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National Income Disparity...A Look Behind the Numbers

Updated on September 26, 2014

Over the years there has been an ongoing discussion about the growing income disparity in the United States. This discussion has been particularly emphasized when compared to the income distribution of other parts of the world. While it’s true that the US has a higher GDP per capita then all of the European Union member nations, the question is how well has the national income been distributed proportionately throughout society. One of the most commonly cited studies on the topic was done by two economists, Thomas Piketty & Emmanuel Saez in 2006. This study demonstrated a continuous trend in the widening disparity of income. So how severe is this problem ??? Unfortunately, this is not as easy of a question to answer as many would like to present it to be. So what did the Piketty/Saez study NOT tell us ???

In order to measure income disparity, this study along with many others on this topic looked at national tax return figures. This seemingly would make sense when attempting to look at income distribution. Yet when trying to benchmark this against past decades, this can be quite misleading. Over the decades the US has had dramatic changes to the income tax code that greatly impacts this data which was simply ignored by both Piketty/Saez and various other studies.

Defined Contribution Plans

Way back in 1980 an obscure portion of the tax code was spotted by a benefits consultant who noted that a 401k was a way to shelter taxable income and defer it until retirement. Throughout the 1980’s participation in 401k plans exploded. Defined contribution plans such as 401k/403b plans have become the primary source of retirement savings today. Currently, the national average employee contribution to a 401k plan is nearly 7% of an employee’s income. The national average plan balance in 2013 for pre-retirees over age 55 is about $250,000.00. Additionally, there is often an employer match which is a median contribution of 3% annually. Yet these figures do not appear on the income tax return and are totally excluded from the Piketty/Saez study. By contrast, these income figures would have been reported as taxable income rather than salary deferral as early as the 1970’s, and greatly skews a substantial portion of the national income. Furthermore, this disproportionately reflects as a greater decline in income for the middle/lower income earners because there is a contribution limit on the amount of aggregate dollars. Someone making 1 million dollars annually cannot contribute 10% of their income. They are capped at the same annual dollar amount of a middle income earner. So if a person making 100K maximizes his contribution alongside a person making 1 million annually theIr total contribution will be the same in dollars, but not as a percentage of income.

As a simple example, the IRS maximum contribution under age 50 is $17,500.00 for 2013. The individual who makes the maximum contribution with a 100k salary would have contributed 17.5% of his pay and completely removed this from the estimates of national income using the Piketty/Saez data. Yet, the individual who makes 1 million annually and makes the maximum contribution would have only sheltered 1.75% of his income and removed it from the national income data.

This will be a disproportionate skew in the reporting of national income. A study done by MIT economist James Poterba found that those in the 28% marginal income tax bracket (middle class income) held about 32% of their assets in tax deferred accounts. Yet in contrast the top 1% of earners held less than 6% of their assets in tax sheltered accounts.

Small Business Tax Laws

In the early 1980’s there were a number of tax law changes to the Federal income tax code. Among them was a change to the marginal tax rates on personal income. Personal tax rates were lowered to a level below the marginal tax rate on the corporate tax. As such there was an incentive for many business owners to transfer from a C-Corp which pays tax at the corporate rate…to an S-Corp which pays taxes at the personal rate. Since then there have been numerous other variations such at the Limited Liability Company (LLC) which also pays taxes at the personal rate. Further tax acts from 1986—1996 encouraged more and more participation in pass thru entities. Today small business profits that flow through to the personal return from businesses organized as pass thru entities (such as S-corps/ LLC’s etc) now account for about 25%-30% of the income of the top 1% of earners. Yet in 1981 this was only about 8% of their reported income. The number of business returns filing as S-corps has increased at an annual rate of about 9% per year since the 1986 tax act. What ultimately happened was not so much that income rose substantially for the highest earners, but rather a substantial portion was simply reported as personal income rather than corporate income. This shift in small business income accounts for nearly 5% of the current increase in disparity between the top 1% of earners and the other 99% cited by the Piketty/Saez study.

Let’s also not forget that many of the deductions that were used by high end earners in the 1950’s to hide income are simply unheard of and not available today. One of many examples would be passive activity losses. For example, in the 1950’s a doctor or attorney could often reduce their taxable income to near ZERO by taking depreciation and paper losses on real estate they owned through Real Estate Investment Partnerships. If you made 50k per year…that might hypothetically correspond to 500k today. Yet today that deduction would be maximized at 3k per year, a much smaller percentage of income and producing a much greater amount of taxable income. Yet in the 1950’s signing up for money losing schemes on paper was big business. It had become in many ways an accounting art form. Yet with the changes to the tax code in the 1980’s, many of these deductions which were quite uneconomical were tossed out. So were many others such as credit card interest being eligible for a tax deduction.

These shifts in how income is reported is hardly a change in the distribution of income. Yet once again the Piketty/Saez study and most others simply excluded such facts.

Employee Benefits

Should we choose to rewind the clock further in the economic history of the United States, we could look at other fringe benefits. The Stabilization Act of 1942 exempted fringe benefits such as health insurance from caps on wages and salaries. So in an attempt to compete for labor, employers began to offer health insurance as a benefit of employment. This was the first step towards employer driven health insurance. In 1949 the National Labor Relations Act classified health insurance as wages. Yet, from a tax perspective insurance is not treated as a taxable benefit. Over the years, more and more employers began to offer health insurance as the norm. Yet in the early 1950’s this was not the case. Most people paid a doctor out of pocket. Today, as many of us know full well…a family of four could cost 15-25k in insurance benefits annually. Much of this is often subsidized by the employer. Today about 45% of Americans receive their benefits through their employer. Although due to rising cost and an aging population, this statistic has been in decline. Currently the largest insurance provider in the nation is the US gov’t through programs such as Medicare. Nevertheless, the percentage of workers in the labor force receiving this benefit through their employer is dramatically higher than the 1930’s-1950’s. Additionally there are numerous other tax exempt benefits that employers offer employees. Today the national average cost to an employer in benefits paid is approximately 30% of annual compensation which is also not typically reflected in income disparity figures.

Existing Transfer Payments

Transfer payments are forms of income transfers from one part of society to the other. These can take various forms that are direct or indirect. They may be welfare payments, earned income tax credits, healthcare programs or even food stamps. Data from the Bureau of Economic Analysis demonstrates that in 1970 wages and salaries accounted for approximately 65% of personal income and transfer payments equaled approximately 8% of national income. Today the national income is made up of approximately 55% in wages and salaries, while transfer payments equal approximately 18% of national income. It should be noted that a good percentage of this is related to national entitlements like Social Security/Medicare/Medicaid. Yet, many Americans on the lower end of the income spectrum receive more benefits from these programs then they contribute over their lifetime. The average Medicare recipient receives more than 100k in lifetime benefits than they contribute according to a study done by Douglas Brandow, a Senior Fellow with the Cato Institute. Rather than debate the efficacy or morality of these programs, it should simply be noted that this data is also excluded from many of the studies around growing income disparity such as the Piketty/Saez study. With an aging population of baby boomers, this trend will likely continue. Yet is still a major distortion in the distribution of income data.


Tax Units vs Households

Their work also makes reference to tax units in comparison to households. This is a function of examining tax returns and not families in enough detail. It was noted that

"The average household income was about 30% higher than the average tax unit’s income."

In reality it can be much larger than that. Two people whom are not married but choose to live together are one household…but two separate tax units. Their household income could be twice as large as their tax unit income.

Let us also not forget that if a child has more than $6,200 dollars in earned income or $1,000 of unearned income ($750 back in 2006 when his work was first published)…they must file an income tax return. They are now considered to be tax units. So even though they are poor tax units in regard to their work around income disparity…they may in fact come from very well off families. Now is it really a fair comparison to look at a young student in college working a part time income, or even a kid with some stock that granny gifted and has some dividend and interest income…and subsequently measure them against a 40 year old full time truck driver ?



Income Rotation & Mobility

Another aspect often missed is how much of one’s income is also related to capital gains. Small business owners every year sell their businesses for as much as 2-3 times annual revenue depending on the industry. That spike in onetime cash flow moves a substantial number of people into a top bracket on a onetime basis, only to see them drop back down to a lower income. This is also true when someone of a modest income sells a piece of property that produces a onetime capital gain. To portray this as a consistent income stream is misleading at best.

A study done by the US treasury around income mobility found that about 25% of those in the top 1% of earners in 1996 were no longer in the top 1% by 2005. The same study demonstrated there was a considerable degree of income mobility in the US. More than 55% of tax filers moved to a higher filing bracket between 1996-2005. More importantly, of those in the lowest brackets...at least 45% of them moved to a higher income bracket. In reality, there is a great degree of rotation among those who are top earners on a year over year basis.

http://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf

Capital Gains

Additionally, annual stock market returns can greatly impact ones tax reporting. In 1986 during a relatively bullish market, the top 1% of earners realized approximately 30% of their income from capital gains. Yet during the recession of the early 1990’s that figure fell to about 5% in 1992. As a result, this is not always the result of much higher wages, but rather when one chooses to realize income based on the tax code. Lower capital gain rates encourage one to realize a gain, and increase their reported taxable income. Yet while the Piketty/Saez study excluded transfer payments, they opted to include capital gains as though it was traditional income. However, as the chart below provided by Alan Reynolds of the Cato Institute demonstrates...when adjusted for realized capital gains, the income of the top 1% has not increased at nearly as rapid a pace as many studies suggest.

