Airs – Ian Lance Taylor

Increasing Inequality

Inequality is increasing in the U.S. The real income of the bottom 20% is stagnant or even decreasing. The real income of the top 1% is skyrocketing. The effect is that the difference between the rich and the poor is getting steadily larger.

Is this bad? Extreme disparities of wealth is common in third world countries, but those countries are different from the U.S. in many ways. The U.S. has seen extreme wealth inequality before, during the Gilded Age around the turn of the 20th century. I’m not sure but I believe the inequality dropped somewhat during the 1920’s, helped by the introduction of easy credit. Then of course the Depression led to the backlash of the New Deal.

Increased inequality seems to lead to a loss of social cohesion. But the superrich are a small percentage of society, and it’s not clear how much they participated in society anyhow. A poor person envious of a rich person can go one of two ways: “take their money” or “earn my own money.” Pursuing the latter course is generally good for society. The degree of difference between the rich and the poor may not matter very much when it comes to making that sort of choice.

The wealthy, at least the ones who give interviews, often significanly discount the role of luck in the positions they’ve attained. In winner-take-all capitalism, somebody often does win. But exactly who wins is a matter of luck as much as anything else. However, there is nothing deeply wrong with this attitude, it’s just fatuous.

But can we expect any long-term bad effects from the increased inequality? I don’t know. It’s not obvious to me why we should. The worst possible direction would be increasing social unrest, tied to further separation of the wealthy from the rest of us.

Is the income inequality good? It’s pretty hard to see how. A capitalist society works best when some people are rich, so that everybody else has something they can work toward. But that doesn’t require anything approaching the kind of inequality we see today.

Should taxes be raised on the rich? In my view, unquestionably. Even relatively small adjustments would raise significantly more money which could be used to pay for universal health care and to pay down the significant government debts. It’s ludicrous to think that raising taxes on the rich would somehow dampen people’s desire to become wealthy themselves. And it’s ludicrous to claim that the wealthy owe nothing to the society which made it possible for them to earn their money. It is a particular scandal that social security taxes have a limit.

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Ian Lance Taylor

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17 responses to “Increasing Inequality”

  1. fche Avatar
    fche

    > A poor person envious of a rich person can go one of two ways: “take their money” or “earn my own money.” […]
    > Should taxes be raised on the rich? In my view, unquestionably. […]

    I guess that makes clear which of the two ways you support.

  2. ncm Avatar
    ncm

    “Their money” is a slippery concept. How did “they” get the money? Often it was got through a government-enforced and/or illegally-maintained, monopoly, and as often by direct grant of tax money, e.g. through DOD contract, or subsidy. Could they have got it the same way anywhere else? Generally most of it is value extracted from the fertile environment, and should go (at least) to maintaining that environment.

    The 0.1% of the population controlling most of the property make resource-allocation decisions very different from what the 99.9% would choose. Furthermore, they own the communication media, and can manipulate popular opinion in their favor and against the interest of the nation as a whole. They can buy off government officials to evade legal enforcement, and buy private laws (“privileges”, literally). We have seen all this, in spades, in recent years.

    “Income inequality” is a marked understatement of the problem. During the Reagan administration income in the U.S. passed from a normal distribution to a bimodal distribution. The bimodal distribution implies not just inequality, but the foundation of a caste system, with the makings of a permanent underclass. The caste system in India has lasted millennia. The program to establish such a system in the U.S., initiated by the likes of Carnegie and Mann (with plenty of publicity, in the late 19th century), is well along. None of it is accidental.

    The question now is not whether it’s bad for the rest of us, or how bad it is for the rest of us, but whether anything can still be done about it.

  3. fche Avatar
    fche

    > It is a particular scandal that social security taxes have a limit.

    I’m not sure I read the US web info right, but don’t social security *benefits*
    also have a corresponding limit? If you don’t consider that also scandalous, why?

  4. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Frank: we all pay taxes as part of being a member of society. In the U.S., the rich actually pay less tax as a percentage of their income than the non-rich (though of course the rich pay more total money). This is because of the special treatment of capital gains income and of carried interest. When I mention raising taxes I don’t mean to “soak the rich.” I mean to adjust their payment to a level which reflects the gains they have gotten from society. Obviously one could argue that the only fair tax is a flat tax or a consumption tax, but note that under either scheme, the rich in the U.S. would actually pay (slightly) more than they do today.

    Nathan (and Frank): You may be interested in reading Peter Singer’s arguments about how much of wealth really comes from societal standards. He suggests that an 80% tax rate could be fair–though he doesn’t support it because it would be demotivating.

    Nathan: income inequality at a specific moment isn’t the same as a caste system. You need to consider income mobility over time. Income mobility in the U.S. is not as high as people are taught in school, but it is non-zero, and I haven’t seen anything indicating that it is decreasing. Certainly income mobility is higher in the U.S. than in India.

    Frank: There is no limit to social security benefits based on income. If you pay enough money into the system–which most people do over the course of their career–then you get the maximum benefit paid out. The system was designed so that you do have to pay a certain amount in in order to get full benefits, but that most people would reach that amount. So it’s not really accurate to say that there is a limit to benefits: the system was never intended to return all the money that you pay in.

  5. ncm Avatar
    ncm

    India has had millennia to cement its caste system, so that’s not a meaningful comparison. A bimodal income distribution is itself evidence of a sharp drop in income mobility. Increasing income inequality is a product of decreasing income mobility. There are subpopulations that enjoy better opportunities, but evidently they are small enough not to change the picture much; subtract them from the total and the rest is even worse.

