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Wealth, Tax Policy & Social Mobility 2 March 2006

Posted by Todd in Capitalism & Economy, Democracy, Inequality & Stratification, Political Commentary, Politics.
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As a continuation of mine and Equality's discussion about wealth on the Consumerism and Democracy thread, I thought I'd post some numbers about the tax policies of the past 25 years. Warning: Lots of stats ahead.

A 2001-2002 IRS study found that the only demographic to have lowered their overall tax burden as a result of the Bush tax cuts were the top .1%.

Over 10 years, if the Bush cuts are made permanent, those with yearly incomes over $1 million will benefit from the majority of breaks, both in raw amounts paid and share of Federal Income Tax.

The Alternate Minimum Tax (the AMT mentioned by Equality in the other thread) has been the most insidious issue for middle-class (including the PMC) tax payers. The AMT, set in 1969, has never been adjusted for inflation, so anyone with a filed income of over $75K is subject to minimum taxation. For those earning between 100K and 500K per yer, it nullifies 1/2 to 2/3 of the Bush tax cut, meaning that the "merely rich" are paying more than the "super rich" in terms of share. But (and this is the fun part) the way the Bush cuts are written, only 1/3 of those earning more than $1 million/year are adversely affected by the AMT, mainly because investment income is not subject to this tax, and most of the tax cuts over the past 10 years have been on income from investments and dividends.

The main issues for me are that the wealthier you are, the greater your benefit from the Government, ranging from the education of your workers, policing of borders, transportation infrastructure, military backing of trade interests, etc. So although I do believe in redistribution through taxation, it is far more important to me that the wealthy actually pay for the benefits they receive from the government, which are for all intents and purposes welfare for the wealthy. (Middle class welfare would be things like mortgage interest deductinos, college tuition deducions, and college education itself, be it through state funded institutions or federal financing of a private university education.) Off the top of my head, the two things that need to change are: 1) military funding needs to be restructured and our military needs to be reorganized to fight the threats we face now instead of the Cold War model which is a huge burden on our economy; and 2) the erosion of progressive taxation must be halted in its tracks, the losses restored, and the numbers adjusted to account for current values.

[Source: David Cay Johnson. "Richest Are Leaving Even the Rich Far Behind" in Class Matters (Times Books: New York, 2005). It's not a fantastic book, but its solid journalism and analysis. There are some good critiques, however, of the NYT study; The Columbia Journalism Review criticizes the Times for pulling back from its hardest critiques.]

Per mobility, I just wanted to give a couple of observations about mobility in the U.S. First, intragenerational mobility is quite common, an individual moving between classes during his or her lifetime. This usually is an individual gradually rising to meet parental class or a downward mobility do to layoffs or outsourcing or technological shifts.

Intergenerational mobility, or exceeding parental class through education and/or marriage, is rare for native-born Americans, but common among immigrants. The exception to this is the most recent wave of Mexican American immigrants (starting in approximately 1986, after the amnesty) are really struggling to raise their class positions and indicators are that they will fail to do so, for the first time in the history of Mexican-American migration. Historically, there have been two massive upward shifts in class position: 1) between 1880-1920, when the birth of the corporate bureacracy created a new white collar middle class to complement the emerging Professional Managerial Class; and 2) from 1948-1964, often mistakenly credited to the GI bill, this massive upward shift has a lot to do with cold war investment in technical education, the massification of housing in suburbs, and the general rubust economy (a few downturns in the 1950s notwithstanding), which was generally halted by 1968 when the economy stagnated for any number of reasons ranging from petroleum prices to Vietnam.

Intergenerational downward mobility has historically been less than upward, except during depressions (e.g., 1873, 1886, 1892, 1929, etc.). Since 1973, downward mobility has become increasingly significant with the movement of most of the manufacturing jobs; the outlook is still unclear with white collar outsourcing in the past decade, but it's possible that it will have a similar effect on downward mobility.

Longitudinal studies of the U.S. since 1950 shows that mobility is primarily "vertical mobility" between occupations within classes, but that mobility between classes is itself exceptionally rare. (My own family is an exception to this, as both my parents have PMC status now, but were raised in poor and workingclass families.)

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Comments

1. Ed Ormsbee (dad) - 2 March 2006

Ok. Here is my quick response. You mention the richest of the rich receiving the greatest benefit from the tax cuts without addressing the taxes paid, as a percentage of taxable income and in total dollars. The primary purpose of the tax cuts was to stimulate the economy both on main street and on wall street. I believe most economists would agree that that has happened although they may argue as to degree and other social issues. From a social standpoint you can argue the tax code from now until eternity without finding consensus. From an economic standpoint I believe economists can find some agreement on many issues. For instance, if you want to stimulate investment and spending that will grow the economy (and thereby increasing the total tax revenue) tax rate reductions should happen in the highest tax brackets.

