Inequality and Economic Policy: Essays In Honor of Gary Becker
208
Inequality and Economic Policy: Essays In Honor of Gary Becker
208Overview
Product Details
| ISBN-13: | 9780817919061 |
|---|---|
| Publisher: | Hoover Institution Press |
| Publication date: | 12/01/2015 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 208 |
| File size: | 5 MB |
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Inequality and Economic Policy
Essays in Memory of Gary Becker
By Tom Church, Chris Miller, John B. Taylor
Hoover Institution Press
Copyright © 2015 Board of Trustees of the Leland Stanford Junior UniversityAll rights reserved.
ISBN: 978-0-8179-1906-1
CHAPTER 1
Background Facts
James Piereson
Our subject is the inequality crisis, so called. I somewhat regret the title of my book, The Inequality Hoax. If you've published anything lately, you know that your publishers want an attention-drawing title on your book or article. I could not call the book "The Inequality Dilemma" or "The Inequality Challenge"; those titles are too equivocal. That's more or less what it is: a challenge or a dilemma, and one that will be difficult to address. My view is that inequality is real, however you want to measure it. But the subject is being used in ways that are not helpful and could do a great deal of harm if we're not careful. I'll elaborate on that view.
We've experienced a series of crises over our lifetimes. I think back to the poverty crisis of the 1960s, the urban crisis of the 1960s, the energy crisis of the 1970s, the inflation crisis, later the homeless crisis, the health care crisis, and the global warming crisis today. Many people find it helpful politically to talk in terms of crisis, perhaps as a way of stampeding voters into doing things they might not otherwise do. If we look back over these crises, it's not clear that we've responded to them in ways that have always been helpful.
Today we have what some have called "the new inequality." The old inequality was all about helping the poor move up into the middle class: think about the poverty programs in the 1960s or spending on education. Federal programs of all sorts were designed to allow the poor to rise. The inequality crisis today is from the other end. It's about the top 1 percent of the income distribution, and finding ways to redistribute that income down through the population to raise the living standards of the other 99 percent. We've been talking about this for a number of years, but it surged into public consciousness last spring with the publication of Thomas Piketty's book, Capital in the Twenty-First Century. It was a monumental bestseller, and was widely read and reviewed. Piketty became an overnight celebrity. It is a carefully researched and closely argued book. I encourage everybody to read it. It's an impressive work. It's very insightful in a lot of ways and it makes a case that puts inequality in a historical and intellectual context. In a certain sense, he's done for inequality what Marx did for capitalism. In the nineteenth century, intellectuals and radicals complained about the factory system, the movement of people into the cities, the exploitation of labor, and other developments associated with the rise of industry. But it was Marx who placed it into a theoretical and historical context.
In the 1920s and 1930s, many people were talking about public spending and public works as a way to deal with unemployment. It was John Maynard Keynes who put that into a broader theoretical context to explain how public spending could be used to manipulate or jumpstart the economy during the Depression. In a certain sense, Piketty (along with his colleague, Emmanuel Saez) has done something similar for inequality. They've placed it into a broad intellectual context. It's the strongest statement we have of what we might call "the redistributionist thesis." They have done an impressive job of collecting a great deal of data on wealth and income extending back into the 1800s in the case of a few countries. With respect to the United States, they have collected data on wealth and income going back to 1900. These data are not perfect in every respect. The wealth data in particular were arrived at via some sophisticated statistical estimation. Governments collect income data because they tax income. They don't collect data on wealth. For this reason, Piketty and his associates had to piece together the data on wealth using estimation techniques from estate tax filings. People have criticized their data. I do not, because I expect that they will improve the data over time. In addition, no one else, to this point, has done a better job.
Piketty makes the theoretical case that inequality is built into the fabric of the capitalist order. It's not accidental but fundamental: inequality will inevitably explode unless it is counteracted by active governmental measures. Their remedy to redistribute income is not complex; they call for a return to the high and confiscatory tax rates on the wealthy that were in place in most countries from the 1930s into the 1970s.
The basic theory is that returns to capital always grow more quickly than output in the economy or returns to labor. If that pattern persists over time, then those who own capital grow wealthier over time. In Figure 1.1, taken from Piketty's Capital in the 21st Century, one sees that in the middle of the twentieth century returns to capital declined and were overtaken by overall economic output. For that reason, there was a rough equalization of incomes during that period. Later in the century, after about 1980, inequality increased because capital accumulated faster than the output of the world economy.
What we conclude from this is that the modern age of capitalism can be divided up into three periods. The first period, running from roughly 1870 to 1929 in the United States and from 1870 to 1914 in Europe, was the original gilded age of inequality. The middle period, running roughly from 1930 to 1980, might be called the "golden age of social democracy," marked by high marginal tax rates, output growing more rapidly than returns to capital, and a greater equalization of incomes and wealth. Beginning in 1980 and moving forward to the present time, we have lived through a new gilded age of rising inequality and returns to growth going disproportionately to the wealthy. That is the tripartite division of the history of modern capitalism, which I more or less accept on the basis of the data marshaled by Piketty and his associates.
