The Greatest Retirement Crisis in the History of the World

From noted pinko rag Forbes:

We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many elderly Americans.

That dire prediction, which I wrote two years ago, is already coming true. Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts – $100,000 if you believe the retirement planning industry - the decades many elders will spend in forced or elected “retirement” will be grim.  (Update: In response to readers’ questions about the lower number, Teresa Ghilarducci, a professor of economics at the New School for Social Research, estimates that 75% of Americans nearing retirement in 2010 had less than $30,000 in their retirement accounts.)

...

Americans today are aware that corporate pensions have been virtually eliminated and that the few remaining private, as well as the nation’s public pensions, are in jeopardy. Even if you are among the lucky few that have a pension, you cannot rest assured that it will be there for all the years you’ll need it. Whether you know it or not, someone is busy trying to figure how to screw you out of your pension.

Americans also know the great 401k experiment of the past 30 years has been a disaster. It is now apparent that 401ks will not provide the retirement security promised to workers. As a former mutual fund legal counsel, when I recall some of the outrageous sales materials the industry came up with to peddle funds to workers, particularly in the 1980s, it’s almost laughable—if the results weren’t so tragic.

All of which is why we need to increase Social Security benefits, starting now.

More on Social Security and 401(k)s

Ryan Cooper at Political Animal is another person who wants to increase Social Security benefits, and suggests a different way of financing them.

There is another source of funding we could tap for a Social Security increase before we talk about raiding other pots of money [such as Medicare, as per Josh Barro]: the 401k tax exemption. Originally this was supposed to usher in the neoliberal free market retirement utopia. It failed (instead we’ve created yet another set of rent-seeking parasites, this time in the form of objectively useless mutual funds).  

The 401k exemption costs somewhere around $200 billion per year (depending on the estimation), and it doesn’t work. That money could be plowed into Social Security right away, and if that’s still not enough to keep most seniors out of poverty, we can talk other funding sources. Because as [Duncan] Black says, lots of people are set to retire right now without nearly enough to make it. Regardless of whose fault that is, shall we let them starve? 

I say no.

Hmmm. As 401(k)s cap out at $17,000 (for 2012), I don't think they're the worse thing in the world. Basically, they offer a nice opportunity to the higher reaches of the middle as well as the upper class. But they offer no benefit to the median American household, which only made $50,500 (in 2011).

And 401(k)s also require some sophistication, especially around balancing the portfolio (and moving more and more to bonds as the investor ages). And most people, God love 'em, don't have it. So I wouldn't mind see this replaced by pensions (which we don't have anymore) or increased Social Security benefits.

Another big source for new Social Security funding would be to have FICA taxes apply to income, period. Not just earned income, but investment income as well. As we wrote a while back:

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%. 

But it gets worse in terms of Social Security, because these things have ... never been taxed at all. 

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $62 billion in revenue. 

And all of this increase would be on income -- literally -- that no one worked for.

$62 billion —which is just a guesstimate —is a lot less than the $200 billion Cooper's talking about. So maybe it's time to talk about scaling back the 401(k) — that's a conversation I'd be willing to have.

To put things into perspective, in January 2013, Social Security paid 46 million people $55 bilion dollars in old-age benefits. Annualized, this works out to be $660 billion a year. So what Cooper is talking about is a 30% increase in retirement benefits. As the average monthly benefit was $1200, we're talking about how giving old folk (on average) a whopping $1560 a month, or $18,720 a year.

So I think we're in agreement with Cooper on the amount, and now it's just a question of paying for it. Fortunately, we now have a couple of good ideas on the table.

How Rich are The Really Rich?

Forbes has published its lists of the richest folk in the world, and below are the Americans who made the Global Top 100.

Hmmm. Where to start.

There are 36 names on the list, and 12 of them are heirs: Wal-Mart (four times), Mars, Inc. (three times) and Koch Industries (twice). When one-third of the richest people in your country have inherited their wealth, it is safe to say your estate laws are fucked up.

Collectively, these 36 people are worth just north of ¾ of a trillion dollars. Since annual GDP is about $15 trillion, that means this crew — 30 friggin' 6 people — is worth 5% of GDP. Now this is impressive, but it's not an apples-to-apples comparison. So let's do one of those as well.

