Pity the Rich. It’s So Hard to Get By.

A couple of items that remind me of the discussions last year about tax cuts.  The major bone of contention in last December’s tax cut deal was over whether the Bush era tax rate cut for the top income bracket should be extended. You may remember that it the Bush tax cuts were originally scheduled to expire January 1, 2011. But Republicans in Congress refused to renew extended unemployment benefits for the unemployed unless the tax cuts for the upper income bracket was extended.  The top bracket starts taxing income above $209,000 (married, file jointly) at 33% and 35% for income above $373,000. ( source). Note only income above these limits gets taxed at these rates.  Income up to this limit pays lower rates like everybody else.  The debate was partly framed as a question about whether “the rich” should pay higher taxes.

At the time there was a lot of complaints from people who were in these brackets, making this kind of money. They complained that they were “not rich”, they certainly didn’t “feel rich”, and that they too had a “hard time making ends meet.”  What they didn’t understand is that “rich” is a relative term. It’s how much money you make (or wealth you possess) relative to everybody else.  It is not a question of whether you “have everything you want” or whether you can manage your budget to make sure expenses are less than your income.  Everybody has that problem with the possible exception of those religious types that have managed to totally transcend their human material wants.  Others claimed that somehow “living in New York/Beverly Hills/Washington means that a high income isn’t rich.  I even had a lobbyist for the insurance industry try to tell me in a televised debate that people making $250,000 in Beverly Hills were not rich.  But it is.

The plain truth is that very few people make that kind of money.   Yes, $250,000 isn’t much if you compare yourself to Wall St. execs that pay themselves more than $20 million per year. But you’re still rich compared to the entire population.

The confusion still exists. Ezra Klein of the Washington Post points out:

Even in New York City, $250,000 is rich

income_distribution_in_new_york_city.png

Arguments over income taxes tend to get bogged down in arguments about who is really “rich.” And what you hear then is that rich in Ohio and rich in New York City are different. But how different?

According to the Census Bureau, only 6.3 percent of New York City’s households pulled in more than $200,000. So if you’re a household making $250,000 or more, you’re easily in the top 5 percent — even in New York City.

Now, it’s true that those people might not “feel” rich. There’s lots of stuff to buy in New York City. It’s pretty easy to construct a lifestyle where you spend $250,000 a year. In Columbus, Ohio, only 1.3 percent of households make more than $200,000, so there’s less stuff for them to buy and fewer rich people for them to try to keep up with. But what you buy and whether you try to keep up with the people in the penthouse is a personal decision, not an objective economic necessity. The fact of the matter is that a household making $250,000 in New York City is making more than pretty much anyone else in the city. Being rich is more than just a feeling.

Yes, even in New York City. A joint household income of over $250,000 is rich. It puts you in the top 5%. That means for every household with more money, there are 19 with less.  A lot less.  Nationwide, such an income puts you in even more rarified company because more rich people live in New York.  There was no reason to cut taxes for these people.

Note: No I am not hypocritical or simply jealous.  My spouse and I, both being college professors, easily make a combined income that reaches into very low 6 figures. That makes me rich.  We’re in the top 10% or so and we know it.

 

 

 

Reality Check: Income

Our culture in the U.S. tends to over-estimate just how rich most people are.  Hollywood TV shows and movie routinely show “middle class” families in houses that are anything but middle class.  Our political rhetoric tends to do the same – witness last fall’s arguments by Republicans that incomes of over $250,000 are actually just middle-class and anything but rich. So it helps to do a reality check.  Here (thanks to Brad Delong for finding this) U.S. Census data for the year 2007 (just before the big Recession).  It shows median income by age bracket and by gender in the U.S.

 

Reminder for those for whom stats class was long ago and far away:  The median income is that level of income where there are just as many people with incomes greater as there are people with incomes that are less.  In a statistic like income, which is limited at one end of the distribution (can’t have an income less than zero, bu t you could have an income in the billions at the other end), and particularly when a large number of people are clustered toward the lower (bounded) end, the median will always be less than the mean.  Example: suppose we have 5 people. Two people have an income of $10, one has a $25,000 income, and two have a $100,000 income.  The median income is $25,000 – two less than that and two more than that.  The mean (or arithmetic average) is $45,004.  In economics, we like to use the median. It is more indicative  or representative of the typical income.

Observations:

  • I’m not surprised by how low the numbers are, although I suspect many people will be.  Yes, $45,000 per year is only a typical income for men and then only if they are in the prime earning years of age 35-54. That’s $21.63 per hour for a 40 hour x 52 week year. Many young folks think they’ll do a lot better as they grow up.  The data say that only 50% will beat that number.
  • I’m also not surprised, but expect many will be, by how low the income number is in retirement for the over-65 crowd.  So much for the media and industry hyped visions of everybody retiring to Florida and living on the golf course and traveling the world.  Not on $24,000 a year.
  • What I am surprised at is that for both men and women, by age 35 the big-increase-in-income days are largely over.  From 35-55 it’s largely about as good as it’s going to get.
  • Of course, the female numbers are lower than the male, but there are reasons for that. Some reasons are not really good, such as gender discrimination in wages.  But a large part of the lower female numbers reflects the fact the female workforce participation is much lower than male, particularly in the prime working years (in other words, there are more non-working women of that age than there are non-working men). Finally another reason for the discrepancy is the differences in hours worked and in occupations chosen.  But that calls for another post sometime.



Inequality Matters and Redistribution of Income Helps the Economy

Inequality matters, and contrary to much “conventional wisdom”, income redistribution can and does work in man countries.  In fact, the evidence is that it results in faster growing and more productive economies. (Hat tip to Mark Thoma for this summary.  I strongly urge readers to go to  Born Poor?, by: Corey Pein:     and read the full original profile of Bowles, or his Wikipedia profile.

Inequality and “Guard Labor”

This is from a profile of Samuel Bowles:

Born Poor?, by: Corey Pein: …Bowles’ most recent paper … examines how wealth is transferred from parents to children in hunter-gatherer societies versus agricultural societies. That might seem distant… But everyone can relate to his chosen subject: inequality. …

Bowles’ course was set in 1968, when he was an assistant professor at Harvard, and the Rev. Dr. Martin Luther King Jr. came to his department looking for advice on the next stage of his social justice campaign.

“We were just elated that we could use economics, which we had so painstakingly learned, to answer questions that Dr. King thought were important,” Bowles tells SFR. “We were also extremely angry that we were totally unable to answer the questions on the basis of having gotten a PhD at Harvard.”

King’s assassination that year cut short the equality movement. …

Most economists in 1968 thought of inequality as “somebody else’s problem,” Bowles tells SFR. “I actually was denied the right to teach a graduate course in inequality because it was said not to be economics.” It wasn’t always thus.

“The founders of the discipline of economics, almost to a man—and they were only men—thought that the problem of distribution between classes—they used the word classes—was the key to understanding why nations grew or not,” Bowles says. What Bowles sees as the essence of his profession [is] problems of wealth distribution…

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