Alan Reynolds yet again argues in the WSJ that there has been no increase in income inequality. Most objective observers agree that income inequality has indeed grown, and that the top 1% (and top 0.1%, 0.01%) have all gotten relatively richer than the rest of of us.
A similar column (and other work) from a couple yrs ago did not stand up to scrutiny: See Gary Burtless of Brookings, and Piketty and Saez.
But say he was right – and that pre-tax income inequality was always as skewed as it is today. What does that say about the tax code? Well, it might then say that the top 1% will do fine no matter what the top marginal tax rate is – we’ve had a wide range of top marginal tax rates over the last 75 years. So increasing by a few percentage points would be just fine. Somehow I don’t think he’d agree.
The Truth About the Top 1%
By ALAN REYNOLDS
October 25, 2007; Page A23
Key legislators and presidential hopefuls in the Democratic Party have proposed raising the top two tax rates. They’re also suggesting extra surtaxes for war, for alleviating the Alternative Minimum Tax, for Social Security, and for subsidizing compulsory health insurance. Barack Obama and John Edwards advocate taxing capital gains at 28%; Hillary Clinton favors taxing dividends at the surtaxed income-tax rates.
The argument for these proposals has nothing to do with the impact of higher tax rates on incentives and the economy. It is all about “fairness” — defined as reducing the top 1%’s share of income.
This political exercise invariably begins by citing dubious statistics about pretax incomes among the top 1% (1.3 million tax returns) as an excuse for raising tax rates on the top 5%, among others. Echoing speeches from Sen. Clinton, Business Week recently exclaimed, “According to new Internal Revenue Service data announced last week, income inequality in the U.S. is at its worst since the 1920s (before the Great Depression). The top percentile of wealthy Americans earned 21.2% of all income in 2005, up from 19% in 2004.”
These statistics are extremely misleading.