Tuesday, January 31, 2012
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.