Yes.
This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion. (Hat tip: Harry Clarke).
The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.
The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.
What does this mean? Two things:
(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.
It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.
The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.
John Quiggin 
Obviously the Piketty focus is very important, especially in the modern world, but surely inequality between those percentiles is still important? Like, the highest social marginal utility will be in the redistribution of the wealth of the ultra-rich, but there’s something seriously divisive in the middle and upper middle classes reliably making significantly different amounts of money.
A big driver, if not the big driver, of inequality in the US is the generous capital gains tax rate (20% for those who are in the 39.6% bracket for ordinary income). Increasing the top income tax rate to 50% is all very well, but if you want real money to give to the poor, fix the CGT rate.
Naaaah, we should just let this happen. <- Sarcasm.
http://www.thenation.com/article/one-rich-guy-who-owns-everything/
“The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant.”
And the real lesson I learned, one I came to over a period of about 20 years, is that macro-economic variables are of very limited usefulness and policies based on achieving target values of macroeconomic variables are not much better than KPIs. Detail matters. Representatie government, defined as elected members having detailed knowledge of the circumstances of their electorate matters.
@Ernestine Gross
What should policies be based on then? I ask that question in all honesty. It is the key question if current policies are not working.
Your statement “policies based on achieving target values of macroeconomic variables are not much better than KPIs” can probably be interpreted in a number of ways. It could, for example, be taken as a criticism of both monetarist surplus targeting and exaggerated Keynesian counter-cyclical spending.
Reasoning ad absurdum suggests to me that very bad macroeconomic variables could quickly wreck an economy. For example, we could keep taxes the same and spend none of the taxes (massive surplus) or reduce all taxes to zero and government-spend at the same rate (massive deficit). I think it is fairly certain that each of these policies would rapidly wreck the economy. However, I am sure there is good evidence that the converse is not true. I mean namely that “set macro variables to “perfect” and we get a perfect economy” cannot be a true proposition. This would assume that no other variables affect the economy: clearly an unsupportable assumption.
Good or at least workable macroeconomic settings must be a necessary but not sufficient condition for a good economy. The question then is this. What are the other variables upon which policy can have an effect? What policy or societal tools, other than macroeconomic settings, do we have to affect these variables? Again, I ask these questions in all honesty. One of the alternative theses is that in creating a complex political economy and technology system we have created a dynamic system which we do not understand, do not know how to control and will never know how to control. Are we to be forced to that conclusion at some point?
There is s strong political case for taxing the very rich, even without redistribution to the poor. Great concentrations of wealth are by themselves a threat to a democratic or even a republican form of government. The last century of the Roman Republic is the classic example, but the contemporary USA is almost as good. Trump is more Crassus than Caesar, of course.
@James Wimberley
I agree. But once the tax is levied it can be spent on the poor, the middle class or not spent at all. It would negate the purpose to give it back to the rich. These are the best uses. The last “use” of “not spent at all” would mean in essence that the rich tax is used in a monetarist manner to prevent inflation. The rich should approve… theoretically. It would be as enjoyable irony for the rest of us to observe.
I do not see anyone on this blog arguing against redistribution and wondered what the argument against might be.
The present level of inequality in income and concentration of wealth is a threat to democracy. However, as uncle Milton above points out if we are serious about this issue the CGT would be the first to consider. Indeed why should capital gains receive special treatment compared to income derived from other sources?.
I would also question whether even 50% is a high enough top rate for incomes in the top 1%.
I’ve decided that the best way to do any good for society as a whole is to help those at the bottom. So this gets a thumbs up from me.
There is also a perfectly good justification for high marginal income tax rates for high income earners. In many cases, the high incomes are the result of distortions that governments should be tackling, or that government created in the first place. So if someone is on $2 million a year because they have a strong union (i.e. they are a medical specialist or a pharmacist), then clearly the government should be going after the restraint of trade being practiced by the union. But in the mean time, a high marginal tax rate provides a partial fix. Similarly if someone makes a fortune from a patent – well patents are an imperfect system that can reward inappropriately at times – and the tax system ameliorates that.
It has been a lot higher in the past, without the sky falling. But current thinking is that somehow all the best and brightest would run away to a tax haven somewhere if we taxed them too much.
The best and brightest do run away, but usually because the opportunity to work in their chosen field is limited in Australia. Those that run away for money – don’t come back now.
@John Brookes
In many cases, the high incomes are the result of distortions that governments should be tackling
Too true, but if governments feed off the distorters donations, then changes are not sustainable. The lobbies are winning.
