Back in September 2012, he was the author of a study by the Congressional Research Office, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.” The study was used by Obama as basis for his economic tax policies, and criticized by conservatives for partisan language about tax cuts. He also personally gave thousands of dollars to both Democrat campaigns of 2008, and 2012. He is hardly a tax conservative.
He has a number of points in his January paper - as seen by his title. However, I found a number of interesting conclusions in his final remarks.
He notes that gross wages as a percentage of income significantly decline from 92% in 1991 to 77% in 2006. The largest gains that eat bigger chunks of the pie are capital gains/dividends and business income.
The gross numbers add up to more than 100%, because they are before deduction of taxation. It should be noted that despite significant tax law changes, individual taxation was not materially different between the two years. However, 2001, the year before the Bush Tax cuts, individual taxes were the highest of any of the four groupings. The biggest decline over the fifteen years was payroll taxes, which is an equitable progressive savings decline across income groups.
Income inequality does widen between 1992 and 2006; however, the reasons are not based in salary. In Hungerford's words, "Wages had no or a small disequalizing effect when other incequality [sic] measures are used. Overall, changes in labor income does not appear to be a significant source of increased income inequality between 1991 and 2006."
What about tax policy? "Federal individual and corporate income taxes had an equalizing effect on inequality regardless of the inequality measure. Federal taxes had a slightly greater equalizing effect in 2006 than in 1991—taxes appear to have been slightly more progressive in 2006 than in 1991." That is AFTER the Bush Tax Cuts. He continues, "The top marginal tax rate in 1991 was 31% compared to 35% in 2006; the lowest tax marginal rate was 15% in 1991 and 10% in 2006." Another benefit of the Bush Tax Cuts often overlooked. "[T]he increased equalizing effect of the individual income tax is likely due to bracket creep—more income is taxed at the highest rates—than to tax law changes."
So why the progression of income inequality? Investment.
The highest earners are making more money by investing in growing businesses, or taking equity in their own businesses. Individual investment made leaps and bound between 1991 and 2006 (and beyond). As you can see in the chart above, income from capital gains/dividends rapidly increased over the 15 years. Some of that is the CEO options effect. CEOs and higher level managers received options grants that are not considered wages. So a CEO who once made $1.2 million a year, now makes $2.0 million plus significant equity grants. Many argue that CEOs are paid too much, and maybe they are. However, in most cases today, they aren't making the huge sums unless they are creating value - preferably long term, although the 2008 bubble showed that too much was short-term.
It's not all CEOs and Hedge Fund Managers. Obviously, the highest income earners have the greatest ability to make investments. The improved investment income isn't a zero sum game. Investment is improving our standard of living significantly. The poorest quintile of income earners all have cars, cell phones, cable TV, DVRs, and xBoxes. That's from innovation, which is a direct result of investment. The top earners are benefiting from investment gains, but society is benefiting from job creation and improved standards.
On a side note, the study was done in 2006. Part of capital gains is real estate. 2006 was close to the height of the real estate bubble. Therefore, the increased effect of capital gains may be substantially overstated. Every house flipped was a capital gain, and those in the highest income brackets tend to have the most expensive homes.
Second note, one flaw with income inequality arguments is that the participants don't remain the same. The U.S. has one of the greatest income bracket mobilities of any country on earth. The average taxpayer in today's top 1% isn't likely to be in that group again. Similarly, many in the bottom quintile and not likely to be in that quintile when surveyed again.
Income mobility makes the numbers very difficult to draw conclusions from. Yes, the rich are getting richer, but 1. it's not the same people, and 2. it's a result of how their money is invested.
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