The aughts are an example of irresponsible smoothing of consumption by irresponsible households that got money from irresponsible lenders. In such instances you will get a boom and a bust.
The bailout is a different story. That is the fault of the big government types (liberals and conservatives). If our government was the same size as it was in the 19 aughts (relative to GDP) it would not have had the resources to bailout the banks.
A fascinating article JDH, with an equally set of fascinating comments. With this issue it appears that there are no bad/incorrect answers. All view points have some level of validity.
But, your question ended in a political question, “The Republican position looks like a loser politically, is intellectually and morally difficult to defend, and puts them in a battle whose outcome is already known.
So why fight it?”.
The simple answer is because the fight is not over raising taxes/revenue, but over cutting spending. Especially cutting that spending in the social safety net programs. No one believes (trusts) that Congress can/will cut in those categories. So the issue is trust over Congressional spending behavior, and not taxing. Just look at the Congressional polling numbers.
Further complicating the issue, is a fight, primarily by the Dems, to expand or increase spending on the social safety net programs, Healthcare, unemployment, child care, etc are recent examples.
Wonder why taxes is raised as an issue? Because Dems know the argument over their profligate spending is a loser. And, a huge majority of American voters know it!
So we have a trust issue with Congress doing what needs to be done, and the Republicans actually representing the core feelings over spending of the vast majority of voters.
The political arguments represented by the JDH tax charts will be overlayed by the historical Federal spending charts. For Dems that “…puts them in a battle whose outcome is already known.”
Imagine if you will a dry forest, with knee high dead underbrush. A hiker walks by and drops a lit match. The wind picks up, and a firestorm ensues. Then, aerial tankers, instead of dropping fire retardant, drop napalm.
This is a metaphor for the interaction between the financial crisis and a peak in Global Net Exports (GNE) of oil and in Available Net Exports (ANE). Peak Exports was both the trigger and an accelerant.
Regarding the 1% group, I suspect that a good deal of their wealth and income earning potential is somewhat illusionary, since I think that the markets are fundamentally mispricing most debt and equity instruments, given our outlook for declining GNE & ANE.
So, while I suspect that governments will attempt increase revenue by raising taxes, I suspect that it will be largely futile.
Since this is Turkey Day in the US, I thought it might be useful to speculate on what happens as more and more OECD countries are forced to do “Cold Turkey” withdrawals from conventional funding sources for debt financed deficit spending.
In other words, as time goes on, it seems more likely that the “lender” of last resort will be central banks. An interesting interactive chart that shows total public debt by OECD country by year:
http://www.gfmag.com/tools/global-database/economic-data/10394-public-debt-by-country.html#axzz1ecltauJ8
Excerpt:
“The 2007-2009 financial crisis led to a dramatic increase in the public debt of many advanced economies, with many of them experiencing their highest levels of debt since World War II. This was in large part due to the huge stimulus programs in countries around the world, in addition to government bailouts, recapitalizations and takeovers of banks and other financial institutions. Another contributing factor to the increased debt was the decrease in tax revenues.
“Public debt as a percent of GDP in OECD countries as a whole went from hovering around 70% throughout the 1990s to more than 90% in 2009 and is projected to grow to almost 100% of GDP by 2011, possibly rising even higher in the following years. It could already be higher, as potential costs of aging populations may not be entirely reflected in the budget projections of some countries.
“The rise in public debt has been seen not only in countries with a history of debt problems – such as Japan, Italy, Belgium and Greece – but also in countries where it was relatively low before the crisis – such as the US, UK, France, Portugal and Ireland.”
b turnbull nailed it.
The Dirty Fed (along with crony capitalism) is responsible for wealth inequality, not tax policy.
Happy Thanksgiving, everybody, and End the Fed!
I frequently feel like Tim Allen in the movie, “The Santa Clause.” He kept asking, “What happens if I fall off the roof?” And no one had an answer.
Governments, analysts, reporters, bloggers, etc. keep discussing plans and scenarios based on an expectation of a virtually infinite rate of increase in the volume of exported oil, when some simple math shows that the volume of oil exports available to importers other than China and India (Available Net Exports, or ANE) fell from 40 mbpd in 2005 to 35 mbpd in 2010, a volumetric decline of a million barrels per day per year.
If we look at Canada’s increase in net exports over this five year time period, 0.25 mbpd (BP), it would take the incremental increase in 20 exporting regions like Canada to offset the decline in ANE. And note that 21 of the top 33 net oil exporting countries showed declining net exports from 2005 to 2010.
