A commenter pointed me to Krugman’s recent post on inequality, expecting me to respond that income inequality is meaningless.  Well income inequality is meaningless, but Krugman’s post was on wage inequality, which is a real and growing problem.  It’s not one of the top ten problems facing the country, but probably makes the top 20.  (I’ll do a post on what I think are the big issues, in a few days.)

Krugman presents this graph:

I have read some of the excellent work by Matt Rognlie and Kevin Erdmann, which looks at these issues in more detail.  They found that some of the fall in wage share was going to implicit rents on owner-occupied homes.

I decided to take a fresh look at the data for my own benefit, and compared current (GDI) income (2015:2) with income from 50 years ago (1965:2).  The earlier period was the Golden Age of American labor.

And here’s what I found:

Type of (Gross) income       Share in 1965     Share in 2015

Wages and benefits                   54.6%               53.0%

Indirect taxes – subsidies          7.8%                 6.6%

Net Operating Surplus               25.7%               24.9%

Depreciation                             11.9%               15.6%

It seems silly to focus on gross domestic income, which includes depreciation and indirect taxes.  If we subtract them out we get the more conventional measure of national income, the way most people envision the concept.  And using that measure the labor’s share has been amazingly stable, rising from 68.0% in 1965 to 68.1% in 2015. Capital’s share fell from 32.0% to 31.9%.  No change in 50 years! Is that too good to be true?  Yes, for instance in 1990 labor’s share was 72.4%, so it’s just a coincidence. But it does suggest that labor’s share in the very long run is pretty stable.

So why the perception that workers are not doing well?  Krugman points out (correctly in my view) that it’s an inequality story.  Blue collar workers at GM and Ford are not doing as well as in 1965 (especially younger workers).  Workers like Goldman Sachs executives, Tom Cruise and LeBron James are doing much better than in 1965.  So the problem is not that “workers” are getting screwed by companies, but that worker income is itself becoming more unequal.  That seems like a problem to me, but then I’m a utilitarian who doesn’t think Tom Cruise deserves a high wage income just because he was lucky enough to be born with a lot of charisma and ambition.

Let’s revisit the Jeb Bush tax plan.  The structure of the plan is great; it does lots of wonderful things.  It’s not my dream consumption tax, but it’s vastly better than the current system.  But the left hates it.  I believe the plan is so good that Bush should meet the objections of the left (not now of course, but in the very unlikely event he gets elected.)  The obvious compromise is to keep the structure of the tax system as he proposes, but adjust the tax rates upward enough to make it both revenue neutral and progressivity neutral.

I normally ignore progressivity discussion in the media.  Not because I don’t care about tax progressivity, but rather because no one knows how to measure tax incidence.  Thus even though corporate taxes are not actually paid by corporations, it probably makes sense (politically) to set the new corporate tax rate at a revenue neutral level.  Or perhaps revenue neutral given whatever growth boost the CBO estimates.  And the top rate on personal income needs to be higher than 28%

Unfortunately, with taxes there will never be an end of history.  The fights between the GOP and Dems will continue.  But both sides should be willing to fight with a clean tax regime, not a monstrosity.  You can still nudge the rates up or down, as the elections change who’s in power, but you’ll do so with a much simpler regime.

I’m enough of a supply-sider to understand why the right prefers low MTRs on the rich. But given the very real increase in wage inequality, and given that never in history has it been easier to make a billion dollars by age 30, I really think you need a tin ear to propose a massive tax reform that simultaneously lowers taxes on the group that has done so well in recent decades.

PS. Earlier I said I favor a zero top income tax rate.  I still favor that.  But that’s only if we have a fairly progressive consumption tax.  This post assumes that’s too big a reach, and that this proposal is the best we can do.

PPS.  Although I said Tom Cruise does not deserve a high income, I nonetheless want him to be very rich (for utilitarian reasons.)  That’s because an economy that allows Cruise to be very rich will generate more good films for me to watch.  So yes, he should be very rich, just slightly less very rich than he actually is. Let’s face it, if you get to have young women fawning all over you because you have the guts to do dangerous stunt work in James Bond type films, when you are in your fifties, you are pretty much the luckiest man who ever lived, even if you make the LA minimum wage.

