Posts tagged ‘income inequality’

April 16, 2015

Should the rich pay more taxes?

by Grace

Top 20% of Earners Pay 84% of Income Tax

When people claim that the rich don’t pay their fair share of taxes, do they believe that top earners should pay 90% or more of taxes?

The bottom 40% of earners pay no taxes, and actually pay negative income taxes through government transfer payments.

Why is the share of income taxes negative for 40% of Americans? In recent decades Congress has chosen to funnel important benefits for lower-income earners through the income tax rather than other channels. Some of these benefits, such as the Earned Income Tax Credit and the American Opportunity Credit for education, make cash payments to people who don’t owe income tax.


The top 1% of earners pay “nearly half the income tax”.

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The average tax rate for those earning more than $1 million is 27.4%.

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Professor Mark Perry says we should “thank top 20% for shouldering 84% of the income tax burden”.  So are the top earners villains or heroes?

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Laura Saunders, “Top 20% of Earners Pay 84% of Income Tax”, Wall Street Journal, April 10, 2015.

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January 26, 2015

What is the most valuable inheritance in a knowledge economy?

by Grace

Inheriting money is certainly nice, but intellectual capital may be the most valuable bequest in today’s knowledge economy.

… today’s rich increasingly pass on to their children an asset that cannot be frittered away in a few nights at a casino. It is far more useful than wealth, and invulnerable to inheritance tax. It is brains.

Intellectual capital drives the knowledge economy, so those who have lots of it get a fat slice of the pie. And it is increasingly heritable. Far more than in previous generations, clever, successful men marry clever, successful women. Such “assortative mating” increases inequality by 25%, by one estimate, since two-degree households typically enjoy two large incomes. Power couples conceive bright children and bring them up in stable homes—only 9% of college-educated mothers who give birth each year are unmarried, compared with 61% of high-school dropouts. They stimulate them relentlessly: children of professionals hear 32m more words by the age of four than those of parents on welfare. They move to pricey neighbourhoods with good schools, spend a packet on flute lessons and pull strings to get junior into a top-notch college.

Yes, all this is true.  But how to address the issue of income inequality?  Thankfully, the author agrees the “solution is not to discourage rich people from investing in their children”.  But he does have other ideas.

  • Improve early childcare for poor children.
  • Move primary control of public school funding from local to state level, and tilt it to favor poor students.  Expand school choice.
  • Change college admission so it is based “solely on academic merit”, and force schools to be more transparent about the financial “return that graduates earn on their degrees”.

Even if these recommended reforms could be magically imposed, I question whether much would change.  Head Start doesn’t work in improving long-term outcomes, and I’m skeptical about the chance for reforming such a massive government program.  State funding of public education would be an improvement, but wealthy parents would always find ways to make sure their own children got a better deal.  School choice would at least offer motivated low-income families better options.  I like the idea of academic merit becoming the primary determinant for college admission, but that in itself would do little to mitigate the effects of inadequate K-12 education.

How much impact would increased income redistribution have?  So far, it appears our attempts to address poverty have ‘been a “success at strengthening the social safety net” but a “failure as an engine of self-improvement”’.

There are important reasons to help all Americans develop the ability to create their own financial success.

Loosening the link between birth and success would make America richer—far too much talent is currently wasted. It might also make the nation more cohesive….

Related:

 “87 percent of poor smart kids escape poverty”

Changes in marriage patterns have affected poverty and income inequality

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“America’s new aristocracy”, The Economist, January 24, 2015.

February 11, 2014

Does ‘expanding equality of opportunity increase inequality’?

by Grace

It seems that expanding opportunity leads to increased inequality.  Would higher taxes be a good solution?

Since “families are the primary transmitters of human capital”, does it follow that “expanding equality of opportunity increases inequality because some people are simply better able than others to exploit opportunities”.  This is the premise explored by George Will in a Washington Post opinion piece last year.

