# Reducing Income Inequality

With the “Occupy” movement, the demonstrations, and all of the various news and analysis articles that have been written over the last couple of months, it being the Thanksgiving holiday, and recognizing the manifest blessings that many of us continue to enjoy I thought it might be interesting to revisit the issue of income inequality in the United States (something I posted on with maddening repetition long before it became popular). Let’s look at some graphs. I don’t think there can be any doubt that income inequality has increased in the U. S. over the last 40 years viz.:

To fill in some of the blanks in that graph, the “Gini coefficient” is a measure of income inequality that can be thought of as the ratio of the area between the “line of equality”, a 45° line that represents perfect equality, and the Lorenz curve which plots the proportion of the total income of the population (y axis) that is cumulatively earned by the bottom x% of the population. I don’t know whether that make it any clearer or not. Suffice it to say that the Gini coefficient fits an intuitive notion of inequality: Norway’s Gini coefficient is 25.0, Brazil’s is 53.9 (the U. S. Gini coefficient is 45.0—we’re relatively unequal).

I find that chart alarming. It certainly doesn’t reflect the America that I expected to see or that I’d like to see. I also think it’s interesting how, over the period of the last sixty years, the Gini coefficients of the U. S. and Mexico have converged.

Here’s a chart of U. S. taxes to GDP:

and, courtesy of Paul Krugman, a chart of real per capita tax revenues:

See the relationship between taxes and income inequality? Me, neither. In a brief digression does Dr. Krugman’s chart look like a graph of the business cycle to you? It sure does to me.

Even in the post-war parousia I don’t see any clear relationship between tax revenues to GDP, tax revenues per capita, tax rates, or any other simple relationship. Why the emphasis on taxes as a mechanism for addressing income inequality?

Part of it, I guess, is the sort of Robin Hood-ish notion: you take from the rich to give to the poor. I think that reflects a fundamental misunderstanding of how the U. S. government has functioned over time. I see very little evidence that there was ever a notable policy trend to redistribute power or money from the highest income earners to the lowest. What I see is pretty strong evidence of redistributing power and money among the highest income earners.

I think that income inequality is one of those issues, like global warming (which I’m now told we’re calling “climate change”), in which the dialogue is completely misdirected. Rather than arguing about whether it’s taking place we should be talking ways and means. Do the measures that are being proposed actually accomplish what’s being advertised?

As in the instance of climate change, with respect to income inequality I don’t see it.

Update

I remain extremely skeptical of the prescription of education as a solution for income inequality for two reasons. First, the on-time high school graduation rate has remained stubbornly high in New York, Chicago, Los Angeles, and most other major cities for a half century or more—around 50%. As my wife says “You can lead a horse to water but that won’t make him into a duck”. If we can’t get more than half of the kids to graduate from high school, how will we convince them to get associates or bachelors degrees?

Second, consider this:

If there’s any relationship between income inequality and higher education, it would have to be a positive one, no?

Despite all the squabbles over tax rates, I have always thought it a secondary factor in economic performance. The one are in your tax chart which does have some bearing is payroll taxes. Our tax burden has shifted away from corporate tax onto the payroll tax. This is really a tax on the workers, and it is regressive.

While we have relatively little wealth redistribution from the wealthy to the poor, we have have major wealth redistribution going from the working young to the elderly. Medicare and Social Security are where most of our wealth redistribution is going. Since it is not acceptable to get mad at grandpa, we rail at (largely nonexistent) welfare queens instead.

Steve

I don’t look to taxes on the rich to solve income inequality, I look to use it to take some of the edge off poverty, especially on health care, food stamps, unemployment insurance, the social safety net generally. I think that mitigates some of the sting of inequality and adds to the stability (not to mention decency) of our society.

I don’t think Occupy is promoting an across-the-board leveling, I think they want to erect a wall between Big Money and Big Politics. The relationship between BM and BP devalues the individual voter to such a degree that peaceful participation in the political system starts to look like an exercise in naivete and futility. This is destabilizing, and in this Occupy has a very conservative goal.

Our core democracy, and the assumptions and myths on which it is partly built, are being subverted by legal corruption. You simply cannot sustain a democracy where voters feel they are engaged in a sham and that the real power is held by a tiny band of super rich folks.

