Arnold Kling  

The Inequality Fuss

PRINT
Villainy Amok... The Common Sense of Defense Cu...

Some recent posts on the inequality fuss:

1. Greg Mankiw writes


If I were a redistributionist, here is what I might propose: A large fixed payment to every citizen, paid at the beginning of every month, financed by a proportional tax on consumption, such as a value-added tax.

Meaning something like this?

2. Will Wilkinson writes,


I was surprised to discover that U.S. market income (i.e., pre-tax) inequality is lower than the U.K.’s, the same as Germany’s, and only slightly higher than Sweden’s...

it is remarkable how much differences in tax and transfer policies push the U.S. to the top in inequality in disposable income.


About which Tyler Cowen comments,

One very eminent source emailed me and he wishes to stress that the (relatively) high level of the European Gini stems from higher levels of unemployment, whereas the relatively high level of the American Gini stems from the rich being very rich.

One story that might tie this together is that the U.S. has lower marginal tax rates, so we wind up with more people working, and some very talented people working very hard. If you're equally talented in Europe, you would take more of your income in the form of leisure, because the tax rate on market income is high.

The point of this story is not I think it's true (it could be.) The point is that in this story, the pre-tax distribution of income is a function of the tax system. So be careful about treating the pre-tax income distribution as some Exogenously Given Thing (EGT), and be careful about treating post-tax income as a separable function of this EGT and the tax system.

My general feeling about "our" income distribution is Lose the we. If you want to do something for poor people, then do something for poor people. Advocating a higher marginal tax rate on high-income people is not exactly an exercise in selfless moral courage. (If you are a high-income person yourself, you can always donate more of your own money to the government if you think that's the right thing to do.)


Comments and Sharing


CATEGORIES: Income Distribution



COMMENTS (11 to date)
Ned Ilincic writes:

"Advocating a higher marginal tax rate on high-income people is not exactly an exercise in selfless moral courage." But it never was about the poor people, was it? It was about "cutting down the tallest poppies", as someone put it. "(If you are a high-income person yourself, you can always donate more of your own money to the government if you think that's the right thing to do.)" Exactly.

neal hockley writes:
If you are a high-income person yourself, you can always donate more of your own money to the government if you think that's the right thing to do

Similarly with foreign aid. I've never understood why poverty campaigners want to nationalise aid - by increasing the % of GDP spent by governments on helping poor people abroad.

SARS apart, most foreign aid doesn't seem to me to be providing a public good, and its not even as if governments are any good at aid!

General Specific writes:

In companies, those who "lose the we" are sometimes pushed aside as deleterious because of their indability to consider the collective interest of the organization--instead of their own individual interests. The two do not always coincide.

The boundary and border between "we" and "I" hasn't been too well defined in this blog, making it easy to place issues on either side as one sees fit.

E.g. in terms of Caplan's latest post, one could argue that if the wealthy defense from a nuclear submarine, they should buy a share--yet I'm going to bet the neocons are happy requiring "us" and "we" to pay for defense expenditures, e.g. to pay for those bombing raids in Iran they argue for.

Unfortunately, "we're" all paying the price for the unnecessary and indept decision for a few "I's" to muck around in Iraq. Will "we" also pay a similar price for the few neocon "I's" who want to expand the chaos?

Not trying to be too divisive here--nor wander from the topic of the original post. But as I said in a previous comment, "losing the we" is utopian (as is losing the "I"). And the role of the government is a balance between "we" and "I."

Personally, I think higher marginal rates are a small price to pay for the many benefits this society provides. And "I" intend to support governments that don't lose that sense of "we."

Matt writes:

Abe Lincoln said, "You can fool some of the people all of the time and all of the people some of the time, but not all of the people all of the time?

He was restating the central return to equilibrium theory for government wealth. Government can hold price over a finite transaction range, and hold a transaction over a finite price range. Or, over long integration times, government cannot price fix its own wealth, it will occupy its natural position.

Brian, Arnold, and most of us want the integration times for return to equilibrium to shorten. Averaged over the last 160 years was the average size of government proper? How fast does government return to equilibrium? Can it continue to push out its day of reckoning?

When government is overvalued, it apears as a bump on the income distribution. The bump on the right causes cyclic perturbations in the economy, both in the spectral X axis and in time.

How can we cause that bump to optimally dampen? How do we shorten integration times? Government and its large partners, by virtue of sitting on the tail end of the wealth distribution, do not operate in linear markets. Mechanism design is needed to force these large organization to simulate a linear market.

This goes back to proof that Arnold posted recently that we cannot have a mechanism design that does better than integration over long periods, for the aggregate economy. Government cannot be a referee, it has to be a player.

If valuations are bloated on the right due to bad mechanism design in non-linear markets, then we can find a correction or we can wait for long integration times.

Libertarians demanding shorter integration times are faced with looking at progressive income tax, breaking up government, putting pressure on government with international trade, or jaw boning the issue. Libertarians had better get used to the idea that more progressivity may just shrink government.

Buzzcut writes:

Men are from Mars, women are from Venus. Men are Masonites, women want government to do what their good for nothing ex-husband won't do for them.

