Emmanuel Saez Writes in About American Income Inequality Rising Rapidly in 2005

He says:

The IRS has released yesterday the preliminary stats for year 2005 which I have used to extend my [and Thomas Piketty's] series [on the top income share by tax return unit] to 2005, posted at: http://elsa.berkeley.edu/~saez/TabFig2005prel.xls

2005 shows a very large increase in income concentration: the top 1% gains 14% in real terms from 2004 while the bottom 99% gains less than 1% (when including capital gains). The [previous] record peak of 2000 is surpassed even though 2005 is less of a high capital gains, high stock option year than 2000. By 2005, it looks like top incomes are showing strongly along all components: wages, business income, dividends, and capital gains.

The striking thing about 2003-2005 is the huge increase at the top with quasi-stagnation below the top 1%. In the late Clinton years, the top gained enormously but at least the bottom was also making progress (something you can see on Fig A2)...

Market income excluding capital gains

Comments

[anne]

Stunning, but perfectly expected and there will be the same for 2006 for the returns to capital were even stronger while tax structure was even more slanted to benefit the wealthiest.

[andres]

Agree completely. Unfortunately, what is needed is a more center-of-the-road, respected-by-business-community prominent economist to announce what a worrying trend this is in the long term. Emmanuel Saez may be a brilliant economist, but it's too easy to dismiss him as a denizen of the People's Economics Department of the People's Republic of UC Berkeley (and frequently cited by the Great Satan Krugman, to make things worse). Milton Friedman could have brought this worrying trend some more merited attention, but chose not to do so. Oh well.

[andres]

Also, not to forget Jamie Galbraith's work, the increased returns to capital are disproportionately concentrated in a handful of geographical areas, most recently for example near the nation's capital (but not in DC itself!) as a result of the post-9/11 military-industrial boom.

[Robert Waldmann]

The huge 86 to 88 increase may be, in part, due to reduced efforts to disguise income as capitol gains and/or corporate profits due to the Tax reform which made tax treatment of different flows more similar and closed loopholes.

For example, there is the company car evasiun in which consumption by a manager is disguised as investment by a firm (most cars in the UK belong to firms with the usufruct granted as a fringe benefit). With the increase in the corporate income tax, reversal of insanely accelerated depreciation and the cut in the top marginal individual income tax rate, this became less attractive.

Similarly, explicit bans and reduced individual income tax rates made the traditional tax shelter unprofitable (in which overstated depreciation makes an investment in a building appear to generate negative income and then a capital gain when it is sold). This implies a reduction in reported capital gains and an increase in reported income with no true changes.

Now similar increases in the reported top 1% share after the Clinton tax incease and the
Bush tax cuts suggest that there is something horribly real going on.

I would be interested in an attempt to purge capital gains of the effects of stock prices ,housing prices and unimproved land prices (regress and take residuals). I would add the residuals to reported income (as income that was hidden with tax shelters) if I weren't so lazy.

[Julian Elson]

It seems that the most dramatic rises in top 1% income happened from 1986-1988. How did that happen? Did it have something to do with the devaluation of the Dollar increasing real returns on profitable foreign investments or something?

[I'll ask Emmanuel what he thinks--he knows his own numbers much better than I do. IIRC, he thinks that income inequality was rising in the mid-1980s, but that before the tax reform of 1986 the rich were postponing realizing income on their tax returns in anticipation of 1986, and afterwards there was a rush to realize income that could now be reported at lower tax rates. Emmanuel sees a gradual rise in "true" inequality from 1982 to 1992 that shows up in his data as (a) flat before 1986, (b) a steep rise from 1986-1988 as people shift their tax reporting to take advantage of the new laws, and then (c) flat after 1988 as continued rises in "true" inequality are masked by the dying away of the tax-law-change-induced spike. But understanding the 1986-1988 jump--and figuring out how much of it represents either a short-term or a long-term rise in "true" inequality that we wish we were measuring--is an active research topic.]

Another strike against Emmanuel Saez is that his name has an unfortunate resemblence to a French revolutionary who called for the dissolution of the first and second estates. That can't put a middle-of-the-road, respectable businessman at ease, can it?

[Alex]

There is no question that income inequality is rising. I just wish someone could analyze the IRS data and the CBO data, and make better reports on income distribution, as well as finding more precise numbers for the deciles in the income distribution, even for the 1st through the 100th percentile, if someone dared.

[a]

"It seems that the most dramatic rises in top 1% income happened from 1986-1988."

Reagan? Economic policies have a lag...

[lvtfan]

Let's keep in mind that "capital" as used here includes land. Capital tends to depreciate. Land, as pointed out by many people, appreciates. Even Milton Friedman recognized (in 1978 and again in an interview in early November 2006), though for some unfathomable reason he didn't think it worth acting on, that the tax on land value was, on his scale, the "least bad" tax. He could see it, but he didn't raise his voice to pursue it. Why? Why??

