wsj

Never in American history has the debate over income inequality so dominated the public square, with Democratic presidential candidates and congressional leaders calling for massive tax increases and federal expenditures to redistribute the nation’s income. Unfortunately, official measures of income inequality, the numbers being debated, are profoundly distorted by what the Census Bureau chooses to count as household income.
The published census data for 2017 portray the top quintile of households as having almost 17 times as much income as the bottom quintile. But this picture is false. The measure fails to account for the one-third of all household income paid in federal, state and local taxes. Since households in the top income quintile pay almost two-thirds of all taxes, ignoring the earned income lost to taxes substantially overstates inequality.
The Census Bureau also fails to count $1.9 trillion in annual public transfer payments to American households. The bureau ignores transfer payments from some 95 federal programs such as Medicare, Medicaid and food stamps, which make up more than 40% of federal spending, along with dozens of state and local programs. Government transfers provide 89% of all resources available to the bottom income quintile of households and more than half of the total resources available to the second quintile.
In all, leaving out taxes and most transfers overstates inequality by more than 300%, as measured by the ratio of the top quintile’s income to the bottom quintile’s. More than 80% of all taxes are paid by the top two quintiles, and more than 70% of all government transfer payments go to the bottom two quintiles.
America’s system of data collection is among the most sophisticated in the world, but the Census Bureau’s decision not to count taxes as lost income and transfers as gained income grossly distorts its measure of the income distribution. As a result, the raging national debate over income inequality, the outcome of which could alter the foundations of our economic and political system, is based on faulty information.
The average bottom-quintile household earns only $4,908, while the average top-quintile one earns $295,904, or 60 times as much. But using official government data sources on taxes and all transfer payments to compute net income produces the more complete comparison displayed in the nearby chart.

Government transfers go mostly to low-income households. The average bottom-quintile household and the average second-quintile household receive government transfers of some $17 and $4 respectively for every dollar of taxes they pay. The average middle-income household receives $17,850 in government transfers and pays an almost identical $17,737 in taxes, while the fourth and top quintiles of households receive government transfers of only 29 cents and 6 cents respectively for every dollar paid in taxes. (In the chart, transfers received minus taxes paid are shown as net government transfers for low-income households and net taxes for high income households.)The average bottom-quintile household receives $45,389 in government transfers. Private transfers from charitable and family sources provide another $3,313. The average household in the bottom quintile pays $2,709 in taxes, mostly sales, property and excise taxes. The net result is that the average household in the bottom quintile has $50,901 of available resources.
The average top-quintile household pays on average $109,125 in taxes and is left, after taxes and transfer payments, with only 3.8 times as much as the bottom quintile: $194,906 compared with $50,901. No matter how much income you think government in a free society should redistribute, it is much harder to argue that the bottom quintile is getting too little or the top quintile is getting too much when the ratio of net resources available to them is 3.8 to 1 rather than 60 to 1 (the ratio of what they earn) or the Census number of 17 to 1 (which excludes taxes and most transfers).
Today government redistributes sufficient resources to elevate the average household in the bottom quintile to a net income, after transfers and taxes, of $50,901—well within the range of American middle-class earnings. The average household in the second quintile is only slightly better off than the average bottom-quintile household. The average second-quintile household receives only 9.4% more, even though it earns more than six times as much income, it has more than twice the proportion of its prime working-age individuals employed, and they work twice as many hours a week on average. The average middle-income household is only 32% better off than the average bottom-quintile households despite earning more than 13 times as much, having 2.5 times as many of prime working-age individuals employed and working more than twice as many hours a week.
Antipoverty spending in the past 50 years has not only raised most of the households in the bottom quintile of earners into the middle class, but has also induced many low-income earners to stop working. In 1967, when funding for the War on Poverty started to flow, almost 70% of prime working-age adults in bottom-quintile households were employed. Over the next 50 years, that share fell to 36%. The second quintile, which historically had the highest labor-force participation rate among prime work-age adults, saw its labor-force participation rate fall from 90% to 85%, while the top three income quintiles all increased their work effort.
Any debate about further redistribution of income needs to be tethered to these facts. America already redistributes enough income to compress the income difference between the top and bottom quintiles from 60 to 1 in earned income down to 3.8 to 1 in income received. If 3.8 to 1 is too large an income differential, those who favor more redistribution need to explain to the bottom 60% of income-earning households why they should keep working when they could get almost as much from riding in the wagon as they get now from pulling it.
Now we know why Elizabeth Warren took so long to release the financing details of her Medicare-for-All plan. The 20 pages of explanation she released Friday reveal that she is counting on ideas for cost-savings and new revenue that are a fiscal and health-care fantasy.

