Income Inequality Question #2: Is cash wealth the right measure?

As noted in yesterday’s posting, income inequality has captured the imagination of our politicians and they now spend a lot of time reminding us that some Americans are way richer than we are. As I wrote back in December, income inequality doesn’t surprise us when we look at tennis players or novelists, but at least some politicians are able to get the public’s attention citing statistics about workers across different fields of endeavor.

Measured in terms of cash it is beyond dispute that Goldman Sachs partners, medical doctors, and public company CEOs have pulled much farther ahead of the average worker than in, for example, 1950 or 1900. But I’m wondering if cash is the right measure.

Due to the rise of universal health care in most developed countries (e.g., 1948 in the U.K.) and public hospitals (mid-1800s) and Medicaid (1960s) in the U.S., the rich and the poor now have pretty much the same health care in most countries (and die within a few years of each other, life expectancy-wise). The rich and the poor have the same access to the Internet and to mobile phones; compare to 50 years ago when an immigrant might have to spend a day’s wages to make a phone call back to the old country. The rich and the poor have the same access to the most popular forms of entertainment, i.e., movies, television shows, and video/tablet games.

If one were therefore to look at health care, entertainment, and communications, one would conclude that America’s income/lifestyle disparity was narrowing.

Middle class people get a lot of enjoyment from dating and sex. How about rich people? The economist or politician will point to a statistic showing that a rich person has 50 times the income of the middle class person and we need to be envious. But could that person with 50 times the income date people whose company is 50 times more enjoyable? Have sex 50 times more frequently? From the stories that I have heard, it is unclear that overall rich people get more out of dating and sex and middle class people. One of the guys in my pilot circle thought that he was having some harmless fun with a carefree 25-year-old. He was able to take her on a couple of trips that wouldn’t have been affordable for a middle class man. But after a few months she presented him with a positive pregnancy test result, an Excel spreadsheet showing the millions of dollars in child support that he’d have to pay over the next 23 years, and a lawyer ready to negotiate the sale of her abortion for $250,000 (plus the cost of the procedure and attorney’s fees). A divorce litigator in Los Angeles that I interviewed told me about a woman who had a brief encounter with a wealthy man in New York City, then flew her pregnant body to California in order to get around a New York law that caps child support at roughly $50,000 tax-free dollars per year. When the baby arrived she sued the guy in California for $1.5 million per year (times 18 years = $27 million) arguing “Why should my child have to look at the Mona Lisa as a picture in a book when I can charter a Gulfstream, fly him to Paris, and hold him up above the crowd to see the real thing?”

Middle class people get a lot of enjoyment from marriage and children. As noted in this posting about Jane Austen, in the old days there were people who married for money but they had to stay married to keep the money and the lifestyle. With the availability of no-fault divorce in all 50 states, as well as a legislative and customary preference for sole custody to one parent in many states, plus the doctrine that a rich defendant should pay a less-rich plaintiff’s legal bills, the rich person becomes a target for a mercenary marriage. While a middle class couple is gaining a deeper mutual understanding and settling into the routine of having children in K-12, the rich person is likely to be defending a divorce lawsuit, facing the loss of his or her parental role (except every other weekend), and paying the legal bills on both sides. These academics found that the probability of being sued for divorce rises linearly with what a plaintiff can expect to collect. One of my high-income friends just finished writing $130,000/year tax-free child support checks to the woman to whom he was married for two years back in the 1990s. “I was supporting my ex-wife, her new husband, and the boyfriends she was cheating on the new husband with. My daughter was in public school and maybe $5,000 per year trickled down to her. Though my ex-wife and her lawyer had insinuated that I was molesting my daughter, as soon as she got the cash she wanted to be out having fun with her friends. She used me as a free babysitter for about half the time. Not a day went by when I wasn’t angry about what my ex-wife got away with, though of course it was all perfectly legal under Massachusetts law.” A middle class person is statistically more likely to be married for love and to stay married. A middle class man is statistically more likely to be able to enjoy the company of his children (wealth/high-income women are sometimes the targets of for-profit marriage but it is difficult in most U.S. states for a father to use litigation to take the children away from a mother).

