It surprised me that a family bringing in $900 a week ($47k per year) doesn't feel comfortable in Des Moines (statistically it's above local median). But then they note every 2 weeks they pay $375 for health insurance.. 20.8% of their pre-tax income! Yet their "state and federal" taxes are only about 10%?
For all the bleating about paying "less tax" than other countries, it's ironic that an ostensibly "free market" healthcare system is less efficient, more cartel-like and wildly more expensive for its users than, say, the "socialist" one in the UK where you could live well on the same money and still be paying your fair share without getting any handouts.
The idea of the non-regulated free market is that you'd choose with your wallet by going for another health care provider that tells you the billing rates.
If you want to force companies to reveal standard rates you are adding regulation. So is regulation needed or not?
Not even Adam Smith argued for a free market without regulation... He himself even identified several pain points and warned against "laissez-faire" economy.
That's at least one data point suggesting that in a free market, prices will become transparent.
Rather than focusing on the "meaningful use" EHR stuff, I wish the government would demand machine-readable and easily accessed pricing (list, prevailing, medicare, and all negotiated insurance, as well as actual collection rates) for services, at least from any doctor who accepts medicare or medicaid. Publish this, let people build awesome tools.
P.S. I never shared my opinion on the matter, but since you brought it up, I'm actually on the fence about the matter. I'm not a fan of the health care bill, but more because it seems to me like it's going to make things even more complicated than before. Also, I'm not a fan of the precedent the supreme court's ruling has set essentially weakening the states' powers. But, that's all fairly irrelevant to the discussion at hand.
What "fair share" of taxation would they be paying in the UK?
The United States government spends substantially more per capita on healthcare than the UK (a number which, to be clear, excludes people's private spending and if anything understates things because it doesn't include the cost of tax breaks for employer plans), but fails to guarantee healthcare to everyone and has developed an underclass of people who have substantially worse healthcare than many second world countries.
The UK system is, in many ways, unique, in that it's severely underfunded but gets outstanding bang for buck. I wouldn't recommend it here, because I'd be pretty skeptical we could transplant the necessary consensus political support and willingness to say no to stupid treatments.
I broke my collarbone (clavicle, whatever) snowboarding - I go to see an orthopedic surgeon, or rather I go to the local hospital's orthopedic department and see somebody who I assume is a surgeon (he was in fact an MRCS) who tells me, "Collarbones heal on their own just fine in about 95% of cases" - my response - "According to this very out of focus x-ray I was given in France, my collarbone is in a gazillion pieces - maybe I'm in the 5%" - to which he replies - "Collarbones heal on their own just fine in about 95% of cases, I can write you a sick note".
My nephew, my brother's child, was born with what at the time was assumed to be a hole in the heart but which later turned out to be a particularly obnoxious genetic disorder (CHARGE), my brother and his partner lived in a central London hospital for six months while their son lived on life support and underwent open heart surgery. He will need a fairly high level of medical support his entire life, the cost to his parents $0 - in the US this could bankrupt an extended family.
Perhaps my point about not doing stupid treatments was badly phrased, though: your collarbone example is one such treatment, and stupid isn't exactly the right word. Humans seem to have this inborn tendency to always overestimate the effects of medical care. The USA healthcare system thrives on that impulse: if there's any procedure at all that could conceivably do something and you can afford health insurance, you get it, from a full array of pointless tests to highly invasive surgery.
In the UK, the system seems to work on the opposite assumption: because every cent spent on healthcare is a cent that the government doesn't have access to, it vigorously refuses treatments if at all possible. Hence, your collarbone example: most collarbones (apparently) heal easily enough on their own, so it's cheaper to assume it will and treat it later than it is to treat all of them to the maximum extent possible. "Death panel" is fairly histrionic, but it does have some validity to it. The issue is that if we want to get the American system's spiraling costs out of control, we need to recognize it doesn't have enough death panels (i.e. a willingness to say, no, it's better to give half-assed or no treatment here and perhaps sacrifice some level of well-being in order to save a couple bucks).
I personally believe that people place way too much faith in the ability of medical science to perfect outcomes, and that much of what we do amounts to modern voodoo. So I tend toward thinking that doing the minimum treatment that can be justified is the better way to go.
I know it may sound pedantic to argue over little words like that, but I think people's lack of understanding around basic economics contributes to the problems we have. Promoting the notion that healthcare can somehow be "free" does little to fix the problems we see in our current system here in the US.
Sort of, but not exactly. I was implying that a household with that income would be making close to a median contribution to the tax base so, purely in my own opinion, would be paying a "fair share" in absolute terms. That is, they should not be either highly subsidized or a major contributor. But.. let's run the numbers to see if my hunch is wrong! :-)
Said household would have a gross income of £30000, pay £4505 in income taxes, pay £2732 in "national insurance" (ostensibly to fund social security, sick pay, and various benefits), and be left with £22,762, or 75.9% of pre-tax income.
(A "hidden" part to this is that (most) employers also make employer "national insurance" contributions, in this case of £3164 so it could be argued this is a hidden salary cost for employees.)
The total NHS budget in 2008/2009 was £94bn and there are around 25 million households in the UK. This gives an expense of £3760 per household or 36% of the total earned in direct taxation on our imagined household. This is double the percentage of the national budget dedicated to health, so my initial assumption may have been wrong.
However, with indirect taxation, especially VAT at 20% and high fuel duties, and subtracting the contribution of things like corporation taxes to the tax base, the total tax paid vs the absolute "fair share" is likely to come pretty close for this family.
Sorry if this is boring but I was intrigued and thought I'd look into it! :-)
I get the distinct impression that taxes in the UK are just thrown into one big pot anyway so NI contributions are just another general tax.
Technically NICs are for the social security system generally, including most major benefits, state pension, unemployment, and sick pay. On their own they couldn't be able to fund all of this plus the health service (I don't have the numbers but I'd be surprised if they could even fund just the health service).
Essentially, yes. The government has been considering merging the two into a new, higher income tax in recent years.
