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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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no subject
Date: 2009-09-08 06:26 am (UTC)no subject
Date: 2009-09-08 10:08 am (UTC)no subject
Date: 2009-09-08 12:45 pm (UTC)no subject
Date: 2009-09-08 01:08 pm (UTC)no subject
Date: 2009-09-08 03:00 pm (UTC)When we has marginal tax rate above fifty percent, executive pay was much less. The money not spent on executive salaries (which can be as much as ten percent of general revenues) was spent on things like factory upgrades, benefits, and (gasp) employee salaries.
With the rise of stock options as a way to work around things, the means to reward the executives still remains (esp. with the differential on capital gains), but really... if the incentive do pay so much were removed, I suspect a lot of companies would realise they weren't getting a whole lot of bang for the buck.
We have this myth that we somehow need to pay people unbelievable sums of money to stay competitive, well places like Germany, France, Japan, China, don't, and they are doing just fine.
no subject
Date: 2009-09-08 03:33 pm (UTC)That's not completely obvious, is it? Certainly when the stock market and house prices were going up, many people could get away with not saving anything or even accepting more debt and yet see their total assets increase by a tidy sum each year.
That phenomenon has (at least temporarily) been halted. But there may be other, more subtle factors that need taking into account before one can make this assertion.
I find it difficult to believe that the top 0.01% spend 50% of their income. Spending 75% of $916,000 seems pretty high too, but maybe.
no subject
Date: 2009-09-08 04:16 pm (UTC)no subject
Date: 2009-09-08 05:07 pm (UTC)What gets me, though, is the sheer disparity of it all. I can pretty readily imagine what I'd do with $900,000 a year, sadly. Quite happy on a fraction of that, though, but... Even (perhaps especially) at the low end, the disparities between what people find normal and accessible vs. too expensive to consider start to be quite a thing.
(Admittedly, I have an odd perspective on that - middle class is still 'rich' to me, I *love* being able to buy things somewhere other than a yard sale. I've had to modify my childhood price points for things like "reasonable price for a shirt" by a factor of about 100, and I still act like I'm allergic to spending money about half the time.)
no subject
Date: 2009-09-08 06:52 pm (UTC)no subject
Date: 2009-09-08 07:09 pm (UTC)And then there's the reverse argument that people just above the poverty level are still charging debt to credit cards while they pay for things like dvds and conventions (personal friends of mine). No one telling them how to live or to save money for rainy days. No one telling them to stop having kids (and the massive amount of expense that goes with having/raising one). No one says, "You brought this on yourself."
I feel like there's a double standard for who should get what. Then again, I'm not certain if the original statement was for a flat 90% tax or progressive.
no subject
Date: 2009-09-08 07:27 pm (UTC)Nobody needs a mansion. Some people choose to buy one. That's their choice, but they need to be able to support their choice on their income even with a tax system that works towards redistribution.
And then there's the reverse argument that people just above the poverty level are still charging debt to credit cards while they pay for things like dvds and conventions (personal friends of mine). No one telling them how to live or to save money for rainy days. No one telling them to stop having kids (and the massive amount of expense that goes with having/raising one). No one says, "You brought this on yourself."
Funny, I read and hear people saying that all the time to poor people. I like your world better.
no subject
Date: 2009-09-08 10:04 pm (UTC)no subject
Date: 2009-09-08 10:13 pm (UTC)So yeah, dinners at nice places, cellphone contracts? I bounce between "I'm rich! I can do this! yay!" and "zomg, spending?! but that's like... like... can't I just not?"
no subject
Date: 2009-09-08 11:13 pm (UTC)no subject
Date: 2009-09-09 12:50 am (UTC)I suppose I should have said that no one seems to be telling that to my friends and then I ignore the talking heads because they'll say that no matter what when it isn't them. I don't because frankly, it's not my life. But when I was in similar financial stead, I didn't live that way because that's how I was raised. But it seems like that education should come from somewhere external before being in that situation. And honestly, I would have liked some education of how much it costs to raise a child. I lived well within my means before having a baby. Now I check the finances every month to make sure we're not living outside them. It's sucky and I think about how much nicer I *could* have lived before having a baby.
ugh..tangenting again.. okay.. let me sum and send. I don't need a mansion, but I'd sure like to have one because of how it would make me feel coming home to it every day and living in it. And I don't want to take away someone's mansion for the idea of redistribution.
no subject
Date: 2009-09-09 04:49 am (UTC)Since a non-zero amount of them are (or were), saving money, the totals guessed at aren't quite right.
The scary thing is, that small number (1 percent) of the population, has the ability to save more than the entire US seems to be actually saving.
A more progressive tax structure would go a long way to solving a lot of our problems.
no subject
Date: 2009-09-09 04:52 am (UTC)But there are some of us in the bottom 99 percent who are saving money.
And, since assuming his numbers are right, the top 1 percent isn't saving as much as he posits (which he says), we have to assume most of the top one percent aren't saing either.
