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Monday, August 07, 2006

Comments

A. PERLA

"All up, 90 pages of quite intriguing analysis. It's a pity, though, that the authors didn't also turn their spotlight onto market incomes (wages)."

And, what about non-wage wealth distribution as well? Isn't it total distribution that is nub of equitabililty? (Wealth equality sounds a bit too communist for my tastes.)

Isn't it that 20% of the population in the US garners 80% of the wealth, or just a specious rumour of left-wing nutters? (Which is mostly due to inheritance and not wages.) Or, is this merely a rumour of the left-wing nutters.

Or is it more like, in the US, that 1% of the population obtains between 20 and 25% of the total wealth? Or in Switzerland that this 1% garners 35% of the wealth?

Go see this AEA paper by T. Picketty and E. Saez: http://pdftohtml.spiritofanime.com/pdf2html.php?url=http://elsa.berkeley.edu/~saez/piketty-saezAEAPP06.pdf

Tim Worstall

Picketty and Saez are using pre tax incomes. This paper seems to be looking at disposable (is post tax and post benefit).

We might thus say that the tax and benefit is doing exactly what it is supposed to be doing (in the minds of some) reducing the inequality of pre tax income.

A. PERLA

"Picketty and Saez are using pre tax incomes."

Your right. But, one percent of the population obtaining 25% of the income (pre-tax or not), does that appear to you to be "fair"?

And, that is the question, not "equality". I don't know where this word came from - perhaps for lack of a better one. Income equality means everyone gets the same income. That is not possible in a market economy. So, let's use the word income equitability or even wealth equitability.

Had marginal rates at the upper income levels been higher, then the income would have been distributed by the government to the community. For instance, better education for the have-nots?

I further maintain that this loss of income would have been spent and promoted the economy, since the propensity to spend marginal income is greater amongst the middle class than amongst the upper classes. The middle class aspires to an upper class standing and they spend to obtain it.

The rich, having no further aspiration, simply salt the money away and inevitably hand it over to their inheritors.

Besides, Picketty and Saez also report (Figure 2) on Capital Income (which is income from equity holdings and savings) along with the other two, earnings income and "business" income (whatever that is). Capital income is a derivative of wealth (since it does not include the nominal value of the capital instrument generating the dividends or capital gains (which is income reported in their numbers.)

My question remains, "What is a fair distribution of wealth". Because, at the heart of the answer is a nation's attitude towards inheritance tax. Inherited wealth is unearned income when obtained, but generates capital income subsequently for the inheritor.

Before Katrina, there was a movement by this administration to do away with inheritance tax, which would have increased the social divide between the haves and the have-nots. Perhaps that the administration dropped that idea after Katrina is the only good thing that came out of that particular hurricane.

And finally, the have-nots are not only the impoverished lower classes. When wealth is unfairly accumulated by the very rich in a systematic manner, then even the middle class suffers. They are deprived of the wealth that would have been distributed further down the income scale. It is, in effect, a loss of income that they should have earned … had fairness prevailed.

I maintain further that this loss of income would have benefited the economy had the middle class earned it. They have a propensity to spend marginal income, whilst the upper class will simply salt it away and inevitably transfer it to their inheritors.

Arthur Eckart

A Perla, the U.S. has a progressive income tax system. High income workers pay a larger percentage in taxes than low income workers. Also, there's a negative income tax for low income workers. Income redistribution has shown to be inefficent, because a bureaucracy has to be created just to implement it. Also, it's political and full of value judgments. So, it often doesn't have the desired effects. A flat tax would be more fair, and a more simplified tax system would be more efficient. Wealth has been and continues to be shifted from the rich to the poor. However, it would take a lot of effort to make incomes equal. Perhaps, the easiest way is to destroy wealth. The middle class also creates wealth. The problem is the poor doesn't. The poor either needs welfare, if they can't work, or opportunities to improve their incomes and lives, which also improves society, if they can work. Unfortunately, many systems designed to help the poor have harmed society.

A. PERLA

A. Eckart "A flat tax would be more fair, and a more simplified tax system would be more efficient."

Where did you get this from? More fair to who? The rich, surely.

A progressive income tax is in place throughout the world because it is fairest to the poor and not the rich. There are for more of the former than the latter in any nation. The rich can afford to pay more because they have more. Neither is it anything new. Kings centuries ago applied the same principle.

A. Eckart: "Unfortunately, many systems designed to help the poor have harmed society."

Yes, and said with the comprehension of someone who would not know a poor person from a doorknob. We use both and disregard them at the same time.

Still, what you say is correct. The poor do not necessarlily need hand outs. They need opportunity. But, whilst seeking that opportunity (to scramble up the economic ladder into the middle class), they need help.

It is otherwise impossible, particularly if they are unskilled workers. Exactly the kind that are turning up in droves on both shores, American and European.

You cannot tell me that the same marginal income tax for all is simultaneously fair to the poor AND to the rich. That simply does not compute. Taking twenty percent of, say a salary of $100 a week, leaves $80. Taking the same percentage from a salary of $10,000 a week leaves $8000. Who feels the bite hardest? The poor slob who has to feed and house four kids on $80 a week.