Some guy said of sick care in America: The American health care system is socialism without a central plan, and capitalism without markets or prices.
You really have to pick one or the other of socialism or the free market. Our current system is the worst of both worlds.
That is the essence of contemporary corporatism. It has nothing to do with capitalism or socialism, because it's neither system. The problem is one of social topology, from which money disparities follow, but it's otherwise not really about money per se. Modern corporatism works like this: a well-connected, parasitic elite (~0.5%) gets the best of both systems: the chance of personal enrichment and the freedom of capitalism, and the safety net (up to outright governmental favoritism, as seen in corporate welfare) and low minimal expectations of socialism. The other 99.5% get the worst of both systems.
I'm simply not sufficiently well versed in economics to be able to judge what's best for society. I'm also hoping that this is not purely subjective, and that indeed there might be an optimal golden middle.
On one hand PG's arguments make sense to me, on the other, I cannot but feel pulled in the opposite direction by some kind of populist/socialist desire to chip in more and make society a better place. That said, I don't have millions (billionaires seem to be more generous, so I'm not going to consider them) and thus if I ever were to become wealthier, I wonder if I also would really mind sharing more.
I already don't particularly enjoy paying 30% or more of my income, but I feel like I'm doing my part (being originally from EU perhaps conditioned me to think that this is "the norm"), although I wish that money was better spent by the people in power.
- he conflates earnings and effort, as if by earning 100 times you were necessarily 100x more productive at some point.
- related: wealth is categorically different. The worst chess player and the best chess player must both play the same game. But if chess were wealth, the poor guy would have to carve his own pieces and rent the hall, while the rich guy would turn up and sit while the game played itself, no effort required
- he's right that the middle-classes are the true engines of wealth creation, not the rich. This is the crux of the problem: income inequality destroys the middle class. It leaves only very poor and very rich. No middle class = no wealth generation. That is why it's an issue for everyone, and no amount of "smart people who work hard deserve to control 99% of capital" changes that.
Taking a typical relative definition, if the middle class is [50-X%, 50+X%], then by definition the middle class always makes up 2X% of the nation and nothing can destroy it.
If you take an absolute definition of middle class (i.e., middle class = home with X ft^2/person, tv, car, refrigerator), then inequality is pretty much unrelated to how many people are middle class.
In short, for your claim to be true, you must be using some uncommon definition of middle class. It would help to explain what it is.
Go to figure 6.
The number of people who are middle class or higher has remained contant since 1970. Using Alan Krueger's definitions, all inequality has done is moved people from middle class to rich. Is that a bad thing?
The middle class is the engine of wealth generation. It both spends high proportions of its income and has enough income to start new enterprises. A middle class drives an economy.
What you are asking is if it's OK for the middle class of merchants to shrink because many are now rich enough to be lords and kings. That may be, but it still leaves a society with no merchants: only the very poor and very rich.
Why can't a middle class person who became "rich" (although most people don't consider >1.5x median to be rich) do the same thing?
Suppose my income dropped dramatically and I suddenly entered the "middle class" (by Alan Krueger's definition - I'm actually middle class by the definition of most people). How would this make it easier for me to start new enterprises?
Starting new businesses: It's more a matter of "Don't" than "Can't." A middle-class person who became rich is either tending the business that got them there or has otherwise lost the impetus of need that drove them to start a business. If your income suddenly dropped dramatically, what would you do: adjust to your new income level and be happy, or strive immediately to retain your previous level?
Spending income: It's easy to spend 99% of a median income. It's almost impossible for the very wealthy to spend anything like what they make.
Additionally, there are only so many needs to be filled. It's more economically productive to have a very large number of people willing and able to buy modestly priced items than it is to have a very small number wanting to buy very highly priced items.
This has absolutely nothing whatsoever to do with the very wealthy.
If you have evidence that people going from $50k to $80k is bad for the economy, go ahead and present it. You haven't yet. All you've presented are vague misconceptions and demonstrated you don't understand the numbers under discussion.
In particular, you have not provided evidence for your contention that the middle class has shrunk solely because people have moved "from 65k to 85k", you have shown only that they have not dropped below 25k.
The facts -- income stagnation and wealth inequality -- are in direct opposition to your "the disappearance of the middle class is fine, they're just getting rich" fantasy. People have either gone to exceptionally above 85k, are stagnant, or are dropping towards the lower end.
What they are not doing is just edging into "rich". That's not a supportable claim.
And, ultimately, irrelevant. The problem is income inequality, the shrinking middle class is its symptom. If you have evidence that a society can survive this level of wealth inequality, please present that.
True - $65k -> 85k was an example. Let me be more precise: the middle class has only shrunk because people have moved from X to Y, where $25k < X < $75k and Y > $75k. I.e., no one became poorer, and some people became richer.
No one is dropping towards the lower end. The number of people at the lower end (below $25k) is the same (about 25%). Since the number of people between $25k and $75k shrank, it must be because the number of people above $75k increased. That's just basic arithmetic.
You still have yet to show how people's income exceeding $75k causes any harm at all, short of vague hints that it's almost impossible for them to spend anything like what they make.
Again, you haven't shown this, either. Many people could have gone from $65k to $35k while a few moved from $65k to $650k on the same set of facts. That nobody has dropped below the baseline of the middle class does not mean it is not shrinking or that nobody in it has gotten poorer.
"You still have yet to show how people's income exceeding $75k causes any harm at all"
This is not the point. The point is that massive wealth inequality causes the harm. A shrinking middle class is a symptom of that inequality.
Whether or not you continue to deny or justify the symptoms is not going to change the facts of the underlying disease. I'm not going to show you how dying causes cancer.
It's political economy 101. I don't understand your bizarro counter-arguments. Take the first for example:
>Taking a typical relative definition, if the middle class is [50-X%, 50+X%], then by definition the middle class always makes up 2X% of the nation and nothing can destroy it.
It cannot destroy the existence of the category named "middle class", but it can very much destroy its living conditions. It's not just being in the 50%+-X range, it's also what that range represents in purchase power.