00:00 / 28:57
SUBSCRIBE
You certainly can’t criticize the new Iowa Democratic caucus front-runner for lack of ambition. Despite criticism from fellow Democrats, she is sticking to her plan for a government takeover of American health care, including the elimination of private insurance that 170 million or so Americans now have. She continues to claim that this will cost “not one penny in middle-class tax increases.” She walks on water too.
***
Start with the overall fiscal math, which by itself is staggering. She concedes that her plan will cost only “slightly” less than the $52 trillion that the U.S. is expected to spend on health care in the next 10 years. She deducts from that what the feds now spend on Medicare and Medicaid, plus $6 trillion that the states contribute to Medicaid, the state-federal children’s health program and government worker benefits.
That leaves $30 trillion to finance, but Senator Warren waves her wand and says the bill will really be $20.5 trillion. She makes the rest vanish by positing magical savings from things like “comprehensive payment reform.” One of her ideas is the hardy perennial known as “bundled payments,” which have failed to reduce costs as promised by Obama Care.
She says hospitals would be reimbursed at an average of 110% of current Medicare rates, which is supposed to address the criticism that Medicare currently under-compensates patient care. But hospitals now rely on private insurance payments to stay in business, and 110% of what Medicare now pays will hardly be enough to compensate for the loss of that private money.
Amusingly, she also proposes savings from “restoring health care competition.” Because everyone will have good insurance, she says, “providers will have to compete on better care and reduced wait times in order to attract more patients.” But if government is controlling all prices and reimbursements, what incentive is there to compete at all?
There’s a reason every government-run health system in the world rations care. Ms. Warren won’t admit this explicitly about her brave new health world, but she comes close. If U.S. health-care spending exceeds GDP growth, she says, “I will use available policy tools, which include global budgets, population-based budgets, and automatic rate reductions, to bring it back into line.”
In a word, rationing. And that’s no surprise, since she credits the advice for developing much of her plan to Donald Berwick. He was an advocate for ObamaCare’s Independent Payment Advisory Board—known uncharitably as the death panel—that Congress repealed last year in a bipartisan vote.
Ms. Warren would also impose foreign price controls on U.S. drug makers, which is why patients in France and the U.K. have access to only about half of new medicines that are available in the U.S. Manufacturers that don’t agree to Ms. Warren’s price negotiation would get whacked with a hefty excise tax on their profits. She also threatens to confiscate their patents.
The details of how she’d pay for the other $20.5 trillion are even more fantastical. Start with her “Employer Medicare Contribution.” Instead of paying employee health-care premiums, businesses would cut a check to Uncle Sam to the tune of $8.8 trillion over 10 years based on what they pay now.
She says per-employee health costs for every employer would remain about the same, but payroll costs of this sort are essentially middle-class taxes on employees. Fixing per-employee business costs at some future date would also be an incentive for companies to reduce their coverage now to reduce future costs. So employees would get worse coverage than they have now. If this “employer contribution” raises less money than projected, her fall-back is to whack “big companies with extremely high executive compensation and stock buyback rates.”
Meantime, she’d also raise the corporate tax rate back to 35% from 21% and extend it to income earned worldwide with no deferrals for foreign taxes. She claims this would generate $1.75 trillion over 10 years, which is fanciful since it would be an immediate incentive for companies to relocate overseas.
She also doubles down on her plans to soak the rich, assuming there are any left after her other tax proposals. She wants a new annual tax on unrealized capital gains of the wealthiest 1% of households (raising $2 trillion over 10 years), which would mean you owe a tax even if you haven’t sold the asset. She graciously says taxpayers could offset the gains with losses in bad years, but that would lead to extreme revenue fluctuations from year to year.
Ms. Warren has already proposed a 2% wealth tax on assets of more than $50 million, which is supposed to pay for her education, child-care and college-debt forgiveness plans. She now wants to add a 6% annual tax on Americans with more than $1 billion in assets that she says would raise $3 trillion. Most economists, including Democrat Larry Summers, believe a wealth tax would raise far less due to tax avoidance, which is why so many European countries have repealed their wealth taxes.
But, no worries, Ms. Warren would hire a new army of tax collectors to close what she calls the 15% “tax gap” between what people owe and what they pay. The Senator says this will be worth $2.3 trillion in additional revenue. This is another old Congressional standby that never yields what is predicted.
Oh, and she’d save $800 billion by cutting defense spending for Overseas Contingency Operations. Senator Warren calls this a “slush fund,” but it’s really the account to finance current overseas operations as well as readiness. This would return to the Obama years of slashing defense even as global threats from regional powers and new technology are increasing. This is a hyper-fantasy.

