Tuesday, February 21, 2012

1% + 99% Should Be Greater Than 100%

We hear a lot about the 1% and fairness.  The chart below that was prepared by the Tax Foundation shows the share of income earned by the top 1% as well as the share of the income tax burden of the top 1%.  Progressivity is defined as the ratio of the top 1 percent's tax share divided by their income share.

A true fair share would have the tax share be the same as the income share.  A 2.00 ratio means that the tax share is double what the income share is.  Is that fair?  If not, what is?  2.50?  3.00?

What is interesting in the data is that the income tax system in 2009 placed a greater tax burden on the top 1% than at any time since 1986.  This is not something you hear in the press.  You also have to keep in mind that 1986 was the year in which there was the last big reform of the Internal Revenue Code.  Major changes were made in the definition of adjusted gross income which means that the data is not necessarily comparable for dates prior to 1986.

The other interesting perspective is how the share of the top 1% has changed over the years.  There is no question that a much greater share of income is concentrated in the top 1% today than it was 30 years ago.  You can see this trend beginning in the mid-1980's and continuing to the turn of the century.  It dropped for a few years and then picked up further momentum in 2004-2008 before dropping significantly in 2009.

Progressivity of the Federal Income Tax Code, Taking into Account Income Shares

YearTop 1% Income Share (A)Top 1% Tax Share (B)Progressivity (B/A)

What caused this?  I believe there were two big drivers.  First, the technology industry began to take off in the mid-1980's.  We entered the information age from a manufacturing age.  Manufacturing spreads income in a much broader swath in an economy.  You need to pay a lot of workers to build an automobile.  You only need a couple of computer programmers to develop a video game that might sell millions.  For example, the Call of Duty: Modern Warfare 3 game that was released last year grossed $1 billion in the first 16 days it was for sale.

The second factor was the bull market in stocks that began in the 1980's and reached its zenith in 2000 with the internet stock boom (technology again).  When stocks fell in 2001-2003 so did the incomes of the  1%.  Incomes rebounded with the stock market and with the housing bubble in 2004-2008 but 2009 showed again how connected the income of the top 1% is connected to a healthy stock market.

The popular narrative seems to be that we are playing a zero sum game when it comes to the economy.   That is, if the 1% has it then the 99% does not have it.  However, the data does not seem to back this up.  In fact, the numbers suggest that the unemployment rate has dropped as the share of the top 1% has grown.  Unemployment also has tended to increase as the share of the top 1% has dropped.

Unemployment Rate and Share of Income of Top 1%

For example, in 1983 the unemployment rate was 9.6% and the top 1% share was 9.29%.

By 1989 the top 1% had a 14.2% share of income but unemployment had dropped to 5.3%. 

Between 1989 and 1993 the top 1% income dropped to 13.8% and unemployment increased to 6.9%. 

Between 1993 and 2000 (the internet boom), the top 1% went from 13.8% to 20.8% and unemployment dropped from 6.9% to 4%. 

Incomes from the rich dropped from 2000-2003 to 16.8% and unemployment increased to 6%. 

The rich did well again from 2004 to 2008 and unemployment dropped. 

I don't think I need to go through the numbers from 2008 forward. The chart clearly shows the correlation between the loss of income with the top 1% and the loss of jobs overall.

This data should put to rest all of the class warfare nonsense the President and others want to participate in. The bottom line is that we are in this together in this country.  President Kennedy said it best 50 years ago when he said, "A rising tide raises all boats".   

We should spend more time and effort working to make the economic pie bigger rather than worrying about how to slice it.  The reality is that when the rich do better it seems that everyone does better.  If the rich become poorer, we all become poorer.  We need to start recognizing that if the 1% and 99% work together we will get much more than 100% in the end.  If it is the 99% versus the 1% we will get much less than 100% out of this country.

I don't remember a lot of class warfare talk back in 2000 when the share of the top 1% was 20.81%.  Of course, the unemployment rate was only 4% then.  Why do we hear so much about it now when the most recent data indicates that the top 1% have much less income and are paying even more taxes on that income than they did then?

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