The Rich *Are* Different
by Tom Bozzo
Yesterday, run75441 sent an e-mail to the Bears touching off a bit of a discussion on the perennial question of what constitutes the “middle class” or a “middle-class income.” Run’s touchstone was the AMT, which has been turned by bad legislation (not indexing the zero bracket; interactions with the Bush-era changes to the ordinary income tax) and 40 years of inflation into something that “requires” — in the sense of avoiding the actual or perceived political catastrophe of raising taxes on a (fairly) large number of (mostly) upper-middle income taxpayers with high propensities to vote — annual patches to keep it mainly an upper-upper-middle-income tax. While there are horror stories about middle-income taxpayers with unusual circumstances being hit with AMT (e.g. due to exceptional numbers of exemptions for dependents), the patches mainly serve to keep AMT off the backs of low-six-figure earners who, despite being relatively well-to-do, nevertheless don’t have sufficient income to be in line for tax increases under Obamanomics.
I’ve viewed the $200K or $250K-ish threshold for who’s rich enough to be subject to so much as the statutory income-tax rates of the 1990s as a mutant offspring of behavioral economics and tax politics. It’s a figure that happens to be enough money that people who will never make $100K (but don’t know it) won’t worry that raised upper-income taxes will affect themselves, or something like that. Based on criteria such as ability to pay without major hardship, I’m with Felix Salmon that the boundary of the “rich” is being set too high.
That said, there is an interesting qualitative change in the structure of income that starts to happen around this cutoff for the “rich” which actually suggests that taxpayers above that threshold are rich in most important ways. The most recent (2007) tax stats from the IRS now reflect the peak of the late bubble and show that the $100K-$200K AGI bucket is the last one that more-or-less resembles middle-income categories in their dependence on labor as the all-but exclusive source of income. (Think of pensions and proceeds of retirement accounts as representing deferred wages or salaries.) This graph shows the shares of AGI from some major income sources, and the average incomes for various brackets. (*)
(May be embiggened by clicking here.)
Starting with the $200-500K category, the share of earnings from labor begins a marked decline. By the time you hit mid-six figures, average earnings from income, dividends, and capital gains become high enough to provide middle-class or better incomes without (necessarily) working. Tax returns in the upper-six-figure bucket, on average, show more income from other sources collectively than from salaries, and at the top of the income scale even interest and dividend income exceeds wages and salaries. (**) I suggest that if you can provide yourself with a better-than-average living without working, a very rare luxury indeed, you are in fact rich.
(Revised and slightly expanded.)
(*) That some of the shares sum to more than 100 percent is not an error. Some sources of income, notably nontaxable Social Security benefits, are not part of AGI. If average incomes by bracket are not plotted on a log scale, that line looks like everyone except the super-rich makes nothing.
(**) Moreover, high-earners are negligibly dependent on Social Security and pensions for retirement income, in case anyone wonders about the origins of the long-running war on social insurance.
One note, $200,000 in New York City is much different than $200,000 in Toledo. Keep that in mind.
Substance not form Margery, a little labor from the reader, not just meaning falling into your linguistic lap. Did you get the point? Do you wonder about the origins of the long running war on social insurance?
Do you see value in ending or mitigating wars?
I don’t know if these people are “different” but they may be. Whatever be the case, I think they are obscene (but important in the USA of course):
The first apartment Your Mama is going to discuss and work over is the triplex unit that encompasses significant portions of the basement/garden level, first, and the second floors. Property records reveal the unit was purchased in March of 2006 by Kathryn and Kenneth Chenault who laid out a breath taking $21,500,000 for their titanic triplex maisonette. Mister Chenault, currently the Chairman of the Board and CEO of American Express, earns nearly 30,000,000 clams a year which explains how he and the wifey can afford to buy and maintain unimaginably dee-luxe digs that measure, according to marketing materials, 14,550 square feet of interior space and include another 1,720 square feet of private garden and terrace. Altogether, the apartment includes 15 rooms, an prairie-like 1,100 square foot living room, 5 bedrooms–including a elephantine 1,100+ square foot master suite with two clothes-horse friendly dressing rooms and a 5-star pooper–4 additional private poopers and another 5 powder poopers. Other numbers to ogle over are the apartment’s 21 closets, 5 fireplaces–plus a sixth decorative one, 3 sizable storage rooms, and 2 butler’s pantries–one on the kitchen level, one on the dining room level–conveniently connected by a dumb waiter.
From the Realestalker blog that gives one many glimpses into the living quarters of the plutocracy.
Maybe this will help you, Marge.
Maybe this will help you, Marge.
Phooey, image didn’t upload. Oh well.