What if we look at houses and cars? It is indisputable that rich people have more and fancier houses and cars. But on the other hand how much value do they get out of these things? A person with 10 houses can use only 1 house at a time. The economist would point out that this person has 10X what the rest of us have and if he or she acquired two more houses, 12X what we have. Similarly with cars. A rich person has a $1 million stable of exotic cars in which to drive around and impress other rich people. A poor person has a 10-year-old Dodge Caravan worth $3000. So a politician would say that the rich person is 333X better off but it would be just as easy to note that both will get through traffic in LA at the same rate. The rich person cannot drive multiple cars simultaneously. The rich person does not own a car that can hold more friends or family than the poor person’s Dodge Caravan.

In the bad old days, therefore, the rich person had a lifestyle that was not recognizable to an average person of the time. There were servants, doctors when necessary, communications with foreign lands, a box at the opera, a horse or a touring car instead of walking, a spouse from a good family, private tutors for the children, etc. As noted above, the rich person today may get less enjoyment from family life than the middle class person. The people who are paying the new wealth transfer taxes, e.g., the Obamacare taxes that start at $200,000 per year in income, will have a similar medical care experience, similar options for entertainment and communications on most days, and will get around in a similar way, albeit in a much newer and more expensive car.

If we look at statistics we can imagine an investment banker driving around the Hamptons in his Rolls-Royce , while his other 5 houses and 7 cars sit idle. We can see him walking in the door to an adoring wife who “loves him for himself” and four well-scrubbed children. We can imagine that he has hired a string quartet to play Mozart in the dining room during the family dinner. After dinner, nobody in the house reads a Kindle, watches Netflix, or surfs the Web because they have better and different “rich family” things to do with their time. The Harvard Medical School graduate drives out from Manhattan to make a house call the next morning when Little Johnny wakes up with a tummy ache.

But what if this guy doesn’t exist? Why are we putting so much energy as a society into figuring out how to tax these non-existent rich people who are supposedly pulling away from the rest of us in terms of quality of life?

22 Comments

  1. lelnet

    February 1, 2014 @ 12:29 am

    1

    “So an economist would say that the rich person is 333X better off but it would be just as easy to note that both will get through traffic in LA at the same rate.”

    An economist would say no such thing, because anyone describing himself as an “economist” would have at least passed a 100-level economics course at some point in their lives, where they’d have learned about the Law of Diminishing Marginal Utility. Which says, in essence, that the more of some good you already have, the less you benefit from acquiring still more of it.

    There is no arena of human endeavour in which this principle has ever been shown to be absent.

    Which is why, when you compare the lives of the moderately-middle-class with the lives of the wealthiest Americans, you don’t actually find as much of a difference as one would imagine. The super-rich are different in a few significant ways, but not many:

    1. They are mostly immune to fear of predatory legal action against themselves as individuals (except, as you note, by their spouses)…they may still be sued or even occasionally arrested, but they can afford to cover the costs of such eventualities
    2. When they want or need to fly somewhere, they have the means to do so without undergoing a mandatory sexual assault by government employees
    3. Their children will graduate from college without a crippling debt burden
    4. If they launch a business, they can do it with their own money, instead of taking on outside investment too early and thus risking what happened to ArsDigita
    5. If a current or proposed law would be burdensome to themselves, they have the attention of parties in government who can ensure that they will be exempted from it, and likewise they can often affirmatively _bring about_ government action which imposes unreasonable burdens on their would-be commercial rivals.

    These things don’t change their day-to-day lives nearly as much as most people imagine.

  2. philg

    February 1, 2014 @ 1:42 am

    2

    lelnet: Good point. I should have said a “politician” not an “economist”. I will fix the original post.

