Income gap widened in 2005

In case you wonder why the American public isn't all that excited about their economic outlook despite an economy that's doing well on the macro level, here's the reason.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

So despite what looks like healthy wage gains, very little of it was actually wages. All of the income increase and more went to the top 10 percent. Actually most of it went to the top 1 percent, whose income grew 14 percent.

That explains the following statistics from the article:

1. Both the top 10 percent and top 1 percent have hit income shares not seen since 1928 -- shortly before the 1929 stock market crash and the Great Depression.

2. The top 300,000 Americans -- one tenth of one percent of the population -- earned almost as much as the bottom 50 percent -- 150 million people. On average, each of those 300,000 people earned 440 times as much as one of those 150 million.

And the numbers probably understate the situation:

The Internal Revenue Service estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures.

Defenders of the current tax system argue that the problem isn't tax levels -- even though federal income taxes, measured as a share of income, has stayed largely flat for middle-income workers over the past 40 years while dropping by half for the affluent.

They make two main claims:

1. The numbers simply reflect the demands of the global economy, where skilled workers command ever more of a premium and unskilled workers fall behind.

2. The numbers don't count benefits, such as health insurance, that make up a much larger share of total income for poorer Americans than they do for the wealthy.

There is probably some truth to #1, but it's a stretch to argue it accounts for the entire difference. And even if it did, it's not an argument for complacency or acceptance. Extreme income inequality is a hallmark of unstable societies. Too much wealth concentrated in too few hands sparks unrest.

#2 is mostly bogus. The reason health insurance makes up a larger share of worker income is because health costs have gone up sharply. My employer paying 20 percent more for health insurance doesn't leave me better off if my health costs go up that much; it's a wash as far as disposable income is concerned. Never mind that I'm probably worse off because health-care costs also are eating into my take-home pay, in the form of higher premiums, co-pays, deductibles and all the other ways hard-pressed employers are devising to push more such costs on to workers.

While there can be plenty of principled disagreement about what causes the situation and what should be done about, two things seem obvious:

1. The tax system that conservatives often criticize as "punitive" toward the wealthy or successful has turned out to be nothing of the sort. Despite such "confiscatory" measures, the wealthy have increased their share of income -- to the point of hoovering money out of the pockets of the less affluent.

2. Given #1, as well as the gigantic federal deficit and the consequences of extreme income inequality, it makes zero sense to prolong or enhance tax cuts for the wealthy. The estate tax should be retained, and the AMT fixed instead. The cap on Social Security taxes should be removed, and income caps on benefits should be added. Marginal rates should be re-examined. Tax enforcement should be beefed up to capture more of that non-wage income.

Perhaps you think this is somehow a socialist redistribution of wealth downward, ignoring the fact that the current situation is a socialist redistribution of wealth upward, which simply makes no sense.

Dealing with the national debt will require work on both the spending and revenue side of the federal ledger. But as far as the revenue goes, it is only logical to take the most money from those most able to pay. Everyone's second $100,000 should be taxed more heavily than everyone's first $100,000. Doing so will not only restore our federal finances to health; they will head off a building social convulsion that benefits nobody -- especially the rich.

deficit, AMT, class, income, taxes, politics, midtopia

The educated class

When our children were little, their grandparents really liked talking "baby talk" to them. I'd watch as supposedly intelligent adults spent hours talking nonsense to unresponsive infants. both baby and adult seemed to enjoy it.

I hated it.

Why? Because my wife and I were convinced that it stunted brain development. Because of that, and because we had no desire to turn our own brains to mush by babbling like idiots, we always talked conversationally to our children from the day they were born. Sure, for the first year it was more of a monologue than a dialogue, but that was fine. We got used to speaking to them like they were adults.

We felt strongly enough about this that we eventually asked the grandparents to stop with the babbling. They thought we were killjoys, but they complied.

Vindication is oh-so-sweet. Not only were we right, but we were a living example of why there's an enduring achievement gap in this country.

This according to the New York Times, which hides its best stuff behind the Times Select wall. In an article in the Nov. 26 magazine, writer Paul Tough explores the challenges facing the No Child Left Behind act. After noting that black children are three times more likely to grow up in poverty than white children, he writes, researchers Betty Hart and Todd Risley decided to conduct an in-depth study of 42 families. What they found should surprise people only in its scope.

