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The Great Inequality Debate
Soaking the Rich Won’t Work

Peter Orzsag, director of the Office of Management and Budget for two years under President Obama, is out with a new paper with a conclusion that is sure to disappoint the increasingly restive Bernie Sanders wing of his former boss’s party: Jacking up the top marginal tax rate barely has any effect on income inequality. Orzsag and two Brookings colleagues, William G. Gale and Melissa S. Kearney, calculated how the U.S. income distribution would change if the top rate increased to 50 percent from 39.6 percent and the new revenue were redistributed to the poorest fifth of households. They found that such a shift would barely make a dent in the Gini coefficient (a standard metric that expresses the level of income inequality as a decimal between zero and one). Orzsag, Gale and Kearney write in their report:

Increasing the top rate to 45 percent would bring in an additional $49.4 billion in revenue. Dividing that evenly among the 36.1 million households in the bottom income quintile (defined over households) would give each of those households an additional $1,370 in post-tax income.

Increasing the top rate to 50 percent with the same redistribution scheme would bring in an additional $95.6 billion in revenue, leading to an additional $2,650 in post-tax income for the bottom fifth of households. Applying a new top rate of 50 percent to income above $1 million for married filers and above $750,000 for single filers would bring in an additional $63.5 billion in revenue, which would result in $1,760 in additional post-tax income for households in the lowest quintile.

The reduction in income inequality resulting from each of these tax and redistributive plans is quite modest. The Gini coefficient falls from .574 under the current income tax schedule to .567, .560, and .565 respectively. These are very small reductions in the calculated statistic: .007, .015, and .010, under the three tax increase scenarios.

By way of comparison, when the top marginal rate on earned income was 50 percent in 1979, the Gini coefficient was .435. Thanks to globalization and new technologies—and a whole range of economic and demographic changes that we refer to as the decline of the blue model—the economy delivers much more unequal returns now than it did then, and there may not be a whole lot that the government can do to reverse that shift without enacting truly confiscatory taxes (which, to be fair, is what Bernie Sanders has said he wants to do).

As the authors note, the study itself doesn’t necessarily argue against raising the top income tax rate—one could argue that this is the best way to get new revenue to tackle the deficit, for example, or to alleviate poverty. But if the concern is inequality—the overall gap between the income going to the people at various percentiles of the income distribution—then simply hiking the top tax rate is the wrong way to go. If rising inequality really is really as serious a problem as liberals say it is (and most voters don’t think so) then they need to start offering more innovative solutions than simply soaking the rich.

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  • Fat_Man

    Anyone who thinks that additional revenue gained by a tax rate increase will spent on the poor is a fool. With a 500 G$ deficit, any money that does not go to closing the fiscal gap will go to propping up collapsing middle class entitlement programs like medicare.

  • Boritz

    It isn’t necessary to reduce income inequality. Just paying angry lip service to the issue suffices. Like most issues of this type it would be disastrous if the issue actually went away.

  • Dale Fayda

    If the liberals ever found a cure for poverty, they’d burn it.

    • JR

      Are you referring to the Great Inquisitor story in Brothers Karamazov?

      • Dale Fayda

        I wasn’t, but that a pretty good analogy.

        • JR

          One of my all time favorites as far as written word is concerned. (Grand Inquisitor story, not the entire book. Too long).

  • CapitalHawk

    Step one in reducing economic inequality in the USA – stop importing millions of people who drive down wages for working class Americans.

    • FriendlyGoat

      Donald’s wall is going to have a guest-worker door in it.

      • CapitalHawk

        A wall with a door is better than no wall.

        • FriendlyGoat

          True, for reducing the drug runners and other miscellaneous bad people from down south of the border. But you don’t get any reduction in the number of workers admitted who are driving down wages—–UNLESS—-the Chamber of Commerce Gang in America says so. They haven’t, and they’re not going to. Republicans will be constantly lobbied to permit more “guest workers” in all wage ranges—–and Republicans in office will gladly serve their sponsors in the “business community” in this manner. You will get a few less day laborers from Mexico and a lot more skilled competition from everywhere in the world.

          • CapitalHawk

            What you say is true as long as we keep electing politicians that are answerable to the Chamber of Commerce Gang.

          • FriendlyGoat

            That’s what a Republican is, by definition. Some Democrats too, of course

  • FriendlyGoat

    The main reason for high tax rates on very high incomes is not to pull money into government and redistribute it to the poorest fifth (a concept that would never happen in practice anyway.) The main reason for high taxes on very high incomes is to avoid excesses in the first place.

