I saw the movie “Inequality for All” starring Robert Reich, the former labor secretary for Bill Clinton and a very short guy (he’s 4′ 11″) who is pretty personable and funny. Reich uses his day job as a university professor while teaching a class to illustrate his thoughts on inequality from the movie.
In the movie he attempts to link:
– decline in average wages, in “real” terms (adjusted for inflation)
– growth in the highest wages (the top 1%)
– with various factors, including globalization, automation, declines in unions, and the financial bubble
– income inequality with lower marginal tax rates on the rich
There are certainly some concepts in here than anyone can agree with. It would be good if more people in the USA earned a higher salary, had better educations, and were more productive.
In the movie he mentions Warren Buffett, who famously pays a lower marginal tax rate than everyone else in his office, which is due to the fact that he receives long term capital gains and dividend income which are taxed at a lower rate. This is grist for the “raise taxes on the wealthy” discussion, as Buffett plays the likable old man. However, what he fails to mention is that Warren Buffett is the very candidate that the ESTATE TAX is designed to catch… rather than nickel and dime him every year on his assets as they rise in value (and cause friction and force him to sell them off to meet the tax bill), the estate tax would be levied on the super rich and it would effectively make up for the lower marginal rate during his lifetime by taxing increases on his wealth at a rate of 40%, for all amounts greater than about $5M. However, Warren Buffett is choosing to “evade” these taxes by setting up trusts and / or giving it away to his favorite causes; if Warren couldn’t avoid his estate tax through these loopholes (the same way you or I can’t avoid the payroll or sales taxes) then 40% of his $60B estate ($24B) would go to the Federal government, to fund the “investments in people” that Robert Reich is so passionate about. Funny that Reich didn’t call that out (didn’t follow his narrative, apparently).
Another element he fails to mention is the growth in illegal immigration in the USA, and the havoc that this causes with unskilled labor (as they are willing to work for far less). It is funny because two professions he specifically mentions, meat packing and short order cooks, are magnets for immigrants and their arrival is a direct cause for falling wages in these fields. Not surprisingly, Reich didn’t want to alienate a core Democratic group.
There is a rich “pillow manufacturer” who makes $10M+ / year who also describes how ridiculous it is in his opinion that his marginal rate isn’t higher. That same entrepreneur says that he invests in “funds of funds” and due to this he makes money without creating any jobs. That is quite a statement – what do you think those hedge funds invest in? They invest in commodities, stocks, real estate and debt (I’m assuming). When you are an investor and you provide money for stock and debt you are supporting companies that, in turn, hire staff. I can’t believe that Reich let this comment slide, but since it was what Reich wanted to hear, why interject?
Finally we get to the biggest blown point in the article, about unions; that while union-led companies stagnate and die (see US auto manufacturers, airlines, most other private sector unionized businesses), in non-union states primarily in the South there are many manufacturers that create world-class products and pay good wages. Certainly the wages don’t compare with the ’70s when unions were at their zenith (and productivity was miserable), but they are important economic engines and have brought many areas out of poverty and created industries which drive more investment. He fails to see that economic growth and improvement can and often is done without unions, especially in the USA where there are still many other elements that protect workers.
The core of this documentary, that the US has high and growing inequality, is true. The fact that we are higher than many other nations is also true. However, anyone who has even set foot in the REAL countries that we will compete with in the future (such as China, India or Russia on oil and gas), will note that they have gargantuan inequality that the USA can’t even touch. It doesn’t matter what the Netherlands does, or these other smaller countries. Those aren’t the competitors. In China workers have few rights and productivity is growing rapidly; in India the immensely rich build giant skyscrapers for their families and are billionaires while the destitute are everywhere. For Saudi Arabia and the other gulf countries, the problem is even crazier; their own citizens may be relatively equal, but all the work is done by laborers from other countries who are paid a pittance and are often ill-treated, to boot.