Vocabulary growth differed sharply by class.... By age 3, children whose parents were professionals had vocabularies of about 1,100 words, and children whose parents were on welfare had vocabularies of about 525 words. The children's I.Q.'s correlated closely to their vocabularies. The average I.Q. among the professional children was 117, and the welfare children had an average I.Q. of 79.

... By comparing the vocabulary scores with their observations of each child's home life, they were able to conclude that the size of each child's vocabulary correlated most closely to one simple factor: the number of words the parents spoke to the child. That varied greatly across the homes they visited, and again, it varied by class. In the professional homes, parents directed an average of 487 ''utterances'' -- anything from a one-word command to a full soliloquy -- to their children each hour. In welfare homes, the children heard 178 utterances per hour.

What's more, the kinds of words and statements that children heard varied by class. The most basic difference was in the number of ''discouragements'' a child heard -- prohibitions and words of disapproval -- compared with the number of encouragements, or words of praise and approval. By age 3, the average child of a professional heard about 500,000 encouragements and 80,000 discouragements. For the welfare children, the situation was reversed: they heard, on average, about 75,000 encouragements and 200,000 discouragements. Hart and Risley found that as the number of words a child heard increased, the complexity of that language increased as well. As conversation moved beyond simple instructions, it blossomed into discussions of the past and future, of feelings, of abstractions, of the way one thing causes another -- all of which stimulated intellectual development.

In other words, talk to your kids like they're adults, and they will rise to the challenge. Talk to them like they're servants to be ordered around (or worse yet, don't talk to them much at all) and they will stagnate.

So why do blacks do worse than whites on standardized tests? Trick question, because it's the wrong question. There is a gap in education, but it's not racial. Instead, race has become a misleading proxy for class.

Tough identifies other class-related differences. Poor kids tend to be taught not to question authority, for example, while middle-class kids grow up engaging in back-and-forth conversation and negotiation with their parents -- which is a lot more work for the parent, but ends up producing kids with more self-confidence, who expect their concerns to be taken seriously.

The article goes on to discuss what that means for equalizing academic performance, and it's not pretty: intensive (and expensive) intervention in order to compensate for the shortcomings at home.

But interesting as that is, it's not the point of this post. I'm going to use the article as a springboard to make two related points:

RACE IS OFTEN IRRELEVANT
It's time to look very hard at how race is viewed in our society, because education is not the only place where race is used as a proxy for other issues, with the result that actual causes (and thus actual solutions) are overlooked.

The most controversial way race is accounted for is in college admission and hiring, where schools or companies apply racial preferences as a way to increase minority representation. Laudable as that goal is, it isn't a long-term solution.

Because affirmative action is itself discrimination, it's only legitimate as a way to directly repair damage done by previous discrimination. It would have been unfair, upon repeal of Jim Crow laws, to simply say to blacks "okay, compete." Some degree of remediation was needed to level the playing field and make up for decades of discrimination. But such reverse discrimination must be narrowly tailored and carefully monitored, and ended as soon as the major effects of prior discrimination have been ameliorated. Which requires that objective standards be developed to decide when that has occurred, and that we are careful to separate the effects of racism from other, non-race-based effects for which affirmative action is not the solution.

I'm not saying affirmative-action should be ended; I'm saying it's way past time we had a conversation based around the question "when has the debt been paid, and how will we tell?" The Times article notes that black achievement soared between 1960 and the late 1980s, and then stalled. A reasonable explanation for that might be that by the late 1980s the major effects of racism had been accounted for, and after that the continued focus on race not only did increasingly little good but may have done active harm by diverting attention from underlying causes. It bears looking at.

BARRIERS ARE REAL
While race may not be the barrier it once was, barriers do exist. The biggest barrier, I believe, is class. We have a good degree of social mobility in this country, but the mythical Horatio Alger model simply doesn't work as social policy. From their home environment to the school they attend to the expectations ingrained in them from the day they are born, children from poor families must contend with things that most middle-class children do not.

My wife was raised in a blue-collar household. When she inquired about going to college (an ambition that itself set her apart from many of her peers), her parents didn't encourage her. Their response was "why do you want to do that?" and "don't expect us to pay for it." She was left entirely on her own to find the money, time and initiative to enroll in community college, then transfer to a four-year university. She worked full-time during her entire college career.

My dad has a PhD and my mom has a master's. From early in my childhood I understood that I was expected to go to college. Schoolwork was a priority. Money wasn't a problem; if I hadn't landed an ROTC scholarship, my parents would have paid for everything. Because I didn't have to work, I had plenty of time to study (I didn't, as a rule; but I could have....).

