Tag: redistribution

Can Inequality Get Worse If Poverty Gets Better?

Jim Tankersley of the Washington Post believes he has discovered “The Big Issue With Hillary Clinton Running Against Inequality”:

“Inequality got worse under Bill Clinton, not better. That’s true if you look at the share of American incomes going to the 1 percent, per economists Emmanuel Saez and Thomas Piketty. It’s also true when you look at the share of American wealth going to the super-super-rich, the top 0.1%, per research by Saez and Gabriel Zucman.”

What this actually reveals is the absurdity of (1) defining inequality solely by top 1% shares of pretax income less government benefits, and (2) judging any strong economic expansion as a failure because top 1% income shares always rise during strong economic expansions.

The graph uses the Congressional Budget Office estimates of top 1% shares, because (unlike Piketty and Saez) they include government benefits as income and subtract federal taxes.  What it shows is that both affluence and poverty are normally highly cyclical. When the top 1 percent’s share of after-tax income jumped from 11.2% in 1996 to 15.2% in 2000, the poverty rate simultaneously dropped from 11% to 8.7%.  Meanwhile, median income, after taxes and benefits, rose from $50,900 in 1993 to $61,400 by 2001, measured in 2011 dollars. 

 

Conversely, when the top 1% share fell from 16.7% in 2007 to about 12% in 2013 (my estimate), the poverty rate rose from 9.8% to 15%.  If we adopt the egalitarians’ top 1% mantra, must we conclude that inequality “got better” lately as poverty got worse?Top 1% and Poverty

The income peak of 2000 is a tough act to beat, and few of us are ahead of it today – least of all the top 1%. The brief surge in top incomes of 2006-2007, like the related speculative surge in housing prices, proved unhealthy and unsustainable. But weak economic performance and high poverty in the past four years is no reason to dismiss the 3.7% average economic growth of 1983-2000 simply because such prolonged prosperity made more people rich.

Tankersley also asks us to “look at the share of American wealth going to the super-super-rich, the top 0.1%, per research by Saez and Gabriel Zucman.”  As I’ve explained in The Wall Street Journal, however, the Saez-Zucman estimates misinterpret shrinking shares of capital gains and investment income still reported on individual tax returns, or shifted from the corporate tax to a pass-through firm, rather than (like most middle-class savings) sheltered in IRA, 529 and 401(k) plans.

It is easy to envision Republican partisans welcoming and adopting the Tankersley theme that Hillary Clinton should now be ashamed of the strong economy of 1996-2000 because “inequality got worse” as many new firms were created and stock prices soared. Yet whenever stocks crashed and the top 1% share fell (making inequality “better”?) the poverty rate rose and median incomes were flat or down.

Some Republican candidates have already alluded to the same pretax, pre-transfer “top 1%” figures to claim inequality worsened under Obama – meaning since 2009.  According to Piketty and Saez, real average incomes of the top 1% were indeed higher in 2013 ($1,119,315) than in the crash of 2009 ($975,884).  Before crashing below $1 million in 2009, though, top 1% incomes had been much higher in 2007 (the equivalent of $1,533, 064 in 2013 dollars) and in 2000 ($1,369,780). The rising tide has not lifted many small boats or big yachts since 2009, because the tide hasn’t risen much; higher tax rates in 2013 certainly didn’t help.

The trouble with Republicans using highly cyclical top 1% statistics as a political weapon against Democrats is that doing so requires capitulating to the divisive and dishonest leftist fallacy that poor people and middle-income people do best when the top 1% is doing badly.

The truth is that the poverty rate fell sharply and middle-incomes rose briskly in President Clinton’s second term, and the top 1% gladly reported more taxable income and paid more taxes as the tax on capital gains was cut from 28% to 20%.  There is a lesson to be learned here, but it is not to denigrate the so-called rising inequality of the late 1990s.

Another Defective IMF study on Inequality and Redistribution

IMF Warns on the Dangers of Inequality,” screams the headline of a story by Ian Talley in the Wall Street Journal. The IMF – which Talley dubs “the world’s top economic institution”– is said to be “warning that rising income inequality is weighing on global economic growth and fueling political instability.” 

This has been a familiar chorus from the White House/IMF songbook since late 2011, when President Obama’s Special Assistant David Lipton became Deputy Managing Director of the IMF.  It echoes a December 2012 New York Times piece, “Income Inequality May Take Toll on Growth,” and a January 14, Financial Times feature, “IMF warns on threat of income inequality.”  This isn’t news.

Talley writes, “The IMF … says advanced and developing economies need to raise more revenues through taxes, focusing on progressive taxation that moves more of the burden for social security, health care and other state benefits to the high-income earners.” That isn’t news either.  The IMF has an ugly history of advising countries to raise tax rates, with disastrous results.  The inequality crusade is just a new pretext for old mistakes.

Obama’s New Budget: Burden of Government Spending Rises More than Twice as Fast as Inflation

The President’s new budget has been unveiled.

There are lots of provisions that deserve detailed attention, but I always look first at the overall trends. Most specifically, I want to see what’s happening with the burden of government spending.

And you probably won’t be surprised to see that Obama isn’t imposing any fiscal restraint. He wants spending to increase more than twice as fast as needed to keep pace with inflation.

Obama 2015 Budget Growth

What makes these numbers so disappointing is that we learned last month that even a modest bit of spending discipline is all that’s needed to balance the budget.

By the way, you probably won’t be surprised to learn that the President also wants a $651 billion net tax hike.