  3. Turar

    February 1, 2014 @ 2:14 am

    3

    I still see few key differences.
    - Power. (See Koch brothers, Murdoch, etc).
    - Freedom. To do whatever the hell you want, start any new enterprise you want, and not be bound by mortgage, college debt, kids’ future tuitions, and employer-dependent health care.
    - Healthcare. Middle class don’t get Medicaid, that’s for poor. Middle class go bankrupt in case of serious health issues.
    - Free time. This is really a subpoint of “freedom”. But yeah, middle class don’t really have that much free time either. Homeless do, but not middle class.

  4. sv

    February 1, 2014 @ 2:37 am

    4

    Rich people fly in private jets to private islands, or cruise there on their yachts, staffed year-round with crew.

  5. philg

    February 1, 2014 @ 12:15 pm

    5

    sv: Good point regarding billionaires, but the new wealth transfer taxes are targeted more at $400,000/year primary care physicians in Oklahoma (friend of a friend was just offered a job there; he currently makes less than that in Manhattan). Nobody seems to be proposing to clip the wings (so to speak) of the Gulfstream G-650 crowd. I would tend to agree with you that the life of a billionaire is very different, but I don’t know any billionaires so I can’t say. Maybe when they’re in the back of their Gulfstreams they pull out the same iPad that we might and play the same game…

  6. Brian Gulino

    February 1, 2014 @ 2:04 pm

    6

    You need to hang out with poor people more often.

    Take your kids to a free clinic instead of a private doctor. Send them to a public school where you’re worried about their safety. Get a legal aid lawyer instead of a private attorney and therapist when they are arrested for drinking underage or smoking pot.

    As a 64 year old attorney’s son, what I find has changed since my childhood and youth is that, yes, everybody has the same consumer goods (reliable cars and big screen TV’s), but the rich and upper-middle class have managed to opt-out of many public and shared services, particularly for their children. Their kids play on different streets, go to different schools, eat different foods (Whole Foods vs. Safeway/Von’s), and exercise at different Gyms (YMCA @$1,000/year vs. Boys & Girls Club $ $6.00/mo). It really is quite striking.

  7. Neal

    February 1, 2014 @ 2:21 pm

    7

    There is something to the idea that focusing on income misses part of the story. As near as I can figure, the rich have captured all of the income growth over the last few decades. However, that only accounts for about 75% of GDP growth. The remainder seems to have gone for health care which is distributed more equitably through insurance and government programs. So yes, while income is generally flat most people have (presumably) benefited from more health care spending as well as the dramatic fall in prices for certain goods and services (e.g. communication & computing). At least, if these developments haven’t been beneficial it isn’t an inequality problem.

    The best reason to be concerned about inequality is its impact on the health of the overall economy. It does look like there is too much money sloshing around at the top reducing the velocity of money and producing bubbles as all that money chases limited investment opportunities. Another reason for concern is that the recent distribution of GDP growth is different from that in the post WWII era. To the extent that this change indicates the rules of the game have come to excessively favor the rich, it is a symptom of a problem which must be corrected through policy changes.

    If you are going to develop arguments like this via personal anecdote, I think you also need to provide some anecdotes from working class and poor people. Anyway, this post does provide a nice exposition of the argument for progressive taxation.

  8. Anonymous

    February 1, 2014 @ 3:21 pm

    8

    I think you make an excellent point. Progress makes all of us much better off. Any factory worker in the EU or the US is far better off than a European king in the XVI century. I would rather be middle class (whatever that means) in 2014 America than rich sixty years ago. The $400k watch of Tom Perkins (the guy who recently compared the plight of the rich in the US with the Holocaust) does not tell time any better than my $14 Timex. The fact that people like Tom Perkins can make millions in this society also shows that stupidity is not a barrier to economic success. Uneducated rich people (of whom there are many) cannot enjoy many intellectual pleasures available to any person who has the right talent and training.

    The drama in this society is not “the gap between rich and poor” but the terrible education that many of our young people get.