>If you take an absolute definition of middle class (i.e., middle class = home with X ft^2/person, tv, car, refrigerator), then inequality is pretty much unrelated to how many people are middle class.
Only in a bizarro world where the wealth is magically readjusted to account for inequality. In the real world this inequality is caused by wealth moving from the middle to the upper classes.
For example, a company moves its factories to China. The middle class families making a living around the US factory and the nearby city are devastated, but the company executives get even richer because of the higher margins.
In the US, the purchasing power of that range has dramatically increased over the years. We live in bigger houses, consume better medicine, more food, more education, more and better electronics and entertainment, etc.
I think you'll be hard pressed to find a single category in which contemporary Americans have less than 1970's Americans, for any reasonable value of x. If you dispute this, go ahead and find that single category.
Are you seriously calling a world of economic growth and technological process "bizarro world"?
We have become vastly wealthier than we were at any historical period, ignoring short term fluctuations (e.g., recessions). In the 1970s, the bottom 11% didn't have flush toilets.
Hahaha! Now I know you are writing a parody of something - first complaining about inequality, then complaining about wages becoming more equal.
x = time and unencumbered balance sheets. The gains you indicate are partially the result of the other 50% of working-age adults (women) entering the labor force. The expected outcome of this is average household income increasing ~100%, with net increasing somewhat less due to childcare expenses.
Arguably this trend had mostly played out by the early 90s, when consumer debt came to the rescue in the forms of credit cards, securitized mortgages, and educational loans, which allowed the trend to continue. Outstanding consumer debt is much higher today than in 1970.
So while economic growth and technological progress have helped the middle class, they don't tell the whole story. And taken alone, they don't provide a useful roadmap for the future.
"go ahead and find that single category."
Income expectations for their offspring are lower now for contemporary Americans than 1970s Americans.
If you want historical comparisons, you will be hard pressed to find a single successful society that has maintained income equality at anything like current US levels without collapse, economic devastation or massive human rights violations. Which of those three are acceptable in the quest to be the richest-ever?
No, income expectations for the offspring of Americans are far higher than they were in the 1970s.
However, when you include immigrants and their children in the mix, the numbers appear disproportionately low. This is due entirely to Simpson's paradox.
Your post doesn't adjust for immigration levels. In particular, income stagnation was not similar at previous periods when immigration was at comparable or higher levels.
I hear this argument all the time, but it doesn't seem to match reality as I've personally observed it. Example: my uncle, who had only a high school education, was a delivery driver for a bakery, and he had a wife who didn't work, 2 kids, a house, and a car. The idea that somebody like him (like, say, his son-in-law, who works the same job for the same employer to this day) could do that now is laughable - unless his family qualified for government assistance, which might actually be true for a family of four on that income.
I think you meant to say "if absolute wages are declining". Increased prosperity could easily make relative wages decline - the bottom might increase by 10%, while the top might increase by 20%.
But forget the bottom 50%, lets look at people below the poverty line. Even most people below the poverty line today have a house (with 2 rooms per person) and a car. And that house has all sorts of amenities that were uncommon even for the mid to upper classes in the 1970's.
The numbers suggest the lifestyle formerly characterized as "middle class" is now accessible to virtually every American. I.e., we have more now than ever before.
This conflates technological and process improvements (e.g. a CPU with 100 times an CPU 's PC power can now be made with 1/1000 of the money) with increases in actual purchasing power.
This also forgets that wealth is relative. A piss-poor Mississippi kid might now have a mobile phone, which in 1980 it would cost tens of thousands of dollars to have (if it was even possible). That doesn't mean the kid is richer than Gordon Gecko, it just means that the scale has changed.
See this for example:
American men in their 30s are earning less than their father's generation did (…) The study was produced by a handful of politically diverse think tanks including the Pew Charitable Trusts, the American Enterprise Institute, the Brookings Institute, the Heritage Foundation and the Urban Institute. It looked at income levels of American men in their 30s, which can be a good indicator of lifetime income. (…) Relying on Census Bureau figures, the study's authors found that after adjusting for inflation, men in their 30s in 2004 had a median income of about $35,000 per year, for a 12 percent drop compared with $40,000 per year for men in the same age group in 1974. (cnn.com)
See here for more: http://www.scribd.com/doc/70425671/Economic-Mobility
>>Only in a bizarro world where the wealth is magically readjusted to account for inequality. In the real world this inequality is caused by wealth moving from the middle to the upper classes.
No, what I call bizarro world is that place you describe where "inequality is pretty much unrelated to how many people are middle class".
>We have become vastly wealthier than we were at any historical period, ignoring short term fluctuations (e.g., recessions). In the 1970s, the bottom 11% didn't have flush toilets.
Again, conflating technological and manufacturing progress (and cheaper prices for certain products) with wealth.
From Wikipedia: "12.3% fell below the federal poverty threshold and the bottom 20% earned less than $19,178". And this "less than $20K annual", is for household incomes, not personal.
>Hahaha! Now I know you are writing a parody of something - first complaining about inequality, then complaining about wages becoming more equal.
Yes, it must be "hahaha"-level funny for all the families in foreclosures, the homeless, the dying communities with an industry in decline, et al.
And, no, I'm not complaing about "wages becoming more equal", I'm complaining about wages entering a race to the bottom.
If the chinese made $1/hour and US workers made $20/hour, getting the chinese to $2/hour and the US workers to $5/hour is not the kind of equality we were discussing. How about raising Chinese wages WITHOUT fucking the american middle class over (and eventually the Chinese too, as it both caps their salaries and kills their market)?
The study you cite says income went up, it's just distributed more evenly between men and women (i.e., it went up for women by more than it went down for men).
What do you think wealth is, if not technology, goods and servies?
How about raising Chinese wages WITHOUT fucking the american middle class over (and eventually the Chinese too, as it both caps their salaries and kills their market)?
The American middle class has more goods and services than ever before. So does the Chinese middle class. What else do you want - ponies for all?
Your biggest complaints seem to be that women and the Chinese are now allowed to compete with you. I.e., your complaint isn't really with inequality at all, it's more with the elimination of inequality.