***

The political vulnerability of all this isn’t lost on Ms. Warren’s Democratic competitors. A spokeswoman for Joe Biden said Saturday that Ms. Warren is “lowballing the cost of her plan by well over $10 trillion” and isn’t telling the truth about her taxes “that would come out of workers’ pockets.” The likeliest outcome, if her plan ever became law, would be a value-added consumption tax on the middle class.
Ms. Warren is trying to sell an illusion and make it sound like political courage. Donald Trump’s boast that Mexico would pay for the wall was more believable.

Comments

Post a Comment

Popular posts from this blog

ft

Image
Fed keeps wiggle room on rates No matter how hard the Federal Reserve has tried to give itself room for manoeuvre on monetary policy, by decision time that flexibility has become more limited. That is the view of central bank-watchers in the weeks since the Fed reduced its benchmark interest rate for only the second time since the financial crisis. It is widely expected to cut again at its October 30 meeting, but US central bank officials have gone to great lengths to brace investors for a pause following that cut — barring a dismal turn in the economic data. Investors have so far accepted this reality, with the odds of another rate reduction in December modest at 30 per cent, according to Fed funds futures contracts compiled by CME Group. But should investors ramp up their expectations for another interest rate cut later this year, the Fed could very well find itself pressured into action once more, or risk sparking a market sell-off. In the days before the Fed’s so-called “black...
Read more
Image
For most of the twentieth century, as David Edgerton shows in his vital and decisive book, “United Kingdom” was a technical term used by statisticians, diplomats and the army, but seldom in a wider context. It was not until the 1960s that historians seeking to foster a progressive national consensus began presenting the “United Kingdom” story in terms of an emancipatory and cohesive welfare state, while underplaying the extent to which it was a bundle of semi-unified nations. Most subjects of Elizabeth II associated the phrase “United Kingdom” with broadcasts of the Eurovision Song Contest: “Royaume-Uni, nul points”. The first three country code top-level domain names allotted in 1985 – .us, .uk and .il – and the spread of email traffic and internet shopping finally brought “uk” into common currency among people living in the British Isles. As to the noun “Britain”, it became the standard usage in politics and historical writing only after 1945. It was – and is – used promiscuously ...
Read more

gillian tett 1

What probability do you give that there might be a new financial crisis? This month, the number crunchers at Oxford Economics, a research group, asked 162 global businesses this question. Their average answer was 20 per cent over the next two years. That is twice as high as the perceived risk of a second global wave of the Covid-19 pandemic and also, sadly, the probability of an early effective vaccine arriving.  These fears already have tangible consequences: they pushed down business sentiment more in this month’s Oxford survey than hard data justified. “Our analysis suggests that financial crisis fears account for much of the gloom,” said Jamie Thompson, the poll’s lead economist. This should concern investors, although not because a financial crisis is likely to explode right now — at least not in the headline-grabbing style of 2008. At least two factors mitigate that risk.  First, the US Federal Reserve and other central banks have made it clear that they will do “whatever it...
Read more