Everything you know about inequality is wrong

By Kevin Pollari
October 19, 2012

This is the fourth response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press. The first response can be read here, the second here, and the third here

Plutocrats is a provocative, articulate summary of the income inequality crisis having spawned the 1% crowd that “pulls up the ladder” available to others.   Honestly, I found myself wanting to read more, like a guilty pleasure.  If only it all were true.

There is such broad consensus that income inequality exists that to suggest otherwise feels ridiculous (Please, no global warming analogies).  For example, the Obama campaign emphasizes millionaires must pay their fair share.  Research by academics such as Piketty-Saez propose a top tax rate of 70 or even 80%.

Yet, it is surprisingly easy to find non-confirming evidence. For example:

  • Most recent IRS data suggests income inequality is not a growing problem
  • The 1%, 5% and 10% all do indeed pay their fair share, at least as compared to what they’ve paid for the past two decades
  • For every anecdote of bad behavior by the 1%, there are many more counter examples of good, such as their pivotal role with respect to charities.

Media coverage typically compares income and tax data between 1979 and 2007. Indeed, income inequality looks like a growing problem based on it.  On the other hand, consider the period from 1997 to 2009.  Top 1% and 5% earners had a slightly shrinking share of AGI.  That’s right, incomes actually have become more equal over the past 12 years.  Alternatively, looking at a two-decade period, from 1988 to 2009, the top earners had a 10% increase in relative income, all which occurred by the year 1997.

A 10%, front-loaded increase in relative inequality over two decades does not seem worthy of all the hysteria. Of course, top incomes do tend to go up or down with stock market performance more so than for others. Why? One reason is that those at top have a much greater share of their investments in taxable accounts, because of the caps on 401-K and IRAs.  For a middle class investor, typically much more of their investment income will be tax-protected and therefore not show up as AGI.

This also invalidates direct comparisons between today and the 1970s when 401-Ks and IRAs did not even exist.  Changes in the tax code also invalidate such comparisons.  Specifically, the tax code changed in 1986, triggering many businesses to report income as an S-corp rather than C-corp.  That is, much of the apparent income inequality actually reflects a shift of business income reporting to individual tax returns after 1986.

At the same time, the progressivity of income taxes has actually increased.  From 1988 to 2009, those at the top experienced a 33% increase in their relative share of taxes.  This more than covered the 10% increase of their relative incomes noted above. Even under Bill Clinton’s higher marginal tax rates of 1997, the top income earners paid a smaller portion of the total tax bill than today.

One might ask, “What about those outrageous tax loopholes exploited by the likes of Warren Buffett?”   The simple fact is that lower effective tax rates for the upper class is largely due to capital gains and dividends.  What gets lost in the discussion is that these are both a double tax. In the case of Buffett, he owns roughly 25-30% of Berkshire Hathaway.  Hence, their corporate tax hits his pocketbook directly, dollar for dollar.  The upshot is that Buffett pays a total tax rate closer to 45%.

One can certainly debate whether the rich pay their fair share in absolute terms.  However, IRS data suggests they certainly do compared to benchmarks of 10 or 20 years ago.

So, why is there all the outrage? Reactions to both Wall Street’s role in the 2008 worldwide recession and the Bernie Madoffs of the world have fueled much emotion.  But a broader view is possible.

Consider the myriad non-profits that could not exist at nearly the same scale were it not for the large charitable donations and board leadership of successful business leaders. The blunt truth is that these organizations could not survive on just $5 or $10 donations. Big money makes it happen.

Misunderstanding these facts has disturbing consequences that raise the specter of class warfare. Much of the 99% is frustrated with rising income inequality; dismayed that the top earners do not pay their fair share; and, angry that it seems the top 1% are achieving success by not following the same set of rules.   They have been told this over and over.  Is it any wonder that they vilify business executives?

The bottom line: the American public has been duped.  This is not to say we should ignore divergence of incomes or threats posed by globalization.  But the tragedy is that these discussions are now clouded by ill-informed emotion.  Sadly, we now live in a time when many view success with resentment or suspicion.

Now, consider who has been the chief spokesperson for this class warfare narrative?  This goes a long way to explaining why many top income earners dislike Obama.  Think how different the reaction might have been if his appeal had been along the lines of, “On average, your taxes have more than kept up with your income, you donate more than the typical citizen, and you run businesses that create jobs.  You are patriots.  Now, we are asking you to do just a little bit more for the good of the country”.  Who knows?

