Another Win for the Top

In another victory for the top 1% of income earners, The New York Times reported today that Representative Charles Rangel, Chairman of The House Ways and Means Committee, agreed to drop the carried interest proposal from the legislation that was passed by the House to adjust the AMT threshold.

The AMT was originally enacted to make sure high-income earners paid their share of taxes by limiting the amount of deductions that can be taken over certain income thresholds. The problem is that the thresholds were not inflation adjusted, so every year people with less real income get caught up in having to pay this tax unless Congress passes a law to provide relief. Now, instead of just fixing the problem by changing the law to index the income thresholds to inflation, every year Congress passes a law for the following year only, wasting many of the tax dollars the Treasury does collect in the process. The end result of increasing the income threshold is fewer taxes are collected and millions of taxpayers who don't quite make the top 10% are spared a very unpleasant surprise at tax time. In order to pay for this reduction of anticipated tax revenues, Representative Rangel had proposed a change in the carried interest rules that apply to hedge fund and private equity managers.

The carried interest proposal would have raised taxes on hedge fund and private equity fund managers who benefit from a tax gift, paying only 15% on much of their (often seven figure) income. Basically, these money managers have structured their businesses so they can claim that the income they receive from managing other peoples' money should flow through to them in the same way it flows to those investors. If the investors are getting capital gains, then the managers also get capital gains treatment on their income because their income is based on a share of the investors' income, even though it is not their own money that is at risk (the typical justification for capital gains treatment in the first place). So, hedge fund managers and private equity managers, many of who are in that top 1% of income earners, pay a 15% tax rate on much of their income. Now, if you work for a mutual fund you don't get this benefit. If you sell real estate and the owner receives a capital gain the broker doesn't get this treatment. But somehow, hedge fund and private equity managers do.

Well, there are all kinds of cerebral arguments and debates over this topic. One such argument made by the private equity and hedge fund group is the claim that because they provide such a necessary service to the economy by reallocating resources to their most efficient use they somehow deserve this special tax treatment. Teachers, firemen, and police apparently don’t contribute in ways that benefit society as much as hedge fund and private equity managers because they don’t get special tax treatment. I have written about this rule in the past and how I believe it is a sham on all other taxpayers. You can read that comment if you would like more detail.

All of these very complex and sophisticated sounding debates aside, my cynical brain boils it down to a very simple situation. These very wealthy people who do things that most of us don’t understand hide behind this complexity to gain a tax advantage over the rest of us. They take a portion of this tax savings and they donate it to their elected representatives to ensure that these representatives will not change their tax benefit. See how simple that is? Now, I don’t want to simply dismiss the plight of taxpayers, so lets take a look at the various groups of income tax payers and see how they have fared over the past few years since the Bush tax policies have been in effect.

The latest release to shed light on this issue is the Congressional Budget Office report Historical Effective Federal Tax Rates, 1979 – 2005 (the “Report”). The Report contains interesting data on the distribution of incomes since the Bush tax cuts, especially when combined with the same report from two years ago.

Here is a table of the percentage of all after tax income that went to households in the five quintiles by income (approximately 20% of households fall into each of these quintile categories):

Quintile	2002	2003	2004	2005
Lowest	5.2	5.0	4.9	4.8
Second	10.4	10.3	10.0	9.6
Third	15.7	15.5	14.9	14.4
Fourth	21.6	21.4	21.2	20.6
Highest	48.2	48.8	50.1	51.3

The data make it clear that low-income households have been getting less of the total national after tax income than those in the highest quintile. In fact, the highest quintile is the only one that expanded its share of total after tax income over the period, from 48.2% in 2002 to 51.3% in 2005. Since these are expressed as a percentage of the total income, the gains come from losses to others. In this case the losers are those in the lower quintiles.

About 82.5% of the households in the highest quintile are also in the top 10% of households by income. Here is the trend in income share among those in the top 10%, 5%, and 1%:

Rank	2002	2003	2004	2005
Top 10%	33.3	33.9	35.5	37.4
Top 5%	23.5	24.2	25.9	27.8
Top 1%	11.5	12.2	14.0	15.6

The top 10% did exceptionally well as compared to all others, gaining a minimum of 4% of the total national after tax income while all other groups lost share. But that’s not the whole story. Lets look at what has happened to the actual average after tax income in each group as opposed to group shares of the total. The data for 2002 are in 2003 dollars while the data for 2005 is in 2005 dollars. To compare apples to apples, I adjusted the 2003 dollars to 2005 dollars using the US Department of Labor Bureau of Labor Statistics Inflation Calculator to get inflation adjusted numbers for 2002:

Quintile	2002	2005	% Change
Lowest	15,178	15,300	0.8
Second	32,585	33,700	3.4
Third	47,233	50,200	6.3
Fourth	66,444	70,300	5.8
Highest	141,486	172,200	21.7

It looks like things have been pretty good for those in the highest quintile, with the average after tax income increase (21.7%) of 3.5 times the next best quintile. In the lower two quintiles things have been relatively stagnant with less than single digit gains in the lowest quintile. What about the top 10%?

