There's a lot of trash being talked here and elsewhere these days about how income and wealth are distributed among the US populace, how these distributions are changing, what is causing these changes, and whether those changes are benign or malevolent. Beyond that lie the questions of whether, how much, and in what ways the fiscal policies of the Federal Government have affected these distributions in the past, and whether Government policy can or should try to affect them in the future.

My hope is to start a discussion of these issues that gets to the heart of our collective (i.e. political) choices about these matters, while avoiding a flame war based on misunderstanding and miscommunication. If there ever was a waste of energy it's a flame war where the opposing sides aren't even talking about the same thing. So here's my attempt to define some key concepts and terms and start the discussion. I'm sure I can depend on you to chime in with cheers, boos, clarifications, questions or elaborations.

Income dispersion is not the same as economic injustice. It should come as no surprise, and should arouse no moral outrage that there IS a dispersion in incomes received by individuals with different skills and talents. Low-skill jobs pay less than high-skill ones. Recent hires make less than workers with seniority. For the most part, differences such as these reflect the relative value of the economic contributions made by the individuals who receive the income.

There is nothing unjust or unfair about this as long as individuals have the opportunity to improve their skills and leverage their experience in order to move up the income ladder over the course of their working life. In fact, the potential for income mobility by individuals depends on the existence of such a dispersion of incomes within the job market. Terms like "income inequality" carry a negative connotation, but if there were no income ladder to climb, there would be no legitimate way for individuals to improve their economic well-being by their own effort. The existence of a wide dispersion of incomes in the economy is not, by itself, evidence of injustice or unfairness. If the dispersion of incomes grows over some time interval, that, by itself, is not evidence that the economy is becoming less fair or just.

Usually, at lower and middle income levels, most income is derived from employment (wages, salaries, benefits, bonuses) or entreprenuerial activity (profits, fees, commissions). At the upper end of the income distribution, a larger share is typically derived from wealth (interest, dividends, rents, capital gains). Younger people tend to get most of their income from employment, while older people get more of it from either their own accumulated wealth (retirement accounts) or from wealth invested on their behalf (pension funds).

Economic injustice arises when individuals are denied a fair opportunity to even get on the income ladder or to advance up it in proportion to their skill and performance. Defining, measuring and enforcing the meaning of "fair opportunity" is the heart of the matter. Children of wealthy and well-connected parents have an advantage in the competition for the best educational and career opportunities compared to children from families of more modest means and status. Is this unfair? Is it unjust? Is there a difference?


Income is not the same as wealth. It's only a little bit oversimplified to say that Wealth is the value of everything a person owns less the total of all the debts they owe. Income is how much they got paid last year. As a measure of economic security and well-being, wealth is more meaningful than income. A destitute person who wins the lottery, or a poor kid who becomes a sports superstar will have a large income for a brief period, but may or may not acquire wealth as a result. The scion of a wealthy family whose parents give him everything he wants may have neither wealth nor income of his own, though if he outlives his parents he will probably have both.

There are two legitimate ways to acquire wealth. One way is to save and invest some of your income instead if spending it all. The other way is to inherit it. Are wealthy people who got that way by earning a high income and investing it wisely any more or less deserving of it than people who got their wealth by inheritance?

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Originally Posted by ordinaryguy

Are wealthy people who got that way by earning a high income and investing it wisely any more or less deserving of it than people who got their wealth by inheritance?

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No. Anyone that makes a living legally, whether by having a skill or trade, investments or through business profits, has done exactly what they should accomplish within a capitalistic society. Personally I think we can, and should, abolish the IRS and put into a place a system that taxes on what you spend, not what you earn. Inheritance I think should be treated with a one time taxation. People that are fortunate to inherit wealth are usually taught by the previous generation to appreciate the fortune and find opportunity for the next in line. The few that don't recognize their good fortune will lose it eventually and let it slip through their hands. By law, a person is neither more or less deserving of the inheritance based on moral issue. It's simply a matter of legal transaction of whom the written will, or in some cases video, or audio, will determine rightful beneficiaries. For example: as much as society may view Paris Hilton's appearance as a spoiled brat, any inheritance she has or will receive in the future, is of irrelevant testimony or consequence in a court of law.



Bobby

”Income dispersion is not the same as economic injustice.”

If, labor costs are based on supply and demand, as I believe they are, and if Business interferes with the supply and demand of labor then it is certainly probable that the possibility for injustice exists. For example, if labor is imported to keep demand down.

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There are two legitimate ways to acquire wealth. One way is to save and invest some of your income instead if spending it all. The other way is to inherit it. Are wealthy people who got that way by earning a high income and investing it wisely any more or less deserving of it than people who got their wealth by inheritance?