For all this, Reich is a likable guy, and seems to believe what he is saying. If we could some how create conditions that generated good jobs for many people and moved them up the ladder, that would be a great thing. At least he wasn’t outright calling for them to all be employed by the government.
Cross posted at LITGM
Mr Reich should come to live in Britain where he’ll get to pay 45% income tax, 40% Capital Gains Tax (except on death) and 40% Death Tax (confusingly called Inheritance Tax).
Chuck Lorre, Vanity Card #419 (The season premier of Big Bang Theory):
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“… what I really want to talk about is the ridiculously expensive tuxedo I bought a few days ago. Seriously, I could’ve gotten a small car…”
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Hilarious, in a sad kind of way.
It’s just A-OK when Lorre spends thousands and thousands on a freaking SUIT, but no, if a Republican ever spent a dime on something so pointlessly extravagant… well, that’s why they’re EVIL… :-S
This is liberal hypocrisy, and he’s utterly blind to it — when an eeeevil “rethuglican” spends money on something so frivolous, it’s an offense to everything right and decent in the world. When a liberal does it, he’s just “fitting in”.
Liberals always want to spend someone else’s money, and that’s all there is to it.
They are hypocrites at best, bald-faced con artists and thieves most of the time.
Reich seems to be ignorant about basic economics.
Reich is not an economist. He’s a lawyer who had undergraduate economics to some extent. Obama has raised marginal taxes on the poor to stratospheric levels. Often over 100%. Why doesn’t Mr. Reich criticize that? Could it be it’s all partisan?
I’m not sure U.S. factories will compete with Chinese factories much in the future (countries don’t compete as a whole anyway).
The Chinese already won in the sectors where they’re competitive to such a degree that the remaining factories are largely not threatened by them. What’s left is left because Chinese strengths can’t beat it.
Another competition that’s worth noting in this context is the domestic competition between states; the race to the bottom, with low-wage state Texas as example.
Those factories which move to low-wage weak unions states would mostly have stayed in operation where they were without this domestic competition. The difference between them moving to low wage weak union states or not is primarily about the distribution of income between capital owners and workers: Factories in low wage states allocate more income to capital owners and less to workers.
And that’s reinforcing Reich’s point about inequality, so I was irritated by such factory migration being used to argue against Reich’s narrative.
The Estate tax reference was nice to see in the text, but name me the Republican congressmen in favour of closing those loopholes when it comes to the vote. AFAIK almost all (R) in Congress pledged their allegiance to Norquist and Norquist does the pledge interpretation for them; thou shall not raise tax rates nor close loopholes.
You may prefer a reform at the estate tax level – Reich merely argues for other levers.
The immigration issue is also an interesting remark, but here’s my impression:
Republicans weren’t determined to reduce illegal or other immigration for decades, and their typical big money sponsors were all too often interested in having this competition among workers, as they were interested in cheap labour.
The more recent interest in closing the (Southern) border came only after many millions of cheap labourers arrived. (R) are still against giving those who arrived citizenship or work permits, and this again suits the cheap labour interests of many of their big sponsors well: Being 3rd class people without citizenship, they’re cheaper labourers and keep pressure on the citizens in low wage jobs.
“However, anyone who has even set foot in the REAL countries that we will compete with in the future (such as China, India or Russia on oil and gas), will note that they have gargantuan inequality that the USA can’t even touch.”
This is utterly incorrect.
Gini coefficient household income according to CIA World Factbook:
China 47.4
United States 45.0
(Korea South) 41.9
Russia 41.7
India 36.8
(Indonesia 36.8)
(European Union 30.7)
(Ukraine 28.2)
http://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html
The United States has a more gargantuan inequality than most of those countries.
@Tim:
Feel free to support your “over 100%” assertion with reference to actual tax laws. I suppose you can guess why many people would think your claim is implausible and likely just a partisan lie.
