Monday, November 21, 2011

What little I know about taxes and income inequality

My god it is confusing trying to understand the truth about income disparities.  Here are a few facts I feel comfortable, with no attempt to tell you what they mean.

Fact 1:  The richest people are indeed getting richer, and the proportion of their income taken by taxes is not rising.  This is a graph Rolling Stone has posted on their website and was within an interesting article I read.

Fact 2: The federal tax system is indeed a progressive tax.  The poorest 20% of Americans in 2006 paid federal taxes equal to 4.3% of their income.  As you move the the higher quintiles, this percentage increases: 2nd, 10.3%; middle, 14.2%; fourth, 17.6%; highest quintile, 25.8%; and the top one percent of Americans pay 31.2% of their income to federal taxes.  When you include all taxes, it is possible to find the top 1% paying slightly less of their income than the top ten percent, but at least some of this seems to be due to state and local taxes.

Fact 3: There is little evidence that the really high marginal tax rates in the past (like the 70% marginal tax rate around the middle of the 20th century) brings in more tax revenues, and it may actually reduce tax revenues by deterring economic activity and diverting activity into less valued enterprises.

Fact 4:  It is very difficult to determine the extent to which statistics take into account corporate taxes.  A corporation can't be taxed.

Fact 5:  A large percent of total income is captured by the richest people, but the percent of total taxes they pay is much larger.  In fact, the poor get much of their public goods for free.

Fact 6:  In some ways there is large income mobility in the U.S., and in some ways there isn't.  People move around a lot within the top and bottom quintiles, but they tend to stay in the top and bottom quintiles over time.

Fact 7:  Because people regularly ignore fringe benefits, study household income without accounting for changes in divorces rates, and misrepresent the data to support their ideology, it is almost impossible to discern whether income inequality is becoming larger and if the poor are better off.

Fact 8:  When people do try to correct for the deficiencies in Fact 7, it appears that everyone (the rich, the poor, the middle class) increased their incomes between 1979 and 2007.  However, if you ignore benefits and the composition of U.S. households, and choose your time period carefully, you can make it appear the poor are getting poorer.

Fact 9:  The rich increased their wealth by a larger percentage than the poor in the last thirty years, but again, both probably got richer during this period.

Fact 10:  Discussions of income inequality are also clouded by the corporate tax.  It is absurd to think a corporation can pay a tax.  Do cows pay a cow tax?  If the rich get most of their money from stocks, then their tax rate is the 35-37% corporate tax rate plus the capital gains tax of around 15%.  So, a rich person whose only income is from stocks is going to pay 50% of his taxes to the federal government, and then must pay state and local taxes of around 10%.  The result is that these individuals will pay more of their income to taxes than they keep for themselves.

Fact 11:  When you use Gini Coefficients--economists' favorite measure of income inequality--there has been no rise in income inequality in the last fifteen years.  There only appears to be inequality when you look at households without adjusting for the number of workers in that household.

Because no one reads this blog, I left out the references.  Email me if you would like the reference to something.

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