Wednesday, June 11, 2014

The Wealth of the Top 10% in the US

An interesting graph of the top decile income share in the United States from 1910–2010 from Piketty’s data here.


As we see, since 1981 the top 10%’s wealth has soared back to the level it was at in the 1920s, and a major cause, though not the only one, was Reagan’s changes to the tax system which made that system substantially less progressive.

The process is illustrated by changes to the top marginal tax rate.

From 1933 to the early 1940s the top marginal tax rate was progressively increased from about 60% to about 90%, and stayed at 90% until the Kennedy–Johnson tax cut of 1964 reduced it to 70%. Even with this, the minor fluctuations from 1945 to the early 1981 are within the band of 32%-36% and showed no long-run trend upwards but relative stability until the early 1980s.

Libertarians are fond of railing against so-called “soak-the-rich” tax systems, and yet from the 1940s to 1981 the US had a tax system with large progressive taxes on high individual income.

But those high taxes rates were consistent with very strong economic growth in that era: in fact, if we ignore the World Wars, the best decadal per capita GNP growth the US ever had, in the period from 1871 to 2001, was in the decade from 1961 to 1970.

Then under Reagan’s presidency the top marginal tax rate was reduced to 50% in the Economic Recovery Tax Act of 1981 and to 30% (in 1988). Further adjustments were but minor and only changed this rate in a range from 30 to 40%, as can be seen in the data here.

I have largely steered clear of the whole debate on Thomas Piketty’s Capital in the Twenty-First Century, but it seems to me James Galbraith, amongst others, has provided a good heterodox Keynesian perspective on it:
(1) Galbraith, James K. 2014. “Policy, not capitalism, is to blame for the income divide,” May 26, Ft.com.

(2) Galbraith, James K. 2014. “Kapital for the Twenty-First Century?,” Dissent, Spring.
Addendum
Philip Pilkington also has some good posts analysing Piketty’s work here:
Philip Pilkington, “Piketty’s Regressive Views on Public Debt and the Potential Impact of his Book,” Fixing the Economists, April 30, 2014.

Philip Pilkington, “Why Thomas Piketty is Wrong About Inflation and Interest Rates,” Fixing the Economists, May 16, 2014.

13 comments:

  1. I'd go further than Galbraith. I don't think that Piketty has a coherent macroeconomic framework and this renders many of his historical interpretations suspect.

    http://fixingtheeconomists.wordpress.com/2014/04/30/pikettys-regressive-views-on-public-debt/

    http://fixingtheeconomists.wordpress.com/2014/05/16/why-thomas-piketty-is-wrong-about-inflation-and-interest-rates/

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    1. Thanks -- have added links to these posts!

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  2. Those top tax rates were a joke: so chock full of loopholes (even more than todays system) that very few rich people paid those exorbitant tax rates.

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    1. Not true. Certainly not when they were first implemented, and it was only by the 1960s and 1970s that the loopholes emerged:

      http://www.ft.com/cms/s/0/8eb5e942-e49d-11e3-894f-00144feabdc0.html#axzz34KluyRQp

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  3. ???
    Where, in the article, does it make your claims?
    http://top-federal-tax-rates.findthebest.com/q/35/1004/How-much-was-the-federal-capital-gains-tax-in-1950

    Lol, dont you think a ceo in the 50s would choose his compensation in stock or options to avoid the ridiculously highh income taxes?

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    1. The really significant use of stock and options was very much a post 1970s phenomenon. Although it did exist in the 1950s and earlier it was not a that great in terms of the % of CEO compensation:

      http://www.huffingtonpost.com/2013/07/23/executive-pay-caps-not-working_n_3639281.html

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    2. Also, my original link should have been:

      http://www.dissentmagazine.org/article/kapital-for-the-twenty-first-century

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  4. Hey LK,

    Not trying for a debate. I just wanted to know if you could please point to a argument source as to the reasons why inequality should be the focus for tax policy.

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    1. It isn't the exclusive purpose of taxation, but certainly one major purpose.

      Another major purpose is control of aggregate demand.