Credit Suisse estimates that the privately-held wealth in America at $62 trillion. (See page 46 of the PDF at the link.) That means that the folk listed above have 1.2% of the country's total wealth. Not bad for a group that represents 0.00000012 of the American population, or approximately one tenth millionth of the citizenry. 

Credit Suisse (in that same report) sets the median American wealth at a bit below $38,800. The median wealth for the group above is about $21.4 billion, or about 550,000 times the median amount for all us folk. That strikes us as just a bit unreasonable.

So we have a proposal for all the Americans fortunate enough to be among the world's 100 richest people. Take $1 billion each and put is aside. Then take whatever's left over and donate it to charity. Do some good with it. Right now, you're just running up the score. But if you guys could put $736 billion into play, odd are you could make a lot of people's lives a lot better. 

If you're one of the older-than-80-crowd (Buffet, Soros, Mars, Bren, Chambers,  Murdoch and Taylor), think of this a fuck-you to the government. You can keep your money out of their hands. If you're one of the younger group (Bezos, Page, Brin, Dell, Zuckerberg, Jobs), you're likely to live long enough to see your efforts achieve some real and substantial good. Not many people can do that.

And, at the end of the day, you'd still be billionaires. 

Party Up, Chuck

From Talking Points Memo:

Sen. Chuck Schumer (D-NY) said Sunday that Democrats in the Senate intend to draft a budget this year that will include revenues, regardless of House Republicans use of the debt ceiling to force the Senate to come up with a  budget. 

"We're going to do a budget this year, and it's going to have revenues in it," he said on NBC's "Meet the Press."  "And our Republican colleagues better get used to that fact."

 Chuck — we've got you covered. All you need to do is ...

1. Expand the number of brackets to what they were during the early Reagan years, and bring the top marginal rate back to the 50% it was back then. It was good enough for St. Ronnie; it's good enough for today. 
2. Get rid of the capital gains tax. Treat all income as ordinary income. 
3. Junk the mortgage interest deduction. OK, just phase it out then.
4. Set the trigger for the alternative minimum tax at $250,000 (for a household) and adjust it automatically for inflation.

A couple of other things. There's been a lot of screaming about the deficit lately, but very few people are noticing that the deficit has been getting smaller.

The graph above shows that the deficit got worse in the 70s, but got considerably worse at the same time the Reagan tax cuts were enacted. (Hint, hint). Then things got much, much better in the 90s under Clinton, and we were in a surplus at the end of his administration. (Psst -- Clinton raised taxes.) And then the bottom fell out under Bush. There's the the first big dip, which is the result of the Bush tax cuts and the wars in Afghanistan and Iraq. It improves somewhat, and then craters once the recession took hold (and tax receipts fell). (Note that the 2009 budget was created by Bush, and included a modest stimulus package. Then Obama enacted his own stimulus package. Both were the right thing to do.)

But since 2010, the deficit has been decreasing — at a pretty aggressive clip. And, if employment rates continue to rise, more people will leave government assistance and start paying taxes again. So this trend line is really, really good.

Better news still is what we're spending to service the national debt.

From the New York Times

Holy moly! As a percentage of GDP, our interest expense is the lowest it's been since the 50s! This is because the interest we're being charged is crazy.

From the Department of the Treasury

The real interest rate (e.g., the one calculated after accounting for inflation) is negative for anything with less than a 20-year maturity. So when we borrow money now, we're actually paying less back in the future! Pretty cool.

And, finally, there seems to be an idea that there are just great gobs of government waste floating around out there. Here's a breakdown of the 2011 budget by type:

From Wikipedia

Sixty-two per cent of the budget goes to defense, Social Security and health care. An additional 6% goes to servicing the national debt. So that leaves 32% open for cuts — and just 18% if you're looking solely at discretionary outlays. Sure, the budget is an eye-opening $3.6 trillion dollars, but when you put aside caring for the army, old people and the sick (and interest), you're looking at an effective budget of $1.152 trillion for a nation of 300 million people. That's about $3840 per person, or $320 per month, or $10 a day — for research on disease, air traffic control, food inspections, air quality standards, national parks, the federal highway system, NASA, the Library of Congress — everything. That strikes me as rather cheap.

We don't have a spending problem. We have a revenue problem. And some of us aren't paying our fair share.

From the New York Times.
And note that this table includes neither state income taxes or sales tax, which are very regressive in nature.
For more on how our total tax structure is basically flat (e.g., regressive), see this article from the Atlantic.

