Thursday, September 04, 2008

America's wages - the big story

David Cay Johnston, a former New York Times tax reporter and author of two authoritative books on tax (here and here), has been looking at American wages in the highbrow tax publication Tax Notes. His article contains a big nugget that may surprise some people. First, he says:

"On the surface, the income numbers indicate that the economic lives of Americans are improving. Tax returns show that in 2006, for the third year in a row, Americans reported rising average and total income."

But then he qualifies it, by looking at a longer time-scale:

"While median income rose year-over-year in 2007, it was still smaller than way back in 1999 by $408 or nearly 1 percent. Eight years and no gain is not good news."

And he adds:

"Looking deeper, the data show that the gains are almost all at the top. . . . of the gains of the top fifth, an astonishing 42 percent went to the 1 in 400 taxpayers."

What he's said so far, or at least the thrust of it, is fairly well known. But then he says something rather more surprising.

"Among those making more than $1 million, it was a very different and more complicated story. First, their numbers grew by 42.9 percent, to $285,759. But their total wages fell, and so did the average.

How can the number of million-dollar-plus incomes soar and the total income of that group fall? It happened because the 33,000 taxpayers who made more than $5 million in 2006 had much smaller wages than in 2000 — on average, $2 million less."

Huh? Smaller wages?

He goes on to explain. (Note, here, that he is making an all-important distinction between income, on the one hand, and wages, on the other.)

"So where is the income growth coming from? A small part is from pensions and retirement savings plans, which are simply deferred wages, and which will continue to grow as the boomers move into their final decades. But the big growth in incomes is in business profits and investment gains.

And therein lies the big story.

The dominant and often only form of income for most Americans (wages) is slowly eroding, while the capital incomes earned by those at the top are soaring. . . The share of adjusted gross income due to wages was 82 percent in 1980. By 2000 it was down to 70 percent, and in 2006 it slipped to 68 percent of all income."

So why is this degradation happening?

"Wages are the base of the American economy, crucial not just to consumption, but to political stability. And our policies are slowly eroding that base. "

Weaker unions is one reason. Other policies, he explains, favour moving capital offshore.

"Meanwhile, through favors for individual businesses and sometimes whole industries, our federal and state governments exclude ever more business and investment income from tax.

And while it is true that the top 10 percent pay the lion’s share of income taxes, this levy explains only about a sixth of the dollars that governments at all levels collect. When you look at all federal taxes that fall directly on individuals, the data show that schoolteachers, cops, and office workers pay marginal tax rates of more than 40 percent on wages that have been mostly stagnant over the past three decades. But at the very top, where the marginal tax rate is just 15 percent, incomes soar."

Businesses and others constantly lobby for lower taxes on capital gains and other forms of capital income. All too often, they get what they want, partly because these issues are often too complex to get voters excited, and partly because pernicious "tax competition" (which we have just blogged about) puts wind in the lobbyists' sails, who use this as a brute weapon to frighten the politicians.

And so the tax rates on capital fall, and fall further. Wealthy people convert their income into capital income, and cut their tax bill, growing wealthier faster. The poorer sections of society then have to pick up the tab: in effect, they pay the wealthiest people's taxes for them. The billionaire Warren Buffett, a beneficiary of this, had this to say:

"In our office 15 people cooperated in a survey out of 18 - and my total tax: payroll taxes plus income taxes - mine came to 17.7% - the average for office was 32.9% and there wasn't anyone in the office, from the receptionist up, who paid a lower tax rate. And I have no tax planning, i don't have an accountant, I don't have tax shelters, I just do what Congress tells me to do. . . . (in the last 20 years) the average American went exactly nowhere on the economic scale: he’s been on a treadmill while the super-rich have been on a spaceship.”

And, of course, all this is not only happening in America. We will, of course, return to this theme.


Blogger Tim Worstall said...

If you're going to return to the theme you'd do well to actually learn a little more about the US tax system then.

The top marginal income tax rate is not 15%.

The rate for capital gains is indeed that but as the Piketty and Saetz data shows it is not in fact capital gains which is driving the top incomes.

It is also true that the dividend tax rate is 15%....but that gets taxed first at the company level (unlike the UK's system where it does not) and at the corporate income tax rate.

The true rate of tax on corporate profit distributed as dividends is thus the corporate income tax rate plus the dividend tax rate: or around and about that 40% marginal tax rate before State and other taxes are included.

The high income groups in the US do not face a 15% marginal tax rate on income, not at all.

4:51 am  
Blogger Richard Murphy said...


So, for the income tax payer the marginal rate of tax on dividends and capital gains is, you seem to agree 15% for both capital gains and income tax on dividends.

So what did David Cay Johnston say that's wrong and how come you argue that a 15% marginal tax rate is not 15% (underlying tax matters not one iota here: we're talking marginal rates, that's all)?

Richard Murphy

8:32 am  

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