Here's a chart based on Paul Krugman's writeup of data from the CBO's new "Historical Effective Federal Tax Rates" report. Naturally, the only solution is tax cuts.
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Class Warfare
14 Dec 2007 10:20 am
Comments (46)
Of course, on the flip side, Paul Krugman was continually telling us how bad the economy was in 2001 and 2002. But if you look at the distribution there, it was only bad for the rich:
Percentage change in after tax income, 2000-2002:
Bottom 20%: -2%
Next 20%: 0%
Middle 20%: 1%
Fourth 20%: -1%
Top 20%: -12%
Top 10%: -16%
Top 5%: -20%
Top 1%: -30%
So, as we can see, 2000-2002 was only a bust for rich people. Everybody else's after tax income hardly changed at all. Indeed, truly "middle class" people's income (middle 20%) actually increased during those years that were supposedly the "worst economy in XX years".
So as usually, Paul Krugman is lying with statistics. The rich had a bust in 2001 and 2002. And they recovered from that bust during the next few years.
The non-rich never had a bust, and so didn't have a recovery from the bust.
Wow, Al, those percentage changes of -2, 0, 1, and -1 for eighty percent of the country have really convinced me that the poor unfortunate wealthy are the ones who truly got the shaft.
Income stagnation is awesome!!
"So, as we can see, 2000-2002 was only a bust for rich people."
Flat income at the middle and decreasing income at the bottom sure is wonderful, Al. Those lucky duckies win again.
Who said it was "wonderful" Petey? Not I, so you're making up what I said.
However, we were told by the Left Wing that during the period between 2000 and 2002 the economy was awful - worst economy since Herbert Hoover, as John Kerry told us. And yet the change in after tax income for the bottom 4 quintiles didn't change more than 2%, and the middle class's income actually increased. Flat income change is not wonderful, but neither is it awful.
So if Bush is lying to us now because his "boom" only applies to rich people, then the Left Wing - Krugman chief among us - were lying to us back then when the terrible economy also only applied rich people.
Feel free to offer up a computation of after-tax income shifts by cohort since 2001, Al, if you find 2003 to be an arbitrary or unfair dividing line.
Somehow, I think that the upper income cohorts are going to be doing more than a little bit better than the lucky duckies over the course of this administration.
You can do the math yourself, Petey, but the difference between how the upper income cohort did between 2000 and 2005 and how the other cohorts did in that period is slight. In fact, if you look at Bush's first term alone (without including 2005), the rich did worse than the non-rich - that is, income inequality decreased during Bush's first term.
You know full well that the only solution, pace Mr. Quirk, is something else entirely.
2001-2002 were special dot-com-bubble-burst years. So, I made half a mil in 1999-2000 - never before and never after, that was a one-off spike. 2000-2002 stats don't mean anything.
Jesus. Excellent cherry picking of data from Mr. Krugman and Mr. Yglesias.
Cumulative annual growth rates from 2000 (pre-tax cut) to 2005:
Bottom quintile -- -0.3%
Next quintile -- 0.5%
Middle quintile -- 1.1%
Next quintile -- 0.9%
Top quintile -- 1.4%
Top 10% -- 1.5%
Top 5% -- 1.7%
Top 1% -- 1.8%
Slightly better for the wealthy, sure, but hardly the ridiculous picture redistributionists would have it be. The bottom quintile is definitely a problem, but not one that there's any evidence tax policy would change.
Higher level incomes are always going to be more volatile, being much more closely tied to financial markets, corporate performance and so forth, thus you see a large drop from 2000-02, and a strong recovery from 02-05. I'm pretty sure higher income volatility is NOT what we want for the bottom quintiles.
More data -- Change in Effective Federal Tax Rate 2000-05:
Bottom quintile -- 6.4% to 4.3%
Next quintile -- 13.0% to 9.9%
Middle quintile -- 16.6% to 14.2%
Next quintile -- 20.5% to 17.4%
Top quintile -- 28.0% to 25.5%
Top 10% -- 29.6% to 27.4%
Top 5% -- 31.0% to 28.9%
Top 1% -- 33.0% to 31.8%
How much lower should we take the bottom quintile for their income to start growing again? How much higher should we tax the top 1% to do the same? You're looking for solutions in the wrong places.
