Don’t look at the rich?

My last post, arguing that the share of US income going to the top 1 per cent of households is now so great that any effective policy must be financed by reducing or more effectively taxing the income of this group produced a range of interesting (and some not so interesting responses). First up, it elicited what appears to be new variants on a couple of standard rightwing talking points. More interesting to me is a response from Matt Yglesias arguing (as I read him) that, even if there is no serious prospect of reversing the shift of income to the top 1 per cent[1], there is still plenty of capacity for progressive political actions based on a broadly neoliberal (US sense) agenda.

The new talking point (apparently due to the Heritage Foundation) starts with the observation that while US tax policy has changed radically since the 1950s (particularly with the elimination of high marginal rates from the income tax system), the share of national income collected as revenue by the Federal government has not. This, it is claimed, shows that tax rates are uncorrelated with revenue. The claim, then, is a watered down version of the Laffer hypothesis. Whereas Laffer claimed that the US (as of the late 1970s) was on the descending portion of the Khaldun curve[2], the new talking point suggests that the US has, for the last 50 or 60 years, been on or near the flat part at the top. I haven’t seen the claim supported by any analysis the mix of tax revenues between income taxes and other taxes, and I don’t intend to offer one. I’ll just make the points that
(a) most other developed countries have higher tax rates than the US and collect a larger share of national income in tax revenue than the US
(b) numerous studies of large tax changes such as the Bush tax cuts have confirmed the common-sense expectation that higher tax rates produce more revenue
The Bush senior assessment of Laffer’s work as ‘voodoo economics’ remains as valid now as when he first made it.
The second talking point is that we shouldn’t worry about income inequality, since consumption is what matters. In the absence of any actual data, a lot of the discussion is based on the assumption that the income of the top 1 per cent is not consumed, but saved and invested, and that if the government taxed these investment flows it would have to replace them with more public investment, leaving no revenue to finance transfer payments or public.
Since there is not a lot of data on the consumption patterns of the top percentile of households, it’s unsurprising to see argument based on anecdotes, in this case with people like Bill Gates in mind. It’s amusing though to note that very different anecdotes were being cited only a few months ago when the Bush tax cuts were in danger of expiring. At that time, we were regaled with household budgets showing that those on $250k could barely make ends meet after covering the basic expenses associated with their lifestyle. Admittedly, these budgets usually included some pretty hefty 401(k) contributions, but there was also plenty of consumption expenditure.

It is certainly true that, on standard measures, consumption inequality is lower than income inequality. In part this reflects the fact that a significant component of income inequality reflects transitory variations, which households can smooth over by borrowing and saving.

Although consumption inequality is than income inequality, we would expect the two to move in parallel. In the US, standard measures suggest that income inequality has grown much more than consumption inequality. Some recent research by Aguiar and Bils (full paper paywalled) suggests that the standard measures are misleading in various respects, such as underestimating growth in the luxury expenditure of the wealthy.

Taking the figures at face value though, the big factor driving a divergence between measured income and consumption inequality over the period from the 1970s to the recent past was the increase in household indebtedness over this period. According to the standard measures this enabled middle-income Americans to increase consumption substantially even though median household income was growing only slowly (and has actually dropped in the last decade).

Such a trend couldn’t be sustained and it hasn’t been. As credit has been tightened, consumption has weakened in general, but particularly for credit-constrained households faced with declining incomes. It seems pretty clear now that consumption inequality is growing.
I’ll turn now to the more interesting response from Matt Yglesias
He says:

the median American household has quite a lot of money compared to the median household of almost every other country. And yet, I think there are a lot of other respects in which quality of life in the United States falls short. We spend a lot of time in traffic jams. We have both a frighteningly high murder rate and a frighteningly high level of incarceration. Our health care system is very inefficient. Americans work very long hours and have unusually little vacation time. It’s not clear to me that any of these issues can be usefully tackled primarily by focusing on higher taxation of the very wealthy.

Looking at this list, it’s probably true that that the high murder rate is due to a gun culture that predates the rise of inequality. But traffic jams are, to a large extent, a reflection of inadequate infrastructure and poor public transport. Fixing those things costs money, and the point of my post was that the only place to get that money was out of the 25 per cent of US income going to the top percentile of households.