It is also important to note that capital gains, unlike earned income requires one to first risk capital. You cannot achieve the gain unless you were initially willing to invest the capital and potentially lose it. This is quite different than income from employment, in which an individual can only lose their position, but not their skill set. An investment once lost in a capital investment venture is gone permanently.

Another issue related to capital gains, is that after the 1986 tax act…capital gains had gone up and ordinary income rates came down. Suddenly, there was a surge in the use of Non-Qualified stock options as form of compensation. Because unlike incentive options they are not taxed at capital gains rates, but treated as ordinary income. Now if you’re an executive…in 1975…you negotiate your deal so that your paid in incentive options…because you don’t want to pay at the 70% marginal rate. Now it’s 1987…and you’re happy to take your income in Non-Qualified options…and get taxed at the 28% rate for ordinary income. So you renegotiate the arrangement. This is just another form of income shifting from capital gains to ordinary income. Note that this is not a change in income…or more income…it is simply reported differently. And Non-Qualified options plans became a significant source of income to top exec’s. Virtually all option gains were treated as capital gains prior to the 1980’s.

Immigration

As many of us know, immigration is a hotly contested subject. Regardless of one’s political position, It cannot be debated that the US has a great deal of both legal and illegal immigration. The reality is that most immigrants come to the US from impoverished backrounds looking for a better opportunity in the US. As a result those that are here legally and reporting their income immediately import a degree of poverty on our income distribution data. It should be noted that immigrants statistically are more likely to start their own business and become self-made millionaires than a natural born citizen of the US. The Kauffman Foundation’s index of entrepreneurial activity is almost 40% higher for immigrants than for US born citizens. However, immigration is not a onetime event, but rather it is ongoing. Population growth due to immigration has grown by nearly 60% since 1990. The aggregate tax returns filed by new immigrants also has a disproportionate effect on the lower end income distribution, regardless of whether or not they eventually work their way up the economic ladder in years to come.


Dividend Income

In 2003 the tax rate on what became "Qualified" stock dividends fell from 35% to 15%. Subsequently, the portion of income derived from dividends among the top 1% of earners doubled from 4.2% in 2002 to 8.4% in 2007. This was simply a shift in investors moving from the tax free treatment of municipal securities and tax sheltered accounts, to investing in individual stocks for their income outside of tax shelters as a result of the more favorable tax treatment. Yet another example of income shifting rather than increased income inequality.

As part of the 1986 tax act...beginning in 1987 interest derived from tax free municipal bonds was now required to be reported on a 1040 even when it was not taxable income. However, prior to 1987...there was no way to track this income since it would not appear on a tax return. So what is now close to a 4 trillion dollar market can be found a tax return. These investments paid double digit tax free interest rates in the early 80's and flew completely below any tax reporting radar available.

Of course there is always the unreported income that is generated from cash transactions. However, the transactions that occur in the shadows are very difficult to quantify.

These are just a few data points that illustrate that the income disparity figures are quite misleading when compared to a historical analysis of US economic history. There are other factors that affect reported income such as interest earned from tax free municipal securities, and the various itemized tax deductions associated with self-employment.

In reality there is and always has been a disparity of income distribution. There will always be a disparity in a free market. Some of us are smarter and more innovative than others. Some of us are willing to make sacrifices that others are not. But the data behind the data suggests that the widening distribution of the income is not nearly as pronounced as some studies have suggested by simply looking at personal income tax returns. There is in my view a great deal of data to suggest that the purchasing power of the income realized has consistently been in decline for nearly a century. This is more a function of monetary policy as well as how we calculate the cost of living. Price stability is a different topic altogether, which I believe is a better explanation of why many Americans may feel that their standard of living has been strained in recent decades.

Yet from a policy perspective, in recent decades there have been numerous policies in place that encourage lower end earners to defer income and save for retirement. While simultaneously encouraging many wealthy individuals to declare more income that would have otherwise not been reported as personal income, or simply not reported at all. Such policies that encourage savings are healthy. However, they should not be construed to represent a major fundamental change in the distribution of income when compared to past decades.

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    • f_hruz profile image

      f_hruz 3 years ago from Toronto, Ontario, Canada

      Can you address a more fundamental question as to how soon the US will have to default on the ever expanding, never to be repaid dept burden?

      http://youtu.be/xHmhrtx9C_4

      This video speaks right to the point a lot of dreamers can't quite grasp, eh?

    • LandmarkWealth profile image
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      LandmarkWealth 3 years ago from Melville NY

      It is impossible for a fiat currency system to default. Even Greece did not technically default. Under a fiat system, there is an infinite amount of currency, so there is no way to default. Even under a monetary standard, default is highly unlikely. This is something that is simply beyond the grasp of the average citizen.

      That is not to suggest that the debt burden is not a concern. But debt and deficits are only a concern in the context of how they measure as a share of GDP. The aggregate dollars of debt are in no way relevant. We could have 100 trillion in annual deficits, and it would mean nothing if it were in the neighborhood of 1% of GDP. Historically, a deficit averaging 1-2% of GDP is healthy, as it allows for a consistent increase in the monetary base, and does not inhibit economic activity. The real risk in relation to debt/deficits is in purchasing power and the potential devaluation of a nation’s currency. As Reinhardt and Rogoff demonstrated, when a nations debt exceeds the neighborhood of 90% of GDP, it seems to correlate to an impairment of economic growth. So debt is relevant in that context. And many from the Keynesian, and more so the MMT school of thought take issue with the work of Reinhardt and Rogoff. I for one largely agree with them.

      The author of this video knows virtually nothing about economics, and less about the US budget. The reference to the discretionary budget and the impact of military spending is a classic example. The US military budget is a small fraction of spending as a share of GDP when compared to the 40’s and 50’s, and has been in decline consistently since the 1940’s. The total of military expenditures make up less than 20% of all Federal spending. The largest expenditures are not even part of the discretionary budget. Mandatory entitlement spending are by far the largest liabilities in the US budget, and are the largest unfunded liabilities. Medicare/Medicaid alone are 700 billion annually, not including administrative expenses. Social Security is over 800 billion. The entire military budget including active wars are 600 billion annually. Military spending is simply not a very big fiscal problem in the grand picture of Federal spending. That is not to say that there is not waste in the military budget. All forms of gov’t are inherently wasteful and can afford to be more efficient. But to suggest that military spending is consuming Federal spending is either intentionally misleading viewers or terribly misinformed.

      http://www.usdebtclock.org/

      Now if you want to argue that the US is too involved in foreign affairs, I would agree to a large extent. This is not about “predatory capitalism”. I find it problematic that we are the global police force too often at the expense of the US taxpayer. But this is not some attempt at exploitation. The US is the only dominant military force in modern times to defeat a foreign army on its own territory and return governance to the indigenous population. The US has actively attempted to increase the role of democracy around the world, and largely in an attempt to open up markets…which is a benefit to all parties involved in free trade. Unfortunately, opening up markets too often must happen organically, and can’t be levied upon a society that is not ready for it. And all too often, after WW2 the US assumed the role of policing an unstable world, and never let nations like South Korea completely stand on their own two feet. But these references towards “predatory capitalism” are frankly comical. It is somewhat scary how many people simply have no idea how markets function and what influences them.

    • f_hruz profile image

      f_hruz 3 years ago from Toronto, Ontario, Canada

      Thanks Joe, for a well reasoned reply from the perspective of a person who wishes to see market forces as the source of all justice and wisdom, when in reality every one, from market makers over companies, corporations and cartels, to trans-nationals are ALL out to manipulate, as much as they can, what ever market forces there maybe, in their own favor to maximize PROFITS ... with minimal regard to existing rules, regulations and laws of the land, and even less to any social, cultural, and other, more valuable aspects of a civilized global society.

      I'm sure you can see my point, but maybe are too entrenched in having bought into supporting an exploitative, politically distasteful and humanly immoral system which is now finally in decline, with little chance of a real come back soon.

      I find your background impressive, never the less, and like to ask you, why you haven't focused more in the direction of running your own derivative hedge found, instead of offering fee based wealth management services to the public?

    • LandmarkWealth profile image
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      LandmarkWealth 3 years ago from Melville NY

      First of all market forces are not exploitative. You are yourself a market force. And markets produce opportunity. Markets create efficiencies and eliminate waste. Free markets have lifted more people from grinding poverty than any other economic system ever designed by man. The quest for profit is not immoral. It is such a quest that develops the very technology which permits us to communicate as we are doing right now. Markets become exploited when gov’t oversteps its boundaries and moves beyond the role of regulating an orderly market, to actually becoming a market participant. This is when we lose price discovery, see monopolies/oligopolies take hold and damage the competitive benefits of a market place. In every area of a greatly distorted market that produces poor results…I can show you a major gov’t intervention that went beyond the purpose of regulating, and began to dictate outcomes.

