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pecuniumOne 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.
“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.
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On the one hand...
Date: 2009-09-09 12:30 pm (UTC)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.
Re: On the one hand...
Date: 2009-09-09 08:00 pm (UTC)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).
Re: On the one hand...
Date: 2009-09-10 02:33 am (UTC)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.
Re: On the one hand...
Date: 2009-09-10 04:14 am (UTC)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.