pecunium

One wonders that there haven't been tumbrils in the streets already.

“The Savings Rate Has Recovered…if You Ignore the Bottom 99%”

...there IS some pretty good data on income stratification in the United States, and a few assumptions can help shed some light. Economists Thomas Piketty and Emmanuel Saez have made careers of studying US income inequality using IRS data, which goes back to 1913. The most recent data available (for 2007) showed that the top 14,988 households (0.01% of the population) received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received 49.7% of income (the highest on record).

The fortunate 14,988 had an average income in 2007 of $35,042,705. They had an average federal tax burden, according to Piketty and Saez, of 34.7%, leaving them after tax income of $22.9 million. If you assume a 50% savings rate among this group, you get total savings of $171.5 billion. This is nearly ONE HALF of the total savings for the entire country implied by a savings rate of 4.2% ($365 bn) reported in this month’s Bureau of Economic Analysis data.

I’ve never actually had an after tax income of $22.9 million, so I couldn’t say for sure whether a 50% savings rate is a reasonable assumption, but I’m going to go out on a limb and say that it is, just based on the pure physics of spending money. Buying cars, clothes, and fancy dinners, even at Masa, won’t get you there…the math doesn’t work. Buying a private jet could get you there, but most people, even rich people, don’t buy one of those every year. The only EASY way to spend more than 50% of $22.9 million on an annual basis is to buy lots of houses…but the definition of “personal consumption expenditure” used by the BEA specifically excludes purchases of real estate. They use an imputed rent calculation instead. So I’m going to stick with my 50% number.

An after tax income of 22.9 million... My mind reels a bit at trying to spend the money when he talks about, the top 1 percent, forget trying to imagine spending 11.45 million, every year for those in the top .01:

we find an average income of $1.36 million for 2007. These folks had an average federal tax burden of just under 33%, so their after tax income averaged $916 thousand. If you assume this group had a savings rate of 33%, you get total savings of $452 billion (remember, $171.5 bn of this comes from the top 0.01%, we’re assuming a savings rate of around 25% of after tax income for the “poorer” 99% of the top 1%)

Why does this matter? because if one makes the assumptions he makes in his numbers you get (as he points out), a savings rate which is actually greater, than the total savings rate for the entire US.

Since we know that some of the 99 percent of us who aren't making more than $900,000 US a year are saving some money, that means those who are making huge piles of cash are doing their bit to keep the economy afloat by actuall spending more than half (and it seems much more).

But most of us... we aren't able to save much at all, and a lot of us are actually in the red, eating our seed-corn, and managing to make ends meet; in the present, by living on credit, and hoping we can make enough money to catch up to the usurious rates being charged.

Flat | Top-Level Comments Only

From:

don-fitch.livejournal.com

One of the more fascinating aspects I find in this is that the top .01% had an average tax burden of c. 35% of their income. That's almost as large a percentage as prosperous middle-class people pay. And it seems likely that as many as half of them paid less than that. I think I'd like to see a graduated income tax that went up to something like 80 or 90% of income over 10 million dollars per year, with no (or fewer) loopholes. (And yes, I'm reasonably certain of wanting that even if I were in that exalted category, rather than having close to the median income.)

From:

pecunium.livejournal.com

Me too.

One of the evil things about the various tax breaks in the past 20 years is how it moved the real burden down. The Reagan cuts were, as I recall (being pissed about it at the time), bell-curved. The middle had a higher percentage taken out.

Add the caps on FICA costs (still something like 92,000 and they stop taking it out), and the middle class pays the highest percentage, and more than their fair share.

That's before the accountants get into the picture. I recall the blasé way the guy comeing to talk about a 401k said, "but I always max out both" in response to a question on 401k/IRA in tandem. The guys who were asking the question weren't able to max out the 401k, because they didn't make enough.

From:

harimad.livejournal.com

The U.S. tax code attempts to do two, incompatible things:
1: raise money for government expenses
2: encourage citizens to do good things.
These are fundamentally inconsistent and lead to a mess, be it a greater or lesser mess. Reagan's tax reform made it a lesser mess. Changes in tax law since then have made it the greater. I thought Clinton was bad, creating tax breaks for investing in specific neighborhood blocks and such, but Bush the Younger put even Clinton to shame. And we all know how hard it is to shame Bill Clinton.

#2 leads to many of the so-called loopholes. A rich person can set up a Charitable Remainder Unit Trust (CRUT), by dumping a couple million into a CRUT. He gets a certain percentage of the value every year, and the remainder at his death goes to the charity.