Rank	2002	2005	% Change
Top 10%	192,328	246,300	28.1
Top 5%	269,811	369,800	37.1
Top 1%	688,008	1,071,500	55.7

Now those are income gains!

The next time you hear any Republican talking about how Democrats engage in class warfare against the rich, remember these numbers. Looks as though it is the other way around, and the rich have been winning all the battles.

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More Crap about Incomes

The United States Treasury – funded by your tax dollars – released a report (the “Report”) yesterday that is, in my opinion, a propaganda piece in the war against the middle- and lower-income classes being waged by the current administration and its allies. In my opinion the Report is crap.

That may sound like strong rhetoric to some, but it is well deserved. This report is being mischaracterized in the media with reckless abandon. For example, see this opinion piece in yesterday’s The Wall Street Journal Online Edition titled “Movin’ On Up”. Sounds cheery! Unfortunately it is the usual crap that I regularly read by those afraid of tax increases on higher incomes.

What the right is saying about the Report:

Based on the WSJ article above (the “Article”) as well as a quick search of the Internet, the Report is being referred to as proof of the success of the Bush tax policies and as evidence there is not really a growing income gap in the US. For example, the Article ends with these words of warning:

“All of this certainly helps to illuminate the current election-year debate about income ‘inequality’ in the U.S. The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn't remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.

“The great irony is that, in the name of reducing inequality, some of our politicians want to raise taxes and other government obstacles to the kind of risk-taking and hard work that allow Americans to climb the income ladder so rapidly. As the Treasury data show, we shouldn't worry about inequality. We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.”

Oooohhhh – better beware of the tax boogie person! He (or she) is coming to get you and will cause our economy to crash!

What the Report says:

In (my) summary, the Report says that if you look at a group of people in 1996, and then look at the same group of people in 2005, many of those people moved up in real income and many moved down. This demonstrates that there is plenty of income mobility in The United States, and is contrary to the many reports about a growing income gap. The Report points out that “Nearly 58 percent of households … in the lowest income quintile in 1996 had moved to a higher quintile by 2005” and “more than half of the top 1 percent of households in 1996 had dropped to a lower income group by 2005…Put differently, more than half of the households in the top 1 percent in 2005 were not there nine years earlier.” Sounds impressive.

What the report does not say:

I find it amazing that purportedly educated people can read the Report and come to the conclusions they do. I guess our educational system really is as bad as people say it is.

To get to the point, ask yourself a simple question. How many of the people that you know in the top 1% of income earners today will be retired in ten years? Ask yourself another question. Of all the people you know in the bottom quintile who are at least 25 years of age, how many are younger and should achieve substantial income growth over the next ten years of their careers? That’s right, these factors are NOT considered in the results. As noted in the Report, “The data also conclude that the incomes of many taxpayers at the highest income levels are very volatile.” Retirement can do that to your income. The report concludes “Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. In addition, the real incomes of two-thirds of all taxpayers increased over this period. Further, the median incomes of those initially in the lower income groups increased more than the median incomes of those in the higher income groups.” Now I didn’t see a definition of “economic growth” but if it means the economic growth over time of individual households as they mature from young people to accomplished professionals then this makes sense. Unfortunately that is not the context in which it reads. There is a footnote, however, that says "By comparison, in the U.S. Census data (2006), median household real income increased by 5.4% from $43,967 to $46,326 over this time period in 2005 dollars." How much do you want to bet you will read the 24 percent number in the press and not the 5.4% number?

Now to be fair, the report does compare incomes within the group and to all taxpayers. Here is one line of what it says about the intra-group only comparison: "Nearly 60 percent of taxpayers in the top 1 percent in 1996 dropped out of the top 1 percent by 2005, although 87 percent of them remained in the top quitile." I wonder what percent of them retired? We don't know that from the report. It also makes one wonder what the results would look like if they were expressed in quartiles instead of quintiles.

I would have recommended that this report be used as a starting point for actual research into the movement among income categories by families in the United States. Unfortunately it is so biased it warrants nothing other than a trip to the trashcan.

I really hate it when my tax dollars are used to produce propaganda like this. It’s a disgrace, and it’s bi-partisan (both parties do it).

PS: For a good article about bipartisan reports on this topic, you can go here. Michael Gerson does the topic justice even from the conservative perspective.

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