No I don't:
"When we talk about "unequal distribution of income," we should also ask, where does that income come from? Who made the wealth it represents? Because to the extent that income varies simply according to how much wealth people create, the distribution may be unequal, but it's hardly unjust."
This shows the same problem -- productivity (effort) of the individual is not identical with wealth creation (earnings) and hence the two have different consequences for the individual's compensation and its justification.
A person (your CEO) who is a 100x more productive (which I do have difficulty conceiving) does not necessarily generate 100x more wealth. Jobs was replaced by Tim Cook, and Apple continues to create astonishing amounts of wealth. Is that because Cook is actually as productive as Jobs? Was Jobs in fact replaceable?
No, it's actually that the wealth created by Apple was attributable to Apple. Yes, it took a particular person to start Apple and forge it into a wealth-creating machine, but that forms a different kind of compensation argument.
Sever that link between an individual's productivity/effort and the earnings of their company, and it becomes vastly harder to justify a CEO earning 100x more than an employee.
I realise the difference is subtle, and that's why it's often missed. But the output of a person and the output of a thing they created are not identical, and you can't conflate the output of the creation with the creator's effort.
A good example is scientific and mathematical discoveries. Judea Pearl's work on Bayesian networks has created a large amount of wealth, some of it pretty directly, but he himself has seen very little of that.
I would hypothesize that the correlation between wealth-creation and wealth-capture is actually not very high, because a large amount of value creation is indirect and sometimes time-delayed, making it hard for the wealth-creator to capture the result. Alas, attempts to fix the accounting process so that people who create value have some sort of ownership interest in it (patents) often seem to produce new problems that are possibly worse than the original ones.
Look at the second richest person in the article, the Amazon investor - no doubt he believes that entrepreneurs and investors like himself should be allowed to get rich, as does pg, yet he favors increased taxes on the rich. Paul Graham's article doesn't deal with his arguments, which are far more common in the real world than arguments for a return to the 98% tax rate of 70s Britain or the economics of East Germany, which are the most relevant real world cases pg refers to (at least nobody was arguing for that at the time pg's was written - I'm not quite sure about the Occupy crowd today). So pg devastated a strawman.
And you can see in the US that increases in wealth disparity have had a negative effect on some of these measures. Healthcare outcomes and the state of road repair are two headline examples of what suffers when the wealthy become so wealthy as to resemble an aristocracy rather than a bourgeoisie. It's often pointed out on HN that there is a seperate legal system for those with money. Likewise, the wealthy have outsized control of the legislative process and the levers of government in general, and they have used this power to enrich themselves at the expense of the lower tiers of society.
No, wealth is not a zero sum game, but when the wealthy use their power to make sure they don't have to contribute to the government purse and keep a greater share of corporate wealth for the very top of the hierarchy, they impoverish the rest of society by destroying the foundation that allows people with fewer advantages to turn their labor into wealth.
A 747 pilot doesn't make 40 times as much as a checkout clerk because he is a warlord who somehow holds her in thrall. His skills are simply much more valuable.
Pilots are also supported by a union that undoubtedly increases their pay. There are many more pilots than there are jobs for pilots, which suggests that they are not paid market rates.
I cannot but feel pulled in the opposite direction by some kind of populist/socialist desire to chip in more and make society a better place.
You can believe that wealth disparity is bad for the country without being some sort of squishy idealist. Most wealthy people are not like Paul Graham. They are largely in corporate management and finance. It can be argued whether CEOs are worth what companies pay for them, but it does appear that most people who truly have a lot of money are rent seekers, not innovators. And they have actively attempted to make it harder for people who are not already wealthy to become like them.
In the first part, he argues about different levels in skill which supposedly generate different levels of income. The argument works well for sport stars: A football team, that draws a crowd of 50,000 to a home match every two weeks, produces something like $25,000 per week per player. By contrast a slightly worse player who is never playing in a big league will at best generate 1/10th or 1/100th of this numbers. The crucial point here is, that the players are exploiting their personal skill to do this.
By contrast in the case of an CEO, the immediate value is created by workers. ( The guys in the factory who actually assemble a product, not by R&D and not by the CEO himself). The CEO is merely responsible for creating an environment were the workers can effectively create value. Therefore the wage is not only based on his personal skill, but also on the skill of others.
The later sections of the essay are sometimes simply a libertarian straw man ( The Daddy Model of Wealth), sometimes very good ( in particular the second half of "The Lever of Technology").
With the shortened tenure of CEOs, they often don't even have this responsibility in practice. The average tenure of an S&P 1500 company is something like 6.5 years. These companies generally have 20k-200k employees; I don't think anyone would argue that 6 years is long enough to create an environment where workers can create value in a firm of 200k employees. More like "don't screw up the environment that worked when you got there" in most cases. (Obviously turnarounds are different.)
There's another big problem with the theory that wealth is generally deserved because markets allocate it efficiently. CEOs of public companies generally make 100s of times what their employees make, even when they are actively destroying value. For example, compare the wealth destruction on Ballmer's watch with his compensation over the same period.
pg's essay is interesting in that it's one of the few I've read that did not have a note indicating he received comments from others before publishing it.
Everyone has their own ideas about fairness, whether they are rich or poor.
The article does seem to suggest that the wealthy have some sort of conscience. They do think about the lower classes.
Here's a thought to ponder: What if we took all the poor folks out of America and put them in another country. Then the wealthy would not have to think about them. It might ease their conscience. A question for the economists: Would anyone's wealth be affected if we removed the poor?
I'm an economist, and it really aggravates me to hear such misunderstanding of the profession. Try replacing "economics" and "economist" with "medicine" and "doctor" to hear how ludicrous it sounds.
But yes, I agree that many Econ 101 models are tragically flawed. Don't confuse introductory classes for the beliefs of the "majority of economists".
My understanding of the stats informs me that our household income puts us in the top 2.5%. Certainly a very blessed situation to be in, and one that we both work very hard to achieve.