Utterly, utterly disagree. Margery asks for standards clarity, and riverwood says “why bother?” While I may fall short of a decent standard fairly often myself, I think the decision to write for an audience should carry with it a committment to clarity.
The advice to “write the way you talk” is heard with some regularity, but we need to understand that advice is offered as a solution to a certain narrow set of problems. People who aim at a high tone but fail to carry it off, people who fear putting words on paper (or screen) at all – they can usefully be told to write the way they speak. The next step, in anything but emergencies, is to edit for clarity, consistency, and removal of error.
Substance and form. Go Margery.
I was actually trying for a low tone. But anyway I actually do tend to work asides to the effect of ‘1990s tax rates didn’t implode the economy’ (now eliminated from the revised post for the sake of clarity) into conversational discussions of whether it’s feasible to revert in whole or in part to 1990s tax rates.
Margery:
There is a magnifier in the upper left corner.
Link to the full-size version of the graph is here, and also added to the post.
A couple points.
STR has a very good point. Cost-of-living varies wildly in the US. NYC is obscene with its high costs. $200K in NYC will put you in solidly ‘middle class’ digs and lifestyle (remember you are going to lose 50% of that income up front due to Fed, State, city taxes). Come down to TX and $200K will let you buy a house in best neighborhoods and live a comfortable upper-middle class lifestyle. $200K in Shreveport LA (another place I lived) will put you in the upper crust…you get to pay big if you want to live in NYC or SF or LA etc….
Secondly, Toom said: “As for the Chenaults’ extravagant quarters, well that suggests (to me, YMMV) that they are both rich and undertaxed”
I would agree that they are rich, but you have no idea if they are undertaxed. the 2004 Dem Presidential canadate was supposidly worth a cool billion mostly in tax free munis. Was he under or over taxed?
Lastly, yes the rich ARE different (using your definition). I have been fortuante to meet some very rich (and very nice) people and they have a total different outlook on life. Probably the most obvious is they have ability to go/do almost anything (as one told me, look around and imagine every price you see is divided by 1000 – that’s the equivelent economic difference. Think on that). They don’t have to work, at all, so you have no leverage on them – which is why if you are in the military and hit the lottery/inherit they quietly seperate you (you also loose your security clearance).
Anyway nice post, if I added anything I would add a bar on each income number showing the % of teh population in each bucket.
Islam will change
With apologies to Margery and Kharris for the initial tortured language, I’ve made some edits to break up some of the more rambling sentences and hopefully to clarify the transition from AMT incidence into the Obama tax policy definition of the “rich.”
As for embiggen, well see here.
I agree with S_T_R that $200K makes you richer in Toledo than in NYC, but that doesn’t mean that someone with $200K in NYC is poor — even if they might be surrounded by the very rich in some neighborhoods.
As for the Chenaults’ extravagant quarters, I’d suggest (YMMV) that the implication is that they are rich *and* undertaxed.
Hi Tom:
My computer stalled the last time I tried to write here so I will try again. First a little history:
“The Tax Reform Act was passed in 1969 and included the nefarious AMT, then called the Minimun Tax, and was meant to target the “rich,” some of which escaped paying any federal income tax. 155 individuals making > $200,000 escaped paying any federal income tax of which 23 were millionaires. The Minimun Tax was later modified in 1978 becoming the Alternate Minimun Tax with increased taxes and was meant to offset capital gains taxes reductions.
Some 30 million not-so-rich people today will be subject to the AMT in 2010. Among that 30 million, 94% of families with incomes between $75,000 and $100,000 will be subject to the AMT. The AMT was designed with incomes between $100,000 and $175,000 (26%) and incomes > $175,000 (28%).
To get by in today’s world, the EPI calculates an ~$48,778 for a family of 4, which varies by region, and of which 1/3 of all families fall short. http://www.epi.org/publications/entry/bp224/ ‘What We Need To Get By'” I would add to this that a family can qualify for CHP/SCHP subsidies in NJ and have ~$80,000 in income.
The AMT touchstone I used was meant to determine what was considered rich in 1969. If we look at the percenatge of people making >$200,000 today, we find ~4.2% as taken from here: http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2419&topic2ID=40&topic3ID=41&DocTypeID=1 “Baseline Distribution of Cash Income and Federal Taxes under Current Law” or ~6.2 million taxpayers.