Besides, my central point was the accumulation of riches and not specifically income taxation. The accumulation of riches is mostly due to the transfer of wealth upon death and not the creation of wealth by individual effort. The latter is merited by hard work (and luck), the former is obtained by birth.

Looking at income taxation is like looking at a car going down a highway at a certain speed in traffic. I am suggesting that we look wealth accumulation, which is analogous to the eventual destination. Who gets to the destination and why do they get there?

Also, we have not discussed the element of chance. It is generally thought, and I tend to agree, that the probability of becoming rich is about the same for those who struggle to do so and those who simply play the lottery.

So, in fact, it is perhaps wise to simply enjoy life and buy lottery tickets. That seems heretical, I know, in a can-do-and-succeed society. I know as well that there is no economic theory or statistical analysis to support the contention. But, it is just a thought …

A. PERLA

DISREGARD PREVIOUS POST

A. Eckart "A flat tax would be more fair, and a more simplified tax system would be more efficient."

Where did you get this from? More fair to who? The rich, surely.
A progressive income tax is in place throughout the world because it is fairest to the poor and not the rich. There are for more of the former than the latter in any nation. The rich can afford to pay more because they have more. Neither is it anything new. Kings centuries ago applied the same principle.

You cannot tell me that the same marginal income tax for all is simultaneously fair to the poor AND to the rich. That simply does not compute. Taking twenty percent of, say a salary of $100 a week, leaves $80. Taking the same percentage from a salary of $10,000 a week leaves $8000. Who feels the bite hardest? The poor slob who has to feed and house four kids on $80 a week.

Besides, my central point was the accumulation of riches and not specifically income taxation. The accumulation of riches is mostly due to the transfer of wealth upon death and not the creation of wealth by individual effort. The latter is merited by hard work (and luck), the former is obtained by birth.

Looking at income taxation is like looking at a car going down a highway at a certain speed in traffic. I am suggesting that we look wealth accumulation, which is analogous to the eventual destination. Who gets to the destination and why do they get there?

Also, we have not discussed the element of chance. It is generally thought, and I tend to agree, that the probability of becoming rich is about the same for those who struggle to do so and those who simply play the lottery.

So, in fact, it is perhaps wise to simply enjoy life and buy lottery tickets. That seems heretical, I know, in a can-do-and-succeed society. I know as well that there is no economic theory or statistical analysis to support the contention. But, it is just a thought …

A. Eckart: "Unfortunately, many systems designed to help the poor have harmed society."

Yes, and said with the comprehension of someone who would not know a poor person from a doorknob. We use both and disregard them at the same time.

Still, what you say is correct. The poor do not necessarily need hand outs. They need opportunity. But, whilst seeking that opportunity (to scramble up the economic ladder into the middle class), they need help.

It is otherwise impossible, particularly if they are unskilled workers. Exactly the kind that are turning up in droves on both shores, American and European. And, saddling the poor with a "fairer" fixed tax rate would only increase thier total tax burden, whilst reducing that of the rich.

Arthur Eckart

A Perla, it's more likely progressive income tax systems are in place to generate greater government revenues rather than your belief of being fair. The link below shows the top 20% pay about 80% of income taxes, while the bottom 40% pay nothing. Also, I don't disregard the poor. The poor should earn much higher incomes. So, they can pay their "fair share" of taxes. The private and public sectors should find the most effective ways to actually help the poor with the least consequences to society.

Income Category 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1999
(Projected)
Highest 20% 68 67 66 68 68 72 72 72 75 77 79
Fourth 20% 20 20 20 20 19 18 17 18 17 16 16
Middle 20% 10 10 10 10 9 8 9 9 8 8 7
Second 20% 3 4 4 3 3 3 3 2 2 1 1
Lowest 20% 0 0 0 0 0 0 -1 -1 -1 -2 -2
All Families 100 100 100 100 100 100 100 100 100 100 100

Top 1% 20 19 17 20 21 24 24 23 27 29 29
Top 5% 38 37 36 38 39 43 44 42 46 49 50
Top 10% 50 50 49 51 52 56 56 55 59 61 63

http://www.allegromedia.com/sugi/taxes/

Arthur Eckart

A Perla, it's more likely progressive income tax systems are in place to generate greater government revenues rather than your belief of being fair. The link below shows the top 20% pay about 80% of income taxes, while the bottom 40% pay nothing. Also, I don't disregard the poor. The poor should earn much higher incomes. So, they can pay their "fair share" of taxes. The private and public sectors should find the most effective ways to actually help the poor with the least consequences to society.

Income Category 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1999
(Projected)
Highest 20% 68 67 66 68 68 72 72 72 75 77 79
Fourth 20% 20 20 20 20 19 18 17 18 17 16 16
Middle 20% 10 10 10 10 9 8 9 9 8 8 7
Second 20% 3 4 4 3 3 3 3 2 2 1 1
Lowest 20% 0 0 0 0 0 0 -1 -1 -1 -2 -2
All Families 100 100 100 100 100 100 100 100 100 100 100

Top 1% 20 19 17 20 21 24 24 23 27 29 29
Top 5% 38 37 36 38 39 43 44 42 46 49 50
Top 10% 50 50 49 51 52 56 56 55 59 61 63

http://www.allegromedia.com/sugi/taxes/

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