The same is true of health care: any really effective reform would require more public expenditure, at least in the short run. But high inequality also contributes to US health costs more directly – a substantial part of the cost gap with other countries is due to the high incomes of medical professionals, which in turn reflect both the general inequality of the income structure and the huge costs of medical training, also due to inequality

As regards working hours, the end of the long decline in annual working hours for US workers coincides with the emergence of wage stagnation and growing inequality. Households have supplied more labor in an attempt to maintain living standards. This point has been made for at least 20 years (I can’t find it online, but the first time I saw it in detail was in a Congressional Study: Families on a Treadmill: Work and Income in the 80’s, January, 17, 1992)

fn1. I don’t want to misrepresent Matt. He certainly endorses more progressive taxation and I assume he thinks of the ideas he’s putting forward as complements rather than substitutes for redistribution. But the post still suggests that it’s a waste of time to put too much energy into a fight that’s doomed from the start. My view, on the contrary, is that a challenge to the top 1 per cent is the only political strategy that is likely to produce an effective mass mobilisation, though I admit I have no idea how to get started on this.

fn2. As Laffer himself concedes, the correct idea behind the curve associated with his name was well known as far back as Ibn Khaldun in the 15th century and were certainly familiar to Keynes. Laffer can reasonably claim originality for what I’ve called the Laffer hypothesis, that the US is, or was, on the declining part of the curve. So, as in other cases, Laffer’s napkin presentation contains much that is correct and much that is original. Unfortunately …

24 thoughts on “Don’t look at the rich?

  1. there’s plenty of public expenditure on healthcare already. by “healthcare” I mean pumping pharmaceutical industry stock prices. Remember Medicare D.

  2. At the rate things are going in the US the Bush tax cuts will simply expire and taxation will rise on the rich. I see no prospect any time soon for raising basic rates of taxation. And for a high income person in NY or CA tax rates on labor income are very similar to those in Australia. There is more scope to cut subsidies and loopholes. For example, the US tax worldwide income of individuals even if they don’t reside in the US. But foreign profits of US corporations are not taxed in the US. Then there is the whole carried interest thing (management fees of hedge funds and private equity taxed as if they were investment income). But in the end they will need to cut defence spending and reduce spending on Medicare and Social Security, which are the two big areas where the US spends much more than Australia. US soc sec. is the exact opposite of the Australian system. The more you earned in your lifetime the more you get in soc sec. while Australia means tests the age pension.

  3. At the rate things are going in the US the Bush tax cuts will simply expire and taxation will rise on the rich.

    They were meant to expire at the end of 2010. Yet they were renewed, even though the Democrats still had huge majorities in both houses at the time. There’s no likelihood of them expiring in the foreseeable future.

  4. What is required now is a set of three salutary disasters. The three (interconnected) issues facing us are climate change/biosphere collapse, resource shortages and financial-economic woes. In each of these areas, global civilization, humanity as a whole, unfortunately needs to suffer what I term a salutary disaster.

    Each salutary disaster needs these characteristics;

    1. At least several millions are impacted with severe consequences.
    2. These millions need to be in first world countries or the BRICs.
    3. The causes need to be unmistakeably, undeniably and respectively climate change, resource shortages and the current political-economic set-up.

    It is clear that the current global world system is unsutainable and needs to change. It is now clear that without salutary disasters this system will never change. Therfore, the least worst, but still feasible scenario is that a set of salutary disasters must occur which will transform the political landscape and enable revolutionary changes.

    This set of salutary disasters will definitely occur and they will affect millions in both the first world and other parts of the world. That much is now inevitable. The issue will be whether the causes of these disasters are unmistakeable and undeniable to the majority of people. Depending on the precise nature of the unfolding disaters there may be much or little latitude for the world oligarchy to manufacture and promulgate effective denial and obscurantist propaganda. The first battle to win will be the battle to correctly attribute the real causes for these salutary disasters and to do this by ensuring the bulk of citizens understand the basic science, the basic empirical facts and the basic political-economic causes.

  5. I should have made it clear. There is no need for any activist agenda to cause these disasters.* The current system will cause them. The activist agenda starts with opposing the oligarchic propaganda which will seek to deny the real cause of the disasters.

    *Any activist agenda to cause or bring forward these disasters would be illegal, immoral and of course totally unecessary.

  6. On guns and America it’s interesting to note that Vermont has some of the lowest homicide rates and it also has virtually no firearm regulation. You don’t need a permit to buy, conceal, carry or own a firearm whether a pistol, rifle or otherwise. And yet a lower homicide rate than Australia.

    On the laffer curve the case for tax cuts does not end when you are below the point of maximum revenue. Government revenue is a rough proxy for public sector welfare. However we ought to care a out total welfare. That is public sector welfare plus private sector welfare. And the point at which this is maximised is at a tax rate below the point at which public sector welfare is maximised. Even if government revenue is declining that does not mean the case for tax cuts has ended. Unless your goal is simply to have the biggest government possible.

  7. For every view there is a counter view.

    “Sen. Patrick Leahy (D-Vt.) noted that his home state of Vermont has a low crime rate despite its lack of gun control, but he also said what works in Vermont may not work in all areas of the country… ”Vermont has the lowest crime rate in the country, lowest or second lowest, and doesn’t have gun control. But I would not want Vermont laws to be in an urban area. We have to decide what works best.” Leahy said. Vermont is one of the few states in the nation that requires no permit to carry a concealed weapon.” – CNS News.