  9. jay c

    February 1, 2014 @ 10:04 pm

    9

    On the East Coast, I knew some kids who were from WASP families. They always had the following characteristics:
    1) parents drove junky cars, like a Volvo 240DL or a Mercedes 300D –low personal property tax!
    2) family only had a small TV set which was used to watch PBS mostly
    3) family always took amazing vacations, like to Italy for the entire summer, or to their summer house in California
    4) Multiple houses in differnet places, like say Coronado Island or Florida they would rent out when not staying in them
    5) parents would spend a lot of time with their kids

    Sounds like a nice life to me.

  10. Johnny Caustic

    February 2, 2014 @ 1:49 am

    10

    There are no biblical poor left in America; everybody gets enough to eat and a roof over their heads except those too mentally incompetent or drug-addicted to take the basic steps to accomplish that. Once the basic needs of life are met, research shows that additional wealth doesn’t seem to produce much additional happiness. Sure, there are still major differences between rich and poor (as the commenters above tirelessly list), but it has always been so and always will be so. The question is, how much more should we try to level those differences by taxation?

    I think that these politicians are promoting the new communism. The core goal is to inspire in people the worst of emotions, Envy. Some do it for electoral gain, and some do it because they’re ideological true believers in the principles of communism, though they would never agree to call themselves Communists.

    When you hear people promoting “equality”, they really mean “Envy”. The appeal to Envy has produced a culture of resentment and entitlement that has become standard operating procedure in America. Ironically, resentment and entitlement erase gratitude, and no person can be happy without gratitude. So at bottom, Envy produces a culture of misery. American blacks, for instance, were a happier people before the Civil Rights Movement, even though they’re objectively wealthier now.

    Not to say we shouldn’t support efforts to remove governmental special favors for the rich–but it’s not the job of government to stop the rich from being able to buy a better life on the private market. The focus should be on whether the minimum needs of the poor are met, not whether the rich are enjoying themselves too much.

  11. Mark

    February 2, 2014 @ 7:26 am

    11

    To anyone here who wants a better aka wealthier lifestyle:
    Get to work. DO SOMETHING instead of complain about what you don’t have.
    It reminds me of little kids whining.
    This country is still the land of opportunity. Don’t believe me? Ask virtually any immigrant.

  12. bjk

    February 2, 2014 @ 8:54 am

    12

    These points can be made all day long, nobody cares. Inequality isn’t about inequality. If it were, we’d have less immigration and McDonalds would pay enough to support a family. Ultimately inequality is about not being able to buy a house in as good a neighborhood as your parents did, and then looking at that guy in college who wasn’t that bright but just bought a $2M house. That’s what gets people angry.

  13. Eric Shun

    February 2, 2014 @ 2:36 pm

    13

    @Turar: “Middle class go bankrupt in case of serious health issues.”

    How so? I’ve never met a middle class person w/o health insurance; in fact, having employer-sponsored health insurance is arguably a component of being middle class. And, pre-Obamacare, if one lacked an employer-sponsored plan, one could buy their own catastrophic health insurance for fairly low cost. All health insurance plans have a reasonably low out-of-pocket maximum. A middle class person w/ health insurance will not go bankrupt due to health issues.

  14. Robert

    February 3, 2014 @ 11:39 am

    14

    Being a middle class wall street worker bee, I agree that my lifestyle wouldn’t be all that different if I was wealthy. I can pay all my bills and live in a comfortable middle class house and even a nice car. However, I think the HUGE difference between the wealthy and the middle class is that the wealthy can choose not to spend 12 hours of his waking moments going to work.
    Time is the most valuable asset, most people are awake 16 hours a day. Comparing 4 hours of free time per day with 16 hours, I would argue the wealthy have 4x the life expectancy than the middle class! Now that’s worth getting rich for.

  15. Steven

    February 6, 2014 @ 6:23 am

    15

    The comfortable middle class are almost as comfortable as the comfortable rich. Not like snipped billionaires
    http://www.telegraph.co.uk/news/worldnews/northamerica/usa/9114385/CNN-founder-Ted-Turner-spends-one-week-each-month-with-a-different-girlfriend.html
    But they enjoy life. Even if they have to work.

