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Monday, January 25, 2016

The Elusive Quest for Income Equality

Institute scholar Ernie Goss posted an interesting piece at the Economic Trends blog, which can be found here http://www.economictrends.blogspot.com/. In this post, “Taxing Rich More Heavily Gets Votes, But Ineffective in Reducing Inequality”, Dr. Goss discusses data involving the share of federal income taxes born by the top 10 percent of earners. It may not surprise you that the relative tax burden (measured by the share of income tax collections) born by that group has increased over time, while the share born by the bottom 50% has gone down. As Dr. Goss reports, many in the bottom 50% have negative tax rates, due to the Earned Income Credit and other refundable credits that function as transfer payments from the government.

Looking at the IRS Statistics of Income, it appears that this trend can be confirmed over a slightly larger time frame. (See SOI Bulletin Article – Individual Income Tax Rates and Tax Shares, Table 5, 1986-2009). Between 1986 and 2009, the share of Adjusted Gross Income (i.e., the bottom line on the first page of your Form 1040) for the top 10 percent has increased from 35 percent to 43 percent, reaching a peak of 48 percent in 2007. But that group’s share of total income tax has increased, too, from 54 percent in 1986 to 70 percent in 2009. Perhaps more telling is the fact that the top 50 percent accounts for 97.75 percent of individual income tax in 2009, up modestly from 93.54 percent in 1986.

As Dr. Goss points out, some politicians (and it should be added, academic elites, too) are making political points on the growing rate of income inequality. Their prescriptions involve even higher taxes for the “rich”, but these historical trends indicate that tax policies are not moving the needle toward greater income equality. This is a fair point.

And of course, there is much more to discuss here. Several questions come to mind, including: What should income equality look like? When will we know that we have achieved this putative good?

To think this through, let’s consider equality in a different context. How about death, instead of taxes? The Center for Disease Controls tracks deaths from various causes. See CDC, Table 12, Number of deaths from 113 selected causes (2013), available at http://www.cdc.gov/nchs/data/nvsr/nvsr64/nvsr64_02.pdf . CDC data is based on death certificate records, which may not track all causes quite adequately. For example, a 2013 study published in the Journal of Patient Safety indicates that hospital errors caused 440,000 deaths in 2013, which would be the third highest cause after heart disease and cancer according to CDC tallies.

Death reaches all of us at some point, but deaths are also distributed unequally, at different ages and from different causes. For example, motor vehicle transportation accidents caused 35,369 deaths, far less than heart disease or cancer. Accidental discharge of firearms caused 505 deaths, far less than drowning (3,391), homicide (16,121), or suicide (41,149). All of these outcomes fall below the estimate of deaths caused by medical errors in hospitals. Within each category, variation occurs based on age and demographic groups. More males die in motor vehicle accidents than females; there are racial differences as well.

Death strikes unequally. But should we expect otherwise? How can we judge these outcomes? Looking at numbers without thinking about the complexities behind the causes could lead to odd conclusions indeed. One might argue that incompetent medical professionals present a greater death risk than criminals or riding in cars, but this will not deter me from driving to the hospital if I need to, even if the hospital is in a bad part of town. Moreover, one might use age or demographic differences as the basis for making various claims about racism, sexism or ageism. But before we form policies to address disparities, shouldn’t we consider biology, geography, genetics, and other factors, which might also explain the difference?

Isn’t the same true with income? Income is an effect or outcome that is produced by complex and interrelated factors. Before jumping on the equality bandwagon, we first need to define the target, which is no mean feat. When does income inequality present a problem? For example, is some inequality necessary to incentivize production? Does the reason for inequality matter?

Understanding why some people earn more than others could be extremely valuable in formulating what, if anything, to do about differences. If high earners are more productive than lower earners, is that an acceptable reason for inequality? What about age, experience, and training? What about marriage and family stability? What about workforce participation and commitment? And what about risk-taking, whether in employment or entrepreneurial efforts?

Policy options here are also fraught with danger. Should we focus on ways to raise productivity and earning capacity of the less productive, or to lower the returns for the more productive? Is growing the income pie better for all, even if that growth does not get distributed evenly?

Finding ways to increase productivity is a tall order. Redistribution (i.e., lowering returns for the more productive through forced exactions) is something governments are already quite good at. But we also know from history that this may not turn out so well.

More to come on this topic, and thanks to Dr. Goss for starting the conversation.

Edward Morse

Tuesday, January 19, 2016

Taxing Rich More Heavily Gets Votes, But Ineffective in Reducing Inequality

Even the down home atmosphere of Omaha's Sokol Auditorium could not hide the irony of mega rich Hillary Clinton and Warren Buffet speaking on behalf of the non-rich and calling for an increase in income tax rates on high income earners. One of the goals of their proposals is to cut income inequality.