That’s in addition to the big fiscal cliff tax hike from early last and the (thankfully small) tax increase in the Ryan-Murray budget that was approved late last year.

P.S. Since we’re talking about government spending, I may as well add some more bad news.

Likely Sources of Obama’s Misconceptions about Income Mobility

President Obama has been expressing inordinate alarm about differences between income groups, and about mobility between such groups over time.   “The combined trends of increased inequality and decreasing mobility,” he says, “pose a fundamental threat to the American Dream, our way of life, and what we stand for.”  

A fundamental limitation of annual income distribution figures is that income in any given year may not be at all typical of a family’s normal or lifetime income.  Job loss or illness can push one year’s income well below normal, for example, and asset sales can produce one-time windfalls. People are commonly much poorer when young than they are by middle age, after accumulating experience and savings. For such reasons, the President’s strong opinions about “decreasing mobility” could be important, if true.

We need to separate two concepts of mobility. One is intergenerational mobility – whether “a child born into poverty … may never be able to escape that poverty,” as the President put it. Another involves intertemporal mobility – whether starting with a low wage at your first job supposedly impedes moving up the ladder of opportunity.

The President’s opinion that intergenerational mobility has declined was rigorously debunked by Raj Chetty, Emmanuel Saez and others.  As for inequality and mobility being related, they also found that, “the top 1 percent share is uncorrelated with upward mobility [p. 40].” Moreover, “The fraction of children living in single-parent households is the strongest correlate of upward income mobility among all the variables we explored [p.45].”  Since other countries have fewer single-parent households, this is just one reason for being wary of facile international comparisons.

Intertemporal mobility is not about links between parents and children, but about the ease with which individuals move from a lower to a higher income group, and vice-versa.  Are we stuck with the same paycheck we had just after leaving school, or can we move up with effort, experience, learning and saving?  Did having a big gain in the stock market in 2007 ensure that would happen again in 2008-2009?

The Federal Reserve Board’s Survey of Consumer Finances (SCF) tracks income mobility of the same families over time.  It turns out that mobility is surprisingly hectic even over short periods.

IRS Budget Soars

The revelations of IRS officials targeting conservative and libertarian groups suggest that now is a good time for lawmakers to review a broad range of the agency’s activities. Since the agency’s last overhaul in the IRS Restructuring and Reform Act of 1998, its budget has exploded from $33 billion to a proposed $106 billion in 2013. 

Using data from the OMB budget database, I split total IRS outlays into two broad activities: administration and handouts. Administration includes tax return processing, investigations, enforcement, and other bureaucratic functions. Handouts mainly includes spending on “refundable” tax credits such as the EITC. 

The chart shows that the IRS has become a huge social welfare agency in recent decades. Handouts have soared from $4.4 billion in 1990 to an estimated $91.1 billion in 2013 (red line). Handouts are down a bit in recent years because some of the refundable credits from “stimulus” legislation have expired. IRS administration costs have grown from $7.7 billion in 1990 to an estimated $15.3 billion in 2013 (blue line). 

 

How should we reform the IRS budget? First, we should terminate the handout programs. That would save taxpayers more than $90 billion annually and cut the IRS budget by 86 percent. 

The largest IRS handout is the refundable part of the EITC, which is expected to cost $55 billion in 2013. Many policymakers favor the EITC as a “conservative” handout program because it encourages people to work. But the EITC itself creates a discouragement to increased work over the income range that it is phased-out. It also adds to tax-code complexity and has an error and fraud rate of more than 20 percent.

The EITC is an example of how big government begets more big government. We certainly wouldn’t need the EITC incentive to work if we slashed all the taxes and welfare programs that currently encourage people not to work. 

It’s a similar situation with other IRS handout programs, such as the $1 billion “Therapeutic Discovery” grant program. These grants are supposed to “produce new and cost-saving therapies, support jobs and increase U.S. competitiveness.” But it would be better to accomplish those goals by repealing the excise tax on medical devices and slashing the high 40 percent U.S. corporate income tax. 

As for the $15 billion in spending on IRS administration, we could dramatically cut that cost with major tax reforms. In particular, a consumption-based flat tax would hugely simplify the code and greatly reduce paperwork costs of the IRS and taxpayers alike. 

Looking ahead, the IRS budget is expected to balloon in coming years as the agency plays a key role in implementing ObamaCare. Unless the health care legislation is repealed, IRS outlays are expected to soar from $106 billion this year to $263 billion by 2023.

Trick-or-Treat at 1600 Pennsylvania Avenue

I shared a cartoon last Halloween that made fun of those who support class-warfare tax policy.

Now we have a related cartoon, featuring a stop at the White House.

The next two cartoons are almost identical. We’ll start with this one from Michael Ramirez.

Ramirez is one of my favorite cartoonists, incidentally, and you can see more of his work here, here, here, here, here, here, here, here, here, here, herehereherehereherehere, and here.

Here’s a Gary Varvel cartoon with the exact same message.

Instead of great minds thinking alike, this is a case of great cartoonists thinking alike. Though they probably have great minds as well.

But I don’t want to make too many fawning comments since I would modify both of these cartoons so that the kids were looking at papers that said “Medicare” and “Social Security” instead of “debt.”

It’s always important to focus first and foremost on the disease of spending, after all, and not the symptom of red ink.

Last but not least, I can’t resist linking to this comedian’s video, which includes some very good economic insights about work incentives.

Sort of like this Wizard of Id parody featuring Obama.

Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the United States and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the United States, but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.