    The uncomfortable middle class and uncomfortable working class would benefit quite a bit from getting more money for their work/better tax breaks, though.

    And, as some rich guy puts it, that would also benefit the rich: http://www.youtube.com/watch?v=CKCvf8E7V1g

    A smart, non-corrupt market and some smart taxation of the rich, middle class and poor are usually a way to get to the greatest happiness of the greatest number of people.

    And yes, I do know that creating a smart, non-corrupt market
    http://blogs.law.harvard.edu/philg/2014/02/02/is-russias-sochi-project-more-corrupt-than-the-u-s-military
    or a smart taxation is hard. i don’t think we’re done improving things even if the comfortable, shrinking middle class is comfortable.

  16. Mike

    February 9, 2014 @ 5:40 pm

    16

    Phil said: “But what if this guy doesn’t exist? Why are we putting so much energy as a society into figuring out how to tax these non-existent rich people who are supposedly pulling away from the rest of us in terms of quality of life?”

    That happiness generally doesn’t increase as wealth exceeds a certain level strengthens the an argument for reducing, through tough labor laws, unionization, and progressive taxes, the people in the position of wasting their money on luxuries they don’t even really enjoy that much.

    Not to be too hard on this author, whose talk about poor people is jarringly out of touch, but I would gladly see him suffer the loss of a few private plane rides every year so that more poor kids can go to preschool.

  17. philg

    February 9, 2014 @ 7:44 pm

    17

    Mike: The idea that the government can take away from me some private plane rides and send poor kids to preschool is certainly an appealing one. But I don’t think that it is a new or untested idea (see 1970s Sweden for example). Your idea depends on some assumptions, including (1) that government-funded preschool will have a limited cost (unlike government-funded K-12, which turned out to have unlimited costs, when you include pension obligations), (2) that higher tax rates on people like me won’t reduce our inclination to work, (3) that current tax rates are not already yielding the maximum that the government can collect.

    I see this most clearly with my female medical doctor friends. Many of them simply choose not to work and/or work very limited hours. How can it be that a person who can earn a salary of $300,000 to $500,000 per year would elect not to work? They’re married to men who make enough money that the family would have to pay 40-50 percent of the doctor’s income in taxes to state and federal governments. The after-tax spending power of a doctor’s wage is not sufficient to motivate them to leave the house. So what seemed like a guaranteed $150,000+/year income stream for state and federal governments turned out to have a value of $0. (See http://www.nytimes.com/2010/10/10/business/economy/10view.html for Harvard econ professor Mankiw’s analysis.) And, since the U.S. already has fewer doctors per capita than most other developed countries, you will end up waiting months for an appointment and paying a very high hourly rate to the doctor that you are finally able to see.

    After discouraging from working the rich people who are supposed to pay for hand-outs, hand-outs based on not having a job discourage poor people from working. You’d think that would have been obvious, but the Congressional Budget Office report that free Obamacare would cause 2 million (relatively poor) people to withdraw from the labor force was exciting news. Here in Cambridge two adults who elect to have children but not work will receive housing, health care, food stamps, and other benefits with an after-tax value of over $100,000 per year. If they were to get jobs they would lose all or most of that. (Check out http://www.cnn.com/2014/02/05/showbiz/octuplets-mom-welfare-fraud-charge/ for how the Octomom is in trouble because she collected Welfare in California for her 14 children but “did not report nearly $30,000 in earnings.”)

    And of course one also sees it with alimony and child support. There are plenty of people in Massachusetts who are unable to work until their children all have turned 23 and they can’t collect child support (top of the guidelines for a single child is $40,000 tax-free dollars per year, but judges can award $100,000 per year or more; the cash stream is reduced, however, if the recipient gets a job) anymore. They find jobs a week after their youngest child’s 23rd birthday. In states with lifetime alimony there are plenty of adults who formerly had jobs that turn out to be incapable of ever reentering the work force.