Which is provable, every time the NYT does a story about how hard it is to not go broke when all one got as a bonus this year was a measly $3,000,000.
no subject
Date: 2009-09-09 05:04 am (UTC)I do this by taking a look at my finances, estimating my income (and increases; though conservatively), and then factoring in the value of equity in event of a downturn.
I have some (but not much) sympathy for someone who is suffering from a contraction, but when they are complainging because the bonus they got this year was only 3 million, and they were used to five... well sorry charlie, that's like buying a car because the overtime won't stop.
And then there's the reverse argument that people just above the poverty level are still charging debt to credit cards while they pay for things like dvds and conventions (personal friends of mine). No one telling them how to live or to save money for rainy days. No one telling them to stop having kids (and the massive amount of expense that goes with having/raising one). No one says, "You brought this on yourself."
Nonsense. The entire argument of the Bankruptcy Bill was, "No one goes bankrupt because the system is broken; they do it because they buy plasma screens and a new car every three years. They bring it on themselves."
Why tax someone to the point of not being so rich that the pocket change they don't worry about isn't more than I made in any of the last five years?
Because that level of wealth is bad for the economy. It's bad for the polity. If I'd had Bill Gates breaks, I'd be set too. A hundred grand to set up shop and I'd be a happy camper as a professional photographer.
At that level, it's not a big deal, it's even arguable that people being able to give their kids a solid grubstake is beneficial.
But when the kids are getting the grubstakes of tens of thousands of people, well that's not so beneficial.
Add the distortions it makes to the political scene (esp. where money = speech) and the gulf gets wider. When the gulf gets too wide, bad things happen. It's probably not unrelated that the big depressions (1870, 1929,, 2008) were all preceded by huge examples of wealth disparity, and the periods of huge growth (like the 1950s) were times of narrow gaps (and high taxes on really large incomes).
no subject
Date: 2009-09-09 05:05 am (UTC)no subject
Date: 2009-09-09 05:08 am (UTC)I've seen it at the County Services Offices, where people were told they had to give up their 401k, because it was an asset. Never mind that they would end up losing more than they gained. They had saved the money (though it had conditions), and by God they had to spend it before the could get any help.
So yeah, I have to agree with Thette, I want to live where you live, and no one tells the poor they deserve their lot.
no subject
Date: 2009-09-09 05:12 am (UTC)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.
Post hoc ergo proptor hoc
Date: 2009-09-09 12:10 pm (UTC)What you say is true but incomplete. That was not the only change between then and now, making it impossible to isolate marginal tax rate as the cause of higher executive pay.
If you really want to boggle an executive or an executive pay committee, ask why already-high-paid CxOs need incentives to do their job well, whereas cooks and truck drivers and lower-paid mid-level execs seem to manage just fine without them.
no subject
Date: 2009-09-09 12:21 pm (UTC)The 1950s were also a unique time in history. The US was the only industrialized nation whose industrial base wasn't devastated by the war. We were the practically monopsonistic high-end supplier to the entire world - goods pouring out, money pouring in. Historial and economic consensus is that the US monopsony was a greater factor in the prosperity of the 1950s than the tax profile. Keep in mind, too, that it wasn't that the rich weren't getting richer, it was also that the poor and middle class were getting richer at a faster rate (since they started at a lower base).
Now that I've set the economic record straight... I'm a big fan of the estate tax. I think it's great that people can make themselves rich and they should have the benefit of that.
What's not great is that this wealth persists. It's bad for the community and the polity for permanent gulfs to open between the haves and the have-nots. Wealth that persists down generations tends to do that.
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.
On the other hand...
Date: 2009-09-09 12:37 pm (UTC)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.
no subject
Date: 2009-09-09 12:43 pm (UTC)You're not thinking broadly enough. You're imaging spending that amount on just yourself or a few people. Expand your horizons, man! Here are some ideas. A large number of them are very common.
Common ways:
- become a behind the scenes political player
- yachting or flying as a hobby
- yachting and flying as hobbies
- have a large staff (people are *so* expensive)
- keep a mistress; even better, keep several
- entertain a lot: imagine a destination wedding where you pay for your guests' expenses, and do this several times a year
- support your deadbeat relatives
Uncommon ways:
- invest in commodities (how do you make a small fortune in commodities? start with a large one)
- underwrite independent films
- buy a newspaper
- balloon around the world
no subject
Date: 2009-09-09 07:48 pm (UTC)None of which addresses the levelling factor of strong unions (and the herd immunities which competition with a strongly unionized workforce provided).
There was a lot of intentional social levelling in the 50s tax-code, which subsequent administrations and legislatures have been undoing.
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 other hand...
Date: 2009-09-09 08:02 pm (UTC)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.
Eat the rich, the poor are tough and stringy.
Date: 2009-09-10 12:42 am (UTC)John Raulston Saul once observed that the primary difference between Marxists and Neo-Liberals was the question of who was supposed to end up up against the wall. Increasingly, I am inclined to believe that he was not exaggerating for effect.
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 other hand...
Date: 2009-09-10 02:38 am (UTC)True, which is why I advocate a national sales tax combined with a lessening of the national income tax.
Re: On the other hand...
Date: 2009-09-10 04:12 am (UTC)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.
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.