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February 25, 2014

Finally: A Plan to Stop Income Inequality Before It Kills Us All

Income inequality - the distressing fact that some people *have* (ignorant folk might say "earn", but we all know that's just crazy talk) more money than other people - is a Very Big Problem.

In fact, economic injustice may just turn out to be the defining challenge of our time (this, according to members of the evil, Chinese toy-loving 1% income bracket whose selfish refusal to 'do their part' is single-handedly preventing the rest of us from achieving the American Dream:

President Barack Obama and first lady Michelle Obama earned $608,611 in adjusted gross income in 2012, down 23 percent from 2011 as royalties from the president’s books kept declining, tax returns showed.

Obama and his wife paid $112,214 in federal income taxes, according to the returns released yesterday, for an 18.4 percent rate. That’s less than the 20.5 percent rate they paid the year before.

While still making more than 10 times the U.S. median income, they made less money in 2012 than in any year since 2004, when Obama -- then a state legislator -- was running for the U.S. Senate in Illinois and started attracting national attention.

By taking widely used deductions for state and local taxes, mortgage interest and charitable contributions, the Obamas were able to get themselves out of the top marginal tax bracket, which was 35 percent last year.

And before you knuckle draggers start asking ignorant questions like, "Why is a man who thinks rich people ought to do the right thing and pay more taxes working so hard to avoid paying his so-called 'fair share'?", we have two words for you:

Warren Buffet.

Admit it: the remorseless logic of the War on Income Inequality is undeniable and inescapable. Income brackets are inherently divisive and unfair. Why should one person get to be in the top 20% of wage earners while another who made different choices or has different talents has to settle for being in the bottom 20%? Why can't we all be in the top 20%? Surely a great nation can find a way for every single person to become a selfish, money-hogging oppressor of the proletariat?

That's how we'll know when things are finally fair enough in America. When we're all equal, we'll be forced to outsource our economic exploitation of the under classes to Third World nations. In the meantime, baby steps:

Why ban Harvard? Simple. It is well known in the empirical literature that one of the drivers of increasing inequality is a change in the way people match themselves up – mostly in families, but also in other ways of interacting. The simple story was that in the 1950s there was much more marriage and relating across classes than there is today. The “typical” married couples today consist of highly educated people marrying highly educated people and lowly educated people (at lower rates) marry people from their same educational and income class. This perpetuates and deepens inequality. Of course, where does most of the high-talent, high-income, high-class sorting happen? At the elite colleges. Ban them and then you fix that “problem.”

...Other reasons to ban Harvard on inequality grounds should be obvious. If you take the view that education is a way to enhance productivity, and you understand that those folks who are already more productive and more privileged are more likely and more prepared for Harvard, then by banning Harvard you would reduce the already large advantage the already productive people have. After all, Harvard can’t possibly enroll, in equal shares, the less productive members of society along with the more productive members. AND … there are not enough good colleges in the US to ensure that we represent people across the skill, income, productivity distribution in equal proportions, so the only obvious choice is to ban Harvard.

If you take the view that education does nothing to improve productivity but instead acts as a signal, that would seem to be even MORE reason to ban Harvard. In other words, the reason Harvard grads get paid so well upon graduation is that the mere act of graduating from Harvard reveals a signal that they are indeed more productive workers. This signal is easier for truly rich and bright people to obtain and harder for the less fortunate to obtain. Therefore, by eliminating the signal entirely, it would be harder for the truly productive to signal this to future employers (and mates) and we would therefore have a pooling equilibrium wherein inequality is reduce. So again it is obvious that we should ban Harvard.

We shouldn't stop with closing the President's alma mater, though. We need to find all the causes of income inequality and fix them the way the ACA fixed insurance inequality. Marriage inequality is a big problem, for one thing. And since we very well can't expect poor people to change their behavior, the obvious solution is for rich folk to stop making choices that widen the gap between the top and bottom income brackets:

One of the differences between the haves and the have-nots is that the haves tend to marry and give birth, in that order. The have-nots tend to have babies and remain unmarried. Marriage makes a difference. Heritage reports that among white married couples, the poverty rate in 2009 was just 3.2%; for white nonmarried families, the rate was 22%. Among black married couples, the poverty rate was only 7%, but the rate for non-married black families was 35.6%.