      In regard to the second portion of your question. I would not be qualified to operate a hedge fund. I was schooled in a different area of the business, and frankly am not interested in working in a one dimensional area of the industry. I utilize hedge funds, and other alternative asset classes as a mechanism to lower correlations and reduce volatility for clients. But a hedge fund is one of many components that can and do exist in the wealth management picture. In general, a derivative is an instrument that is used by hedge funds and other 40 act funds as well as individual investors who buy and sell options daily. But there aren’t many funds who are exclusively utilizing derivatives. That would be more true of a managed futures fund. Hedge funds simply allow a greater degree of flexibility over traditional investment funds. And that is not even entirely true anymore, as many of them now offer publicly traded 40 act funds which are available to the general public which offer just about every strategy available in the traditional hedge fund world to the retail investor.

    • My Esoteric profile image

      My Esoteric 2 years ago from Keystone Heights, FL

      Good article @Landmark, but still wrong, in my opinion. I went back to make sure I understood how Piketty, et al, used the income tax (he didn't forget corporate taxes, btw), which he extended out to 2010 for his latest book.

      First, he uses what is essentially Adjusted Gross Income without any deductions which might slip in there, nor does it include capital gains. Consequently, every argument you offer, save two, transfer payments and immigration, only server to "bolster" the idea of a strong trend toward divergence in income from non-capital sources between the haves and have nots.

      Each idea you offer, be it the lowering of the marginal tax rates in the 1980s (a short-term effect in any case), the hiding of income via 401Ks and similar vehicles (which I would argue only the more or less well off take full advantage off because the rest can't afford to) and any other similar method used to reduce the amount of reported income only serves to increase the wealth divergence. Why? Because only the rich, the very rich, and the unbelievably rich can afford to do that "in any meaningful way" that would show up in gross statistics. The middle class, those between say the 40 and 80 quintiles, often find themselves barely able to have a reasonably comfortable life, let alone prepare for retirement. Then anybody below the 40th quintile are near or in poverty.

      While welfare payments are generally not reportable income, if they were, they would be an insignificant part of total AGI, around 3%. So, instead of the bottom 50% of income earners (by AGI) earning 11% of total income, they would get about a 14% share. The top 1% dropped from an 18.7% share to an 18.1% share when you add in welfare payments to the totals. So while you may be technically correct that transfer payments do reduce the inequality (just as they were designed to), their impact is insignificant.

      Bottom line is that all of those deficiencies you bring out from using AGI from income tax returns doesn't really invalidates their use, instead, it validates the results as a best case scenario.

    • LandmarkWealth profile image
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      LandmarkWealth 2 years ago from Melville NY

      Using adjusted gross income would NOT include 401k, 403b, profit sharing contributions, non-qualified deferred comp plans, pension plans or any qualified retirement plan. AGI also does not include employer matches to these plans which average 3%, plus another 8% if there is a profit sharing plan. It also would not include benefits paid by an employer for health plans, HSA/FSA accounts which offer both employee contributions and company matches. All of these are removed from your income to arrive at your AGI. Your AGI is after those are excluded. They are NOT deductions from AGI. The deductions like property taxes and mortgage interest are what get itemized from AGI. Additionally, the average employee benefit package is about 30% of compensation. Things like health benefit premiums paid by an employer are compensation that is not included in income, and would not show in AGI. Capital Gains are also part of AGI.

      Using aggregate national income is also a terrible method if you don’t differentiate between closely held C-corps and public companies for the reasons I illustrated in your article, which I will repeat here.

      Looking at aggregate income including corporate profits as a measure is about as misleading as could be. That pulls in publicly traded companies as well. So if I owned Microsoft in the 80’s or Apple in the early 2000’s…these companies paid out nothing in dividend income for a long…long time. If I owned stock in these entities, I made a fortune and realized no reportable income unless I actually sell it. In fact I made a fortune on almost every stock thru the 80’s and 90’s. And even then I have no reportable income if I have a capital loss carry forward from years prior. (Creating capital losses on paper to offset a gains is an art form I have personally have perfected…which is totally legal for my clients) And if I sell it in a tax shelter like an IRA...still no reporting. It's as though it never existed. On paper, companies like Microsoft and Apple retained all the profit. Yet, individual investors…pension funds…education endowments…charitable organizations are all shareholders benefiting from this wealth increase, and on paper…it’s just corporate profit. To use such a method is ridiculous. I am much better off having owned Apple who retained all their earning during that time than General Electric who paid out a steady cash flow and the price went nowhere. But on paper…it would not appear so.

      Even if you can’t take advantage of a full 401k deduction…the average American is still contributing as a % of their income a higher percentage. If I make $1 million annually, the max % I can contribute is 1.7- 2.3% of my income depending on my age. On a percentage basis, the benefit is still much higher to a lower income earner. We also know this already because middle income individuals in the 25% marginal bracket are sheltering over 30% of their assets in qualified tax shelters, as opposed to the top 1% of earners holding only 6% of their net worth in tax shelters. The median match to a 401k is about 3% of pay. When there is a profit sharing component, due to safe harbor rules…the median is an additional 8%. That data totally contradicts your assumption. And prior to 1980…non of these plans defined contribution plans where available.

      Piketty has yet to explain how he accounts for the Muni income which was totally unreported to the IRS pre 1987, which mysteriously pops up as a jump income. He has no reasonably accurate source for any of this info until then. So a now 4 trillion dollar municipal market paying income to those in high tax brackets just jumps into the data in 1987…and he ignores the fact that it was always there, and had even broader participation under the higher tax rates prior to 1987.

      I don’t disagree that transfer payments alone are not enough to dispute his assumptions. But the combination of all of this data that he leaves out is more than enough. Not to mention the fact that it has been recently discovered that his latest work contains factual errors were he has no data source and just made assumptions. The significance of those errors is still yet to be determined.

    • LandmarkWealth profile image
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      LandmarkWealth 2 years ago from Melville NY

      There are also various other items that are not included in AGI which I didn't list. Some are subject to limitations based on income. Examples...student loan interest, tuition expense, moving expenses...etc.

    • My Esoteric profile image

      My Esoteric 2 years ago from Keystone Heights, FL

      "Using adjusted gross income would NOT include 401k, 403b, profit sharing contributions, non-qualified deferred comp plans, pension plans or any qualified retirement plan. AGI also does not include employer matches to these plans which average 3%, plus another 8% if there is a profit sharing plan." - None of those come under the heading of labor income, i.e., disposable income, instead, they come under Wealth, since they are a capital asset.

      It does no good comparing what you can't spend with what you can when talking about labor income. ,,,,

      STOP, HOLD THE PRESSES - I am sorry, I must apologize as in my old age, my memory doesn't do me as well as it used to. As I was about to continue with the above, it occurred to me I had my definitions of labor and capital income wrong (it was from reading something recently that got me going in the wrong direction.) Pikitty's Labor Income is NOT AGI, as I tried to so neatly tie a knot around. Instead, it is more like Line 7 (Wages) plus Line 20 (SS) and maybe Line 19 (UE).

      Capital Income, on the other hand, is income derived from rent (in its formal meaning), profits, dividends, interest, capital gains (which he excludes in most of his analysis), royalties, and any other income derived from the mere fact of owning a capital asset (which I presume includes IRAs, pensions, and the like. Does that take SS off the labor table?)

      Anyway, as I was saying - It does no good comparing what you can't spend (which as you describe is in the form of a future asset) with what you can spend today when talking about labor income. What is under inspection is how does the million dollars the CEO was paid in cash compare the the $20K the teller was paid. Is it reasonable to think that yesterday, the ratio of CEO to worker was such that the CEO of the same business earned only $400K to the tellers $20K and today earns 2.5 times that when all that has changed is time and growth? In addition, now the CEO has a bundle tucked away in all those things you mentioned while the teller does not.

      There is something fundamentally wrong with that simple but very realistic picture; and that is the picture that Piketty is painting and what the world is noticing is actually happening.

      I don't think Piketty needs to explain the bump caused by the muni bonds. It is just a bump that effectively raises the y-intercept in a trendline that has the same positive slope as the previous trendline. It has zero impact on the conclusions drawn from the long-term trend. What WOULD require an explanation is if the slope suddenly increased or decrease after the jump, but it didn't.

    • profile image

      bradmaster 2 years ago

      LW

      I would like to just comment on some of the fine points here.

      "oday the national income is made up of approximately 55% in wages and salaries, while transfer payments equal approximately 18% of national income. It should be noted that a good percentage of this is related to national entitlements like Social Security/Medicare/Medicaid. Yet, many Americans on the lower end of the income spectrum receive more benefits from these programs then they contribute over their lifetime. The average Medicare recipient receives more than 100k in lifetime benefits than they contribute "

      bm:

      Here is my problem, FDR and LBJ created both of these entitlement programs. The problem today is one that congress has contributed since 1937, and 1965.