Strangely enough, Fred is right, and Krugman's numbers are a bit misleading. In 2000, the top 1% had 15.5% of after-tax income. By 2005, their share had increased to ... 15.6%. The increase in inequality from 2003 to 2005 was exactly counterbalanced by the income compression from 2000 to 2002. (See table 1C here.) Got to acknowledge the facts, no matter who points them out.
Now, it's true that Bush's first tax cuts mostly didn't go into effect until 2002. And they were weighted overwhelmingly toward the rich. But the fact remains, after-tax inequality was the same in 2005 as when Clinton left office.
I think what this points to is that while the Bush administration has been horrible in countless ways, rising inequality is a deeper structural problem that won't be solved just by putting a Democrat in the White House.
Al is a scummy slimy lying slug, who is lying as usual. Al is competing for the scummiest liar of them all.
"hardly the ridiculous picture redistributionists would have it be."
In other words, income inequality grew pretty rapidly from 2000 to 2005...
"I'm pretty sure higher income volatility is NOT what we want for the bottom quintiles."
So the 80% of the folks outside the top quintile may be earning a lesser and lesser share of the pie, but their volatility is lower. Those damn lucky duckies win again!
Is there any way we can stop the poor from screwing the rich?
Al, note that this very time period was also a time in which real estate prices were skyrocketing, driving up rents. So the income stagnation you list was actually an income decline, because they had less disposable income at the end of the month. By the nature of things, this was going to hit the lower brackets much, much harder.
"rising inequality is a deeper structural problem that won't be solved just by putting a Democrat in the White House."
Indeed!
I'm glad you finally understand that merely replacing corporate Republicans with corporate Democrats won't fundamentally change anything, lemuel pitkin. Glad to see you've finally come around to the Edwards point of view.
Strangely enough, Fred is right
What, all right winger commenters look alike?
Is that Chris Ford again?
Is there any way we can stop the poor from screwing the rich?
Who said the poor is screwing the rich?
I'm just wondering how the tax policy is magically going to help the poor's after-tax income, when their effective tax rate has already been reduced by a third over the period we're looking at. Would love an answer.
Does the chart show constant dollars or inflation-adjusted dollars?
If it's constant dollars, the first four bars will come out negative in inflation-adjusted dollars.
lemuel pitkin,
I am curious about your reasonable sounding comment. Why, if the Bush tax cuts did not mostly take effect until 2002 would the relevant numbers be the change in income from 2000 to 2005? If the effect of Bush's policies largely began in 2002, than the 2003-5 would seem to be a much better indicator of what Bush's policies do. And they give the result that Krugman and Yglesias are indicating.
It is certainly true that when ones political opponents are right one should acknowledge that. But I don't see how your comment actually supports the idea that this is one of those cases.
Why, if the Bush tax cuts did not mostly take effect until 2002 would the relevant numbers be the change in income from 2000 to 2005? If the effect of Bush's policies largely began in 2002, than the 2003-5 would seem to be a much better indicator of what Bush's policies do.
Oh boy. Couple of things:
1) If you want to see "the effect of Bush's policies" then you have to compare before the policy went into effect to after, not after-to-after because you've missed the first part of the effect.
2) I don't know if you're aware, but the country was in a recession in 2001-02 so income levels, particularly high volatility incomes in the top quartile, were temporarily depressed. 05 was a boom economy, so you should only compare it to levels of the previous boom economy, in 99 or 2000.
3) "What Bush's policies do". I don't think any of this analysis speaks to that. The effect of tax policy in the ranges we're talking about have an unclear and likely tiny effect on income growth. It's not as if the federal government sets wages for the entire economy. There are macroeconomic factors at play here that "tax the rich!" just won't impact.
Lon,
We know that Bush's tax cuts were not responsible for the increase in inequality between 2002 and 2005. We know this because the trends in before-tax and after-tax income distribution look almost exactly the same.