S O makes a reasonable comment in a non incendiary manner so we can discuss rationally…
– As far as Warren Buffett, to discuss him and his comments on tax policy without mentioning the estate tax (which he is going through immense efforts to avoid, on the scale of what Apple is doing to minimize the corporate tax) is simply deceitful. Reich should either have 1) avoided using Warren Buffett 2) mentioned the actual mechanism that is designed to capture his “fair share” of wealth as written in our books. This has nothing to do with Republicans or Democrats
– interesting on the theory that without the competition from non union Southern States, that those Northern industries would have continued on in a unionized fashion. Since the south never had unions that is an untestable principle. Also I disagree that countries don’t compete… look at English (and US) shipbuilding vs. the Koreans – that entire industry is virtually extinct
– I went to that CIA factbook link and it didn’t work because they’ve moved that site around. Here is what I saw
https://www.cia.gov/library/publications/the-world-factbook/fields/print_2172.html
At this link Russia, China and the USA are in a dead heat for Gini and India was behind but hadn’t been updated in many years. We also need to consider the velocity of change – those other countries are on a higher slope than the US in recent years.
On illegal immigration – I think Reich could have made his points differently but HE chose industries which were disproportionately impacted by illegal immigration – short order cooks and meatpackers. I have personal experience with meatpackers in central Illinois and they absolutely favored illegals and still do. Once again this has nothing to do with Republicans or Democrats. I believe that he intentionally left this critical component out when talking about how low wage non-college educated workers are seeing wage erosion, and immigration absolutely is relevant in this context.
“(…)the theory that without the competition from non union Southern States, that those Northern industries would have continued on in a unionized fashion(…)”
There is an exhibit, though: The automotive industry assembly plants (which are a posterchild for factories set up in the south) survived in European countries with stronger (than in blue states) labour unions as well.
The automotive industry and several other industries for exportable goods orient their production locations largely at their markets, not primarily at labour costs. It is part of their strategy that by maintaining jobs in major countries they keep legislation there friendly to themselves. The German government wouldn’t fight EU regulation on per-car emission standards if the German automotive industry didn’t produce more than an average share of luxury cars, for example.
It’s this kind of details that overrode the wage argument in the industries which did not migrate to China et al yet (and likely won’t anytime soon). The topic of factory (non-)migration is a huge one, and more suitable for a doctor thesis than for a blog comment, of course.
It’d be funny watching one of Clinton’s henchmen talk about inequality and the stock market, if I weren’t American.
The German Government and elites don’t hate Germans. The American elites DO.
That’s the difference.
Buffet is a vulture as well as a hypocrit regarding the death tax. While working hard to avoid his paying it, he swoops down and acquires businesses whose founders build them up and their heirs had to sell them to pay the 55 percent death tax. That’s how he acquired Dairy Queen and GEICO, for example. Keep in mind, when there was talk about repealing the death tax a few years ago, Buffet was opposed to repealing it. No wonder, he benefits from it.
“The German Government and elites don’t hate Germans. The American elites DO.”
Close enough. I think the American elites are globalists with no special concern for the United States or the American people. The GOP establishment has no concern for the working public, believing that if mere wage-slaves counted for anything they would have managed to become part of the worthy, deserving rich.
Failing that, they are essentially nothing more than lucky third-world peasants who are paid too much for the US to be globally competitive. Hence, the party has not much to say about falling wages for most of the electorate including most Republican voters.
The leftist elite, of course, is composed of transnationalist progressives who would cheerfully hand over control of the US government to the UN kleptocracy, believing themselves citizens of the globe and not the evil, hated, United States of AmeriKKKa.
But as a rough approximation both the left and the GOP establishment effectively want the same economic policies, even if they justify them using different words for their different audiences.
At this point I don’t much difference between them.
It’s the American people against the pocket-stuffing, thieving, corrupt-to-the-bone political class.
Morgan: Yes.
Morgan, right. Berkshire Hathaway did the same thing with Marmom Group. They’re a diversified manufacturing holding company previously owned by the Pritzkers (who’s prominent scion Penny is now Secretary of Commerce incidentally). When one of the cousins sued to have the family trust broken up, Buffet was first in line to take over.