But here's the striking truth about wealth distribution in our country...
The power-law-ish distribution of our wealth means that quantitatively, as a percentile, I'm much closer to the "1%" than I am to the "50%". But qualitatively, the struggles I face -- saving for retirement, knowing that if I had a serious illness our cash flow would dry up, etc -- my life is nothing like the "1%".
Another way to put it... I'm near the very top of the small pile of wealth shared by normal Americans.
I'm having a hard time properly articulating this but I think you get the point. It's almost as if, by percentile, you'd think "wow, I really have earned a big slice of this pie" only to find out that more than half the pie was taken by 0.5% of Americans before it was ever put on the shelf to cool. That until you're invited to take a sliver from that first half, you'll never get more than crumbs of the share that's split 298.5 Million ways.
I will never in my life understand how Americans (myself included) can think this is, in any way possible, okay.
Or, how, if we just moved it more toward private companies having more control over our healthcare than they already do, that it'll get better. It's asinine.
Since you mentioned it, though: for people that are well-off in this country, the healthcare system works fine (more or less). That's probably a large source of the complacency. For both my wife and I, our health insurance plans are very good. They are paid 100% for us. They include a 10% co-insurance but a relatively low out of pocket cap.
The other big anger-relieving valve is Medicare, which removes a large proportion of major illnesses (anything with onset age 65+) from the problem space that private-sector health insurance has to address. If the elderly had to buy health insurance on the private market, or alternatively have their insurance covered via employer pension plans, I don't think the system would work at all, and there would be a lot more angry people (who vote at high rates).
If these business gains were retaxed at the personal level as ordinary income, that would incent company owners and directors to keep the money in the company's coffers safe from taxation. Then you have corporations sitting on illiquid wealth. Giving personal tax breaks for these business gains creates incentive to distribute money back to the economy to be spent and continue flowing.
I'm surprised to see a reputable publication like GQ repeat the "rich people pay low taxes" fallacy. But it's such an easy way to score pandering points that pretty much every business article and publication spreads the misinformation now.
This taxation scheme isn't gratuitous. The corporate vehicle offers investors the tremendous advantage of limited liability. When it comes to a creditor's suit against the company, the corporation is treated as a distinct entity and the investor is not liable in such suits beyond his investment. The cost of being treated like a separate entity in lawsuits is being treated like a separate entity when it comes to taxation.
Limited liability is not free. When creditors cannot collect because an investor's corporation has insufficient assets, they bear the losses of activity that is attributable to and generates profits for the investor. If investors did not want to be taxed this way, they could reorganize their investments as partnerships. That way they would be taxed as individuals and bear liability for their business activities like individuals.
For a nanny, sure, but apparently you missed Accounting 101
Expenses are deducted from income for tax purposes (talking about a corporation)
So this means, for a company, that if let's say, earn (example values) $1000 and pays an employee $400, their taxes are calculated on the $600, not on the $1000
Hence, no double taxation, the taxes on that money are payed 'down the chain'
But it's dishonest to claim tax rates are only 11%. They aren't.
The corporate form comes along and says "let's treat this business as a separate legal person." The corporation, thus, is entitled to the proceeds of its business, and is liable for its debts and other obligations. The important thing to realize is that under this arrangement, the investor is not automatically entitled to a share of the corporation's profits. It's not his money, it's the corporation's money. The only thing the investor is entitled to is his capital contribution (which is not taxable), voting rights, and certain fiduciary duties from the corporate officers. When the corporation pays out a dividend, it's not giving the investor money he's entitled to by operation of law. It's a gratuitous transfer by one person (the corporation) to another. And it's taxed as such.
So it's not at all "dishonest" to say that the tax on capital gains is only 15%. It's a correct statement of the facts. It's no less correct than saying that your nanny's tax rate is 20% or whatever, even though she is paid with post-tax dollars. The corporate income tax isn't some gratuitous tax as the "cost of limited liability." It's just the natural consequence of structuring a business as a separate legal person in a system that taxes transactions between persons.
Yes, that may cause corporations to not pay out profits, but there's nothing wrong with that, because if the profits are not paid out, then the shareholders don't have the problematic high income.
If keeping the profit causes share values to rise, then this rise in value should be taxed appropriately according to the same mechanism.
Most corporate income will not go to its shareholders as dividends (or otherwise). Hence, it is inaccurate to say that the tax cost of limited liability is [x+y]% except in the very limited circumstances where all corporate profits are dividended up to the shareholders. When measuring the true total effective tax rate on a shareholder, you must exclude any corporate income which will not be dividended up from the calculation, so the effective tax rate becomes [x-z+y]%, where z is usually equal to or greater than 95% of x.
Say 10 people each invest $100 in a business. After 1 year of operation, the business generates $10,000 in profits. The business is taxed as a separate person, and has $6,500 left. With the $1,000 of initial capital, it's worth $7,500. Now, say one investor sells his shares for $7,500 / 10 = $750. How much richer is he? ($750 - $100) = $650. Now, say instead the company pays out all of its profits as a dividend. Each investor receives $6,500 / 10 = $650. The $100 of original investment will of course be recovered when he eventually sells his shares.
In each case, the investor is $650 richer than he was previously. What amount should he be taxed on? $650! His net gain is $650. Why should be he taxed any differently on this net gain of $650 for a passive investment than someone who earns $650 in exchange for services?
If a person makes $1000 pre-tax on a $100 investment, we should tax the $900 in a single chunk. The tax rate should probably be the same as the individual income tax rate, and it should be the same regardless of whether it is long or short term capital gains, dividends, interest or royalties.
My objection is to breaking the tax up into pieces X+Y, and then acting as if the investor only paid Y. That's just a way of complicating the tax system and pretending investors pay less than they really do.
C and I are separate legal persons. Everything is accounted that way. E.g. when the U.S.'s GDP is calculated, C's income ($100) and I's income ($65) are added up and contribute $165 to the U.S. GDP.
Yes, the taxes on C reduce the amount available for C to pay I as dividends. But that's true in any transaction between two people. The taxes on my income reduce the amount available for me to pay my nanny, but you don't add together the taxes I pay and the taxes she pays when computing her tax rate.
