INEQUALITY, POVERTY, AND TAXES
Miller, Herman P.
Herman P. Miller Inequality, Poverty, and Taxes Income distribution in the United States has remained virtually unchanged for onequarter of a century. According to govern- ment figures,...
...The share going to the very wealthy is cut back from 7 percent to 5 percent based on these assumptions...
...benefits from public assistance and social security were allocated to the recipients of these types of income, etc...
...and vast expenditures were made to improve the quality of education in low-income areas...
...and the share going to those with incomes of $25,000 or more is reduced from 18 percent to 14 percent...
...We may not choose to have redistribution as a social goal...
...And he is happier provided that the income of others does not go up as much as his own...
...We have been led to believe that the great fortunes such as those created by the Mellons, Carnegies, and the Rockefellers are a thing of the past...
...For years we have been told by conservative economists that we have little to gain by taxing the wealthy more heavily...
...If these studies are valid, our statistical indicators regarding poverty are misleading...
...if that group is called poor, the incidence of poverty must remain unchanged...
...and 1 percent of the units have wealth of $200,000 or more and own over one-third of the wealth...
...We have been led to believe that the great fortunes such as those created by the Mellons, Carnegies, and the Rockefellers are a thing of the past...
...These figures show that less than one-half of 1 percent of families and individuals with assets of $500,000 or more own 22 percent of all the wealth in the United States...
...We live in a society in which real incomes are going up at the rate of 2 percent per year...
...In other words, the absolute economic well-being of the bottom income groups would have improved even though their income in relation to others would not be changed...
...We live in a society in which real incomes are going up at the rate of 2 percent per year...
...We shall soon see where their policies lead us...
...Economists who say otherwise are going beyond the limits of the knowledge of their profession...
...and vast expenditures were made to improve the quality of education in low-income areas...
...Although these changes did not alter the dktribution of income very much, they demonstrated widespread awareness and deep concern with the problem at the very highest levels of government...
...by 1972, this rate had dropped to 38 percent...
...Also excluded are capital gains, undistributed profits, and imputed income...
...We can assume that the final third is spent to protect our property...
...The benefits of expenditures on elementary and secondary school education were allocated to families with children in school...
...There has been little change during the past 25 years...
...also “Tax Changes Among Income Groups,” Business Horizons (Indiana University), February 1972...
...The poverty line was then adjusted back to 1959 on the basis of changes in the cost of living index, and it has been adjusted upward each year since 1963 on the basis of the same index...
...All we know from experience is that we had a major redistribution of income 25 years ago and there were no measurable harmful effects...
...Under the present definition, no provision is made for the changing of' the content of the poverty budget...
...Some socialist countries have found that they have had to widen wage differentials in order to stimulate productivity...
...The average income of families that were not poor was $10,021 in 1959 and $13,672 in 1972 (again, using dollars of constant purchasing power...
...This share can be distributed proportionate to our wealth...
...Despite the rhetoric of the Great Society architects, their programs did not change income distribution very much, if at all...
...These feelings and attitudes become so much a part of us that we come to assume they are based on facts...
...According to government figures, the poorest 20 percent of all families received 5 percent of the cash income in 1947 and they receive the same share today...
...The greatest obstacle to income redistribution and major tax reform is not a lack of evidence that such changes are needed or a lack of knowledge of how to achieve these goals...
...All we need is the desire to do so...
...This share can be distributed proportionate to our wealth...
...There is little evidence to support these beliefs...
...Abut one-third of all the wealth in the United States is owned by the top 1percent of the families who have a net worth of $200,000 or more...
...But even before the onset of these problems, American voters showed strong antagonism to policies designed to alter income distribution...
...Social scientists assumed that an inexorable law determined the distribution of income in a given time and place, and that changes in that distribution could be made only at great peril to the social order...
...These items are omitted from the official figures primarily because the procedures that have been developed for distributing them by income levels are regarded as too crude to * Roger A. Herriot and Herman P. Miller, “The Taxes We Pay,’’ Conference Board Record, May 1971...
...Rather it is the belief most of us have that such changes are unwise, unfair, and unwarranted, and that some great evil will befall us if they are made...
...After 13 years, however, it begins to lose its relevance...
...Some economists went so far as to assert that a sharp rise in income inequality would cause a revolution and a sharp drop would cause a civil war, It has been argued that the French and Russian revolutions were caused by undue concentrations of income and wealth whereas the Spanish revolution of the late 1930s was caused by “socialistic trends” that followed the overthrow of the monarchy and “lowered greatly the ratio of concentration from its Pareto norm...
