Yesterday I promised to explore income inequity further and delve into impacts of tax rates. Here is the first edition but with a disclaimer, there may be some outside reading to do…I’m a little self-conscious repeating what all these really smart folks and thorough studies have already determined. But here goes.
Start with the two previous charts yesterday. First the growing wedge between productivity and compensation. We claim increasing productivity is a path to a better standard of living. True it will help US competitiveness in the world market. But it does nothing for worker Smith if his productivity grows but he isn’t seeing a share from his increased competitiveness. The study: The wedges between productivity and median compensation growth  is well done and deserves a read. Not tough, best for guys like me it includes few graphs, you know pictures for us slow readers. Anyway Mishel explains:
“The analysis above has shown that from 1973 to 2011, the largest factor driving the gap between productivity and median compensation has been the growing inequality of wages and compensation, followed by the divergence of consumer and output prices and the shift of income from labor to capital. From 2000 to 2011, when the productivity-median compensation gap grew the fastest, the divergence of prices had only a modest impact, whereas the shift from labor to capital income was the single largest factor, accounting for roughly 45 percent of the gap.”
He goes on to discuss the three factors impacting this wedge. The one I see as most significant when looking at the capital flow relative to tax rates is:
“The first is the substantial gap between the growing earnings of the top 1 percent of earners and other high earners within the upper 10 percent: Between 1979 and 2007 the annual earnings of the top 1 percent grew 156 percent, while the remainder of the top 10 percent had earnings grow by 45 percent.”
From here lets jump to the depiction from Krugman and his short “No Trickle” blog. Most of us remember the term “Trickle Down Economics”. We believed if we allow the top tax rates to be lowered, that money would be re-invested in American business and we will all share in the wealth as the economy grew. Sure…and the economy did grow (following a huge rise in government spending and deficit growth under Reagan.) But looking back at both of these charts from yesterday, it’s pretty obvious the middle and lower class was left far behind. But let’s check in on the “Trickle Down Theory”
So today’s new entries; first is a chart depicting Capital gains taxes as compared to real investment….exactly what the lower tax rates were claimed to stimulate. A look from post depression years on shows a steady upward curve in the amount of real investment once through the first few post-depression bumps. But there just aren’t any of the peaks or valleys relative to the capital gains tax rates we’d see if there was actually a relationship between a rate change and additional investment. So like the (lost but now found) Congressional Research Service study, there just is not any direct impact of low capital gains tax rates and real investment. With no real investment, the additional findings of no increase to the GDP and no increase to the GDP are right in line. In short, “Trickle Down” –Doesn’t.
Lastly today is a tighter focus on Maximum Long Term Gains Rates. I specifically chose this chart because it represents the years from when the wedge between productivity and compensation began to grow. If we overlay these two charts we see a second wedge between productivity/profitability and the lower max capital gains rates. Fall back to the worker compensation line to see where the income inequity comes into play. Don’t forget…that additional income at the top is being taxed at some of the lowest rates in history.Making more and paying less taxes = adding to income inequity.
Next look will be at another Hungerford study which clearly lays out various elements contributing to income inequity.