That's not how it works. The only time shareholders will see the corporation's income is if such income is distributed to them. Generally, this happens via: (1) a distribution of the corporation's assets, (2) a dividend, i.e., a distribution of the corporation's earnings and profits but not its assets, (3) a redemption which decreases the shareholder's ownerhsip, or (4) a liquidation which eliminates all shareholder's ownerships.
Capital gains reflects the increase in the market value of the corporation. It is entirely possible, and usually is the case, that the market value of corporate stock is based on the "goodwill" value of the corporation (i.e., brand strength) rather than the corporation's cash earnings. For example...every tech company purchased in the past decade, including but not limited to, such notable non-revenue producing companies as Reddit and Instagram.
1. Fungability: companies have similar tax flexibility as individuals and are therefore comparable.
2. Consumption equivalence: that income from capital gains or "personal tax breaks for these business gains" is actually redistributed back into the general economy in the same way as it would be as general (wage) income.
Both are clearly incorrect.
I would go a step further to suggest the US has a relatively high corporation tax compared to other developed countries precisely to compensate for other tax code deficiencies and trends.
Of course, in a sense, all the current arrangements do is capture the "middle" or "poor" class of corporates. Large or sophisticated corporates, especially financial companies, have very extensive means to ensure minimal or even, in some cases, no tax is ever paid.
A preliminary and revealing book on this issue for laymen is Shaxon's "Treasure Islands" (http://www.amazon.com/Treasure-Islands-Uncovering-Offshore-B...).
Size is not a factor in this; proper planning is. Paying an expert $10,000 to structure your business flows at the beginning can save millions down the line. You would not skip out on hiring a lawyer to properly incorporate your business and draft your shareholders agreements, so why would you skip out on a tax planner?
The capacity to bypass taxes or headline rates is not being compared. In addition, if anything, that only further supports my points.
If an individual earns a million dollars a year by owning a fleet of cabs, each organized as a separate corporation with the legally-required $50k or whatever of insurance, and one of the cabs hits and kills someone resulting in a $3 million wrongful death lawsuit, the individual is out at most the assets of that single corporation (say $50k + legal fees).
It would be ridiculous if the individual paid the same %-age of taxes on that million dollars in both cases.
 This is actually how many (most?) cab companies are structured.
Uh, except that corporations pay taxes on net while individuals pay taxes on gross. It is entirely possible to structure your corporate income such that you would pay less tax than a normal individual.
You simply use your company to pay for all your expenses, take no salary and instead pull in dividends and/or stock that can be sold at long-term capital gains rates in a year.
I'm not sure how you missed all those stories about the selfless CEOs taking $1 salaries (and millions of dollars in stock) in order to do just that.
I'm one of those media-created myths. I am a programmer, but I work under a "corporation". And I know I pay way less taxes than friends who work as employees with pure earned income.
I don't see how this would be any different if I, for example, ran a corner store. (Actually, the possibilities increase even more there, as you can use creative accounting on your taxes, PLUS, very easily run a significant portion of your business "off the books".)
Aside: I knew a guy who relied on wikipedia to give out tax advice. He was sued for malpractice and lost. He now owes his former clients $2 million (the amount of additional taxes they had to pay as a result of his erroneous advice).
The solution is simple: stop taxing corporations and replace it with taxes on capital gains/etc. (Also, while we are at it, equalize the taxation of cap gains, dividends and interest.)
The GE type corporations effectively pay very little tax in the present system. They also have the right to spend an unlimited amount of money on election campaigns. In the U.S. system corporations are treated as persons. If a person makes an income (profit) they get taxed.
What we presently have is a broken system in my opinion. The very rich earn their money through capital gains and the capital gains tax is very, very low. The very wealthy in the U.S. do not pay a fair share of the tax burden or for the cost of government. Perhaps eliminating corporate taxes while simultaneously greatly increasing capital gains taxes would be good. There could also be some bad consequences to eliminating corporate taxes altogether.
In the US the very wealthy pay a disproportionate fraction of taxes, relative to the income they earn.
http://i.imgur.com/wa8uu.png (A graph of the data)
The US actually has a more progressive tax system than any other OECD nation - only Ireland and Australia even come close.
Given that the poor and middle class consume disproportionate amounts of government services (primarily redistribution), while the wealthy pay a disproportionate amount of taxes, it's an untenable position that the wealthy don't pay their fair share.
What matters is not the percentage of all taxes they pay but what percentage of wealth they control and how much they can pay. I agree with Christ in this matter. To whom much is given much is expected.
The US is already more progressive than the rest of the world - how much more progressive do you believe it needs to become?
The focus on income taxes is a red herring. The poor pay a disproportionate amount in regressive taxes such as sales tax. One must look at overall burdens and overall ability to pay. Proportionately the more one has the more one should pay.
If you read the article, you'd know that capital gains are included (since cap gains are included on federal income tax returns).
The poor pay a disproportionate amount in regressive taxes such as sales tax. One must look at overall burdens and overall ability to pay.
Yes, the poor consume disproportionately, and pay a disproportionate amount of consumption taxes. All that says is the rich consume far less than they could, and are much less of a drain on society than the poor.
One must look at all tax receipts and not concentrate on income taxes. The very wealthy are not paying enough to sustain the system that they benefit from.
I did read the article. It wasn't clear if capital gains taxes were included. Capital gains are not income as far I know. I mentioned my ignorance on this point. Clearly I indicated reading the article. Nitpicking on this is also a red herring. The point remains that total tax receipts is the relevant statistic in comparison to total wealth. The top 20% of the U.S. control 93% of the financial wealth in the country. I don't think they are paying 93% of the total tax burden. Taxes are also at a 50 year low and so it's clear that the very wealthy can pay more and should.
On the other hand, yequalsx, your characterization of the poor as a "drain on society" speaks volumes of how little you understand income disparity.
