Welcome to Income Inequality Kos.
Join us Thursdays, at 9:00 p.m. eastern. We discuss income inequality, concentration of wealth, and related issues.
Previous diaries in the series can be found by the tag Income Inequality Kos, or by a series history.
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Emmanuel Saez
Emmanuel Saez is a professor of economics at University of California Berkeley.
On Tuesday, Saez was awarded one of 23 MacArthur "genius" Fellowship grants for 2010.
This diary is a brief introduction to some of his academic work and themes.
I think inherently the study of inequality is interesting precisely because regular people care about inequality. When they see statistics of income equality increasing, poverty statistics, they react strongly. It does have an impact on how they feel, and hence the decision they will take in the political arena.
Emmanuel Saez
Themes and Emphasis
- An emphasis on stratification even at the top income levels. Charts showing distinctions of top 10%, top 1%, and top 0.1% income levels are common in his work.
- The income shares of the 90 to 99% income levels have been more consistent. The income share of the top 1% shows enormous fluctuations. Changes in overall concentration of wealth are highly related to changes of the top 1% share.
- A demonstration that the recent concentration of wealth comes from a surge in wage compensation at top income levels. Salaries and bonuses are now more important than dividends and interest. The current extreme concentration of wealth is closely related to the explosion of executive compensation.
- Work on optimal tax policy, how taxpayers at different income levels respond to tax system changes.
- International comparisons of concentration of wealth.
- The Kuznets hypothesis posits an inverse U-shaped curve for development of concentration of wealth. Concentration of wealth in the U.S. and elsewhere shows the other shape, a U shape. It holds steady for long decades after the Great Depression and World War II, and then surges in the early 1980s. U-shaped graphs need explaining.
- Financial crashes wipe out wealth at the highest levels. The effect is temporary. Economic policy determines the long term effect of financial downturns on concentration of wealth.
Income Inequality in the United States
In 1929, capital income was most important at the top income levels. Today, wage compensation is most important. Today's rich are the working rich. Even at the top 0.01% income level.
The surge in top level wages, and extreme executive compensation, are related to the current levels and patterns of concentration of wealth.
The income share of the 90 to 95 and the 95 to 99% income levels has held fairly steady. The income share of the top 1% shows enormous fluctuations, and has a U-shaped graph. Changes in concentration of wealth of the top 1% largely explain overall changes in concentration of wealth.
I've included the above graph merely out of sense of relief, after seeing so many U-shaped graphs showing the steady rise since around 1981. Some things stay constant!
The Evolution of Top Incomes
This rise in top income shares is not due to the revival of top capital incomes, but rather to the very large increases in top wages (especially top executive compensation).
The Evolution of Top Incomes
How Progressive Is the U.S. Tax System?
Over the last 40 years, the U.S. federal tax system has undergone three striking changes, each of which seems to move the federal tax system in the direction of less progressivity.
- There has been a dramatic decline in top marginal individual income tax rates. In the early 1960s, the statutory individual income tax rate applied to the marginal dollar of the highest incomes was 91 percent. This marginal tax rate on the highest incomes declined to 28 percent by 1988, increased significantly to 39.6 percent in 1993, and fell to 35 percent as of 2003.
- Corporate income taxes as a fraction of gross domestic product have fallen by half, from around 3.5–4.0 percent of GDP in the early 1960s to less than 2 percent of GDP in the early 2000s (for example, Auerbach, 2006). Meanwhile, corporate profits as a share of GDP have not declined over the period, suggesting that capital owners—who are disproportionately of above-average incomes— earn relatively more net of taxes today than in the 1960s.
- There has been a substantial increase in payroll tax rates financing Social Security retirement benefits and Medicare. The combined employee–employer payroll tax rate on labor income has increased from 6 percent in the early 1960s to over 15 percent in the 1990s and 2000s. Moreover, the Social Security payroll tax applies only up to a cap—equal to $90,000 of annual earnings in 2005—and is therefore a relatively smaller tax burden as incomes rise above the cap.
The contrast between the progressivity of federal taxes in 2004 and in 1960 is striking.
How Progressive is the U.S. Federal Tax System?
In addition to progressive or flat or regressive, and how steep the rates rise, the shape of the progressiveness of taxation is important. The shapes of the overall curves from 1960 and 2004 are reversed. 1960 is concave, 2004 is convex. 1960 has an exponentially increasing quality, 2004 has a logarithmic leveling-off quality.
In 1960, the highest incomes had steeply progressive taxation. In 2004, the highest incomes have very near a flat tax. Corporate and estate taxes had a progressive bite in 1960. Payroll taxes have a regressive bite in 2004. This is a very strong difference in policy.
Striking it Richer
Looking further ahead, based on the US historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s (Figures 2, 3). In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration (Figures 2, 3).
Striking it Richer
The only hope for improving present conditions, restoring employment, affording permanent relief to the people, and bringing the nation back to the proud position of domestic happiness and of financial, industrial, agricultural and commercial leadership in the world lies in a drastic change in economic governmental policies.
Democratic Party Platform of 1932
Papers
A fuller list is available at his academic home page.
Income Inequality in the United States, 1913–2002, Thomas Piketty and Emmanuel Saez, 2004.
Striking it Richer: The Evolution of Top Incomes in the United States, updated 2010.
The Evolution of Top Incomes: A Historical and International Perspective, Thomas Piketty and Emmanuel Saez, 2006. NBER summary.
How Progressive is the U.S. Federal Tax System? A Historical and International Perspective, Thomas Piketty and Emmanuel Saez, 2007.