...These items are omitted from the official figures primarily because the procedures that have been developed for distributing them by income levels are regarded as too crude to * Roger A. Herriot and Herman P. Miller, “The Taxes We Pay,’’ Conference Board Record, May 1971...
...It is important to realize that although the numerical value of the poverty line increases each year, it is a fixed standard in terms of the quantity of goods and services that it provides...
...and when the incomes of some people go up, but at a slower rate than the income of others, that becomes a source of discontent...
...As a starter, we might assume that one-third of the expenditures are made to protect our freedom and that we all get an equal benefit from that component...
...OF CONSUMER UNITS BY AMOUNT OF WEALTH: 1962 PercentDistribution Amount ofWealth Consumer Units Wealth Less than $1,000 26 * Less than $5,000 45 2 Less than $10.000 61 7 1 35* 22that “higher taxes induced more wives of business executives to enter the labor force and in general led executives themselves to More than $260,000 More than $500,000 *Less than one-ha1f Of percent...
...Assume also that an additional third is spent to protect our lives...
...They believe that the government serves the interests of the few who are wealthy and powerful rather than the great majority...
...Debts are subtracted from the market value of each of the above assets, and the result is the estimate of net worth for each consumer unit...
...it takes a change in feelings...
...But there is no sound economic reason why we should not resume the progress that ended one-quarter of a century ago...
...The great majority of the American people have lost faith in their government...
...Because of high taxes and the high cost of living, very little saving is accumulated by the lower and middle income groups...
...Incame Inequality and Taxation INCOMES IN THE UNITED STATES are much more unequally distributed than the official figures show...
...Spokesmen for the rich have long tried to persuade the rest of us that they are being pauperized by heavy taxation...
...The average income of rich families was $27,267 in 1959 and $40,142 in 1972 (in constant dollars...
...They believe that the government serves the interests of the few who are wealthy and powerful rather than the great majority...
...When this same comparison is made between the poor and the rich (defined as the top 5 percent of the families ranked from lowest to highest by income), the results are even more striking...
...He cites one study showing postpone thek dates of retirement...
...In the reports referred to above, Mr...
...In other words, the equalization of incomes during the ’30s and the early ’40s did not diminish the productivity of the economy...
...It can destroy incentives to work or invest and thereby become detrimental to the health of the economy...
...One way to help change that image would be a major revision of the tax laws, which have long provided a shelter for the rich and have deprived society of the funds needed for income maintenance of the poor, better housing, improved education, and numerous other social and economic programs...
...The economizers are firmly in the saddle...
...also “Tax Changes Among Income Groups,” Business Horizons (Indiana University), February 1972...
...According to a recent report by the Brookings Institution, the same proportion of income is paid in taxes by families at the 20th percentile and at the 99th percentile...
...There was more objection to McGovern’s stand on income redis40 tribution than to any other part of his program, nor is there evidence that attitudes on this subject have changed much since...
...These assets include equity in a home or business, checking and savings accounts, savings bonds and other liquid assets, and bonds and stocks...
...families of four with incomes below this amount were statistically classified as poor...
...Or, stated differently, the average income of nonpoor families was four and one-half times that of poor families in 1959...
...It is assumed that poor people will maintain the same level of living even though the level of living of everyone else has been rising...
...For the moment, the nation appears to have lost its interest in income redistribution...
...At the bottom end of the distribution we find that 45 percent of the units Table 2 CUMULATIVE DISTRIBUTION...
...According to the best estimates, the number had grown to 200,000 by the end of the ’60s...
...they are just ingrained in us by constant repetition in our homes and our schools, on television and in the press...
...The fact is that people’s feelings about their economic well-being are based, not only on their own incomes, but also on the incomes of those around them and on the income that is considered necessary to get along in this society...
...If we were to tax the rich more, it might be possible to do some of those things we now say we cannot afford to do...
...But these figures exclude about $260 billion of unreported cash income, capital gains, undistributed profits, and imputed income, all of which accrue disproportionately to the top-income groups...
...This represents a fourfold increase from the beginning of the decade...
...Today, however, few Americans seem to have much interest in redistributing income...
...During the ’50s the number of millionaires doubled, increasing from 27,000 to 53,000...
...A recent study by Professor Richard Easterlin of the University of Pennsylvania, based on 30 surveys conducted in 19 different countries where information was collected on the relationship between happiness and income, shows that in all societies, at any given point in time, happiness tends to increase with income (Le., those who have more income tend to be happier...
...It is comforting to know that we have the wealth to create a better world if we become disenchanted with their false economics...
