PUTTING THE GINI BACK IN ITS BOTTLE

A tax loophole is something that benefits the other guy. If it benefits you, it's tax reform. ~ Sen. Russell Long

Liberals have been understandably concerned about the distribution of income and wealth in the US. Over the past four decades an ever-higher share of the nation’s total income and wealth has been garnered by a small number of rich, wealthy Americans. This blog discusses the vicissitudes of income and wealth inequality over the past seven decades and how this inequality is related to the Republicans’ current legislative focus, their Tax Cuts and Jobs Act.

This unequal distribution is seen as the few very rich people gaining control of a growing amount of our nation’s income and wealth. Such concentrated control likely has serious implications and consequences.

Economists commonly account for the nature of a nation’s income and wealth distribution using the Gini index. The Gini index is a measure of inequality of a nation’s distribution of income (or wealth). It was pioneered by the Italian statistician and demographer Corrado Gini in his 1912 paper, “Variabilità e mutabilità” (Variability and mutability). The Gini index has a maximum value of 1 (signifying total inequality) and minimum of 0 (signifying complete equality). A perfectly equal distribution of income would be when each income decile of a nation’s households accounts for 10% of its total earned income, including the highest- and lowest-deciles of households. The lower the value of the Gini index, the more equal is the underlying income (or wealth) distribution. The higher the index is, the more unequal the distribution of income becomes.

The table below shows the share of US income and wealth held by the Top 1% rising since the since the 1940; the income-based Gini index is also presented from 1955 to 2015. Both the 1%’s share of income and wealth and the Gini index have steadily risen since 1975, signifying growing inequality.

Economic Inequality in the US, 1940-2015

Year	Share of Top 1% for Gross Income	Share of Top 1% for Total Net Wealth	Gini Index (Household Income)
1940	15.7%	39.7%	NA
1955	9.2%	27.5%	0.377
1975	8.0%	22.8%	0.371
1995	13.5%	27.9%	0.433
2005	17.7%	32.1%	0.450
2015	18.4%	37.2%	0.454*

Source: Chartbook of Economic Inequality. *2014 value, last year available.

In 2016, the Top 1%ers had household income of $430,600 and net worth of $10,374,030. The inequality of wealth distribution has long been far more pronounced than of income, as shown in the table. You can readily see that control exercised by the 1% over the nation’s wealth is roughly twice that of the nation’s income.

The 75-year period shown in this table spans significant economic growth and change as well as economic booms and busts. The Gini index grew more than 20%, the income and wealth shares increased much less. Between 1940 and 2015, the US real GDP grew by 13 times.
To state the obvious, the Republican tax “reform” legislation now has no economic or social justification. Following the widely-accepted view, expansionary fiscal policy (broadly lowering tax rates and increasing government spending) should be enacted when the nation is suffering from a recession. Like what was happening in 2009 when unemployment was 9.9% and GDP shrank by 2.7%. Since 2010, the US has enjoyed steady if minimal economic growth, in no small part due to the Obama stimulus legislation. The Republicans vehemently opposed Obama’s 2009 $787 billion fiscal stimulus because it would increase federal deficit and debt.

Hypocrisy now abounds. The US is already at full employment, the unemployment rate is 4.1%, 0.63% below the natural (full-employment) rate of unemployment. The Republican inequality-enhancing tax “reform” bill would increase the national deficits at least $1.5 trillion, probably much more, over the next decade. This time, nary a word of opposition has been heard from the two-faced Republicans with regard to this significant deficit escalation. This fiscal policy “reform” that overwhelmingly supports the 1% is not needed for any economic reason except to compensate the Republicans’ most important donors.

If your legislative preferences conflict with the narrow fiscal priorities now espoused by those who exercise political power in Washington DC, you’re likely to be grasping at short straws for some time to come regarding somehow remedying inequality.

Higher inequality and slower growth have created market warriors and market worriers. An example warrior in the news now is the Federal Communications Commission (FCC) Chairman, Ajit Pai, who is strongly pushing to slay “net neutrality” and give ISPs more power. Two other market warriors are Representative Paul Ryan and Senator Mitch McConnell who have led the Congress in nearly passing the Republican Tax Cuts and Jobs Act that will increase inequality by providing the already-wealthy with significant tax reductions and thus even more income and wealth, despite what these two warriors deceptively claim.

Example worriers include Senator Elizabeth Warren and economists Paul Krugman and Thomas Piketty, who envisage economic and social havoc arising from ever-escalating inequality. Sen. Warren and Dr. Krugman are irate about the Republicans’ tax “reform” success and its expected deleterious effects on many middle-class families.

Although the Republican tax bill hasn’t yet been finalized, it’s easy to see that the many changes likely to be approved by the House/Senate Conference committee will ultimately increase income and wealth of the already rich. These gains appear to be the principal goal of the Act, notwithstanding Republican pronouncements. Inequality will rise.

The Tax Cuts and Jobs Act will reduce taxes for upper-income people, and especially for corporations (which after a series of Supreme Court decisions, including Citizens United, are “people” too). About 67% of the Act’s total tax cuts will benefit corporations.

