Taxes and inequality

A quote from this linked paper:

Overall, we find that the combined federal and state tax codes substantially mitigate income inequality. However, state tax systems, on average, tend to increase income inequality slightly.

Washington state’s heavy reliance on sales and gas taxes—absent a state income tax—increases income inequality for Washingtonians. These taxes disproportionately affect lower-income households. By comparison, Oregon, which has an income tax but no sales tax, slightly mitigates (compresses) income distribution.

By the way, most of the overall compression of incomes results from the federal tax code. However, since at least 1980, the top marginal tax rate has declined dramatically, from 70 percent to less than 40. Meanwhile, income inequality continues to rise.

gini index may 2015

There was a time

personal savings and expenditures

During the “relative halcyon days” of the initial post-war decades both personal savings and spending were increasing each year. Then something happened, beginning in the latter 70s. Both spending and savings started dropping, though the savings rate has picked up a bit over the last ten years—but still far below the level in the 60s and early 70s.

gini index and per capita income

In the above chart we see that personal income per capita has steadily risen since 1960, though it actually fell slightly during the Great Recession. So, why are both spending and savings down if income is up? Well, that red curve above shows the Gini index, a measurement of inequality. More and more of the economy’s output finds its way into the bank accounts of the few. Indeed, the rich have accumulated so much wealth that they really have no place to spend it all. The Rest of Us, on the other hand, spend nearly all that we make, and we’re not making as much as we used to.

That said, the spending by the rich on the kinds of things we need—especially housing—inflates prices beyond the reach of the ordinary. The wealthy are driving out the Rest of Us and the businesses we depend on. See this piece by Tim Wu in The New Yorker.

Why no resistance?

An interesting review of two books pondering the question: Why is there no effective opposition to the status quo, one that benefits a few, impoverishes many, and leaves the Rest of Us struggling?

[Steve] Fraser’s purpose, however, is not to point out how bad things are, which every newspaper reader already knows. It’s to ask how the authors of this catastrophe have gotten away with it—why there is so little organized resistance to plutocracy in the second Gilded Age. Occupy Wall Street was an inspiring outburst but left little institutional residue. Minority-rights and gender-equality struggles have scored great successes, but they have not carried over into opposition to economic inequality and corporate dominance. Why, compared with the tempests of a century ago, are there only scattered bursts of resistance now?

I, for one, have no answer to the question. I scratch my head from time to time.

However, it does occur to me that, despite the problems of inequality and retarded social mobility, a critical mass of the populace is feeling okay about things, enough to supply “the authors of this catastrophe” with all the support they need to carry on.

This is not my grandfather’s society.

Free, but not too much

Economist Dean Baker suggests hypocrisy on the part of those who favor both the Trans-Pacific Partnership and re-authorization of the Export-Import Bank.

If anyone is missing the irony, the TPP is being sold as “free trade.” This is a great holy principle enshrined in intro econ textbooks everywhere. Since the TPP is called a “free-trade” agreement, those who opposed to it are ignorant Neanderthals who should not be taken seriously.

However the Export-Import Bank is about subsidies for U.S. exports. It is 180 degrees at odds with free trade. It means the government is effectively taxing the rest of us to give money to favored corporations, primarily folks like Boeing, GE, Caterpillar Tractor and a small number of other huge corporations.

I can’t get to my job

Bob lives in a low-rent district of Atlanta. (I don’t know Bob. I just made him up.) He’s been looking for a job since the Great Recession. But the only work he can find for which he’s qualified is in the suburbs, several miles from his residence. He can’t afford a car, so he tries public transportation. Then the fun starts.

Writing for Vox, Joseph Stromberg tells us that there are lots of “Bobs” out there—and, shall we say, “Sallies.” Because of their economic circumstances, they must rely on public transport to get from home to job and back again.

One of the basic problems here is called spatial mismatch: the fact that millions of low-income urban households are located far from the suburban places where jobs are often available. Danielle Kurtzleben’s Vox article on spatial mismatch is a great primer on the issue.

Part of the root cause of this mismatch is historical. Starting in the 1950s, extensive highway systems were built through almost every major US city, linking them with budding suburbs. Along with other factors, this led many wealthy, white residents to flee cities, initially commuting in for work on the highways.

Employers eventually followed them, bringing workplaces to the suburbs and leaving fewer jobs in the cities. Since at least the 1990s, the majority of suburbanites commute to the suburbs for work. “The dominant pattern today,” says Alan Pisarski, a commuting researcher, “is suburb to suburb.”

Nevertheless, a huge swath of Americans stubbornly resist funding public infrastructure, including transportation. Anything involving governments is automatically suspect, and the public sector is all about governments.

Seattle is adding thousands of new jobs, led by Amazon and Paul Allen’s myriad ventures. But the city is unable or unwilling to accommodate many of these new workers. As demand for housing soars, supply can’t keep pace, driving up shelter costs. (Knute Berger reports on escalating Seattle rents here.)

The head of the Master Builders Association pens on op-ed for the Seattle Times, calling for housing accommodation by local governments. He writes:

Instead of resisting our region’s expected growth and enacting policies that subtract from our very limited buildable land supply, local governments should work within their communities to expand housing supply and choices for families.

Proffered solutions abound. Achieving meaningful consensus, not so much.

Wrong convergence

Real disposable income per capita continues to rise—for a few, at any rate. Meanwhile, residential rents also continue to rise. The gap between the two represents what many have available to spend on non-housing expenses. Those expenditures contribute to economic growth and better employment figures. Let’s look at a chart:

disposable income per capita and rent cpi

Source: St. Louis FED

During the last years of the Carter administration rents began a sharper upward trajectory, eventually wiping out the gap between income and housing costs.

I want to live—someplace

Suppose you live in San Francisco and want to buy a home. You’ll need to come up with a downpayment, say 20 percent of the selling price, and have a high enough income to pay the mortgage. You’ll also need some money to pay for everything else, like food, water, electricity, and transportation.

That first part—the downpayment—will be tough. If you make the median wage and want to purchase a median-priced home, you’ll need 37 years to accumulate the cash, assuming you’re able to set aside five percent of your salary. By the way, a Seattleite would need just over 20 years to amass the downpayment. (Source)

housing affordability index since 1981