perfidy

Laura writes on the income issue. She's discovered a census bureau paper with an interesting take on the income issue. Because I think there is a good chance it was my comment that got her to do it...

Hello, Laura! There's a good possibility that I am the commenter who inspired you to write this article. I've written quite a bit about the income distribution issue, and have quoted the Piketty/Saez paper often. For some additional historical perspective, there is an IRS study that tells us about income tax rates and how they have changed, over many decades. Saez has an additional paper which analyzes the mathematical effects of tax policy.

You've got a good find here. Read on...
I need some time to digest it, but here's some food for thought:

1. P and S specifically address this issue in their paper. What they indicate is that for the purposes of calculating income, the changes in households (decrease in the number of persons per household) holds roughly even across all income levels. That is, poor and middle class folks have about the same change in household size as rich folks do.

2. What we're talking about here is whether we're really "better off" than we were 30 years ago. By the median income measure adjusted for inflation, 99% of Americans are not. Their income levels have stayed almost constant. You make the argument that _per capita_ income is a better measure of how well off we are, and by that measure things have improved quite a bit; certainly far in excess of 4%-6%, depending on time frame. You also say that while the top income earners have seen dramatic increases in their incomes, per capita income has not remained flat, and that in the median, we are better off. I hope I have accurately represented your position.

Under debate is the following proposition: Tax policy over the past thirty years has resulted in improved circumstances for the median US person. I say it has not; I'd prefer not to characterize your position on that proposition directly, as you haven't addressed it.

The general discussion of whether we are better off or worse off, independent of government policy, is a different argument and has a different set of variables. The per-capita income argument is interesting, but has these flaws, in my opinion:

1. To a very large degree, smaller households are the result of cultural change. Government policy has probably had a minimal effect. If tax policy had not changed, we would still have smaller households.

2. It is distinctly possible that at some point in the future, the size-of-household trend might reverse itself. This would lower the per-capita income rate.

3. Taxation rates on our median individual are very important. The income numbers we are discussing are before taxes. An example: the Social Security Administration gives us a table of social security rates over time. We can see from this table that in 1969, the household income was reduced by about 9.6% (4.8 + 4.8). By 2003, this has risen to 15.3% (7.65 + 7.65). Tax rates have risen substantially over the time frame we are discussing. I'm not sure if that effect has been taken into account in the inflation adjustments.

4. The short-term effect of a drop in the number of persons per household may be beneficial in terms of income per capita. The backside of that is the forthcoming baby-boomer retirement. Taxes will have to rise dramatically, or benefits be cut, to preserve the system we have in place.

5. Employment to population ratios have altered over the time frame, as well. Using the tools at the BLS site, I'd say that we've seen roughly a 5% increase in employment to population.

6. Other forms of taxation have also risen dramatically (state, local, property, fees).

7. Maintaining a house is maintaining a house! Anyone who's had a roommate knows that it's a lot cheaper to share costs. Far more people today maintain their own households, and thus forgo the opportunity to share costs. This brings higher per-capita incomes into focus -- people need to be making more, per person, to maintain the same standard of living as before.

My sense of it is this: Income per capita is a poor way of judging how "well off" we are. The dramatic drop in "married with children" homes is a primary driver; that coupled with dramatically higher numbers of women working makes income per capita too squishy to work with.

And it's besides the point -- we're trying to figure out if tax policy has resulted in higher incomes! Tax policy has resulted in a drop of the top rate from over 90% (which was paid by only 500 taxpayers in the entire nation) way back when to the current top rate of 38.6%, which is paid by over 500,000 taxpayers (from the second Saez paper). The general trend has been a tremendous flattening of the tax system. We have pushed the tax burden "down" the income scale; the idea here is that this will lead to increased economic performance, which will "float all boats".

One of the most striking quotes from the Saez paper:

"Top income shares within the top 1% show striking evidence of large and immediate responses to the tax cuts of the 1980s, and the size of those responses is largest for the very top income groups. In contrast, top incomes display no evidence of short or long-term response to the extremely large changes in the net-of-tax rates following the Kennedy tax cuts in the early 1960s."

Very recently detailed studies have become available that show us what's really happened with household income. Using them, we can see that the supply-siders were just flat-out wrong. The huge tax cuts generated little other than massive increases in wealth for the recipients. While we were cutting these top tax rates, tax rates at the bottom and in the middle have been rising to compensate. The predicted effect of across the board increases in income simply did not materialize.

The statistic I would most like to see is after-tax income, broken down into per-capita and per-household measures, in inflation-adjusted dollars. Maybe there's a way to get there with the information sources I have.