Class Note for INDV 102 with Professor Kenworthy at UA
Class Note for INDV 102 with Professor Kenworthy at UA
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Date Created: 02/06/15
Reducing inequality and poverty Outline The top The middle and bottom The top middle and bottom 1000000 I Top 1 500000 250000 Average household income 2005 Middle 60 and bottom 20 I l 1975 1985 1995 2005 Year Note Households Posttransterposttax income These data are available beginning in 1979 They are generated by merging survey CPS data with tax records Source Congressional Budge Office wwwcbogovdoccfmindex8885 The bottom 25000 Fourperson households amokI lt3 0 15000 0 S D E 8 10000 E Mon 5000 households 0 I l I I 1975 1985 1995 2005 Year Note Households with a quotheadquot age 25 to 59 Tenthpercentile ofthe household income distribution Posttransferposttax income The income measure includes the EITC and Food Stamps and subtracts taxes Source My calculations using Luxembourg Income Study LIS data Strategies Strategies to reduce inequality do not have to follow directly from the causes of trends in inequality and poverty For example if salaries for superstar entertainers are an important source of soaring incomes at the top that doesn39t mean the best solution is a cap on such salaries Technological change may have played a role in earnings stagnation at the middle and bottom but we shouldn39t try to slow it down Thetop Three groups at the top 1 Top corporate officers CEOs 2 Financial players investment bankers lawyers 3 Entertainment and athletic superstars Europeanstyle corporate governance Large shareholders focus on steady longrun growth of the firm rather than quarterly profits This reduces the perceived need to provide large incentives or rewards for nearterm results But we can39t switch And in fact most European countries have been moving toward the Anglo corporate finance model A cap on CEO pay Probably not doable firms would find other mechanisms such as inkind rewards to replace income Would it make sense The big payouts usually come from stock options If the firm39s share price increases a lot why shouldn39t the CEO be allowed to cash in More generally if a firm39s shareholders feel extremely high pay is merited why shouldn39t they be allowed to provide it Two alternatives to a pay cap 1 Encourage company boards to peg stock options payouts to the firm39s performance relative to the market 2 Require boards to accurately reveal CEO pay to shareholders Very high taxes at the top This only works if there are lots of deductionsloopholes so that the e ectve tax rate is moderate Better to have moderate statutory and effective rates We could aim for rates a little higher than those under Clinton in the mid1990s Taxes at the top 100 75 A J a D E 50 X N l 000 25 0020 Top marginal federal income tax rate Effective federal tax rate on top 1 P S 0 Effective federal tax rate on top 1 CBO 0 I I I I I 1945 1955 1965 1975 1985 1995 2005 Year Note These rates are for federal taxes only The effective rate includes taxes on individual income payroll Social Security and Medicare and corporate income P S Piketty and Saez CBO Congressional Budget Office Source Tax Policy Center wwwtaxpolicycenterorg Thomas Piketty and Emmanuel Saez data set for quotHow Progressive is the US Federal Tax Systemquot Journal of Economic Perspectives 2007 Congressional Budget Office wwwcbogovdoc cfmindex8885 Taxes at the top 20 15 A Top 139s share oftotal income 10 5 Solid line actual Dashed line hypothetical 0 I I I I I 1965 1975 1985 1995 2005 Year Note The dashed line shows the top 1 s share of total posttax income if federal taxation had reduced that share by the same degree that it did on average from 1960 to 1979 Source My calculations from data in Thomas Piket ty and Emmanuel Saez data set for quotHow Progressive is the US Federal Tax Systemquot Taxes at the top 100 Top line top 001 Uppermiddle line top 01 Lowermiddle line top 1 Lower line top 10 75 50 25W Average effective federal tax rate I I I 1965 1975 1985 1995 2005 Year Note Top 001 about 12000 households average 2004 pretax income of 18 million Top 1 about 12 million households average 2004 pretax income of 13 million Source Thomas Piketty and Emmanuel Saez data set for quotHow Progressive is the US Federal Tax Systemquot The top It may prove difficult to reduce income inequality We should aim to satisfy John Rawls39 criterion An increase in inequality is tolerable as long as the absolute wellbeing of those at the bottom improves The middle and bottom Trade and immigration Imports and immigration may well have contributed to stagnant incomes in the bottom half But reducing them is likely to harm people in other countries who are much poorer We should look for other options before considering this strategy Low unemployment A low unemployment rate 4 or less seems to be critical to enabling wage increases However this has proved difficult over the past generation we39ve achieved it only in the late 1990s Unionization The most likely mechanism is quotcard checkquot It may well be implemented Employee Free Choice Act if the Democrats win the presidency and 60 seats in the Senate Unionization has its biggest impact on the earnings of those in the lowermiddle and middle of the distribution Education Claudia Goldin and Lawrence Katz The Race between Education and Technology 2008 argue that the key to earnings stagnation since the mid1970s is the slowdown in educational attainment No further increase in high school graduation Very little rise in college graduation Including GED recipients Public and Private Secondary School Graduation Rate 0 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Figure 92 Public and Private Secondary School Graduation Rates 1890 to 2004 Minimum wage 2008 level 655 2009 level 725 Increase it to 8 in 2010 and index it to inflation Reviewed regularly by a quotLiving Standards Commissionquot similar in status to our Federal Reserve and to the UK39s Low Pay Commission Allow state and local governments to address regionallocal variation in cost of living Minimum wage 20000 a 15000 00 o o S I 8 E 10000 8 Solid line actual 19602009 g Dashed line proposed 2010ff 5 5000 0 I I I I I I I 1960 1970 1980 1990 2000 2010 2020 Year Note Annual earnings for a person working fulltime yearround at the federal minimum wage The proposed minimum wage for 201 Off is 800 per hour 762 in 2008 dollars Source My calculations using Bureau of Labor Statistics data Earned Income Tax Credit EITC Increase the generosity of the benefit especially for childless households Reviewed regularly by a Living Standards Commission Allow state and local governments to address regionallocal variation in cost of living Earned Income Tax Credit EITC 20000 15000 2 m 10000 00 8 Solid lines married N Dashed lines single 2 or more kids 5000 I I 0 15000 30000 45000 60000 75000 Pretax household income Note 2008 EITC benefit Source Tax Policy Center BrookingsUrban wwwtaxpoicycenterorgbriefingbookkey elementsfamilyeitccfm Earned Income Tax Credit EITC 20000 15000 5 O l M 8 10000 8 2 or more children 8 1 child i No children 5000 0 l I I I 0 15000 30000 45000 60000 75000 Pretax household income Note Proposed EITC benefit Median income for a household of four as of 2007 75000 Source My calculations How to fund the E T C increase Higher taxes at the top Gradual reductionphaseout of the homeowner mortgage interest tax deduction 160 billion Result of these minimum wage and E T C changes A single adult working fulltime yearround at minimum wage would have an income earnings plus EITC of approximately 19500 A family of four with two minimum wage earners would have an income of about 37000 Targeted help for groups particularly at risk of pa verty Initial labor market entry with low education Longterm unemployed Geographic areas of concentrated poverty Disabled Returning prisoners
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