Why Inequality Matters in a Recession

Joseph Stiglitz, writing in the New York Times:

There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle — who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators — have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable — it was reliant on the bottom 80 percent consuming about 110 percent of their income. 

Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses. 

Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks. The recent modest agreement to restore Clinton-level marginal income-tax rates for individuals making more than $400,000 and households making more than $450,000 did nothing to change this. Returns from Wall Street speculation are taxed at a far lower rate than other forms of income. Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength. 

Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s — the last time inequality of income and wealth in the United States was so high — ended with the Great Crash and the Depression. The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson. 

Our skyrocketing inequality — so contrary to our meritocratic ideal of America as a place where anyone with hard work and talent can “make it” — means that those who are born to parents of limited means are likely never to live up to their potential. Children in other rich countries like Canada, France, Germany and Sweden have a better chance of doing better than their parents did than American kids have. More than a fifth of our children live in poverty — the second worst of all the advanced economies, putting us behind countries like Bulgaria, Latvia and Greece. 

From the Atlantic.

Edward Conard is a Douche

The New York Times is running an article by Adam Davidson entitled The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy, which addresses arguments around inequality put forth by Edward Conard of Bain Capital.

Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. “Most citizens are consumers, not investors,” he told me during one of our long, occasionally contentious conversations. “They don’t recognize the benefits to consumers that come from investment.” 

This is the usual defense of the 1 percent. Conard, however, has laid out a tightly argued case for just how much consumers actually benefit from the wealthy. 

Davidson then goes to completely avoid that tightly argued case, perhaps because it doesn't exist. Davidson does retell a story about how investment and innovation in computers has made them affordable to nearly everyone. And he even gets known pinko Dean Baker of the Center for Economic and Policy Research to acknowledge this is a true.

Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value. 

Wow, that's pretty good!

So what's the problem? It has to do with what qualifies as an investment. Providing start-up capital to a new business, or additional capital to an already existing company, is an investment. Buying stock in the secondary market -- what most investors think of investing -- is not. It's gambling.

As we wrote here:

Unless you're involved in a public offering, all of the securities you've purchased have been in the secondary market. This means that not one dollar of the purchase price you paid went to the issuer. Instead, all of the purchase price went to someone who purchased those securities before you. You've made a bet that the security will rise in price and, if you're right, you'll win! But you won't owe taxes on gambling winnings -- which are taxed as regular income. Instead, these winnings are classified as capital gains, and taxed at a much lower rate.

Here is another example of how the tax code works to the betterment of the 1%. Capital gains (and their preferential tax treatment) are very much skewed towards the wealthy. In fact, in 2001, 2002, 2003 and 2007 (the last year for which data is available), more than 10% of all of the capital gains in the country went to just 400 tax payers.  

And those 400 returns represents those filed by the the top 0.00026%. Not the top 1%, but the top 0.026% of the top 1%. The remaining 90% of capital gains is filtered down to the 99.99974% of us.

Except that it doesn't. The top 0.1% ends up with nearly half of all capital gains, so that leaves 50% for the 99.9% of us.  

And all of that is taxed at 15%, the same tax rate which would kick in at $17,000 if you actually worked at a job. So if you made $8.50 an hour (and worked a forty hour week, fifty weeks a year), you'd be taxed at exactly the same rate which applies to the gambling winnings of the nation's wealthiest individuals.  

But it's actually worse than that, because we haven't figured in Social Security and Medicare taxes. As we noted in our discussion of Social Security,  capital gains are currently excluded from Social Security (usually 6.2%, but currently 4.2%) and Medicare (1.45%) taxation, So that's an additional 5.65%. 

This means that the lowest combined tax rate applicable to working stiffs -- 15.65% - will always be higher than the combined tax rate -- 15% -- applicable to the gambling winnings of the well-off. Always.

And it's not like Conard is an investor, at least in his professional capacity at Bain Capital. As we discussed here, private equity firms like Bain Capital are merely the leverage buy-out firms of the '80s with a makeover. Josh Kosman explained to Mike Konzal:

JK: The whole industry started in the mid-to-late 1970s. The original leveraged buyout firms saw that there were no laws against companies taking out loans to finance their own sales, like a mortgage. So when a private equity firms buys a company and puts 20 percent down, and the company puts down 80 percent, the company is responsible for repaying that. 