Figure 1.2 displays a set of data on after-tax income from the Congressional Budget Office. The data cover the period from 1979 to 2010. The top dotted line displays the percentage growth in income from year to year for the top 1 percent of the income distribution; the bottom line displays the same variable for the bottom 99 percent. The line displays the evolution of the median income for the entire population, which tracks closely with the incomes of the bottom 99 percent of the distribution. The basic problem is that the income of the top 1 percent is exploding and the income for the rest is increasing much more slowly, though (importantly) it is not declining. The mean after-tax income for the top 1 percent in 2010 was $953,000 and for the bottom 99 it was $66,000. The figures are for after-tax income; the distribution of pre-tax income is slightly more skewed in favor of the wealthy, as there is a mildly redistributive element to the federal tax system.
Placing these figures within a longer historical frame, it is apparent that the great increase in inequality since 1980 represented a departure from the pattern of earlier decades. Figure 1.3, taken from an article by Saez, displays the share of pre-tax income (with and without capital gains) received by the top 1 percent and 0.1 percent in the United States between 1913 and 2010. The data begin in 1913 because that is the year the United States launched the income tax. The lines follow a recognizable U-shaped pattern, with the wealthy reaping higher shares of national income before 1930, then somewhat smaller shares between 1930 and 1980, and once again much higher shares during the three-decade period after 1980. Today the top 1 percent of the income distribution is receiving close to 20 percent of national income, a figure close to what it was in the 1920s. In the intervening decades — 1930 to 1980 — those shares dropped by half to around 10 percent of national income. This chart more or less encapsulates Piketty's historical narrative: the original gilded age broken up by the stock market crash of 1929 and the New Deal, the "golden age" of social democracy from 1930 to 1980, and the return of the gilded age in recent decades.
Piketty also points out that the wealthy in our era earn their incomes from different sources than was the case early in the twentieth century. In the early decades of the century, the wealthy received most of their income from capital gains — that is, by earnings from stocks and bonds rather than from salaries and wages. In the parlance of the day, they were "coupon clippers," passively receiving income from investments. In the contemporary era, the wealthy are increasingly professionals who earn generous salaries from executive positions. Today, more than half of the total income of the top 1 percent is received in the form of salaries. These are people who work for a living and depend upon salaries to pay their bills and accumulate wealth.
Piketty focuses a good deal of attention on the so-called "new salaried rich" — those who earn salaries of between $300,000 and $1 million per year as executives in businesses, financial firms, colleges and universities, and not-for-profit organizations. He does not believe that they genuinely earn these salaries on the basis of their contributions to the profitability or efficiency of the organizations they run; rather, he suggests, they set their own salaries, or recruit board members who support generous compensation packages, and in general receive high pay packages as members of a "club" with wealthy associates and directors.
The evidence for these claims is thin and impressionistic. Nevertheless, from his point of view, they justify much higher tax rates on members of the new managerial class, particularly since he believes that the lower marginal tax rates of the post-1980 decades have created a permissive environment for boards of directors that set salaries for executives. In the old days, with a 91 percent marginal tax rate, it did not make a lot of sense for boards to approve overly generous salaries, since most of the added increment went to the federal government in the form of taxes. High marginal tax rates thus tended to keep executive salaries down. Today, the logic is different: with low marginal rates, salaried professionals can keep most of their raises.
As one would expect from these figures, there are now significant differences among different segments of the national economy in mean household incomes and net worth. In 2010, as depicted in table 1.1, the mean household income of the top 1 percent was $1.3 million while the bottom 40 percent received on average about $17,000. The disparities are even greater for household net worth, measured in terms of ownership of real estate and financial assets. It is hard to quibble with Piketty and his associates in their claim that inequalities in wealth and income are substantial and growing decade by decade.
Piketty and Saez argue that these patterns justify aggressive national policies to redistribute income through higher taxes on the wealthy. Though the argument is logical, there are several problems with it.
First, though the very wealthy have gained in terms of shares of income and wealth, they have also been paying a larger share of the income tax in the United States. From 1979–2010, the tax liability on the top 1 percent has increased sharply, even as we have reduced marginal tax rates. In 1979, the highest earners paid federal taxes at a marginal rate of 70 percent. Ronald Reagan (and a Democratic Congress) reduced that rate to 50 percent in 1981 and then later to 28 percent. Nevertheless, the share of federal income taxes paid by the top 20 percent of the income distribution increased from 65 percent in 1979 to 93 percent by 2010. The top 1 percent paid 17 percent of income taxes in 1979 but 37 percent in 2010.