    “Very high incomes” are coming from somewhere. They generally are not coming from the rich making each other rich. The money is being pulled out of either the pockets or lost opportunities of lower classes and redirected upward. Good tax policy is stiff enough to discourage this natural tendency in economic life. You want businesses SPENDING on people and growth in order to avoid reporting high incomes and paying high taxes.

    • Dale Fayda

      Horse puckey.

      Aside from the economic asininity of high levels of taxation (France, anyone?), it is oppressive and immoral.

      In a free society, the purpose of taxes is to enable government to perform its core responsibilities, which at the Federal level are maintenance of national defense & sovereignty and conducting of foreign policy. That’s it – nothing else. In an unfree society, of which the US is now one, the government elbows itself into every sphere of human endeavor, assigns itself ever expanding powers and confiscates as much money as it feels it’s entitled to.

      For the umpteenth time, it’s not the government’s money! It belongs to the people who earned it, not to Obama, the Democrat party nor to the vicious administrative state! It’s as much their private property as anything else they own!

      The decline (such as it is) of the middle class coincides with the rise of the welfare state, with the flooding of America with non-white Third World immigration and with the decline of cultural values, which enables the drug culture to flourish and infantilizes the population. Do you want me to give you a list of formerly prosperous, majority white American cities, which are now post-apocalyptic non-white hell holes? Hint – it’s a looooooooooong one.

      Add to this a tremendous amount of economic competition from the rest of the world, as it recovered from WWII and threw off the yoke of Communism (in part or in whole).

      The way to reduce “inequality’ is not to rob from the rich and give to the poor, but to facilitate an economic and social climate favorable enough for the poor to do better on their own.

      • FriendlyGoat

        “facilitate an economic and social climate favorable enough for the poor to do better on their own”

        If only ANYONE knows what that means. Tax cuts are not creating jobs. They are encouraging the elimination of jobs. The resulting over-supply of labor then keeps wages at declining levels. I know you don’t agree, but so what?
        We don’t have to agree.

        • Dale Fayda

          Once again, horse puckey.

          I know you’re old enough to remember the rates of job creation under Reagan after he cut the marginal tax rates. I remember one quarter when over 1 million jobs were added and that’s with a much smaller population than today. Obama can only dream of those numbers and that’s WITH a brown energy boom which has kept this economy afloat for the past 6 – 7 years.

          If confiscatory levels of taxation are the answer, why is the French economy in the toilet? Holland has certainly raised their taxes high enough to make the rich squeal like pigs over there, yet their economy taken a nose dive and his approval ratings are in the 10% range. Riddle me that one, FG. Tax rates not high enough, perhaps?

          On a different note, the Left is so maniacally obsessed with power that it can’t even fathom a society where taxes are not tools of social engineering nor those to punish their political enemies, but are merely a way of keeping the government functioning at its most basic level, the way our Founders intended.

          • FriendlyGoat

            Like I said, we don’t agree and we don’t have to. We do not have tax levels to cut from which will result in a net creation of jobs after you eliminate the millions of jobs you do not believe the government should be one-way-or-another funding in the first place. Net, net, people will lose if your political dreams are accomplished and speculation pools will increase from their already-ridiculous levels. Most of the tax cuts you want are going to go to money that is already in idle piles looking for a “trade”.

    • Thom Burnett

      It’s not always the case that ‘Very high incomes” are coming from somewhere. At least, not if you mean coming from other people. Wealth often comes out of nothing. In general, each transaction in a market benefits everyone involved. There are exceptions – like fraud and theft – but in many cases, for instance Steven Jobs. He got rich by increasing the wealth of millions of people.

      • FriendlyGoat

        You lost me at “wealth often comes out of nothing”. Except for investment bubbles, where the prices for assets such as certain real estate, stocks, bonds and commodities inflate beyond long-term reality and appear for a time as “wealth” from nowhere, I have no idea what you’re talking about.

        As for Steve Jobs, we could look at one of his products as an example. The smart phone is a cool modern invention with many potential uses. As a result, many, many people want one. They buy them with their money and they buy voice/data subscriptions with their money. Lots of people work for Apple, the carriers and the contract manufacturers (in China). Lots of economic activity is created. BUT, customers are always paying real money for everything that happens, including whatever remuneration flowed up to Steve. (Separately, whether Steve’s shares of Apple stock are in a bubble is always an open question, but we don’t tax the wealth in stock unless/until it is sold or passed in an estate.)