If America is to be equitable, with careers open to all talents and competent citizens capable of making their way in an increasingly demanding world, Americans must heed the warnings implicit in observations from two heroes of modern conservatism. In “The Constitution of Liberty” (1960), Friedrich Hayek noted that families are the primary transmitters of human capital — habits, mores, education. Hence families, much more than other social institutions or programs, are determinative of academic and vocational success. In “The Unheavenly City” (1970),Edward C. Banfield wrote: “All education favors the middle- and upper-class child, because to be middle or upper class is to have qualities that make one particularly educable.”

Some lucky, privileged “people are simply better able than others to exploit opportunities”.

Elaborating on this theme, Jerry Z. Muller, a Catholic University historian, argued in the March-April 2013 issue of Foreign Affairs that expanding equality of opportunity increases inequality because some people are simply better able than others to exploit opportunities. And “assortative mating” — likes marrying likes — concentrates class advantages, further expanding inequality. As Muller said, “formal schooling itself plays a relatively minor role in creating or perpetuating achievement gaps” that originate “in the different levels of human capital children possess when they enter school.”

Would raising taxes on rich people reduce inequality?

Recognizing that a meritocracy doesn’t always work very well for people lacking supportive families or other advantages, Matt Yglesias proposes that the government should tax rich people and “give the money to poor people” as a way to make everyone happy.

Should we guarantee everyone a “great” life?

,,, When you think about physical disabilities this becomes particularly clear. We try to help out people who are blind or who lost a leg in Iraq or who are born with a congenital heart weakness not because providing such assistance accords with a principle of merit, but precisely because people who lack “merit” in the field of seeing or walking or not dying as a child due to heart failure are the people who need help. But lots of people suffer from less visible problems, be it a genetic weakness for alcoholism or the below-average intelligence that afflicts exactly 50 percent of the population. Those people should have great lives, too.

More money is not the solution.

The rich already “pay an overwhelming majority of the taxes in the United States”, but presumably Yglesias means their taxes should be increased.  As much money as we throw at them, I don’t think we can provide every disadvantaged person with a great life.  Add on the problem “that you eventually run out of other people’s money”, and this doesn’t seem like a good solution.  Money can sometimes help improve lives, but it must be spent wisely.  Politicians and bureaucrats don’t have that part quite figured out, and it seems that the more money we give them to control the less effectively they spend it.

Related:  Changes in marriage patterns have affected poverty and income inequality (Cost of College)

January 31, 2014

Changes in marriage patterns have affected poverty and income inequality

by Grace

Florida Senator Marco Rubio’s recent comments on the benefits of marriage in reducing poverty were soundly criticized by some left-leaning voices.  Rubio had offered up “a very old idea”:

Social factors also play a major role in denying opportunity. The truth is that the greatest tool to lift people, to lift children and families from poverty, is one that decreases the probability of child poverty by 82 percent. But it isn’t a government program. It’s called marriage.

National Review Online clarified that “cajoling impoverished single mothers into marrying men who don’t have particularly bright labor market prospects” is not the solution proposed by Rubio or other conservatives.  Rather, the idea is to encourage marriage before having children.

Even amid strong resistance to this idea among liberals, the New York Times has reported about the effect of marriage on poverty.

changes in marriage patterns — as opposed to changes in individual earnings — may account for as much as 40% of the growth in certain measures of inequality.

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Another notable trend is how the rise of assortative mating has increased income inequality.

… Income inequality has gotten worse in past decades in part because college-educated, high-earning men and women are more likely to marry each other, rather than get hitched to partners with divergent education or wage levels.

This is the finding of a research paper, “Marry Your Like: Assortative Mating and Income Inequality”  authored by economists Jeremy Greenwood, Nezih Guner, Georgi Kocharkov, and Cezar Santos.

No “solution” is proposed.

The rich, married, and educated get richer while the poor, single, and uneducated fall further behind.

… College-educated households are more likely to be married and thus more likely to have secondary earners contributing to household income.

… “assortative mating” … married college-educated persons are more likely to have a college-educated spouse. Thus, they are more likely to have a spouse with high earnings.

Related:  Lack of college-educated men may be a reason for declining marriage numbers (Cost of College)

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