“Chindia’s” combined net imports increased at 7.5%/year from 2005 to 2010 (BP). At their 2005 to 2010 rate of increase in net oil imports as a percentage of Global Net Exports (GNE), Chindia’s net imports would approach 100% of GNE in about 19 years. If we just look at China, China’s net imports would approach 100% of GNE in about 23 years.
Recently, China’s oil production has shown some definite indication of a possible peak.
It’s useful to note what happened to US net oil imports, after we peaked in 1970.
From 1948 to 1970, US net oil imports increased at 11%/year (EIA). After we peaked in 1970, US net oil imports increased at 15%/year from 1970 to 1977 (almost tripling in seven years). In 1978, Alaskan production started to come on line, and then consumption started to fall, resulting in a decline in net imports.
Given an ongoing decline in ANE, what happens to the OECD economies, what happens to government revenues, what happens to stock prices, what happens to the value of debt instruments, etc.? It seems that no one except a handful of people focused on “Net Export Math” are asking these questions.
Re your comment that SS declines as a percentage of income as income exceeds $106K:
It is even more interesting that given that SS has a mild progressivity in benefits (ie, working poor receive more than those who make $106K), it is now the middle class which is paying for the lower class’s slightly higher SS benefits, not the top 1%.
Considering that with welfare reform some folks have shifted to SS disability, it is now the middle and lower classes who are paying for those who would have otherwise qualified for traditional welfare.
We need some adjustment here: to the extent there is a welfare transfer to lower income folks via SS, upper 1% should also contribute.
W.C. Varones: You could take 100% of everything they [1%] earn…
I would like to see this actually done. There is already too much capital, much more than profitable investment opportunities. Excess reserves at the FED are overflowing. FED funds rate is near zero for “an extended period of time”. Treasury rates are in the gutter. My CDs in the bank pay near to nothing. People need to face the obvious: we are drowning in capital.
As of 2005, 60% of the 1% belonged to the upper managerial class. The 99% would benefit in countless ways: affordable luxury goods, better returns on their modest investment (less reason for managers to pay themselves huge bonuses at the expense of dividend), expanding vibrant labor market (less reason for managers to pay themselves huge bonuses at the expense of capital investment), government investment in science and technology, social services and infrastructure, etc, etc. Paradoxically, the managerial class would also benefit as well.
We are at the point of significant damage to our research and technology capacities. I was floored upon hearing that significant military cuts were part of the Budget Control Bill. To me it looks like we are willing to throw away not only a superior quality of life for a majority, but also our technological and military edge, so that a couple of individuals remain fabulously wealthy.
W.C. Varones: “The dirty secret on the Democrat side is that there’s not that much money to be gotten from taxing the 1%. You could take 100% of everything they earn and it wouldn’t fix the deficit, to say nothing of what it would do to investment, production, and GDP.”
I agree with nilys: we should be taking nearly 100% of their marginal income, as we used to do back in the Eisenhower years–and those years were not so terrible in terms of “investment, production, and GDP.” Also, an extra couple of hundred billion dollars, which is roughly what we’re talking about, would be enough to fix the pre-recession deficits (I think in 2006, 2007 and 2008 the deficit averaged about $200billion). To save more, cut the military budget and deal with health care the way every other developed country does–but in times like this we should be running a deficit.
Professor Hamilton
In the chart from the CBO showing percent cumulative share of income vs. cumulative share of population plots “line of equality.” Equality is a particularly powerful word.
Is this line your ideal result of the best economic system? Is this the line you are striving to approach, with your with your what you consider “politically, {and} is intellectually and morally” defensible?
Hope your Thanksgiving holiday was joyous for you and yours.
Jay The aughts are an example of irresponsible smoothing of consumption by irresponsible households that got money from irresponsible lenders. In such instances you will get a boom and a bust.
The enabler for that “irresponsible smoothing of consumption” were the financial wheeler-dealers who worked overtime to disguise the true underlying risks. There is nothing particularly horrible about banks making risky loans as long as that risk is not disguised. The problem comes when financial institutions try to hide that risk by wrapping it up and slicing and dicing things into utterly opaque packets so that no one understands the true risk. And that was primarily the fault of the whiz kids at the top, not the hapless homeowner without a clue. Financial institutions did not reduce risk, they only hid it, repackaged it, and then leveraged it 40:1 with very little of their own skin in the game. Of course, one CEO was all too happy to give himself $38.3M in one year even though his company lost 90% of its value. Nothing like pay for performance in the private sector. And say you own a hedge fund that isn’t doing well…just sell it to your company for $165M and let the company take the hit. That’s CEO integrity for you. Then ask the Feds to cover $300B in toxic assets. Sure, no problem. This was fairly typical. Similar story with AIG and Goldman-Sachs and Lehman not to mention overseas pirates of the boardrooms. These guys were crooks who in an earlier time might have found their heads on the ends of pikes. They are largely responsible for the financial recession we have today. They made the mess, so I don’t think they ought to complain too loudly when asked to help clean it up with higher taxes. If they want to leave the country we should all offer to help them find their passports. Good riddance.