Either Big Money wises up and realizes they have drastically overplayed their hand, or we’re going to have a backlash that will be far more serious than Occupy. I don’t believe in the end that the American people are going to let their democracy be stolen from them. I don’t think we will allow ourselves to be turned into a nation of serfs.

As we transition to a less-than-full-employment world we need to maintain a safety net and a degree of social cohesion. The people need to be able to believe they have a part to play and that they have some measure of control over their government. They have to feel they are playing an honest game with clearly understood rules. If they feel they aren’t doing as well because of luck, that’s one thing. If they feel they are doing less well because the game is rigged against them, that is a very different situation.

If Big Money were half as smart as they think they are, they’d be embracing Occupy as an essentially conservative movement looking to maintain stability and cohesion. Doubling down on greed while hurling ridicule and dispatching uniformed thugs is the wrong approach.

“I see very little evidence that there was ever a notable policy trend to redistribute power or money from the highest income earners to the lowest. What I see is pretty strong evidence of redistributing power and money among the highest income earners.”

Word.

• As we transition to a less-than-full-employment world we need to maintain a safety net and a degree of social cohesion.

Michael, I see no way of accomplishing that in the absence of a widely-accepted code of transcendent morality. Even then it would be difficult to maintain and unlikely. I don’t believe that such a code is innate. Concepts like “fairness” are learned in natural development. Behaving in such a way as produces fair results is something else again.

I don’t believe that what you’re advocating can be derived from utilitarianism or consequentialism.

Additionally, I see no method of maintaining a system of social cohesion in the absence of kinship ties, a perceived common history and tradition, or common values.

“Our tax burden has shifted away from corporate tax onto the payroll tax. This is really a tax on the workers, and it is regressive.”

Not a verygood analysis, steve. Corporation do not and have never paid taxes. You have to ask yourself about the incidence. Because that is so difficult to measure, there are few studies. But anything I’ve ever seen places it at about 60/40 on capital vs consumer. Then of course you have to parse rich/middle class/poor as capital providers and consumers. Quite a task. However, I think one would be reasonably safe to say that capital is disproportionately held by the better off, and dollar volume of expenditures similarly so. I think you are going to end up with a progressive, not a regressive result.

Second, payroll taxes are often cited as being so regressive. But anyone self employed knows that you pay as an employee and employer. Double. That’s the case for an awful lot of small businesses. Throw in the well known incidence of the fed income tax and taxes have become steadily, in fact markedly, more progressive over time.

“While we have relatively little wealth redistribution from the wealthy to the poor, we have have major wealth redistribution going from the working young to the elderly.”

Well that is absolutely true. But when one considers how many elderly are also of relatively low income, what’s the difference in redistribution routes?

“I don’t believe that what you’re advocating can be derived from utilitarianism or consequentialism.”

Nor did Rawls.

BTW, what would you say to this quasi-rawlsian recasting of your argument that redistributive programs such as Social Security are necessary lest our (consumer-driven) economy perish?

[T]he key point…: without Social Security our economic growth and income growth for everybody at all levels would be a lot smaller.

We cannot depend upon the spending of the wealthy to sustain us in our consumer-driven economy. They simply cannot buy enough. So, to put it crudely, we have to depend upon other people to spend some of their money for them. Hence, the necessity of redistribution.

As for justification, consider the difference principle: Society and its institutions should be arranged so that, no matter how the great the inequalities, the least-advantaged in the society benefit. But there’s a corollary to this, I believe, as far as your argument goes. In a society so arranged, and based on an economy such as ours, benefits accruing to the lower ends of the income distribution (via redistribution) work to the advantage of all throughout the income distribution by sustaining and increasing the overall level of economic activity. Thus, redistribution promotes the interests of all.

“I don’t think Occupy is promoting an across-the-board leveling, I think they want to erect a wall between Big Money and Big Politics.”

The family and I are in NY for the holiday. So we spent about an hour down at Zuccoti Park. A fine collection there. We walked about the palce just listening in on conversations, impromptu speeches etc. I didn’t hear one word about the nexus of money and politics. just money, money, money and money. They’ve got it, we want it. They did a couple good things, though. Free Thanksgiving dinner, free water, and free love. So they got that going.