...and even if we should try and fail, the action is not irreversible...
...When every income goes up at the same rate, no one is happier...
...There is little point in changing the percentage of the economic pie received by the poor if it means they will receive a smaller piece...
...In short, we could decide to raise the incomes of poor people and tax the rich more to help pay for it, if we want to, and not have the feeling that we are violating some natural law or endangering social order...
...Nothing could be further from the truth...
...The misleading nature of government proclamations heralding the decline of poverty in the United States can be demonstrated with just a few figures...
...The dollar gap between the rich and the poor, therefore, increased from $25,089 in 1959 to $37,686 in 1972 and the average income of the rich rose from 12.5 times that received by the poor in 1959 to more than 16 times in 1972...
...Column D shows still another, and perhaps more reasonable, way to allocate expenditures for defense and related activities...
...The economizers are firmly in the saddle...
...The answer to this question is by no means clear, but it is worth exploring...
...it dropped again during World War I1 in response to economic forces, which created a great demand for unskilled labor as well as government policies designed to narrow wage differentials between low-paid and high-paid workers...
...It is by no means clear that those among the rich who work would stop working if we taxed them more...
...If the various types of noncash income that are omitted from the official figures are added to the distribution, the share going to the rich is vastly increased...
...This became the poverty line...
...but there is no good economic reason that requires us to make such a choice...
...Let us look a little closer at the basis for some of our attitudes regarding income redistribution and tax reform...
...These benefits can be allocated proportionate to the present value of the expected lifetime income of each family...
...There is no question that equalization of income can be pushed too far...
...The dollar gap between the rich and the poor, therefore, increased from $25,089 in 1959 to $37,686 in 1972 and the average income of the rich rose from 12.5 times that received by the poor in 1959 to more than 16 times in 1972...
...Our Federal Income Tax laws show that as a society we have a preference for progressive taxation (i.e., for taxing the rich at higher rates than the poor) ;yet, in practice we do not adhere to this policy...
...During the depression of the ’30s the share of income going to the top 5 percent of the families and individuals dropped sharply...
...After 13 years, however, it begins to lose its relevance...
...On the basis of this and other evidence presented in the report, Professor Easterlin concludes that each person believes he will be happier if his income goes up...
...Table 2 shows the distribution of consumer units by the total amount of assets owned...
...Social scientists assumed that an inexorable law determined the distribution of income in a given time and place, and that changes in that distribution could be made only at great peril to the social order...
...Assuming that families spend one-third of their income on food, the cost of the total budget was set at $3,128 for a nonfarm family of four...
...44 HERMAN P. MILLER is complicated...
...As we shall soon see, there are other reasons...
...The misleading nature of government proclamations heralding the decline of poverty in the United States can be demonstrated with just a few figures...
...Major changes were made in the civil rights laws...
...The few studies that have been made are small and inconclusive...
...it dropped again during World War I1 in response to economic forces, which created a great demand for unskilled labor as well as government policies designed to narrow wage differentials between low-paid and high-paid workers...
...If the standard for measuring poverty remains fixed for too long, we may decrease the number of people whom we call poor, but we will not change their feeling that they are still poor in relation to others around them...
...Most of the redistribution, however, took place during the depression of the ’30s and during World War 11...
...If these studies are valid, our statistical indicators regarding poverty are misleading...
...It can destroy incentives to work or invest and thereby become detrimental to the health of the economy...
...For one thing, it takes more than information to change attitudes...
...They show how the net national product was distributed before taxes...
...How then is poverty defined in the U.S...
...Despite the rhetoric of the Great Society architects, their programs did not change income distribution very much, if at all...
...We can have a further reduction of inequality and a different distribution of the tax burden without necessarily hurting the economy...
...In the reports referred to above, Mr...
...The official statistical definition of poverty (or low income as the government now prefers to call it) was adopted a decade ago, when the Kennedy-Johnson War on Poverty was begun...
...The rich among us are still flourishing...
...But clearly that is not the case in the United States at this time...
...The average income of families that were not poor was $10,021 in 1959 and $13,672 in 1972 (again, using dollars of constant purchasing power...
...The results are shown in Table 4. The basic procedure required us to make assumptions as to who paid each tax and who benefited from each government service...
...In 1968, the federal, state, and local governments took one-third of our income in taxes and they gave it back to us in the form of transfer payments, goods, and services...
...Major changes were made in the civil rights laws...
...He cites one study showing postpone thek dates of retirement...
...According to government figures, the poorest 20 percent of all families received 5 percent of the cash income in 1947 and they receive the same share today...