Marriage inequality is a substantial reason why income inequality exists.



And then there's assortative mating. BRING BACK HYPERGAMY!!!!

If marriages occurred randomly across educational categories, Greenwood and his co-authors show, the Gini coefficient for household income in the U.S. in 2005 would decline to 0.34 from 0.43. (The coefficient falls as inequality decreases.) That would more than offset the entire increase in inequality that has occurred since the late 1960s. (This comparison is not entirely fair because even in the late 1960s, some assortative mating occurred. Nonetheless, it shows how large the effect is.)

Marital sorting also affects women’s participation in the workforce. Since the 1970s, the correlation between the wages of husband and wife has doubled, Christian Bredemeier and Falko Juessen of the University of Dortmund found. Over the same period, wives of high-income men have increased their working hours more than wives of low-income husbands have.

In the 1970s, wives with high-earning husbands tended to work fewer hours than other wives did. Assortative mating changed the pattern.

And all these women working outside the home. That has definitely got to stop.

In general, the "greedy rich" owe their ill-gotten gains to three factors: they stay in school, they work longer hours, and they reside in dual income households:

tradeoffs.jpg

Looking at the median number of wage earners in various income brackets is instructive:

median_wage_earners.jpg

The conclusion is both obvious and beautifully simple: wealthy married households are taking all the jobs. Once upon a time, womynfolk knew their place. They stayed home and let their husbands support them. All this women's liberation nonsense has made things worse, not better.

Good Lord. We might have stumbled upon something the Left and Right can agree with.

Posted by Cassandra at February 25, 2014 07:40 AM

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Comments

"Logic is logic, and that's all, I say"

Posted by: Roy at February 25, 2014 12:09 PM

The $608K in income quoted for the Obamas vastly understates the reality. After they leave office, they will very quickly achieve a financial net worth on the order of $100 million or more (see: Clintons, Al Gore for comparison) by doing very little other than issuing a couple of (possibly ghostwritten) books and doing some speeches and board/consulting assignments.

A correct measurement of their compensation for their White House years would be to take the $150 million or so they will soon have, subtract the actual labor value that will be involved in getting it, and divide the result by 8, giving the true economic value of their White House years. Surely it is at least $10 million per year.

Posted by: david foster at February 25, 2014 12:23 PM

I will say, the concept of handicapping everyone until all are equal is a favorite of the Communists. Well, save for those in charge of the handicapping. They must receive SOME recompense to offset all the stress of making sure the rest of the proletariat is equal. :)

Posted by: MikeD at February 25, 2014 12:40 PM

MIKE!!!! :)

You just made my week!

Posted by: Cassandra at February 25, 2014 12:48 PM

Yay me! Had I known it was this easy to make folks happy, I'd have complained about Communism long before now. ;)

Posted by: MikeD at February 25, 2014 12:56 PM

[note to self: rag on Communism more]

You had me at, "Posted by: MikeD" :p

Posted by: Cassandra at February 25, 2014 01:04 PM

In all sincerity, sorry about being away. Work's been crazy and I've just not had the blog bug for too long. Once it stopped being a routine thing, I just did not even think to check the old links. I was very pleased to find you're still posting this splendiferous blog!

Posted by: MikeD at February 25, 2014 01:12 PM

It has been a while, Mike. I mean, not even caption contests with cheerleaders has brought you out of the Lurker's Lounge.
0>;~]

Posted by: DL Sly at February 25, 2014 01:19 PM

Maybe it's the age finally getting to me, but I find stimulating conversation more enticing than mere pictures of women I'm old enough to have fathered.

Posted by: MikeD at February 25, 2014 01:28 PM

No worries, Mike. I get sick to death of blogging all the time and some weeks I just want to walk away from the keyboard forever.

So I totally understand! Just wanted you to know we're happy to see you whenever you feel like stopping by :)

Posted by: Cassandra at February 25, 2014 01:42 PM

1) AS usual, the NYTimes lies by omission:

In January, under pressure from his Republican rivals, Mr. Romney released documents estimating that he had earned $20.9 million in 2011 and paid about $3.2 million in taxes, for an effective tax rate of about 15.4 percent. On a form requesting the extension, he estimated his taxes to be $3,226,623 .