Rich people tend to give a lot to charity. Look into Walter Annenburg's history, for example. One year - an average year for him - he gave the NAACP a donation larger than its annual operating budget. Some do it for the tax breaks, which is why the breaks succeed in influencing behavior. If I ran a charity, I wouldn't much care as to motive but I'm aware that not all charitable heads feel the same.

Another reason some rich people pay 35% tax rate is that they invest in ventures that go bust.

From:

pecunium.livejournal.com

But, as we go back to the nature of such incentives, as the tax burden is reduced, the value of such donations tends to be reduced. Yes, there are the large donors (Bill and Melinda Gates, to name one) who seem to do it because they feel a duty; that or they just have so much money their idea of chump-change is so beyond the normal ken that it croggles.

But the idea that rich people pay 35 percent because they invest in things is wrong The highest rate in the US is 35 percent. That's on all income over 372,950.

Since that's the marginal rate the actual tax paid (federal income; no deductions) is 29.02 percent

If one makes 1,000,000 the tax is 32.77 percent. There is some extra, for the cost of state taxes, and for FICA (which may not apply, if one is making purely investment income).

As the tax rates have gone down, the amount of charitable donation has gone down. It's hard to say, because the economy started going south, but the Bush tax cuts seem to have ushered in a notable decline, almost immediately, in such donations.

As to Reagan, he may have cleaned up some of the arcana of the code, but a "revenue neutral" change, which reduces the highest rates, and raises the bar (so the lowest rates see a decrease in how much is taxed) isn't good for the middle. It can't be, because someone has to be picking up the tab, or it won't be revenue neutral. Since there was also an increase in the wage gap, I have to assume it was that middle (this is without factoring in the increase SS taxes he and Greenspan authored; which was, again, a tax which fell on the bottom of the spectrum more solidly than the top, even with the increase from 70,000ish, to 90,000ish as the point the tax stops being collected).

From:

harimad.livejournal.com

I have to assume it was that middle

You should discard that assumption. What you're missing[1] is that more dollars were taxable: exclusions ceased or were decreased, loopholes closed, etc. The rich had benefited most from these exclusions and loopholes, and when these went away it was the rich were the most hit.

Not saying that I know exactly how the different income groups were affected; saying that the effect wasn't as stark as you outline.

Damned if I can tell why FICA should cease to be collected above a certain income, or how that came about. Damn stupid policy.

[1] I think; it's late and was a lousy day so if I'm missing something, credit me with goodwill and also correct my mistake.

From:

pecunium.livejournal.com

I think the closed loopholes didn't quite make up the lost tax rates. It's been a while, so I am not as current on it as I was when it was happening, but I do recall that my folks saw their available income drop.

That may have merely been the increase in FICA, but the net effect seemed to be the middle classes having a larger chunk of their pie taken away.

From:

harimad.livejournal.com

The current tax code is a mess and a travesty. It is inefficient in raising money, expensive to implement, and impossible to fully understand. A tax code should be the opposite of all these things. Money spent on setting up complicated tax-driven arrangements, such as the CRUTs I mentioned, is a net loss to the economy and the polity. If we're going to have an income tax than all income should be subject to tax, and the tax should be low and graduated - ie, higher on the higher incomes.

That's assuming we should have an income tax. There's a lot to be said for national sales tax to replace a large chunk of the national income tax. For starters, it's a fantastic encouragement to save.

What gets me the most is what pecunium raises: the cap on FICA tax base. If there's a cap on the tax base then there should be a cap on the calculation base. IOW, if you pay tax only up to $92K, then when you're retired, your highest salary considered should be $92K. Anything else is grossly regressive and a mathematical guarantee for bankruptcy.

From:

pecunium.livejournal.com

The problem with a sales tax is the regressive nature of it.

Me, I see ways around that, but it will never pass... food, clothing, books, non-taxable.

Other goods taxable. Luxury items (say Gulf-stream 500s) at a higher rate.

But that would be called class warfare.

From:

harimad.livejournal.com

The problem with a sales tax is the regressive nature of it.

True, which is why I advocate a national sales tax combined with a lessening of the national income tax.

From:

pecunium.livejournal.com

The problem is ratio. If I make 25,000 a year, and pay 3,330 per year (the present rate), and the national sales tax is 8 percent I come out ahead.

If the national sales tax is, however 15 percent, then I come out behind.

More to the point, the relative percent hits me harder than it does someone who earns (or otherwise gains) 100,000.

Sales taxes are, in their nature, regressive. If they are combined with gross dichotomies of income, then the nature of the regression is more pronounced.