@John Brookes
It would be an interesting study in behavioural psychology to investigate the motivations of people at various wealth levels from the super wealthy to the say 80th percentile income earners to establish at what point tax rates would cause them to changes their behaviour and place of residence. Having worked in the international motor industry and observed CEO’s and other senior management at close range I do not believe that money is the sole or even the main motivator at this level. Rather it is about the power they wield, the extent to which they can shape the company they work or (legacy) and recognition of achievement. Sure, they want to be well paid for what they do but beyond a certain point it is not the main reason for working. I would suggest that high tax rates are not the disincentive that people suggest they are provided that people can see that there is public benefit to society overall. If this were not the case, the scandanavian countries would have seen a mass exodus years ago.
I can recall when I first came to Australia to live in 1984, the highest marginal tax rate in Australia was 6o% and kicked in at a relatively low income level. When it changed under Hawke-Keating, the senior managers at Ford had a massive increase in disposable income and were delighted, but did it change their behaviour, not in the slightest. Would they have continued doing what they were doing even if the highest marginal rate had stayed at the level of 60%, absolutely.
upon reading the Brookings paper, I am trying to work out whether the executive summary was a deliberate attempt to mislead or they whether they are simply obtuse. They state
“that such a sizeable increase in top income tax rates leads to such a limited reduction in income equality speaks to the limitations of this particular approach”
Yet their own analysis demonstrates that the redistribution provides a lift of about 22% in the net disposable income of the 10th percentile of incomes. I would have thought that that was rather significant. I think that the Gini coeficient s a measure of inequality obviously has its limitations and to suggest that the impact of such a redististibution is “limited” flies in the face of their own figures and seems to me a rather disingenuous attempt to push a particular agenda.
@James Wimberley
Yes and given his recent pronouncements he should take note of what happened to Crassus in the Middle East in 53 BC.
@John Turner
I have argued in many threads on this blog for a change in our economy such that re-distribution is less necessary. The view is not my invention of course. Very simply, if wages were lifted and profits to capital reduced, there would be less need for redistribution via taxes and welfare.
You are right to argue for higher wages and a reduction in profits to capital but as I understand it the reality is that the trends worldwide have been an increasing share of GDP going to capital, much of it speculative capital. The Financial services sector’s take of profits to capital was extremely high prior to the GFC and I would suggest that it remains so post GFC.
In the face of the growing proportion of income going to capital and little prospect of changing that situation (e.g continung labour market deregulation) redistribution is becoming more important unless we want the growing inequality to continue growing.
Also, I rather suspect that extreme wealth and extreme income levels and the associated inequality are corrosive in terms of the cohesiveness of our society, eroding social capital and ultimately leading to more criminality and unwanted social behaviour. Redistribution through the increased public provision of services and increases in net disposal income of he lower paid can I believe have a significant impact on the way people behave, in my experience a sense of ‘fairness’ is a powerful motivator of human behaviour. If an individual can only afford a Suzuki Alto while all around them people own Mercedes, they will feel aggrieved no matter how high their standard of living. It is all about a sense of being able to participate fully in the society around them.
@Ikonoclast
Yes, re-distribution sucks and does nothing for the person being re-distributed to.
What we poor people need is a system that allows us to succeed despite being ‘less able’ than those who are ‘able’ to steal our labour and create wealth for themselves from our lack of ability to take advantage of others like silly nurses who think they ‘need’ to work for a pittance on a Sunday.
@Ikonoclast
A bit clumsy in my typing, the previous comment was meant for you.
“If an individual can only afford a Suzuki Alto while all around them people own Mercedes, they will feel aggrieved no matter how high their standard of living.”
Unless the individual has some sort of higher moral or ethical standards or knowledge system that provides them with the knowledge that if they are not happy now, a Mercedes will not make any difference.
@Julie Thomas
I guess this comment was aimed at me as well as at ikonoclast.
The problem is that you are fixated on the penalty rates issue. Surely the important matter is to get higher wages for the lower paid generally and to implement a taxation regime that enables us to redistribute resources to fund those areas of social need where the incomes are abysmally low (e.g the pittance paid to those who actually do the hands on work in the community sector such as personal carers in aged care, child care, cleaners of our hospitals etc. if you believe nurses are hard done by you should take a look at these areas by way of comparison).
There has been a growing managerialism in our society and a trend where the further you are from the actual coal face the greater the rewards to an extent where in many work places the high paid chiefs almost out number the low paid indians. Moreover, it is gender biased. Look carefully at the community services sector, both the private providers and the state providers and you will find that whereas the people delivering the services are overwhelmingly women, the management is more generally male. If you want to do something about helping the low paid, I would suggest that the gender bias issue is more important than the penalty rates. To me this means introducing such things as free child care/preschool kindergarten, improved and free educational opportunities for women wishing to return to work, more work flexibility in terms of working hours.