Also, Buffet doesn’t have to worry about leaving any money to his son Howard because he’s already set him up for life on the Board of Directors of Coca Cola and Berkshire Hathaway. He also farms a couple thousand acres in southern Illinois and has benefited from generous govt subsidies.
And if he ever gets tired of collecting govt largess, his land just happens to be sitting on a sizable oil and gas deposit
The reason he farms in Illinois is because he’s located right next to Archer Daniels Midland, which buys up his corn (or whatever is left over after the govt pays him). In the 90s he was on the Board and a Vice President (he never graduated from college).
There was a nice triangulation in the arrangement:
Buffett the Elder was a major investor in Coca Cola which was the world’s biggest user of high fructose corn syrup
ADM processed, fixed prices, and sold corn and other food additives.
Buffett the Younger was granted a high position and ultimately some land (after all the price fixing and collusion there was apparently a lot of bargain deals in farmland)
The shale gas play may actually be closer to fruition.
Earlier in the year Buffett the Elder sold his stake in ADM and bought a stake in CB&I which makes equipment to process liquified natural gas.
ADM announced this week that they are moving their headquarters out of Decatur.
Buffett the Younger just bought a farm in Arizona to “research” ending world hunger. It is officially owned by his foundation which was given a $2 billion grant from Buffett the Elder.
Excerpt from Casey Mulligan’s blog:
The Congressional Budget Office estimates that the Affordable Care Act’s means-tested subsidies and cost-sharing will implicitly add more than 20 percentage points to marginal tax rates on incomes below 400 percent (see Page 27 of the C.B.O. report) of the poverty line (a majority of families fit in this category) by phasing out the assistance as family incomes increase, although a number of families will not receive the subsidies because they already get health insurance from their employer.
These marginal tax-rate additions are on top of the marginal tax rates already in place because of personal income taxes, payroll taxes, unemployment insurance, food stamps and other taxes and means-tested government programs. In 2014, some Americans will be able to make almost as much from combined benefits as they would by working, and sometimes more.
In summary, the United States intends to move in the direction of more assistance programs and higher marginal tax rates, while Britain intends to move in the direction of fewer programs and lower marginal tax rates.
Either country, or both, may ultimately fail to fully carry out the new programs by granting waivers and exceptions, refusing to administer them or by rewriting its new laws. But if both do follow through, perhaps future empirical economic research comparing the United States and Britain will reveal which country is living an age of wisdom and which one in an age of foolishness.
SO–You can do the rest of the research. This is not really controversial. Read Mulligan’s book for example. What does > 100% marginal tax mean? That if you work an extra unit of labor you end up with less money. There have been well documented instances of people having to raise their incomes from around the upper $20K to over $60K in order to be better off. Sorry you don’t get this.
“SO–You can do the rest of the research. This is not really controversial. Read Mulligan’s book for example. What does > 100% marginal tax mean? That if you work an extra unit of labor you end up with less money. There have been well documented instances of people having to raise their incomes from around the upper $20K to over $60K in order to be better off. Sorry you don’t get this.”
I get the principle, but I doubt that marginal TAX rates could go beyond 100 %, as this would easily be busted by any supreme court. I saw data indicating the effect for the COMBINATION of taxes and gradual withdrawal of means-tested benefits. The effect already exists for household incomes up to ~20,000 USD annually IIRC. Mankiw pointed at such a study one or two years ago.
It’s primarily a problem with means-tested social transfers. The unconditional basic income concept defeats this phenomenon and its undesirable disincentives, but despite its simplicity and elegance as well as ultra-low administrative costs an unconditional basic income is too repelling to people on the instinctive level and doesn’t happen on the national level anywhere (Alaska’s state oil dividends are organisationally similar, though).