Seriously, Arnold often wonders why IQ isn't a bigger factor in economic research. I wonder why the gender gap with regards to welfare isn't a bigger topic of research.

Ian Repley, Ann Arbor writes:

Several presidential candidates advocate replacing our income tax system with a progressive national sales tax currently sitting in Congress under bill no. HR 25 ("FairTax"). Mike Gravel and Mike Huckabee are the most outspoken advocates of this novel idea of sending advance rebates (cash payments), or prebates, not just to low income families, but to all families to untax necessisties (set prebate amount based on Dept. of HHS determinations of the family size and spending amount, not family income).

I suspect "the Rich" are not supporting Gravel or Huckabee because their opportunities for minimizing taxes vanishes under FairTax which, simply put, means that if you spend more, you pay more. But, will the FairTax really bring great equity to income classes?

The effective tax-rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly "prebate" (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of HHS poverty-level data; a single person receiving ~$200/mo, a family of four, ~$500/mo, in addition to working earners receiving paychecks with no Federal deductions) Prof.'s Kotlikoff and Rapson (10/06) concluded,

"...the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

"Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax."

Further, per Jokischa and Kotlikoff (circa 2006?) ...

"...once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there's a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent."

In light of the above, it would seem well past due to scrap the tax code and pay for government the way that America's working men and women are paid - when, and because, something is sold.

Chuck writes:

"(If you are a high-income person yourself, you can always donate more of your own money to the government if you think that's the right thing to do.)"

I think this kind of thing is baloney, and so are all other versions of it (If you care about the environment, go live in a cave, etc.).

This kind of statement applies to things that you think are fundamentally immoral (ie, murder, non-standard sex behavior, etc) but not to things that you think or a general good/bad, like the enironment, universal health care, etc.

There are many things that are only worth doing if other people do them as well. It is sort of a reverse prisoners dilemma. I know that if I live in a cave and everyone else's life goes on as before, I'm wasting my dang time, and so it goes with paying higher "taxes" on an individual basis and other baloney like that.

Oh yes, and I also wanted to point out that you surely know this already.

Arnold Kling writes:

Chuck,
I don't understand why it is only worthwhile for me to donate money to the government if everyone else does so.

I give money to charities that most other people don't give to. I think it works.

I can see that a brand new start-up charity might need a minimal number of donors. But government is not in that position.

TGGP writes:

General Specific, I found it hilarious that you denounce Kling and the Masonites for trying to get the government to mind its own business by dropping the "we" and then detailing how the neocons used all that "we" talk to get the government involved in a clusterfudge.

Alan Reynolds writes:

If inequality is measured by the "income" (AGI) reported on individual tax returns, top percentile shares always rise whenever the marginal tax rate falls. This is partly elasticity of taxable income (supply-side behavioral responses), partly a matter of realization timing (capital gains and exercised stock options)and partly just income switching (professionals and private firms switching from corporate tax to pass-through taxation as partnerships, LLCs and Sub-S Corps).

This results in big data breaks in CBO, SOI or Piketty-Saez series when tax rates changed in 1986-88, 1993 and 2003.

There is a different sort of data break in Census data for 1993 (they sampled higher incomes), making previous data incomparable.

I suggest using either the Consumer Expenditure Survey or mean and median real incomes from the Survey of Consumer Finances from 1989 to date. But no such unbroken series supports the "stylized fact" that U.S. inequality has increased since 1989. It is commonplace to start with the cyclical peak of 1979, but that just shows that real incomes for the bottom 60% fell the most during the stagflation of 1980-82. The top 1% share is also very cyclical, falling in every recession since 1920, but that does not mean recessions help the poor.

A lot of bad income data are being used to promote punitive tax policies that could not be defended on their merits. One of the worst examples of data mangling is Chapter 2 of "Falling Behind" by Robert H. Frank. If any of Frank's five charts seem persuasive, the reader is very gullible.

General Specific writes:

"General Specific, I found it hilarious that you denounce Kling and the Masonites for trying to get the government to mind its own business by dropping the "we""

I was trying to be subtle. I'll be blunt: Kling is a neocon at times. He wants us to bomb Iran for example. He supported the mess in Iraq. I was trying to be non-confrontational by using the term neocon and not singling him out. Kling uses the "we" when it suits his purpose. Just as, long ago, I remember someone pointing out that he argued against the left being too "angry" while at the same time arguing that the people of Israel need to be more angry.

All I'm saying is that often beneath the logic and good sense of what people are saying is at least some unreason and personal bias. And I've noticed that Kling believes strongly in logical thinking. So I look or opportunities to find what I think may be illogical.

I'm not a big fan of postermodernism, nor of Derrida and deconstruction, but I find it interesting when people deconstruct their own arguments. Kling doesn't want to use the "we" except when he does. Same with the neocons in general, many of whom are economic libertarians. That's all I'm saying. In the economic realm, Kling loses the "we". In the military realm, Kling embraces "we."

I think it's important to point these things out. That's what blogs are for.

Comments for this entry have been closed
Return to top