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I hope this isn't trash talk... If I'm not mistaken ,wealth is money that has already been taxed. Taxing the transfer of wealth is social engineering . It forces 2nd generation owners in many instances to have to sell their business to pay the taxes.

My income is already taxed and then after that my savings,investments ,property ,purchases are taxed again . If by some degree of luck I have anything left when I die ,why should it be subject to yet another tax ?

Family businesses are too often sold at fire-sale prices so the 2nd generation can cover the inheritance taxes .If I'm not misteken Warren Buffet has benefitted from these types of purchases. The more savy hire lawyers to shelter their assets .Bill Gates and Buffett are divesting themselves of their assets before they die.Then they testify before Congress that the Estate Tax is a good thing. If this is so then why don't they subject their whole wealth to the tax ? In essence to the degree that they have their wealth taxed when they die ,it will be completely voluntary . I have a great idea for Buffett. If he thinks the estate tax is such a great idea then give the % to the government that he would've been taxed if he wasn't sheltering it. Then he is free to give the balance to the Gates Foundation if he chooses to do so.

The family farmer and small business owner doesn't have that luxury . The next generation in effect has to purchase the business back from the government to own it again.

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The death tax is bad fiscal policy. The tax itself is a tiny revenue producer, raising only about 1% of federal revenue, and repeal would be, at worst, revenue neutral. It could even be revenue positive: several studies, most recently a 2005 analysis by professors at Carnegie Mellon University, show that repeal would cause a net increase in federal revenues through dynamic growth effects and increased capital gains tax receipts.

The death tax is bad economic policy. The tax destroys hundreds of thousands of jobs every year and forces many family-owned businesses and farms to shut down.

Given this fiscal and economic destructiveness, the only real debate is a moral debate. Many Democrats and liberal pundits remain convinced that inheritance is in some way morally tainted, and that estates should be confiscated to largely "level the playing field." But the myth of the idle rich has long been debunked, with bestsellers like Stanley and Danko's "The Millionaire Next Door," revealing that the vast majority of millionaires are frugal, hard-working Americans. Indeed the moral case for repeal is far stronger that the case for keeping confiscatory taxes on inheritance.

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Bury the Death Tax | Phil Kerpen

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Economic injustice arises when individuals are denied a fair opportunity to even get on the income ladder or to advance up it in proportion to their skill and performance. Defining, measuring and enforcing the meaning of "fair opportunity" is the heart of the matter. Children of wealthy and well-connected parents have an advantage in the competition for the best educational and career opportunities compared to children from families of more modest means and status. Is this unfair? Is it unjust? Is there a difference?

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Fair and just doesn't seem to be very important because the relationship of wealth to education is suspect . Given that theory the heir of the Kennedy and the Ford would be the innovators .

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"Dynastic wealth, the enemy of a meritocracy, is on the rise. Equality of opportunity has been on the decline. A progressive and meaningful estate tax is needed to curb the movement of a democracy toward plutocracy."

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Warren Buffett.

I dispute Buffet's claim that dynastic wealth is on the rise. Forbes publishes lists on weathy people and often new wealth tops those lists . The old dynasties do not top them . Some of the richest in the group are college drop outs or were at best average students.

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Originally Posted by Dark_crow

it is certainly probable that the possibility for injustice exists.

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A certainly probable possibility should be taken seriously, certainly.

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Originally Posted by Dark_crow

For example, if labor is imported to keep demand down.

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Did you mean to say "to keep wages down"? Importing labor would increase the supply without changing demand, thus lowering the "price", i.e. wages.

Yes, the competitiveness and increasingly global scope of labor markets is one of the forces that have kept lower and middle-level incomes from rising as fast as they did from the fifties to the mid-seventies when the US economy was more insular. Far more significant than imported labor supply is exported labor demand. In a competitive labor market, labor-intensive production will migrate to the lowest-cost adequately-trained labor pool.

Is international competition in labor markets unjust? Whether your answer is yes or no, the cat's out of the bag, the horse is out of the barn, and there's no putting the genie back in the bottle. National Governments can't do it, international corporations can't do it, international institutions can't do it, it can't be done.

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Originally Posted by tomder55

I hope this isn't trash talk.......If I'm not mistaken ,wealth is money that has already been taxed.

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The initial investment was made with after-tax income, yes. But the accumulated and re-invested earnings from that investment are not taxed until the asset is actually sold. So no, not all wealth has already been taxed.

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Originally Posted by tomder55

Taxing the transfer of wealth is social engineering .

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So is an income tax. So is a sales tax. An estate tax is neither more nor less "social engineering" than any other form of taxation. EVERY form of taxation causes some kind of distortion and inefficiency in private-sector markets. Still, we want the services that government provides, so we have to tax ourselves to pay for it.

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Originally Posted by tomder55

Family businesses are too often sold at fire-sale prices so the 2nd generation can cover the inheritance taxes .