My question was in as to whether the Median Household Income can be considered Middle Class anymore or at best lower Middle Class. Median HouseHold Income being ~$50,000. The 2001/2003/2006 tax breaks were skewed towards the upper 5% of the taxpayers with the 1 percenters achieving 31% of the total break. As Shown by Spencer’s Nonfarm Capital vs Labor Wages, much of the productivity gains were skewed towards capital since the early eighties with Labor Wages trending downward. Labor Wages being the sole source of income for much of the nation. Dr Warren in her presentation “The Coming Collapse of the Middle Class” points out that what took 1 person’s, with a high school and a good work ethic, income in the seventies now takes 2 incomes. The loss of one income now often times can lead to bankruptcy which was not a case so much in the seventies.
My remarks were more about what is middle class as I believe the income necessary to be such has shifted upwards. Make sense now? I am aware of the distribution of numbers and the meaning of median and mean. I do not believe the people numbers match up so much with the income numbers anymore.
Why 1990s tax rates? IMHO, a couple of decades of 1950s Tax rates (scaled for CPI inflation and tweaked to discount higher state/local taxes today) would solve a whole lot of the country’s problems. It might also teach some of the less mindless free lunchers that stupidity and duplicity have consequences.
As for the article. I thought, like most of Tom’s stuff, it was well written. “Embiggen”? Maybe not — unless it implies something other than enlarged or magnified.
Buff, I would not actually disagree with a proposition that the Kerrys *and* the Chenaults are undertaxed. Whether there’s a public purpose to giving them a large tax exempt income is a little tricky, I admit — among other questions is what would happen to the taxes paid by everyone else were municipal bond interest taxable.
Arguably one feature of the AMT — subjecting interest on “private activity” bonds that are exempt from ordinary income tax — actually did amount to a Congressional policy decision that some municipal bond holders were in fact being undertaxed.
The suggestion to add something with the % of population in each bucket is not a bad one, but it would take a 3d y-axis to do so legibly. The median is in the $50-75K bucket and there is very little population, but a lot of income, above $200K.
Buff:
If you go to the one tax chart I referenced you can see percentages and numbers of people within an income bracket.
Kharris,
While I may fall short of a decent standard fairly often myself
I’ve decided to work some on my writing. I blow too many good points with stupid errors.
I wouldn’t have a problem with higher bracket(s) applicable to very high incomes, though I’m at least as happy to raise the revenue with (relatively) low rates on broad income. The reference to 1990s rates is mainly in reference to current policy to allow some rates to revert to the law prior to the Bush admin.
Thanks run, I did not go to your link.
Tom – I figured the pop numbers in the upper side would be miniscule.
Thanks Run. The discussion did go off into ‘what constitutes rich’ and that’s what I’ve hit upon.
Whether a middle income is sufficient for a “middle-class lifestyle” is another matter. I think in most places there are a lot worse things to be than an average family with $50-75K AGI. However, whereas someone with a HS diploma and a good work ethic might have been at the human-capital median 30-40 years ago, they’re in the lower tail of the distribution now. It also does not seem reasonable to believe that there’s more risk of financial calamity (other things equal) for two-income households than for one-income households. This is not to suggest that financial strains haven’t increased, that various policies haven’t amounted to a war on the working classes, or that I favor ‘tough luck’ as a basis for policy.
The existence of tax free bonds is not a result of 20th Century tax policy — conservative or liberal. It’s an early 19th Century constitutional thing — McCullough vs Maryland I thnk. Basically, it says that the federal government, states, and municipalities can not tax each other’s bonds.
The effective interest rates on these things are quite low — often barely exceeding inflation. And they have risks including, but not limited to, default. Also, if interest rates drop, the profits if the bonds are sold are not tax free. And, I believe that, any losses if interest rates rise and the bonds are sold at a loss are treated just like any other capital loss.
In general, tax free bonds are priced such that they yield very modest returns to the highest bracked investors in the highest tax states. Not an especially good deal for most people — including the rich — most of the time.
Personally, I think the AMT private activity thing was more a quit subsidizing one (especially oboxious) taxpayer rip-off thing than a reaction to undertaxation of the the wealthy. The complaint here is that East Dogpatch Bozos — a professional lawn darts team — intimidates the town of East Dogpatch into building them a stadium by threatening to move the franchise if they have to continue playing at Bozo Field. The new stadium is built using money generated by tax free bonds. The Bozo’s owners lease the stadium for $1.00 a year, take a 15% cut on the concessions and sell off Bozo Field to a housing developer. The owners are now among the nation’s very rich, the taxpayers in East Dogpatch are deeply in debt, and the nation’s tax payers are out the taxes that would have been paid on the bonds earnings.
