Income inequality is a bogus issue. If you want to help the poor then you need to look at serious issues including how to keep families intact, how to get folks to move to economic opportunities like the fracking boom in North Dakota, and reduce barriers like regulations on jobs or minimum wage increases. The other thing you want to do is pay homage to the growth fairy. The growth fairy has made us all rich. Whether you call it Jonah’s Miracle or Deirdre’s Great Enrichment, growth is the key element to why we are all better off.
Robert Verbruggen at NRO has a nice article on how folks are trying to repackage income inequality to gin up the politics of envy. He is reacting to a NYT article touting The Triumph Of Injustice by Emmanuel Saez and Gabriel Zucman. Robert starts out with the book’s claims:
Per Saez and Zucman, while the rich have been pulling in more and more of the nation’s income — grabbing about a fifth of it now, double what they got a few decades back — they’re paying lower and lower tax rates. Indeed, in 2018, the richest 400 Americans paid the lowest overall tax rate (including state, local, and federal taxes) of any income group. While the very richest Americans in 1950 paid two-thirds of their income in taxes, in 2018 it was down below a quarter; even the full top 0.1 percent barely pay more than the bottom 90 percent these days. It’s not that much of an exaggeration to say we have a flat tax system, not a progressive one.
These claims seem silly when compared to the data on federal tax returns from the Tax Foundation:
The share of reported income earned by the top 1 percent of taxpayers fell slightly to 19.7 percent in 2016. Their share of federal individual income taxes fell slightly, to 37.3 percent.
The rich are making less than 20 percent of taxable income but paying over 37 percent of federal income taxes. What the book is doing is making an invalid comparison between taxes computed on one basis and income computed on another basis.
Robert tell us measuring income is complicated:
As the JEC report details, this is only the first of many technical decisions researchers must make that affect the results. Should we worry about income inequality before or after taxes are taken out? Should we include governmental transfers as income? Should we analyze married couples together or separately, bearing in mind the decline of marriage in recent decades, especially among the poor? How to handle corporate profits that are retained rather than given out to shareholders? How to handle stocks that have grown in value but have not been sold? [Emphasis added]
Yup, computing income is complicated. We would like to give an example of the last item that we have made bold. Income, as accountants and especially PhD students know, can be measured in a variety of ways. Taxable income would be one and financial accounting income (GAAP) would be another but there are others. When measuring the income, what accountants call unrealized holding gains (UHG) become a big issue especially for individuals. An UHR happens when an asset owned by an entity or individual goes up in value. Taxes are not paid on the UHG until the asset is sold or in the case of your house not paid at all. This is one of the reasons that the individuals in top one percent of taxable income varies so much from year to year. Individuals (generally) only pay taxes on your cash income as your start up company prospers but when the individual sells it to a bigger company, depending on how it is structure, it might cause a big income year.
Let’s take a plausible example to help you understand. Bill Gates is estimated currently to own over 400 million shares of Microsoft. He doesn’t pay taxes on the UHG unless he sell the stock. So let’s say (this is total guess) Bill has cash income of $100 million. Microsoft is up almost $40 per share this year. It is a bit of an over estimate but it keeps the math simple. Bill has an UHG of $16 billion versus taxable income of $100 million and taxes of less than $37 million. Of course in 2000 when Microsoft decreased in value by over $30 per share and Bill owned many more shares then his tax rate would be astronomical.
Sidebar: It makes good policy sense to tax on a mostly tax basis because taxes must be paid in cash. End Sidebar.
The argument is all about timing. When you measure income one way by including UHG and taxable income another way then trying to make a ratio is … [we pause here as we try to find a word other than crazy or insane] … bad methodology [as we retreat to jargon].
Don’t listen to the envy lobby. Income inequality isn’t important even if we could agree on how to measure it. Regulations (generally anti-incentives) and incentives are important. Let’s worry about those.