Also given your barbed comment, despite the common perception, when it comes to the ‘low’ paid, general practice nurses are at the higher end of the scale ($70,000 + a year in our practice working a 38hr/week in normal hours) and also enjoy substantial benefits not enjoyed by other workers (how many other employees get 18 weeks long service leave as in our practice or 26 weeks for hospital nurses, 5 weeks annual leave as standard, 21 days sick/personal leave per year, 5 days study leave and other allowances which is what they receive in Victoria?)
@John Turner
I agree that redistribution is better than allowing ever-increasing inequality. If that is all we can do for the time being, then we must do it of course. However, if we settle for a primarily unequal system with secondary redistribution then we are settling for second best (or worse).
You say “the reality is that the trends worldwide have been an increasing share of GDP going to capital, much of it speculative capital”. I am interested in why that trend occurs or rather why it is occurring now. The long run trend of capitalism has been to increase inequality. Piketty’s work demonstrates that trend at the national level for countries where he could find a sufficient historical run of data. There was a period that went against that trend after the Great Depression and Piketty demonstrates the conditions under which this counter-trend can happen. Notwithstanding this, the long run systemic trend of capitalism is to increase inequality. If Piketty could have measured all countries and thus tracked international as well as limited intra-national inequality trends, I think he would have shown an even greater measure of inequality being generated.
What intrigues me (and it’s something I hope to post about sometime in an appropriate thread) is the issue of power. To my mind, behind the issues of economics, politics and political economy, is the issue of power. I mean here the power of some humans over other humans. How is this power constituted, accumulated and exercised? If relatively more income and capital accumulation is going to one sector (capital) over another sector (labour) then ipso facto capital has more power. The powerful take what they can. The flows or lines of the money “field” follow the power “field”.
The question is this. What constitutes the power field? I believe we need to think in terms of field theory for guidance, be it field theory in physics or sociology. But I will have to hold off and post on this sometime. These are speculations on my part. I claim no firm theory about this.
> The problem is that you are fixated on the penalty rates issue.
Please observe blog rules on coarse language – JQ
You don’t understand the penalty rates issue. I’ve pointed it out, in tedious detail, twice, or is it three times now: penalty rates shift employment away from the weekend and towards the weekdays, and shift recreation away from the week and towards the weekend. This means that the value of people’s spare time is increased through network effects [because they can spend it in coordination with others][1].
For the incentives to work they need to be incentives: the weekend rate needs to be higher than the weekday rate, regardless of how high the weekday rate is. They are two entirely separate issues and should not be conflated or confused.
[1] this actually also increases the value of the work hours for the same reasons, but this is a smaller effect because:
+ working hours are less concentrated, and
+ few people deal with outside businesses.
> The problem is that you are fixated on the penalty rates issue.
No no no no no.
You don’t understand the penalty rates issue. I’ve pointed it out, in tedious detail, twice, or is it three times now: penalty rates shift employment away from the weekend and towards the weekdays, and shift recreation away from the week and towards the weekend. This means that the value of people’s spare time is increased through network effects [because they can spend it in coordination with others][1].
For the incentives to work they need to be incentives: the weekend rate needs to be higher than the weekday rate, regardless of how high the weekday rate is. They are two entirely separate issues and should not be conflated or confused.
[1] this actually also increases the value of the work hours for the same reasons, but this is a smaller effect because:
+ working hours are less concentrated, and
+ few people deal with outside businesses.
@Julie Thomas
Perhaps that was a clumsy example. The point I am making is that a sense of ‘fairness’ is a strong motivator and that high levels of inequality and extreme wealth create a sense of “unfairness” and erode social capital. I’ll give you a real life example of how a sense of ‘fairness’ can create powerful emotional responses.
In our to and fro of comments I have drawn on the example of our practice. It was a general policy of ours to provide presents to our staff at Xmas by way of a thank you. On one occasion I went out and purchased expensive perfumes for all of our female staff (I know it was a brave thing to do but as a safeguard arranged with the pharmacy to change any perfume that the receiver did not like) amazingly out of 17 people only one wanted to change. When they chose an alternative perfume, the pharmacist asked for an extra $5 for the more expensive one which was the same as another staff member had received.
The result was that this person felt they had been treated ‘unfairly’ never mind the fact that these were gifts and all were expensive perfumes.
On another occasion, an employees’s circumstances changed so that she wanted, for family reasons, to work a shorter day (she had young children). I accommodated her request and immediately was criticised by staff who thought that because she was not participating in late (6.00pm) finishing rosters they wre bein treated unfairly. There are many examples I could draw on in my working life both in the international motor industry, the dairy industry, in community care service and in health management. “fairness” is a powerful motivator no matter how trivial it may seem to others.
