The Great Divergence

[ShadowHM]

Hello all

I have been following a series of essays written for Slate Magazine, exploring the possible causes of the increasing disparity in income distribution in the U.S.A.

It has been fascinating reading and I feel motivated to share. I admit, I have not had the time to explore the bibliography (i.e. all the provided links) in the essays. No matter.

Here you are: THE GREAT DIVERGENCE : WHAT'S CAUSING AMERICA'S GROWING INCOME INEQUALITY?

[kandrathe]

Hello all

I have been following a series of essays written for Slate Magazine, exploring the possible causes of the increasing disparity in income distribution in the U.S.A.

It has been fascinating reading and I feel motivated to share. I admit, I have not had the time to explore the bibliography (i.e. all the provided links) in the essays. No matter.

Here you are: THE GREAT DIVERGENCE : WHAT'S CAUSING AMERICA'S GROWING INCOME INEQUALITY?

I've always been troubled by the focus on income.

I think it pits the less successful workers against the more successful workers. Where I would like people to focus is on net worth. If incomes rose 10% under Carter, who cares, because under Carter the prices of goods went up by 20 or 30%, and so the net effect was that we are worse off. In fact, I think we discussed that briefly once here before. I believe that in general for the bottom 2/3rds of Americans, their CPI adjusted purchasing power has declined over the past 20 years. Wages are not keeping up with inflation.

Per Capita Net Worth is more interesting to me, and it shows the illusion of wealth created by continuous bubble building and popping economies.

Now, if only we might convince the IRS to tax us at a flat rate according to net worth, then those at the top, like Warren Buffet, might actually feel the sting of having to contribute rather than grouse about it. For most of the people in the US who remain in the negative territory, they may benefit from paying less. The fairest method I believe would be high consumption based taxes, made progressive by tax rebates commensurate with net worth. How to implement this would be less difficult in the age of electronic debit and credit cards.

[Lissa]

Now, if only we might convince the IRS to tax us at a flat rate according to net worth, then those at the top, like Warren Buffet, might actually feel the sting of having to contribute rather than grouse about it. For most of the people in the US who remain in the negative territory, they may benefit from paying less. The fairest method I believe would be high consumption based taxes, made progressive by tax rebates commensurate with net worth. How to implement this would be less difficult in the age of electronic debit and credit cards.

I'm not so sure that Warren Buffet would have an issue. Warren and Bill were famously quoted during Bush's tax reduction for the wealthy (those making over $250k a year as a family) saying something to the effect of; "I need a tax reduction why?"

And while flat tax makes some sense, there's some articles out there (I would need to go find them) that show mathematically why a flat tax won't work (it boiled down to cost of goods and services compared to the amount of net income someone has after taxes are figured where a 15% flat tax against someone in the poverty line area would make it next to impossible for them to survive adequately whereas 15% against someone making $150k a year would be negligible to them).

[kandrathe]

And while flat tax makes some sense, there's some articles out there (I would need to go find them) that show mathematically why a flat tax won't work (it boiled down to cost of goods and services compared to the amount of net income someone has after taxes are figured where a 15% flat tax against someone in the poverty line area would make it next to impossible for them to survive adequately whereas 15% against someone making $150k a year would be negligible to them).

But... I was talking about taxing net worth, and something like 2%. Someone whose net worth is $20,000 would pay $400 per year. So, add up money in savings, stock values, property and other hard assets -- keep retirement, college trusts, and medical savings account out of it for now). Warren Buffet personally who was until recently at a net worth of like 62 billion, would owe $1.25 billion in taxes.

http://www.forbes.com/2009/09/30/forbes-..._land.html

The Forbes 400 who own collectively $1.27 trillion at just a 2% tax rate would owe $25.4 billion.

[--Pete]

Hi,

I have been following a series of essays written for Slate Magazine, exploring the possible causes of the increasing disparity in income distribution in the U.S.A.

Thanks for that link. It is an interesting read, though it seems a bit slanted. I'll have to follow up on it.

Now, if only we might convince the IRS to tax us at a flat rate according to net worth, . . .