There are values other than pure economic utility, but from a pure economic utility function, a poor person consuming medical services doesn't help the economy. The money paid (via taxes to doctors, equipment vendors, etc.) would be more efficiently used for another purpose -- it's the broken window fallacy.
It would be interesting to figure out where the net consumers stop and net producers begin, and maybe graph that over time and culture.
There are a lot of good reasons to favor an economy which is slightly less productive than optimum, but where a larger percentage of people are net-contributors; redistributing income or wealth from the positive outliers to invest in making more people net-contributors, vs. trying to maximize the total contribution, is probably a good social choice. But it's not the purely efficient choice.
They don't?? The top 1% of taxpayers paid 36.7% of all income taxes in 2009 (yes, that includes capital gains). The top 10% paid 70%!
well, i think we all should be grateful for the %10, we are basically funded by them. Thank you rich folks!
The poor spend all of their income on necessities: food, rent, utilities, clothing. They effectively do not have income after deducting their necessary expenses; many do not have sufficient income before deducting their necessary expenses.
The wealthy spend comparatively little of their income on necessities; their income is increasingly used on luxuries.
They can afford to do this because of the services provided by the government. The wealthy receive disproportionately more value from the government, yet the only pay 10% more than the rest of us.
My favored solution is having two taxes: a heavily progressive consumption tax, and a flat capital gains/etc. tax. Because what people usually are bothered by are the Paris Hiltons of the world, not the humble billionaire featured in the article.
I don't believe they should be used for revenues, because once you do that, it misplaces the incentive: now the government makes more revenue per unit externality. So I favor a flat rebate for all externality taxes.
The reasons capital gains taxes are lower than income seem sound to me. You want capital formation and savings.
There's only a problem because the government inflates the currency and manipulates interest rates down. This subsidizes speculation. The solution is just higher interest rates.
Higher interest rates will help increase savings, but it will do little to address the incentivization of speculative markets caused by the tax rate differential. The solution is to increase interest rates and reduce the tax rate differential (either by increasing capital gains taxes or lowering income taxes).
You can think of progressive taxes as a form of insurance policy on the misallocation of resources by wealthy people. Wealthy people may on average make better resource allocation decisions, but sometimes there are mistakes. Progressive taxes prevent wealthy people from gaining so much that a single mistake will be catastrophic.
The mechanism by which the free market performs better than a command economy is that of distributed decisions. Instead of a central planner, everyone makes resource allocation decisions based on price information. This free market mechanism works to the extent that resources are distributed. Thus progressive taxes ensure the continuing efficiency of the market.
The asymmetry makes some sense to me, though. A poor person may or may not be justified in where they direct their anger, but I can see why they're unhappy. If you've got a lot of money, it seems strange to be actually angry about wealth distribution. I could see intellectually opposing various kinds of economic policies, but I mean, in the meantime, you still have a pretty good life.
How much more money would end up in Uncle Sam's coffers anyway if the richer are taxed more?
No. The people with the highest incomes already pay a disproportionately high portion of their income in taxes, far more than the poor or middle class.
Bringing their tax payments into line with the rest of the country would cause them to pay a lot less in taxes than they do now.
Even so, using AGI is misleading because the "A" means adjustments have already been removed. The more meaningful debate is actually around total (federal + state + local) effective tax rates measured against gross income.
Where does that article discuss "proportionate portion of their income", which I take to mean "percentage of income"?
I read that article and I don't think anything in the article surprised me.
Immigrant working for next to nothing? Check.
Middle class family living paycheck to paycheck in middle america? Check.
Millionaire who drops 100k for a business manager? Check.
Dot.Com millionaire who takes everyone he can on his private jet? Check
"Self-Made Man" who doesn't want to pay more taxes? Check.
How long have you been working? I ask out of curiosity, because I've been working for the past 12 years as a software developer. For the last 8 years if I didn't change jobs or get a promotion there was only 1 time that my raise out-paced the insurance increases.
The fact that the lowest paid guy got paid via pre-paid debit card is only surprising because I assumed it was cash under the table. I know that in central Missouri that if you work construction it's common practice to pay you in cash for the first 2 weeks because too many people don't stay on for two weeks. As a result employers see it as too expensive to fill out all the paperwork etc.
I guess I just thought most (if not all) of this was common knowledge, and I'm in a upper-middle bracket and come from an upper-middle class family, so it's not like I "came up from welfare" and saw all this first hand.
However, I assume that the stories of these family run a lot deeper. I just kept thinking "Is it really news that a dishwasher gets taken advantage of and lives in a scary neighborhood?"
I assumed cash as well, especially since the employer is shady; our cards also have chips and would easily be tied to an ID, so I was a bit thrown off. We do share the problem of catering relying on undocumented labour.
I've been fortunate enough to get promoted & change jobs over the past 5 years so I've actually out-paced insurance costs. We'll just see if that continues.
I HATE any kind of posh establishment that doesn't pay it's employees well.
When I want to spend some money on a posh restaurant or hotel (not that I have any money to do that often) I don't want the people tending me to be making minimum wage, while dinner costs $200 per person. Pay your bloody employees better.
To me, any establishment that does that kind of thing, are fake-posh. Paying their staff like shit is like having a huge chandelier made of plastic, or "silverware" made of nickel.
My ex-girlfriend of 8 years was Haitian. I got to know and love her parents, Marie-Ange and Frantz. They moved from Haiti in the 60's to NYC, then later to Miami when my ex was a girl.
I had a chance to learn a lot about Haitian culture and history. They are, almost without exception, some of the nicest and hardest working people I've ever met. Some of her family are doctors, lawyers, and musicians. Others struggle everyday to put food on the table. Frantz never spends much money, and worked as a foreman for years. He helped to build a lot of modern Miami. Despite never having an abundance of money, he always gave to help others.
Miami is a very, very hard place to get ahead. It is, per capita, one of the poorest cities in the US. The opportunities for most people, especially immigrants, are lacking. Frantz in the story is likely doing the best he can to support his family in a very shitty situation. Based on my experiences, I will make the claim that it's nearly impossible for him to find a second job. He's likely another hard working, striving young man like countless others I know. But his opportunities in the place his family lives don't make his life easy.