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Current law handles this by putting a lower threshold on the value of estates subject to the tax. That handles the family farm or business intergenerational transfer just fine. Where it gets complicated is whether a DuPont heir is unjustly deprived if they have to reduce their stake to less than a controlling interest in the company.

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But the accumulated and re-invested earnings from that investment are not taxed until the asset is actually sold. So no, not all wealth has already been taxed.

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I'm not that familiar with all the nuiance so let me ask...

If I purchased Microsoft shares at the outset ,and then transferred the stocks to my heir ,then she would not be subject to an estate tax on the current value of the shares until after she cashes them in ? If I purchased a home in the 1970s and saw it's value rise dramatically since then ,she would not be subject to an estate tax on my home at it's current value until after she sold it ?

OG,

First of all, this is a great topic, and your post is terrific. It shows a very good understanding of how our capitalist economic system works, and what is fair or unfair about the system.

Your post, I believe, highlights an issue that I have brought up in the past: the fact tat most people only look at part of a "financial statement" when judging others or their government, and get a skewed financial picture because of it. For instance, most people who talk about the "budget deficit" or the "national debt" are only looking at the "expenses" or "liabilities" portion of the financial statement of the USA, without looking at the income, assets, and cash flow, (or for that matter the "accountant's notes") portions of the financial statement. They see a big "debt" number, and scream bloody murder, without having an understanding of what that debt funded.

Similarly, when we look at some financial guru who has collected a 6- or 7- or 8-figure bonus, most people look only at that fact... the income figure. They don't look at what this person might have contributed to the wealth of others through his work, what he might have done to grow his company, what jobs he might have created, what taxes he has paid, etc. They only get a very partial and skewed picture of the whole financial/economic/fiscal picture.

Tom mentioned Paris Hilton before in an earlier post. And he pointed out that her 'eccentricities' keep people employed. And that is true. But I believe that even Tom misses much of the financial picture. Paris Hilton SPENDS almost as muh as she earns... and that money gets spreat throughout the economy. Also, she BORROWS against her assets and uses those borrowed funds for various purposes, so that too effects the eonomy. She pays taxes. She owns a fashion line (perfumes, handbags, clothing, etc. ) that employs hundreds of people (or more). She does advertisements that help OTHER companies sell their stuff, thus causing economic effects. (I seem to remember her doing a bathing-suit clad commercial for Burger King.) The TV shows she does keep people employed, and those TV shows sell ad time that in turn keeps advertisers and advertising clients making money. She is also involved in quite a few charitable causes that she lends her name to. She may not be "marketable" to employers in the sense that most employees are, but her great wealth has great economic impact that improves the lives of others.

So in most cases, those who speak of our economic system as "unfair" because "so much wealth is concentrated in the hands of so few" are only able to do so because they either have not looked at or have ignored the rest of the economic equations. Those who say that it is unfai that Bill gates is the richest man in the world (or third richest, now) tend to forget his contributions to society... as in the creation of an entire new industry that employs literally MILLIONS of people worldwide, the ability of anyone, anywhere to have a personal computer to help them become more efficient, and hundreds of millions of dollars paid in taxes. Not to mention his charitable funds.

Another factor often ignored is the fact that in our system, anyone can move from lower class to upper class. My own family is a good example of that. My grandparents came to this country after the Holocaust (all of my grandparents were survivors) with literally NOTHING but the clothes on their backs. One generation later, my father and his brother became attorneys, and their sister became a social worker... all of whom are well paid. Other uncles became what most people would call "filthy rich" from real estate. My family went from dirt poor immigrants to upper-middle/upper class in a single generation. All it took was working their a$$es off.

In our system the "distribution of wealth" is a constantly changing thing. The richest family in the world just 50 years ago, the Rockefellers, are merely middling upper class these days, and in another generation or so will be upper-middle class.

A dirt-poor man from Depression-era rural Oklahoma who milked the family cow and sold the extra milk around the neighborhood in order to help the family make ends meet eventually became the founder of the most successful retail store chain in the world... Wal-Mart... and his is probably the richest extended family in the world.

In our system, wealth may indeed be concentrated in a small upper class. But where our system is fairer than any other is that there are fewer barriers to entry to (or exit from) that upper class. Rich people lose their wealth, poor people become rich, and wealth transfers hands all the time. The 1990s saw more people become millionaires than in any other time in history. It also saw the largest number of millionaires become bankrupt than any other time in history. And that is the point. That is what makes our system great.

Thanks for this great topic, OG.

Elliot

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Originally Posted by ordinaryguy

A certainly probable possibility should be taken seriously, certainly.