...The rallying cry today is, “Balance the Budget...
...The average income of rich families was $27,267 in 1959 and $40,142 in 1972 (in constant dollars...
...however, the average income per family (adjusted to changes in purchasing power) has oontinued to rise at the rate of 2 percent per year compounded...
...Although these changes did not alter the dktribution of income very much, they demonstrated widespread awareness and deep concern with the problem at the very highest levels of government...
...Assuming that families spend one-third of their income on food, the cost of the total budget was set at $3,128 for a nonfarm family of four...
...Few economists today believe that there are inexorable laws of income distribution...
...Equivalent poverty lines were established for smaller and for larger families...
...Conclusion AT ONE TIME, income distribution was regarded as fixed...
...The big INEQUALITY, POVERTY, AND TAXES 47 ~ ~ ~~ from the middle class to the poor...
...Herman P. Miller Inequality, Poverty, and Taxes Income distribution in the United States has remained virtually unchanged for onequarter of a century...
...There is little evidence to support these beliefs...
...We shall soon see where their policies lead us...
...In 1968, the federal, state, and local governments took one-third of our income in taxes and they gave it back to us in the form of transfer payments, goods, and services...
...But there is no sound economic reason why we should not resume the progress that ended one-quarter of a century ago...
...In other words, the dollar gap between poor and nonpoor families rose Table 3A Average Income 1959 1972 Poor families $2,178 $2,456 Nonpoor families 10,021 13,672 Dollar gap 7,843 11,216 Ratio of nonpoor to poor 4.6 5.6 46 HERMAN P. MILLER from $7,843 in 1959 to $11,216 in 1972...
...It is based on a food plan (the Economy Budget) designed by the Department of Agriculture for emergency or temporary use when funds are low...
...If the various types of noncash income that are omitted from the official figures are added to the distribution, the share going to the rich is vastly increased...
...We can assume that the final third is spent to protect our property...
...If we were to tax the rich more, it might be possible to do some of those things we now say we cannot afford to do...
...The income gap between the rich and the poor in the United States has been narrowed within the lifetime of many who are reading this article...
...There is little evidence that taxation has dried up the sources of wealth...
...the share going to those with incomes between $4,000 and $25,000 is virtually unchanged...
...Herriot and I attempted to distribute the burden of taxation as well as the benefit of government expenditure by income classes...
...The last major attempt to alter the distribution of income in the United States occurred during the 1960s...
...Conclusion AT ONE TIME, income distribution was regarded as fixed...
...On this basis we find that the share of income going to families with income under $4,000 is more than doubled, going from 4percent to 9 percent as a result of the intervention of the government...
...This fozd plan was priced for a nonfarm family of four in 1963 and it was found to cost $1,042...
...There is no question that equalization of income can be pushed too far...
...When every income goes up at the same rate, no one is happier...
...The benefits of expenditures on elementary and secondary school education were allocated to families with children in school...
...Debts are subtracted from the market value of each of the above assets, and the result is the estimate of net worth for each consumer unit...
...Few Americans realize that poverty is defined statistically in such a way as to artificially deflate the number of poor and make the problem appear less serious than it really is...
...We won’t know if we don’t try...
...The official statistical definition of poverty (or low income as the government now prefers to call it) was adopted a decade ago, when the Kennedy-Johnson War on Poverty was begun...
...is economic growth...
...training programs were instituted for school dropouts and unskilled workers...
...The fact is that people’s feelings about their economic well-being are based, not only on their own incomes, but also on the incomes of those around them and on the income that is considered necessary to get along in this society...
...The average income of poor families was $2,178 in 1959 and $2,456 in 1972 (both figures measured in constant dollars of 1972 purchasing power...
...0 INEQUALITY, POVERTY, AND TAXES 49 the middle class to the poor...
...Attention is focused on fuel shortages, inflation, and corruption in government...
...By contrast, the richest 5 percent received 17 percent of the cash income in 1947 and 16 percent today...
...families of four with incomes below this amount were statistically classified as poor...
...Their status in the government figures is changed from poor to nonpoor, but their feelings of deprivation remain unchanged...
...According to the Council of Economic Advisers, the principal factor behind the decline in poverty in the U.S...
...Our tax policies are in part responsible for the chronic shortage of the funds that are to deal with many social and economic problems...
...These feelings and attitudes become so much a part of us that we come to assume they are based on facts...
...We won’t know if we don’t try...
...Rather it is the belief most of us have that such changes are unwise, unfair, and unwarranted, and that some great evil will befall us if they are made...