If our roles were reversed, would I have made it to college? Would I have made it through college while working full time? It's impossible to say. But in many situations, the answer would be "no".

And that's the key point. Is it possible to rise above adversity and succeed without help? Of course. But social policy shouldn't be based on the extraordinary exceptions, however convenient that may be for the comfortable.

So the challenge before us is this: identify the true barriers to achievement, and develop policies to address them. I suspect that such an approach would see racial preferences wither and die, while other measures -- primarily, class -- step up to replace them. Extra help for poor students would both address the real cause of disparity and, as a pleasant side effect, increase minority representation and performance.

And our kids? Big vocabularies. Further, one thing we discovered is that to them a concept is a concept. "Tree" is a concept, but so is "black hole." As long as both are explainable, one isn't drastically more intimidating or difficult to grasp than the other. Children teach themselves to talk; they're wired to assemble seemingly unrelated pieces into a coherent whole with minimal clues. If you don't tell them it's complicated (and thus encourage them to give up), more often than not they'll surprise you with their depth of understanding.

Every child deserves that chance.

affirmative action, education, race, politics, midtopia

As expected, House votes to slash estate tax

The vote was 269-156.

Now it goes to the Senate, where the vote is expected to be much closer.

Republicans trot out the same discredited rhetoric:

"I've never thought that every trip to the undertaker should be a accompanied by a trip by the I.R.S. to your family," said Representative Roy Blunt of Missouri, the Republican whip. "Do I have to sell the corner grocery store or the service station, just to pay the inheritance tax?"

Of course, Republicans have been unable to show examples of that actually happening. I'm blown away by Blunt's ability to repeat a talking point with a straight face, even after it's been debunked.

The Democrats have it right on this one:

Democrats, with equal vehemence, countered that fewer than 1 percent of estates are subject to any tax and that a further rollback would benefit only the very richest families while widening the federal deficit.

"This is the Paris Hilton tax relief act — not Conrad Hilton, Paris Hilton," said Representative Stephen Neal, Democrat of Massachusetts. "This Congress has bent over backward to take care of the wealthy, the strong. Who do we neglect? The people who do the menial work."

It's all about priorities. And it makes no sense for this to be a top priority. Fix other things first.

Bleh. Let's hope the Senate is made of sterner stuff.

taxes, estate tax, politics, midtopia

Estate tax vote looming

The estate tax will go up for a vote in the House this week, but full repeal isn't on the table.

Here's the compromise:

Estates worth as much as $5 million -- $10 million for couples -- would be exempt from taxation indefinitely.

The tax rate on estates worth more than the exemption level up to $25 million would be set at the same tax rates that apply to capital gains -- now 15 percent but scheduled to rise to 20 percent in 2011. The rate for estates worth more than $25 million would be twice the capital gains rate.

Here's what I don't like about the bill:

The bipartisan Joint Committee on Taxation estimated the estate tax cut would cost the government $279 billion over 10 years.

And with no "pay as you go" provision, guess where that money will come from? If you answered "piled on top of the already big deficit", you'd be right. It's better than the $1 trillion cost of a full repeal, but it's still too much money.

As I've written before, "fixing" the estate tax just makes it that much harder to address more-pressing concerns, like the Alternative Minimum Tax or, say, reducing the deficit.

There's also this lovely piece of bribery:

To lure Democratic senators from Washington state and Arkansas, Thomas included a lucrative tax break for the timber industry, pushing the total cost of the bill to nearly $280 billion.

You gotta love it when both sides sell out their principles for a buck.

The good news: Passage isn't certain, and is even less likely in the Senate, which rejected an estate-tax appeal earlier this year.

alternative minimum tax, AMT, taxes, estate tax, politics, midtopia

Estate tax stays unrepealed

The fight's far from over, but for now the Republicans are unable to permanently kill the estate tax.

Voting 57 to 41, with only a few lawmakers crossing party lines, the Senate was three votes short of the number needed to end debate on the bill, dooming it on procedural grounds. The vote all but killed hopes at the White House and among Republicans on Capitol Hill of eliminating the tax on large estates, which under current law would be phased out by 2010 but would return in 2011.

Republicans are now debating whether to give up on their goal and attack Democrats in the coming midterm elections as obstructionists on a measure that they say has considerable support, or settle for a bipartisan measure that would stop short of eliminating the tax entirely.