I don't know if there's a clear point to my story, but I hope my experiences provide some extra background to the discussion.
Why is he only working 27 hours/week? If he's serious about raising himself out of poverty, finding another part-time job would seem to be a priority.
It's probably not terribly easy to find another part-time job when you're a Haitian immigrant without the best English skills and not much on your resume. Even if he found another job would it conflict with his current job? Most jobs don't care if you have another job on the side, they want you there when they want you.
Also sounds like his ego/pride has taken a beating from the treatment he's received. When you live at the bottom for awhile you start feeling like you're going to be there forever. The honest truth is that many do stay at the bottom forever.
I am not sure why the food industry loves to underpay people. I think the last thing we need are lowly paid workers, with no healthcare, pressured to come in when sick making our food.
Because they can. Your boss or company would do it too if they could. Or if they're too nice, the rest of your industry would do it if they could, and then your boss or company would feel that that's just the way it is.
The article doesn't make that claim. But at the same time, unless he's here on a student visa or some such, his employer is required to pay FICA taxes, AFAICT. I think that's true for Haitians with refugee status.
EDIT: I see the title has been updated. With the exception of the "Americans" issue, I liked the old title better. "Amber Waves of Green" doesn't tell you much about the link.
Maybe they won't let him work more hours per week? Many businesses do just that so they can claim the worker as "part-time" permanently and not pay for their benefits or give them leave.
As for a second part-time job, as others have mentioned, it's hard to look for work when your commute can eat up to 5 hours of your day and you don't get off work until 1AM.
Could Maurose Frantz raise himself out of poverty if he just pulled a little harder on them faithful ol' bootstraps? Maybe! You'll never know, of course, since you don't know his actual situation and have almost certainly never known anything like it, but your go-to move of imagining that this is the case--that it's basically 'his fault' he's poor--is definitely a good way to calm your conscience. We all sleep better when we're convinced the world is just.
Maybe you've gathered from my tone that I don't think this is exactly the smartest way to go about fixing America's problem with poverty.
And seriously: The article doesn't tell us, but we can assume he's a first or second generation immigrant from Haiti, a place of truly grinding poverty. "We" have already given him an absolutely tremendous hand up by giving his family a chance to be here. We could easily deal with the "problem" of poverty like Frantz's if we simply didn't let Haitian refugees and other extremely poor individuals migrate here. But I think it's for the best that we do offer that opportunity when we can.
Many documented US citizens live in poverty. Shall we just deport them back to the USA?
Actually people have raised themselves out of poverty by working far less. IIRC, one guy in the article, just chanced upon Jezz Bezos and invested a small sum in Amazon.
That said, there are people unable to work themselves out of poverty even by working more than 40+ hours per week. Try talking with people working on your nearest Walmart for example, for some insight. Those kinds of salaries are spent as soon as they are received, in gas, rent, utility bills, foods, the kids, etc, rarely leaving anything to pursue something more, enroll in some educational program, etc.
Plus, people working 50+ hours a week in some office job, a lot of times slack, browse the web, gossip around the water cooler, and such, that in the end their productive time ends less (and much much easier on their body and mind) than a guy working 27 hours a week in a restaurant kitchen, which could be a no-breaks, work constantly, hell.
Not a good example for "raising oneself out of poverty"
> His parents made good money in the pillow trade, and after college he set up a few okay businesses
That is not poverty.
Have you accounted for the commuting time? Like the bus that eats away 2 hours every day, and that he sometimes he has to wait for 3 hours?
Plus, nobody raised himself out of poverty by getting multiple part-time, bad-paid jobs. The way to do it is to get a better paying job.
Also: those 27 hours, are they regular, or the boss can reschedule him as he pleases (as often happens)?
This book is an eye opener of how people doing these jobs get by:
(the journalist forfeited her money et al, and worked and lived as a minimum wage employee for a year or so, in order to write the book).
See also the book "Scratch Beginnings", about how a guy started with only $25 and got himself into a stable financial situation (e.g., apt, pickup truck, $5k in savings) in only 10 months with only hard work.
As explained in the article, Mr. Frantz has been promised promotion many times only for the company to renege. Is this because he does a poor job? I can't really say. It sounds like he is at least somewhat ambitious in getting ahead. Also it sounds like his employer isn't above being unscrupulous.
I've also found myself moving up the chain only to suddenly have the position eliminated and demoted further back down the chain. One job I worked at, getting a promotion was the first step to getting fired what with how often they fired managers. In some cases it's better to keep your head down, but it all depends on the situation. I think it's a bit of a fairy tale to say you'll start in the mailroom and end up an executive in 20 years by "working hard". Does it happen still? Probably, but rarely.
My guess is that criticizing some local supermarket (unknown outside of portland or wherever it was) wasn't as sexy as criticizing big evil Walmart.
Your guess is wrong. From the online book synopsis:
Ehrenreich is eventually hired by both Wal-Mart and Menards (a large-box building supply retailer), passing both the personality and drug tests and enduring their respective new-employee orientations. After discovering that Menards not only back stepped on the initial starting wage of $10 per hour but would demand 11-hour shifts, Ehrenreich opted to accept the Wal-Mart position, despite its lower wage scale.
Yes, and by also being white AND highly educated AND not having a family or people dependent on her AND not having a history of abuse and poverty to NOT draw strength from. Which was hardly the case for most of the other employees.
Not that I remember those cases for "promotion" in the book.
In Miami there is merely a surplus of unskilled labour desperate to work under the table. They don't pay more because they don't have to.
I surely can't compete with a sous-chef.
Washing dishes and bussing them back and forth from tables to the kitchen does not require the same level of specialization.
My grandmother can cook better than many places using standard household equipment. It really is sad what we have done to both the culinary world and the home kitchen.
Think about cooking different dishes for years, 40 to 60 hours a week. How good do you think they should be? Most good chefs that gave a damn and had the option left the business.
I wonder why its done, there's no reason for it.