Tuesday, April 17, 2012

Taking Income

I think the choice of words in Annie Lowery's New York Times story about Emmanuel Saez and Thomas Piketty is unprofessional.  Here are the excerpts in which she describes the income of high-income or high-wealth households, with my emphasis added:

More than anything else, their work shows that the top earners in the United States have taken a bigger and bigger share of overall income over the last three decades,...

But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes. 

They figured out the benchmark for various income levels — the top 10 percent, top 1 percent and top 0.1 percent of earners, for instance — and calculated what share of income each group took each year.

But then inequality started increasing again, with the top 1 percent of earners drawing a bigger and bigger share of overall income.

Data that the two economists released in March showed that the top 1 percent of earners got nearly every dollar of the income gains eked out in the first full year of the recovery. In 2010, the top 10 percent of earners took about half of overall income. 

So, what is that -- 4 takes, 1 draw, and 1 got?  Income isn't taken by individuals away from some collective pile of "overall income."  It is produced by individuals working together under voluntary arrangements.  Absent coercion or government largesse, income is earned in ways that don't deserve to be derided in this way.

Her distorted language detracts from an important issue.  Tax rates need to go up primarily because we have a deficit problem, not a fairness problem.  They have to go up even though we have a weak economy, because we have a deficit problem.  In the process of raising tax rates, we should obviously consider ability to pay, which will generate larger tax increases on higher incomes.  The fine work of Piketty and Saez shows us just how much room there is in different parts of the income distribution, relative to historical distributions, to raise that revenue.


Russ Abbott said...

How can you say there isn't a fairness problem? We are approaching an extreme of inequality. That's a fairness problem and a problem of imbalance in society. A society with our current level of economic imbalance is not stable. If we want to preserve our democratic culture, economic inequality must be reversed.

Andrew Samwick said...

I didn't say we don't have a fairness problem, only that the reason that tax rates have to go up is primarily to raise revenue.

Inequality has widened over time. But not all inequality is the result of unfairness, and not all policies that would make the distribution of income more equal would make it more fair.

We could choose to address inequality in many ways, with disproportionately higher tax rates at the top being just one of them. Greater investments in education are another. A more generous safety net is still another (even if financed at the current relative tax rates).

Inequality and unfairness coincide most in my view when those with wealth use that wealth to distort governments or markets in their favor, at the expense of others. Regardless of what happens with tax rates, curbing those abuses should be a high priority.

Vivian Darkbloom said...

Mr; Abbott's comment suffers from the same defect as Ms Lowrey's article in making the apparent assumption that there is a finite pot of income that is simply there to be divvied up among the citizenry. In being "fair" in order to help the poor one also needs to be a little bit pragmatic. i would submit that the most "fair" course of action is the one that is best suited to achieve the desired result (in this case, I think, everyone agrees "reducing inequality" is a desirable thing).

Suppose we have a classroom of students, some of whom are excelling and some of whom are failing (like income inequality, this is a reality). I don't think it would be particularly "fair" (or productive) to try to divert resources from the former and give them to the latter merely to "reverse" this inequality. Here, inequality might best be alleviated if the latter group put a greater emphasis and effort on their studies. There is no "lump of learning" in that classroom to be divided in much the same sense that there is no "lump of income" to be divided, either.

Mr. Samwick has written a very good rejoinder to your comment; however, I would differ with him on one point. The United States currently spends more per capita on education than any other country but one--I believe that is Finland. Yet, the United States does not, by far, have the best educational outcomes, particularly at the primary and secondary levels. "Investing" even more in education (which I interpret to mean spending more money) is clearly not the answer, because not spending enough is clearly not the problem. Pretending that it is the problem can be very much counter productive because it draws attention from the real changes that need to be made to improve educational outcomes.

These necessary changes would not only increase educational outcomes, but would go much farther towards reducing economic inequality than Mr. Abbott's idea of re-distributing the pie. The needed changes are multifold, but I would start with being frank about the need for parents to show greater interest in their children's education and sending a consistent message that the amount of money we spend on them is far less important than the time and effort they spend on their studies. We also need to increase and enforce higher educational standards, for both teachers and students, particularly at the primary and secondary levels. These are great investments and they don't need to cost anything. Writing a check (or cashing one) is quite often not a substitute for rolling up your sleeves.

Hadji said...

Government should ensure processes, treatment are fair, not outcomes.

But governments invest quite a lot that directly allows a pool of income to be consistently generated including safety through military and state, army, a consistent, accessible legal system, and transparent market making infrastructure for cash and securities.

Governments that don't provide these things limit the inherent income the country can produce and so in a sense there is a government enabled pool of capital that may have limits in some countries, and in those countries, some classes of people do "take" an unfair share.

It remains unclear to me whether some taking by the top earners in this country occurs through manipulation of the political system and tax policy (carried interest tax rate comes to mind).

Vivian Darkbloom said...

I thought, belatedly, of this column when reading the headline of Keith Hennessey's latest entry: "The Government Does not Give Tax Cuts---It Takes More or Less Taxes".

I guess that is the flip side of how one refers to what proportion of total income a particular cohort earns. My suspicion is that one who says that the top cohort "takes" a particular percentage of the total would also be inclined to write that the government "gives" them a particular percentage of tax cuts. The real issue is how one might refer to tax expenditures---is this give or take or perhaps take and give?

In any event, there is no doubt that it is always a question of "give or take" (or is it "give and take"?).