    European countries that went down what is now the U.S. road (higher taxes, more free stuff from the government) eventually had to back up (lower tax rates, cut back on free stuff) because their economies were not growing fast enough to generate sufficient tax revenue to keep the government fed. Remember that the U.S. government cannot survive on current tax revenues. https://www.cbo.gov/publication/44521 has some curves that don’t look too scary. Federal spending grows only to 26 percent of GDP (so federal and state government combined would be about half of the economy (compare to less than 20 percent in Singapore). But this builds in assumptions that the U.S. GDP will continue growing at close to 3 percent per year.

    So you’re right that the nation would be happier if consumption were equal across all families, since people who are currently poor would enjoy a marginal dollar of spending more than a person who is currently rich. But if you can’t find a way to equalize consumption that doesn’t discourage people from working, the economy will shrink to the point that even a 100 percent tax rate would not be sufficient to pay debts, pensions, health care, and other obligations.

  18. Mike

    February 11, 2014 @ 12:10 am

    18

    Phil,

    I apologize for the sharpness of tone in my message. Perhaps you have your own way of understanding the lives of people living on much less than your means. Your photography and various charitable activities suggest an engagement with people that is commendable.

    What remains, however, is frustration with your generalizations. Where do I start? Lets see…

    1. That rich and poor have equal access to technology in developed countries:
    That is simply not true about the United States. Over 100 million lack broadband, which, in its current form, is vastly inferior and much higher priced than in many other places, including Sweden and Korea, due to the cable and telco cartel. I could keep going on, but you get the picture. More about the basic issue here: http://en.wikipedia.org/wiki/Digital_divide_in_the_United_States#Income

    2. That rich and poor get pretty much equal healthcare: Wrong again. Yes, the same doctors often treat all classes of people (albeit not in the case of concierge medical practices for the wealthy), but there is no question that uninsured people, who are disproportionately the working poor (many with jobs with no health benefits) get less treatment and often too late.

    3. That disparities are narrowing: So, in some cases that is true: To wit, my kids and I got to play an Android version of Zork while waiting for dinner at Denny’s a few days ago, while in 1979 only a few well compensated professors and elite geeks who got accepted into MIT and had PDP 10 privileges could do the same, while we would have been stuck with peg board until we got home to play pong. And no doubt, Wikipedia obviates the need for the poor folks who are not on the bad side of the digital divide to fork over a thousand bucks for an Encyclopedia Brittanica. But in many meaningful contexts these disparities are growing far worse: Look at the skyrocketing price of higher education, now run largely by exploited adjuncts, compared to what it cost in, say, 1970. Healthcare is also a grotesque example of predatory economics, with winner-take-all compensation disparities between various professionals, and insurance and drug industries that extract large amounts of wealth from the industry for very little value in return. And what about housing, and the outrageous bubble and collapse that has destroyed, disproportionately, the meager net worth of working class homeowners and minorities? I could go on, and on, and the data to substantiate each of the claims above is not really controversial.

    Current social welfare programs (“free stuff”) and high taxes in high incomes discourage work: Yes, I agree with you, lets find away to reduce this problem. One way to start would be to be realistic about the nature of the problem rather than fixate on hysterical anecdotes out of the tabloids about Octomom and her massive welfare graft, or those few idle M.D.’s you know who would rather not pay 50 percent. Furthermore, you made no mention of another major problem, which is that work is generally taxed, in this country, at a higher rate than passively accumulating wealth. It’s a dangerous outrage, and the solution is obvious. However, the political will to solve this problem is impossible to obtain when it isn’t just ordinary rich folk like you who, arguably, earned a substantial part of your wealth through work who control policy, but those much richer than you who really don’t work for a living, but just own capital.