  6. fche Avatar
    fche

    > […] If you pay enough money into the system–which most people do over the course of their career–then you get the maximum benefit paid out. […]

    Right, so there is a limit on the benefits – something on the order of $100K/year if I interpreted the data correctly. Then it is only fair that there should be a limit on the contributions/taxes too, unless it is to become a general wealth redistribution scheme instead of a forced retirement savings (ponzi) scheme.

  7. fche Avatar
    fche

    > the system was never intended to return all the money that you pay in

    Wait a moment – when has the effective rate of return of the current scheme dipped below zero?

  8. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Social security is not a Ponzi scheme, and never has been one. It is a socialized pension system. It’s goal is not to force you tosave for retirement. It is to ensure that every resident has a minimum pension in their old age. Given that goal, I see no contradiction in having no limit on the taxes assessed to support it.

    It has always been the case that people who make a lot of money pay more into social security than they receive. And it has always been the case that people who pay the minimum into social security, and who live a long time, receive more than they paid in. The effective rate of return for wealthy individuals has always been less than zero.

    FDR created the social security system with individual payments so that everybody would feel invested in the system–if it were ever cancelled, people would want their money back. He explicitly said that this was a hook to make it very difficult to ever repeal the system. Without the individual payments into the system–if social security payments came out of general tax revenues–it would be much easier for later governments to cancel the program. FDR wanted to make it hard to cancel. So don’t let the payments confuse into thinking that social security is some sort of retirement savings account; it isn’t.

  9. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Nathan: I don’t see why bimodal income distribution necessarily implies decreased income mobility. My personal income has never moved smoothly from one value to another. Instead, it has jumped up and down at different times of my life.

    That is, some kinds of jobs pay the same salary they did 30 years ago. Other kinds of jobs pay much much more. To show that income mobility has gone down, you need to show that people can not move between the two sorts of jobs. That could be true, but it is not necessarily true.

  10. ncm Avatar
    ncm

    When you have even minimally effective mobility, the Central Limit Theorem enforces a normal distribution. A deepening bimodal distribution implies structural barriers of some sort. The barriers don’t have to be perfect to be effective, and in “our field” they’re leakier than most Americans experience. The statistics tell us that the barriers have been secure enough, overall.

  11. Ian Lance Taylor Avatar
    Ian Lance Taylor

    I still don’t see why you couldn’t have bimodal salaries and people moving between them. I certainly agree that income mobility is not as high as it could be, and it never has been. But I’m not sure I’ve seen the evidence that it has decreased.

  12. ncm Avatar
    ncm

    Who ping-pongs between jobs as Kmart cashier and corporate director? In Michael Moore’s “Pets or Meat?”, we saw a corporate PR executive laid off, and offering personal wardrobe color consultation. The title referred to a former auto manufacturing employee raising rabbits to sell from her home. So, yes, in recent years we have seen a demographically significant number of Americans move from substantial salaries to a marginal or even homeless existence. Is that mobility?

    We would all like jump from one income hump to the next by tripling our salary. What most find instead is incremental changes with a ceiling somewhere around $100K, and a distinct population collecting income from $300K and up.

  13. fche Avatar
    fche

    Sorry for revisiting this old thread. but:

    Ian said:
    > When I mention raising taxes I don’t mean to “soak the rich.” I mean to adjust their payment to a
    > level which reflects the gains they have gotten from society.

    If the concept of “gains they have gotten society” as a source of taxable guilt is to have any logic to it, it would apply to underpaid peons as well — and to the limit of 100% to those collecting welfare.

  14. Ian Lance Taylor Avatar
    Ian Lance Taylor

    My view is that society has chosen to provide a certain minimal level of care for all members. We guarantee food, shelter, and health care for all children and for adults who can not take care of themselves. We also provide them for competent adults for a certain period of time. Since we are a capitalist society, we have to pay for this somehow–the government can not simply requisition the required services.

    The traditional mechanism for raising the required money is taxes. The U.S. has traditionally chosen to use a progressive tax system, though in the past it was far more progressive than it is today. Taxation is ethically supportable because we all benefit enormously from living in society. As you observe, this applies to everybody, rich and poor alike.

    So it’s not a matter of “taxable guilt.” Unless we make radical changes to society, we need taxation. And I personally don’t see anything wrong with progressive taxation. Given that, I see nothing wrong with observing that at present many very wealthy people actually pay tax at a lower rate than most non-wealthy people–that is, the current tax system is not progressive. So I see nothing wrong with making it more progressive.

  15. fche Avatar
    fche

    OK, you support “progressive” taxation. That’s a fine and fashionable opinion.

    But you cannot base it upon a notion that it is because of “gains they have gotten from society” that people deserve to pay. Those earning most are almost certainly the least “drain” upon the resources (especially, entitlement moneys). If the “gains” are to include all sorts of indirect effects that amount to “the totality of income”, then you have a circular argument: you want progressive taxation because you want those who earn more to pay a higher fraction.

  16. Ian Lance Taylor Avatar
    Ian Lance Taylor

    I suppose I didn’t phrase myself well. We all gain a great deal from society. Rich people in fact gain more from society, because society is the infrastructure which permitted them to become rich. If we conservatively say that 50% of all wealth is due to society’s infrastructure (a legal system, etc.), then rich people do in fact gain more from society than poor people, even poor people on welfare. It’s not an issue of resource drain.

    This general argument is the ethical basis for taxation. If we didn’t gain anything from society, then taxation would simply be stealing. I’m arguing that it is not: it is a reasonable demand for a partial return.

    So, given that taxation is OK, we can decide who should pay taxes, and how much. I don’t see the circularity in saying that it is OK–not required, but OK–to ask people who gained more to pay more.

  17. ncm Avatar
    ncm

    Apropos:

    http://clivecrook.theatlantic.com/archives/2007/11/opportunity_and_equality.php

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