Now the tax angle is that the company can take the interest it pays on its loans off of taxes. That reduces the tax rate of companies after they are acquired in LBOs by about half. Banks, also realizing this tax effect, were willing to finance these deals. At the time, you could also depreciate the assets of the company you were buying — that’s not true today. 

They saw that you could buy a company through a leveraged buyout and radically reduce its tax rate. The company then could use those savings to pay off the increase in its debt loads. For every dollar that the company paid off in debt, your equity value rises by that same dollar, as long as the value of the company remains the same. 

MK: So the business model is based on a capital structure and tax arbitrage? 

JK: Yes. It’s a transfer of wealth as well. It’s taking the wealth of the company and transferring it to the private equity firm, as long as it can pay down its debt.  

James Surowiecki of the New Yorker noted:

The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust. 

And:

[B]etween 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

Spectacular.

How to Make 30-40% More Right Now!

First, get a time machine. Then, travel back to the late '70s. Finally, prevent the benefits from increases in productivity from going mostly to capital instead of labor (to, in labor, to the top earners instead of the middle).

Paul Krugman explains.

Larry Mishel has a systematic breakdown of the reasons for worker income stagnation since 1973. He starts with the familiar divergence: productivity up 80 percent, the compensation (including benefits) of the median worker up only 11 percent. Where did the productivity go? 

The answer is, it’s two-thirds the inequality, stupid. One third of the difference is due to a technical issue involving price indexes. The rest, however, reflects a shift of income from labor to capital and, within that, a shift of labor income to the top and away from the middle. 

What this says is that widening inequality makes a huge difference. Income stagnation does not reflect overall economic stagnation; the incomes of typical workers would be 30 or 40 percent higher than they are if inequality hadn’t soared.

The Lemmy and Vikram Pandit

Kudos, firstly, to Citibank shareholders. From the New York Times:

Citigroup received a particularly public rebuke on Tuesday when its shareholders voted to reject the bank’s executive compensation package at its annual shareholder meeting. Citigroup was required to hold this vote as part of the “say on pay” provision of the Dodd-Frank Act that mandates that companies hold advisory shareholder votes on their executive compensation pay. While the shareholder rejection is only advisory, it creates a major headache for Citigroup. 

... 

 Last year, the Citigroup board paid Mr. Pandit almost $15 million, plus one-time retention awards with a potential value of $34 million.... [A] proxy advisory firm recommended against Mr. Pandit’s package because parts of his awarded pay were not based on Citigroup’s financial performance, Citigroup stock had declined by more than 90 percent in the last five years and Mr. Pandit’s pay package was not in alignment with that of his peers. 

Citigroup in part defended this pay package by arguing that Mr. Pandit had not received a meaningful salary for the three previous years, being paid only a dollar a year. This was nice of Mr. Pandit, but it must be put against the fact that Citigroup paid about $800 million to acquire Mr. Pandit’s hedge fund, Old Lane, an investment that Citigroup subsequently wrote off completely. And Mr. Pandit received an $80 million payment from Citigroup last year as part of the Old Lane buyout. He’s not about to become part of the 99 percent anytime soon.

As the Lemmy (or LMI, or Lifetime Median Income or $1.36 million  -- the total amount of revenue the median American can expect to make over his lifetime) was defined to make large amounts of money more understandable, let's re-write the last two paragraphs above using the Lemmy.

Last year, the Citigroup board paid Mr. Pandit almost 11 Lemmies, plus one-time retention awards with a potential value of 25 Lemmies.... [A] proxy advisory firm recommended against Mr. Pandit’s package because parts of his awarded pay were not based on Citigroup’s financial performance, Citigroup stock had declined by more than 90 percent in the last five years and Mr. Pandit’s pay package was not in alignment with that of his peers. 

Citigroup in part defended this pay package by arguing that Mr. Pandit had not received a meaningful salary for the three previous years, being paid only a dollar a year. This was nice of Mr. Pandit, but it must be put against the fact that Citigroup paid about 588 Lemmies to acquire Mr. Pandit’s hedge fund, Old Lane, an investment that Citigroup subsequently wrote off completely. And Mr. Pandit received a 59 Lemmy payment from Citigroup last year as part of the Old Lane buyout. He’s not about to become part of the 99 percent anytime soon.