      Now, they talk about 2040 and the SS and Medicare trusts going bad. They had all of these decades to make the trust fund grow to cover the day when the Ponzi scheme runs dry.

      They chose to put trust fund into a very low yield ROI. Over time, congress must have forgotten what is a trust fund.

      A Ponzi scheme needs new blood, so government workers, and other that were originally exempt were mandated to be part of the system. Then when the government got all the new blood they could get, they started to change the retirement age.

      In between, they kept raising the cap on the salary, and the rate for the tax. Both of these are really taxes.

      The wage earners would have been better off, if SS was more like the 401k with the seven percent from the worker, and the employer tax adding another seven percent. Those funds would have been managed by private rather than government funds.

      This would be a defined contribution fund that actually vests with the contributor, as opposed to SS which is at the mercy of congress.

      SS requires lifetime contributions as long as you earn a wage, while a DB vests in a set number of years. The benefits from SS are hard to retire on alone, but a well managed 401 can be lucrative.

      As far as your point about the existing 401ks, you could look at it as future revenue for the feds, while they are paying benefits to the SS retirees. Yes, it is not revenue from SS, but it offsets it.

      ---------

      As for you comment on health insurance. There have been a lot of changes in the health industry since your trip back through history.

      Things had to be simpler back then, the congress didn't give the FDA the control of the drug companies until the late 1950s. That relationship alone is the core problem of health care.

      The drug companies are a for profit industry, and their shareholders require that they maximize profits. What could be more profitable than inventing long term treatments that are very expensive, as opposed to outright cures. We don't see cures in major diseases from the drug companies. We see at lot of treatments, and many of them just treat the symptoms of a disease, and not the root cause.

      The FDA doesn't have any testing facilities, they merely review the data provided to them by the drug companies. An FDA approval costs about 800 million dollars. Then many of the approved drugs fail enough for the lawyers to swoop in and take the drug companies to court. Many huge awards have drained the balance sheets of the drug companies. There has been a trend to drug company mergers, and acquisitions to cut the competition, and or get their patents.

      Patents by the way impede scientific progress on finding cures for diseases. Most of the best work in the health industry has been in what I call the mechanical improvements. Surgeries have improved because of new technologies and procedures, but they are very expensive.

      Everyone talks about health insurance, but health insurance companies limit your medical care, by practicing medicine. They tell your doctor and hospital how you should be treated.

      The real problem in health care is the pathetic level of quality of care.

      The ACA does little to improve the quality of care. There are a few things in it that might be helpful, but it depends on the implementation.

      The primary thing is that the ACA penalizes the hospital if they release a patient too soon, and that patient comes back with the same problem or complications from it in a short time. Currently, the health insurance company wants to get you out of the hospital really quick. Patients go home, or a temporary care center, only to return to the hospital, usually via the emergency room.

      This actually drives costs up instead of reducing them

      Thanks

      bradmaster

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      LandmarkWealth 2 years ago from Melville NY

      @ myesoteric

      “It does no good comparing what you can't spend with what you can when talking about labor income”

      It does plenty good in misrepresenting compensation that employees are receiving which will be an eventual income source. Unless you feel it is bad for people to save for retirement…I don’t see you’re point. The employee’s could choose to take much of this as labor income if they wished. Instead they wisely choose to defer it.

      If the formula you gave above is accurate…than he is using AGI. Adding lines 7 plus 20…and maybe 19 does not include qualified plans. Box 1 is not inclusive of a 401k plan, or other qualified plan contributions, and most certainly would not have a company match. It also doesn’t have HSA contributions or employee & employer health benefits paid. So he is in fact using AGI. When you list box 1…you are listing only taxable wages.

      “What is under inspection is how does the million dollars the CEO was paid in cash compare the the $20K the teller was paid. Is it reasonable to think that yesterday, the ratio of CEO to worker was such that the CEO of the same business earned only $400K to the tellers $20K and today earns 2.5 times that when all that has changed is time and growth? In addition, now the CEO has a bundle tucked away in all those things you mentioned while the teller does not”

      This is totally irrelevant…The CEO made substantially more money than the teller in 1940 as they do today. But today…the teller and the other 99% are still hiding a much higher % of their gross income. Whereas the CEO has lost large deductions that where available to him pre 1980’s that would have suppressed his income reporting, because they would have been removed before line 1 on a 1040. Tax shelters went up for lower income people, and declined substantially for the high income CEO in exchange for the lower bracket.

      The Muni market today is 4 trillion dollars with an average yield of about 3%. That’s a lot of income that is going to wealthy individuals that is totally unreported pre 87. He mostly certainly needs to account for that. And according to Piketty…the jump in disparity was significant after the 1980 tax reforms. This just happens to coincide with him not counting qualified plans…Muni income and various other points I made. If the median 401k plan contribution nationally is 7% and employer matches are 3%...that is 10% of the national average compensation that is excluded for all participants. This is quite relevant to trend lines. And when you look at the work of economist like Richard Burkhauser which includes some of the points I have made…and other variables he mentions…we find that the disparity is nowhere near as pronounced as Piketty suggests.

      Dr Burkhauser’s paper which was published with the NBER can be found here.

      http://www.nber.org/papers/w17164.pdf

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      LandmarkWealth 2 years ago from Melville NY

      @ bradmaster

      “Yet, many Americans on the lower end of the income spectrum receive more benefits from these programs then they contribute over their lifetime. “

      Agreed…which is another gapping whole in the wealth disparity story. That will always be the case to some degree. But in relation to the discussion…it is one more item that is ignored in the measurement of income distribution.

      I will not disagree with you that program’s like SS needs to be gradually phased into a hybrid of privatization. But I would not hold my breath. In general…entitlements are on an unsustainable course without serious consequences. They won’t go bankrupt…because the gov’t can create infinite amounts of money. The value that this money can purchase is the concern.

      I also agree with many of your points about health insurance. It is a market that is no longer permitted to function as a market, and medicine has lost all price discovery. The role of the gov’t has literally destroyed the medical industry. In terms of this discussion around income…to not count the benefits received as compensation is entirely misleading.

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      LandmarkWealth 2 years ago from Melville NY

      @myesoteric

      To clarify...Line 7 on a 1040 comes from Line 1 on the W2...which excludes all the things I mentioned. Qualified plan contributions and matches, employer and employee contributions to insurance, HSA/FSA accounts. All of which are limited in dollar amount caps that are very small percentage of a high income earners wages...and a very large percentage of a middle income earners compensation. The national average of the employer portion of these benefits is 30% of compensation. Then you have to include the employee contributions.

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      bradmaster 2 years ago

      LW

      This agreement shows that on My Esoteric's hub, I failed to make my points clear.

      Thanks,

      bradmaster

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      LandmarkWealth 2 years ago from Melville NY

      @ bradmaster...I think we agree on a lot. Mainly that gov't should get out of the way quite bit more. But I do differ with you on a few items...as we are free to do.

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      LandmarkWealth 2 years ago from Melville NY

      A couple of other points about the work of Piketty that I didn’t elaborate on in this Hub because I wasn’t intending to write a research paper, although I should have considering the commentary.

      In his original 2006 work he referenced tax units in comparison to households. This is a function of examining tax returns and not families in enough detail. He noted that the average household income was about 30% higher than the average tax unit’s income. In reality it can be much larger than that. Two people whom are not married but live together are one household…but two separate tax units. Their household income could be twice as large as their tax unit income.

      Let us not forget that that if a child has more than $6,200 dollars in earned income or $1,000 of unearned income ($750 back in 2006 when his work I am referencing was published)…they must file an income tax return. They are now considered to be tax units. So even though they are poor tax units to Piketty…they may come from very well off families. Now is it really a fair comparison to look at a kid in college working a part time income, or even a kid with some stock that granny gifted and has some dividend and interest income…and measure him against a 40 year old full time truck driver ??? Apparently Piketty believed it was. Utterly ridiculous. If he corrected for this in his most recent work…than I applaud him….although I doubt it.

      Some of the changes to capital gains treatment are also relevant. As most know, the first 500k (250k for an individual) from the sale of a primary residence goes unreported. This was not necessarily the case until the 1990’s.

      Another issue related to capital gains, is that after the 1986 tax act…cap gains had gone up and ordinary income rates came down. Suddenly there was a surge in the use of Non-Qualified stock options as form of compensation. Because unlike incentive options they are not taxed at cap gains rates, but treated as ordinary income. Now if you’re an executive…in 1975…you negotiate your deal so that your paid in incentive options…because you don’t want to pay at the 70% marginal rate. Now it’s 1987…and you’re happy to take your income in Non-Qualified options…and get taxed at the 28% rate for ordinary income. So you renegotiate the arrangement. Another form of income shifting from Cap Gains to ordinary income. Note this is not a change in income…or more income…it is simply reported differently. And Non-Qualified options plans became a significant source of income to top exec’s. Virtually all option gains were treated as cap gains prior to the 1980’s.