Leftists are always so naive and mislead. They vote for Big Government – inevitably funded by Big Power – (like Obama’s Wall Street buddies, the trial lawyers, or Large Corporate) and then scratch their heads in amazement when it’s turned around like a howitzer right at their stated goals. Wasn’t it Einstein who said something about doing the same thing over and over?

Interesting points raised. It puzzles me as to why our nation’s high school cirriculum is built around making our youth jacks of all trades. With 250+ million people, is it necessary for everyone to read and understand Macbeth and The Great Gatsby? Trigonometry? Let alone how many will remember upon leaving. What makes that 50% rate even more depressing is how many pass performing the absolute bare minimum. As a product of the NYC school system, I’ve seen many a teacher tell his students whom he (rightfully) perceived weren’t interested in the course to just do all their homework and pass a test or two to receive a passing grade.

Youth today, for good or ill, are far more empowered than previous generations, and obviously are not responding well to the rigid system in place now. With the substantial amount of resources allocated to education, does anyone really believe we’re preparing our youth for a globalized, competitive world?

There’s more I wish to get into, but I’m writing this from my Kindle and its been quite a chore. Apologize for any format and spelling erros

Dave:

I think we have a level of social cohesion deriving from American mythology which acts as a quasi religion and is your “common history.” And we do, after all, have a safety net. It’s a question of degree both as to cohesion and safety nets.

As a person almost devoid of kinship ties I nevertheless feel an obligation to my fellow Americans. I do actually think that’s innate — there are primatological studies pointing to altruism as possibly an innate characteristic. There are certainly (possible, and not proven) evolutionary explanations for altruistic, other-directed behavior. And we have the parable of the Good Samaritan, which is some 2000 years old, as evidence that altruism, other-directedness, kindness to those beyond tribe or family (Samaritans were the other) was understood and considered admirable even then in a very clannish, tribal world.

Besides which, there is enlightened self-interest. I want stability, most people do. I don’t want starving beggars with their noses against the window as I eat foie gras. I don’t want riots. I don’t want an unstable politics characterized by wild swings from this faction to that.

So I think we have ample basis for social cohesion in the US. We can achieve consensus if we choose to do so.

Why the emphasis on taxes as a mechanism for addressing income inequality?

Because it makes for nice, clean sound-bites. Makes it easier for speechwriters, pols, pundits and journalists to talk about it, makes it easier for the lobbyists to work on the stuff that really matters. Makes it easier for us peons to think if we JUST changed the tax structure, everything would be hunky-dory. It’s a win-win-win scenario, just so long as you don’t hope to accomplish anything – and rest assured almost none of the groups I mentioned really want to change anything.

• I do actually think that’s innate — there are primatological studies pointing to altruism as possibly an innate characteristic.

And yet somehow within living memory we’ve forcibly sterilized our fellow citizens, infected them with fatal disease in the interests of furthering science, not to mention dragging them behind trucks until their bodies fell apart.

I believe that the parable of the Good Samaritan is deeply imbedded in Western culture but it’s part of a transcendent morality, a pretty good example of what I’m writing about. I don’t believe that such a transcendent morality is necessarily connected with theism (although it helps) but I also don’t think you can arrive there without an appeal to some sort of transcendent values or power whether it’s utilitarian like enlightened self-interest or other.

How will Americans learn the American mythology? It isn’t taught in the schools as it used to be. When you and I were in school or learning at our mothers’ knees, about 1% of the U. S. population were immigrants. Now immigrants comprise closer to 10% of the population. I don’t believe that the forces to inculcate in them the American mythology are anything approximating what they were a century ago, the last time immigrants comprised so high a proportion of the population and they probably didn’t absorb much of it in the old country.

“Not a verygood analysis, steve. Corporation do not and have never paid taxes.”

Mea culpa. I think that I worded it correctly, taxes have shifted from the corporate tax to the payroll tax, but I stopped short in adding that this tax is largely passed on to consumers.

“Second, payroll taxes are often cited as being so regressive. But anyone self employed knows that you pay as an employee and employer. Double. That’s the case for an awful lot of small businesses. ”

I was self-incorporated for about 5 years. Still, as an employer I think of the payroll tax, as I suspect you do, as a cost of having an employee. When I was self-employed, I thought of the payroll tax as part of the cost of business. Of being a worker.