Thereby discouraging investing or saving. Rent your house, don't buy it. Buying it adds to your net worth. Buy that bottle of hundred year old cognac -- that'll reduce your net worth by a couple of hundred. Don't start your own business, that becomes part of your net worth. Work for somebody else, let him pay the taxes.

Of the various ideas you've put forth, I think this may be the worst.

. . . then those at the top, like Warren Buffet, might actually feel the sting of having to contribute rather than grouse about it.

As Lissa originally pointed out, bad example. Buffet is a money player. For him not to take advantage of every legal loophole in the tax code would be like a hockey coach voluntarily removing a man while the other team has one in the penalty box just to keep things 'fair'. Buffet is on record as saying that the tax laws are broken and that he is not paying a 'fair' amount although he is paying the legal amount.

The problem is the tax code. Eliminate all deductions. Count everything as income (i.e., The company supplies a car? The mean monthly rental for that car is part of your income. Ditto anything else supplied in lieu of cash.) Drop the single-married-etc. distinctions (the government is neither responsible for nor at fault because of your personal choices). Tax net total income of any and all kind. Determine a reasonable 'poverty' level, set the rate to there at 0. Above that, tax inversely to the percentage of the population making more than the poverty level and less than that taxpayer, in 5% or 10% increments.

--Pete

[Jester]

I think it pits the less successful workers against the more successful workers. Where I would like people to focus is on net worth. If incomes rose 10% under Carter, who cares, because under Carter the prices of goods went up by 20 or 30%, and so the net effect was that we are worse off.

I assume this is all hypothetical? I know that it's fun to stomp all over Jimmy the Peanut, but I don't think real incomes dropped by a whole 10 or 20% during his term.

In fact, they rose, by about 5%.

In fact, I think we discussed that briefly once here before. I believe that in general for the bottom 2/3rds of Americans, their CPI adjusted purchasing power has declined over the past 20 years. Wages are not keeping up with inflation.

This is both true and disturbing. Real wages for the lowest quintiles have stagnated... almost exactly following the Reagan reforms intended to "trickle down."

Per Capita Net Worth is more interesting to me, and it shows the illusion of wealth created by continuous bubble building and popping economies.

We are not creating a dragon's hoard, nor are we in the age of mercantilism. Net worth, while important, is less important than income. The ability to produce more is what drives economies, not the quantity of stuff possessed.

-Jester

[--Pete]

Hi,

. . . not the quantity of stuff possessed.

Yeah. That just determines who won.

--Pete

[kandrathe]

I assume this is all hypothetical? I know that it's fun to stomp all over Jimmy the Peanut, but I don't think real incomes dropped by a whole 10 or 20% during his term.

In fact, they rose, by about 5%.

Yes.

We are not creating a dragon's hoard, nor are we in the age of mercantilism. Net worth, while important, is less important than income. The ability to produce more is what drives economies, not the quantity of stuff possessed.

I was talking about taxing people fairly.

For just Federal taxes using close to the current brackets rounded a bit for ease of the example (marginal rates for 0-10 is .1, 10-34 is .15, 34-82 is .25, 82-172 is .28, 172-373 is .33, and >373 is .35).

Person A inherits a 500 million dollar trust fund from daddy set up in the Bahama's, and draws $75K every year for 10 years and pays 10% on the first $9999, 15% on $10K - $34K, and 25% on the rest. So pays $14850 per year, or 19.8% of their gross income per year, total of $148,500 of the $750,000.

Person B - is an entrepreneur, and starts a business and earns $0, $0, $0, $0, $10K, $20K, $40K, $90K, $180K, $360K earning a total of $700K over the same ten years. They would pay zero for four years, $1000, $2500, $6100, $17090, $42690, and $102090 respectively, for a total of $171,470 or an overall marginal rate of 24.5% of their income.

Person A took no risks, has more wealth, was less "productive", earned $50K more over the 10 years, and paid a 4.7% lower tax rate. Person B is the one we want to encourage, and is the one who will hire employees, and grow the economy, yet we penalize productivity. If you taxed Person A, based on wealth, they'd pay $1M per year, or $10M over the ten years if they maintained at least a 2% rate of return on their trust fund. Person B would have paid $14,000 over the 10 years assuming they had no debts and all their earnings were conserved as wealth (unlikely).

