Defining Rich VII: Explaining Income inequality in pictures

I had my hair cut last week.  It’s a big event as it happens about twice per year.  While there I always get into political conversations with the lady cutting my hair.  This time, as often it was the economy.  Her position still is that the individual citizens collecting welfare are effecting her income.  We’ve discussed this before.  So, I used my simple math of $100 dollars and 100 people and 9% to the 1 person and the remaining 99 splitting what remains.  I then note the current split of 24% to the 1 and the 99 splitting what is left.  Easy?

Unfortunately, it did not resolve the issue.  Her question was: You don’t think the welfare people are effecting this?  So, I asked her to explain to me just how someone collecting welfare (we are not talking corporate welfare) could be the cause of her lack of share of the overall income?  This is not a laughing matter.  It shows just how strongly the conflation has been made of associating the indigent population as the cause of ones financial condition, namely the money in their pocket.

This got me thinking.  Maybe numbers are just not enough.  Maybe using 100 dollars and the fact that after the 1 gets about $9 as of 1978 the other 99 get $0.92.  Shift the split and it’s $24 vs $0.77.   How is that relative to a median income of today?  And here I’ve been thinking I was keeping it simple.

So, I have upped the numbers.  $10 million.  100 people.  This produces the following:

$10 Million 9% Share 24% Share
The 1 Inc. $900,000.00 $2,400,000.00
The 99 Inc. $91,919.00 $76,768.00

That is quite the shift of the 1’s income.  In fact it is a 166.7% increase simply due to changing how the pie is cut.  The rest of the people, the 99 get 16.5% less.  No one worked harder, no one worked less.  We just cut the pie differently.

It is that simple.  It is that fundamental.

What if we go to the next step: Taxes.  I keep hearing how the rich are carrying the tax load.  I’m sure this is also on the mind of my friend as like me, she is self employed and figures her tax burden is just to large.  It’s the welfare!  Again, I assumed showing that one’s share of income has shrunk would make it obvious as to why the taxes seem so high.  I was wrong.

Pictures!  We need graphs.  I have taken the 2 splits of income share and used my tax tables that I reconstructed from the marginal tax rates of 1936, 1967 and 2010 to produce what an individual would have as net income and the effective taxes paid.  The incomes of the splits above were treated as the gross.  We are obviously not considering deductions.  We are simple seeing what the tax machine spits out in it’s purest iteration.

Important: When you read 9% split, I am referring to the percentage to the 1 of the 100.  Everything is labeled based on the share of the 1 (1%).

First is the graph for a person of the 99.

99 income and tax chart

Blue is the net income and red are the taxes paid.   What we see here is that regardless of the changes, the 99 having basically made no headway since 1936.   In fact, the net income in 1936 with the 9% split is essentially the same as in 2010 with the 24% split.  The only thing a tax cut in 2010 has done is make up for the lack of share of income.  We know this because if the share had remained as it was in 1978, then the 99 people would have actually benefited from the low tax rates of 2010.  The 99 have been fooled, they have been played.

Let’s now look at how the 1 has done.

The 1's income and taxes

This is where we see the benefits of high effective rates on the 1 to the issue of income distribution.  It is clear, regardless of share of income for the 1, the tax tables of 1936 and 1967 assured they were playing a fair share.  Their incomes were less than the tax paid.  It is not until the tax rates of the Bush era reflected in the 2010 rates that the 1 gets to have an income/tax ratio similar to the other 99.  Obviously, the 1 and some of the 99 will think such a similar effect is what is fairer, that the 1 should not pay more in taxes than they have left in income.    I can appreciate such a thought.  After all, we are taught that a plate of cookies are to be divided up as one for you and one for me.  But, the economy is not structure in such a simple ratio of “fairness”.

What we do not see in the graphs is the comparison of the 2 groups.  The 1 vs the 99.  These are post tax results.

Income % change 1936 Tax 9% 1967 Tax 9% 2010 Tax 9% 1936 Tax 24% 1967 Tax 24% 2010 Tax 24%
% ∆ 1 at 9% 0 3.4%% 112.2%% 0 29.00% 179.8%%
% ∆ 99 at 9% 0 -17%% 22.1%% 0 -20.9%% 2.00%

The table shows exactly what happens when the income pie is sliced differently.  A large enough shift of the share to the 1 protects the 1 even from high taxes, but inflicts harm to the other 99.   It is very clear that with all the changes of income share and tax cuts, the 99 have essentially remained in place.

Over the years we have changed our economy (and I me we as we voted) such that we are deceived by the results.  Years ago when I first began writing, I suggested that not only were we earning money differently, but that we had changed our tax code in such a way that it became part of the new earning method.  It is clear that the code is part of the way we “earn” income.  For the 1, it simply means more in their pocket, but and more importantly, for the 99 it means they can not see how screwed by the policies that shifted the income they are.  The tax code in the form of lower taxes are covering for the shift.

This has not answered the other claim which is that the 1 is carrying the tax burden.  I will get to that in the next post.