Actually, Elizabeth Warren and the National Bankruptcy Project at Harvard ran the numbers and determined that two income families are actually more vulnerable to financial calamity than one income households. While this is counterintuitive, it makes sense once you discover (as they explained in The Two Income Trap) that the increased percentage of family income that is devoted to essentials means that if either earner loses a job, the family can be sunk.
run,
I’m not sure that the income necessary to be ‘middle class’ has shifted upward. I think two things are influencing your perceptions that it has.
1) Cost of Living. You cannot be ‘middle class’ and live in SF or NYC on $50,000. Not going to happen. On the other hand you can live a very comfortable middle class lifestyle on that income in TX (you can buy a 1500-1900 sq ft house for under $100,000 on 1/4 acre in the best public school district in Ft Worth – better than the private schools BTW). In places like Columbus MS or Shreveport LA your $50K will go far. $50K in NYC makes you part of the working poor.
The problem is your typical MSM/blogger types are centered in high cost-of-living area so their perception is off. And that is then translated out to the public. I’d bet good money Dr. Warren suffers from that also.
2) The loss of the value of a college education. Stay with me for a second. College educated people (BA or BS) almost invariably, back in our parents/grandparents day, immediately stepped into the middle class-upper middle class brackets within a few years. These people could support a family on one income back then. Now, as many people have pointed out here, a BA is considered the equivelent of a HS education once was. Worse college educations vary greatly and many grads come out numerically illiterate even from the top schools (Matthew Yglesious is a perfect example of this). So we have watered down that credential greatly while adding to the initial debt many start out with. Entry level jobs that used to be within the grasp of HS educated are no longer available due to the glut of colledge educated – but they are still PAID as if they were HS grads.
Thus once again people releally beleived that getting a BA in English Lit would garentee them a nice middle class job. The perception is there that they deserve a middle-class lifestyle, but they don’t bring anything to the table in this highly technical world.(I can teach a Chemical Enginieer to write, I can’t teach an English major ow to do chemical engineering OJT). Worse they are saddled with college debts and the cost of housing is way out of their reach in the “hip” places – even if they grew up there.
So the perception in this case is they deserve middle/upper-middle class lifestyle but with the equivelent of HS level skills of yesteryear. That’s why they think it takes two incomes to live that way – yes it does becuase you have a equivelent HS education of the 50-60s generation!
I hope that was fairly clear. I would add the bubble-prices in housing over the last decade just piled on that impression for the 26-36 year old crowd. Food for thought….
Islam will change
I would add one other thing. The pay of the writing/news-person type carrers have aslo been goning into the toilet – once again shifting perceptions of teh people who do the reporting…
Islam will change
The “doctrine of intergovernmental tax immunity” appears to be the origin of the exemption, but the prevailing Supreme Court case is South Carolina v. Baker, which holds, in remarkably plain language, “The owners of state bonds have no constitutional entitlement not to pay taxes on income they earn from the bonds, and States have no constitutional entitlement to issue bonds paying lower interest rates than other issuers.” See also this CBO testimony on tax-preferred bond financing.
Right, but that’s just to say that other things aren’t equal — the problem results from financial stresses that are correlated with (not necessarily caused by) the second income, not the second income per se.
It is difficult to have a meaningful conversation on taxes without first confronting the larger question: Are compensation levels, from low to high, deturmined by market forces which are not manipulated?
Tom:
Hiss, hiss, boo, boo . . . you are mincing words here similar to what some did to you on your initial post. Not what I meant although it could be read in such a manner if one was a devious economist! 🙂
If all things were equal or proportional, we would expect to see increased savings and a healthier life style for the middle class on two incomes. In fact we don’t and its not because of clothes, McMansions or a Paris Hilton lifestyle. The costs of living have increased placing greater stress on the middle class while the incomes have remained stagnant or decreased for the middle class.
Indeed with these higher costs and lower incomes (and male income decreasing), there is a higher risk of declaring bankruptcy as there is no leeway anymore to sustain with one income or with the former stay-at-home mom going to work while hubby was laid off in the seventies.
Anyhoo, my $.02
Subsistence wage theory may provide a partial explanation for why wages have stagnated. The basic idea is given below:
Real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle in the mid-nineteenth century, although the idea might be said to have been formulated by Thomas Malthus.
According to Lassalle, wages cannot fall below subsistence level because without subsistence, laborers will be unable to work. However, competition among laborers for employment will drive wages down to this minimal level. This follows from Malthus’s demographic theory, according to which population increases with wages above the subsistence wage and falls for wages below that level. Assuming the demand for labor to be a given monotonically decreasing function of the real wages rate, the theory then predicted that, in the long-run equilibrium of the system, labor supply (i.e. population) will be equated to the numbers demanded at the subsistence wage. The justification for this was that when wages are higher, the supply of labor will increase relative to demand, creating an excess supply and thus depressing market real wages; when wages are lower, labor supply will fall, increasing market real wages. This would create a dynamic convergence towards a subsistence-wage equilibrium with constant population.