I strongly encourage the Republicans to try the former route. That way they can make political hay out of it and see how far they get. More importantly, it would eliminate any chance that the repeal passes this year.

Let me repeat my main point regarding the tax: If you're going to eliminate $100 billion a year in tax revenue, there are all sorts of better things to spend that money on -- fixing the Alternative Minimum Tax, for example. Better yet, keep the tax and pay down the deficit.

Tangentially, Bill Frist is now for 0-for-2 an the wedge issue votes -- estate tax, gay marriage -- that were supposed to grease the skids of his presidential campaign. Maybe he'll realize that voters are far more concerned about real issues -- as nicely spelled out by Molly Ivins.

estate tax, Frist, Ivins, politics, midtopia

Estate tax still on the table

Seanate majority leader Bill Frist, his presidential aspirations in tatters and aflame, has been trying to resurrect his hopes by addressing such pressing issues as gay marriage and the estate tax.

The former is doomed to defeat, as even supporters acknowledge, which exposes the "red meat for the base" motivation behind bringing it to the floor for a vote. But the latter is still alive.

GOP leaders on Tuesday put abolition of the federal estate tax on the Senate's election-year agenda as other senators weighed ideas to shrink, but not erase, the tax.

President Bush's tax cuts eliminated the estate tax in 2010, but that temporary law expires, and the tax comes back to life, one year later.

I always admired this cute provision, designed to mask the budget implications of repealing the estate tax while increasing the political pain of letting it be restored. It has done one thing, though: it's forcing Congress to find a more palatable permanent fix.

At least the discussion is moving away from outright repeal and toward some sort of compromise:

Kyl told other GOP senators Tuesday that common ground might be found by increasing the size of an estate exempt from taxation to $5 million per person or $10 million per couple, according to GOP aides familiar with the proposal speaking on condition of anonymity while negotiations continued.

His idea would tax estates between $5 million and $30 million equal to the top tax rate for most capital gains. The remainder of the largest estates would be taxed at 30 percent, those aides said.

That's better than an outright appeal, but I still have two reservations. One, how much will this reduce tax collections? And two, my main philosophical objection remains. Why this tax cut, and why now? There are at least two budget problems more pressing than the estate tax: the Alternative Minimum Tax, and the yawning budget deficits. The estate tax cut will make solving the other two even more difficult, and that just reveals majorly screwed up priorities. However unfair you think the estate tax is, the AMT is even more unfair. And on a purely practical level, the AMT increasingly affects people who need the money, unlike the estate tax. And the deficit is a bouquet of dead roses that we're passing on to our children, regardless of their ability to pay.

Congress needs to prioritize, and shelve the estate tax until they address more pressing concerns.

Update: As expected, the Senate has rejected the gay-marriage ban.

gay marriage, estate tax, Frist, politics, midtopia

Estate tax lunacy

That's what Harold Meyerson calls it. And he's right.

If enacted, Kyl's bill would plunge the government another trillion dollars into the red during the first decade (2011-2021) that it would be in [/quote]effect....

A decades-long campaign by right-wing activists (brilliantly documented by Yale professors Michael Graetz and Ian Shapiro in their book "Death by a Thousand Cuts") has convinced many Americans that the estate tax poses a threat to countless hardworking families. That was always nonsense, and under the estate tax revisions that almost all Democrats support -- raising the threshold for eligibility to $3.5 million for an individual and $7 million for a couple -- it becomes more nonsensical still. Under the $3.5 million exemption, the number of family-owned small businesses required to pay any taxes in the year 2000 would have been just 94, according to a study by the Congressional Budget Office. The number of family farms that would have had to sell any assets to pay that tax would have been 13.

On the other hand, an estate tax repeal would save the estate of Vice President Cheney between $13 million and $61 million, according to the publicly available data on his net worth. It would save the estate of Defense Secretary Donald Rumsfeld between $32 million and $101 million. The estate of retired Exxon Mobil chairman Lee Raymond would pocket a cozy $164 million. As for the late Sam Walton's kids, whose company already makes taxpayers foot the bill for the medical expenses of thousands of its employees, the cost to the government for not taxing their estates would run into the multiple billions.

Is now really the time to blow another $1 trillion hole in the budget? If we decide the answer is "yes", is this the cause we should blow it on? I don't think so.