CoRev tells us that there are “no bad/incorrect answers” and then proceeds to a story that is simultaneously bad, incorrect and not actually an answer. A trifecta! He tells us that the problem is not on the revenue side, but on the spending side. Actually, today’s average tax burden is ~12%, which is about what it was under Nixon, a little less than under Carter, about what it was under Reagan, a little higher than it was under Bush #41, a lot lower than it was under those economic hard times during the Clinton years, and about the average for the Bush #43 years.
And of course CoRev blames it all on spending. Well, except for Social Security, Medicare, Medicaid, Defense and interest on the debt, non-cyclical federal spending (e.g., excluding unemployment insurance) has been flat. Since Social Security is financed with a FICA tax and Trust Fund bonds it’s unclear just how it contributes to the long-run debt. In any event, I didn’t see a lot of Tea Party activists demanding that the government cut their SS benefits. Similar story with Medicare and Medicaid…especially Part D, which was Bush’s unfunded brainchild. I also didn’t see a lot of Tea Party signs protesting defense spending.
As Ron Brownstein has pointed out, the dirty little secret that a lot of Democratic politicians are discovering is that the three geezer programs (SS, Medicare and Medicaid) primariy benefit a Tea Party constituency that is unlikely to vote Democratic anyway. It’s the GOP that will find it hard to cut spending on those programs because that constitutes the GOP base. We saw that in 2010. And Democratic support for those geezer programs comes at the cost of support for the Democratic party’s core constituency, which is increasingly minority and young. Fixing Medicare and Medicaid either means cutting benefits (something that strongly motivated Tea Party activists in 2010) or raising Medicare taxes (something that hurts minorities and the young). So when Democrats talk about having to raise taxes to support Medicare and Medicaid, they are actually working against the interests of their core constituencies. I don’t see the GOP making similarly bold arguments that hurt its core constituency.
1. I think you have mis-represented the Republican position. They are not against taxes, they are against feeding the machine. {In other words, they want to ensure that tax increases are not wasted but are instead linked to spending control.
2. Is there a logical link between tax policy and income equality? When has the correct level of income equality been determined? Where is the economic justification for using tax policy to shape certain incomes towards a determined level? Face it, income inequality has simply become a non-sensical excuse for raising taxes.
“Throughout this period, the U.S. has had a progressive income tax structure– the rich pay a higher percentage of their income than the middle class.”
While almost technically accurate as stated, this is an important misconception because it ignores state and local taxes.
Our overall tax system is actually not progressive at all above about $60K in income.
http://economix.blogs.nytimes.com/2009/04/13/just-how-progressive-is-the-tax-system/
Technically accurate would be:
the U.S. has had a progressive *federal* income tax structure
Professor Hamilton
To continue my above post.
The “line of equality” of the CBO chart is simply a graphical representation of:
“From each according to his ability, to each according to his need”
An intellectually and morally difficult to defend position, as well as terrible economics, which comes not from the republicans but the other side.
Ed Hanson Do you honestly believe that between 2003 and 2007 the top 1% constituted 60% of the growth in the economy’s talent and ability??? Really? Because that’s how much of the GDP growth they took home. Meanwhile the bottom 80% saw negative growth, so by your logic they must have lost ability and talent. And even in 2008 when the top 1% lost income it was only a temporary loss in income for that year. Generally there was no clawback to cover the wealth that they destroyed for the 99% who were not responsible for the recession.
A few days ago Krugman quoted the executive director for financial stability at the Bank of England:
“In fact, high pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector. This was not an outward shift in the portfolio possibility set of finance. Instead, it was a traverse up the high-wire of risk and return. This hire-wire act involved, on the asset side, rapid credit expansion, often through the development of poorly understood financial instruments. On the liability side, this ballooning balance sheet was financed using risky leverage, often at short maturities.
In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not.”
That really gets to the nub of the issue. If the clowns at the top had actually contributed value equal to what they earned, then a little inequality might not be so galling. But those at the very, very top in the financial world did not add value. They simply stole money. And now they’ve managed to convince gullible apologists that making them pay for the mess they created is somehow a left-wing socialist plan to redistribute the income of hard working one-percenters. The bankers at the top may have worked hard, but they didn’t add value and income should be based on value added, not effort. Afterall, street criminals work hard at their profession as well. What you don’t seem to realize is that the operating principle at work here is not “From each according to his ability…” but rather “Heads the top 1% wins, tails the bottom 99% loses.” Is that the moral principle you subscribe to as well?