Changes in pre-tax income and after-tax, 2002-2005:
Bottom 20% - 0; +0.7%
Next 20% - +1.6%; +2.7%
Middle 20% - +3.7%; +4.6%
Fourth 20% - +4.8%; +5.7%
Top 20% - + 20.8%; +21.6%
Top 10% - +27.0%; +27.9%%
Top 5% - +35.8%; +37.0%
Top 1% - +52.2%; +55.8%
You can see clearly that while the Bush tax cuts did give a disproportionate boost to those a the top, that's a very small part of the increase in inequality over this period. So, again, on this narrow point, Al (not Fred!) is correct.
i think a broader lesson here is that liberals tend to overvalue progressive taxation and other direct redistributive measures, as opposed to addressing the underlying causes of inequality by empowering workers.
Now that I go back and read it, Krugman's post actually doesn't say anything about tax cuts. What he says is that the lower half of the income distribution has done poorly under Bush, but did well under Clinton. And that this is a general trend across Republican and Democratic administration but that the exact mechanism is unclear. So it isn't really misleading. It's still important to note, tho, that whatever Bush's contribution to increased inequality, tax cuts are a very small part of it.
Lemuel--Interesting... This isn't really my area of expertise, but a quick question:
How reasonable is comparing percentage growth in the lowest quintile to the top one percent? Although, say, Bush's tax cuts apparently only added a few percentage points of income increase to the uber wealthy, that's an awful lot of money. Put different, if my income increases from $100 to $101 because of the tax cuts, and your income increases from $100,000 to $110,000, there's significantly more inequality in strict monetary terms than you would capture with the sort of numbers you use. Or am I missing something?
I think you're right-very right-that we overlook a lot of structural issues when we focus narrowly on tax cuts, but I wonder if you might be swinging too far the other way.
Yes, the part about taxes was something that Matthew threw in, for no apparent reason.
If we are going to talk about a President's contribution to inequality, certainly, based on the available data, Clinton contributed to inequality more than Bush has.
After all, if you run the same numbers that Krugman did but for Clinton's term (comparing 2000 to 1992), you'd see a much larger difference between the poor and rich cohorts than you see for the 2000 to 2005 period.
The right wing knuckleheads are focusing on the last 6 years because the top income earners were hurt pretty badly after the tech bubble bust in 2000-2001.
If focus a little farther back, you can see things have been very good for the most wealthy, especially the top 20%. For the bottom 80%, not so much.
I made a figure that illustrates the change in share of income normalized to 1979. The bottom 80% all show the same trend: an equal loss in share of income. For the top 20%, there is an increase. Clearly tax cuts directed to the top earners is having its desired effect. The amazing thing is that the share for each of the bottom quintiles has decreased by about the same amount. So it's not like it's just the poorest of the poor are getting squeezed. Instead, anyone who is not rich is getting screwed equally, including the middle class.
See it here:
http://afferentinput.blogspot.com/2007/12/widening-divide.html
If focus a little farther back, you can see things have been very good for the most wealthy, especially the top 20%. For the bottom 80%, not so much. ... The bottom 80% all show the same trend: an equal loss in share of income. For the top 20%, there is an increase. Clearly tax cuts directed to the top earners is having its desired effect.
You're absolutely right about the trends -- there has been a huge upward redistribution of income in this country over the past 30 years. But you would see the exact same trends if you looked at pre-tax income. So tax cuts aren't the main story.
In my opinion, the biggest factors are the decline of organized labor, the reorientation of corporations toward Wall Street and maximizing "shareholder value", slower growth generally, high interest rates (due to some combination of Fed policy, banking deregulation and autonomous economic factors), the growth of the South and Southwest at the expense of the Northeast and West Coast, the decline of manufacturing, the erosion of the minimum wage, and changes in the culture devaluing solidarity and elevating competition and greed. Taxes (and trade) bring up the rear.
What I always find interesting is how the right tries to claim the rich didn't gain that much, and then throw out a percentage.
How's about we make this more real and list that in dollars, rather than amorphous percentages?
For example, if a person's $20K a year income went up by 1%, that's not a whole lot in terms of actual money in the bank.
But if a person is making, say, $1 million a year, and income increases by 1%, that's a lot of real money.
In other words, we can all hide behind percentages all we want, but it's when that percentage is factored into real, cold-hard cash that the disparity really stands out.