...Economists who say otherwise are going beyond the limits of the knowledge of their profession...
...All we know from experience is that we had a major redistribution of income 25 years ago and there were no measurable harmful effects...
...The great majority of the American people have lost faith in their government...
...In short, we could decide to raise the incomes of poor people and tax the rich more to help pay for it, if we want to, and not have the feeling that we are violating some natural law or endangering social order...
...training programs were instituted for school dropouts and unskilled workers...
...Column D shows still another, and perhaps more reasonable, way to allocate expenditures for defense and related activities...
...The official figures for 1968 are based on a total of $543 billion in cash reported in the census survey...
...For one thing, it takes more than information to change attitudes...
...Since these expenditures are made to protect our freedom, our lives, and our property, why not divide them into three different components and use a different procedure for each...
...and what are the limitations of that definition...
...Equivalent poverty lines were established for smaller and for larger families...
...The rich neither gain nor lose in the process, because most of what is taken away from them in taxes is returned in the form of an insurance benefit designed to protect their property...
...They even gave this law a name, “Pareto’s Law,” in honor of the Italian economist who was among the first to do empirical work in this field during the latter part of the 19th century...
...Or, stated differently, the average income of nonpoor families was four and one-half times that of poor families in 1959...
...Because of high taxes and the high cost of living, very little saving is accumulated by the lower and middle income groups...
...and when the incomes of some people go up, but at a slower rate than the income of others, that becomes a source of discontent...
...As a social gamble, such a program is certainly worth serious thought even on the part of the higher income groups who would have to pay the cost...
...This fozd plan was priced for a nonfarm family of four in 1963 and it was found to cost $1,042...
...However, as the income of a society increases, the proTable 3B Average Income I959 I972 Poor families $2,178 $2,456Rich families (defined as the top 5 percent) 27,267 40,142 Dollar gap 25,089 37,686 Ratio of rich to poor 12.5 16.3 portion of people who say they are happy remains unchanged...
...The official figures for 1968 are based on a total of $543 billion in cash reported in the census survey...
...It is entirely possible that we can travel further along the same path without ill effects...
...Just a few months prior to the 1972 presidential election, a Harris poll showed that threefourths of the voters objected to Senator McGovern’s proposal “to give each individual in the population $1,000 by sharply increasing taxes on people with incomes of $12,000 and over...
...by 1972, this ratio had risen to five and one-half times...
...In 1959, the poverty line for a family of four was 55 percent of the average family income...
...The answer to this question is by no means clear, but it is worth exploring...
...but there is no rational basis for such an assumption...
...A recent study by Professor Richard Easterlin of the University of Pennsylvania, based on 30 surveys conducted in 19 different countries where information was collected on the relationship between happiness and income, shows that in all societies, at any given point in time, happiness tends to increase with income (Le., those who have more income tend to be happier...
...A fixed standard may be suitable for measuring changes in poverty for a short period...
...On this basis we find that the share of income going to families with income under $4,000 is more than doubled, going from 4percent to 9 percent as a result of the intervention of the government...
...This became the poverty line...
...they are just ingrained in us by constant repetition in our homes and our schools, on television and in the press...
...When this same comparison is made between the poor and the rich (defined as the top 5 percent of the families ranked from lowest to highest by income), the results are even more striking...
...It is assumed that poor people will maintain the same level of living even though the level of living of everyone else has been rising...
...however, the average income per family (adjusted to changes in purchasing power) has oontinued to rise at the rate of 2 percent per year compounded...
...Such admonitions are open invitations to resentment and anger...
...Assume also that an additional third is spent to protect our lives...
...the share going to those with incomes between $4,000 and $25,000 is virtually unchanged...
...Few economists today believe that there are inexorable laws of income distribution...
...No attempt is made to allocate money income that people receive but fail to report...
...They continue to be unable to enjoy the goods and services widely enjoyed by others...
...Incame Inequality and Taxation INCOMES IN THE UNITED STATES are much more unequally distributed than the official figures show...
...The poverty line was then adjusted back to 1959 on the basis of changes in the cost of living index, and it has been adjusted upward each year since 1963 on the basis of the same index...
...All told, the share of income received by the top 5 percent dropped from nearly one-third of the total income in 1929 to about one-fifth at the end of World War 11...
...Few Americans realize that poverty is defined statistically in such a way as to artificially deflate the number of poor and make the problem appear less serious than it really is...
...At that time, the nation rediscovered the fact that, despite the general affluence, large numbers of Americans lived in abject poverty...
...As we shall soon see, there are other reasons...