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      bradmaster 2 years ago

      LW

      I concur they we share a lot on the major issues, and probably disagree on the remedies.

      I am not a fan of the two political party system and their loyal voters. They are taken for granted by their parties as soon as they register to vote. The parties know how strong the voters are in the other party, so they spend election time trying to woo the independents. It is the independents that give the presidential election the win.

      It is like the loyal cable user that has been with the cable company forever. So how does the cable company reward that loyalty. They give new subscribers the low prices, and the perks.

      As far as income disparity, the comment that I left on the middle class hub about the billionaire club has to be traced back into the economic and political system of the US to find out how they consistently do it, without out regard to which political party is in control, or whatever changes there are in the economy, and the taxes.

      --

      Thanks

      bradmaster

    • LandmarkWealth profile image
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      LandmarkWealth 2 years ago from Melville NY

      No argument on the political. The purpose of this hub was to point out that the issue of income disparity is less of an issue, and the real struggle for the middle class is probably linked to the destruction of purchasing power via inflation.

    • profile image

      bradmaster 2 years ago

      LW

      How does the billionaire club bypass the economics, the political, and even the economy to keep growing?

    • My Esoteric profile image

      My Esoteric 2 years ago from Keystone Heights, FL

      @Bradmaster, I am glad you made this comment " Here is my problem, FDR and LBJ created both of these entitlement programs. [speaking of SS and Medicare]..." it made me go find the following link I think you will find interesting for it covers both points of view; it just depends on how you want to approach it.

      But in terms of SS, it appears it is a Ponzi scheme in fashion but not in another. Its not a Ponzi scheme given the fact that the amount that is put in, on average, measured in today's $$, and assuming it grew at 2% (opportunity cost), you would have put in more money than you probably would get back.

      It is a Ponzi scheme ONLY because the gov't takes your money and rather than keep in the trust fund to let it grow, it spends it and relies on the next generations taxes to pay for their parents SS. It doesn't actually have to be that way. The gov't could, but never will, either borrow enough or lay a surtax large enough to cover the loss from letting all of the SS receipts stay in the trust fund, invested in Treasury bonds, until such time it is solvent.

      http://www.politifact.com/truth-o-meter/article/20...

      On the other hand, on the face of it Medicare pays out more than it takes in, therefore taxes will be needed to subsidize it. But, the alternative is worse when ALL of the costs are taken into account, ones that cost analysts and economists know about but others don't have a clue until they come back and bite you.

      (An example is all the money we were going to save by downsizing the Federal gov't back in 1990. I was just one of the multiple cost analyst who showed it would wind up costing a lot more money in the long-run. But, I was a very tiny fish in a very large pond, and even the big ones weren't politicians, so en mass, we were ignored. Of course, we were right and the gov't ended up spending 20 - 30% paying contractors to do what gov't workers use to do, at least that is what the GAO said; also cost analysts)

    • profile image

      bradmaster 2 years ago

      My Esoteric

      I looked at your link, and I found it to be political, and it didn't have the steps in the math to make factual. First, don't adjust for inflation. Did the contribution also include what the employer paid into SS.

      These questions were not answerable from the article.

      It is a Ponzi scheme because without raising the current contributions, or adding a lot more contributors it is not solvent. FDR created this mess, and the congresses and presidents that followed him didn't make the necessary corrections.

      When have you ever known the congress to think beyond the current decade, much less to 2040 or 2050, the former is the SS admin guess, and the latter is fro the CBO on SS insolvency. The big hit for both the SS and Medicare was the 23 million people on unemployment.

      Also, SS now is up to 67 to retire, and those that retire early at 62 lose a lot of their benefits, and until they reach full retirement age, they can lose some of their benefits if they work during their retirement and exceed an income cap.

      How could President Obama Take 700 billion dollars from Medicare to fund his ACA? These were contributions to Medicare period.

      ===

      And when you talk about paying contractors, their burden rate doesn't contain any benefits that are received by employees, such as Retirement, vacation, holidays, sick pay, and health insurance. So, you are comparing apples and oranges.

      Ever wonder who chose to make apples and oranges for that saying?

      Thanks

      bradmaster

    • My Esoteric profile image

      My Esoteric 2 years ago from Keystone Heights, FL

      "I looked at your link, and I found it to be political, and it didn't have the steps in the math to make factual. First, don't adjust for inflation. Did the contribution also include what the employer paid into SS." -- Actually, the article did, yes they included the employers contribution because it is counted as a substitute for wages (remember, self-employed pay the full-freight.) And, if you were a trained cost analyst, you would know you always adjust for inflation, otherwise it is simply pointless to compare two monetary units from two different time periods.

      The comparison is that instead of giving the money to the government, the government requires you to save it. If you are a dumb person, you would put it in an account that draws no interest. If you were a smarter person, you would put it in an account that at least matches the rate of inflation, and if your smarter still, you would put it in an inflation adjusted treasury bonds, or some such instrument, which is exactly what the government should have done, but isn't. In any case, it is that account that pays at least the inflation rate that adjusting for inflation accomplishes.

      As to the Ponzi scheme idea, if fact it can't be, plain and simple. In private, a Ponzi scheme ultimately fails because, as you rightly think, they can never keep increasing the base to support those who came before. Sooner or later the pyramid with crumble. The reason the SS is not a Ponzi scheme is that can't happen.

      Congress won't let it happen and they have the power to not let it happen. Congress will do what it takes to keep it solvent because their political lives depend on it. Beyond that, the People have the power to not let it happen by voting out the idiots who are trying to bring the system down.

      As t0 the $700 B, that has been disproven so many times, but once again I'll go over it, this time for you. The $700 B was a planned reduction in Medicare spending that would result, from among other things, a major reduction in waste, fraud, and abuse (yeah, I know, promises, promises, but I'll get to that in a sec), another to converting to converting to an all electronic format for record keeping, or at least as much as possible; there were many more initiatives as well. In a theoretical world, if those were done absent Obamacare, that $700 B would be used to lower the deficit and NOT cut benefits. Instead, that freed up future obligation authority will be used to help pay for ACA. Nothing more than that.

      Back to the promises. Medicare has gone a long way since 2010 in cracking down on fraud. Just a month ago, a gang of sleep study doctors in a little town up the road were caught cooking the books on CPAP machines, ordering them for anybody they could get into their clinic; a favorite practice for medical thieves. Anyway, they got fined big time and their practice shut down. The real savings, of course, is the reduction in the fraud. There have been hundreds of millions of savings down in Dade-Broward counties as well due to a nationwide taskforce set up specifically for this. The savings in arena is why the CBO keeps lowering the cost of ACA and Medicare keeps lowering its price tag.

      As to the contractors, it is my job as a cost analyst to make sure the contractors pay is "fully-loaded" as we called it, which means includes all those things you mention and then some. Yes, I have spent many hours in various Pentagon briefing rooms explaining Apples and Oranges.

    • My Esoteric profile image

      My Esoteric 2 years ago from Keystone Heights, FL

      LW, you said "I am not a fan of the two political party system and their loyal voters. " - I don't think you will ever get away from the "loyal voter" problem regardless of how many parties you have. But, when I look at our system and those in countries which have multi-party system, I much prefer ours. One reason is there is much less control by the People over who the Party puts forward to compete for seats. You think ours is a forgone conclusion; compared to Britons, for examples, ours is a free-for-all. The only real choice the British voter has is which Party gets the seat, not which person gets the seat. I suspect this is the same in other Parliamentary systems as well.

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      LandmarkWealth 2 years ago from Melville NY

      @ bradmaster

      "How does the billionaire club bypass the economics, the political, and even the economy to keep growing"

      The nation at large has been growing more than most realize in recent decades. In relation to income, which is what this hub is about...we're just reporting income quite differently over the decades.

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      LandmarkWealth 2 years ago from Melville NY

      @ mysesoteric

      I didn’t make the comment about the two political party system…but I do agree with it to a certain extent. I think one potential solution is to eliminate the party identity with the name in the voting booth. Too many people vote right down the line. The names should be scrambled rather than lined up by party on one line. That is not an end all solution. But I simply want people to listen to specific issues rather than platitudes and personalities. I am not necessarily looking to have 15 different parties either. But I have a problem with the fact that a libertarian or a member of the green party is essentially banned from a Presidential debate and not permitted to join the national election unless they conform to the larger party platform. They can exist only in one of the two primaries.

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      LandmarkWealth 2 years ago from Melville NY

      The problem with cost analysis and the comparison to privatizing services out to the private sector...is that can never really be a truly competitive market. You need to be larger enough to put in a bid...then the decision of who gets a contract is still not decided by a market of consumers...but rather political actors. So inevitably the contractor locked into a contract he won a bid for will overcharge a slow and unresponsive gov't agency. The problem is that there are way to many services that the gov't is involved in to begin with. If the gov't left its mandate to things that can only be provided for by the gov't (national defense, law enforcement, courts of law etc...) and left all else to the consumer to negotiate with these companies directly, then downsizing would work. Otherwise your trading one bureaucracy for another. But or that...we need a society that desires more self sufficiency...not less. Right now...we're on the opposite track. Gov't needs to fairly regulate markets...and not become a participant.