Matt Ygelsias notes that another SEC rule should be coming into play shortly.

Dodd-Frank instructs the SEC to promulgate a rule requiring firms to publish information about the ratio of CEO compensation to median employee compensation.

Introducing ... the Lemmy

And the Lemmy Tax.

Named after Motörhead bassist and founder Ian Fraser Kilmister, the Lemmy is the pronunciation for the LMI, or Lifetime Median Income. As the disparity between the 1% and everyone else has grown, it has become harder and harder to to illustrate how much money some of these guys are making. For example, when we learn that Mitt Romney made $20.9 million last year, it seems like a lot -- but can we properly understand how much of "a lot" it is?


Here's where the Lemmy is useful. The LMI is based on a simple formula:

Median Income per Year x Total Years Working

which gives us a basic calculation of how much the average American could expect to make over the course of his life. In short, this is the total aggregate revenue value of an average American life.


According to the Social Security Administration, the median income in 2010 was $26,364, and inflation in 2011 ran at 3.2%, so let's bump that figure up to $27,207. And figuring the average work life at 50 years (which might be a bit high, but we're being conservative here), that gives us a 2011 Lemmy of $1,360,000.


So Mitt Romney' $20.9 million translates into 15.4 Lemmies. Which means that if you took fifteen average (median) Americans, put them to work and then grabbed every penny they ever made, over the course of their entire lifetime -- literally leaving them with nothing -- you still wouldn't have as much money as Mitt Romney made last year.


We raise this idea because the New York Times published  a list of the top five most profitable hedge fund managers for 2011. They are:

	NAME	FIRM	VALUE
1	Ray Dalio	Bridgewater Associates	$3.9 billion
2	Carl Icahn	Icahn Capital Management	$2.5 billion
3	James H. Simons	Renaissance Technologies	$2.1 billion
4	Kenneth C. Griffin	Citadel	$700 million
5	Steven A. Cohen	SAC Capital Partners	$585 million

But these numbers are simply too big to comprehend. But with the Lemmy, we can put a more human face on these stats.

	NAME	FIRM	LEMMIES
1	Ray Dalio	Bridgewater Associates	2888
2	Carl Icahn	Icahn Capital Management	1838
3	James H. Simons	Renaissance Technologies	1544
4	Kenneth C. Griffin	Citadel	514
5	Steven A. Cohen	SAC Capital Partners	430

So last year, Ray Dalio made, roughly, the same amount as 2888 people would -- over the course of their entire lifetimes. Or, to put it another way, in one year, Ray made as much as an average American would in 2888 lifetimes. With life expectancy now being about 78 years, it would take that average American 225,264 years to make that much (if you include childhood and senescence).

The only problem with this (yes, the only one) is that there were no humans 225,000 years ago (the Middle Paleolithic era) -- there were only Neanderthals. So, technically speaking, you'd need to go back to 225,000 years, be reborn 2888 times and change species, from Homo neanderthalensis to Homo sapiens (and eventually to the sub-species Homo sapiens sapiens).

Lemmy?

In short, Ray Dalio made more last year than one median person could have in all of human history. So good for Ray, but we'd like to see him pay a bit more in taxes.

Readers of our earlier posts may remember that we've already called for a top marginal rate of 50% (as well as treating capital gains and the like as regular income). But because these numbers are so obscene, we'd like to introduce a surtax, applicable to a portion of the 1%.  Here goes:

The Lemmy: If you make more in a year than the average American does in his life, your top marginal rate goes to 55% (with the top bracket starting at one Lemmy). 

The Double Lemmy: If you make more in a year than the average American does in two lifetimes, your top marginal rate goes to 60% (with the top bracket starting at two Lemmies). 

The Triple Lemmy: If you make more in a year than the average American does in three lifetimes, your top marginal rate goes to 65% (with the top bracket starting at three Lemmies).

To be fair, the idea behind the Lemmy Tax is meant to address gross inequality more than raise money. But instituting the Lemmy Tax on just these five gentlemen would raise over $1.4 billion when compared to this site's tax reform package, and over $4.8 billion when compared to current tax law.

Now here's the cool part. Because the Lemmy is based off of median personal income, the level at which any of the Lemmy Taxes would kick in goes up whenever personal income increases. So the interests of the 1% become aligned with those of the rest of us, which is a good thing as median personal income has barely grown in the last twenty years. In 1990, it was $14,498, which converted to 2010 dollars gets you $24,199. So in twenty years, median personal income has gone up $2164, or about 9%.