  19. philg

    February 11, 2014 @ 5:32 pm

    19

    Mike: That I have voluntarily spent roughly $2 million of my own money on charity over the years does not mean that I am an advocate for higher tax rates and increased government spending. The government does a lot of things with the money that it collects that I would not choose to do.

    You point out that the U.S. has inferior broadband to Korea. http://www.heritage.org/index/country/southkorea says that the South Koreans give 30 percent of their GDP to government. The U.S. spends roughly 40 percent according to the same source and some of that increased spending is to pay for various government subsidies for telecom as well as plentiful regulation. Our experience compared to Korea would not seem to support your argument to increase the government’s share of the GDP and role in our economy.

    You suggest that you will tax people who work and give money to people who don’t work, but “lets find away to reduce this problem [of welfare schemes discouraging people from working]“. The Scandinavians tried to do this, but failed and ultimately ended up cutting tax rates (Sweden, for example, currently has a corporate tax rate this half of the U.S.’s). So your suggestion is equivalent to saying “We are much smarter/better than Scandinavians” and “America is uniquely creative and capable.” This is a comforting thought, but right now we are meeting the Norwegians at Sochi and they are earning more than 100X the number of Olympic medals per capita. Could it be that we persistently overestimate ourselves?

    Without any data you assert that there are “few idle MDs who would rather not pay [our 50 percent tax rates]“. There are, however, enough of these comparatively idle female MDs to have inspired journal articles going back at least three decades. See http://www.ncbi.nlm.nih.gov/pubmed/6240467 , for example: “Contrary to conventional wisdom, shorter work weeks for women physicians are not the result of child care responsibilities.” See http://www.anderson.ucla.edu/faculty/keith.chen/papers/GenderNPV_WorkingPaper.pdf for something more recent.

    You complain that people aren’t taxed when they “passively accumulate wealth” (e.g., Warren Buffett with his unrealized capital gains (note that he proposes higher tax rates on everything other than unrealized capital gains, i.e., advocating for higher taxes on everyone other than himself)). So I assume that you want us to apply our much-smarter-than-Scandinavian brains to the challenge of taxing unrealized gains. But what happens in a year when the market goes down? Do we now have to send a $1 million check to an orthodontist whose retirement stock portfolio went down?

    So basically you’re saying that there is an untapped pot of gold here in the U.S.: rich people who won’t move their investments to other countries, high-income doctors who will keep working 80 hours per week even if 70 percent of their income is taxed away, etc. At the same time our politicians, always enthusiastic about taxing and spending more, have been too stupid to recognize that this pot of gold is right under their noses. And then that you’re going to come up with new ways of giving money to people with the condition that the money will stop if they get a job. Your new ways, as yet unspecified, will not discourage anyone from getting a job, which is why the U.S. economy will continue to grow at a 3 percent rate and therefore create a large enough tax base for our government to meet most of its pension and health care commitments.

    Check out the mayor of Detroit’s optimistic “state of the city” address in 2008: http://www.c-span.org/video/?204231-1/CityAdd

    Note how enthusiastic the audience is when he says “We have spent more on the fire department in the past six years than has been spent in any comparable time in our city’s history”.

    I don’t think that anyone in that room expected that the city would file for bankruptcy protection five years later.

    It is easy for Americans to see opportunities to collect new taxes and also to see opportunities for worthy things that a government mind do with additional spending. It is apparently not easy for Americans to see or foresee a shrinking tax base, which, due to the fact that we commit to spending without putting money aside to pay for it, must inevitably lead to bankruptcy (city) or insolvency (state/federal).

    But really all of this is off-topic. The original posting is not about new ways to tax people and/or new ways to provide government handouts. It is about whether we are all being played by our politicians into worrying about a non-existent problem.

    A simpler way to look at this would be to imagine that we had allowed 30 million poor immigrants to settle in the U.S. They would arrive with no savings, no job skills in a modern economy, and no ability to speak English. A politician would then be able to cite a statistic that 10% of Americans were helpless and poor and we had to vote to elect him and his party so that they could change our laws to deal with this inequality.