8 comments

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The US Gini Index – a measure of income inequality – is at an all time high, in the ranks of Rwanda and Uganda.

Some of our elected officials are better at standing up for the middle class than others. Here’s a handy “Report Card” that grades your elected officials for how they voted on legislation that helps the middle class and reduces income inequality: http://8020vision.com/2012/10/18/income- inequality-a-congressional-report-card/

Posted by jaykimball | Report as abusive

Kevin,

You said, “Consider the myriad non-profits that could not exist at nearly the same scale were it not for the large charitable donations and board leadership of successful business leaders. The blunt truth is that these organizations could not survive on just $5 or $10 donations. Big money makes it happen.”

Not true. Think about long tail marketing. The power of small donations multiplied by today’s ability to appeal to and reach millions of people.

Obama’s campaign donation strategy is an example. Through July 31st, 37 percent of the money Obama raised came in amounts of $200 or less. For Romney, it was 17 percent.

For Romney, 51 percent of his donors have maxed-out, compared with just 16 percent of Obama’s.

Posted by jaykimball | Report as abusive

If you want to be taken seriously, you need to stop with the “double taxation” nonsense.

Posted by Sanity-Monger | Report as abusive

Nice article. I am so tired of all the fairness and equality crap, as it defies the laws of nature. Romney’s much touted “gaffe” about the 47% actually needs a serious discussion. I would agree with a social safety net for those who are truly in need – but have we become so pathetic and whiney that almost half the country needs government payments of some kind?

Posted by zotdoc | Report as abusive

Congratulations Mr. Pollari you have written what is quite easily the most pathetic and disingenuous response of the five delivered up to this point.

Your claim “Media coverage typically compares income and tax data between 1979 and 2007. Indeed, income inequality looks like a growing problem based on it. On the other hand, consider the period from 1997 to 2009. Top 1% and 5% earners had a slightly shrinking share of AGI. That’s right, incomes actually have become more equal over the past 12 years.” is both factually incorrect (“the past 12 years” ran from 2000 – 2011, not 1997 – 2009) and ridiculously disingenuous for having finished in a period (2007 – 2009) when the top 1% saw their incomes decline by 37%. Truly pathetic.

And your assertions that 100% of corporate taxes are carried by capital were long ago dismissed and are no longer embraced by any reputable economists. As @Sanity-Monger noted, if you expect to be taken seriously you need to lose the tired old double taxation nonsense. Actually, if you want to be taken seriously I would suggest just keeping quiet in your case.

It should make you proud to have followers as ignorant as @zotdoc who continue to misrepresent the 47% statistic (which is actually 46%) of Americans who paid no federal income taxes as “almost half the country needs government payments of some kind.”

Of the five responses written yours is the only one that has absolutely convinced me to never again click on a link that has the authors name associated with it.

Note to the editors: When the comments are more genuine and factual than the articles it’s time to look for new writers.

Posted by jtfane | Report as abusive

As the author, I’d like to briefly reply (to the disagreeable comments, in particular):
1) I used the term “past 12 years” to refer to the period of 1997 – 2009, because it is the most recent data available. 2010 and 2011 data does not exist yet, because no data exists yet from the Congressional Budget Office (CBO) and think tanks that analyze IRS data. (Obviously, 2011 tax forms are still being completed).

So, I chose to use the data from the most recent year available. As an aside, I fully acknowledged in my opinion piece that the results vary with respect to what years you choose, most obviously 2007 or 2009. Thus, I felt this gave a fair and balanced perspective, to paraphrase Fox. I offered one potential explanation – that the stock market drives much of it, and this may be largely due to differences in tax-protected caps on IRAs and 401-Ks. (and this idea has been documented by economists at some of these think tanks – e.g., Reynolds at the CATO Institute).

On the other hand, the progressive left has blatantly cherry picked data by ALWAYS/EXCLUSIVELY using 2007. Case in point, the Tax Policy Center (frequently cited by the left and referenced in one of the President’s nationwide advertisements as “non-partisan”) does not show data since 2007. it seems obvious to me: they like the year 2007, because it is the all-time peak in income inequality. I spoke with one of their economists and e-mailed back and forth with their Executive Director, asking why they have not added 2008 and 2009 to their tables. Their position is that they simply have not had time to do it. Interesting answer, considering their role in life is purely analysis of econometric data around tax policy.