Update:  Kevin Dick sent me to this very nice graph:

Jeb Bush recently presented some really sensible ideas on tax reform.  For years I’ve been complaining that we tax equity financed investments at much higher rates than debt financed investments.  Not only does that make no sense on either equity or efficiency grounds, it also makes our financial system more unstable.  One reason the 2008 financial crisis was worse than 2001 is that the tech bubble was more about equity and the housing bubble was more about debt.  (Of course NGDP was the main reason it was worse.)

Bush proposes to cut corporate tax rates to 20%, switch to the territorial system used in other countries, allow the expensing of capital investments, and make up (at least some of) the revenue by no longer allowing the expensing of interest costs.  Finally, debt and equity would be on a level playing field.  And there’s lots of other great stuff—eliminate the marriage penalty, no more AMT, no death tax, etc., etc.  But rather than a top rate of 28%, I’d rather see 70%, combined with unlimited 401k privileges.  Still, a great proposal.

And now to go from the sublime to the ridiculous.  Hillary Clinton is proposing a capital gains reform that is so foolish that even the very liberal Massachusetts legislature eventually abandoned the idea.  There would be a sliding scale of capital gains tax rates. Here’s Alan Reynolds:

Hillary Clinton’s most memorable economic proposal, debuted this summer, is her plan to impose a punishing 43.4% top tax rate on capital gains that are cashed in within a two-year holding period. The rate would drift down to 23.8%, but only for investors that sat on investments for six years.

This is known as a “tapered” capital-gains tax, and it isn’t new. Mrs. Clinton is borrowing a page from Franklin D. Roosevelt, who trotted out this policy during the severe 1937-38 economic downturn, dubbed the Roosevelt Recession. She’d be wise to consider how it played out.

It’s scary that Clinton’s advisers are so brain dead on economics that they think there is some public policy purpose that would justify this nonsense.

We had this for a few years in Massachusetts (back in the 1990s, I seem to recall) and it was a nightmare.  You’d get all these complex statements from mutual fund companies about how many cap gains were under one year, or 1 to 2 years, or 2 to 3 years, or 3 to 4 years, or 4 to 5 years, or 5 to 6 years, or more than 6 years. Then for each one you had to laboriously put the amount into the correct category on the form.  If you owned 10 funds, you dealt with 70 calculations.  Eventually Massachusetts gave up on the silly idea.  And now Hillary Clinton wants to revive it? Why?

PS.  Don’t assume from this post that I lean toward the GOP.  On the most important issues facing the country I probably lean slightly toward the Dems, although my actual views are nothing like either party.

PPS.  Couldn’t savvy (and wealthy) investors just use derivatives to lock in gains, without selling?  Will this be like the estate tax, where only the suckers end up paying?

PPPS.  Dilip just informed me that Larry Summers is now blogging.  Instant reaction:  Larry Summers is a very, very, very talented blogger.

PPPPS.  I have a new post on the sticky wage model over at Econlog.

The German tight money policy of the early 1930s led to a surge in vote support for two groups, the nationalists and the socialists.  Today in America the nationalists and the socialists have all the momentum.  Consider:

1.  Dick Cheney might have been the worst Vice President in American history (at least Agnew didn’t do anything.)  Now add to the list his choice to be one heartbeat away from the presidency—Sarah Palin.  Palin is now gushing praise over Donald Trump, who campaigns on the same mix of statism and xenophobia that you see among the neo-fascist parties in Europe, with militarism thrown in.  For years I could take pride in the fact that America largely avoided that particular policy mix.  I don’t think even Pat Buchanan was a militarist.

Update:  Well that must be one of the most epic brain freezes in my 6 1/2 years of blogging, it was obviously McCain who chose Palin.  Cheney didn’t chose anyone, unless perhaps himself, when he headed Bush’s VP search committee.