[Jester]

I was talking about taxing net worth, and something like 2%.

You know what this is? It's 2% inflation.

-Jester

[kandrathe]

You know what this is? It's 2% inflation.

Only if the wealthy demanded recompense from the engines of production. The wealthy already demand a high ROI on investments (>5% is a must, and 10% or better is desired). The Bush tax cuts (namely to 15% drop in Capital Gains, 100% drop in death tax, and 100% drop in dividend income taxes) didn't result in the opposite, deflation. Just more profits for those who re-invest in building the engines of productivity.

Taxing idle wealth engages it in the economy. What I'm really tired of is a government growing out of control, run by those who don't pay for it, and payed for by those who can't afford it.

[Jester]

Person A inherits a 500 million dollar trust fund from daddy set up in the Bahama's, and draws (lots of numbers)

...

Person A took no risks, has more wealth, was less "productive", earned $50K more over the 10 years, and paid a 4.7% lower tax rate.

Your example only seems unfair because Person A is the son of some previously productive person A*, who apparently preferred to transfer his wealth to his ne'er do well son rather than spend it on champagne and foot massages.

Or, in other words, this is not really income for Person A. It is income for his parent, who transferred the wealth to him. Presumably, you want to encourage his father, no? Assuming he earned the wealth legitimately, and didn't even bother to spend it, he's surely an Ayn Rand dream entrepreneur.

If you really want to stop that from happening, tax the crap out of estates. Death taxes FTW. I'm all for a great levelling after death - the children of the rich are already born with three aces, no particular reason to deal them a fourth.

-Jester

[Jester]

Only if the wealthy demanded recompense from the engines of production.

Hunh? If your saved money is worth less tomorrow than today, that's inflation. Prices of goods and services are going up relative to the money you use to buy them - because the money is being taxed away at a fixed rate. What does that have to do with anyone "demanding" anything?

The wealthy already demand a high ROI on investments (>5% is a must, and 10% or better is desired).

How dare they find the best return on their investments! They should be stripped of their wealth by the state, Comrade! To arms!

The Bush tax cuts (namely to 15% drop in Capital Gains, 100% drop in death tax, and 100% drop in dividend income taxes) didn't result in the opposite, deflation. Just more profits for those who re-invest in building the engines of productivity.

I don't understand. Why would we expect the Bush tax cuts to lead to deflation? The monetary supply isn't changing. The price level isn't changing. What's changing? There's no direct tax on savings, which is what would cause the inflation-like effect, except possibly the estate tax, which is too trivial to have a large price impact. I just don't understand the logic.

Taxing idle wealth engages it in the economy. What I'm really tired of is a government growing out of control, run by those who don't pay for it, and payed for by those who can't afford it.

So, let me get this straight. Government is supposed to tax idle wealth, and presumably spend it to "engage" it. But you're also really tired of government growing, and doing things it can't pay for, and run by those who are not taxed for it.

Do you want people to accumulate wealth privately? Or don't you? The Austrian answer is obvious: Yes, yes, a thousand times yes. Savings are the engine that drives growth, and a wealth tax is nothing more than a tax on success by the chronically unsuccessful government. Yet you appear to be promoting the opposite, some strange form of Leninism, where the state takes control of idle wealth in order to keep it invested... I don't get it.

-Jester

[kandrathe]

Your example only seems unfair because Person A is the son of some previously productive person A*, who apparently preferred to transfer his wealth to his ne'er do well son rather than spend it on champagne and foot massages.

Or, in other words, this is not really income for Person A. It is income for his parent, who transferred the wealth to him. Presumably, you want to encourage his father, no? Assuming he earned the wealth legitimately, and didn't even bother to spend it, he's surely an Ayn Rand dream entrepreneur.

If you really want to stop that from happening, tax the crap out of estates. Death taxes FTW. I'm all for a great levelling after death - the children of the rich are already born with three aces, no particular reason to deal them a fourth.

I'm fine with inheritance. It dissipates across generations, and their spending is probably more important than whatever mismanagement the government might invent. They may do as Bill Gates and Warren Buffet intend, to donate the bulk of their wealth to a benevolent foundation that actually helps people more than any government run entitlement program ever could.