    • profile image

      bradmaster 2 years ago

      LW

      I want to admit that my statement about dividends from Microsoft and Apple do exist. My high tech companies don't give out dividends.

      Nor could I buy enough shares of either, even after the 7 to 1 split of Apple shares.

      Although, the dividends on both of these stocks would hardly make you a billionaire. Bill Gates just sold 8 million shares of MS stock, and that gave him about $400 million dollars. Which would be tax free after he applies his donations. So in essence he is donating about $80 million dollars less his initial price of purchase of tax money. Non profit foundations give the wealthy a tax avoidance.

      Thanks

      bradmaster

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      LandmarkWealth 2 years ago from Melville NY

      First of all wealth in investing whether they are value oriented stocks paying high dividends or growth stocks is about owning sound investments for a long period of time and compounding growth. There stock holding are significantly more than yours because they started these companies and have been key participants. If you want to own 8 million shares, then go to legal zoom and start a company for $700. When you create the company...authorize 8 million shares at the time of incorporation. Then you too will own 8 million shares. Now all that's left to do is create something that people actually want so your shares are actually worth something. Then when you have built your empire on your ideas...you can sell your shares privately or go public and be a billionaire to. First produce something the public is willing to buy.

      Secondly, charitable donations are not fully deductible dollar for dollar to make your income tax free. There are caps applied to your adjusted gross income. And those charitable donations go a lot further to helping those in need than anything the Gov't will do for them.

    • profile image

      bradmaster from Orange County CA 2 years ago

      LW

      First of all wealth in investing whether they are value oriented stocks paying high dividends or growth stocks is about owning sound investments for a long period of time and compounding growth. There stock holding are significantly more than yours because they started these companies and have been key participants. If you want to own 8 million shares, then go to legal zoom and start a company for $700. When you create the company...authorize 8 million shares at the time of incorporation. Then you too will own 8 million shares. Now all that's left to do is create something that people actually want so your shares are actually worth something. Then when you have built your empire on your ideas...you can sell your shares privately or go public and be a billionaire to. First produce something the public is willing to buy.

      bm:

      That wasn't my point.

      -----

      Secondly, charitable donations are not fully deductible dollar for dollar to make your income tax free. There are caps applied to your adjusted gross income. And those charitable donations go a lot further to helping those in need than anything the Gov't will do for them.

      bm:

      You are thinking of wage earners the person, Bill Gates is not a person, he has an organization. It really depends on what is the charity. In Bill Gates and Warren Buffet much of their donations went to Africa, even though we have needy people in this country. The charities that are involved with disease has not been really result oriented. Poor Jerry Lewis retired after working for MS for decades, and he never saw a cure. Many of the charitable organizations have high overhead, not all but enough of them do take a big cut to run their organizations. The people running charities have marketing companies that do the sell, and they are not interested in any thing but revenue. This is the general rule, fortunately there are exceptions.

      ===

      bm:

      Perhaps I should drop my point about billionaires. I have been unable to make the point to you after many tries.

      ---

      Thanks

      bradmaster

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      LandmarkWealth 2 years ago from Melville NY

      You’re point appeared to be that wealth breeds wealth. And it does. But their wealth was initially created by their innovation and initiative. And my point is simply that their wealth is none of our business. If you can’t afford one share of Apple, come up with your own idea and invent your own company and you can have as many shares as you want. Apple was not even an afterthought to the PC business in 2000. Today, through innovation they crushed the PC business. You’re free to invent something to compete with them. Otherwise their wealth has no bearing on you.

      “Bill Gates and Warren Buffet much of their donations went to Africa, even though we have needy people in this country.”

      So does the US gov’t. And that is taxpayer money. That is more of an issue. Who cares if they give corporate or personal money to charity overseas ??? If it’s corporate charity and you’re not a shareholder, then it’s not your money. If you are a shareholder and don’t like it…sell the stock. If it’s personal money, then it’s still none of our business what they do what their money. There are a lot of worthwhile charities overseas. And they also have customers overseas that buy their products just like in the US. And almost every charity is run better than virtually every gov’t agency. Giving money to charity is a much better chance that you’ll ever actually help someone than giving it to congress or a direct to any gov’t body.

      Charitable contributions by corporations are held to even stricter limits on deductibility than personal tax returns. Typically a corporation cannot deduct more than 10% of taxable income.

    • My Esoteric profile image

      My Esoteric 2 years ago from Keystone Heights, FL

      But @LW, "come up with your own idea and invent your own company and you can have as any shares as you want" means that the barriers to doing so are low; however we both know that is nowhere close to being true once Apple and Microsoft have established oligopolistic control over the personal OS market. The only challenge possible at the moment is from an open architecture like Linus, but to become democratically dominant, the other two must be shattered. In that case, the barriers are lowered and you have your shot at getting one millionth of the Linus pie.

      Keep in mind, the Right does not want our government or anybody else, for that matter, giving money to the American poor, they only want the rich to receive it.

      As to wealth breeding wealth, there is no moral issue with the innovators enjoying the fruits of their innovation and others labor. But, there is a moral issue of wealth breeding wealth in the generations that follow with no labor input from the recipients. That is why I have changed my mind about taxing inheritance; it should be progressively taxed.

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      bradmaster from Orange County CA 2 years ago

      LW

      You’re point appeared to be that wealth breeds wealth. And it does.

      bm:

      My point is that everyone should have the same benefits and burdens under the Income Tax system. It is a revenue system, but it is a actually a socialist redistribution system. It doesn't provide for equal protection, and it dilutes due process. This century we have been deluged by minorities that demand equal protection, yet taxpayers are silent on getting equal protection from taxes, and it is systemic in congress to ignore the issue.

      -------

      But their wealth was initially created by their innovation and initiative. And my point is simply that their wealth is none of our business. If you can’t afford one share of Apple, come up with your own idea and invent your own company and you can have as many shares as you want. Apple was not even an afterthought to the PC business in 2000. Today, through innovation they crushed the PC business. You’re free to invent something to compete with them. Otherwise their wealth has no bearing on you.

      bm:

      Apple didn't crush anything, their key trinket is the iPhone. And I said before that is today's Blackberry, and we know what happened to the most popular phone of the last century. My point about $525 a share before the 7 to 1 stock split is that the price is unrealistic to be sustainable. It is hard to conceive with the rise of Google that Apple will continue its string of success.

      My major point was that, the tax system makes no sense for the billionaires to make ten billion dollars in one year. In years, when the bulk of the people are not doing that well. Bill Gates is proud to pay taxes, and he admits to paying over six billion since 1994. Yet, he had over eighty billion now, and that is after he has given away over thirty billion dollars.

      ----

      “Bill Gates and Warren Buffet much of their donations went to Africa, even though we have needy people in this country.”

      So does the US gov’t. And that is taxpayer money. That is more of an issue. Who cares if they give corporate or personal money to charity overseas ??? If it’s corporate charity and you’re not a shareholder, then it’s not your money. If you are a shareholder and don’t like it…sell the stock. If it’s personal money, then it’s still none of our business what they do what their money. There are a lot of worthwhile charities overseas. And they also have customers overseas that buy their products just like in the US. And almost every charity is run better than virtually every gov’t agency. Giving money to charity is a much better chance that you’ll ever actually help someone than giving it to congress or a direct to any gov’t body.

      bm:

      you are right it is the job of the US government to give money to people around the world. And Bill Gates et al is using money that should have been taxed and then distributed by the government. The government doesn't spend enough money of the citizens of the US. They did little to nothing to help the victims of the bad loans leading up to the economic meltdown in 2008. They bailed out the villains, but neither the government money flushed financial industry, nor the government bailed out the victims, who lost their homes, their jobs, and their livelihood. The banks in 2009 hugging all the government bailout money wouldn't even loan money to other.

      Again, why is the issue of unequal protection silent when it comes to Income Tax. My problem is that Income Tax has morphed into a system that prevents the wage earner from getting ahead.

      The people that say the upper ten percent pay as much as the ninety percent, don't realize that the tax slice for the rich is not as much of a burden as it is for the ninety percent. Another reason why I don't like percentages, as they don't tell the whole story.

      ----

      Charitable contributions by corporations are held to even stricter limits on deductibility than personal tax returns. Typically a corporation cannot deduct more than 10% of taxable income.

      bm:

      The end result as depicted by Bill Gates, Warren Buffet and others seems to tell a different story.

      -----

      Taxation, even double taxation without representation is still cheaper than taxation by our current representation.

      Control of the congress and the presidency have changed over the years between the Red and the Blue, but the major issues were never righted in favor of the average person. SS, Medicare, and the Income Tax systems were just OK, but were applied to extremes that could have been corrected by the congress and the presidents since their creations. The sad fact is that congress, and the presidents made the systems worse. And today, they keep going further in the wrong direction Everywhere you go there is a government agency holding one hand out, while the other hand is going to punish you if you don't put something in their hand. The cumulative taxes imposed upon the people by the federal, state, and local governments is oppressive to the middle class, and that is why their dream has turned into a nightmare.