2.  The heart of the Democratic Party is now with Bernie Sanders, whatever the polls show.  And let’s not have anyone accuse me of McCarthyism, he calls himself a “socialist.”  When asked, the head of the Democratic Party couldn’t think of a single difference between socialists and Democrats. And please don’t insult my intelligence by talking about Sweden.  Sweden is not a socialist country.  Venezuela is socialist.  When Sanders starts advocating free trade and investment, liberal immigration rules, privatization, zero inheritance tax, 100% nationwide school vouchers, a $0/hour minimum wage rate, then come back to me with your Sweden talk.  For now, he just wants the bad parts of Sweden.

The official Democratic platform now advocates a nationwide $15 minimum wage. Whatever you think of extreme Reagan era supply-side economics, the GOP never went that far off the rails on economic policy.  The GOP platform said consider the gold standard, not adopt the gold standard.  I suppose the Seattle case is debatable, but a nationwide $15 minimum wage law would literally destroy the economy in many low wage/low productivity parts of the country, such as Puerto Rico.  It would also create even more crime, a massive underground economy.

PS.  I hope it goes without saying that neither of these guys will win, but remember what happened to the policy platform of Eugene Debs

Work is finishing up on the tallest residential building in the Western hemisphere, 432 Park Ave. The penthouse apartments will go for around $100 million each. Here’s how the building compares to the total property values in some well-known American cities:

That’s a pretty valuable piece of property.

As you know, I’ve often advocated a policy that progressive economists used to love, replacing income taxes with progressive consumption taxes.  In some cases it is hard to actually enact progressive consumption taxes (although not as hard as many assume). But in other cases it’s fairly easy.  I’ve often been dismayed to find out that progressive politicians like Ted Kennedy opposed luxury taxes on yachts, expensive cars, and fancy jets.

Real estate is one of the easiest forms of consumption to hit with a progressive tax. We already have property taxes, and we already estimate the value of properties. Just do it!

Unfortunately, liberal cities like New York do exactly the opposite, taxing the most expensive properties at far lower rates than average properties.  Those penthouse units may end being appraised at closer to $6 million, barely 6% of the actual market value:

Because of an odd idiosyncrasy in the New York City property tax system, the “market values” that the City assigns to real estate are not market values at all. For condos and coops, these values are generated by an antiquated pricing model, which underestimates true property values by as much as 95%.

An extreme example is this $100m penthouse, the most expensive sale ever in NYC. Despite having been purchased just six months ago, its official “market value” is reported as only $6m.

Here’s the ratio of appraised value to actual value by borough:

Notice that wealthy Manhattan is especially under-taxed.  And we see the same thing if we look at the ratio by price range:

I would find it much easier to accept the current progressive obsession over inequality if I saw more interest in progressive consumption taxes.  The rich can do one of three things with their money; invest it, donate it to charity, or consume it. If you aren’t taxing luxury consumption, you aren’t taxing the rich.  A billionaire trust fund baby, non-smoker, non-lottery player, can put all their wealth into muni’s and live in a $100 million penthouse paying an absurdly low tax rate. Meanwhile a working class guy in Queens who plays the lottery and smokes and has an average house gets hammered by NYC taxes. That’s not fair!  (And let’s not even talk about carbon footprints.)

PS.  432 Park is one of the few modern tall buildings with pleasant architecture. The interiors are very minimalistic, if that’s your thing. Pencil thin and about 100 floors tall, with six perfectly square windows on each side, all the way up.  Lots of white marble:

I don’t generally envy the rich, as I have little interest in their lifestyle. But even I have a tinge of envy when I think about how happy I’d be if I owned that bathroom. All that white makes me want to put on the Beatles White album (You say you want a revolution . . . )

And I’m in the top (global) 1%!   🙂

Don’t care for that chandelier.  Hopefully the tasteful monochrome interior will never be messed up with colorful children’s toys.

Don’t you hate posts about the “Two Americas”?  Get ready for another.

This is a follow-up to my recent posts on state income taxes.  Here I’ll argue that the supply-side argument is gradually weakening at the state level.  But first let’s dispose of that silly liberal argument that taxes don’t matter.  Here are some facts:

1.  Liberals favor really high MTRs on the rich.

2.  No state has a top income tax MTR of 20%.  No state even has a 15% bracket. And the only 2 with at least 10% top rates just so happen to be the only two places in America with decent weather (and hence a captive audience).