Meanwhile, the top 1% have seen their average income increase by 47% in that same time period, and by 52% if you include capital gains. (Folk at the median personal income have virtually no capital gains.)

From the Top World Incomes Database

If the median personal income had grown by 50% since 1990, it would be at $36,300, and the Lemmy would be $1,815,500. That's roughly an extra half-million a year that would not be subject to our surtax.


Bonus question: Why no Quadruple Lemmy? Because of The Case for a Progressive Tax: From Basic Research to Policy Recommendations by Peter Diamond and Emmanuel Saez. (Obama nominated Diamond, a Nobel laureate, to the Federal Reserve Board, but mouth-breathing Sen. Richard Shelby blocked the vote.) Paul Krugman explains:

D&S analyze the optimal tax rate on top earners. And they argue that this should be the rate that maximizes the revenue collected from these top earners — full stop. Why? Because if you’re trying to maximize any sort of aggregate welfare measure, it’s clear that a marginal dollar of income makes very little difference to the welfare of the wealthy, as compared with the difference it makes to the welfare of the poor and middle class. So to a first approximation policy should soak the rich for the maximum amount — not out of envy or a desire to punish, but simply to raise as much money as possible for other purposes. 

Now, this doesn’t imply a 100% tax rate, because there are going to be behavioral responses – high earners will generate at least somewhat less taxable income in the face of a high tax rate, either by actually working less or by pushing their earnings underground. Using parameters based on the literature, D&S suggest that the optimal tax rate on the highest earners is in the vicinity of 70%.

Or, to put it another way, 70% or so is where the Laffer Curve kicks in -- where you actually raise less money with higher rates. A Quadruple Lemmy would put us at 70%, so to be cautious, we simply won't go there.

How Much Did Mitt Romney Pay in Social Security and Medicare Taxes?

Update: The New York Times was able to find approximately $710,000 in earned income over the two years below. Total FICA taxes paid: about $42,000 on income of $42 million.

Nothing.

Mitt Romney offered a partial snapshot of his vast personal fortune late Monday, disclosing income of $21.7 million in 2010 and $20.9 million last year — virtually all of it profits, dividends or interest from investments. 

None came from wages, the primary source of income for most Americans. Instead, Romney and his wife, Ann, collected millions in capital gains from a profusion of investments, as well as stock dividends and interest payments.

Social Security and Medicare are financed through the FICA (Federal Insurance Contributions Act) tax, which applies only to payroll income. All other forms of income -- the capital gains, interest and dividends referenced above -- are excluded.

If all income were included, as we argued for here, Romney would have paid $3.3 million in 2010 and $2.8 million in 2011.

Full returns available here.

From Talking Points Memo

Median Household Income -- What Could Have Been

Paul Krugman points to a Lane Kenworthy post which includes this graph:

Krugman's notes that:

You see the contrast: a doubling of family incomes in the post war generation compared with maybe 20 percent since, and family incomes growing in line with GDP before, lagging far behind since, with the difference basically being the rising share of the 1 percent.

But Krugman omits this even more telling chart.

Kenworthy explains:

The dashed line in the ... chart shows what median income would have looked like had it risen in sync with per capita GDP. The difference is huge: in 2007, the median family’s income would have been $91,000 instead of $61,000.

Alan Kreuger, Obama's Chairman of the Council of Economic Advisers, noted much the same in a speech at the Center for American Progress earlier this week. From 1947 to 1979, each quintile performed about the same, with the lowest quintile actually performing the best. (All charts are from Kreuger's speech, and are generally based on Census Bureau and CBO data).

But from 1979 to the present, something(s) went very much awry.

And we note that the lowest quintile actually lost ground. Kreuger doesn't really address the causes for this, although he notes several possibilities, including changes in technology, decline in union participation and changes to the tax code.

But look what happens when a Democratic president gets elected.

Everybody does better. The bottom 80% of household perform at or near their historic averages, and the top 20% just cranks.

And if the median household income had continued to rise at it did during the Clinton years, it would now be at about $59,000, instead of about $50,000.

 But we do know where the money went.

As Kreuger notes:

Because of these trends, the very top income earners have pulled much further ahead of everyone else. The following chart shows the share of all income earned by the top 1 percent and 0.1 percent of households.