You missed the greater point perhaps. We are not starting on an even playing field, and we need to address the lumpy Himalayas as they really exist. Many have nothing, many more have a little, a few have enough, and a very few have 90% of the wealth. The false dialectic is in setting those that earn a middle class, or lower middle class wage against those that earn an above middle class wage. They are all wage earners building capital for the wealthy investment class who don't pay taxes on the capital we build for them. They only pay taxes when they convert their capital into income, and for their own conspicuous consumption.

[Jester]

This makes no sense to me.

You get wealth one of two main ways: you inherit it, or you save it from earnings. If you want people to earn money, and you're okay with inheritance, then what's your problem with wealth inequality? All wealth inequality is either the product of one or the other, no?

-Jester

[kandrathe]

This makes no sense to me.

You get wealth one of two main ways: you inherit it, or you save it from earnings. If you want people to earn money, and you're okay with inheritance, then what's your problem with wealth inequality? All wealth inequality is either the product of one or the other, no?

I don't have a problem with a wealth inequality. I have a problem with the worker(proletariat) being saddled with the burden of government. I want to shift the burden of government to the capitalist (bourgeoisie) to enable more of the proletariat to become bourgeois. Think of it as a bowl with steep sides (taxes and regulations). Political forces are aligned to keep the sides of the bowl steep enough to trap the proletariat in the bowl, most never earning quite enough to escape in their lifetimes. If we flatten out the sides of the bowl, more workers become employers. The price of labor increases, and a larger portion of the society is uplifted balancing out the wealth inequality.

[Jester]

I don't have a problem with a wealth inequality.

So when you wrote...

We are not starting on an even playing field, and we need to address the lumpy Himalayas as they really exist. Many have nothing, many more have a little, a few have enough, and a very few have 90% of the wealth.

... you meant what by "addressing" the inequality of wealth? If that's not a problem, why redistribute?

I have a problem with the worker(proletariat) being saddled with the burden of government.

I do too. But thanks to the progressive income tax, the proletarians of the United States pay only a tiny fraction of the total tax burden. Those paying the lion's share are far from "proletarians".

I want to shift the burden of government to the capitalist (bourgeoisie) to enable more of the proletariat to become bourgeois. Think of it as a bowl with steep sides (taxes and regulations). Political forces are aligned to keep the sides of the bowl steep enough to trap the proletariat in the bowl, most never earning quite enough to escape in their lifetimes. If we flatten out the sides of the bowl, more workers become employers. The price of labor increases, and a larger portion of the society is uplifted balancing out the wealth inequality.

Analogies aside, you can't encourage saving and investment with a tax on wealth. That does precisely the opposite. It might discourage low-wealth savers less than high-wealth savers, but that's about the best I can say about it. Nobody is going to be encouraged to become "bourgeois" through a tax on net worth, just like nobody is going to become a cyclist in response to a bicycle tax.

But, I must say, I am tickled by your anti-capitalism.

-Jester

[ShadowHM]

But, I must say, I am tickled by your anti-capitalism.

-Jester

I have to add that I am amused at just how fast kandrathe managed to derail the discussion I thought I was introducing on the reasons for the Great Divergence. Some things never change, but 30 minutes is fast!

[Jester]

I have to add that I am amused at just how fast kandrathe managed to derail the discussion I thought I was introducing on the reasons for the Great Divergence. Some things never change, but 30 minutes is fast!

The question of wealth inequality is also an important aspect of the divergence, Kandrathe's not wrong about that. It's especially pronounced if you look at the racial aspect - racial minorities, especially African-Americans, have seen much less catchup in their net wealth when compared with their incomes.

However, the key point still seems pretty rock solid to me. Top marginal tax rates took a massive nosedive, removing the great society mechanism that squashed the inequality curve from the top end. And, judging from the stagnation of working wages, the "trickling down" happened a lot less than the mere accumulation of wealth at the top, precisely as its critics said it would.

