** Economic reality check on income disparity and taxes

Topics: Taxes
18 Sep 2008

From: Ervan Darnell




1) Income disparity
This is using the widest data range readily available [1]:
top quintile of income earned:
1967 - 43.8% of the total income.
2003 - 50.2%
bottom quintile
1967 4.0%
2003 3.3%
The absolute numbers are not what they seem because these are
pre-tax
numbers (I cannot immediately find after tax numbers for 1967).
But, real income disparity did grow. Taking the most extreme version it
went from 43.8/4.0 to 50.2/3.3. That is, the top quintile was
making 39% more relative to the bottom quintile as a fraction of total
income in 2003 than in 1967.
The 3 middle quintiles went from 52.3% to 48.8% of the total personal
income from 1967 to 1998 (choosing those years because the data is easy
to get, and normalized to the pre '93 metric). The top quintile was
47.4% in 1998 (pre '93 metric). So, the top quintile improved
relative to the middle 3 by roughly 16%.
So, the welfare class is losing some ground, but everyone else is fairly
stable. I suspect the relative instability of the lowest income
quintile is driven by welfare levels and low-income single-parent family
demographics as much as actual economics.
Another correction is that immigrants typically enter at the bottom
quintile. Thus, if you look at the changing income distribution for
the same cohort of people, the disparity doesn't increase nearly as much.
The increase in disparity is in large part an artifact of including new
people in the totals at the bottom.

2) Real Per Capita Income
In the same period the average real (CPI adjusted) income [4] went
from
1967: $12.7K
2003: $25.5K
That is a 101% average improvement. Even the lowest quintile is 66%
better off (on average of course). The other quintiles are all much
nearer 100% better off. That completely eclipses the increase in
disparity.
When Democrats complain about growing disparity on the campaign trail,
they are actually complaining about everybody getting richer. A
deeper analysis of this is that it doesn't really matter who gets rich by
some increase in efficiency. Reagan was right. A rising tide
does lift all boats. Of course, a tax targeting a particular group
can be unfair and inefficient in all sorts of particular ways, but that's
not the bigger point here.
The bottom line is that most economic proposals can be evaluated by
whether they help the economy over all, and not who they help in
particular. It will all equalize in the end. Focus on
pro-growth strategies will do a lot more good, even for the poor, than
focus on redistribution strategies.

3) Federal Personal Income Taxes paid [7, 8]
top 1% - 39% of income taxes
top 5% - 61%
bottom 60% - 0.6%
That's right, the bottom 3/5 of the population pays essentially no
personal income tax (net). The "rich" are indeed paying
most of the personal income taxes.
In fairness, if you include excise taxes (tobacco and alcohol), the
poor pay about 1.6% total. And, these numbers are net, plenty
of individuals in each class pay some or no tax. And, yes, I'm
biasing the presentation by presenting total $ instead of income
percentage, but I think this perspective is useful too.
The tax system is already very progressive. "The rich should
pay their fair share" begs the question of just what are they doing
now. The idea that they are (as a class) somehow escaping taxes is
nonsense. "Should pay their fair share" is one of those
ratchet arguments. No matter what they are paying now it's an
argument they should pay yet more. There has to be some
absolute standard against which to make such an argument, not just the
relative standard of where we are today.
Indeed, the system is too progressive because most voters have no skin in
the game when it comes to voting for higher taxes and more government
spending. Also, about half receive a paycheck from the government
[10] and are compromised in that way as well (as to voting).

So, for example, when Obama said: "I will cut taxes for 95% of
working Americans" [5], it was a lie because 95% of working
Americans don't pay (federal income [9]) taxes. Indeed, 60M
Americans directly don't pay any tax [6]. What he actually meant
was that he was going to increase tax credits, which are not tax cuts,
but welfare payments called something else. Those have to be paid
for, by more taxes. So, when Obama says he is going to cut taxes he
actually means just the opposite, that he is going to raise taxes (on
"the rich" and give the money to people who are mostly likely
to be the ones voting for him).
-----------------------------------------------------------
[1]
1) From 1967 to 1998 [3] the top quintile was
1967 43.8%
1997 49.4%
1998 49.2%
bottom quintile
1967 4.0
1997 3.6
1998 3.6
However, the methodology changed in 1993. The change in methodology
jumped the numbers 2% in 1993 for the upper bracket. It's not clear
how much is real and how much an artifact. Backing out that single
anomalous jump of 2% minus the expected linear fit change of 0.2% we
get:
1997 47.6%
1998 47.4%
bottom quintile (using a similar correction):
1997 3.8%
1998 3.8%
Using yet a 3rd metric [2], we have:
1997 45.8%
2003 48.6%
bottom quintile:
1997 4.5%
2003 4.0%
normalizing to the 1967 metric, we have:
2003 50.2%
bottom quintile:
2003 3.3%
[2]

http://www.census.gov/prod/2007pubs/p70-112.pdf
[3]

http://www.census.gov/prod/2000pubs/p60-204.pdf
[4]

http://www.census.gov/hhes/www/income/histinc/p01ar.html
[5] from XM Potus broadcast, 6/10/08
[6] "Indeed, some 44 million Americans file a tax return but have no
income tax liability after taking advantage of their credits and
deductions. An additional 15 million earn some income but not enough to
be required to file an income tax return. This brings the number of
Americans outside of the federal income tax system to 58 million."

http://www.taxfoundation.org/research/show/22364.html, not sure of
the credibility of this source, but these numbers are consistent with
other sources.
[7]

http://www.cbo.gov/ftpdocs/88xx/doc8885/12-11-HistoricalTaxRates.pdf,
table 2
[8]

http://taxprof.typepad.com/.shared/image.html?/photos/uncategorized/2008/03/03/19752005_3.gif
, not an official source, but it's just a graph of the same thing the CBO
reports.
[9] If you want to quibble that he didn't mean "Federal income
taxes", I'd say he did because as President he wouldn't control
state taxes, and he has separately argued for increasing
"payroll" taxes and generally regarded them as separate from
"income" taxes.
[10]

http://www.nytimes.com/2007/09/22/business/22online.html?ex=1348113600&en=a31c21e4887e86f9&ei=5088&partner=rssnyt&emc=rss

According to Katherine
Mangu-Ward, an editor at Reason, Mr. Shilling, an economist and columnist
for Forbes, totaled up government workers, “private-sector workers who
owe their jobs to government” and recipients of government entitlements
like Social Security and food stamps. For good measure, he threw in
dependents of these beneficiaries. “Shilling found that for each person
earning his pay in the private sector and paying taxes,” Ms. Mangu-Ward
wrote, “there is at least one more person relying on a check from the
government.”

The article contains other links to similar studies


====================================================
Ervan
Darnell

ervan@kelvinist.com

http://www.kelvinist.com



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