TIMOTHY NOAH DECEMBER 6, 2011
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When you're a conservative and you find yourself stumbling over the inequality issue, who you gonna call? Alan Reynolds, senior fellow with the Cato Institute!
And so Reynolds is once again on the Wall Street Journal editorial page declaring that income inequality is a statistical illusion brought about by technical changes in the tax law that alter what income gets reported to the Internal Revenue Service and what income does not. "[W]hat the Congressional Budget Office presents as increased inequality from 2003 to 2007 was actually evidence that the top 1 percent of earners report more taxable income when tax rates are reduced on dividends, capital gains and businesses filing under the individual tax code." Um, Alan? The CBO report documented increased inequality from 1979 to 2007.
As the foregoing demonstrates, Reynolds's technique is to bury you under a mountain of hard-to-follow, often irrelevant, and sometimes entirely erroneous statistical quibbles to the point where you cry "Uncle!" and agree to believe that the existence or nonexistence of inequality is a matter of personal taste, like preferring Cherry Garcia to Chunky Monkey. Brad DeLong calls it "intellectual three-card monte."
This latest piece ends with the triumphal assertion that the CBO report concluded that income taxes were more progressive in 2007 than in 1979. But Reynolds doesn't tell you that the CBO report also concluded that the totality of federal tax and benefit programs were about one-quarter less redistributive in 2007 than in 1979. He also doesn't tell you that the income tax got more progressive because of changes at the bottom (mainly expansion of the Earned Income Tax Credit), not because of changes at the top. At the top, effective tax rates went down. That was detailed in an earlier CBO document from 2008. It showed dramatic declines for top incomes between 1979 and 2005 in both the effective income tax rate and in the effective rate for all federal taxes. For the top 0.01 percentile (i.e., incomes above $10.6 million in 2005 if you include capital gains and above $6.7 million if you don't) the effective income tax rate dropped from 21 percent to 17 percent, and the effective rate for all federal taxes dropped from 42.9 percent to 31.5 percent. Changes in income-tax rates, surprisingly enough, haven't benefited the superrrich as much as other changes in federal tax policy.
A central problem with Reynolds' argument that a lay person may grasp without much difficulty is that even though the technical changes he describes have, during the past 32 years, gone in different directions at different times--for instance, the capital gains tax went up in 1986 and down in 1997--income share for the top 1 percent has pretty relentlessly gone up, falling only during economic downturns, and even then not very far. That's true if you include taxes or not, if you include capital gains or not, etc., etc. (You can slice and dice the data ad infinitum at my favorite Web page, the World Top Incomes Database.) To believe Reynolds's argument you have to believe that the rich are reporting steadily more and more previously-hidden income to the IRS. We should be so lucky!
My esteemed predecessor subspecialized in exposing conservative economic quackery, and I just discovered that he wrote a great piece about Reynolds back in 2007 ("Flat Earth Economics: Equality Bites.") Please read it before you subject yourself to Reynolds's Journal op-ed.
9 comments
Oh, I think I get it -- everybody's equal. It's just that some people are more equal than others.
- AllanL5
December 6, 2011 at 2:23pm
Thank you for deconstructing the egregious Alan Reynolds, Timothy. Concerning income inequality, conservatives take one of two roads usually: they either deny outright that inequality has been increasing for many years, like Reynolds does, or they say it doesn't really matter, citing class mobility as a corrective. The only problem with the latter strategy is that class mobility has slowed to a stall in the US.
- liberalref
December 6, 2011 at 2:27pm
You are off-kilter again, A. This isn't an Orwell story at all. It is small-bore disingenuousness.
- liberalref
December 6, 2011 at 2:30pm
One caveat: it's true that a big reduction in the capital gains tax rate "unlocks" unrealized gains and generates more reported income and income taxes. Indeed, when the rate was dropped to 15% many tax professionals advised clients to go ahead and recognize capital gains rather than engage in deferral techniques available only to the wealthy; it's a well-kept secret that the income tax is essentially voluntary for the wealthy (i.e., those whose income is generated mainly from capital rather than services (labor doesn't seem like the appropriate term in this context)). Of course, unrealized gains ain't what they used to be.
- rayward
December 6, 2011 at 3:07pm
- Nusholtz
December 6, 2011 at 6:10pm
We could ask Seattle to chime in. He's usually a good one to chime in on refuting these "income inequality" myths that those of us left of the Right seem to think exist.
- singlspeed
December 6, 2011 at 6:57pm
We could ask Seattle to chime in. He's usually a good one to chime in on refuting these "income inequality" myths that those of us left of the Right seem to think exist.
- singlspeed
December 6, 2011 at 6:58pm
Yes, and tobacco is not addictive, you equivocating, dishonest piece of garbage. Sorry, after 25 years of listening to these people - I have no patience at all left.
- WandreyCer
December 6, 2011 at 7:31pm
Mr. Noah prefers to ignore “statistical quibbles” much as Jonathan Chait used to do with “picayune details.” Since I complained about the CBO stopping with 2007 rather than 2009, Mr. Noah links to an even older CBO study. It shows that from 1979 to 2005 the average of all federal taxes fell by 49% for the bottom fifth (from 8% to 4.3%), by 24% for the middle fifth (from 18.6% to 14.2%), and by 18% for the top fifth (from 21.2 to 17.4%). I clearly attributed that increased progressivity to tax cuts and refundable credits for lower incomes in my May 3 Senate Finance testimony (http://www.cato.org/pub_display.php?pub_id=13068). Such tax relief at lower incomes was possible, however, only because the top 1 percent paid 28.1% of all federal taxes by 2007, up from 15.4 percent in 1979. My WSJ graph shows the ups and downs of the top 1 percent’s share are mainly driven by capital gains. That makes the top 1 percent figure highly cyclical but also responsive to ups and downs in the capital gains tax. This is called a high “elasticity of taxable income.” As Emmanuel Saez wrote in 2004, “Top income shares within the top 1 percent 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 topmost income groups.” That makes it dishonest to compare tax-based income data before and after the 1986 tax reform. My comment about what happened after 2003 simply updates what Saez wrote about responses to earlier tax cuts. Rather than continuing Jonathan Chait’s quixotic tradition of getting angry with statistics you do not understand, why not just ask me to explain them?
- ALANatCATO
December 12, 2011 at 1:41pm