The list of this Act’s likely stipulations that will accelerate inequality is unfortunately long. They include: reducing the marginal tax rate for high-income individuals that among other effects will increase their disposable income – relative to lower-income people – and provide disincentives for those people to provide tax-deductible charitable donations that provide significant financial assistance to the less fortunate. Drastically lowering corporate tax rates will principally benefit the already-rich and will likely decrease the well of money going into the Low Income Housing Tax Credit that funds affordable housing. Less affordable housing will be built.

Among other wrongs, the House bill removes the deduction for student loan interest. Unlike other tax deductions, the student loan interest deduction is usable even if you don’t itemize your deductions, so it won’t lose its value as the standard deduction rises. For the majority of college students who borrow money to get college educated, their costs will rise, their disposable income will fall and fewer will be able to afford going to college. For the very first time, graduate students will have to pay tax on the value of their tuition waivers in the House bill; both the House and Senate bills will require private universities to pay tax on their endowments’ capital gains.

But how to rein in the growth of inequality – putting the Gini back into a smaller bottle – is far from agreed, and deviously difficult to implement within an existing political system. Many revolutions have been fought through history to enhance equality; peasants and indentured farmers-servants finally rose up to improve their lives. An example is the 1789 French Revolution whose rallying cry was Liberty, Equality, Fraternity. 

Reducing inequality through specific legislation or economic policy has rarely been attempted. Most direct legislative remedies are not politically popular or feasible because they involve raising taxes on well-connected, powerful, upper-income people. As shown in the table above, the last time inequality dropped in the US was during the decade or two after the end of WWII, which was a startlingly exceptional time for our nation. This post-WWII drop in inequality was an historic exception. The norm for the past 70 years and before, is that inequality has been present and gradually risen.

The only way anyone can even partly rationalize the Republicans’ tax “reform” effort is to concede it as an article of faith for true believers in the Covenant of the Latter-Day Wealthy, to which Mr. Ryan, Mr. McConnell and the president are its triumvirate of leaders. The Republicans’ unified support behind this deeply-flawed, mean legislation shows them shedding their ephemeral disguise as sponsors of working-class interests. In the Senate bill the much-flaunted increases in the “reform’s” personal deductions and child tax credit are scheduled to disappear entirely in 2025. This triumvirate probably believes (with reason) that most of the voting public doesn’t care much about seven years from now. They only care about this year and next year, when Trumpian voters will likely see their taxes drop some.

The issue of rising inequality has been at a slow to medium boil on liberals’ political stoves for a while, but it’s not a new issue. Nope, significant income and wealth inequality have been present for millennia, in far greater degrees than now.

Thomas Piketty’s best-selling Capital in the 21st Century showed sizeable inequality was present in the 18th Century. More recent analytical excursions into the past using paleo-data on house-size as a wealth proxy illustrate the virtually-eternal challenges of reversing wealth and income inequality going back 10,000 years. This study’s authors who suggest that inequality was present in later Neolithic societies blame the advance of formal agriculture. Inequality rose steadily after the shift into settled agriculture.

Solutions to inequality such as an international tax on capital that Mr. Piketty recommended are impractical. While worthy of momentary consideration, having the UN improbably establish the legal ability to enact and then enforce a global wealth tax on every very rich person on Earth has absolutely no practical value as a realistic solution. No nation has ever established inequality-reducing taxes on the already-wealthy of the sort Mr. Piketty suggests; an annual levy starting at 0.1% and increases to a maximum of perhaps 10% on the greatest fortunes. He also suggests a retributive 80% tax rate on incomes above $500,000 or so. Good luck with that Thomas.

We now live in a period when our government is proposing to eliminate entirely the very narrowly-defined estate tax. No nation – capitalist, socialist or communist – has punitively taxed wealth, but several have simply absconded with privately-held land, capital and/or assets. In the longer-term, few such seizures have worked out that well for anyone. For example, China’s Cultural Revolution or most recently Venezuela’s chaotic confiscation of property and businesses owned by the elite.
So how about taking a one-way ride in Doc Brown’s DeLorean back to allegedly more-equal early Neolithic society? I didn’t think so.

Here’s a heretical thought. Potentially inequality may effect economic and other harms. But if inequality has been present for most recorded human history (think Queens, Kings, Dukes, Princes, Genghis Kahn and Pharaohs), is it really a serious problem or more a “feature” of human society that may even have contributed something to humanity’s stunning progress over many centuries? What I’m suggesting is that income-wealth inequality may not necessarily be nasty per se, but is problematic beyond some as-of-yet undefined level. Although the literature includes a fair amount of qualitative discussion about such potential harm, little quantitative evidence seems to exist about inequality itself actually causing economic and socio-cultural damage. Is the post-hoc fallacy at work here? Perhaps.

But turning the clock forward to the present, there’s little doubt the Republicans’ tax “reform” will cause rising inequality in the US over the next decade. They’re gleeful; the rest of us, including many middle-class Trumpians, may not be as the clock keeps ticking.