Not since the Roaring Twenties has the share of income going to the very top reached such high levels. 

The magnitude of these shifts is mind-boggling. The share of all income accruing to the top 1% increased by 13.5 percentage points from 1979 to 2007. This is the equivalent of shifting $1.1 trillion of annual income to the top 1 percent of families. 

A trillion dollar shift. Annually. To the 1%.

Capital Gains and Crappy Tax Policy

Recently, the Congressional Research Service published a study on changes in income distribution from 1996 to 2006, which shows, first of all, that's its good to be rich.

From Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006:  The Role of Labor Income, Capital Income, and Tax Policy by Thomas L. Hungerford

While the bottom twenty percent actually made less money in 2006 than ten years earlier, the wealthiest top 0.1% saw their pre-tax income nearly double. During that time, the average inflation-adjusted after-tax income went up 25%, but the only people who did that well were in the top 20%. The other 80% of America under-performed.


Why is that?

From Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006:  The Role of Labor Income, Capital Income, and Tax Policy by Thomas L. Hungerford

One big reason is capital gains (and dividends). The share of income derived from these sources actually went down for the bottom 80%, amounting to little more than an rounding error, while capital gains and dividends ended up contributing more than half of all income to the top 0.1%.


In fact, the "changes in capital gains and dividends was the largest contributor to the increase in the overall [measure of inequality, or] Gini coefficient."

From Wikipedia:  While developed European nations and Canada tend to have Gini indices between 0.24 and 0.36, the United States' and Mexico's Gini indices are both above 0.40, indicating that the United States (according to the US Census Bureau) and Mexico have greater inequality.

Tax policy played a roll as well. From the CRS study:

The major tax change between 1996 and 2006 was enactment of the 2001 and 2003 Bush tax cuts, which reduced taxes especially for higher-income tax filers. These tax cuts involved reduced tax rates, the introduction of the 10% tax bracket (which reduced taxes for all taxpayers), reduced the tax rates on long-term capital gains and qualified dividends, and other changes. 

In 1996, long-term capital gains were taxed at 28% (15% for lower-income taxpayers) and all dividends were taxed as ordinary income. By 2006, long-term capital gains and qualified dividends were taxed at 15% (5% for lower-income taxpayers).

So we basically cut a tax rate in half for the people who needed it the least. The bottom 80%, remember, only derived 0.7% of their income from capital gains and dividends, while the top 0.1% got a majority of their money from unearned income. 


As the CRS notes:

Tax policy changes that affect progressivity will affect after-tax income inequality. Duh.

What all this means is that the effective tax rate for the top 0.1% plummeted; they paid out nearly 33% of their income in taxes in 1996, but only 25% in 2006. This is what the Bush tax cuts did.

From Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006:  The Role of Labor Income, Capital Income, and Tax Policy by Thomas L. Hungerford

Fortunately, though, the Bush tax cuts ushered in an era of unknown economic growth.

From here.

Or not.


But the Bush tax cuts are the largest contributor to the the increase in the national deficit.

From the New York Times.

So, in summary, if you want to reduce the deficit, improve income equality and maybe remove the jackboot of capitalism from the trachea of the bottom 20% of Americans, all without affecting the economic performance of the country, start taxing capital gains as ordinary income now.


Bonus: Taxing capital gains also fixes Social Security!

The Moral Act

Charles Pierce at Esquire:

It is a dead-level time for us as a people. There are now 146 million Americans who are ranked as "low-income" or "poor." Somebody really should do something about that. How we treat them in our politics is going to be the ultimate test of our moral credibility as a nation. Do we treat this situation as the national disgrace that it is, and commit ourselves as a nation to eliminating it? Or do we turn away from them, blame them for the malaise we feel in our lives, and drink deeply again from the supply-side, trickle-down snake oil? Do we look at the president — a Democratic president — and scream that this is no longer tolerable to us as a people? Or do we nod sagely and deplore the lack of civility and bipartisan cooperation in our government and hope that cooler heads will prevail, that the great national purpose of our age is to deprive ourselves further of what was supposed to be the promise of the country in the vague and futile hope that somehow, somewhere, things will get better down the line?  

The moral act is to scream.