This theory seems too simple to explain all but it probably explains some of the wage stagnation that we have experienced over the last 30-40 years. Many products have improved in quality and decreased in price. So now since most things are cheaper, especially food, you can subsist on a smaller wage. In addition, the increased labor force participation by women have also pushed wages down by over supplying the market.
I don’t see how you fix this problem by increasing marginal tax rate. You can take the tax burden off people with lower incomes but then given subsistence theory their wages would just get driven down to the subsistence level. Having the government buy more public goods won’t do it either since what’s lost is the individual’s ability to buy the things they want.
It is probably incorrect to assume the “Salaries and Wages” line on tax return is the only source of “labor” income. On my tax return, I typically have a very small number in the “salaries and wages” lines as most of our income comes from my work in a partnership, which is reported under the “business income” section of my tax return.
This may be the main source of the sudden drop in the “salaries and wages” at approximately the $200k mark. Many people that make more than $200k are business owners or partners in professional firms (e.g., doctors, lawyers, accountants). This does not mean they can stop working and maintain their income.
@Brian: I looked at that before excluding business income from the graph for clarity’s sake, and while it’s not totally trivial for the near-rich, it’s not as big of a factor as you might think.
Certainly you do have the option of paying yourself a “salary” that’s smaller than you might accept from an firm in which you didn’t have an ownership stake. In that case, you would be reporting much of your labor income outside of the salaries and wages category. Perhaps you can articulate incentives to systematically “underpay” yourself.
In general, I’d expect a good chunk of business income to amount conceptually to a dividend payment to the partners (or other equity holders) — basically anything above such business income as would be needed to increase recorded salaries to a hypothetical “market rate.”
“Thus once again people releally beleived that getting a BA in English Lit would garentee them a nice middle class job. The perception is there that they deserve a middle-class lifestyle, but they don’t bring anything to the table in this highly technical world.(I can teach a Chemical Enginieer to write, I can’t teach an English major ow to do chemical engineering OJT).”
If you can teach a Chemical Engineer to write; how about teaching yourself to spell? After that, please step off your soap-box mentality that only “engineers” deserve to have a decent living.
The problem with using taxes to redistribute wealth is that revenue expenditures invariably lead to conflict and moral hazard pitfalls. Wealth distribution via fair and just compensation levels leads to an economy that maintains positive incentives for all.
The periods of high marginal income taxes were during periods when the U.S. economy was productive. Now, upward mobility rates have slowed and asset values are much more influenced by investment capital factors, both by foreign and domestic flows. Bubbles are simply the result of too much investment capital and too little upward mobility. When people earn, save, and invest, asset values remain tied to wages and compensation levels.
It is folly to think that the U.S. might rely on its its financial services sector. The fact that China now has the world’s 3 largest banks should be proof enough of that.
Wealth distribution though is clearly the conversation that the citizens of this country need to have. But the conversation needs to begin at the beginning, the following article explains better than what I can:
http://www.latimes.com/news/opinion/la-oe-adler4-2010jan04,0,7694112.story
I’m actually somewhat disappointed to see that link re “embiggened.” The meaning, of course, is clear. After my first reaction – a chuckle – I was quite admiring of what I thought was an original and somewhat ironic term. In short, I like it!
rl Love,
I don’t see how taking the income of the wealthy is going to change my subsistence wage.
It’s not that radical to suggest that exposing the U.S. working classes to competition with lower-wage workers is driving wage stagnation — Dean Baker makes the point plenty, for one. What Baker (and I) will say, though, is that there are at least semi-conscious policy decisions being made to alter the terms of competition, including promotion of “free” trade in some markets but not others, and diminishing workers bargaining powers with prospective employers.
Otherwise, my objection to the subsistence wage theory as described in the quote is that it assumes the labor supply is chasing a fixed amount of work, and there’s no reason that should be the case. For instance, investing in certain public goods can increase the stocks of human and/or physical capital and thus put the economy on a higher growth path than might otherwise occur. (That need not be the case, of course, but it is possible.)