    It is important to note that Vermont is;

    1. a small state (43rd in land area and 2nd lowest population in the Union after Wyoming)

    2. a rural state with regional towns rather than major cities.

    3. a state of older people (The median age of the work force is 42.3, the highest in the nation. Among the 50 states and the District of Columbia, Vermont ranks has the 2nd oldest median age [51].

    4. racially and culturally homogenous (2nd highest proportion of non-Hispanic Whites (94.3%)

    It is likely that low gun crime correlates with these factors (and relative absence of poverty in Vermont) rather than with the lax gun control laws. Locals were actually in favour of more gun control at least in 2008;

    Burlington, Vermont – February 28, 2008

    A new WCAX News poll* found Vermont voters favor enacting new state laws that would restrict the sale and ownership of guns.” The one simple question they were asked was: Would you favor or oppose the state passing new legislation to restrict sale or ownership of guns? Those in favor prevailed by a more than 3 to 2 margin– 57 percent in favor, 35 percent opposed, 8 percent not sure… Hill, a Middlebury lawyer and gun rights advocate, says the results reflect the cultural and societal changes in Vermont toward firearms.”

    But as usual TerjeP cherry-picks, compares apples to oranges and gives facts and logic the rough pineapple. TerjeP’s thinking is a real fruit salad.

  8. The US social security system is actually more progressive than comparable pension systems in much of Europe – although of course nowhere near as progressive as the Australian system.

    In addition since the mid 1980s the US social security system has been running a surplus of between 1 and 2% of GDP each year. So if not for the social security system the US would have accumulated public debt about40- 60% of GDP higher – or in the neighbourhood of Japan.

    The problem is that by setting up a trust fund the USA has incurred obligations that need to be met later this decade when payouts are projected to exceed revenues – although with reasonable rates of economic growth that turning point gets pushed out.

    Even when the trust fund is completely exhausted, revenues will be able to finance about 75% of payouts – so the US argument is basicallly about cutting benefits now in order to avod benefit cuts in the future.

    Health care costs are a completely different story …

    And of course, who was the chairman of the bipartisan commission that established the over-funding of social security that enabled the USA to run bigger deficits in other parts of government (and now appears likely to renege on the promises made to social security pensioners0?

  9. Ikonoclast states the bleeding obvious, nicely and succinctly. The collapse of market capitalism under unrepayable debt, the ecological crisis of multiple crises and resource depletion is an unbeatable trifecta. They will all, moreover, have synergistic effects on each other. The Right, naturally, denies them all, and actively (nowhere more so than in the USA, with our bunyip pathocrats following suit) sabotages remediation and even,lately, adaptation, although the latter was always a silly, cynical, diversion.
    Unfortunately, I must diverge from his pessimistic optimism over ‘salutary disasters’. The Dunning-Kruger-Joyce tendency will not appreciate the significance of even the most salutary of salutary calamities. And the real bosses simply do not care what happens after they die, or are determined to be revenged on those living then for the sin of being alive when the current pathocrats are dust (or toxic sludge, more like)or simply wish the salutary disasters to occur and thus eliminate the global majority of ‘useless eaters’ that they despise. I could almost hear the ears of the pathocratic Right pricking as the recent climate conference in Melbourne heard evidence that a four degrees hotter globe (inevitable, now)would have a ‘human carrying capacity’ of just one billion. I’d bet that they find that prognosis not just not frightening, but positively exhilarating.

  10. Ikonoclast, we are having disasters, but they are affecting poorer countries. If there are shortages of food, we in the west moan about high prices, while those in poor countries starve.

    Its very sad but it just seems to work like that.

    If a disaster (9/11?) befalls a rich country, it is much more important than a disaster in a poor country.

    What is most urgently needed is a decline in birth rates in poor countries (they’ve already declined in rich), and boosting the status of women seems the best way of achieving this goal.

  11. John, I saw a repulsive opinion piece in the Irish Independent, apparently by some creature called Myers, where he argues, rather heatedly, that the Somalis ought to be left to die because they are all nasty Islamists who wish to destroy that perfection that is really existing ‘Western Civilization’. Moreover he recommends hardening one’s ‘heart’ to the dying children, because they will simply grow up to be terrorists. Well, I’m not often surprised by the depth and intensity of Rightist hatemongering, but I was made somewhat despondent by seeing such stuff in print. A lot of the ‘Analysis’ there, as they call it, is rather, shall we say, pro-Israel, and Ireland, like Iceland and Norway, comes in for a deal of abuse for supporting Palestine’s bid for General Assembly recognition. But, as ‘The Fundament’ (The Fundamental Orifice of the Nation) and sundry other Rightists insist, this is simply ‘free speech’- one of the glories of the West that those evil Leftists which to destroy.