Slug
Parts of what you write are probably correct. But your solution of simply taxing them is not.
The financial section did become too large, and the base reason for this was governments here and in Europe becoming too large, using that sector for its purposes. The solutions the financial sector found to these demands proved unsustainable, and that is because there were no sustainable solutions to these demands. The demands themselves were unsustainable Thus is the result in all command economies.
The actual solution to these problems is not more taxation, leading to bigger government, but the reduction in the size, scope and power of the Federal government.
” If the clowns at the top had actually contributed value equal to what they earned, then a little inequality might not be so galling. But those at the very, very top in the financial world did not add value. They simply stole money. ”
Evidence, please.
Here is a great discussion of income inequality and the 1% by Steven Kaplan of the University of Chicago interviewed by Russ Roberts. It debunks a number of myths about corporate executive compensation, and raises questions about the propriety of “bailing out” firms paying billions of dollars to execs.
http://files.libertyfund.org/econtalk/y2011/Kaplaninequality.mp3
Rich Berger Evidence please.
For starters you might want to read Menzie’s book. He has some pretty good stories of criminals in silk ties. As to the banking sector not adding any value, try this:
http://www.voxeu.org/index.php?q=node/7314
All I can say is that your standards of evidence are pretty low.
2slugs, I’d appreciate a short critique by you of this paper:
http://its.law.nyu.edu/faculty/coursepages/data/First_Assignment.pdf
Actually, I’d appreciate Menzie’s critique as well.
Are there other papers out there that look at this dataset? Seems like this could answer the question, “do the rich just transfer value to themselves” pretty definatively.
An interesting thing in the voxeu article is that the authors say that the excess TFP for the financial sector is overstated, which make some of the EU countries financial sectors look way more productive. From his chart, you can see that this is not the case for the US.
As I said, your standard of evidence (and your reading comprehension) is low. You do rate highly on the bluster scale, I might add.
Rich Berger In case you forgot, many of the riskiest US bank actions were actually off-shored to branch office shadow banks in Europe. That was one of the ways US banks made their investments opaque.
Irrelevant. When cornered, you evade.
Actually the podcast of which this is a summary may partially support your position. I haven’t listened to it yet, but plan to do so this morning.
Rich Berger No, it’s not irrelevant. For example, Menzie describes how the AIG Financial Products division based in London racked up huge profits by disguising subprime mortgages…and being offshore meant that they could do nasty things that they could not have been done here. That was largely US financial stuff that was credited to Britain’s excess TFP numbers.
But you seem to have missed the point about the VoxEu chart. The chart shows mismeasured TFP. Got it? Mismeasured. One of the paper’s points was that accounting conventions mismeasure financial productivity. Specifically, TFP is the Solow residual. If you read the entire paper (not just the summary) you would have learned that even though excess TFP for the US financial sector was low, returns to “labor” in the financial sector (i.e., a non-residual component) were 30%-50% excessive. In other words, rather than showing up as mismeasured Solow residuals, the excessive gains to the financial sector showed up directly as salaries and bonueses. See chart 15 of the complete paper. And for what it’s worth, chart 15 actually comes from an NBER paper #14644, “Wages and Human Capital in the U.S. Financial Industry: 1909-2006.” From page 30 of the NBER paper:
We show in particular that corporate finance needs from the non-financial sector help explain the demand for skills in the financial industry. On the other hand, we find that rents account for 30% to 50% of the wage differentials observed since the late 1990s. In that sense, financiers are overpaid
The argument in the paper is that lax regulation created a demand for highly skilled finance types. A lot of the skill and effort went into burying, hiding and ratcheting up risk without much benefit to society in general. The high private returns in finance were made possible by all of this risk shifting, but that did not generate actual lasting value. Worse yet, because the total number of people in finance did not increase in the US, increased demand for finance skills created an opportunity for rents relative to other occupations requiring similar skill levels. And that is why, in the case of the US, excess returns to finance show up as returns to “labor” rather than as a mismeasurement of the TFP/Solow residual, as tended to be the case in Europe. Remember, VoxEu is primarily oriented towards European readers.
9-9-9 IS 18-18-18
hOW CAN SUCH JUNK EVEN GET A DISCUSSION?
Total National Income is 12,000
Total consumer spending is 10,000
Total Cain Taxable is 22,000
9% of 22,000 is 1,980 or half our 3800 budget
Is we dumb?