So, let’s look at how this causes problems for the self-employed. Corporate tax was a non-factor being self-incorporated. The corporate tax could have been 100%. I would not have cared (as it pertained to me). I had no profits. Everything was paid back to me in salary or I used it to buy what equipment or services I needed. Everything was zeroed out at the end of year, so I paid no corporate tax. I do that now with my corporation. Payroll tax, OTOH, cannot be avoided.

If I am self-employed, making less than \$100,000 in salary (which describes most self-employed and small business people), the payroll tax is more of a negative than corporate taxes. For most in that group the payroll tax will be more of a burden than income tax.

@Greg-

“Youth today, for good or ill, are far more empowered than previous generations, and obviously are not responding well to the rigid system in place now. With the substantial amount of resources allocated to education, does anyone really believe we’re preparing our youth for a globalized, competitive world?”

This does not comport with my experience, which I concede, is anecdotal. When I was a high school senior, I took calculus. My class was the first in our county to have calculus available, and one of the first in the state. Calculus is now a basic course in high school for any student going into a STEM program, and most liberal arts schools. The wife and I were both chem majors in undergrad. We both did pretty well. My wife’s best friend was a math major from the U. of Chicago. We have all been looking at the math science courses my son is taking in his first year. It is way beyond anything we took.

Granted, he is going to a fairly spiffy school, it still strikes me that we are turning out pretty good students when the student wants to excel. Our students are now competing against the best students from Chin, South Korea and India. For the most part, we are holding up pretty well. What we have not done well is figure out how to educate well those who are in the bottom 1/3 of our income group.

Steve

Dave:

My wife is white, so am I, so is our son. Our daughter looks rather as if she might just be Chinese. This is something that would have been fairly unusual 50 years ago. Now it’s commonplace. As is interracial marriage, as is interfaith marriage.

My son wears pro-gay t-shirts to high school. He’s not gay, just political. No one beats him up or expels him. Society which 20 years ago hadn’t really even considered the issue of gay marriage is close now to consensus that it’s fine. In fact more than fine: meh.

In my lifetime I drank from whites only water fountains and my family was threatened for having black people at our house. In a single lifetime (er, don’t mean to put the period on my life just yet) we’ve gone from overt and openly-defended segregation to integration all the way to backlash over affirmative action.

In the same period of time we’ve all essentially agreed to stop littering, stop smoking where it might annoy people, stop heedless destruction of the commons and certainly other consensus-driven adaptations that I’ve forgotten because they’re simply so common. I’ll give you a small one that is rather fascinating to me: I used to hate going to movies because people wouldn’t shut the hell up. No longer a problem except rarely.

I think American society is amazingly quick to reach consensus as a whole on a wide array of issues. We absorb change with such speed that sometimes we don’t notice it happening. All this adaptation despite the fact that we are more racially and ethnically diverse, less religious, less class-conscious, less gender-defined.

I don’t think we have a problem with a capacity for social cohesion and consensus. I think we’re champions of the world at it, in fact. (147 years without a civil war!) We have the same problem we’ve had from the start: groups seeking to subvert social cohesion to their own narrow advantage. But we’ve always dealt with that: we didn’t go fascist, we didn’t go communist, we stuck together more or less, and have thus far maintained a single political regime for an impressive 235 years. How many regimes has ethnically and religiously and historically homogenous France gone through in that time? Or Japan? Germany?

We can do cohesion just fine. But we can’t do it if we abandon it as a goal. That means this time, as in every earlier time, pushing back against the forces of division and finding a way to hold it together.

steve –

Again, I don’t think the corporate and payroll taxes are substitutes. Whether 50 years ago or today, those corporate taxes were either absorbed by capital, or passed on to consumers. At the end of the day I doubt you will find it regressive.

The payroll tax is a different cat. With the rise of the government sponsored pension, unemployment and medical care systems payroll taxes ere put into place to fund them. They clearly are regressive. Now, as a practical matter the money went out the back door for politicians to provide goodies to favored groups. The result? Their is no sunking fund to finance the bulge in pension/med coming up. The current call for action? Tax the rich. Its an impossible quantitative exercise, but one has to wonder, if that is the result, whether we have a latent situation where the payroll taxes ultimately join those of progressive taxes.