...The American experience is not unique in this respect...
...According to a recent report by the Brookings Institution, the same proportion of income is paid in taxes by families at the 20th percentile and at the 99th percentile...
...In 1959, the poverty line for a family of four was 55 percent of the average family income...
...The share going to the very wealthy is cut back from 7 percent to 5 percent based on these assumptions...
...The Impact of Government Redistribution THE INCOME DATA described above tell only part of the story...
...It is by no means clear that those among the rich who work would stop working if we taxed them more...
...They continue to be unable to enjoy the goods and services widely enjoyed by others...
...It is important to realize that although the numerical value of the poverty line increases each year, it is a fixed standard in terms of the quantity of goods and services that it provides...
...Except for the select few in the top 1 percent of the income distribution, there is little if any progressivity in the tax structure...
...44 HERMAN P. MILLER = = Using this model, we would say that the incidence of poverty did not change between TI and T2 (20 percent of the population was poor in both periods), but the amount of income received by the bottom income group increased considerably...
...There is little evidence that taxation has dried up the sources of wealth...
...benefits from public assistance and social security were allocated to the recipients of these types of income, etc...
...if that group is called poor, the incidence of poverty must remain unchanged...
...There is virtually no scientific evidence to support the view that the incentives of the rich to accumulate more would be destroyed if they were taxed more heavily...
...I have attempted to correct this shortcoming by preparing a revised distribution of families by income levels for 1968, which includes the missing income...
...As a result, while many people have been moved above the poverty line, their position relative to others has remained unaltered...
...The rallying cry today is, “Balance the Budget...
...At the bottom end of the distribution we find that 45 percent of the units Table 2 CUMULATIVE DISTRIBUTION...
...Such a definition is a tautology and it is obviously not used in the official statistics...
...Since these expenditures are made to protect our freedom, our lives, and our property, why not divide them into three different components and use a different procedure for each...
...The Impact of Government Redistribution THE INCOME DATA described above tell only part of the story...
...Nothing could be further from the truth...
...is economic growth...
...I have attempted to correct this shortcoming by preparing a revised distribution of families by income levels for 1968, which includes the missing income...
...The few studies that have been made are small and inconclusive...
...The procedures are described in several technical articles that I published jointly with Roger Herriot who is currently in charge of the preparation and analysis of income distribution statistics at the Bureau of the Census...
...The Census Bureau reports only cash income...
...Most of the redistribution, however, took place during the depression of the ’30s and during World War 11...
...During the depression of the ’30s the share of income going to the top 5 percent of the families and individuals dropped sharply...
...Also excluded are capital gains, undistributed profits, and imputed income...
...Such taxation, we are told, would not bring in much revenue, would lead to a reduction in work effort, and would hurt us all in the end...
...Under the present definition, no provision is made for the changing of' the content of the poverty budget...
...These benefits can be allocated proportionate to the present value of the expected lifetime income of each family...
...On the basis of this and other evidence presented in the report, Professor Easterlin concludes that each person believes he will be happier if his income goes up...
...The Census Bureau reports only cash income...
...Attention is focused on fuel shortages, inflation, and corruption in government...
...But these economists only know what they believe in their own hearts to be true, and too often, what they know in their hearts is influenced, one way or another, by those who are putting money in their pockets...
...For many types of services such as education, health, highways, and social welfare it seemed possible to make reasonable assumptions regarding the beneficiaries...
...The American experience is not unique in this respect...
...How then is poverty defined in the U.S...
...It is comforting to know that we have the wealth to create a better world if we become disenchanted with their false economics...
...Our tax policies are in part responsible for the chronic shortage of the funds that are to deal with many social and economic problems...
...Programs were instituted to raise the levels of living for the poor and to change those practices which systematically discriminated against ethnic minorities and other disadvantaged groups...
...In other words, the absolute economic well-being of the bottom income groups would have improved even though their income in relation to others would not be changed...
...According to the Council of Economic Advisers, the principal factor behind the decline in poverty in the U.S...
...The procedures are described in several technical articles that I published jointly with Roger Herriot who is currently in charge of the preparation and analysis of income distribution statistics at the Bureau of the Census...
...Professor George Break of the University of California summarized the available empirical evidence for a congressional committee...
...There is little point in changing the percentage of the economic pie received by the poor if it means they will receive a smaller piece...
...Just a few months prior to the 1972 presidential election, a Harris poll showed that threefourths of the voters objected to Senator McGovern’s proposal “to give each individual in the population $1,000 by sharply increasing taxes on people with incomes of $12,000 and over...
