Exploring Income Inequality, Part 3: Widening Inequality Since the 1970s

November 30, 2011 at 10:51 am

Yesterday’s post showed that the era of shared prosperity ended in the 1970s and highlighted the widening of income inequality since then.  Today, we’ll take a look at what has happened to income since 1979, using the comprehensive data in the Congressional Budget Office’s (CBO) recent report on inequality.

As the slideshow below shows, average after-tax incomes for households in the top 1 percent of the distribution nearly quadrupled between 1979 and 2007, after adjusting for inflation.  That compares with increases of about 40 percent for the middle three-fifths of the distribution and just 18 percent for the bottom fifth.

The CBO data shown here reflect a more comprehensive income definition than the Census data that we showed yesterday. As we explain in our guide, CBO uses a broader measure of income than either Census or tax return data alone can capture.

Tomorrow, we’ll take a closer look at incomes over the 1979-2007 period.

Greenstein on the Perils of a Balanced Budget Amendment

November 30, 2011 at 10:37 am

Testifying before the Senate Judiciary Committee’s Subcommittee on the Constitution, Civil Rights and Human Rights today, Center President Robert Greenstein explained why a constitutional balanced budget amendment would be unwise.  Here’s the opening of his testimony:

Thank you for the invitation to testify today.  I am Robert Greenstein, president of the Center on Budget and Policy Priorities, a policy institute that focuses both on fiscal policy and on policies affecting low- and moderate-income Americans.  We, like most others who analyze fiscal policy developments and trends, believe that the nation’s fiscal policy is on an unsustainable course.  As part of our work, we have been analyzing proposed changes in budget procedures for more than 20 years.  We have conducted extensive analyses of proposals to write a balanced-budget requirement into the Constitution, among other proposals.

The purpose of changing our fiscal policy course is to strengthen our economy over the long term and to prevent the serious economic damage that would likely occur if the debt explodes in future decades as a share of the economy.  But we need to choose our fiscal policy instruments carefully.  We want to avoid “destroying the village in order to save it.”

The goal of a constitutional balanced budget amendment is to address our long-term fiscal imbalance.  Unfortunately, a constitutional balanced budget amendment would be a highly ill-advised way to try to do that and likely would cause serious economic damage.  It would require a balanced budget every year regardless of the state of the economy, unless a supermajority of both houses overrode that requirement.  This is an unwise stricture that large numbers of mainstream economists have long counseled against, because it would require the largest budget cuts or tax increases precisely when the economy is weakest.  It holds substantial risk of tipping faltering economies into recessions and making recessions longer and deeper.  The additional job losses would likely be very large.

Click here for the full testimony.

Expanding Payroll Tax Cut Would Help Small Businesses, Not Hurt Them

November 29, 2011 at 5:13 pm

Some have argued that a Senate bill to extend and expand the payroll tax cut and pay for it through a surtax on incomes over $1 million would hurt small businesses and thus weaken job growth.

This claim overlooks the benefit of the payroll tax cut not only for working families but for small businesses as well.  It also greatly overstates the impact that the millionaire surtax would have on a relatively tiny number of small businesses.

The bill’s payroll tax cut would not only boost workers’ paychecks by hundreds of dollars or more in 2012 but also cut the taxes of every small business.  Employers would receive a tax holiday on fully half of their 2012 Social Security taxes on the first $5 million in payroll.  If employers create jobs, they would pay no Social Security taxes on the first $50 million in increased taxable payroll.

The millionaire surtax, in contrast, wouldn’t take effect until 2013 and would hit only a tiny fraction of small businesses.  According to a new Treasury Department study, 99 percent of small business owners whose small business income is taxed at the individual rather than corporate rate make less than $1 million; they account for 85 percent of small business income.  The surtax wouldn’t affect these business owners at all.  Individuals affected by the surtax will much more likely be corporate executives, Wall Street bond traders, and corporate lawyers than your neighborhood cleaning store owner.

While people with million-dollar incomes would pay more in taxes once the surtax took effect, the economic effect would likely be small, since they are less likely to cut back appreciably on their spending in response to such changes than are families that live paycheck to paycheck.  In contrast, the economic consequences of allowing the temporary payroll tax holiday to lapse would be substantial:  Goldman Sachs estimates that allowing the current payroll tax holiday to expire as scheduled would shave up to two-thirds of a percentage point from next year’s economic growth; according to economist Mark Zandi, such a failure would reduce employment by around 750,000.

Extending and expanding the payroll tax cut would give the economy a needed boost next year.  But Congress needs to act before the current payroll tax cut expires on January 1st.

Exploring Income Inequality, Part 2: The Loss of Shared Prosperity

November 29, 2011 at 2:35 pm

The slideshow below — the first in this week’s series on income inequality — shows that the years from the end of World War II into the early 1970s saw substantial income growth and broadly shared prosperity.  But this trend ended in the early 1970s, when income disparities started widening as incomes began to grow much faster at the top than in the middle or bottom.

The slideshow presents family income data from the Census Bureau.  While these data are useful for illustrating the widening of income inequality beginning in the 1970s, other data are superior for assessing more recent trends, as we explain in our new guide on examining income inequality.

Tomorrow, we’ll examine income growth in recent decades.

Income Mobility Can’t Explain Away Evidence of Increased Inequality

November 29, 2011 at 8:29 am

Some policymakers, like House Budget Committee Chairman Paul Ryan, have tried to dismiss studies like this one from the Congressional Budget Office showing a large rise in income inequality in recent decades by arguing that these studies do not account for income mobility in America.

Here’s their argument:  the data we have showing rising inequality is based on successive “snapshots” of the income ladder over time, but people are not stuck on the same rung over many years; they move up and down the ladder.  Increased income inequality means the rungs of the ladder are further apart, but if there is enough movement up and down that income ladder, where people are in a particular year would tell us very little about where they were a few years earlier or where they will be a few years later.  If mobility has increased enough, the dramatic rise in income inequality over the past thirty years is not an obvious problem.

The problem is, there’s just no evidence that mobility is increasing, and quite solid evidence to the contrary.

A new paper by Federal Reserve economist Katharine Bradbury clearly documents a statistically significant decline in the rate of mobility.  The slowdown isn’t dramatic; Bradbury accurately labels it “slight.”  But it’s there.

This graph, based on Bradbury’s analysis, shows two measures of family income mobility over ten-year spans:  the share of families in the richest fifth who move down the income scale to the middle or lower fifths and the share of families in the poorest fifth who move up to the middle or higher.

The lines basically drift down starting in the late 1970s, meaning there’s less movement between the rungs on the income ladder.  Bradbury found that the downshift over time was statistically significant (see Table 5 of her paper).

The argument that mobility offsets higher inequality may sound plausible, but the facts don’t support it.