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Tuesday, January 31, 2012

Tax Foundation: Income Inequality Is Lower Now Than It Was Under Clinton

Tax Foundation, Reversal of the Trend: Income Inequality Now Lower Than It Was Under Clinton:

The most recent published studies on income inequality use 2006 or 2007 as their end point, without fully correcting for the business cycle. ... It is deeply misleading to talk about income inequality without properly taking into account the business cycle.  Since the peak of the business cycle in 2007, personal incomes have collapsed to a degree not seen since the Great Depression.  The most dramatic collapse has been in high incomes, as the most recent IRS data shows. For example, since 2007 the number of millionaires has dropped 40%, while income reported by millionaires has dropped in half. ...

Figure 1 illustrates how the Great Recession has dramatically reduced measures of income inequality.  It shows the share of income attributable to the top 1% of income earners from 1980 to 2009.  The top 1% income share peaked in 2007 at 22.8% and declined precipitously to 16.9% by 2009.  This is about where it was in 1996-1997. ...

[Figure 5 shpws] a measure of progressivity that takes into account income shares, where progressivity is defined as the ratio of the top 1%'s share of taxes paid over their share of income. Progressivity by this measure is now higher than at any time since 1986, though it has mainly fluctuated with the business cycle without any long-run trend. The fact that progressivity has increased since Clinton was in office may be partly explained by the fact that the Bush tax cuts not only lowered top marginal rates, but also introduced the 10% bracket, expanded the 15% bracket, expanded the child credit, and made many tax credits refundable.

Income inequality has completely changed since the Great Recession began in late 2007. The long established upward trend has abruptly reversed itself, such that inequality is back where it was in about 1997. Moreover, inequality over the last decade is characterized by extreme volatility, owing to extreme volatility in capital gains, the stock market, and the economy. It is therefore no longer legitimate--if it ever was--to simply draw a line between two years and claim a trend in income inequality.

As a result, it is not evident that the Bush tax cuts in either the top marginal rate or capital gains rate had any long-term effect on inequality. If anything, they appear to have reduced inequality. Therefore, a return to Clinton-era tax rates would not necessarily reduce inequality. The Clinton- and Bush-era tax cuts n the capital gains rate may have resulted in more volatility in capital gains realizations, and thus affected volatility in the stock market, but this remains speculative.

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So, basically, if you want to solve the alleged problem of income inequality we just need to root for a sustained economic depression. Conversely, if the economy booms, we're screwed.

Posted by: Colin | Jan 31, 2012 9:49:44 AM

Don't know that I'd make a big deal about this? 0bama will take credit.

Posted by: Shake | Jan 31, 2012 10:08:51 AM

Income gap is an imaginary problem. Lets’ say five years ago a typical wage earner, Mr. A, made $50K a year. Another earner, let’s call him Mr. B for Mr. Big, made $250K annually. Now let’s say inflation was 3% per year, and each earner was given only a cost of living adjustment over the 5 years. Now Mr. A is receiving $57.95k annually and Mr. Big is receiving $289.75K per year. The multiplier is 3% inflation compounded for 5 years (15.9%). Now the income gap is $231.80K, up from $200K. For Mr. A, the gap has grown by $31.8K, which is a large fraction of his income and he is honked off. But in truth there has been no change in the buying power of Mr. A or Mr. B. The apparent gap widening is due to inflation induced by fiscal policy. Neither person is richer, but they may face an increase in marginal tax rates and thus may be poorer.

Posted by: Claude Hopper | Jan 31, 2012 12:10:46 PM

This is the same charade that we see with so called "Global Warming" studies. Cherry pick an artificially low point, and an artificially high point, and compare the apples and oranges to create a false appearance. Comparing the average high temperature in January to the average high in August doesn't "prove" AGW is happening. So comparing rates of differences in income from selected years doesn't tell us anything useful either.

Then there is the false term "inequality". In the same way that global warming "denier" attempts to equate non-belief in AGW with holocaust denial, an utterly perverse accusation, so "income inequality" seeks to compare income differences with racial discrimination. An equally despicable mischaracterization of people of wealth. Use terms that are not politically charged and the whole issue appears in a different light. Those who don't believe in AGW are simply AGW non-believers, as the wealthy are high income achievers.

Posted by: Robert Hanson | Jan 31, 2012 12:17:18 PM

Could you please put a Share/Twitter/Facebook button so we could share your great articles?

Posted by: surtsey55 | Jan 31, 2012 12:34:25 PM

there is a simple data set that cuts to the heart of the matter...

income tax to federal govt by year:
2007, 1.88 trillion.
2008, 1.81 trillion.
2009, 1.37 trillion.
2010, 1.39 trillion.
2011, 1.61 trillion.

worth noting that the wh projects this number to rise to 2.38 trillion by 2014.

it isn't a stright up 'cause and effect', but the simple interpretation is that the greater the income gap, the more revenue is created by the top end.

anyone who wishes to shrink the income inequality gap is basically asking for a the top end to stop making so much-and resultingly pay less in taxes.

the obama admin, for all their class warfare rhetoric, is basically projecting that the actual income of tax payers will advance 48% in the next three years.

i'm sure the sunset of the obama tax cuts is figured in, but it only accounts for 10% of the increase.

if a republican was making these projections, we'd hear about growing income disparity. if it is a dem, as in the case of clinton, all we hear about is how well our economy is doing.

Posted by: mark l. | Jan 31, 2012 2:55:38 PM

Going forward we need to add a third graph to these two: Number of articles published on the subject of income inequality.

This number will fall precipitously, as income inequality "researchers" go radio silent and find other subjects to write about for the next several years.

Posted by: AMTbuff | Jan 31, 2012 4:21:48 PM

All the 'income inequality' talk was just to move the conversation off the debt. And, if you're cynical--I'm really getting there--'income inequality' and '99% vs 1%' are merely battlefield prep against Romney whom they believe will be the nominee.

Thanks for this post.

Posted by: Syl | Jan 31, 2012 7:17:01 PM

As I recall, the downturn in 2000 and 2001 was triggered by the revelation of rampant, fraudulent corporate reporting (most notable examples include Enron, MCI and Health South), followed by the economic fall out of the 9/11 attacks. The more recent 2008 collapse is a result of sucking trillions of dollars out of the global economy over night caused by the perfect storm of fraudulent representation of bad assets through collusion between investment firms and their ratings agencies, and the expansion of capital leverage by many of the same "too big to fail" institutions. Are these the "business cycles" to which Mr. Caron refers and on which his argument is completely dependent? Assuming so, are we accepting that fraud and terrorist activity are part of normal business cycles? I contend that it would be impossible to have any meaningful economic predictions if we are willing to accept that premise. Take those anomalies out of the graphs and it is an entirely different story.

Perhaps the real story is that the top 1% wasn't more affected by the recent downturn. My guess its that the wealth of these top earners, and the leverage and opportunity it provides, insulated them from much more significant income loss. Remember that while these individuals saw a decrease in income share to 1996 levels, 4% of the country saw their income share drop to 0 -- not even represented as an historical benchmark on the graph.

Finally, I suspect that the top 1% is a red-herring. Mr. Cohen, can you provide the graphed data for the top .1%? I am certain that we would see a much different picture.

Posted by: Michael | Feb 4, 2012 6:04:08 PM