Cantab ~ “I don’t see how you fix this problem by increasing marginal tax rate. You can take the tax burden off people with lower incomes but then given subsistence theory their wages would just get driven down to the subsistence level. Having the government buy more public goods won’t do it either since what’s lost is the individual’s ability to buy the things they want. ”
– Flag – Like – Delete – Edit – Moderate
You make a good point here but I disagree with the premise that the government is unable to redistribute wealth. The government can of course subsidize and there is a worthy argument for the possibility that the public good is better served by the governments use of targeted spending.( This is a central issue in our health-care debate). But even if “big government” is the best solution, higher wages and higher income taxes on the lower brackets, as well as the higher brackets, allows for targeting with increased tolerances. Which thereby allows for improved control of factors which are currently out of control. Consider for example how much better a tax cut for the working class might have been regarding our current foreclosure debacle, as opposed to monetary policy. Or consider the affects on consumption downturns.( I suppose “tolerance” is not the correct term, but I am a builder and I don’t know the apt economic term[(slack?], but I was also an English major and I am far more accepting than I could be, so, I hope for some of the other type of tolerance [karma][English major humor{dropout}]).
Your comment should have included immigration factors, but I meant what I said about it being a good comment.
Hi Tom,
I don’t know whether there are any good reasons in which someone would voluntarily systematically underpay themselves in “wages and salary.” In certain corporate entities, however, there is no choice. In my case, for example, I am a parter in a law firm. At the end of the year I get a K-1 statement listing all of my income from the partership. The income all flows through to the business income line of my 1040, even though for all practical purposes I consider the income wages. If I were to quit the parternship today, my income would soon stop. I believe that owners of other corporate entities, such as S-Corporation, would be similarly taxed.
I’m surprised that business income is not a significant factor in the percentage of income, particularly in the $200k – $1million range, which is where I would have guessed many of the sucessful self-employed professional types would fall.
Tax revenues used as subsidies.
I’d like to suggest that these days, the difference between the rich, the middle class and the rest of us, is that the rich are secure, the middle class think they are secure, and the rest know they are insecure.
This was not the case when I was a mere sprout back in Minnesotee. Even poor people could usually find something, and the something they found could usually support them, if poorly. The jobs might change often, but they would be there. My dad’s BEng set him up as, eventually, chief designer in an electrical firm. Mom didn’t work outside the home and we 5 kids all went to college. What wage does a fellow need to make now, to manage that with only his income? And even if he has a $150k job, or whatever would be necessary, a mere shift in the wind — a bankruptcy or merger of the company, for instance — could dump him with no recourse and thru no fault of his own.
The erosion of the middle class, I think, is best seen as an introduction and cultivation of instability throughout the whole economic culture. The people in your chart who are above $200k, the people whose income does not depend primarily on wages, are the ones whose economic well being isn’t directly determined by others.
rl love,
The government could tax and then redistribute some of the revenue, but in doing so they may create some perverse incentives and cause individuals to do less work and investment in human capital then they might otherwise have done. We still need as hamsters on a wheel a piece of celery [middle class dream] to chase after.
Brian, thanks for the reply. Partnership income that’s tied to your continued employment is in a gray area, as you’re (presumably) collecting surplus generated by non-partners as well as getting paid profits resulting your own gross ‘revenue product.’
You’re right that S-corps would be taxed similarly (w/business income flowing to the owners’ returns as ordinary income) though in that case there’s no necessary connection between ownership and the owners’ labor — the income flows as a dividend based on shareholdings in the S-corp.
Robbie,
I just punch this out on a computer. I can spell just rarely bother to fix what I write. And factually there is nothing wrong with what I wrote. English Lit BA does not provide people with the technical chops in this highly technical world. Worse they, in most cases, can’t understand enough basic statistics to understand what the data presented to them in the public sphere means (or doesn’t mean). A perfect example of this is Matt Yglesious (sp). By his own admission he graduated from Harvard with a single class in stats – basically Harvard graduated someone uneducated. It would be no different if Matt Y couldn’t read or write. My son will graduate High School with a better scientific background than a Harvard Grad – there is something very wrong about that. YMMV.
Sorry, but a degree in English Lit, or Womyns Studies, or Communication at best signals to me you can read and write. A HS diploma with a lot of writing practice. Great for secretaries….
Islam will change
Cantab,
I agree, but it is not “may create some perverse incentives”, it is that they are already and have been for decades. Agricultural subsidies, when considered as those used by all developed nations, have done far more harm than good. And welfare programs in the U.S. are crime subsidies. Poverty in most of the world requires the afflicted to busy themselves with survival concerns. But in the U.S. the afflicted are buying subsidized staple goods with food stamps, a double-whammy subsidy. And with 4% of the world’s population we incarcerate 25% of the world’s prison population. And our streets are still unsafe. But our criminals are fed better than any in history, and our poor have unprecedented amounts of time on their hands.
You seem to think that I advocate wealth redistribution via taxes. I began this conversation by advocating “market forces” reform as a prerequisite for any meaningful conversation about taxes of any type. The article I recommended is a gem.
rl love,
You seem to think that I advocate wealth redistribution via taxes.
