There are a couple of things I found interesting about the graph above which I sample from this post by Alan Auerbach and Laurence Kotlikoff at The Conversation. The first is that the article argues that inequality is being overstated. If that graph illustrates less overstated inequality, it’s still awful.
The second is that the bottom four quintiles are responsible for the majority of the spending and, if their numbers are correct, that’s true regardless of age cohort. It’s still a bit misleading since individuals within the same age cohort may move from income quintile to income quintile at different points in their lives. Lord knows, that was true of me.
I also have problems with this statement of the authors:
Another key finding is that U.S. fiscal policy acts as a serious disincentive to work longer hours or harder for more pay.
Our system’s plethora of taxes and benefits – designed with a multitude of income and asset tests and with little regard to how they work as a whole – have left many households facing high to super high net marginal tax rates. These rates measure what a household gets to spend (in present value) over its remaining lifetime in exchange for earning more money now.
For example, a typical 40-49 year-old in any of the bottom three quintiles (poor to middle class) of our resource distribution will only get to spend about 60 cents of every dollar he or she earns. For the richest 1 percent in that age group, it’s just 32 cents.
My reaction was “so what?”. Maybe I don’t understand what they’re saying but I don’t think that’s relevant to either income or wealth inequality for one simple reason. Most people who aren’t already in the top quintile of income earners don’t have the option of working longer or harder for more pay, either because they’re already full up or there are no additional jobs for them to do. I know many, many more people who are already working multiple full-time minimum wage jobs trying to keep body and soul together than I do people who could work a few more hours and get more pay.
I’m skeptical that tax cuts will ameliorate either variety of income inequality. Basic optimization theory is that you optimize where there’s something to optimize. That’s at the lower end of the income spectrum rather than the top end.
For those who think that we can remedy income inequality by increasing taxes, I still want to know how. Somehow the proponents never get around to explaining how they plan to increase effective tax rates. You can raise nominal rates to the moon and it won’t do a darned thing unless you can boost the effective rates while you’re doing it.
Is he really arguing that there’s a quid pro quo with pay and hours? The best most white-collar employees can hope for is that spending extra hours at the office, whether meaningful or not, is a signal of your devotion and teamwork. Someone working their ass off at an Amazon warehouse has probably the same demand but in far less glossy terms.
I interpret what they’re saying as that if incentives were different people could work longer or harder for more pay. For most people that’s just not an available option.
I think what he’s getting at is that there are marginal costs at the lower end of income that are often not discussed. E.g., the pay increase that reduces government benefits and increases taxes. I remember an employee I’d given a significant raise coming and complaining after the first pay check that it was actually less than previous paychecks. The withholding had increased, probably some of it was the FICA formula, the other was health insurance. He was probably already planning his budget to spend the raise, and his expectations had to be dialed back.
Are these large numbers? I don’t know, some conservative columnists that think the GOP needs to be more responsive to the working class seem to think so.
I’d like to see that quantified. They try to quantify the inequality but they’re not even trying to quantify the effects of these disincentives. Basically, I think they’re exaggerating for ideological reasons.
I think your post is more interesting than the author’s analysis.
This: “It’s still a bit misleading since individuals within the same age cohort may move from income quintile to income quintile at different points in their lives.” (with the 40’s to early 50’s being the peak spending years for most) In my opinion this destroys their analysis, even acknowledging that the peak earning years tend to be the same. Any lifetime spending model I’ve ever seen makes this point. And its not a small effect.
As for incentives, I think you err in going for your example to multiple job holding minwage workers. My personal experience is that by and large those who work harder – at similar skill levels – can make more through promotions, if not bonuses as well. And in lower income echelons, its called overtime. And don’t even try to get workers to work during deer season. The work/leisure function seems alive and well to me.
Don’t have the energy to go find it, but when people like this make claims about marginal rates that high they are talking about a tiny minority of people under very specific circumstances. Remember back in math class when for some tests you had to “show your work”? These guys rarely do that. When you actually do the numbers it doesn’t hold up well. Not saying it can’t happen, just that it is rare. Also, what I see is what Drew seems to be saying. When the OT is there, they take it, unless it is some special day or holiday.
Steve
“For example, a typical 40-49 year-old in any of the bottom three quintiles (poor to middle class) of our resource distribution will only get to spend about 60 cents of every dollar he or she earns. For the richest 1 percent in that age group, it’s just 32 cents.”
I think that’s bullshit. The effective federal tax rate for the three bottom quintiles goes from under 2% for the first quintile to about 12% for the third.
So it’s not surprising I’ve never heard anyone I know talk about taxes the way the article suggests. For me, when I started working full-time again in 2012, my income bumped up our tax bracket, but our effective rate only went up by about 4%.