I like this graphic from The Economist as not only does it display the significant increase in inequality but also the changes in economic systems that were prevalent during the time period. Notice after 1930 the drop in the income levels of the top 10% and 1% earners. This can be partly explained by a return to a more dominant role of government. However after 1980 we see the impact of Reagan and Thatcher and the policy of less government and deregulation. This was especially evident with the repeal of the Glass Steagal Act in the US and Big Bang in the City of London.
Some key statistics from The Economist:
The top 10% of American earners brought in 46% of the nation’s salary income in 2007.
2007 – 2009 the inflation-adjusted income of the bottom 99% dropped by 11.6
2007 – 2009 the inflation-adjusted income of the top 1% dropped by 36.3%
However since 2009:
Top 1% of earners income has increased by 11.6% – bailout packages and bonuses?
The other 99% of earners income has increased by just 0.2%.
Obama intends to tackle this problem with increasing the top marginal tax rate to 39.6% of the late 1990’s. Between 1932 and 1944 the tax rate on top incomes rose from 25% to 94%. I think there is little chance of that happening especially with the impending election.
Here is another clip from PBS and Paul Solman “Making Sense of Financial News”. Here he asks do higher tax rates slow economic growth? Some interesting historical observations:
1. High taxes on the rich prolonged the Great Depression, but how do you explain the postwar boom when the top marginal rate remained in the 90s? And when Kennedy cut the top rate, growth was very subdued.
2. Reagan in the 1980’s cut the top rate of income tax from 50 percent to 28 percent with the hope that you will stimulate growth and trickle down from the top all the way to the bottom of the income distribution. Did it happen – NO!
3. When Clinton increased taxes in the 1990’s growth rose significantly which goes against what Arthur Laffer talked about in the previous post. So the relationship between growth and tax levels is complicated.
An interesting tax that I came across on the BBC World Service radio. Hassan Heikal is Chief Executive Officer, EFG Hermes the largest investment bank in the Arab world and his tweet from Tahir Square was in the FT Opinion page. He states that the austerity measures proposed will just make matters worse and will lead to severe social unrest in Europe. We need to tax the higher incomes more in order to be able to pay off the debt. Here is part of his piece from the FT. You can read the full tweet by clicking below:
Hassan Heikal – tweet from Tahir Square
Cuts in governments’ budgets will lead to higher unemployment which is already a staggering 22 per cent in Spain, where one in every three young people is unemployed. Do you think your average 25-year-old Spaniard will stay at home watching Barcelona versus Real Madrid? Or will he ultimately take part in social unrest or, as I call it, a “social justice movement”?
So what could be done differently? I have a controversial solution. We should impose a one-off global wealth tax of ten to 20 per cent on individuals with a net worth in excess of $10m, with tax receipts going to their country of citizenship.
The aggregate wealth of those individuals – that is those with net worth in excess of $10m – is approximately $50,000bn. Paradoxically they – or I should say “we” – represent fewer than one in 10,000 of the world’s population.
The global proceeds of what I call the “Tahrir Square tax” would be, if levied at 10 per cent, approximately $5,000bn. Europe should receive $1,500bn, more than enough to deal with the European public debt crisis. It would bring down eurozone public debt, excluding that of Germany and France, to below 50 per cent of gross domestic product.
In 1897 Irish philosopher and economist Francis Edgeworth set the utilitarian (happiness) foundations for highly progressive taxation. He pointed out that a utilitarian social planner will equalise the marginal utility of the population, but this requires equalising people’s disposable income (after tax). Edgeworth stated that those with greater than average productivity are fully taxed on the excess, and those endowed with lower average productivity are subsidised to bring them up to the average.
As specified in one study, the typical 6-foot American earned $5,525 more than a 5-foot-5-inch worker, after correcting for sex, age and weight. Research has identified that taller adults maintain jobs of higher standing and, on average, earn more than other workers. In developed countries, researchers have highlighted characteristics such as self-esteem, social superiority, and prejudice. Other studies have stated that on average, taller people earn more because they are more intelligent – an additional inch of height is associated with a one to two percentage
increase in earnings. If this is true height should be a useful indicator for determining an individual’s optimal tax liability. Therefore, a tall person of a given income should pay more in tax that a short person of the same income.