However, 17 years of income data should smack some reality into their misguided proposal. In 1996, the top 10% of U.S. income earners paid roughly 60% of income taxes, while the bottom half paid 9%. In 2013, the top 10% of earners paid approximately 75% of income taxes, while the bottom half of income earners received more back from the IRS in cash than they paid in income taxes (a negative burden) via programs such as the Earned Income Tax Credit.

Thus, between 1996 and 2013, the share of federal income taxes paid by the "rich" increased while that of the bottom half of taxpayers declined. What happened to income inequality during this period of time?

*The top 10 percenters' share of income rose from 50% to 64% while the bottom half declined from 12% to 8%.
*The Gini coefficient, which measures income inequality, indicated income distribution tilted more in favor of the rich.
*In 2013, nine states with no income tax had lower Gini coefficients, (i.e. less income inequality) than the remaining states.

Thus, federal and state income tax data provide absolutely no evidence that taxing the rich more heavily reduces income inequality. Hammering the rich with higher income taxes is a "vote getter" but only making sense to politicians. Ernie Goss

Friday, November 27, 2015

High Taxes May Push Pfizer to Ireland: Botox to Reduce Viagra Tax Wrinkles


Pfizer, a 166-year-old New York City headquartered company, is considering leaving the U.S. for more tax-friendly Ireland in what is termed a tax inversion. Pfizer, a $300 billion U.S. biopharmaceutical firm, will purchase the smaller Irish firm Allergan, maker of Botox, for $120 billion. Pfizer, producer of Viagra, will then move its U.S. headquarters (where its current corporate income tax rate approaches 40 percent) to Dublin, where it will have a 12.5 percent tax rate.


In 2014, Pfizer paid U.S. income taxes of $3.1 billion. Under the Dublin rate, Pfizer could have saved approximately $2 billion in income taxes.

The U.S. has suffered the loss of 55 firms via tax inversions in the past year. It has the third highest corporate income tax rate in the world at 39.1 percent, exceeded only by Chad and the United Arab Emirates. The avalanche of inversions pushed President Obama to brand the inversions as "unpatriotic."


Instead of issuing such hyperbole, Obama should take action that would both increase tax collections and reduce the legal and administrative costs associated with tax inversion deals.

U.S. firms are currently estimated at holding more than $2.1 trillion outside the U.S. By reducing the income tax rate on repatriated earnings from 39.1 percent to 10 percent, current tax collections would rise by as much as $210 billion and importantly, it would reduce the motivation to engage in an inversion. This action should then be followed up by a permanent corporate income tax rate cut with the elimination of many tax loopholes.

But instead of positive legislative steps such as this, the U.S. Treasury responded with stiffened regulations in a futile effort to limit such corporate moves. Unfortunately, Pfizer will not be the last U.S. firm to hoist shareholder value by moving abroad.

Ernie Goss

Thursday, October 22, 2015

Americans Vote with Their Feet:Low Tax States Preferred (Except by ConAgra)

Each year based on a questionable set of criteria, scores of publications rank the top places to live in the U.S. It is argued here that states should instead be ranked according to the actual votes of U.S. residents -- where are they moving to and where are they moving from. This method is not subject to the arbitrary selection of factors by the analyst, but is instead based on domestic migration rates from the 50 U.S. states, in this case from 2010 to 2014.

According to American's moving patterns, the five states with the highest net exit rates were New York, Illinois, New Jersey, Connecticut, and Alaska. Among these five states, only Alaska was ranked in the bottom half of states in terms of tax burdens.

Among states with the highest net entrance rates were North Dakota, Colorado, South Carolina, Florida and Texas. Two of these states have no individual income tax, Florida and Texas, and the five states collectively had median tax rates significantly lower than the bottom five.

As American individuals, families and businesses become more geographically mobile, migration voting patterns show Americans are repelled by states with high tax burdens and attracted to states with lower tax loads.

Corporations, however, do not always act so rationally. Take for example, ConAgra moving from high tax Omaha/Nebraska moving to ultra-high tax Chicago/Illinois. It appears ConAgra was drawn to Chicago by either a "boat load" of Chicago tax incentives, and/or the ConAgra CEO just wanted to move the company headquarters within a short limousine ride of his current Chicago home. ConAgra shareholders and employees may ultimately pay for this move that maximizes CEO utility, rather than shareholder value. Ernie Goss.