@John Turner
“The point I am making is that a sense of ‘fairness’ is a strong motivator and that high levels of inequality and extreme wealth create a sense of “unfairness” and erode social capital.”
Yes yes yes you are right about this. You really are not reading what Collin and I are writing are you? You think you see the real argument; the rational one don’t you? But until you understand the point I am making there is no point in saying anything more to you.
I can’t be bothered reading your motivated reasoning because I can tell you real life examples of nurses who work too many hours to buy stupid 4 wheel drive cars that they do not need to impress people they don’t even like; it’s the status bias – do you know any psychology?
All of these nurses suffer from health problems related to lifting and bending and being overweight; they do not need to work Sundays to pay for the crap they think they need. In our town, we would all be better off if they used their Sundays to do some fckn community work.
You really are motivated to think you know it all dude and it’s so not true.
@Collin Street
your assertion is that penalty rates shift employment from the weekend to the weekdays, what is the basis of the assertion?
wow “what is the basis of the assertion?”???
Seriously, John you are evidence for the truth of my PhD supervisor’s opinion that MD’s are not trained to be scientists.
Do you think that you could join the local Progress Association or Hall Committee in your town; you could do a lot for the health of the community by speaking to people at these events?
@Julie Thomas
So typical of many Australians, go for a personal attack rather than discuss the issues rationally. At least Collin is putting up rational arguments, I am just not convinced about his underlying assumptions.
I guess I know about as much about psychology as there is in a Bachelor Degree in Social Work and a Masters in Interntional & Community Development, a lifetime working in many different capacities and a personal interest in Brain Science (to wit I can recommend the Brain Science Podcasts by Dr Ginger Campbell an excellent program). I am not a psychologist.
your assertion is that penalty rates shift employment from the weekend to the weekdays, what is the basis of the assertion?
Honestly common sense is enough, but if you want to do it formally you’d be looking at shifts in consumption patterns of imperfect substitutes as prices shift.
https://en.wikipedia.org/wiki/Substitute_good#Increase_in_price
An increase in price (ceteris paribus) will result in an increase in demand for its substitute goods. If two goods have a high substitutability, the change in demand will be much greater. Thus, economists can predict that a spike in the cost of a particular brand of detergent is likely to result in a large change in demand for other brands, whereas a change in the price of pencils will have a much smaller effect on the demand for other stationery, such as pens on legal documents or pencils on most high-school maths homework.
Or, labour on monday is an imperfect substitute for labour on sunday, so if the price of work on sunday increases the amount of labour on monday will increase.
It’s fairly basic macro; this is essentially an economics blog, so you really do need at least a bit knowledge or at least a willingness to learn to participate usefully.
@Ikonoclast
I look forward to reading your future paper on power. A difficult subject with so many different facets to it.
It has interested me since I did a Masters in International Development under Damien Kingsbury at Deakin although I would not profess any particular knowledge. Once got hammered on an assignment for the Masters which was marked by another department because of my critique about some of the methodologies used in International Aid programmes. The critique was centred on ideas about power and in particular the role of language and did not go down well with the managerialist bias of the partcular department concerned.
@Collin Street
You are right, I am no economist but does this blog exclude commentary from non economists. Sad if ithat is the intent. Academic economists often lose sight of how theory actually translates into real world experience, if they did not, perhaps we would not have the bias towards what JQ calls “Market Liberalism’
I have learned that ‘common sense’ can be rather misguided. Similarly, that actual experience in practice does not always conform to economic theory. People do not always act with rationality and there are many reasons why people would or would not work on Sundays and legislated penalty rates is but one.
Also, there are many circumstances surely where demand is not fixed and increased access or availability (ie by opening on Sundays) does not shift consumption but rather actually grows the total level of consumption? Health services is one such area. In my humble experience the ‘consumption’ of health services is driven not by patient demand, but by the availability of providers willing to provide the services. Increase the number of doctors and consumption of medical services will jump, open on a Sunday, people will not generally subsitute the Sunday for Monday, although obviously that will occur to some extent, but the total of services consumed will actually increase. I doubt if health is a unique situation.
@Collin Street
Wrong, but what a performance – it is fairly basic “micro”.
Increasing the price of labour on any day will lead to employers looking to shift some activity to alternative days – true.
@John Brookes
What is the evidence?
Most “best and brightest” I know go overseas for post-graduate studies but return in due course often bring a new partner with them. Only some stay offshore for extended periods if their specialty is better pursued there.
