Why “inequality” will be an evergreen American politician’s talking point

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“The Redistribution Fallacy” by James Piereson looks at some data on American income and concludes that, no matter how high taxes are, income inequality will be about the same (since the services provided to low-income Americans don’t count as “income”). Here’s a chart:

income-by-quintile-graph

 

Piereson explains:

Many in the redistribution camp attribute this pattern to a lack of progressivity in the U.S. income-tax system; a higher rate of taxation on the wealthy should solve it, they think. But the United States is already a highly taxed country with a highly progressive tax rate. Indeed, income taxes in the United States are at least as progressive as those in many other developed countries. The highest marginal rate in the States was 35 percent, from 2003 to 2012; today it is 39.6 percent for top earners—not far out of line with those of America’s chief competitors, including Germany, France, the United Kingdom, and Japan, where the highest marginal rates range between 40 and 46 percent.

[Note that Piereson here makes an error in comparing the total tax rates of these foreign countries with the U.S. federal rate; adding in state and city income tax here in the U.S. makes the true top rate closer to 50 percent in some high-income parts of the U.S., e.g., New York City and California]

Payroll taxes [40 percent of federal revenue] fall more heavily upon working- and middle-class wage and salary income earners than upon the wealthy, whose incomes come disproportionately from capital gains or whose salaries far exceed the maximum earnings subject to those taxes.

Turning to the spending side of fiscal policy, we encounter a murkier situation because of the sheer number and complexity of federal spending programs. The House of Representatives Budget Committee estimated in 2012 that the federal government spent nearly $800 billion on 92 separate anti-poverty programs that provided cash assistance, medical care, housing assistance, food stamps, and tax credits to the poor and near-poor. The number of people drawing benefits from anti-poverty programs has more than doubled since the 1980s, from 42 million in 1983 to 108 million in 2011. The redistributive effects of these programs are limited, however, because most funds are spent on services to assist the poor and only a small fraction of these expenditures are distributed in the form of cash or income.

As it turns out, most of the money goes not to poor or near-poor households but to providers of services. The late Daniel Patrick Moynihan once tartly described this as “feeding the horses to feed the sparrows.” This country pays exorbitant fees to middle-class and upper-middle-class providers to deliver services to the poor.

The American welfare state was built to deliver services rather than incomes in part because the American people have long viewed poverty as a condition to be overcome rather than one to be subsidized with cash. Many also believe that the poor would squander or misspend cash payments and so are better off receiving services and in-kind benefits such as food stamps, health care, and tuition assistance. With regard to aid to the poor, Americans have built a social-service state, not a redistribution state.

As one NBER study bluntly stated: “Social Security does not redistribute from people who are rich over their lifetime to those who are poor. In fact, it may even be slightly regressive.” This is partly because wealthier recipients tend to live longer than others and partly because they are more likely to have non-working spouses also eligible to collect benefits.

… the people and groups lobbying for federal programs are generally those who receive the salaries and income rather than those who get the services. They, as Senator Moynihan observed decades ago, are the direct beneficiaries of most of these programs, and they have the strongest interest in keeping them in place. The nation’s capital is home to countless trade associations, companies seeking government contracts, hospital and medical associations lobbying for Medicare and Medicaid expenditures, agricultural groups, college and university lobbyists, and advocacy organizations for the environment, the elderly, and the poor, all of them seeking a share of federal grants and contracts or some form of subsidy, tax break, or tariff.

What can we as citizens do about this? Perhaps save ourselves a lot of time by not listening when a politician promises to do something about the poorest Americans! We can be pretty sure that their ability to spend cash will be almost nonexistent, regardless of the tax rates applied to society’s highest earners.

Burning Man: The Musical

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Today is the official start of Burning Man. If you’re not on the Playa and without Internet access, enjoy Burning Man: The Musical.

Higher tax obligations from the “American Taxpayer Relief Act of 2012″

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A recent newsletter from the bank notes that the American Taxpayer Relief Act of 2012 effectively saddles people with an income over $258,000 with higher tax rates. The higher effective rates come from the fact that these individuals can’t deduct the full amount of mortgage interest, state tax payments, charitable contributions, etc (for a person with a high enough income, only 20 percent of the amounts spent can be deducted, thus resulting in a tax reduction of only about 10 percent of the amount spent/donated).

Readers: What are some other examples of federal laws whose names suggest the opposite of what the law does?

Related:

Most published research is false (redux)

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If you’re a fan of “Why Most Published Research Findings Are False” (2005; Ioannidis), you’ll be interested to know that Professor Ioannidis’s work has in fact been reproduced. See “Many Psychology Findings Not as Strong as Claimed, Study Says” (nytimes) and “Estimating the reproducibility of psychological science” (the paper; full text available).