...According to the best estimates, the number had grown to 200,000 by the end of the ’60s...
...It is of no avail to preach to the American poor that they live better than most people in most parts of the world or to tell them not to compare their lot with those who are more fortunate...
...Some economists went so far as to assert that a sharp rise in income inequality would cause a revolution and a sharp drop would cause a civil war, It has been argued that the French and Russian revolutions were caused by undue concentrations of income and wealth whereas the Spanish revolution of the late 1930s was caused by “socialistic trends” that followed the overthrow of the monarchy and “lowered greatly the ratio of concentration from its Pareto norm...
...They even gave this law a name, “Pareto’s Law,” in honor of the Italian economist who was among the first to do empirical work in this field during the latter part of the 19th century...
...They show how the net national product was distributed before taxes...
...Programs were instituted to raise the levels of living for the poor and to change those practices which systematically discriminated against ethnic minorities and other disadvantaged groups...
...and even if we should try and fail, the action is not irreversible...
...We may not choose to have redistribution as a social goal...
...and the share going to those with incomes of $25,000 or more is reduced from 18 percent to 14 percent...
...Since that time there has been little change in income distribution...
...The fact is that incomes in the United States are more equally distributed today than they were 40 years ago...
...it takes a change in feelings...
...As a starter, we might assume that one-third of the expenditures are made to protect our freedom and that we all get an equal benefit from that component...
...If the standard for measuring poverty remains fixed for too long, we may decrease the number of people whom we call poor, but we will not change their feeling that they are still poor in relation to others around them...
...INEQUALITY, POVERTY, AND TAXES 41 than to any other part of his program, nor is there evidence that attitudes on this subject have changed much since...
...and what are the limitations of that definition...
...The last major attempt to alter the distribution of income in the United States occurred during the 1960s...
...For many types of services such as education, health, highways, and social welfare it seemed possible to make reasonable assumptions regarding the beneficiaries...
...Some socialist countries have found that they have had to widen wage differentials in order to stimulate productivity...
...These figures show that less than one-half of 1 percent of families and individuals with assets of $500,000 or more own 22 percent of all the wealth in the United States...
...For the moment, the nation appears to have lost its interest in income redistribution...
...Every distribution has a bottom 20 percent...
...OF CONSUMER UNITS BY AMOUNT OF WEALTH: 1962 PercentDistribution Amount ofWealth Consumer Units Wealth Less than $1,000 26 * Less than $5,000 45 2 Less than $10.000 61 7 1 35* 22that “higher taxes induced more wives of business executives to enter the labor force and in general led executives themselves to More than $260,000 More than $500,000 *Less than one-ha1f Of percent...
...This represents a fourfold increase from the beginning of the decade...
...Such admonitions are open invitations to resentment and anger...
...All told, the share of income received by the top 5 percent dropped from nearly one-third of the total income in 1929 to about one-fifth at the end of World War 11...
...Abut one-third of all the wealth in the United States is owned by the top 1percent of the families who have a net worth of $200,000 or more...
...The big INEQUALITY, POVERTY, AND TAXES 47 $7,843 in 1959 to $11,216 in 1972...
...but there is no good economic reason that requires us to make such a choice...
...Let us look a little closer at the basis for some of our attitudes regarding income redistribution and tax reform...
...His conclusion was that “income taxes exert relatively little influence on work incentives and when they do they induce greater effort as frequently as they deter it...
...These assets include equity in a home or business, checking and savings accounts, savings bonds and other liquid assets, and bonds and stocks...
...Such a definition is a tautology and it is obviously not used in the official statistics...
...Such taxation, we are told, would not bring in much revenue, would lead to a reduction in work effort, and would hurt us all in the end...
...There was more objection to McGovern’s stand on income redis40 P. Miller Inequality, Poverty, and Taxes Income distribution in the United States has remained virtually unchanged for onequarter of a century...
...Herriot and I attempted to distribute the burden of taxation as well as the benefit of government expenditure by income classes...
...Today, however, few Americans seem to have much interest in redistributing income...
...A fixed standard may be suitable for measuring changes in poverty for a short period...
...Professor George Break of the University of California summarized the available empirical evidence for a congressional committee...
...0 INEQUALITY, POVERTY, AND TAXES 49...
...As a result, while many people have been moved above the poverty line, their position relative to others has remained unaltered...
...But these figures exclude about $260 billion of unreported cash income, capital gains, undistributed profits, and imputed income, all of which accrue disproportionately to the top-income groups...
...But even before the onset of these problems, American voters showed strong antagonism to policies designed to alter income distribution...
