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Monday, June 9, 2014

Inequality, Piketty, Income, Wealth, Taxes

A short read here. I write comments to articles, here's a lengthy comment,  but it's a short blog essay, relative to my usual. 

We should ask why one in every six Americans, 15% or 47 million, are so poor they must obtain their food with charity coupons (food stamps), or why 21% their medical care from Medicaid, and why 16.0%, over 50 million citizens, qualify as officially poor (see The U.S. Census report here, page 5). The average after-tax income for all Americans of all ages, per capita, is now $40,017 according to the site, see here. The Census report, above, states that $23,283 is the poverty threshold for a 2 adult, 2 child family, while the average after-tax income for 4 Americans, according to the BEA report above, is $160,068  -- average income. How many "average" families were there? Regarding wealth or "household net worth", the average is $665,000 per household (see Federal Reserve report, page 2). 
How many are average or above? 10%? (Take a guess here.)
If "on average" we are floating in abundance, why are so many sinking in want? 

One in every five children under age five is poor, and 1% of all households (or 1.2 million households with children) lives on nothing but food stamps, see this report. And nearly "1.2 million public school children were homeless in 2011-2012." Inequality is shaping America. While the collective income of the top-one percent of households is greater than the collective income of the lower-earning 60% of households (see the report from Citizens for Tax Justice), and the richest one percent own more than the lower-saving 92% (see the report) -- I'm left to ponder about our society's growing discontent, its unfairness and the inefficiency of our economic system. 

Taxation: High Taxes needed on High Income, the Historical Amendment, and the Top Income in 1950 has some valuable articles on taxation during the 1950s and before. I recommend a few articles, one about why high taxes on high incomes as in the 1950s were and still are  necessary,  
And another about the history of the income tax amendment passed in 1913, --- 
And when America's top-paid CEO, Charles Wilson, the CEO of General Motors in 1950, had an income of $5.6 million (in today's dollars) and paid 73% of it in taxes; his after-tax income was $1.5 million, see   
Isn't the average income for all 500 CEOs in the top 500 U.S.  corporations around $10 million today? That's $5,000 an hour, more or less. Paying an over-all effective tax rate of 33% (see here), their after-tax income would be around $6.7 million? The AFL-CIO provides the data:  --
the average is $11.7 million, so after taxes -- federal, state and local -- $7.8 million is the average for all 500, five times higher than the top of the top income in 1950. REVISION: William Lazonick reports at the Roosevelt Institute that the average compensation was $30.3 million in 2012 for the 500 CEOs. After taxes their income is $20 million, so the current average for 500 is 13.3 times higher than the top CEO at GM in 1950. 
REVISION #2: The Economic Policy Institute released a report, June 13, 2014, stating that the top 350 CEOs had an average income of $15.2 million, the major points are these, 
  • "From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period.
  • The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s."    
  • My interpretation: We should strive to replicate the income distribution of 1967 or the 20 years 1946 to 1966; then each household in the lower 99% would increase its income by 24%, and the median family income would grow from today's $51,017 to $63,433. In 1967 the median household income was 89% of the average household income, but today it is 72% of the average. (I took my figures from the U.S. Census report here, page 33.) If today's median were 89%, then it would be $63,433. (The average is actually above $112,000 but the Census under-reports the average. The Census reports just "cash income." See my next essay about this discrepancy. See this State of Working America table on income that reports average household income in 2007 being $104,163 (using 2011 dollar values).) Average? But wasn't the median household income around $51,371 in 2012 (see U.S. Census here, page 3)? It is confusing, but it is also out of whack. 

  • Average annual change in mean family income of US households by quintile & top 5% (Pew Research Centre)

  • This is why the economy and the society worked better 46 years ago in 1967 than today. In the 35 year period, 1978 to 2013, the economy grew by 77% -- the per capita output or GDP, inflation adjusted, increased by 77%, from $28,120 to $49,797 -- but wages grew by 10%. The population increased by 42%, from 222 million to 316 million, and the "real" GDP increased by 151%. Over half of all workers (in 2008) worked in firms of over 500 employees, and nearly 2/3rds in firms of 100 or more employees (see this U.S. Census report on firm size). The  CEO employers had a ten-times increase in income (now averaging over $15 million a year), the employees had a 10% increase over 35 years (now at the median at $40,352 per year, see here). The output per worker increased by 77% per worker/hour. Almost all the increase went to the top. 
  • See some great graphics here at the Russell Sage Foundation web page. The median household income grew by 19% while the per capita income grew (four times faster) by 77%, 1968 to 2012.  

  • The system is not working, it will impoverish the nation if it continues, because the economy depends on consumer purchasing -- that's its genius and its achilles heel. This is why the first TooMuch article cited above --- about maintaining high marginal income tax rates, such as 80% as recommended by Thomas Piketty, such as 91% between 1950 through 1963 (see here) --- is so important to understand. 