One of my MIT graduate school classmates commented on this article: “When there were only a couple of climate scientists, they were probably reasonably good. Now that it is a popular discipline, they are approaching in quality the average of the population… And that is without taking fads and funding pressure into account.”

Massachusetts legislature prepares an attack on the local aviation industry

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Our Legislature is once again taking up the idea of taxing new aircraft (Avweb), which drives the small airplane folks over the border into New Hampshire and the big airplane folks to Advocate Tax for a “solution” (starts with the aircraft owned by an LLC somewhere other than Massachusetts, presumably).

[Plainly nobody is going to pay $6.25 million in sales tax on a $100 million Gulfstream if the plane, pilots, and mechanics can be based in New Hampshire and the plane can swoop in, pick up the rich people, and fly out (has the effect of doubling aircraft noise for neighbors since there are two operations instead of one).]

I had wondered why PlaneSense, whose owner lives in Massachusetts, hadn’t moved down from New Hampshire (huge base that generates lots of jobs) when Massachusetts went tax-free for aircraft. Presumably the owner figured out that the Legislature wouldn’t be able to resist reinstating the tax. Smart guy!

Bernie Sanders would be proud, presumably…

What does it mean when a rich person expresses ardent support for Bernie Sanders?

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One of my wealthiest friends on Facebook has, over the past few weeks, posted more than 50 items about Bernie Sanders and/or her passion for Bernie Sanders. A recent example was a photo of a Bernie Sanders bumper sticker affixed to her shiny new BMW (BMW badge also in photo). She’s a stay-at-home wife to a partner at a law firm with annual profits per partner of roughly $3.5 million (i.e., her husband very likely earns in that neighborhood). As far as I know she spends almost all of her husband’s income. They live in one of the most expensive neighborhoods in the United States and recently expanded their already sizable house despite the fact that their children have departed for (expensive private) colleges. With Sanders promoting ideas such as a 90-percent federal tax rate on income over $1 million (with state tax that would be nearly 100 percent), her Facebook postings are tantamount to her saying “I want the government to cut my spending power roughly in half.” But she could already cut her spending power in half by donating the majority of her husband’s income to charity and this she does not do.

Readers: What’s going on here? I can understand why people with low incomes would support Sanders but why a rich person whose lifestyle he is supposedly targeting for reduction?

Nation of victims: the Inspector General’s perspective

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I attended a wedding this weekend in Massachusetts (a healthy percentage of the upper-income attendees had been defendants in custody, child support, and alimony lawsuits so people were a little less sentimental than in other states (Best Man: “[the groom] said that if I did a good job today that I could be best man at the next one.”)). As it happened I was seated next to a retired U.S. military officer who had been “inspector general” for eight years on a base with about 1200 members of the military.

What were his office’s responsibilities? “The majority of the work was handling complaints about discrimination or harassment,” he responded. “Mostly women complaining about sex discrimination but also some race discrimination complaints.” What percentage had merit? “About one percent,” he said. “If these people had put half of the effort that they put into pursuing complaints into working the base would have been about twice as productive.”

I thought of that conversation today while watching television in our local airport lounge. The man who murdered Alison Parker and Adam Ward in Roanoke, Virginia (Wikipedia) was a frequent flyer in the American grievance system, having sued one employer for race discrimination and threatened a second employer with an Equal Employment Opportunity Commission complaint.

Related:

Extreme power reduction in a Cessna 172

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Nightmare for flight instructors: Nasa drop-tests a Cessna 172 from 100 feet: on YouTube. Maybe a good reminder to students to maintain airspeed and keep a touch of power in for normal approaches and landings…

(The goal was to test emergency locator transmitters (a selection) that are supposed to start transmitting in response to high G forces.)

Parent’s view on topless women in Times Square

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A friend arrived in Manhattan with his three children just in time for the press to erupt with stories about topless women in Times Square (e.g., nytimes, Daily News). His response to the complaints that this kind of, um, exposure would be bad for children: “It is not even in the top 100 things in NY that can harm children.”

Petco: Private Equity home run

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“Petco Files IPO, Plans Return to Public Markets” is a Wall Street Journal story about Petco, which keeps going back and forth between private and public. The private equity guys last purchased the company from public shareholders in 2006 for $1.7 billion. Now they will sell it back to the public for $4 billion. So a starting theory could be that they collected $2.3 billion from the public shareholders. “8 Takeaways from Petco’s IPO Filing” is a follow-up WSJ piece noting that “Since TPG and Leonard Green took Petco private, they’ve received two dividends. The first one came in 2010, when Petco made a cash payment to its PE owners of roughly $700 million. Moody’s estimates this payment returned over 85% of the equity invested in the company by its owners. In 2012, the company made another dividend payment of roughly $589 million.” In other words, whatever the private equity guys put at risk has been completely paid back. The money that comes from this IPO and the value of their remaining holdings will be gravy.

Presumably it is successes like this that keep people excited about private equity.

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