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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

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August 21, 2008


The “What’s Fair” contest

At Café Hayek, George Mason’s Russell Roberts opens up a brand new “Inequality Chart Contest.” The chart in question is based on work by Thomas Piketty (professor, Paris School of Economics) and Emmanuel Saez (professor, University of California Berkeley), the essence of which is that the rich have gotten richer and everyone else not so much. (You can find a link to the Piketty-Saez paper, as well as updated data and executive summaries, on Emmanuel Saez’ homepage. Russell links to more information from the Center on Budget and Policy Priorities.)

Here’s the picture…

Figure 2

… and the contest is to construct “ONE sentence explaining ONE thing that is wrong with concluding that these numbers are evidence that the U.S. economy has become more tilted toward the rich at the expense of the poor.”

In the spirit of prompting reflection on issues of inequality and fairness, I invite you to think about the following three pictures, generated from Internal Revenue Service (IRS) tax data through 2006:

Avg Tax Rates by Income Percentile

Avg Tax Rates by Income Percentile

Avg Tax Rates by Income Percentile

Let’s focus on the 1 percent of income-earners (by IRS defined Adjusted Gross Income, or AGI). If you look at the average federal tax rate paid by this group—that is, taxes paid divided by AGI—it did fall substantially over the period from 2000–2006. The average tax rates for other income groups fell as well, but not as dramatically.

If you instead prefer to look at taxes paid, the share the top 1 percent forked over to the federal government rose from 37.4 percent in 2000 to 39.9 percent in 2006. The share paid by the next highest 4 percent rose only slightly over this period, and the share paid by all other groups actually fell or stayed roughly the same.

On the other hand, concentrating on the share of taxes paid relative to the share of income earned by each group would lead you to the conclusion that not much had changed between the year 2000 and 2006.

So here’s the contest: Explain in one sentence which one of those pictures tells us whether the federal income-tax system has become more or less “fair.”

August 21, 2008 in Inequality, Taxes | Permalink

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The top 1% earns 350,000+

The top 0.1% earns 1.6 million+

The top 0.01% earns 5.5 million+

The disparity _among_ the top 1% dwarfs that between them and the remaining 99%.

Any study that does not go further into the top 1% is essentially dishonest

It’s like Bill Gates walks into a bar and average income of the patrons is into millions..

This has been well-documented, but still everyone screams about the top 1% is paying a lot.

But among that 1%, who pays?

Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000.

Tax rates increase with income, *except* for the top 0.1% - yes that’s 0.1 - thats only 145,000 households.

And that is just reported income on tax returns, leaving aside all the legal and illegal shelters that this 0.1% use.

This grand con - shifting the taxes onto the working “rich”, by the hyper-rich is the hallmark of the plutocratic conservatives

Posted by: bumble | August 21, 2008 at 06:03 PM

The 'fairness' just depends on the average tax rate. The ranking for each group should be the same in graphs one and three - I'm not sure what is added by dividing the average tax rate for each group by the average tax rate for the economy, as is done in the third graph.
Fair for who? The top 2% to 5% have not gotten the breaks that the rest seem to have enjoyed.

Posted by: don | August 21, 2008 at 07:05 PM

Changes in average tax rates have been limited but the income and therefore the tax share of the top 1% has grown greatly over the last 20 years, largely at the expense of the top 6-25%, though the tax share relative to income share has changed little. One does wonder whether their entire growth in income since 2000 was simply compounding of their tax cuts. With their rates at a low, it wouldn't be a surprise to see them rise.

Posted by: Lord | August 21, 2008 at 09:10 PM

I am not sure the question should be 'what is fair' so much as 'what is desirable'. I am not sure the disappearance of the middle class is.

Posted by: Lord | August 21, 2008 at 09:18 PM

"Fair" is not a capitalist concept.

Posted by: Ken | August 21, 2008 at 10:31 PM

Figure 2 clearly demonstrates our tax regimen is less fair than it used to be.

Posted by: Gegner | August 22, 2008 at 03:30 AM

If a rapidly increasing income is multiplied by a decreasing tax rate, does the resulting increase in the product mean that the wealthy are contributing more in taxes, or that the wealthy are sharing a smaller piece of a larger pie?

Posted by: pmorrisonfl | August 22, 2008 at 01:22 PM

Error: These charts and the words around them imply that the wealthy and the high income earners are the same people.

It is possible to be extremely wealthy with little income.

Bill Gates did not get rich by drawing huge paychecks. He got rich through appreciation of assets he owned (MSFT stock).

High income tax inhibits high income and keeps the richest on top.

If I'm winning a race I'm all in favor of adopting strict speed limits as soon as possible.

Posted by: Name | August 22, 2008 at 02:49 PM

Figure 1, by itself, demonstrates nothing about equity, unless you believe in equality of result rather than equality of opportunity. It would need to be accompanied by some explanation for the divergence in growth. For example, if the result shown comes largely from international trade or illegal immigration, is that 'fair'?

Posted by: don | August 22, 2008 at 04:57 PM

Didn't the best "improvement" in income disparity occur during the Great Depression?

Posted by: Empircal Conservative | August 22, 2008 at 05:43 PM

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