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.
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.
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.
I have an extremely well educated conservative friend who reacts just like your hair cutter. Two factors which play a role in his case are that he thinks of himself in the 1% when he defends income inequality and the notion that we should have a “flat tax”, but fails to recognize he is in the top 10% when it comes to modestly increasing tax rates on the more well to do in our country–” $250K a year is not a lot of money”. The other thing is racism. He always associates those on welfare as being inner city people of color. I thought the one best thing that the Democrats did at their convention last year was explain that over 50% of Medicaid goes to old people in nursing homes. My friend would have assumed that 95% goes to single moms and their children in urban areas.
“In fact it is a 166.7% increase simply do to changing how the pie is cut. The rest of the people, the 99 get 16.5% less.”
This does not seem the way most people would look at it. The size of the pie changed at the same time.
This also skews your bar charts. The 1 percent share in 1936 was about 17 percent. Perhaps if you highlighted the bars that represent actuals it would make more sense to me, but even then the axis label in unsdjusted dollars is confusing.
Pulling in orthogonally related numbers, it seems to be that for most of the 20th century the bulk of our debt came from waging wars and the rich in our country were OK with paying off most of that debt.
The numbers are for income tax, not payroll tax, so the idea that the rich are paying for entitlements id bogus.
Again I say we should have a war surtax. Today I will throw in numbers. 5 percent of taxes paid for the top 10 percent, 50 percent of taxes paid for the top 1 percent. Think of how much lobbying there would have been to stay out of Iraq.
Arne,
Regarding your first comment. You are over thinking this. All this is, is a simple example keeping one thing constant and 2 variables. It is simply to help people understand what they are actually experiencing when someone talks about their share of the nation’s income declining.
I could certainly get into constant dollars and shares at the time of the tax periods, but it is unnecessary for this presentation. Regardless of how big the pie is or is not, the percentages act the same and the economy is relative to that moment. It is that people see a larger pie that they do not see that they are actually worse off relative to the block of 1. This is quite true of those in the low to mid and upper mid 6 figures. I find they are the most conflicted. They are well off and know it, but by comparison to the 1, they are not doing so well, the distance is too great.
Once they understand that they have less of the pie, the next step is to understand that what ever gain they think they have made is simply do to a cut in taxes and not do to a gain in productivity. This is why using a 2% cut to SS was so wrong (beside Coberly’s argument). In fact the entire sting implemented with Reagan was to convince people they could become more rich by cutting taxes all along they were becoming poorer due to cuts in share of income which is actually cuts in share of productivity.
This sting has produced an under funded government and an under paid 99 of 100 people. It is a double results of reduction of the nation’s income to 99 of 100 people.
To your second comment. We have had surcharge war funding taxes in the past. Simply taking a percentage of what is currently paid and posting it to war funding will not change anything and might in fact create a desire for more security spending.
DB: I point this out not to be petty — but because you’ve typed it 5 times in this thread, and it distracts from what is otherwise a very lucid, insightful and important argument.
When speaking of causality, the result can be said to happen “due to” some factor, not “do to” some factor.
Pete,
I know, it’s been pointed out before. I just keep failing to get it into my head. I’ll correct it. Thanks.
I’ve studied economics now for the past 10 years. Maybe I should have begun studying Sociology sooner.. for there is one thing I am still unable to wrap my mind around.
“They are well off and know it, but by comparison to the 1, they are not doing so well, the distance is too great.
Once they understand that they have less of the pie, the next step is to understand that what ever gain they think they have made is simply do to a cut in taxes and not do to a gain in productivity.”
When we go from a small pizza to a large pizza we are dealing with a different “pie”. I get a smaller percentage of the bigger pie… but the percentage of the new pie that I get is still 10% bigger than the percentage I got of the old pie. That is more important to me than to worry about the other guy whose new pie share is 20% larger than his old pie and that much bigger than my new pie than his old pie share was compared to my pie share.
The thing I can’t forget is that pies are for eating, and in this case they are for providing for one’s family and enjoying life. My kid will have more toys, more fun, a better education, and more leisure time than I had when I was a kid, and if that means that some rich man’s son has a golf course all to himself whereas the rich man had to share his golf course with the other kids in the neighborhood, why should I be bothered by that?
On the other hand where does the tax money go if not to welfare?
I hope this does show up. Its from the the U.S. Government. http://www.usgovernmentspending.com/federal_budget_detail_fy12bs12013n_4000#usgs302
Here we see 11% goes to welfare, but 23 % goes to healthcare. Taken to mean what the word means, it would seem reasonable to view healthcare as a subset of welfare. a doctor doing humanitarian work in Africa is there for the welfare of the people. So that brings the total to 34%. If corporate welfare is not included in the chart under “welfare” I don’t know if it is or not. but war is a whopping 24% and If pensions are meant to mean or include social security, then the welfare amount is higher than otherwise displayed.
But more to the heart of the matter. We have taxes, so we are told, to fund the government. not to clothe, feed and provide shelter to people, as once was the case under British rule.
If we ended the wars in Iraq and Afghanistan, we could abolish the income tax and still collect enough revenue from tariffs to fund the government at the size it was at in 2002.
If we want fairness why not allow each person the portion of pie he is entitled to without the government taking the crust?
Read the numbers again. You and your children are not better off. Your pizza analogy is to cute by half. Your slice of pizza may be larger than it was because the pie is larger, but the pie is larger and the entire environment that the pizza is made in is that much larger to, you’re getting a smaller percentage of it which means your not worth as much as you were to those paying you. This means you can not actually provide for your children presently as some one in the 60’s and 70’s could.
But you knew that right? I mean you’ve been studying econ for 10 years which means you understand percentages and relativeness and constant dollars and…