"In my opinion, the biggest factors are the decline of organized labor, the reorientation of corporations toward Wall Street and maximizing "shareholder value", slower growth generally, high interest rates (due to some combination of Fed policy, banking deregulation and autonomous economic factors), the growth of the South and Southwest at the expense of the Northeast and West Coast, the decline of manufacturing, the erosion of the minimum wage, and changes in the culture devaluing solidarity and elevating competition and greed."
I'd see tax policy as being involved in a large number of those items.
I gotta agree with lemuel pitkin. Taxes are an important part of the story, but there are lot of other factors contributing the the erosion of the middle class and transfer of wealth to the wealthiest in our country. The richest in our country have lots of ways of grabbing bigger and bigger parts of the pie all for themselves.
matty,
did you just discover Microsoft Excel last week? I've never seen so many charts as I have around here lately. i have to tip my hat to your graphing color schemes. there top-notch.
matty,
did you just discover Microsoft Excel last week? I've never seen so many charts as I have around here lately. i have to tip my hat to your graphing color schemes. there top-notch.
Nah, fellas.
It's probably true that cutting the top rate from 40% to 35% is not such a big deal.
On the other hand cutting the top rate from the post-war high of 90+% to 40% certainly is.
Raise the top bracket (for all income categories) to 95% and it'll make a helluva difference; the lower teh top bracket the stronger incentive for the bastards to keep grabbing more and more. Just legislate a friggin maximum wage and stop all that nonsense.
@right: Your list of "effective federal tax rate" is highly misleading. Most lower and middle income workers pay a substantial part of their income in Medicare and Social Security payroll taxes and this is not reflected in your numbers. Also, the decrease in capital gains tax primarily affects upper income folks. This administration has decided that it's more important to preserve heriditary wealth (the Hiltons) than to encourage upward income mobility by people who work (the sad suckers).
Few comments here address a reality that this kind of analysis ignores. Progressive taxation means people who make more pay more percentage in taxes. Not just more in dollar terms, but a higher percentage.
The tax cuts enacted under Bush readjusted the formula, so that all tax payers got tax relief, by paying a lesser percentage. Notice the declines in percentage. For the top 1%, that was a decline from 33.0% to 31.8. Sounds a lot less than the drop from 13 to 9.9. But in net dollar terms, the difference is huge, but so what? Why the surprise?
Unless you take it as a given that the existing rates and proportionality was perfect, anytime you readjust, the impact hits higher income earners more. (That's math.)
That's the inherent dishonesty in Krugman's analysis, and much of what's here. The tax cuts aren't some pool of everybody's money, and we all get an equal share. If you already don't pay taxes or pay very little, you'll never get much or any of the tax cut pie, will you?
That money the 1% get to keep more of is their own. Just like your tax cut, wherever you fall, is your own, as well.
The only legitimate way to debate this is to talk about the net % that each level of income should have to pay. Guess what? It's already progressive. Lots of the lowest earners get money from the rest of us rather than actually pay taxes.
So what's a fair distribution? Between Feds, State and Local, top 10% are already paying up to or over half of their income in taxes. If that's not enough for your tastes, what do you think would be fair? And how much will come out of your pocket?
Those who always opt to have the money only flow one way (always from rich to poor) are living entirely on the dole, or think Socialism and complete wealth redistribution is the answer. (You just may not want to admit it.)
Most of you here think of taxes and tax cuts as coming from some fairy gold mine, and everybody should get an equal share of the fairy gold. I've got news for you: the money that's being talked about was earned, for better or worse whether you like it or not, mostly from those who are our wealthiest citizens.
"Dadmanly" (where did that name come from? Is it as ridiculous as it sounds?), you're talking nonsense. First of all, since the tax cuts were funded by borrowing, they most definitely ARE coming out of a common pool of "everybody's money". When the Federal debt increases, we are all equally responsible for paying it back. So the Bush administration raided the common pool of public money to give out these tax cuts. And they gave a lot more $ out of that pool of public money to the rich than the middle class.
Second, the income tax (including cap gains) is the tax that hits high earners the most, followed by the corporate tax. Those are the two taxes that the Bush administration cut. There are a host of other taxes -- SS and Medicare taxes to sales and property taxes -- that hit lower income people much harder. None of those taxes were cut by the Bush administration. (The last two probably increased as a result of Bush refusal to give aid to states). So it's not about proportional tax cuts, it's about class warfare.
