What do Americans think of a 70% marginal tax rate?

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New Boston Indicators analysis finds that despite economic gains, inequality persists in Greater Boston

A new report by Boston Indicators finds that Greater Boston’s continued economic boom has failed to crack persistent economic inequality among residents. 

The new report, Boston’s Booming… But for Whom?: Building Shared Prosperity in a Time of Growth, was released Wednesday morning to a crowd of 300 people at the Edgerley Center for Civic Leadership.

The report finds that Boston actually ties for second nationally among the nation’s largest cities when it comes to the ability of those raised in lower-income households to improve their economic state as working-age adults. Boston also ranks high when breaking out by race, but the analysis finds that Blacks in the cohort still earn 22% less than their white peers.

The challenges of the economic boom on the middle-class are evident in the shrinking size of Boston’s middle class. A Boston Indicators analysis finds that while the number of low- and high-income city residents has risen sharply in the past three decades, the number of middle-class residents has declined.

One possible culprit? The cost of housing. Despite the City of Boston playing a leadership role in the region by creating thousands of units of affordable housing, the Indicators team analysis found just 20 census tracts of 150 in Boston where median rent would be considered affordable for a median income household. That list included zero tracts in Roxbury, Dorchester or Mattapan.

Affordable housing by median income
Redoubling efforts to produce affordable housing, close Boston’s racial homeownership gap, improve transportation, and continue to reduce incarceration in Massachusetts are highlighted among a dozen local action areas for building greater shared prosperity in the region.

The report is available now for download, and easily can be read online at bostonindicators.org.

The Indicators team plans to take deeper dives into a number of the issues raised by the report during the course of the coming year.


Source: Boston Foundation

Can higher capital taxes finance infrastructure and diminish inequality?

A new NBER working paper, "Overcoming Wealth Inequality by Capital Taxes that Finance Public Investment," by Linus Mattauch, David Klenert, Joseph E. Stiglitz, and Ottmar Edenhofer 

Abstract:

Wealth inequality is rising in rich countries. Capital taxation used simply to finance redistribution may not be able to counteract this trend, but can increased public investment financed by higher capital taxes? We examine how such a policy affects the distribution of wealth in a setting with distinct wealth groups:  dynastic savers and life-cycle savers. Our main finding is that public investment financed through capital taxes always decreases wealth inequality when the elasticity of substitution between capital and labor is moderately high.  Indeed, for all elasticities of substitution greater than a threshold value, at high enough capital tax rates, dynastic savers disappear in the long run.  Below these rates, both types of households co-exist in equilibrium with life-cycle savers

gaining from the higher capital tax rates.  These results are robust with respect to the different roles of public investment in production. We calibrate our model to OECD economies and find the threshold elasticity to be 0.82.

More here. 

Trade does not increase income inequality

A recent IMF paper by Diego A. Cerdeiro and Andras Komaromi  "Trade and Income in the Long Run: Are There Really Gains, and Are They Widely Shared?" tackles big questions about income and income inequality related to trade. 

Abstract

In the cross-section of countries, there is a strong positive correlation between trade and income, and a negative relationship between trade and inequality. Does this reflect a causal relationship? We adopt the Frankel and Romer (1999) identification strategy and exploit countries' exogenous geographic characteristics to estimate the causal effect of trade on income and inequality. Our cross-country estimates for trade's impact on real income are consistently positive and significant over time. At the same time, we do not find any statistical evidence that more trade increases aggregate measures of income inequality. Heeding previous concerns in the literature (e.g. Rodriguez and Rodrik, 2001; Rodrik, Subramanian and Trebbi, 2004), we carefully analyze the validity of our geography-based instrument, and confirm that the IV estimates for the impact of trade are not driven by other direct or indirect effects of geography through non-trade channels.

Good question from LifeHacker: "Why the Dow Jones Breaking Records Isn't Helping Your Bottom Line"

Why the Dow Jones Breaking Records Isn't Helping Your Bottom Line

To put it in perspective: just 52 percent of American adults owned stocks in 2016, according to Gallup. And as you may have guessed, that stock ownership is not evenly distributed among income groups: The Federal Reserve reports that 93.6 percent of families earning a median salary of $251,500 (the top 10 percent of wage earners) owned stock in 2016, while less than 40 percent of families earning up to a median salary of $54,100 did (0 to 50th percentile). Separately, an economist from New York University found that the top 20 percent of earners owned 92 percent of the stocks in 2013. So celebrating record highs for an arbitrary measure that almost half of adults don’t benefit from doesn’t make a ton of sense.

What’s a better measurement for the average worker? I’d posit employment, wages and debt. And here’s the thing. If you don’t have a job at all, you’re likely less concerned with whether the Dow is at 21,000 or 25,000 than when you’ll get your next paycheck. The unemployment rate is at a 17-year low, but economists worry that job growth may begin to slow. Then there’s wages, which are low, and our debt, which keeps increasing*—according to the Federal Reserve, consumer credit card balances are at a new all-time high of $1.0227 trillion, which should give the Dow enthusiasts pause. (*Actually, the Fed recently found we’re slightly less indebted overall because we’re not buying houses, which isn’t exactly a silver lining). Are you really celebrating the Dow’s new watermark if you have over $25,000 in student loan debt?