Using optimal-taxation formulas, Mankiw and Weinzierl (2007)* crunched the numbers and came up with a “tall tax” amounting to 7 percent of a tall person’s income. Short people would receive a 13 percent rebate. According to conventional utilitarian calculus, the optimal height levy is large. The optimal tax for white males in the US is divided into 3 height groups:
Medium = 1.77m – 1.84m
Tall = 1.85m
Taxing people by height is a rather unusual idea but it has been interesting to look into the research concerning optimal levels of taxation.
*The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution Gregory Mankiw & Matthew Weinzierl (2007)
Here is an interview with Larry Summers – outgoing director of President Obama’s National Economic Council. He has been a leading architect of economic policy of the Obama administration. He was also Treasury Secretary under the second Clinton Administration from 1999-2000.
Summers does say that the tax-extension is a compromise and that reductions in tax for the high income earners is not the best way to increase growth in the economy. But he argues that this will have a significant impact on the economy in 2 years time – he assumes the economy will be growing significantly. It is just under 10 minutes long but good viewing.
From the PBS Newshour in the US – although quite a long the interview with Paul Krugman (New York Times columnist and Princeton Professor) and Stephen Moore (The Wall Street Journal) it is worth a look. It concerns President Obama defending his decision to compromise with Republicans on tax-cut extensions for all, in order to extend unemployment benefits. Krugman states that “it is just going to be money handed over to people who are not going to spend it. It’s not actually going to boost the economy”. Moore on the other hand agreed with the tax cuts. “I think we needed to extend them for everyone, not just people who make less than $250,000 or a million. They’re wealth-producers who put Americans to work.”
This morning on Radio New Zealand Morning Report programme there was an interview with New Zealand Wine Growers Chief executive Philip Gregan concerning the Government’s intention to raise the tax from July 2011, which will cost wineries another $1.00 per case.
His worry is that the winegrowers will have to bear the whole tax themselves because they can’t pass it on to the retailers. There are 600 – 700 wineries in New Zealand, but only two major players in the retail sector, which are the supermarkets. Mr Gregan says that gives power to the retailers which are very reluctant to accept price increases so it becomes impossible to pass on the annual tax increases. He says the Government should tax the consumer directly at retail, rather than producer level. Furthermore, despite the excise tax on wine going up more than 60% since 1991, the increase in the cost price index for wine in the past 19 years is only about half the overall CPI increase.
Excise tax: a tax collected by Inland Revenue Department (IRD) which is usually on a specific good within the country. Excises are distinguished from customs duties, which are taxes on importation.
A hat tip to Kanchan Bandyopadhyay for this piece entitled “Everybody wants fair play – shame we can’t agree what it is” by Tim Harford – Undercover Economist fame. It discusses what is fair with regard to the tax burden and the distribution of income. In the light of recent tax changes in NZ it is an interesting read. Harvard economist Robert Nozick, uses the famous “Wilt Chamberlain” thought experiment.
Imagine, said Nozick, a “fair” distribution of income. After the government somehow imposes that distribution, then imagine that a million people are willing to pay 25 cents each to see basketball games featuring Wilt Chamberlain, a star of the day. Each is now 25 cents poorer and Chamberlain is a quarter of a million dollars richer. Everyone has been made happier by this voluntary set of transactions. How, then, can we say that the original distribution was “fair” and the new distribution is “unfair”? Leaning on this logic, Nozick argued that fairness must be more a matter of fair processes rather than fair shares.
Click here for the full article.
With my A2 class we are looking at policies to help developing economies. Earlier in the year economist Jeff Sachs called for a tax on every deal conducted by the financial industry to curb the excessive power of Wall Street, and pay for the west’s unfulfilled promises to poor countries.
“Wall Street has had the most profitable year in its history. It made profits of $55bn (£37bn) in the midst of the biggest downturn since the Great Depression,” Sachs said. This was due to the 0% interest rate policy by the Fed Reserve and the bailouts paid by the taxpayer. Sachs is quite rightly disappointed with the G8 countries as they promised in 2005 to double the aid to Africa which would equate to $60bn – they are $20bn short. To put it in perspective the credit default swap (CDS) market was worth $62tn which is the output of the global economy. CDS – the buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. Below is a very good discussion of the Robin Hood Tax.