  12. Linking (tenuously) the NoW / Murdoch fiasco ( which forced some hand ringing in the British parliament with this issue, might I suggest a comparitive analysis of the russian oligarchs and american business and financial institutions with respect to their involvement in the political economy. Who knows maybe that might get enough blood to boil to force institutional change and political change in the US …. Bet that would get reported on Fox News!!

  13. It is likely that low gun crime correlates with these factors (and relative absence of poverty in Vermont) rather than with the lax gun control laws.

    Yes of course. That is the point. Gun control is largely irrelevant in Vermont. Likewise it is likely that high homicide rates in the rest of the US (or Brazil for instance where gun control is even tougher) has little to do with gun laws and more to do with age, non homogeneus racial and cultural mix, urban density, poverty and other factors.

  14. p.s. Hard to see what Vermont being a small state has to do with crime rate. The USA is a big country but size of jurisdiction seems a poor explanation for crime rate.

  15. Way off the mark, TerjeP. High homicide rates have everything to do with an excessive reverence of machoism, magnified by the degree of exposure, and moderated by degree maternal empathy. Poverty, urban density, and cultural mix are just the setting in which amplified egos interact. Genetics play a major role but far more intra racially than inter racially. The other rarely referred to factors are birth order and average family size.

  16. The general case that tax revenue rises with the tax rate is close to self evident. But there is an Australian exception. A back of the envelope calculation suggests NSW is close to the top of the Laffer curve for stamp duty on residential real estate transactions. This is based on Andrew Leigh’s estimate of the elasticity of transactions to stamp duty rates. We’re not quite at the revenue maximising point, but pretty close.

    We should eventually pass the peak of the Laffer curve for stamp duty because average tax rates rise over time: stamp duty thresholds are not indexed, stamp duty rates are progressive, and house prices rise over time, bringing more and more houses into higher brackets.

  17. BilB – even if we accept your points as given they don’t contradict my point. Which was that gun control laws are far from being significant in influencing homicide rates. As an indicator it is swamped by other far more significant factors.

  18. @TerjeP

    Good to see you continuing your research on diverse subjects – income and wealth distribution, and now gun control. I was thinking, if you want some pointers on conducting your research why not talk to OJ Simpson?

    I am sure Juice has learnt a lot on the subject of research since devoting the remainder of his life to his quest to discover the ‘real killer’? Could you possibly find a better mentor?

  19. Definitely, Terje, if a person is inflamed to murder then they will use what ever is at hand to soothe their rage. Availability of guns ensure that such a soothing will share that rage with the greatest number of people in the shortest period of time. Jared Loughner, for instance would have been hard pressed to kill or wound 19 people with a knife or a piece of pipe in just one minute, for instance.

    By the way David Marr of the Sydney Morining Herald has just, on The Drum, declared the US as being the lowest taxed of major developed nations. Barak Obama declared that in the US it is possible for the most highly paid in the US to use loop holes to pay less tax than “nurses and teachers”. I think, Terje, that you have some explaining to support your claim that the US is the most highly taxed nation. It is starting to look as though the poor are the most highly taxed and the rich have a free ride. Perhaps Paul Hogan might step in here to support your argument,…or not. Do you have any credible information on the subject?

  20. BilB – my figures were out of date and I’ve conceded that Australia is now more highly taxed than the US. But it is only by a slim margin.

  21. BilB – you are right that with a gun more people can be killed quickly than with a stick. But likewise with a gun a violent thug can be brought down quicker than with a stick. What matters from a policy perspective is if the lose of liberty that gun control entails actually delivers any benefits. Some control, like the need for shooters to be licensed is readily accepted by the likes of the NRA and other pro gun groups as being effective measures. Most other forms of control are of no notable benefit.

  22. @TerjeP

    Gee, Terje. You may be right. The Police should have guns “a violent thug can be brought down quicker than with a stick” and others should not “you are right that with a gun more people can be killed [more] quickly than with a stick”.

    I am surprised at the clarity of your logic.

  23. @BilB

    What might be being ignored is, one, a lot of taxation happens at the state level in the US, with the states having as much power to tax within their jurisdictions as the Fed, and, two, taxation is significantly lower at the Fed level because they are financing a significant part of their expenditure by borrowing. Very Greek-like I must say. Borrow and then think you shouldn’t have to repay the borrowed money.

    Why, I wonder, do they still have a triple A rating, although the Greeks now have a debt rating more fitting their borrow-but-don’t-repay philosophy? Oh, that’s right, the rating agencies are American, not Greek.

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