However, there are other aspects to consider. Globalization is the big one. Third world countries do not generally produce the high-end goods and services that the highest earners depend on for their income, and so the market for those things has increased, especially in the English-speaking world. Meanwhile, the things that your "proletarians" produce are now the subject of fierce competition around the world from workers whose wages are a tiny fraction of an American workers' wage, but still several times what they'd earn back on the family farm. There's not much to be done about that process, although perhaps we can take the edge off it with social programs.

-Jester

[ShadowHM]

I have to add that I am amused at just how fast kandrathe managed to derail the discussion I thought I was introducing on the reasons for the Great Divergence. Some things never change, but 30 minutes is fast!

The question of wealth inequality is also an important aspect of the divergence, Kandrathe's not wrong about that. It's especially pronounced if you look at the racial aspect - racial minorities, especially African-Americans, have seen much less catchup in their net wealth when compared with their incomes.

However, the key point still seems pretty rock solid to me. Top marginal tax rates took a massive nosedive, removing the great society mechanism that squashed the inequality curve from the top end. And, judging from the stagnation of working wages, the "trickling down" happened a lot less than the mere accumulation of wealth at the top, precisely as its critics said it would.

However, there are other aspects to consider. Globalization is the big one. Third world countries do not generally produce the high-end goods and services that the highest earners depend on for their income, and so the market for those things has increased, especially in the English-speaking world. Meanwhile, the things that your "proletarians" produce are now the subject of fierce competition around the world from workers whose wages are a tiny fraction of an American workers' wage, but still several times what they'd earn back on the family farm. There's not much to be done about that process, although perhaps we can take the edge off it with social programs.

-Jester

Ahem.

Decent points, Jester. However, you missed my point. The last essay in the series wasn't even published when I gave the initial link. Since reading and digesting the information in the series is something I have not yet managed, it was a bit over the top to see a post purporting to respond to the issues in less than 30 minutes.

Here is the summary offered by the author of the series in essay #9 of the 10 (for those who read here only and don't want to read the full essays):

We have now reviewed all possible causes of the Great Divergence—all, at least, that have thus far attracted most experts' attention. What are their relative contributions? Here is a back-of-the-envelope calculation, an admittedly crude composite of my discussions with and reading of the various economists and political scientists cited thus far:
Race and gender are responsible for none of it, and single parenthood is responsible for virtually none of it.
Immigration is responsible for 5 percent.
The imagined uniqueness of computers as a transformative technology is responsible for none of it.
Tax policy is responsible for 5 percent.
The decline of labor is responsible for 20 percent.
Trade is responsible for 10 percent.
Wall Street and corporate boards' pampering of the Stinking Rich is responsible for 30 percent.
Various failures in our education system are responsible for 30 percent.

[Maitre]

[snip]

Now, if only we might convince the IRS to tax us at a flat rate according to net worth, . . .

Thereby discouraging investing or saving. Rent your house, don't buy it. Buying it adds to your net worth. Buy that bottle of hundred year old cognac -- that'll reduce your net worth by a couple of hundred. Don't start your own business, that becomes part of your net worth. Work for somebody else, let him pay the taxes.

[snip]
--Pete

Actually Pete, I'm not so sure that renting would be the way to go. I think the way to go would be my personal situation: buy a home at the peak of the housing market, then watch your home value disappear while the debt you incurred to get it doesn't. Now you "own" your home and pay your property taxes, but you're net worth is barely positive because your primary asset isn't currently worth what you paid for it. Oh, and nobody's likely to help you out because you actually manage to pay your bills on time every month and have something in the bank at the end.

I'm starting to like this idea of taxation based on net worth. Maybe I should go about getting more debt to cancel the assets I do have. Oh, no, better idea: go out and get some student loan debt so I can increase my earning potential without increasing my taxation, because all my new income will by cancelled by the debt I incurred to get it.

If I can generate enough negative net worth, would I then get a rebate check instead of a tax bill?

[In case I'm being too obtuse here: government policies should NOT ENCOURAGE DEBT ACCRUAL. Don't give undisciplined people a reason to flaunt their spending. It takes a lot of energy to try and do it the right way, and even when you do, it may not work out. Don't offer bad shortcuts to those who aren't looking at what's in the other hand of the person helping them up.]