Federal Reserve Bank of St. Louis: MSA real income in the early 1970s influenced population growth

Extract:

The figure seems to indicate a positive correlation between these variables. For instance, the Seattle, Denver, Anchorage, and San Diego MSAs, which had relatively higher real incomes in 1970, experienced high population growth over the period. On the other hand, the Detroit, Philadelphia, and Pittsburgh MSAs, which had lower real incomes in 1970, seem to have experienced lower (negative) population growth. Not all cities exhibit the positive correlation, however. The Atlanta, Houston, and Dallas MSAs had low average real incomes in 1970 yet experienced high population growth over the period. Incomes in these MSAs, however, have grown rapidly since 1970, which could be a main reason for the population growth.

Read the entire synopsis here.  Complete analysis in PDF. 

High skills generation induces consumption that requires more high skill production, driving inequality

From the new NBER working paper by Justin Caron, Thibault Fally and James Markusen, "Per Capita Income and the Demand for Skills," 

Almost all of the literature about the growth of income inequality and the relationship between skilled and unskilled wages approaches the issue from the production side of general equilibrium (skill-biased technical change, international trade). Here, we add a role for income-dependent demand interacted with factor intensities in production. We explore how income growth and trade liberalization influence the demand for skilled labor when preferences are non-homothetic and income-elastic goods are more intensive in skilled labor, an empirical regularity documented in Caron, Fally and Markusen (2014). In one experiment, counterfactual simulations show that sector neutral productivity growth, which generates shifts in consumption towards skill-intensive goods, leads to significant increases in the skill premium: in developing countries, a one percent increase in productivity leads to a 0.1 to 0.25 percent increase in the skill premium. In several countries, including China and India, simulations suggest that the historical growth experienced in the last 25 years may have led to an increase in the skill premium of more than 10%. In a second experiment, we show that trade cost reductions generate quantitatively very different outcomes once we account for non- homothetic preferences. These imply substantially less predicted net factor content of trade and allow for a shift in consumption patterns caused by trade-induced income growth. Overall, the negative effect of trade cost reductions on the skill premium predicted for developing countries under homothetic preferences (Stolper-Samuelson) is strongly mitigated, and sometimes reversed. 

Or to put in other words:

We provide a quantitative assessment of a simple yet overlooked mechanism:  growth in income increasingly shifts consumption patterns towards goods and services that require relatively more skilled labor in their production. 

Read more here. (Gated)

Increased consumption for most families despite growth in income inequality

Income inequality has been increasing but so has consumption according to a working paper by Bruce Sacerdote of Dartmouth College. 


Extract:
Despite  the  large  increase  in  U.S.  income  inequality,  consumption  for  families  at  the  25th  and  50th percentiles  of  income  has  grown  steadily  over  the  time  period  1960-2015.  The  number  of  cars  per household  with  below  median  income  has  doubled  since  1980  and  the  number  of  bedrooms  per  household has  grown  10  percent  despite  decreases  in  household  size.  The  finding  of zero growth in American real wages since the 1970s is driven in part by the choice of the CPI-U as the price deflator (Broda and Weinstein 2008). Small biases in any price deflator compound  over  long  periods  of  time.  Using a  different  deflator  such  as  the  Personal  Consumption Expenditures index (PCE) yields modest growth in real wages and in median household incomes throughout  the  time  period.  Accounting  for  the  Hamilton (1998)  and  Costa  (2001)  estimates  of  CPI  bias  yields  estimated  wage  growth  of  1  percent  per  year during  1975-2015.  Meaningful growth  in  consumption  for  below  median  income  families  has  occurred even  in  a  prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.


Link: Fifty Years Of Growth In American Consumption, Income, And Wages - 61497-w23292.pdf

The debate on what to do about income inequality intensifies

Or, is the debate shifting to one about semantics?

From Fatih Guvenen and Greg Kaplan in a new NBER paper.

We revisit recent empirical evidence about the rise in top income inequality in the United States, drawing attention to four key issues that we believe are critical for an informed discussion about changing inequality since 1980. Our goal is to inform researchers, policy makers, and journalists who are interested in top income inequality. Our analysis is based on a reexamination of publicly available detailed statistics from two administrative data sources: (i) Internal Revenue Service (IRS) data on total incomes (labor income plus capital income), reported in Saez (2012), and (ii) individual-level micro data on labor income (wage plus self-employment income) from the U.S. Social Security Administration (SSA)  reported in Guvenen et al. (2014).

One key take-away:

Put simply, so far in the 21st century, all the action in top income shares has been S-corporation income at very, very high income levels.

National Bureau of Economic Research Working Paper 23321.