Today, then, the top 20 percent of the income distribution pays nearly the whole of our federal income taxes. As we have reduced marginal rates, we have also taken those below the median income completely off the federal income tax rolls (they are still hit with payroll taxes). This, then, points to one of the difficulties in redistributive taxation: there is not a lot of room to raise taxes on "the rich." They are already paying the lion's share of the income tax. It also points to the political difficulty in trying to cut taxes: any tax cut will disproportionately favor the wealthy because they are the ones already paying the taxes.
Second, it is not at all clear that we can reduce inequality very much through the income tax system. In theory, taxpayers would send money to Washington, DC, and from there the political authorities would allocate it to those who need it for the purpose of equalizing incomes. But that is not the way the political system actually operates. Money sent to Washington must pass through a gantlet of interest groups seeking concentrated benefits for their members. In the struggle for funds, the politically influential groups usually win out over disorganized voters seeking small and widely dispersed benefits. In addition, the immediate beneficiaries of the national tax system appear to be those living in or around the nation's capital. Five of the six wealthiest counties in the United States surround Washington. The capital already has the highest per capita income of any metropolitan region in the country. Under current circumstances, a tax increase on the wealthy would merely redistribute income from the top 1 percent to the next 2 percent or 3 percent of the income distribution.
It is true that there is some "real" money in the top income groups. The top 1 percent paid about $400 billion in federal taxes in 2010, leaving them with about $1.1 trillion in after-tax income. It might be possible to gain another $100 billion to $200 billion by raising their taxes by another 10 percent or 20 percent. That is not a large sum in relation to a federal budget of close to $4 trillion, but it would represent a significant proportion of the current federal deficit of $400 billion to $500 billion. But, for reasons stated above, it is unlikely that those added revenues would eventually end up where Piketty and his colleagues think they should.
An obvious limitation of the income tax is that it does not get at the extraordinary accumulations of wealth held by individuals like Warren Buffett, Bill Gates, and other members of the Forbes 400. Governments tax incomes, but not wealth. The very wealthy own a disproportionate share of these assets. According to some estimates, the wealthiest 1 percent own close to half of the $80 trillion to $90 trillion value of the stock, bond, and residential real estate markets.
As a remedy for this problem, Piketty advocates a global "wealth tax" on the "super-wealthy," with that tax levied against assets in stocks, bonds, and real estate. He acknowledges that such a tax has little chance of being enacted, though he hopes that at some point it might be enacted to cover the countries in the European Union. The United States has never had a wealth tax; and in fact such a tax may not be allowed under the Constitution (which authorizes taxes on incomes). Several European countries — Germany, Finland, and Sweden among them — have had such a tax in the past, but have discontinued it. France currently has a wealth tax that tops out at a rate of 1.5 percent on assets in excess of ten million Euros (or about $14 million).
Wealth taxes are notoriously difficult to collect, and they encourage capital flight, hiding of assets, and disputes over pricing of assets. They require individuals to sell assets to pay taxes, thereby causing asset values to fall. Piketty thinks that a capital tax would have to be global in nature to guard against both capital flight and the hiding of assets in foreign accounts. It would also require a new international banking regime under which major banks would be required to disclose account information to national treasuries. Under his scheme, a tax would be imposed on a sliding scale beginning at 1 percent on modest fortunes (roughly between $1.5 million and $7 million) and perhaps reaching as high as 10 percent on "super fortunes" in excess of $1 billion annually. The purpose of the tax, it should be stressed, is to reduce inequality, not to spend the new revenues on beneficial public purposes.
Professor Piketty argues in the broader message of his book that we are living through a new "gilded age" of extravagant wealth and lavish expenditures enjoyed by a narrow elite at the expense of everyone else. As with the original "gilded age" of the late nineteenth century, the wealth accruing to the few gives the illusion of progress and prosperity, but conceals growing hardships and economic difficulties endured by the rest of the population. Much of his thesis rests upon this proposition: our era is one of faux prosperity, a claim that is manifestly untrue.
This argument makes sense only if one accepts the narrow premise that these multifaceted regimes can be assessed on the basis of the single criterion of wealth and income distribution or that the essence of the capitalist order is found solely in returns to capital and in the distribution of wealth and incomes rather than in rising living standards, innovation, and the spread of modern civilization. In each of these three eras, there was much more going on than simply the rearranging of wealth and incomes.
(Continues...)
Excerpted from Inequality and Economic Policy by Tom Church, Chris Miller, John B. Taylor. Copyright © 2015 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
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Table of Contents
Contents
List of Tables and Figures,Acknowledgments,
Introduction,
ONE. Background Facts,
TWO. The Broad-Based Rise in the Return to Top Talent,
THREE. The Economic Determinants of Top Income Inequality,
FOUR. Intergenerational Mobility and Income Inequality,
FIVE. The Effects of Redistribution Policies on Growth and Employment,
SIX. Income and Wealth in America,
SEVEN. Conclusions and Solutions,
EIGHT. Remembering Gary Becker,
Conference Agenda,
About the Contributors,
About the Hoover Institution's Working Group on Economic Policy,
Index,