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Tuesday, October 27, 2009

Income inequality - is it real?

It is one of those things that "everybody knows." In the United States, the rich are getting richer and the poor are getting poorer. The middle class is getting squeezed and we are becoming a society that includes a small, wealthy elite class and a mass of struggling humanity. This "narrative" underlies much of our policy and legislation (and our tax system). Productivity in the U.S. economy has been improving (on average) at a decent clip, but wages are stagnant - and this is what is causing inequality to increase. I tended to believe it.

In my town, Evanston, Illinois, there is a university - Northwestern. One of the grizzled old tenured professors at that university is Robert Gordon, an economist with a Harvard/MIT pedigree. He is a middle-of-the-road guy (not a raging University of Chicago "free marketeer"). He wrote the "Macroeconomics" textbook that is used by college students around the nation. He is mainstream, baby.

So apparently Professor Gordon has been looking into productivity and income inequality. His results were summarized in a recent Forbes Magazine article. Cutting to the chase, Prof. Gordon's research allegedly demonstrates that most of the difference between productivitiy growth and income growth for the middle class can be explained by adjusting for government sector employment (17% of the workforce!!) that has zero increase in productivity (since it is an activity that generates no profit), smaller household sizes (leading to more households but not necessarily lower income growth per individual) and differing rates of inflation by region and by income level. So the great increase in income inequality isn't very great at all, apparently. Huh.

BUT Gordon does confirm that the top 1% of all earners in the U.S. are pulling away from the other 99%. So THOSE are the culprits!! Off with their heads!!!

To be a "top 1% culprit," you would need adjusted gross income of $410,096 in 2007. The top 1% earned about 22.8% of adjusted gross income in 2007 (according to the IRS) and paid 40.4% of all income taxes in that year. So it looks like these wealthy folks are carrying a decent share of the tax burden, right? And their tax rate is the highest of all income brackets - over 22% after all deductions and other hoo-ha that wealthy folks do. Oh wait - back in 1980, the top 1% culprits had effective tax rates of 34.5% So it has been good to be wealthy, right? Except that these numbers don't reflect state income taxes, property taxes, etc. But, hey, those are details - the tax rates have been cut back in a serious way since Jimmy Carter sat in the Oval Office. Remember those fabulous Carter years? Good times, man.

So how much more can we tax these top 1% culprits? Should we take 40%? 80%? 99.99%? And what is the impact on revenues if we put the screws to the wealthy in a serious way? Will our national budget be in better shape? Will we improve as a society?

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