Atlantic Chart One More Reason to Stop Using ‘Income Inequality’

I’m busy this week, and I’m working on a response to the ABA Task Force on the Future of Legal Education’s (final) Report and Recommendations.

In the meantime, the rumor is that “income inequality” will be the theme of B.H. Obama’s State of the Union Address. Paul Krugman put up a post Sunday arguing that Obama’s been “tougher on the one percent than most progressives give him credit for.”

His primary evidence is a chart put together earlier this month by The Atlantic‘s Jordan Weissman showing that thanks to the Patient Protection & Affordable Care Act and the fiscal cliff legislation from last year, the top one percent of households will pay a record high average federal tax rate (not marginal) going back in 1979. Quite a change, even if you think the one percent is merely a rhetorically expedient analytic concept.

Looking at the chart, your first question should be, does this include capital gains? The answer is, yes it does. That’s good on Weissman. Your second question should be, one percent of what? And there you’ll have to dig into Weissman’s source data from the CBO (PDF). Deep in the appendix (page 24), it elaborates on the definitions that appeared at the beginning:

Capital gains—Profits realized from the sale of assets. Increases in the value of assets that have not been realized through sales are not included in market income.

The CBO report defines income percentiles literally, as in, give us precise dollar figures for money that you received. As you can imagine, this leaves a lot out. Two households could have the same dollar income from the same types of sources to the same degree, but one might own vacant land parcels (taxed by state authorities not shown here) that collect imputed land rent while the other might be a renter who happens to make a lot of money. Okay, it’s a farfetched example, but the distinction is crucial. The CBO can be interpreted to agree:

The analysis does not assess trends in the distribution of other measures of economic wellbeing, such as household income measured over a longer period, household consumption, or household wealth.

These are very important dimensions of whatever “income inequality” is because they show household stability, the effects of debt on household consumption, and of course household assets, which tell you about the kinds of resources people have at their disposal. (Maybe “household inequality” hits too close to home?)

The CBO isn’t exactly clear why it’s conducting this study—sort of that the Great Recession reduced incomes and taxes, and well, this is what the CBO does. Sure, its data give some idea of how much households in various income percentiles have paid in taxes over the last few decades, and this can probably give a fairly accurate picture of “income inequality.” That is to say, I think Weissman’s work is valid, though I think Krugman is reaching.

However, “wealth concentration” is the far bigger, and more descriptive, problem. Undoubtedly, the country’s wealth is distributed to a relatively smaller number of households now than in the past, and the wealthy are hoarding it when it needs to be put to use to employ everyone. It’s an especially bad problem when you’re talking about wealth whose quantity is fixed, i.e. land.

It’s for that reason that I don’t like using the term “income inequality.” Imputed incomes matter because wealth concentration kills people, growth, wages, and the environment. I’m pessimistic the president will characterize it that way in his address.

2 comments

  1. “However, “wealth concentration” is the far bigger, and more descriptive, problem.”

    Don’t worry – the wealth tax trial balloons are already going up…and of course have been bobbing along for nearly a year in Cyprus…

    http://www.ft.com/cms/s/0/a3ebc206-876d-11e3-9c5c-00144feab7de.html

    (The funny-as-hell part of this is that Germany – bad evil productive creditor BAD – is making your wealth tax case…to keep the debt-crack-addled southern tier off its back…)

    And isn’t confiscation of wealth’s interest earning power via FED ZIRP a partial wealth tax already?

    (Paging the Fifth Amendment…Granny and Gramps want to talk about their decade long IRA cramdown…)

    Of course, since the “right rich people” (defined as NYC Money Center Banks and DC courtier class) are immunized due to their privileged position at the center of Fed money-creation, I guess that means everything is okay regardless…

    1. And isn’t confiscation of wealth’s interest earning power via FED ZIRP a partial wealth tax already?

      Nope. ZIRP is isn’t a confiscation. Sell bonds. Buy stock. Quit whining.

      (Paging the Fifth Amendment…Granny and Gramps want to talk about their decade long IRA cramdown…)

      The Fifth Amendment forbids depriving people of their property without Due Process. Due Process is here; therefore, no problem.

      Thanks for playing.

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