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BTW, I think you guys pay too much attention to the top 10 bogeyman of the right wing, Buffett. You sound like some left wingers who see Koch money as the reason for everything the right wing does or says.
Sorry SO, you are wrong.
I remember that in the 70s, the era of Swedish rates near 100%, Swedish senior doctors would take off the last three months of the year and go to the Greek Islands or some other warm spot, lest their salary got too high. The last three months of the year were notorious in Sweden for doctor shortages. Incentives matter, even if you are a leftist.
SO
It is Robert Reich who brought in Warren Buffett as an “I told you so” on the topic of marginal tax rates. I didn’t put him in the documentary – Robert Reich did. As such, Warren’s hypocrisy on overall taxation is a 100% relevant topic.
It is common economics that marginal tax rates DO matter. Reich was fighting that basic concept, and using Buffett as his spokesperson.
@MikeK:
Actually, your link confirms what I wrote. No marginal tax rate higher than 100%, and courts intervened to ensure this. Also note the nature of the levy and taxes mentioned in the article.
The headline is (likely intentionally) misleading. The phenomenon is the equivalent of someone paying a property tax during a year without income. That would be no infinite marginal income tax rate, right? Because it’s no income tax rate. The author compares the overall tax bill to income, but that doesn’t make it all an income tax.
There was no >= 100% marginal income tax rate in France.
@Carl:
The comments about Buffet’s business practices were not relevant, though.
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Look, I’m an economist by trade, with five years of university studies primarily on micro and macroeconomics. I don’t think anyone in here is going to teach me about econ theory or fiscal theory.
I remember no government ever having a >=100% marginal tax rate on anything in a country with at least a near-complete rule of law.
S O,
You are an economist by trade, so you know that there is little difference between taxes and withdrawal of means-tested benefits as far as the incentive effects are concerned. It is not unreasonable to include the effects of benefit withdrawal in computing an effective marginal tax rate.
Calling that apples and oranges would be overly nice, and if that’s the basis for the 100% claim, then it wasn’t merely misleading, but a lie.
A marginal tax rate is about taxes, not about household income. You’re writing about something as a “marginal rate of post-government transactions disposable household income”. You can’t simply slap a well-defined term onto some hybrid without being incorrect. The meaning of words has already been defined by others.
http://financial-dictionary.thefreedictionary.com/marginal+tax+rate
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“Obama has raised marginal taxes on the poor to stratospheric levels. Often over 100%.”
For starters, the claim was that Obama did it, but Obama can only sign laws already passes by Congress.
Now if we look strictly at marginal rates and mix withdrawal of means-tested benefits and taxes together, then there was for decades the case of marginal rates over 100%, in fact over 10,000 %.
There was for decades the legal situation that adding a single cent to your income could at certain thresholds mean to lose hundreds of dollars in means-tested benefits.
This kind of exception is simply not what marginal rates are about. I doubt any serious economists call this marginal rates, and law people don’t do so either because they don’t confuse a tax law with a welfare law.
Marginal income tax rates are nowhere near 100% for anybody in the United States. To claim otherwise can be described as “lie”, “wingnuttery”, “nonsense”, “counterfactual”, “pants on fire”.
Please note how one could easily claim more than 10,000% with the wrong ways of calculating things, but 100% were claimed. That’s because talking point / lie fabricators know that their lie needs to be at least semi-plausible or even extremists will doubt it.
Would you have adopted the talking point if it was about “>=10,000%” or if somebody mentioned to you before that these exceptions have been in existence for half a century?
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There is little difference in the disincentive effect, but the extreme exceptions are neither new nor something to be blamed on Obama / Democrats. It’s a systemic imperfection of means-testing subsidies.
The cure for this is an unconditional basic income which works as income tax credit for people with enough income. This concept eliminates such distortions albeit it doesn’t eliminate moral hazard entirely. It’s extremely elegant, cheap and simple – but at the same time so very counterintuitive that it’s impractical politically.