      Thanks

      bm

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      LandmarkWealth 2 years ago from Melville NY

      “My point is that everyone should have the same benefits and burdens under the Income Tax system. My point is that everyone should have the same benefits and burdens under the Income Tax system.”

      Which is why I have advocated repeatedly for the flat tax. But I am not interested in complaining about what one person makes…only that we each contribute the same percentage of what we earn. Yet what you earn is none of my business beyond that. That is between you and the person willing to compensate you.

      “Apple didn't crush anything”

      You might want to check PC/laptop sales in comparison to Apple products. Dell had to go private because they lost so much market share.

      “My point about $525 a share before the 7 to 1 stock split is that the price is unrealistic to be sustainable. It is hard to conceive with the rise of Google that Apple will continue its string of success.”

      If you split a stock 5000 to 1 it doesn’t change the equity in the company. Sustainability in terms of price is based upon market cap in relation to profit and future profit growth. Stock splits are for marketing purposes. They change nothing. And I am sure at some point someone or entity will give them a run for their money. It’s called creative destruction. If that didn’t happen we’d be in a lot of trouble.

      “My major point was that, the tax system makes no sense for the billionaires to make ten billion dollars in one year. In years, when the bulk of the people are not doing that well”

      The tax system will never change how other people are doing if it is based on a concern for what one group has earned over another. What you want is for wealthy people to be encouraged to make capital investments. That is the only way the tax system will be improved for the greater good. Simply comparing what one person earned in comparison to the other ignores the difference in economic value between the two. You don’t create wealth by confiscating it from one group because you think they have too much. That is the definition of redistribution.

      “Bill Gates et al is using money that should have been taxed and then distributed by the government”

      Bill Gates and those in the top 10% already foot nearly the entire tax bill. Sending more of their money to the gov’t will get us nothing but more bridges to nowhere and unsustainable entitlement programs that make people dependent on gov’t.

      “The government doesn't spend enough money of the citizens of the US”

      The gov’t is not supposed to take care of you…you are supposed to take care of yourself. That’s why it is “Life, Liberty and the PURSUIT of happiness”. I don’t want the gov’t to help me economically. Especially not by taking from others. There is a role for gov’t to regulate and provide for basic services. The gov’t should regulate rules…not outcomes. My great grandfather came to the US with less than $20. He got off the boat at Ellis Island and there was no medicaid, welfare program or any other help. In a few years he had a barber shop and a successful dry goods store. And he didn’t expect anyone to take money from the Rockefeller’s because they had more than him.

      “The people that say the upper ten percent pay as much as the ninety percent, don't realize that the tax slice for the rich is not as much of a burden as it is for the ninety percent. Another reason why I don't like percentages, as they don't tell the whole story.”

      Who cares how much more of a burden it is. It’s not their job to carry your weight for you. You have as much an opportunity to start at the bottom like countless people who are part of the top 10% have. I lived with 4 people in one room as a kid. My father a single parent until I was 5 went to bed hungry to make sure I ate many a nights when I was young. I moved out at age 16 and worked 3 jobs while I was finishing High School. Neither my parents or myself ever took a nickel from a social assistance program. Not even unemployment. Today, I am in the top 10%. And after all that struggling…I have to worry about your burden also. Where were you when I was struggling ??? If someone wants to contribute to worthwhile charities…that is very noble. But expecting me to pay a higher percentage because I can afford more of a burden is unfair to me. You see only wealthy people, and not where many of them came from and what they had to do to get there.

      “The end result as depicted by Bill Gates, Warren Buffet and others seems to tell a different story.”

      I don’t know what to tell you. Read the actual tax law. The rules are the rules. You just assume people give money to charity exclusively for the deduction. When in fact people give money away and sometimes don’t claim the deduction, or give money well in excess of deduction limits. Being rich doesn’t mean you are heartless. Many just feel charities are more effective at assisting people…so they send it there. And many give to charity anonymously because they don’t want fanfare when they are high profile people. George Steinbrenner was famous for that only after he died.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      On the topic of men like Steve Jobs...this just came out this morning. It's rather a simple example of the difference between successful leaders and what separate's them from the rest.

      http://www.businessinsider.com/what-it-was-like-to...

    • profile image

      bradmaster from Orange County CA 2 years ago

      LW

      “My point is that everyone should have the same benefits and burdens under the Income Tax system. My point is that everyone should have the same benefits and burdens under the Income Tax system.”

      Which is why I have advocated repeatedly for the flat tax. But I am not interested in complaining about what one person makes…only that we each contribute the same percentage of what we earn. Yet what you earn is none of my business beyond that. That is between you and the person willing to compensate you.

      bm:

      I have really failed to make my points.

      It is not the person, that is the problem. It is the system that is unequal for its participants that is the problem. The Flat Tax still allows the IRS and IRC to exist, and these two are the roots of the problem.

      --------

      “Apple didn't crush anything”

      You might want to check PC/laptop sales in comparison to Apple products. Dell had to go private because they lost so much market share.

      bm:

      Maybe you might enlighten me.

      -----

      “My point about $525 a share before the 7 to 1 stock split is that the price is unrealistic to be sustainable. It is hard to conceive with the rise of Google that Apple will continue its string of success.”

      If you split a stock 5000 to 1 it doesn’t change the equity in the company. Sustainability in terms of price is based upon market cap in relation to profit and future profit growth. Stock splits are for marketing purposes. They change nothing. And I am sure at some point someone or entity will give them a run for their money. It’s called creative destruction. If that didn’t happen we’d be in a lot of trouble.

      bm:

      Once again I failed. It is obvious from my comment that I understand that 7 times 75 is the same value as 525, and the dividend per share is 1/7.

      My point is that the price of Apple stock cannot be maintained, for the same reason as Blackberry failed. That is why I put Blackberry in my previous comment.

      -----

      “My major point was that, the tax system makes no sense for the billionaires to make ten billion dollars in one year. In years, when the bulk of the people are not doing that well”

      The tax system will never change how other people are doing if it is based on a concern for what one group has earned over another. What you want is for wealthy people to be encouraged to make capital investments. That is the only way the tax system will be improved for the greater good. Simply comparing what one person earned in comparison to the other ignores the difference in economic value between the two. You don’t create wealth by confiscating it from one group because you think they have too much. That is the definition of redistribution.

      bm:

      ?? It is not the people it is the system.

      -------

      “Bill Gates et al is using money that should have been taxed and then distributed by the government”

      Bill Gates and those in the top 10% already foot nearly the entire tax bill. Sending more of their money to the gov’t will get us nothing but more bridges to nowhere and unsustainable entitlement programs that make people dependent on gov’t.

      bm:

      That is not true, it is only half.

      ------

      “The government doesn't spend enough money of the citizens of the US”

      The gov’t is not supposed to take care of you…you are supposed to take care of yourself. That’s why it is “Life, Liberty and the PURSUIT of happiness”. I don’t want the gov’t to help me economically. Especially not by taking from others. There is a role for gov’t to regulate and provide for basic services. The gov’t should regulate rules…not outcomes. My great grandfather came to the US with less than $20. He got off the boat at Ellis Island and there was no medicaid, welfare program or any other help. In a few years he had a barber shop and a successful dry goods store. And he didn’t expect anyone to take money from the Rockefeller’s because they had more than him.

      bm:

      I never said that, and I don't understand your comment.

      Here is my full comment about that snippet

      you are right it is the job of the US government to give money to people around the world. And Bill Gates et al is using money that should have been taxed and then distributed by the government. The government doesn't spend enough money of the citizens of the US. They did little to nothing to help the victims of the bad loans leading up to the economic meltdown in 2008. They bailed out the villains, but neither the government money flushed financial industry, nor the government bailed out the victims, who lost their homes, their jobs, and their livelihood. The banks in 2009 hugging all the government bailout money wouldn't even loan money to other.

      -------

      “The people that say the upper ten percent pay as much as the ninety percent, don't realize that the tax slice for the rich is not as much of a burden as it is for the ninety percent. Another reason why I don't like percentages, as they don't tell the whole story.”

      Who cares how much more of a burden it is. It’s not their job to carry your weight for you. You have as much an opportunity to start at the bottom like countless people who are part of the top 10% have. I lived with 4 people in one room as a kid. My father a single parent until I was 5 went to bed hungry to make sure I ate many a nights when I was young. I moved out at age 16 and worked 3 jobs while I was finishing High School. Neither my parents or myself ever took a nickel from a social assistance program. Not even unemployment. Today, I am in the top 10%. And after all that struggling…I have to worry about your burden also. Where were you when I was struggling ??? If someone wants to contribute to worthwhile charities…that is very noble. But expecting me to pay a higher percentage because I can afford more of a burden is unfair to me. You see only wealthy people, and not where many of them came from and what they had to do to get there.

      bm:

      I don't understand your reasoning, it is not consistent with my comment.