2) With respect to double taxation implicit in corporate taxes, this simply is not very controversial so i was surprised by some of the commentary (I spoke directly with economists at the TPC, Tax Foundation, and Congressional Budget office). double taxation is part of ALL the major econometric modeling done by them.

It is indeed true that there is debate as to what percentage of corporate tax should be allocated to shareholders. For example, the TPC allocates 60% of the corporate tax to shareholders (which is a recent revision, effective 9/13/12). So, using the TPC approach, I guess you could say perhaps I could have said “Buffett pays ~35% effect tax rate” (60% * 35% + 15%) rather than 45% – admittedly, at the risk of more words and potential confusion to the reader.

But the broader point is this — the President, with full support of most media, has hammered over and over that Buffett pays only a 15% tax rate. Now, frankly, that is a ridiculous notion that should not be taken seriously. But it is.

Posted by pollari | Report as abusive

Excellent Article Kevin.

In my view the entire idea of Income Equality is false and a creation of the socialist left. It is based on the false premise that there is actually some pre-determined distribution of income that is correct. Nothing could be farther from reality and truth.

People should be free to earn what the market will bear from their talents and productivity assuming they do it legally ethically (not the same thing, both are needed). This is simply rational and in the best interest of creating sustainable individual and national wealth.

What people earn – and do with the income they earn – is solely their business. Government should not use coercive – read too high – tax rates to try to redistribute income involuntarily.

That said, as a Christian I do believe those who have been blessed with more talent from which they can create more wealth than others less fortunate do have obligations.

As you rightfully point out the wealthy routinely provide the material funding for charity.

Income inequality is simply one of many flawed concepts invented by the socialist left to use as justification to create ever larger government and tax rates that enable redistribution, to the detriment of both overall national wealth and individual productivity and dignity.

Keep writing!

Posted by SeanJ | Report as abusive

Nice time-line you have there. Quite convenient, actually, especially if one were predisposed to minimizing the negative societal impact of the vast inequality in wealth and income growth from 1979 to 2007 between the bottom 90% and top 1% of households.

2007 is also a great year as the book end as it shows the top 10% have 70% of the wealth and own 90% of all outstanding stocks, bonds, and mutual funds (much of it stashed in overseas tax shelters).

Including 2008 merely masks the actual disparity by including the very temporary setback to the wealthy, many of whom were complicit in the crash and have now nicely recovered, thank you very much.

Going back only twenty years memorializes the Reagan tax cuts as the baseline, and helps gloss over little details like the 22% income growth for the top .01%, or 15,000 families from 2000 to 2006 while the bottom 90% lost 4%, or the steadily declining share of income the rally wealthy paid in taxes over the last 32 years.

While household income growth per capita from 1979 to 2007 was 64%, the top 1% grew 282% but the bottom 90% only 10%, adjusted for inflation. How about the top 01%? Almost 500% growth.

A similar period from 1946 to 1976 (aka the great compression wage-wise) had 90% per capita growth with the bottom 90% showing income growth of 83% and the top 1% only 20%.

Our last gilded age started to come undone from trust-busting and eventually a progressive tax code when Teddy Roosevelt had to go to J.P. Morgan hat in hand to bail out the U.S. Government, and we once again experienced the dangers to a democracy of concentrating so much into the hands of so few.

The small sliver of elites that has grown the financial sector to 40% of corporate income from 15% over this period while manufacturing has done the inverse, have far more to worry about than the president not giving them the John Galt patriotic salute they crave and paying due deference to their wholly self-constructed title of “Job Creator”, or of having their fee fees hurt by rolling back the irresponsible tax cuts and deregulation of the last 32 years.

When we decide to, I think America will someday do better by not impoverishing or imprisoning the masses while the 1% run amuck, shuffling papers and worrying about their feelings while receiving 24% of tax expenditures in 2011, the top 20% receiving 66%.

We just might need to get us new capitalists who know which side their bread is really buttered on, as the current crop is apparently incapable of doing, not understanding where they really got all that money.

Us.

Posted by cncsawman | Report as abusive