Look at it if you want to experience how intuition tells you that it’s wrong, wrong, wrong:
http://en.wikipedia.org/wiki/Basic_income
Yet when one calculates with a cool head and microecon tools, it’s inevitably superior to the income safety nets in use anywhere.
Humans have mental difficulties to compare a proposal with the status quo instead of an unachievable perfect case. It takes a lot of self-discipline to overcome the intuitive impulses.
The tax that Reich ignored is not the Estate Tax, which is in all events a voluntary tax*, it is the corporation tax.
Until this year Buffet paid a 15% tax on capital gains and dividends. But, each dollar of those items is drawn from corporate profits, that are subject to the 35% corporate income tax. $1 of corporate profits is 65 cents after the corporate tax. If paid out in 2013 as a dividend or realized by capital gains, that 65 cents is reduced to 50.05 cents. (in 2012 it was 55.25 cents).
Thus the real rate paid by Buffet is more than twice as high as the nominal rate.
*The Estate Tax is voluntary because no one is required to have an estate. If one is embarrassed by a surfeit of riches that cannot conveniently be consumed, as Buffet is, he can give it to a third party to complete the chore for him. But, I think it is a stretch to call this a loophole. It is more like a design flaw.
Footnote: Some gifts are subject to the Gift Tax, but it is far from comprehensive in that gifts to spouses and charities are exempt. Further it is inevitably at a lower rate than the Estate Tax.
A quick Google search would have given you plenty of examples where economists do just that. Here’s Casey Mulligan, professor of economics at the University of Chicago, in yesterday’s WSJ. If that is not serious enough for you, here’s the CBO.
About your 1st link:
You’re incorrect (and that’s a nice choice of a word for it), as the marginal tax rate in the article is a compound marginal tax rate for multiple actual taxes, not a marginal rate including withdrawal of means-tested benefits.
Also, no 100+% in there.
About your 2nd link:
That’s an amazingly sloppy text and diagram from the CBO, but much of the time they stuck to writing “effective” prior to “marginal”, and “effective” is a signal of great consequence. It signals that the calculation is actually about something substantially modified in comparison to the clean thing.
The full document is even less clean, and really disappointing. They use the term “disposable income”, for which a marginal rate would be really the way to go. Instead they keep using “effective marginal tax rates” or “marginal tax rates” to describe the counterpart, which is simply not the correct terminology.
I looked it up a bit more elsewhere and it seems that CBO has a couple definitions of its own. It also differs in its definition of income from other sources. Overall, CBO definitions tend to be more close to what’s relevant in practice, but they use established terminology in a differing manner. At least they’re transparent about it.
I suppose the number crunchers at CBO may have too few economists and too many mathematicians/statisticians involved in their reports. It may also be that the proximity to politics led to a preference for well-known terminology even when it’s not accurate.
Still, I didn’t see any 100+% claim in there.
“Calling that apples and oranges would be overly nice, and if that’s the basis for the 100% claim, then it wasn’t merely misleading, but a lie.”
Such a pleasant interlocutor. Since you are an “economist” I can see why that is referred to as a “dismal science.”
Even after MikeK specifically mentioned Sweden, S.O. wrote: “I remember no government ever having a >=100% marginal tax rate on anything in a country with at least a near-complete rule of law.” Wikipedia’s article on Astrid Lindgren confirms my memory that the highest tax bracket in Sweden in 1976 was in fact 102%. As I recall – my memory is of course fallible – the elderly author of the Pippi Longstocking stories was the only person in Sweden making enough money (a million or two in U.S. terms) to be taxed at that rate, since all the rock stars and industrialists had long sinced moved to lower-tax countries. The Wikipedia article says that the Social Democrats were voted out of power soon after, in great part because of that absurd tax rate. Surely Sweden has more “rule of law” than most countries? I would have thought that that would be a story every economist would know: it’s certainly worth knowing.
It used to be common knowledge.
I certainly would never question SO’s expertise. Just his reading comprehension.