You've probably seen this chart recently - Maybe on Reuters or in Financial Risk monthly or on the back page of the Post the guy sitting across from you on the subway was reading. Maybe you always read all the IRS news releases or maybe you just found it in the dictionary, under “unsustainable?”. The table shows some interesting facts. Based on tax returns filed for years 1992-2007, America's top 400 households are reporting an ever increasing share of the nation's income and an ever falling effective tax rate, a combination sure to stir bile in the blogosphere. Given the current unemployment rate, that blogosphere bile might actually turn into mass populist outrage, a serfs storming the castle kind of phenomena, the sort of thing that can create financial risk, maybe even change, for a whole system.
What to do? For starters, douse your torch and lay down your pitchfork. We're not sure exactly which castle to storm The fab 400 has a lot of turnover. 72% made the list in only one year. Only one-fifth of one percent made the list all 16 years. Then think. What if you get to the castle and Bill Gates answers the door? Sure he had some sharp elbows when he was building Microsoft, but he created a lot of jobs, and now he's giving most of his fortune away, wisely. Suppose it's Warren Buffet, for years a voice of clarity in a world of double talk, now he's refilling Gate's philanthropic pockets faster than Bill can empty them. Now that you're a little calmer, I agree with you – the trends in this table seem to be headed for real problems, systemic political and financial risk, that we should do something about.
You can make the rich poorer, with income redistribution through taxes, but it's more fun to make the poor richer, so let's start there. When “rich” is the fab 400, there are an awful lot of “poor”. The number of high paying blue collar manufacturing jobs will never bounce back. It's not the economy, it's not even free trade (manufacturing jobs are declining in China) it's productivity. We manufacture more with less people, everywhere. Education is probably the single most important factor in upgrading the non-rich to higher paying jobs (or any job in the case of the unemployed). The easiest single fix might be to better align educational choices and job opportunities. Propaganda in elementary school never hurts. I'm working on a comic book about an heroic civil engineer and her faithful sidekick, a physician's assistant. Fear might also be a useful deterrent – every would-be English, History and Philosophy major could be required to sign an acknowledgment, “I understand the selection of this major will lead to chronic unemployment and I will ultimately have no choice but to go to law school or retrain as an elementary school teacher.”
Now, let's talk redistribution. You will soon be hearing a lot about VAT as the solution to our fiscal crisis, so let me get that first VAT joke out there right now. What's VAT? A sales tax that comes with its own bureaucracy. That's right, you don't see it as a sales tax (because through a series of collections and partial refunds VAT is handled in stages as goods are produced), but VAT has the economic impact of a sales tax. No sales tax will make a dent on the fab 400, they just don't spend a large enough percentage of their income. In fact, any new VAT or sales tax will exacerbate the trends that are already in the chart. That's right, VAT, like any sales tax, is regressive. At this point in history the VAT might actually be a financial risk in its own right.
Forget VAT and try two old things to turn those effective tax rate trends around. First, WAIT. 2007 was a very good year for capital gains. 2008 and 2009, not so much. The rich thrive on capital gains and our fab 400 had lots of them in 2007. Both the percent of total income and the effective tax rate trends might reverse, or at least decelerate, once the 2008 and 2009 data is available. Second, once we're confident we aren't facing a double dip recession, raise the capital gains tax, by a moderate amount and the top tier marginal income tax rate, by a moderate amount.