    Another simple way to look at this is that politicians remind me that I am comparatively poor because I cannot afford a $50 million beach house in East Hampton and a Gulfstream G-650 to fly to Davos every year to hang out with other rich people. Yet until they reminded me of that fact I had never once wanted to go to the Hamptons for any reason nor had I wanted to go to Davos. So what problem are they solving for me by denying to a Wall Street lord the ability to buy such a house or such a plane?

  20. Neal

    February 11, 2014 @ 6:19 pm

    20

    Marginal tax rates aren’t the only thing keeping 2nd earner physicians from working. As described in the original posting, there is also the diminishing marginal utility of that second income. If $150K/year after taxes is insufficient to motivate someone to work full time (sufficient motivation for over 95% of the population), who is to say that $200K or $250K will be?

    At the end of the day, we tax income not utility. Since *all* of the increase in income over the last several decades went to a small group of people, it makes sense to target any income tax increases at that same small group of people. Even if we don’t want to raise income taxes, I wouldn’t say we can call income inequality a “non-existent problem”.

  21. Mike

    February 13, 2014 @ 12:57 pm

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    To clarify my views:

    1. I support increasing taxes on realized capital gains, not unrealized.
    2. Reducing perverse disincentives to work or innovate does not necessitate eliminating the welfare system, or maintaining our historically low tax rate on the highest earners.
    3. I disagree with your initial argument, if what you wrote (as I understand it) qualifies as such, that there is no reason to tax rich people (purportedly to allow others to have a higher standard of living) because wealthy people don’t live as great of lives as one might think. I countered with an argument that misery and dissipation among the rich is a reason (and not necessarily one I agree with) to take more money out of their bank accounts through taxation that will distribute the wealth downward. This was a rejoinder to a (as I see it) bad argument, rather than a serious case for progressive taxation. There are other, far better cases for progressive taxation than as a judgement on the merit of how wealthy people spend their money or feel about their lives.

    Your final illustration of the “non-problem” of our country being a refuge to poor, uneducated refugees only makes sense so long as our economy and culture work to provide opportunities for education and to earn a living. If you think that this mobility into self-sufficiency where basic needs have been met (“prosperity” would be the wrong word) is possible apart from politics and policy (ie. governance), you think something I disagree with. The whole of the twentieth century’s boom in middle class prosperity (which is now over) would not have been possible without the power of government as a counterforce against the concentration of wealth and power in the hands of a few.

    So, yes, who cares about whether a Davos-bound Gulfstream flying billionaire owns a 50 room pile he built atop a gilded age teardown in the Hamptons?

    Like you, I don’t either on a personal level. But this isn’t all about you or all about me. It is about what is good for society and what is good for the planet. The tendency of wealth to concentrate and comandeer huge amounts of natural resources for private benefit (although benefit is not a great word here) while excluding huge amounts of humanity from the possibility of having basic needs met is a serious problem, and one that has been around for a very long time.

  22. philg

    February 13, 2014 @ 11:44 pm

    22

    Mike: I must not have expressed myself clearly about the 30 million poor immigrants. My point was that politicians who want to get voters excited about “inequality” can trivially engineer “inequality” as it is currently measured. Let in some poor immigrants and the statistics will look as dreadful as you need them to be. That doesn’t mean one should change laws and policies on what had previously been a functional economy.

    As for the rest of your ideas, they all boil down to “I am smarter than current politicians so I know how to squeeze more juice from this economic lemon.” So you’re going to raise taxes on capital gains but your tax increase, despite reducing the effective return on investment, won’t reduce investment in domestic enterprises.

    And you’re also going to increase the amount of cash that flows into Washington, D.C., but somehow you are going to eliminate the ability of government cronies (such as the few who hold the “concentration of wealth and power” that you mention) to collect those new cash streams. If I were wealthy and powerful enough to influence the federal government I would be delighted to see higher taxes and a larger federal government since I would know that those new tax receipts would eventually end up in my pocket.

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