3.  Liberals control the government in a number of states.

4.  Ergo, liberals are terrified of the incentive effects of taxes, no matter how much they mock Art Laffer.  They secretly agree with Gov. Brownback.

But here I’d like to make the opposite argument; the case for supply-side effects is gradually weakening.  In a recent post I said:

In the old days high taxes would make people and companies move to other states. Commodity industries are highly competitive on price. That’s Kansas and Louisiana.  But the new economy in places like Manhattan and Boston and DC and Silicon Valley has companies with lots of market power, and people so rich they care more about amenities than a few extra bucks.  So that works in favor of the progressives, but not yet in all 50 states.

We’ve looked at the Iowa/South Dakota area, now lets look at population growth in New Hampshire and Massachusetts, and the amount by which New Hampshire outpaces the Bay State:

Period  New Hampshire   Massachusetts  Difference

1960-70      21.5%             10.5%             +11%

1970-80     24.8%              0.8%              +24.0%

1980-90     20.5%              4.9%              +15.6%

1990-2000  11.4%             5.5%               +5.9%

2000-10      6.5%               3.1%               +3.4%

2010-14       0.8%              2.9%              -2.1%

The late 1970s saw the famous tax revolts (Prop 13, Prop 2 1/2, etc.)  People were fleeing “Taxachusetts” for New Hampshire.  But that period is over, and Massachusetts (especially Boston) is now growing faster.  Perhaps this represents the concentration in the newer info-tech jobs in the big cities.  But I think it’s more than that.  New Hampshire also has lots of high tech jobs. I think it reflects the fact that highly educated Millennials are becoming more fond of urban living, and find a house in the suburbs to be boring.

But not all of them.  Some still do prefer suburban living, and when you combine that with the strict zoning laws in many “blue” cities, you end up with a more complicated picture.  There are now, yes . . . here it comes . . . TWO AMERICAS!!

InfoAmerica and CommodityAmerica.  InfoAmerica in concentrated in the big cities of the blue states (New York, Boston, DC, LA, the Bay Area, Seattle).  In those places, taxes are less important, because it’s all about the amenities.  Infotech workers are willing to pay modestly higher rates, even in states (like California) where the higher taxes don’t produce good services.

CommodityAmerica is (fittingly) more materialistic (although oddly also more religious.)  These people prefer bigger cars and big suburban homes.  They aren’t interested in edgy urban areas.  They are more strongly incentivized by lower taxes. Texas is the undisputed King of CommodityAmerica.  Texas has a reputation for sucking people in from high tax New York and California, but I believe on closer inspection they are actually sucking in more people from CommodityAmerica states with 5%, 6% and 7% top rates (and the same cheap housing as Texas.)  All of the states close to Texas are not just growing far slower than Texas; they are all growing slower than the national average.

Of course there are exceptions.  Austin is Infotech and low tax, and is (therefore) the fastest growing city in America. Buffalo is in high tax New York State, but is part of CommodityAmerica.  Is there anyone left in Buffalo? I haven’t been there recently.  BTW, there’s a reason Buffalo has an NFL team and Austin doesn’t; Buffalo was once one of America’s great cities.

PS.  I do realize there are many sweeping generalizations here, and that the picture is complicated.  Yes, in aggregate, more Millennials are moving to the suburbs than the cities.  But I still believe the trends I’ve identified are real enough that they are influencing politics and public policy in lots of areas.  The surge of support for very high minimum wages in Seattle and LA can be seen as just another “tax”: that Millennials are willing to pay.

PPS.  One thing that makes the collapse of population growth in New Hampshire especially interesting is that it is arguably the best place to live in the entire world, especially if you are in the bottom 20% of the income distribution.  It’s both rich and relatively equal.  But it’s a bit too expensive for CommodityAmericans and a bit too boring for InfoAmericans.

PPPS.  Minorities?  I’d guess blacks lean a bit toward CommodityAmerica, while Asians lean toward InfoAmerica. Hispanics seem somewhere in between.  But these are guesses, and I’d be interested in your views.