Wednesday, September 16, 2015

End the Federal Reserve's Morphine Drip of Ultra-low Interest Rates

Shaken recently by stock markets across the globe, the U.S. Federal Reserve ("Fed") may delay moving the economy away from its emergency monetary policies begun in 2008. In the 102 years of the Fed's existence, this organization has never so vigorously attempted to stimulate the U.S. economy with what many economists consider crisis measures.

Since 2008, the Fed purchased $4.5 trillion in U.S. Treasury bonds and mortgage backed securities intending to lower long-term interest rates and boost U.S. investment and consumption. Additionally, the Fed's interest rate setting committee, the FOMC, has kept short-term interest rates at close to zero for almost seven years.
Partially as a result of these measures, U.S. stock prices collectively have climbed at a pace six times that of the U.S. inflation adjusted economy since 2011 (3.5 times the non-inflation adjusted economy). And just last month, even the threat of a rate hike of ¼% slammed U.S. stock prices. However, raising interest rates at the FOMC's September 17 meeting will have several significant positive impacts.

First, savers will see a "light at the end of the tunnel" in terms of interest earnings. Second, rising interest rates will encourage businesses and home buyers to invest today in new capital equipment and homes in advance of rising interest rates. Third, it will help restore confidence in the U.S. economy that has been curbed by emergency interest rates. Fourth, and most importantly, it will begin the journey back to normal and sustainable interest rates.

Higher interest rates may well dampen stock prices, but the mandate of the Federal Reserve is to stimulate employment growth and promote stable prices. It is not to enrich stock market participants with price bubbles that must ultimately deflate, slowly or rapidly.

Ernie Goss

Friday, September 04, 2015

More Government Regulation Generates More Income Inequality and Slower Economic Growth

President Obama just announced plans to reduce, and ultimately eliminate, coal-fired electricity generation in the U.S. Data from the Department of Energy show electricity from existing coal-fired plants costs $38 per megawatt-hour compared to $106 per megawatt-hour from new wind facilities.

This action will contribute to rising economic burdens on low income families in the U.S. The bottom quintile of earners already spend five times more of their family income on electricity, compared to the top quintile of earners. Policymakers must consider potential impacts of this and other regulatory expansions on income inequality and economic growth.

Gauging income inequality with the 2013 Gini coefficient, measuring regulatory freedom with the Mercatus Center's regulatory freedom index, and capturing U.S. economic gains with 2008-13 Gross Domestic Product (GDP) reveals how rising regulation influences income inequality and economic growth.

When ranking the states from the most regulatory-free, Indiana, to the most regulatory-constrained, California, distinct relationships emerge. First, the 25 states with the most regulatory freedom in 2013 experienced GDP growth of 4.2% for 2008-13, compared to the 25 with the least regulatory freedom, which experienced a slower 3.3% GDP growth, and 3.7% greater income inequality.

Furthermore, the top 25 states, in terms of restraining regulatory growth from 2008 to 2011, experienced GDP growth of 4.6% compared to 2.6% for the 25 states expanding regulatory burdens. The 25 states growing relative regulation also suffered 2.9% greater income inequality.

This surface analysis should stimulate more in-depth research that examines how Washington's boost in regulation among the states impinges on both income inequality and economic growth.

Ernie Goss

Wednesday, July 15, 2015

Even with Billions of Dollars of Taxpayer Support, Elon Musk Is No Thomas Edison

Without an emoticon for bizarre or laughable, CNBC favorably compared Elon Musk, founder of Tesla Motors, to Thomas Edison. If nothing else, Musk should receive the chutzpah award for naming his company after Nikola Tesla, creator of modern alternating current (AC) electricity systems. But after 12 years of operations and $4.9 billion of taxpayer subsidies, as calculated by the Los Angeles Times, Tesla Motors will produce only 45,000 vehicles for all of 2015 compared to Ford and GM which will sell 225,000 and 246,000 vehicles, respectively, for July 2015 alone.

Matching Tesla's underachievement in sales, investors in Tesla stock will earn $1 every $80 of investor cash in 2015. Alternatively, investors can purchase $1 of earnings from Ford and GM for less than $8.

In other words, the rate-of-return for Ford and GM investors is approximately 15 times that of Tesla stockholders. Furthermore, the only reason Tesla is earning a rate-of-return less than 1% is taxpayer subsidies of almost $5 billion.

Think of what Thomas Edison could have done with billions of dollars of taxpayer subsidies. He would not produce fewer than 50,000 vehicles per year that have a range of less than 270 miles. Only Hollywood celebrities can afford a $125,000 vehicle that cannot transport them beyond their award ceremonies in Las Vegas. I did not know Thomas Edison - he grew up in New Jersey and I in Georgia - but I think I can confidently say that, "Elon Musk, you are no Thomas Edison."

Ernie Goss