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The Gini Distortion

In The Wall Street Journal Phil Gramm and Michael Solon write How to Distort Income Inequality- The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

excerpt:

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornell’s Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the U.S. since 1979.

Simple statistical errors in the data account for roughly one third of what is now claimed to be a “frightening” increase in income inequality. But the weakness of the case for redistribution does not end there. America is the freest and most dynamic society in history, and freedom and equality of outcome have never coexisted anywhere at any time. Here the innovator, the first mover, the talented and the persistent win out—producing large income inequality. The prizes are unequal because in our system consumers reward people for the value they add. Some can and do add extraordinary value, others can’t or don’t.

How exactly are we poorer because Bill Gates Warren Buffett and the Walton family are so rich? Mr. Gates became rich by mainstreaming computer power into our lives and in the process made us better off. Mr. Buffett’s genius improves the efficiency of capital allocation and the whole economy benefits. Wal-Mart stretches our buying power and raises the living standards of millions of Americans, especially low-income earners. Rich people don’t “take” a large share of national income, they “bring” it. The beauty of our system is that everybody benefits from the value they bring.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that U.S. per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

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A Parabolic Tax Curve

From Mark Perry at his AEI- Carpe Diem Blog, Top 400 taxpayers paid almost as much in federal income taxes in 2010 as the entire bottom 50%

Early last year Obama reiterated his belief that the wealthiest Americans still aren’t paying their “fair share” of taxes. Here’s an analysis using recent IRS data that suggests otherwise.

1. In 2010 (most recent year available), the top 400 taxpayers based on Adjusted Gross Income earned $106 billion collectively, and they paid $19.1 billion in federal income taxes at an average tax rate of 18% (see chart above).

2. In 2010, the bottom 50% of taxpayers, a group totaling 67.5 million Americans, earned collectively almost $1 trillion and paid $22.4 billion in federal income taxes at average tax rate of 2.4% (see chart above).

Bottom Line: A small group of 400 of America’s most successful earners in 2010, about the number of residents living in a typical apartment building in Washington, D.C., paid almost as much in federal income taxes as the entire bottom half of America’s 135 million tax filers, which is a population equivalent to the combined number of residents living in America’s 29 least populated states, plus the District of Columbia. What makes this disparity possible is the fact that 41% of individual income tax returns filed in 2010 had a zero or negative tax liability, according to The Tax Foundation. And a recent CBO study (featured on CD here) found that the entire bottom 60% of American households are “net recipient households” and received more in government transfers than they paid in federal taxes in 2011.

When you have only 400 Americans paying almost as much in federal income taxes as the entire bottom 50% of Americans filing income tax returns, I think we can dismiss any notion of the rich not paying their “fair share” of taxes. In fact, maybe the IRS should publish the names and addresses of the Top 400 taxpayers (or provide a forwarding service to protect anonymity), so that we can all send them “Thank You” letters to express our gratitude for shouldering such a disproportionately large share of our collective tax burden.

HKO

An amazing statistic.

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Inequality and The Tax Reform of 1986

In The Wall Street Journal Phil Gramm and Michael Solon write How to Distort Income Inequality- The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

excerpt:

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

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Inequality and The Missing Data

In The Wall Street Journal Phil Gramm and Michael Solon write How to Distort Income Inequality- The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

excerpt:

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

HKO

Far too often progressive policies are based on very distorted data; sometimes from ignorance and sometimes from malice.  The media does a piss poor job of objectively analyzing such data because it fits the story they want to tell; truth be damned.

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Are The Rich Paying Their Fair Share?

superrich

Scott Grannis posts in his blog,  Calafia Beach PunditTax Shares Update:

In 2011, it took $389K or more of adjusted gross income to make it into the top 1% of income earners, and they paid 35% of all federal income taxes. The top 5% of income earners made at least $168K and paid almost 57% of all federal income taxes. The top 10% paid made at least $120K and paid 68%. The top 25% included all those making $70.5K or more, and they paid 86% of all federal income taxes. Meanwhile, the bottom 50% of income earners (those making $35K or less) paid only 3% of all federal income taxes, and the vast majority of them either paid no income tax or received money on net from the IRS.

The Laffer Curve at work: Although the share of total income taxes paid by the top 10% of income earners today has fallen a bit in recent years, it has nevertheless risen by over 40% since the early 1980s, despite the fact that the top income tax rate has been cut in half. Slashing the top marginal rate by half resulted in a huge increase in the share of total income taxes paid by the rich.

Let’s talk “fairness:” In 2011, the top 10% of income earners in this country paid two-thirds of federal income taxes, and the top 1% (the rich) paid over one-third. Is that not enough? Almost half of those who work paid no federal income taxes. Is that fair? Is it healthy for so few to pay so much, and for so many to pay nothing? When almost half the population has no skin in the game, and another quarter pay only a very small share of total taxes, it is easy to demonize or exploit the rich—it’s called the “tyranny of the majority.”

Not surprisingly, top income earners make a large share of total income. However, if you compare the two charts, you see that the share of total taxes they pay is much larger than the share of income they earn. Our tax code is very progressive no matter you look at it. In 2011, for example, the top 1% of income earners made 19% of the country’s total adjusted gross income and paid 35% of total income taxes. The top 5% earned 34% of total income and paid 57% of total taxes. The top 10% earned 45% of total income and paid 68% of total taxes. The top 25% earned 68% of total income and paid 86% of total taxes.

HKO

At what point does one acknowledge that the wealthy are in fact paying more than their fair share?  The increase in income taxes does not redistribute wealth from the wealthy to the poor; it simply impedes the opportunity for others to get wealthy.  By focusing more on inequality than economic growth we retard the opportunities for the non-wealthy to improve their lot in life.