Were we to start taxing land value more, particularly in our major metropolitan areas where economic rent is HUGE, we might see a lot of this income concentration start to shift.

Alas, economic rent is somehow subsumed in "entrepreneurial" income by our accepted accounting systems. Horsefeathers!

And how much other income from natural resources (a/k/a LAND) falls into entrepreneurial and even wage income through our failure to name it and collect it as our common treasure.

Check out http://www.wealthandwant.com/ for more about these ideas. Look at the "themes" link at the top of each page if nothing on the front page catches your eye. (You'll either find it the best cure yet for insomnia, or you'll be engrossed for weeks.)

See in particular http://www.wealthandwant.com/themes/quotable_nobels.htm
and http://www.wealthandwant.com/themes/quotable_notables.htm

[Sebastian Holsclaw]

"He could see it, but he didn't raise his voice to pursue it. Why? Why??"

Because kicking grandmothers out of their homes because they can't afford the increased taxes on homes they own outright isn't great politics.

[Wyn]

Ah, the widow's skirts! They protect a lot of very wealthy people. If we want to protect the POOR grandmother, there are ways to do it without unduly burdening everyone else. California's Proposition 13, of course, does not qualify. Look at the evils it has produced, in the name of protecting the elderly. Don't use a blunt instrument when a precision tool is available.

Isn't it funny that we don't worry nearly as much in public policy about those who don't "own outright" the homes in which they live.

One might argue that our failure to distinguish between land -- on which we are all dependent and to which one might rightly argue we are all equally entitled -- and things produced by labor -- which are rightly privatized -- we have gone down a road which simply is too narrow to support us.

The wide road, the one that treats land (and indeed the entire natural creation, as well as that which results from public investment) as something we all depend on (and can't individually create) and buildings as rightly private, would have been far smarter. But people keep perceiving their own interests as being served by that narrow road.

Should we subsidize some of our grandmothers living alone in fabulously located homes that are near jobs and schools and suitable for raising a family, so that their individual grandchildren can inherit same? Or should we let the market work, so that those cottages which now sit in commercial areas get replaced with buildings suitable to this decade? Should we expend major amounts on publicly funded social services to keep that grandmother in a home she can't afford (if she can't afford the taxes, she may also not be able to manage the utilities, cleaning, maintenance -- but all we'll hear about is the taxes!)

Let's think more precisely and more deeply, and remember that none of us created the land. Those who can afford the taxes on our choicest land should have it. If that is a single very rich family, and they pay their land taxes, fine. If it is 20 families in a mid-rise or high rise sharing that same tax burden, that's fine too. (I'm advocating NOT taxing the building, be it cottage, mansion or highrise.)

Seems fair and just to me, and also efficient, administrable, and otherwise consistent with the canons of taxation.

There is room for all of us here, if we simply share the resources logically.

[save_the_rustbelt]

Hey, let's send more jobs to China!!

DETROIT (Reuters) - Job losses in the U.S. industrial heartland have left states like Michigan and Ohio more vulnerable to mortgage defaults, as home finance costs rise amid often moribund real-estate markets.

On a combined basis, Michigan and Ohio accounted for an out-sized 15 percent of foreclosures across the United States in January, the most recent month for which data is available from tracking service RealtyTrac.

Some 546,000 jobs have been lost in the two states since 2000, according to U.S. government figures, as shutdowns and layoffs at auto plants rippled through the economy.
More hardship is expected as announced job cuts take effect and unionized auto workers begin to leave the area or risk running through recent severance packages in the absence of new jobs, analysts said.

In addition, many homeowners who put their houses on the market months ago and refinanced or bought houses elsewhere with adjustable-rate mortgages are now trapped between a soft real-estate market and their own escalating monthly payments.

"A lot of people had visions of selling their homes, but that's not happening," said Hunt Gersin, president of Troy, Michigan-based mortgage broker Interactive Financial Corp. "Personally, I know dozens of people with houses for sale and no offers. There's not a bottom in sight...............

[Robert Waldmann]

Lots of blah blah on this at my blog.

[Matt]

Every morning I look for an opening, and Brad always provides the lead.

Here is, once and only once, the uniform measure of an efficient economy.

If we could accurately account for property across society, and create a curve of relative property vs population density we would discover that a perfectly efficient economy would have a normal (gaussian) distribution. The accountants would have to accurately measure the underground economy, propery convert wages to net present value, and account for government property.

The gaussian function has the maximum value of property-people, holds the most energy into the smallest width, and has the most frequency content in the smallest width. Mathematically, the proper application of supply/demand curves under the assumption of efficient markets and one would derive the gaussian people-property curve. Using relative property, the curve would be inflation invariant.

If we could measure it accurately we would have a very sound measure to estimate economic perturbations and their effect.