...In other words, the dollar gap between poor and nonpoor families rose Table 3A Average Income 1959 1972 Poor families $2,178 $2,456 Nonpoor families 10,021 13,672 Dollar gap 7,843 11,216 Ratio of nonpoor to poor 4.6 5.6 46 HERMAN P. MILLER this model, we would say that the incidence of poverty did not change between TI and T2 (20 percent of the population was poor in both periods), but the amount of income received by the bottom income group increased considerably...
...During the ’50s the number of millionaires doubled, increasing from 27,000 to 53,000...
...Their status in the government figures is changed from poor to nonpoor, but their feelings of deprivation remain unchanged...
...It is entirely possible that we can travel further along the same path without ill effects...
...His conclusion was that “income taxes exert relatively little influence on work incentives and when they do they induce greater effort as frequently as they deter it...
...Since that time there has been little change in income distribution...
...Every distribution has a bottom 20 percent...
...We can have a further reduction of inequality and a different distribution of the tax burden without necessarily hurting the economy...
...Table 2 shows the distribution of consumer units by the total amount of assets owned...
...In other words, the equalization of incomes during the ’30s and the early ’40s did not diminish the productivity of the economy...
...Spokesmen for the rich have long tried to persuade the rest of us that they are being pauperized by heavy taxation...
...The rich neither gain nor lose in the process, because most of what is taken away from them in taxes is returned in the form of an insurance benefit designed to protect their property...
...By contrast, the richest 5 percent received 17 percent of the cash income in 1947 and 16 percent today...
...but there is no rational basis for such an assumption...
...However, as the income of a society increases, the proTable 3B Average Income I959 I972 Poor families $2,178 $2,456Rich families (defined as the top 5 percent) 27,267 40,142 Dollar gap 25,089 37,686 Ratio of rich to poor 12.5 16.3 portion of people who say they are happy remains unchanged...
...Our Federal Income Tax laws show that as a society we have a preference for progressive taxation (i.e., for taxing the rich at higher rates than the poor) ;yet, in practice we do not adhere to this policy...
...For years we have been told by conservative economists that we have little to gain by taxing the wealthy more heavily...
...All we need is the desire to do so...
...It is of no avail to preach to the American poor that they live better than most people in most parts of the world or to tell them not to compare their lot with those who are more fortunate...
...And he is happier provided that the income of others does not go up as much as his own...
...The average income of poor families was $2,178 in 1959 and $2,456 in 1972 (both figures measured in constant dollars of 1972 purchasing power...
...There is virtually no scientific evidence to support the view that the incentives of the rich to accumulate more would be destroyed if they were taxed more heavily...
...But clearly that is not the case in the United States at this time...
...As a social gamble, such a program is certainly worth serious thought even on the part of the higher income groups who would have to pay the cost...
...But the fallacy in this model is that the incidence of poverty remains the same whatever the level of income...
...INEQUALITY, POVERTY, AND TAXES 41 ~~~~~ ' question is complicated...
...One way to help change that image would be a major revision of the tax laws, which have long provided a shelter for the rich and have deprived society of the funds needed for income maintenance of the poor, better housing, improved education, and numerous other social and economic programs...
...No attempt is made to allocate money income that people receive but fail to report...
...by 1972, this ratio had risen to five and one-half times...
...The fact is that incomes in the United States are more equally distributed today than they were 40 years ago...
...There has been little change during the past 25 years...
...The income gap between the rich and the poor in the United States has been narrowed within the lifetime of many who are reading this article...
...by 1972, this rate had dropped to 38 percent...
...But the fallacy in this model is that the incidence of poverty remains the same whatever the level of income...
...The greatest obstacle to income redistribution and major tax reform is not a lack of evidence that such changes are needed or a lack of knowledge of how to achieve these goals...
...The rich among us are still flourishing...
...At that time, the nation rediscovered the fact that, despite the general affluence, large numbers of Americans lived in abject poverty...
...It is based on a food plan (the Economy Budget) designed by the Department of Agriculture for emergency or temporary use when funds are low...
...But these economists only know what they believe in their own hearts to be true, and too often, what they know in their hearts is influenced, one way or another, by those who are putting money in their pockets...
...Except for the select few in the top 1 percent of the income distribution, there is little if any progressivity in the tax structure...
...The results are shown in Table 4. The basic procedure required us to make assumptions as to who paid each tax and who benefited from each government service...
...and 1 percent of the units have wealth of $200,000 or more and own over one-third of the wealth...
Vol. 22 • January 1975 • No. 1