      -----

      “The end result as depicted by Bill Gates, Warren Buffet and others seems to tell a different story.”

      I don’t know what to tell you. Read the actual tax law. The rules are the rules. You just assume people give money to charity exclusively for the deduction. When in fact people give money away and sometimes don’t claim the deduction, or give money well in excess of deduction limits. Being rich doesn’t mean you are heartless. Many just feel charities are more effective at assisting people…so they send it there. And many give to charity anonymously because they don’t want fanfare when they are high profile people. George Steinbrenner was famous for that only after he died.

      bm:

      Bill Gates is not George.

      It has little to do with the people, and it has to do with the money that is being donated. It is was money that should have been taxed, but escape it because of the IRC that is not available to the 90 percent, then, they are donating money that should have gone to the government.

      The government not getting all that income will raise taxes on the 90 percent to make up the difference.

      -----

      As for Steve Jobs

      Next was not a success, neither was Apple 2 or 3, or Lisa.

      The Mac OS was originally developed by Xerox, Palo Alto Research Center.

      Bill Gates DOS was a slightly modified version of CPM. That base was the reason why there were so many holes in the OS, and even when we went to Windows 3.1, there was still a DOS in it.

      Again, it is not the people, it is the system. And the Flat Tax keeps the system alive. It is the same way DOS was kept alive, when they went to Windows.

      ---

      BTW, it seems like many of your arguments are getting personal rather than responsive.

      That is the drift that I am sensing. I have no desire to make it personal.

      Bm

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      “The Flat Tax still allows the IRS and IRC to exist, and these two are the roots of the problem.”

      And as I said, there will be an agency to account for compliance and a code to follow no matter what tax system we use. The only way there won’t be…is if the gov’t works on an honor system…which will never happen.

      “Maybe you might enlighten me”

      Apple accounts for 19% of the PC/tablet market share. In the 80’s they were on the front page of business week as a once great company that was going under and were a non factor. Then Steve Job came back and the whole organization turned around. Since his death they have begun to lose market share…and the PC makers are gaining some ground again.

      http://www.macrumors.com/2014/02/05/apple-19-5-pc-...

      “My point is that the price of Apple stock cannot be maintained, for the same reason as Blackberry failed. That is why I put Blackberry in my previous comment.”

      The price can be sustained and continue to grow. That is just more difficult to do in the tech sector because of the rapid advancement and highly competitive changes in the field. But other companies like Coca-Cola have maintained market share and grown their market cap and earnings consistently for a century. There are no limitations on economic growth. It is just a question of which of the competitors will capture the market share. And the revolving competition in any sector is good for the consumer.

      “That is not true, it is only half”

      I wasn’t talking about just billionaires…I was talking about top earners. And the bottom half of earners pay almost zero in terms of income taxes. They do pay other taxes…like ½ the payroll tax. But the point is that whether you measure the top 1% or 10%...they are paying for far more services then they can ever utilize. The top 1/10th of 1% pay 16% of all Federal income taxes…but can’t use 16% of all Federal services. The top 1% pays about 38% of the income tax bill…but does not use 38% of gov’t services. The top 10% pay about 70% of all income taxes…but couldn’t possibly use 70% of all gov’t services. They are already paying a disproportionately high portion of the overall Federal liability…and much higher than in most years past. The benefit of the flat tax is about simplicity, not trying to get more money from those people who already pay by far and away the bulk of the bill. Simplicity directs resources more productively which is good for overall economic activity and society as a whole.

      “I never said that, and I don't understand your comment.”

      Your comment implies that homeowners should be bailed out for being foolish enough to borrow more than they can afford to pay back. The govt’s job is not to bail anyone out. So let me be clear. I said earlier that TARP was a success. It was in the sense that it stabilized the banking system, which paid the money back with interest to the taxpayer. If that did not happen there would have likely been no banking system if there had been a run on the banks. Without the banks…it is essentially impossible for the M2 supply to expand. About 95% of all the money circulating in M2 is bank created credit. So without TARP…there would have probably been a huge sucking sound, and little left that you would have recognized. That doesn’t mean I support bailouts. I would have preferred to take the pain and rebuild organically. Unfortunately, the gov’t created the mess in the housing market by socially engineering the system. So they had a responsibility to provide some measures to fix what they created. But I have no interest in the gov’t helping people who borrowed to much money. Why…because they lost their house. No…because it isn’t your house unless you paid for it.

      “I don't understand your reasoning, it is not consistent with my comment.”

      You said… “The people that say the upper ten percent pay as much as the ninety percent, don't realize that the tax slice for the rich is not as much of a burden as it is for the ninety percent”

      The burden on one person has no bearing on the other. I should not have to incur a larger burden because it easier for me to do so. If 15% of a million dollars doesn’t change my lifestyle, but 15% of 50k might change your lifestyle…than too bad. I am saying make more money if it’s a problem, and stop worrying about what others have. We should all be paying the same percentage. It’s a larger burden for me to sit in rush hour traffic than someone with no kids…because I have to get home faster and get them dinner, lunches made for the next day, in the shower and ready for school the next day. Should I get different treatment because my burden is different ??? Do I get to ride in an express lane because of my greater burden of responsibility ???

      “t has little to do with the people, and it has to do with the money that is being donated. It is was money that should have been taxed, but escape it because of the IRC that is not available to the 90 percent, then, they are donating money that should have gone to the government.”

      That’s a good way to make sure that hospitals close when catholic charities can’t fund them anymore…hospice stops helping provide end of life care, St Jude’s stops providing for kids with cancer at no cost to the family. If the money went to the gov’t…it is as good as setting it on fire. Charities do enormous good. The reason it isn’t taxed completely is because it is not income if you gave it away. Charities do ENORMOUS good. Gov’t is completely inept…and you want to give them more funding.

      “Bill Gates is not George”

      You have no idea what he is doing. That is totally presumptuous. Steinbrenner was portrayed as the evil rich guy who hired and fired people like a bodily function…meanwhile he was secretly paying for the college education of poor families and nobody knew publicly until he was dead. Sounds like you don’t like the quality product that MSFT puts out…so you assume Gates is a bad guy. That’s the only personal attack I see. I have nothing against you personally.

      “As for Steve Jobs…Next was not a success, neither was Apple 2 or 3, or Lisa.”

      I don’t care what product was a success. The point of the article was to demonstrate his attitude towards achieving success. To him…the concept of “it can’t be done” was totally foreign to him. That’s why he died a billionaire. Most extremely successful people are just extreme workaholics that need to be constantly accomplishing something. They are a minority because most people would never make such sacrifices…and aren’t as innovative, as big a risk taker…or have such leadership skills.

    • LandmarkWealth profile image
      Author

      LandmarkWealth 2 years ago from Melville NY

      @myesoteric

      “But @LW, "come up with your own idea and invent your own company and you can have as any shares as you want" means that the barriers to doing so are low; however we both know that is nowhere close to being true once Apple and Microsoft have established oligopolistic control over the personal OS market. The only challenge possible at the moment is from an open architecture like Linus, but to become democratically dominant, the other two must be shattered. In that case, the barriers are lowered and you have your shot at getting one millionth of the Linus pie.”

      Why does your idea have to be competition with Apple or MSFT ??? Why must it even be in the tech field at all ??? Invent a faster way to boil water or roast a chicken…or whatever. If people want it, they will buy it. Nobody knew they wanted facebook until it was offered. If you thought of Angie’s list first…you’d have made a lot of money. If you have a great idea…a patent is easy to get. And if the idea is something people really want…there is an awful lot of venture capital money out there waiting to finance a new idea that can be highly successful. Just ask Jack Ma from Alibaba.

      The barriers are only limited by our creativity. If a person is not as creative as the most successful innovators of new products and services…than they won’t ever be as successful.

      “Keep in mind, the Right does not want our government or anybody else, for that matter, giving money to the American poor, they only want the rich to receive it.”

      No the “right” doesn’t believe that the gov’t is in the least bit effective when they take money that is supposedly spent on the poor…yet haven’t moved the poverty level and inch since the Great Society. The “right” is the most philanthropic group in the nation. Particularly, the more religious political “right”. Arthur Brooks documented this in great detail in his book “Who Really Cares”. And they are not all rich. The right has an inherent, and in my view valid distrust of the effectiveness of gov’t to assist the poor in any way other than keeping them poor and on social assistance. As such, they are much more likely to want to give money and/or volunteer their time to a place like St Jude’s rather than our congress.

      http://www.nytimes.com/2008/12/21/opinion/21kristo...

      “But, there is a moral issue of wealth breeding wealth in the generations that follow with no labor input from the recipients. That is why I have changed my mind about taxing inheritance; it should be progressively taxed.”

      I see no such moral issue with my being permitted to leave that which I have earned and already been taxed on numerous times to my own children and grandchildren without compensating you and the rest of the country accordingly. It is once again…nobody's business if I want my kids to have enough that they can have it much easier than I ever did. In fact we should all aspire to that for our kids.

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