And there is my two cents worth.

2. Todd - 2 March 2006

Hey Dad,

Welcome to my sandbox.

You are right that most conservative economists (usually of the market fundamentalist ilk) think that cutting taxes to the rich increases investment; empirically what has happened every time that was tried (starting in 1929) was that the rich horde their dough. Economies *do* turn around, but unless there are other market factors encouraging investment (such as the housing market in CA or continued investment in high tech development) the mere fact of having more money in their pockets does not encourage the rich to invest. , unless you count
buying government bonds “investing”, but as you know, that’s an economically neutral act and economically deleterious when the government has to pay them out with interest. This was the fundamental finding of Keynes’ early 1930s research and has been repeated numerous times since in various market economies around the world. I am not an economist, so my reading in this particular theoretical debate isn’t extensive and almost always secondary. That said, the only economists I know of who argue for “increased investment after tax cuts” or “supply-side economics” do so on ideological rather than empirical grounds. On the rare occasions they try to give empirical grounds, it’s almost always, “see! the economy is turning around”…that hardly satisfies the threshold for determining causality; most economic upturns (and downturns) are confluences of multiple social, cultural, political, and economic factors.

3. Equality - 2 March 2006

Todd, mon frere, stick to the sociology and leave the economics to the professionals. 🙂

“empirically what has happened every time that was tried (starting in 1929) was that the rich horde their dough.”

Huh? You think the rich who get tax cuts stick their cash in a mattress or use their money to light big fat cigars? Or that the only investments they make are in T-bills? (And if you think that people buying govt. bonds is economically deleterious, I might ask you to consider the economic consequences if suddenly the govt. was unable to find buyers for its bonds). Who do you think pumps billions into the stock market? IPOs? M&As? Corporate debt offerings? Or companies pumping those dollars into their own business to expand, etc.? You think Sam Walton was putting his money in a giant piggy bank? Is that how we got Wal-Marts popping up in every vacant field in America?

Now, having ranted, I will grant you that the stimulative effect of reducing marginal tax rates diminishes with each successive reduction. That is, when Kennedy cut marginal rates in the 1960s the stimulative effect on the economy was substantial because the marginal tax rates were as high as 90%. Likewise, when Reagan did it in the early 80s. But by the time Bush comes around, the supply side rationale is not quite as persuasive because (and on this we may agree) the folks the tax cuts are supposed to incentivize have already got buttloads of money to invest, which they are. When rates are 70, 80, 90%, the rich look for any tax haven they can find and investment becomes an afterthought. When rates are 38%, cutting them to 35 or 33% does not have the same effect because those folks have already been investing their dough. It’s late and I need to go to bed now. Good night, Mr. Engels.

4. Todd - 2 March 2006

Huh? You think the rich who get tax cuts stick their cash in a mattress or use their money to light big fat cigars?

LOL. No! I was being glib. But yes, I do stand by my statement that historically, when tax cuts were given to ‘stimulate investment’ during economic downturns, the rich did *not* invest. Think of the recent dot-bust: There wasn’t a huge re-investment, there was a significant cooling in stock markets. Let me be more clear–investment in economy-stimulating industries isn’t what has happened in U.S. history when the wealthy were given tax cuts during recessions. Rather they invest in safe things (like gov’t bonds) to protect their horde.

I’d love to see any works you can recommend that show otherwise at any pointn in the 20th century. I’m not an economist, but I am a sociologist and we do study economic behavior. The idea that a tax break for the wealthy will boost “supply-side” of the economy is an ideal that hasn’t yet actually happened in the real world. Keynes proved it empirically in the early 1930s; it has been studied repeatedly since then. Not even Friedrich Hayek challenged that finding; Hayek’s hobby horse was inflation, but he basically accepted Keynes’ findings on who invests during depressions/recessions.
Let’s be a bit more real here: you don’t pump billions of dollars into the stock market simply because you *have* billions of dollars, especially when the market is tanked (market writ large, not just stock market). The object is to make money. What has happened in economic downturns historically is that the money goes elsewhere, such as government bonds, which are, as I mentioned, economically neutral in terms of stimulation. When there’s constriction in the market, Sam Walton is pumping billions of dollars into improving his business–well, he’s not doing much of anything anymore, except for rotting–he is, like everyone, tightening his belt. Whether it is *necessarily* so, or simply investor behavior, we could argue about for years.