When the Federal debt increases, we are all equally responsible for paying it back.
That's obviously false, unless we've switched to a fixed dollar per person tax code in this country since I last looked at nytimes.com.
Jennifer writes: "Al is a scummy slimy lying slug, who is lying as usual. Al is competing for the scummiest liar of them all."
RFLMAO!!!! Al, she puts you on a pedestal up with her arch-nemesis, Steve Sailer! Your insults are awesome Jennifer. They sound like the title of an Al Franken book, just a bit more vulgar. You should write a book about Steve Sailer and friends called "Scum and the Scummy Scumbags who Wallow in it".
lemuel is right. The famous Piketty-Saez graph at this site shows that we have been in a secular trend in income inequality since 1980.
When the Federal debt increases, we are all equally responsible for paying it back.
Well, I don't think it is right to say we are all "equally" responsible for paying it back. We will pay it back to the extent we are taxed in the future to do so. If we assume that we will be taxed in the future in the same proprtions as we are taxed today, then the rich will "pay back" the debt in the same proportion as they are taxed today - i.e., progressively more than the poor. Of course, that assumption is dangerous, since who knows what future tax progressivity will be. It could be that future rich people will pay a lot more to make up for the debt incurred today as a result of the tax cuts.
Off topic but:
WSJ: "Pro-immigration activists now concede that any attempt to revive a legalization bill is dead for perhaps five years,..."
http://online.wsj.com/article/SB119751215813425623.html?m
Me and the rest of my scummy scumbag company are winning!!! Write your book quickly Jennifer!
It's probably true that cutting the top rate from 40% to 35% is not such a big deal.On the other hand cutting the top rate from the post-war high of 90+% to 40% certainly is.
Right. The observation that pre-tax income disparities demonstrate that inequality is not just a matter of tax policy isn't an argument for not doing anything about taxes. It's an argument for doing more with respect to taxes. It's an argument that says moderate changes to the tax code probably won't accomplish much.
If we want to talk about tax policy, these graphs of income distribution over time should also include the federal budget deficit as a percentage of total income, right?
One needs to correct for stock market cycles, which have a disproportionate effect on the rich. Short time intervals like used here are going to have their results so contaminated by short term market effects as to be nearly useless. It is like me claiming that the fact that it is cooler today at almost any US city than it was last July disproves global warming. Unless I compare same month to same month we all recognize such a comparison as complete bunk. Market cycles are not nearly so regular, so trying to correct for them will likely still leave a lot of noise in the data.
Well, I don't think it is right to say we are all "equally" responsible for paying it back. We will pay it back to the extent we are taxed in the future to do so.
It absolutely is correct that we are equally responsible for paying it back. In fact, it's so clearly correct that I'm unclear why even wingers are questioning it. That statement is just a legal fact.
How it actually *will* be paid back is an empirical question. Debt can be financed by cuts in programs that serve the middle class, such as health or pension programs (the SS "crisis" rhetoric was at heart an attempt to do just that). It can be financed by more borrowing that pushes up interest rates for debtors and benefits creditors (who tend to be wealthier). It can be financed through increases in taxes for the middle class (see, 1983 SS tax increase, which has been financing deficits. Allowing the AMT to go down into the middle class would be another such tax.
It is also true that debt can be financed through increases in tax rates on the very rich. Since much recent debt was borrowed to benefit this class, that would be an equitable solution. It would still leave the very wealthy paying taxes that are quite low by international and historical standards, and it would still leave them with real after-tax income that is more than double what it was 30 years ago -- by far the greatest income growth of any group in the income distribution.
The one thing that seems almost certain is that debt will *not* be financed by just keeping the tax and benefit structure the same over the long run, since that path does not appear to be fiscally sustainable. Although it would be nice if it was.
Bigtom and others are right though that one can't look just at 03-05, too much wealth at the top is driven by capital market swings.
Comments closed December 28, 2007.
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Heads in the Sand
"Naturally, the only solution is tax cuts."
While that is indeed a cromulent solution, alternatively, we could also try this...
Posted by Petey | December 14, 2007 10:24 AM