Yes, the competitiveness and increasingly global scope of labor markets is one of the forces that have kept lower and middle-level incomes from rising as fast as they did from the fifties to the mid-seventies when the US economy was more insular. Far more significant than imported labor supply is exported labor demand. In a competitive labor market, labor-intensive production will migrate to the lowest-cost adequately-trained labor pool.

Is international competition in labor markets unjust? Whether your answer is yes or no, the cat's out of the bag, the horse is out of the barn, and there's no putting the genie back in the bottle. National Governments can't do it, international corporations can't do it, international institutions can't do it, it can't be done.

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What you are talking about here is Globalization which began thousands of years ago when the people in the rift valley of Africa began leaving because of the urge to find a better safer life. Nayan Chanda, has written a very good book titled, “How Traders, Preachers, Adventures, and Warriors Shaped Globalization.” Historically there has been a constant movement of wealth and power shifts in the world…I expect it will continue so that one day America will have become a wealthy, power existing only in history.

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I expect it will continue so that one day America will have become a wealthy, power existing only in history.

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King Solomon's gold ring ?

This too shall pass.. . Tom

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Originally Posted by tomder55

If I purchased Microsoft shares at the outset ,and then transfered the stocks to my heir ,then she would not be subject to an estate tax on the current value of the shares until after she cashes them in ? If I purchased a home in the 1970s and saw it's value rise dramatically since then ,she would not be subject to an estate tax on my home at it's current value until after she sold it ?

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Whether she has to pay an estate tax of any kind depends on whether the value of your entire estate is below the threshold, currently $2 Million, scheduled to rise to $3.5 Million in 2009. If it is above the threshold, she will have to pay the then-current estate tax rate on the market value of the assets in the estate above the threshold amount at the time of your death.

If the value of your estate is below the threshold, title to the assets will pass to her tax-free. Her "cost basis" is the market value of the assets at the time of your death. If she sells them a year or more later, the difference between the sale price and her cost basis will be capital gains income to her and will be taxed at the then-current capital gains tax rate. So the difference between what you paid for the assets and their value at the time of your death will never be taxed at all if the value of your estate is below the threshold.

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Originally Posted by ordinaryguy

If the value of your estate is below the threshold, title to the assets will pass to her tax-free. Her "cost basis" is the market value of the assets at the time of your death. If she sells them a year or more later, the difference between the sale price and her cost basis will be capital gains income to her and will be taxed at the then-current capital gains tax rate. So the difference between what you paid for the assets and their value at the time of your death will never be taxed at all if the value of your estate is below the threshold.

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So the government under threat of punishment forces a reinvestment of the funds…never mind the present state of the economy. Is that economic justice or economic injustice?

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Originally Posted by Dark_crow

So the government under threat of punishment forces a reinvestment of the funds…never mind the present state of the economy. Is that economic justice or economic injustice?

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The government doesn't force her to sell the assets or to use the proceeds of a sale in any particular way. The only "threat of punishment" is that IF SHE DOES decide to sell them, then she has to pay capital gains tax on the increase over her basis value. But WHATEVER she decides to do, the difference between your cost basis and hers (the increase in the value of the assets during the time you owned them) is NEVER taxed.

I have had, I'm retired now, many instances with investors in real estate such as apartment properties. Try and tell them that the one year wait is not a threat of punishment forcing reinvestment of the funds. The question was and is, is it unjust.

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Originally Posted by Dark_crow

I have had, I’m retired now, many instances with investors in real estate such as apartment properties. Try and tell them that the one year wait is not a threat of punishment forcing reinvestment of the funds. The question was and is, is it unjust.

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Holding an asset for at least a year qualifies the increase to be taxed at a lower rate (the capital gains tax rate instead of the regular income tax rate), that's all. So yes, the tax code does provides an incentive to hold such assets for at least a year, but it doesn't force anyone to do so. Paying taxes is not a punishment, it's a civic duty and a legal requirement. If you fail to pay taxes that you owe, THEN you get punished. If you didn't, it would be an injustice to all the people who DO pay their taxes as required by law. The tax on capital gains is no more "unjust" than any other tax.

If you buy a , say, 50 unit income property and sell it 5 years later, you darn well better reinvest the money before a year is up, or you will certainly pay more in tax's than if you reinvest.

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Originally Posted by Dark_crow

If you buy a , say, 50 unit income property and sell it 5 years later, you darn well better reinvest the money before a year is up, or you will certainly pay more in tax’s than if you reinvest.

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Yes, that's the law. The policy goal it serves is to encourage private-sector capital to remain invested in productive assets instead of being converted to income and used for current consumption.

What's your point? Do you disagree with that policy goal, or think that the tax code shouldn't be used for such "social engineering" purposes, or is it the whole idea of taxation that you object to?

The wage earner is not given a year to pay taxes on their incomes, why should the investor? The argument that is an incentive doesn't wash. Let the investor pay the tax when they receive the income, just like the wage earner.