Thomas Piketty, author of Capital in the 21st Century (see the Harvard University Press with its selection of reviews and a video, and the Amazon page with over 600 reviews, and see Too Much, with a long list of related articles), claims in his principal thesis that r > g,  the rate of return on wealth is greater than the rate of an economy's growth, therefore the rich inextricably increase their power and wealth, and democratic power becomes less viable and subject to one-sided wealth influence. Here is a very recent example:    
Since 2008 the Federal Reserve states that the total household wealth has grown by $23 trillion (that is a per capita increase of over $72,000 for every American, and over $185,000 for every family and household). The average household's net worth is $665,000 but median household's net worth is now about $80,000 in comparison. The private wealth increased from $57 trillion to over $80 trillion, a 40% jump in 6 years, 30.2% per capita. The top-saving 5% of households owns 75% of all financial assets so they received most of this windfall. 
Perversely and concurrently  the income of most households have dropped (by 8% at the median), the median household has lost 39% of its "net worth" (and here page 17), and about 5 million lost their homes through foreclosure and that does not include other millions whose homes were sold REO by banks and "short-saled". Some 17% of current mortgage holders are "underwater" with their mortgages, and another 17% are "effectively underwater", or about 24% of all U.S. households, while 35% of U.S. households are renters facing increasing rental costs.  Conclusion: about 60% of U.S. households have difficulties with housing expenses -- in a nation with an average household savings of $665,000 per household. Instead of thinking that 65% are "homeowners", apparently it's the reverse. I recommend this June 19, 2014, interview with the author of Other People's Houses, Jennifer Taub for a review of this housing issue. 

And now a Pew survey states that 40% instead of 25% say they are "lower class" instead of "middle class". Incongruous! The top-saving 6 million households, the top 5%, on average has increased their personal savings by $3.8 million since 2008, 6 years. As Piketty says, r > g. Piketty also says the top income tax rate should be around 80%, and there should be a tax on wealth.  

The mean average household savings is now $665,000 per household, and perhaps 92% of Americans are below average. Total "net household worth" has increased by 30.2% per capita since 2008, according to the Federal Reserve. And just one family, the Walton family, owns more than 41% of U.S. families' collective wealth (one family has more savings than the collective savings of 130 million Americans). The median household's savings is around $80,000 and the lower-saving half own 1.1% of all wealth (see here). 
The average worker income is just under $96,000 -- when I divide $14 trillion in personal income by the 146 million who work each day of the year. Why is the median for full-time workers, as stated above, $40,352 a year, and the median for all 153 million full- and part-time workers $27,519 a year -- when the average is $96,000?

The median worker's income was $27,519 in 2012 according to the Social Security Administration, and the average income for the lower-earning half, or 77 million workers, was around $10,000 or collectively about 7% of total personal income. Do we have full employment? (See here and here and here.) Why not? Is this system good enough? Does it make the grade in terms of fairness and efficiency? About one in eight to one in ten adults cannot find work, about 29% can't find work and/or can't find full-time work that pays above poverty level income. The best we can do? 

The Typical Average Family Expenses
The average expenses per family in the U.S (specified for 615 different communities and six different sizes of families, over 3,600 variations) are calculated by the Economic Policy Institute's Family Budget Calculator, and Topeka, Kansas, has the honor of being at the center (geographically?) of family expenses, the median. Here's how it plays out: 
A family of one adult and one child, 
Yearly expenses, $45,399           Monthly expenses, $3,783
A family of two adults and two children
Yearly expenses, $65,096           Monthly expenses, $5,425
Health care and child care combined account for 40% in the 2 person family and 47% in the family of four. 
About 54% of U.S. families (not households) have incomes below  $65,096 a year (see here), the amount called "The income level necessary for families to secure an adequate but modest living standard." (See here) It is a calculator that estimates  "community-specific costs of housing, food, child care, transportation, health care, other necessities, and taxes."
The question that is begged, why not 0%, or 10% or even 20% -- but not 54% -- under this basic expense level? Are we too poor? What was the average income after taxes per capita? Isn't it $40,017 per person? If the average cash income for households is $78,900, and average family income is $81,007, then 74% of families are below average. But the economy generates enough cash resources so that all could secure  "an adequate but modest living standard." Wage income is too low. (See my previous blog essay about Wage Stagnation.) Since child care and health care are the major income sumps, these areas, along with wage improvement, need the most attention.  

Is it surprising that 40% of adults report to be in the "lower class"? And 44% report being "middle class". Possibly, soon a majority of citizens may self-classify as "lower class", in the richest nation in the world. 

From this report, here's a five year-old's poem: 

A Sad Story
A shopping cart was my first crib. 
My sister and me. 
Our home was on the street. 
Finally under a roof.
Two beds for six. 
No is always on our minds. 
No running, no jumping, no fun.
             — Shanika, age 5