"Republicans" and "fiscally responsible" don't belong in the same sentence any more. And Democrat Max Baucus should be ashamed of himself:

Behind the scenes, the action has been on the Democratic side in the Senate, as the party's leadership has sought to dissuade Montana's Max Baucus, ranking Democrat on the Finance Committee, from forging a halfway-house compromise with Kyl that would deplete revenue by only $500 billion to $600 billion during that decade.

"Only" $500 billion? Boy, what a relief.

Before we repeal the estate tax, how about fixing AMT and eliminating the budget deficit? Just for starters, I mean. The list of things that should be ahead of "repeal estate tax" on the priority list is a long one.

budget, estate tax, politics, midtopia

The wealth gap and the estate tax

From the New York Times comes yet more evidence of the growing concentration of wealth in America, this time from an analysis of inheritances.

In 2004 median inheritances — half were bigger and half were smaller — amounted to about $29,000 in today's money, according to a Federal Reserve analysis of the Survey of Consumer Finances. That is enough for the heirs to buy a new Pontiac Coupe. But for almost all, it is hardly life-changing money.

Nor are inheritances likely to increase. According to the analysis of the Fed data by Mark Zandi of Moody's Economy.com, 30 years ago the median inheritance was about $10,000 more, adjusted for inflation.

Yes, big money is being passed down. According to the Fed data, the overall pie of inheritances has grown to nearly $200 billion annually — more than three times the amount that was passed down in the mid-1970's, after accounting for inflation. ... But the typical American is seeing little of this wealth. Mr. Schervish and Mr. Havens found that most money would go to a few lucky heirs: 7 percent of the estates would account for half the aggregate bequests.

There are several reasons for shrinking inheritances, starting with basic demographic changes: parents are living longer and spending more of their money themselves, and most people do a lousy job of saving for retirement at a time when fewer and fewer people can rely on pensions and other traditional sources of retirement income. So what money they do save gets spent.

But simple demographics cannot explain the increasing concentration of wealth reflected in the statistic that 7 percent of estates account for half of the money being passed down.

The story notes that wealthy heirs are seeing more and more money:

"We are seeing bigger-sized estates," said Myra Salzer, president of the Wealth Conservancy in Boulder, Colo., which helps heirs manage their inherited wealth.

"Wealth is just exploding," said Daniel FitzPatrick, chief executive of Citigroup Trust, whose clients typically have hundreds of millions of dollars.

Add this to all the other evidence of wealth concentration in America, and other measures of disparity such as CEO pay, which now averages 500 times the wages of average workers. 15 years ago the ratio was 140 to 1; 40 years ago it was 40 to 1.

I don't believe in "punishing the rich" simply for being rich; I'd like to be rich someday, after all. But I do think that it's fair to tax someone's second $300,000 at a higher rate than everyone's first $300,000. And I think we all have an interest in the ill effects of excessive wealth concentration.

Tie up too much wealth in the hands of the few and you damage the economy, limiting opportunity and driving social unrest. For extreme examples look at France during the runup to the French Revolution, or Victorian and Edwardian England, or parts of South America today, where the wealthy live in fortresses, drive armored cars and employ bodyguards while the poor scavenge for food in city dumps. This is how revolutions are born.

Which brings us to the estate tax -- or, as Republicans like to spin it, the "death tax." Along with the Bush tax cuts that provided disproportionate relief to the wealthy, the gradual repeal of the estate tax plays a large part in increasing the concentration of wealth.

Republicans cast it as simple fairness: why should someone's money be taxed twice? It's a fair argument, but it ignores several things:

1. A lot of money is taxed twice, through sales taxes, for example. Or consider the gift tax. Give someone more than $10,000 a year and it's subject to tax. Why, then, does it make sense to exempt a gift from taxation simply because the giver has died?

2. The estate tax brings in about $70 billion a year. In a time of war and budget deficits, is it really good policy to blow another gigantic hole in the budget for a law that only benefits the very very rich?

3. What is the social benefit of allowing heirs to receive millions of unearned dollars tax-free?

4. The government taxes nearly every transfer of money. What is the rationale for refusing to tax this transfer of money? What separates it from all the other transfers of money that we do tax?

It makes no sense to worsen our budget situation in order to provide a tax benefit to the least needy -- especially when doing so actively harms society and the economy. I'll give Bush the benefit of the doubt and call it a case of following a principle out the window instead of simply pandering to wealthy supporters. But it's a move we simply cannot afford -- in any sense of the word.

economy, estate tax, taxes, politics, midtopia