The 47%

Much has been made of the 47% who, allegedly, don't pay taxes. As better articles will note, this excludes a lot of taxes, such as excise taxes, sales taxes, state income taxes and property taxes, as well as Social Security taxes. What the 53% crowd is trying to say is that 47% of Americans don't pay federal income tax. And why is that?

Kevin Drum did the math and reports that:

• 23% pay nothing because they're poor. A couple making less than $19,000, for example, doesn't owe anything after their $11,600 standard deduction and two exemptions of $3,700 each reduce their taxable income to zero....

• 10% are elderly and pay nothing because their Social Security benefits are [generally] exempt from federal income taxes. 

• 7% pay nothing thanks to provisions in the tax code designed to benefit low-income families: the earned income tax credit, the child credit, and the childcare credit account.

All of which leaves us with about 7% who don't pay federal income tax because of deductions, tax-exempt income and the like.

But everyone who worked paid Social Security taxes.

So a reader asked how much Social Security revenues are attributable to these folks who, allegedly, don't pay taxes. An exact answer is impossible with the data we found, but we can come up with something close.

According to the Social Security Administration, a little over 48% of Americans made less $25,000 last year. Yet this group still managed to contribute $25 billion dollars to Social Security -- some 4.7% percent. That's actually more than the top 1% contributed ($23 billion or 4.3%). Now, sure there are a lot more people making less than $25,000 a year (72 million, give or take) than there are in the 1% (roughly 1.5 million), but that 1% does control 40% of the nation's wealth. So they've got that going for them.

But there is something a bit odd about that 48% -- namely, a full 100% of their earned income was subject to Social Security taxation. In fact, the same is true for the bottom 94% of working Americans. It's really not until the top 1% where you can see the benefit -- to the very well off -- of capping Social Security taxable income at $106,800. At that point, only 9.4% of their earned income is taxed by Social Security -- and none of their income derived from capital gains.


A PDF of the Excel spreadsheet used to divine these numbers can be found here. 

Inequality in America -- 2011

Your fun facts on inequality for 2011.* 

Median income for 2010	$26,364
Median income for 2007 (in 2010 dollars)	$27,034
Percentage increase in median income from 2007 to 2010	-2.5%
Percentage increase in number of individuals making more than $1,000,000 from 2009 to 2010	18%
Percentage of the gain in wealth since 1983 which went to the top 1%	40.2%
Percentage of the gain in wealth since 1983 which went to the top 5%	81.7%
Percentage of the gain in wealth since 1983 which went to the bottom 60%	-7.5%

From the Economic Policy Institute

Median household net worth -- 2007	$125,000
Median household net worth – 2009	$96,000
Percentage increase in median household net worth from 2007 to 2009	-23.2%
Percentage increase in median household net worth for members of the House of Representatives, 1984 to 2009 (excluding housing)	158.9%
Percentage increase in median household net worth for the rest of America, 1984 to 2009 (excluding housing)	-0.004%
Percentage of all households with no or negative net worth	24.6%
Percentage of black households with no or negative net worth	39.9%
Median household net worth for white families	$97,900
Median household net worth for black families	$2,200
Ratio of top 1% household net worth to median household net worth	225:1

Years in which there was a greater disparity

0

Years in which there was a greater disparity

0

From The State of WorkingAmerica's Wealth: 2011
by Sylvia Allegretto (Economic Policy Institute)

Home equity as a percentage of home value – Q1, 2006	59.5%
Home equity as a percentage of home value – Q4, 2009	36.2%
Number of years in which the home equity percentage was less than 50%	0

From The State of WorkingAmerica's Wealth: 2011
by Sylvia Allegretto (Economic Policy Institute)

Percentage of the nation’s wealth held by the top 5%	63.9%
Percentage of American households in 2007 which owned no stocks at all (either directly, or through mutual funds or 401(k) plans)	49.1%
Percentage of American households in 2007 with direct ownership of stocks	17.9%
Average earned income for the top 1% in 2010	$1,140,044.76
Total aggregate earned income for the top 1% in 2010	$389,732,281,801.22
Percentage of the total aggregate earned income for the top 1% which was not subject to Social Security taxes	90.6%

Hoping next year is better for all of us. Even the 1%.


* Links are to reports from the Federal Reserve, the Social Security Administration, the Economic Policy Institute and a Washington Post article. In addition, we performed some basic math to come up with some of the numbers, such as the percentage decrease in median income from 2007 to 2010, and aggregate earned income figures.