5. Todd - 2 March 2006

P.S. You framed your argument by making what seems to be a perfectly sensible claim about market behavior–that the rich invest because, of course, that’s what they do! They invest! That’s the problem with much of traditional economic analysis from a sociologist’s point of view: it functions on a “rational choice” model, which is nearly always ideological and not empirical. That doesn’t bear out in the real world when you study empirically the economic behavior of the wealthy during economic downturns/recessions/depressions (meaning you actually go see what people actually did/do). This is why I said in my original comment to my father that when investment occurs it is because of other market factors (e.g., dot-com boom, a depression, oil price increase, etc.), *not* merely because the wealthy have money to invest.

By the way, investing is not in itself an effective tax shelter if you loose your investment in the process.

6. Equality - 3 March 2006

Well, I will agree with you that tax policy is only one factor affecting the overall macroeconomic picture, and I will agree that supply-side-style tax cuts may not have been the only factor in stimulating the economy, say in the 60s, the 80s, and the 00s. However, I think I would disagree with you if you are saying that such tax cuts have NO upside effect on the greater economy (i.e., investment that spurs GDP growth). And, while I have not the time or energy to hunt down the stats, I think there is plenty of empirical evidence to back that up. I think we can almost take “judicial notice” of the fact that when there was a recession in the late 70s/early 80s and Reagan got his tax cuts through, that there followed an extended economic expansion. Now, what we may disagree on is whether this amounts to correlation or causation. It sounds like you are saying that while there may be a correlation between the tax cuts and subsequent economic growth, the cause of such growth was really something quite different (monetary policy, perhaps?) I may be reading too much into your argument, and of course, I was also being glib with my previous comment. I am, however, cheered that you are familiar with Hayek. Have you read anything by Ludwig von Mises?

7. Todd - 3 March 2006

EQ,

Yeah! Someone who will argue with me! (That’s why I asked my dad to join it, too.) I hope you don’t take any of this personally, Equality. This is an incredibly useful discussion and I’m learning a lot from it–e.g., your points about diminishing investment. Don’t worry about “digging up stats”–what I was asking was simply what the empirical arguments were (this is a blog, not an academic joural…lol.)

My point is actually a little more precise and narrow: the wealthy don’t invest in a market that won’t make them money (in fact no one does. When economically significant investment is made (that is, investment which actually effects the growth of the overall economy), it is made because of other market factors. So tax cuts on the upper 5% (or higher) are only effective as a market stimulus when other market factors are at play that will encourage them to invest in areas that will positively affect the economy.

Per the 1980s, I would add two things. 1) social historians (I don’t know about economists) are deeply divided about the post-Reagan “expansion,” because it was in the mid-1980s when the top 20% split off from the bottom 80% in terms of wealth and income. So the yuppies were having a 1920s moment while everyone else was getting laid off every couple years. This was highly uneven until the dot-com/high-tech boom of the early 1990s, which had little to do with economic policy of any administration and more to do with innovation and, ultimately, speculation.

2) my sense of the “recovery” and the investment, which began to occur in the mid-1980s, was that it would have happened without the “tax reform” because Reagan’s FRB started lowering interest rates, which is the one area where I think Hayek was onto something.

Per Hayek–the reason I know about all this stuff is because I teach courses on globalization and you can’t understand any of it without knowing about Herr Hayek. There is much about his theories that I think are simply wrong–I know too much about the past 200 year history of industrial capitalism. But–and this is where I’m really out of step with many on the left–I think that Hayek’s critique of post-war Germany and his critique of 1960s India adds a much needed corrective to the ideals of “state directed capitalism.

What I see historically (my interpretation of the empirical events) is that the market is a delicate balance: (Hayek) If you over-regulate it, you stagnate it and maybe even crash it (Germany, India, present-day France, 1970s England, *maybe* even 1970s U.S., etc.); (Keynes) but if you don’t regulate it, you end up with massive suffering, poverty, starvation, and death, and the concentration of wealth into fewer and fewer hands, the antithesis of Adam Smith’s vision for capitalism (England 1810-1880; U.S., 1870-1910, 1920-1929, etc.).

8. Todd - 3 March 2006

By the way: Please don’t ever use the word incentivize in my presence again. My aging degree in English just can’t landle it. 🙂

9. Equality - 3 March 2006

What I see historically (my interpretation of the empirical events) is that the market is a delicate balance: (Hayek) If you over-regulate it, you stagnate it and maybe even crash it (Germany, India, present-day France, 1970s England, *maybe* even 1970s U.S., etc.); (Keynes) but if you don’t regulate it, you end up with massive suffering, poverty, starvation, and death, and the concentration of wealth into fewer and fewer hands, the antithesis of Adam Smith’s vision for capitalism (England 1810-1880; U.S., 1870-1910, 1920-1929, etc.).

On this we agree, and I would add that the problem of underregulation is particularly pronounced in a democracy like ours where big business essentially owns the government, which actually introduces many perversions into the market economy. And, mea culpa on the use of incentivize. I will banish it henceforth and forever from my vocabulary.


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