      But as to why reducing extreme income inequality should be an aim of good policy, it is desirable because

      (1) it is a way to reduce poverty by transfer payments

      (2) as a way to redress the imbalance in the marginal propensity to consume between different income groups, so that more final output will be demanded and the economy will have better economic and employment growth.

      (3) to stop the problems caused by extreme rentier classes and other extreme concentrations of wealth such as capture of the state, media, by the wealthy or magnates and so on.

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  5. "The really significant use of stock and options was very much a post 1970s phenomenon. Although it did exist in the 1950s and earlier it was not a that great in terms of the % of CEO compensation:

    http://www.huffingtonpost.com/2013/07/23/executive-pay-caps-not-working_n_3639281.html"

    Partially conceded. HOWEVER, http://www.vanderbilt.edu/econ/sempapers/Frydman1.pdf
    Pay close attention to p.11:"Consequently, executives paid a marginal tax rate on these options of only 25 percent instead of the 70 to 90 percent marginal rate they faced on labor income." and page 13 "Lewellen calculates the difference between an option’s exercise price and the market price of the company’s stock at the end of each fiscal year, and then spreads these potential gains from stock appreciation over the duration of the option.Because gains from exercising options were significantly higher than the value of grants during this period, this ex-post valuation method overstates the value of option grants."

    I think the authors are wrong here. it makes more sense to value options when they are exercised rather then their initial grants. We want to see how well those at the top are doing. If there is a booming stock market, than even small percentages of initial stock option compensation can yield large gains.

    Besides, there were other loopholes as well. Entire investments were set up to offset exorbitant tax rates through depreciation and other tricks in the 1950-1980 period.(My Dad's cousin is a retired Brazilian executive who lived in the states since the 1970s. He told me he owned buildings in Boston for the express purpose of reducing his total U.S. tax burden to zero.) Most of these were eliminated when Reagan cut a deal with the democrats. The only way Democrats were going to vote for lower taxes on the rich was if he gave them something in return, that is less deductions. (Although, there are still plenty since then)

    "to stop the problems caused by extreme rentier classes and other extreme concentrations of wealth such as capture of the state, media, by the wealthy or magnates and so on."

    The power of the "rentier" classes and the rich are VASTLY overestimated by leftists such as yourself. To give one anecdotal example, here in the states, Eric Cantor was defeated by an opponent despite the fact that he had a vastly superior war chest of funds.
    Another anecdotal example. Sheldon Adelson made a huge donation to the Romney campaign that failed miserably to get him elected.
    Now granted, these ARE anecdotes, but they illustrate an important point, namely, that the power of the rich is not absolute.

    "as a way to redress the imbalance in the marginal propensity to consume between different income groups, so that more final output will be demanded and the economy will have better economic and employment growth."

    Aggregate Demand shortage arguments are not the same thing as "underconsumption" arguments. Spending is spending, whether it is on tractors, cranes, or on consumer goods. As long as cash or cash equivalents aren't being hoarded, they are being put to work in the economy. (The secondary stock market is still a place to make money. Money flows in and out of it. Shares trade hands. )

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    1. (1) since stock and options as % of CEO compensation were minor, the low tax rate on capital gains hardly refutes anything I said.

      (2) "they illustrate an important point, namely, that the power of the rich is not absolute. "

      And since nobody said they have "absolute" powers, yet another straw man.

      (3) no, edward, spending of the rich on secondary financial asset markets has very different effects from spending on final goods and services.

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  6. Galbraith's ramblings about how capital is not supposed to be measurable is nihilistic and anti-scientific. The PK ergodicity stuff is by the way also anti-scientific as it basically implies that you are unable to tell anything about the future.

    Well, I prefer economics to such postmodern nonsense. These are not intellectual games but issues that affect the well-being of millions.

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    1. "The PK ergodicity stuff is by the way also anti-scientific as it basically implies that you are unable to tell anything about the future."

      That is nonsense. Post Keynesians recognise that where systems are ergodic or deterministic or yield stable relative frequencies, you can make predictions with objective probabilities about future states of the system.

      Or perhaps you are recycling the charge that all Post Keynesian do not recognise degrees of epistemic uncertainty? That is also false.

      That fundamental uncertainty exists does not mean that PKians think that we are "unable to tell anything [at all] about the future".

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