    • Anthony

      FG, at core of your contention is question of confiscatory tax rates on incomes deemed to economically useless (indecent perhaps). You know and assume your readers know that good economic and social policy requires more than just a high marginal tax rate on extremely high incomes (Orzag et al report reveals nothing new – by its nature such a tax brings in almost nothing). Familiarity with your material leads me to conclude that you are inferring new instruments for 21st century challenges – progressive income tax tool for 20th century.

      For this reason, discussions of this nature are often clouded by government’s role – and since 1970s the government’s role has been constantly challenged. The challenges will never end FG because of central government role since WWII which logically makes such contention normal and legitimate as debate fodder – in this case taxing perquisites.

      Over and above that, I think what’s really at bottom of most apparently irreconcilable positions on this issue is that the “modern state” (and the tax and transfer systems that are at its heart), though in need of reform as all contenders agree, has acquired a level of complexity that makes both taxes and transfers difficult to understand with default to ostensible antistatist/antimarket positions.

      • FriendlyGoat

        As long as the bulk of society does not mind the levers of power, including all political power, consolidating into fewer and fewer hands, high-end tax cuts are fine. As long as people understand that there is ADDED incentive to cut costs (cut employees) when the ownership class can keep an increasing share of the savings in a low-tax environment, high-end tax cuts are fine. As long as people understand that huge old-money dynasties will flourish more and large-scale philanthropy will drop in the absence of gift/estate taxes, high-end cuts to estate tax are fine. As long as lower classes understand that they will be baited to approve high-end tax cuts by having their own taxes go FROM near zero TO near zero (basically no change), the GOP politics are fine. As long as people understand that whatever taxation you give away in 21st-Century politics, you NEVER EVER get back, “no problem” (as they say).

        • Anthony

          FG, your point is valid and generally tax lowering proponents are theoretically against marginal tax rate increases but have not often considered what government revenues actually pay for – and its not income support (beneficiaries living off the dole, which is less than 1% of national income).

          • FriendlyGoat

            True. What the government is mostly doing is hiring people and buying private-sector goods and services from places where people are hired to provide them. Government provides the demand that leads to millions and millions of jobs. Why this is denied from the right beats me. One wonders what Tea Party (for instance) people believe will replace all the jobs they wish to destroy. One could look around and notice that we already have enough nail salons, tattoo parlors, cottage industries in arts and crafts and for that matter—–restaurants.

          • Anthony

            Well, you allude to recognizing a general interest over a private interest vis-a-vis modern role of government – while at same time acknowledging economic openness and forces of competition. But, you lament how infrequent many Americans acknowledge what is true role of government in the production and distribution of wealth; there we agree – we live in a mixed economy. More importantly and back to your initial thrust, taxation is neither good nor bad in itself – it (taxation) depends both on how taxes are collected and what they are used for.

          • FriendlyGoat

            The best role of taxation is to get business people to avoid—-not with well-lobbied loopholes but with spending on people and growth—-the taxes which would OTHERWISE be onerous.

    • circleglider

      The rich are rich only because they’re “pull[ing] it out of either the pockets, the labor, or the lost opportunities of the lower classes.”

      Sure. And immigrants are stealing jobs from Americans and destroying our middle class.

      The level of economic illiteracy in America is stupefying. Then again, what should we expect from a nation of unemployed basement dwellers on the dole who have nothing better to do with their time than broadcast their ignorance on the Internet?

      • FriendlyGoat

        The party you appear to be supporting wants more “guest workers’, not less.
        Donald’s wall is to block the supposed “rapists”, not to block the desires of the business community.

        As for economic illiteracy, I’m of the opinion that the preponderance of right-side economic thought is exactly that. They have YOU believing that immigrants are your problem, EVEN as more than half the trading on the stock exchanges is computer-driven and high-frequency. Do you think Pedro and Jose are doing that with sombreros and burros, or what?

  • Jerry_In_Detroit

    Where the whole tax the rich scheme fails is that people forget the rich people must be engaged in some sort of business to maintain their wealth; taxes get passed through to everyone in higher costs of goods and services. The end result is the rich become defacto tax collectors and the government hides the fact that the tax rate is approaching 50% for everyone.

    • CapitalHawk

      Of course. From the governments perspective the best tax is an invisible tax.

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