I was trying to identify myself rather then suggest what you believe. A constant theme from most of those writing columns on this blog is to advocate raising taxes, although the reasons given are varied giving the impression that they really just want bigger government with bigger taxes in general and then they go out and think up a rationalization for doing so.
Thanks. I often think confused, sloppy language reveals confused and sloppy thinking. Not always, but often.
I don’t see the need to create neologisms when English has perfectly good, old words for things. Like “enlarge” meaning to make larger or bigger. Elegant language is often simple language.
It’s funny to read all the “In New York” or “In San Francisco” cost of living posts. Seems to me 200k+ earners in those cities are probably overwhelmingly Democrats or liberals happy to pay more in tax. But you’re also being misleading.
When talking about a 200k BRACKET, using the example of poor blokes in NY making 200k is meaningless – they will not see ONE PENNY of additional tax. For simplicity, let’s assume a 3% raise in a bracket above 200k. This means that you won’t see a significant tax hike until WELL OVER 200k – i.e. rich everywhere, even New York. Using an online tax calculater and going from 28% to 31% after 200k I find a no deductions, single, 300k earner would see an extra 1000 bucks, or a 1.2% increase in tax per year.
Possibly one of the reasons for New York’s “absurdly” high prices are the absurdly high incomes paid to so many Wall Streeters. They have so much more money than they need that they use it to bid up the prices of New York real estate. Same tendency in London too I suspect. Ditto Beverly Hills and movie star incomes. High taxes on high incomes would, I suspect, lower real estate prices in New York quite a bit.
I think our recent experience with the economy shows that unregulated markets can quite easily go wrong. And also that rewards can be distorted out of any semblance of moral and social equity (Wood’s batting a ball around a golf course well gets him almost a billion dollar fortune??!!). So I think the concept of “correcting” exaggerated incomes with taxes is a good one. High taxes, to be used for public goals instead of private luxury, would have several desireable effects. One, if 30 million dollar incomes were heavily taxed there would be less incentive to take the reckless risks that produce them; if they were heavily taxed there would be less excess money to be used to build pointless private palaces. Taking away some, if not all, of the immense income some people get from unfettered, unregulated markets would be good for most people, I think. And I can’t see how it would hurt someone to live in a 5 million dollar home instead of a 40 or 50 million dollar one.
Well drat. You’re correct. The logic seems to be that the bondholder is being taxed, not the state or municipality to “intergovernmental tax immunity” isn’t violated. I gather that recipricocity holds so that states can probably — should they so choose — tax income from EE and I bonds. Or, if they really wish to create chaos for taxpayers, they can quite likely tax money invested in IRAs or 401Ks, and the interest earned on those vehicles.
***One, if 30 million dollar incomes were heavily taxed there would be less incentive to take the reckless risks that produce them;***
I think that you are assuming a degree of intelligence and prudence that is no more common amongst the wealthy than amongst the middle class or the destitute.
That’s not a reason for not taxing the wealthy. We have a huge public debt — largely as a result of their depredations and their enthusiastic support of two absolutely awful presidents (Reagan and Bush 2). Thanks to their utterly failed economic and social policies, the wealthy in the US have most of the money. AFAICS, taxing the damn fools to straighten out the mess they and their agents have created would be entirely fair and equitable.
***The government could tax and then redistribute some of the revenue, but in doing so they may create some perverse incentives and cause individuals to do less work … ***
I think that argument might fly better if U6 unemployment/underemployment were in the 4-6% range as if was 60 years ago. With U6 somewhere upward of 17%, does it matter all that much if some workers are less efficient than they might ideally be?
@Sam: I’d hope that the AB commentariat knows the difference between average and marginal tax rates, but yours is always a good point. Exercises like yours are why I’d claim that lowering the income threshold for raising marginal rates back to their pre-2001 levels would cause little tangible harm to more numerous ~$100K earners.
I seem to have made several mistakes – 3% higher tax bracket on 100k (300-200) should come out to 3k. Less than 1% of income anyway.
The typical argument for palacial estates is that there are lots of regular wage earners who BUILD them for the super rich, and if the super rich guy decided to not bother working harder to not pay the extra tax, all the palace builders would be out of work and that money would disappear from the economy. The fallacy is that the top 1% of earners are the only ones capable of providing jobs. I think high tax rates on the top 1% in the past have shown two things 1) the other 99% are perfectly capable of picking up the slack if the top 1% get disincentivized, and 2) the things the rich do to avoid paying high income tax rates, such as starting businesses with lower marginal tax rates, help the economy more than them earning high incomes alone.