Well, except...
Romney and his wife, Ann, gave 29.4 percent of their income to charity in 2011, donating $4,020,772 out of the $13,696,951 they took in.
Also not mentioned:
Romney didn’t deduct all of his charitable donations for last year. He left $1.8 million in donations off his return in order to live up to a statement he made about always having paid at least a 13 percent tax rate on his income. With his charity write-offs partially held back, Romney overshot that mark a bit for 2011, paying at a 14.1 percent rate.
Source

BY COMPARISON
Obama and first lady Michelle Obama gave 21.8 percent of their income to charitable organizations last year, donating $172,130 out of the $789,674 they made.
Biden and his wife, Jill, gave 1.5 percent of their income away in 2011, with charitable donations totaling $5,540 out of $379,035.
Republicans have mocked Obama and especially Biden for being unusually tight-fisted when it comes to making charitable gifts.
When the Obama campaign released past tax returns for Biden in 2008, it was revealed that the Bidens donated just $3,690 to charity over 10 years — an average of $369 a year.

Posted by: OBloodyHell, "Si tacuisses, philosophus mansisses." at February 25, 2014 11:55 PM

2) And this is the REAL point which is absolutely lost on all too many ignorant twits on the left -- And, AMAZINGLY, never EVER gets discussed by pundits on the Right, the Left, or anywhere else on the planet when talking about such things:


Consider --
======================
According to Forbes:
#13 Warren Buffet
Net Worth
$58.5 Billion
As of September 2013
======================

Now, a little research turns this up, regarding his 2010 income:

CNN Money reports that in a letter to Republican Rep. Tim Huelskamp Buffett reveals that he made $62,855,038 last year. He also said his taxable income was $39,814,784.

According to Reuters, the world's third-richest man paid only $6.9 million in federal income taxes.

OKAY, now -- HOLD ON!!
WAIT A MINUTE

Warren Buffet has SIXTY BILLION in assets, yet supposedly only "made" 65 MILLION in income?

Seriously. He made one dollar in return for every single dollar he owns?

Seriously. One Dollar. For every THOUSAND?

He would've made 10x that just by sticking it into Bank of America in a passbook savings account!!!

In actual fact, over time, if you make anything less than 10% a year on invested assets, you're a pretty bad investor.

Hmmm....
"Pretty Bad Investor".
"Warren Buffet".

Synonyms?

I don't think so.

"But the economy was (is) still in the tank, OBH!! And that rule just applies, as you note, 'over time'!! Be fair!!"

OK, let's say Buffet only made FIVE percent in 2010. What is 5% of FIFTY BILLION DOLLARS (Let's also knock off $10B for it being 2010, not 2013).

.05 x 50,000,000,000 == 2,500,000,000

2.5 BILLION dollars.

So, Warren... where did the other 2,435,000,000 dollars go to, hmmm?

Whatever happened to the 414 MILLION in taxes you SHOULD have paid if you paid even the 17% taxes like "rich" bastards are supposed to.... hmmm?

The answer, for those of you in the know, is obvious....

Warren Buffet does not pay taxes on most of the income from his 50-60 BILLION in wealth

ANY TAXES.

Those assets are in a Tax Free Foundation.

Yes, the Buffet Foundation. The Bill and Melinda Gates Foundation. The Rockefeller Foundation. The Ford Foundation. The J. Paul Getty Trust...

All of them tax-free. All of them operated by a "Board of trustees"... generally lead by the major name (or heir) of the name on the masthead.

In fact, that's probably where Buffet's annual income is most derived from -- he gets "paid" to "operate" the trust/foundation as its head officer.

Don't get me wrong here -- I actually do not begrudge these people their wealth.

But if you're going to get all hot and bothered about the rich bastards and their excessive (60 Billion-with-a-capital-B) wealth, then ought not your attempts to grab some of that wealth ACTUALLY TAKE SOMETHING FROM THEM, and not, instead, target the people 2 and 3 tiers down further on the totem pole -- the ones actually making only a million a year or so?