I’d argue inequality has been driven almost entirely by financialization, a government-induced credit boom in the private sector and neo-liberal economic ideology. Banking transactions by definition produce very little wealth because they’re endogenous. The massive profits realized by the industry weren’t newly created wealth, they were transfers from productive sectors of the economy. To compensate those sectors diverted income which would have gone to wages into profits: smart on an individual level, but ultimately self-defeating in aggregate. We might have avoided a lot of the mess if our mainstream economists had been familiar with fallacy of composition.

Skyrocketing executive pay in the real economy is another factor, though I’d trace it to the tribal instinct to compete with their colleagues in finance reciving enormous compensation packages (income as status). It’s become fairly clear pay for many is no longer really tied to actual performance.

Easy credit made everyone think it was ok to suppress wages as people could just borrow the difference. I can’t think of a better example of market irrationality than the widespread notion on the part of many lenders and borrowers that the cycle of debt-refinancing-more debt wouldn’t come crashing down eventually. Yet we had Greenspan and Bernanke and Mankiw telling us there was no such thing as a bubble, no fraud and therefore no bubble to burst. In fact their models explicitly assumed all economic actors were rational and therefore bubbles could not occur (Efficient Markets Hypothesis).

Thansk to several decades of widespread dumbth the inequality is now a part of our culture and therefore much more difficult to address.

A scattering of observations:

(1) To my eye, the Gine Index rose sharply from ’81 to ’93. It’s relatively flat. What current policies could explain that?

(2) I agree with Ben Wolf that a significant driver on inequality has been finance, but the recession would appear to have taken a large toll on the top 1% or .1%. See first two charts. Is a large part of this being self-corrected, because I frankly don’t see finance being capable of playing as significant of a role going forward?

(3) I think the increasing role of education as a credential to jobs creates a postive relationship with income inequality. I think education tends to be a positional good. You can’t improve general welfare by increasing access to higher education, so long as all higher education is not treated equally in the job market.

• What current policies could explain that?

I think the short answer is globalization. In 1979 China ended its official policy of autarky. Manufacturing jobs, the numbers of which had been declining slowly in the U. S. for some time, began to decline markedly.

“This is really a tax on the workers, and it is regressive.”

Gotta nitpick here, as it’s become popular to call taxes “regressive” or progressive” when they actually aren’t, in the definitional sense. A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. The payroll tax is a flat tax with a cap on the amount subject to taxation. (OK, not on the MCR part, which is NOT capped and which rate in 2013 goes UP past certain income levels, but still.)

That’s not counting the EITC, the purpose of which is to offset SS tax payments for low-income workers. Counting the EITC, the payroll tax is actually progressive.

That’s not saying that it does not fall proportionally harder on lower income levels (a regressive *social* wealth effect) but the tax itself is NOT regressive. And the benefit formula for Social Security is *highly* progressive. The lower your average earnings the higher a benefit you get relative to your contributions. Once again this is NOT counting the EITC, which would make the benefits even more progressive if the offsets were figured in.

@Drew- Ahh, I think I see the misunderstanding. Look at Dave’s graph. Intentional or not, corporate taxes have dropped since 1950. Payroll taxes have increased during the same period. Total revenue stays fairly constant. Payroll taxes nearly mirror corporate taxes, but in opposite directions.

“The current call for action? Tax the rich. Its an impossible quantitative exercise, but one has to wonder, if that is the result, whether we have a latent situation where the payroll taxes ultimately join those of progressive taxes.”

When we had the big Medicare reform in the 80s, I believe it was Greenspan who advised that 90% of income be subject to payroll taxes. That is now down to about 80%. Also, while I am sure there are some people who advocate only taxing the rich, the serious writers on the left emphasize health care cost control. Private costs are rising as fast or faster than govt controlled costs. I think, not everyone does, that private insurers drive the cost increases. If you dont control costs, too much of GDP goes to health care. The long term unwillingness of the GOP to even consider health care reform should concern anyone who worries about debt.

Steve

Steve