I happened to see an old Simpson’s episode this evening and the word “embiggened” was used there for comic effect. Bozzo may have watched too much Simpsons and it seeped into his vocabulary that way. It was presented as the kind of word Homer would use.
Noni:
“the rich are secure, the middle class think they are secure, and the rest know they are insecure.”
It is a rather tumultuous world out there. I believe you have caught my message.
Linda:
It took me a bit to reread and understand; but, Finnegan was not an easy read either. I understood Tom.
“May have?” My grad school housemates and I survived the early ’90s with The Simpsons, Star Trek: The Next Generation, and Baltimore Orioles baseball.
margery
i like embiggened. language is to have fun with. you knew what he meant.
the second paragraph, on the other hand, lost me too. just like some of my own paragraphs.
rusty
hey, they CHOOSE to live in New York. they pay for the privilege.
harris
right char. but writing is hard enough without getting all uppity about it.
margery
if english didn’t have people inventing new words alla time we’d still be speaking in grunts.
buff
i don’t have anything against the rich, even if being “nice” is what they do when they send their thugs out to break your knees. but they are undertaxed as long as they are hollering about the deficit.
@Margery: Indeed: pace ‘rl love’ there’s no reason to expect even undistorted market outcomes to be efficient, let alone fair. Brad DeLong had the definitive blog post on the subject some time ago, where he pointed out that for market outcomes to be efficient you’d have to believe that Dick Cheney and Bill Gates have extraordinary marginal utilities of wealth.
@Sam: There is arguably some real dislocation that can hit actual middle income people (a common example from the days of the luxury tax on boats was of craftspeople who built yachts), but there’s an underlying inconsistency to the effect that elite opinion would never save the same jobs from outsourcing on the grounds that there’s a theoretical Pareto-improving transfer somewhere in the economy.
@Codger, going back to your 50s point, I do have to say that the relatively shared prosperity of the high-tax postwar years raises the question, correlation or causality? Also while I think Noni is right on with her classification, the security of the rich is out the window if the economy really blows up, so it’s more than reasonable to expect the rich to pick up the tab for rescues that really benefit them a lot.
Cantab mostly
i agree that wages tend to be pushed toward subsistence. But this doesn’t make it a natural law, or a low of God. The fact is that “the free market” will not undertake certain kinds of work because there is no potential for profit. This means not only can you get into a depression, or persistent unemployment of large sections of the population, but the quality of life for everyone goes down, even for the rich.
The new deal proved for everyone who doesn’t choose to be blind that the government can find useful work for people to do and pay them out of the profits that the “rich” get, actually, out of the purchaces of those people now working who would otherwise have been reduced to below subsistence (sic).
if by wealth redistribution you mean welfare, i agree with you. but you can tax people to get the money to pay people to do useful things. and by one of the less understood laws of economics everyone gets richer. including the people taxed.
well, i’m not even sure that ag subsidies do more harm than good. depends on how narrow your view of “good” is. it also depends on how honest the subsidy program is.
noni
i think you have identified the important thing here.
Sigrid Undset referred to it as putting people into “situations subject to short notice.”
Especially when they are the ones most likely receiving the benefit of the deficit. All the deficit does is increase the number of bonds in the market.
If you can stand the heat, don’t write in the kitchen.
Inability is one word.
tell that to the cabbie making 40,000, or the grocery clerk making 20,000.
How is it that they seem to make it in NY???
Tom,
The luxery tax on boats devastated the US ship building business (in Yachts) since you could just go somewhere else and buy one. This tax really did hit little people right in the nose.
MM,
So exactly what do you propose to go after all the stinking rich? And exactly what is rich? Who decides? Base it on income or net wealth? You do know that communism has failed world-wide and that this ideology has resulted in the largest mass murders in the history of the human race. Right? And that all the communist countries in the world are tyrannies?
Get back to me when you see Senator Kerry vote to confiscate his own wealth….
I thought this was a reality based blog?
Islam will change
‘enlarge’ is not originally an English word. We really should say “make bigger”. Which would be at the same time more simple and less elegant. And BTW neither ‘simple’ nor ‘elegant’ is in origin English. At the end of this path lies madness, or as Coberly says ‘grunts’
Which is in fact an Old English word: http://www.etymonline.com/index.php?term=grunt
coberly – EXACTLY correct! Glad you finally got it.
coberly – the only thugs I’ve been seeing lately are from ACORN and the SEIU. Liberal fascism at its best…
Islam will change
So Buff, just what do you think the top marginal tax rate should be or do you even think that we should have a progressive tax system?
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Lucy
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