These flows have little to do with tax.
@Ivor
I confess to playing something of a role of Devils advocate in relation to this penalty rates discussion. I was trying to show the impact on a single organisation by reference to one that I am familiar with. I do not believe that ‘consumers’ or providers of medical services react/ behave in the same way as perhaps consumers and providers of other goods and services do. In part this due to the power relationship between ‘seller’ and ‘consumer’ that is derived from the imbalance in knowledge. At the individual organisation level while you are right to suggest that pricing labour higher on a Sunday might cause the employer to try to shift some activity to alternative lower priced days, it might not actually be possible because of capacity constraints. i.e in my example, all rooms are booked out, all medical staff fully utilised in the ‘alternative lower priced days’. Similarly with the alternative suppliers of which there is one, within reasonable travelling distance. So the supplier, having no lower priced alternative, and a situation where the higher priced alternative leads to a loss even on a marginal costing basis, will not supply. I.e access to services is constrained despite medical need.
Similarly, I contend that the ‘demand’ curve for health services is rather unusual. As access (i.e supply) is increased demand will surely follow. Why should this be so? Put simply, demand is significantly controlled by the supplier. A doctor will not sit idle for long, for example the frequency of reviewing a patient’s health condition is a matter determined not by the patient but by the provider, a decision whether to issue a repeat prescription without seeing the patient is a provider decision not a consumer decision, identifying people at risk of a particular condition then actively pursuing those individuals for health checks and other health prevention measures is very much in the provider’s control. There are many ways in which the provider can and does induce demand.
I am of the opinion that health ‘demand’ is not finite but is a function of availability and access. Consequently, opening on a Sunday will not in this particular instance cause a shift in consumption patterns from one part of the week to another so much as actually increase consumption.
Some evidence for this can be deduced from what happened at our local level occurred when a second practice opened in the area. Total medical services being provided increased from around 64,000 inclusive of ED to 90,000 with the introduction of the additional doctors. Later when the Hospital ED had its own doctors it continued to see the same number of patients while the two medical practices now with more doctor ‘ resources actually increased their services to over 100,000. As more doctors have been brought into the practices the number of services has continued to grow and now stands at 250% of its level 10 years ago. The actual population has grown somewhat more modestly in the 10 year period by about 2.5% a year. Meanwhile, the waiting time to see a doctor has only slightly diminished. It may be thought that we are now providing services that were provided by practices outside the area but all the evidence I have suggests this is not the case. Rather, the number of services per patient has increased, are the patients sicker? I doubt it.
Colin Street and others on the blog who have lamblasted me over this may well be right at the total aggregate level for all goods and services but not I suggest in respect of medical services, and certainly not correct for individual businesses.
@Julie Thomas
Not an MD. Started off as a statistician in 1965, became a finance analyst, then a marketing manager of a major vehicle producer, then a finance manager for the exporting arm of that organisation, then Finance Director of an overseas subsidiary in Japan, then corporate finance analyst for a different producer in Australia, then Commercial Manager for a dairy company, then a sea change – Social Welfare degree, Community Health Manager, Masters in International & Community Development, worked in Mental Health Area before for the last 12 years the CEO of a large rural general practice. So don’t make presumptions.
@Julie Thomas
I should have added that I do indeed speak to local organisations about health and other matters, write columns for the local newspaper on health matters, such as ‘The impact of discrimination on health’, ‘Effective Consultations’, ‘Climate change and health’ ‘Immunisation- a case for compulsion’ ‘diabetes type 2. – a lifestyle choice?’ To mention but a few. I put community development theory into practice in more ways than one and try to encourage community engagement and encourage my staff to engage by providing them with paid leave to undertake some community work during the year.
@John Turner
Good for you John, I am impressed with your quality as a do-gooder, full of the milk of human kindness and so keen to help the poor and stupid, and of course make a profit that you deserve along the way, but this sort of do-gooding doesn’t work for we poor people.
When I suggested that you involve yourself in the community, the idea I had was that you live with us and set an example for us, by the way you live. The people you want to ‘help’ (you do want to do good?)do not go to talks by people like you.
And I’ll make all the presumptions I like dude and seriously you are so boring and full of yourself and unable to see the mediocrity of your ideas that I don’t care to talk to you any more.
I’ll leave you with a suggestion; it’s bottom up self-organisation we poor people need, not top down prescriptions about how we should live from people who are so sure they have the answer without understanding the problem; from my perspective it is dudes like you who are the problem.
Cease trying to make me and my poor neighbours lives ‘better’ by forcing your values and ideas about the good life, onto me and mine from above.
@Ivor
That is exactly my observation too.