Because when you hurt THEM, you hurt yourself -- they are the ones at the heart of the small businesses that lead ANY economic recovery, by inventing new wealth creating ideas. And those small businesses are always the ones that hire a truly huge percentage of the employees in any growing economy.

.

Why the F*** is it that no one ever EVER EVER comments on this crap?

I mean REALLY. WtF?

Posted by: OBloodyHell, "Si tacuisses, philosophus mansisses." at February 26, 2014 12:42 AM

Duh. Typo:

Seriously. He made one dollar in return for every single dollar he owns?

should be:

Seriously. He made one dollar in return for every single thousand dollars he owns?

Posted by: OBloodyHell, "Si tacuisses, philosophus mansisses." at February 26, 2014 12:44 AM

Very.Nice.Rant OBH

Posted by: CAPT Mike at February 26, 2014 08:21 PM

Two things:

1) Investment gains are not considered income until you sell and actually bring those gains home.

That is, if I buy a $10 stock on Jan 1 2013 and on Dec 31 2013 that stock is worth $100 and I sell it, I have an income of $90 and I will pay taxes on that money in 2013. If I keep the stock, I have no income from this stock and pay no taxes on it for 2013. If, on Dec 31 2014 the stock is worth $200 and I sell it, then I have an income of $190 and will pay taxes on that entire gain in 2014 even though almost half of it was generated in 2013. If I kept it then I would, again, have no income from that stock in 2014 and pay no taxes. If on Dec 31 2015 I sell the stock, but at $5 because the stock has crashed, then I actually have a loss. I get to take $5 and subtract it from any other income and thereby ruduce my total taxes. That the stock went up in the prior two years doesn't matter.

Sales Price - Purchase Price = Income. If no sale, then no income. So it is incredibly easy to increase wealth in any given year, but to have no "income" from it for that year and pay no taxes on it, in that year. There is no missing $414mm.

2) Tax Free Foundations: Once money is placed in the foundation it doesn't really belong to you anymore and you can't use it as such. You can give money from it to a church, you give money from it to cancer research. You can't give money from it to your son to buy a car. The money does grow tax free, but then, you aren't paying taxes on money you give to a church anyway.

Posted by: Yu-Ain Gonnano at February 27, 2014 11:23 AM

Hi YAG,
The very rich frequently 'cheat' (intended purpose) of Tax Free Foundations by installing themselves, relatives or friends as board members or hiring them by the foundation as employees.
Nifty way to avoid either/or gift/death taxes.

There are more effective ways to dodge those taxes, but these foundations are also a 'legacy' (i.e. monument to ego).

Best Regards,

Posted by: CAPT Mike at February 28, 2014 01:30 AM

Not really sure how that's cheating.

Board members and employees are paid salaries and taxes are paid on those salaries. Sure, they may pay them riduculous salaries for little work, but that income is taxed. Gifts, however, are not taxed, at all, until after $5mm+ in gifts have been given.

So, if you have a child and gift him $125,000/year for 40 years there will be 0 gift taxes. Make him an employee of the tax-free foundation and now that $125,000 salary is taxed as ordinary income for every single one of those 40 years.

With no other expenses you'd need to gift over $10mm for the gift taxes to be greater than the income taxes. Once you add in the SEC filings and investigations, the IRS audits, and having to actually make donations to a 3rd party, this becomes are really bad tax avoidance scheme.

It may be good for [strike]infellating[/strike] inflating their ego, but they aren't hiding taxes this way.

Posted by: Yu-Ain Gonnano at February 28, 2014 09:30 AM

I don't see why we can't ration jobs. It seems unfair for more than one person in a household to enjoy an income-producing occupation. Maybe we could have a lottery: one job per every two households.

And if you think that's crazy, my neighbor tells stories from his father, of having been prohibited from working at his own gas station more than 40 hours a week during the Depression. He was required to hire help instead.

Posted by: Texan99 at March 1, 2014 12:11 PM

Hi Tex,
Yeah, libs have had stupid notions about economics for a very long time.
Best Regards,

Posted by: CAPT Mike at March 2, 2014 08:15 PM

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