How Rich Should the Rich Be?

...Yet in 1981 there were better than 800,000 in the group, or almost 1 per cent of all taxpayers...

...But a clue is provided by the lowest income category the IRS reports on—those with no adjusted gross income or a loss...

...Charges of unfairness—which is clearly linked to justice—have been leveled at the Reagan Administration, but they rarely touch on how incomes are distributed across the board...

...We need to understand two concepts: the normal and the log normal distribution...

...The Middle Ages saw one of the first figures, in the Western tradition at least, to advocate a violent redistribution of wealth...

...Considering that the way money is distributed surely is a major component of how we are treated by society, it is remarkable how little analytic thought has been devoted to the issue by our social thinkers...

...Few would want a society reminiscent of mid-19th-century England, with enormous fortunes presided over by a handful and millions toiling for a pittance...

...The progressive nature of the tax, loopholes not included, is supposed to redistribute income— except that if the particular rate schedule chosen before World War land modified many times since has a specific goal, it is completely obscure...

...They insist that by reducing the tax rate on the highest earners (and others as well), much more wealth will be created for everyone and we will all be better off in the long run...

...For example, among the top 2 per cent we would expect the starting income to be about $55,000, but in 1981 it was close to $63,000...

...Many who are not necessarily of the supply-siders' persuasion also see nothing wrong with great income disparities...

...In principle, the Montroll-Shles-inger thesis should apply to everyone's gross, or total, income...

...We will be fair to the minorities, Thurow concludes, when we come close to eliminating this imbalance...

...In contrast, numerous developing countries have their very rich without a corresponding prosperity for the rest of the people...

...Economic fairness is a little like heaven...

...In his estimation, "expanded income is the measure which most closely approximates economic [or true] income...

...Tax rates for the superwealthy have varied over the decades, as Congress has adjusted the laws and inflation has changed the effective schedules...

...This would probably be true if the adjusted gross income roughly equaled the total income...

...In his Zero-Sum Society he confronts an analogous problem: What unemployment rate should we shoot for...

...In a recent publication, Allan H. Ler-man of the Treasury Department's Office of Tax Analysis takes another tack...

...According to the latest figures available from the Internal Revenue Service (IRS) in 1981 the average income in the country was about $14,000...

...But past history does not support the central argument of the supply-siders...

...Logarithms give us the ratio between numbers, rather than their absolute differences...

...Forthe moment, we will leave aside the fact that roughly 1 per cent of taxpayers report a net loss...

...And following Thurow's logic, justice would seem to suggest that it be extended to the top 3 per cent as well...

...In deciding how to react to what they have enabled us to see, we would do well to consider the words of Oliver Goldsmith, written over two centuries ago: III fares the land, to hastening ills a prey Where wealth accumulates, and men decay...

...So having a super-wealthy class does not seem to be the key to producing the best conditions for everyone in a society...

...The progressive nature of Federal income taxes, moreover, reduces the distribution difference between the super-wealthy and the rest of us only to a limited degree...

...During periods of prosperity, free money becomes available for speculation—sometimes in real estate, sometimes in stock or silver, or even in tulips...

...All of us, and especially politicians, are in favor of getting there...

...If all U.S...

...After all, houses burn down, cars are wrecked, other tragedies deductible from income occur, and some people are not insured...

...Put another way, how rich should the rich be...

...Conceding that, in effect, any unemployment is unjust, Thurow sees as even more unjust the fact that minorities —blacks, Hispanics, women, and others—suffer a greater unemployment rate than white males, the largest, most prosperous single group in the workplace...

...And I think that is the case with the obscurely titled "On 1/ f Noise and Other Distributions with Long Tails," by Elliott Montroll, a distinguished physicist at the University of Maryland, and Michael Shlesinger, a physicist at the La Jolla Institute in California...

...We also would not expect incomes greater than $ 14,000 above the average or $28,000, since theoretically it is impossible to be more than $14,000 below theaverage...

...The issue of economic equity—how rich the rich should be compared to everyone else—began plaguing social thinkers long before the first economist totted up a column of figures...

...Montroll and Shlesinger, with their apparently "natural" law of income distribution, have lifted the blinds for us a little...

...BY Herbert Inhaber I wasn't expecting to find a possible answer to an economic question that has been troublesome for millennia when I recently settled down with a dusty 1982 Proceedings of the National Academy of Sciences...

...The income tax is a complicated way of taking from the rich and giving to the poor in the U.S., too...

...At 70 pounds from the midpoint—100 and 240 pounds—we would see extremely few men weighing the former, just as we see many in the latter group on television during autumn Sundays...

...Nonetheless, devotees of so-called supply-side economics will bristle at the present discussion...

...Wittingly or not, this is the critical question I am persuaded the authors enable us to answer...

...But we ride along in a sealed railway carriage, not knowing when we have arrived or even if we are going in the right direction...

...Others have observed that ethics says one thing, yet rationality has so far been virtually silent...

...But the IRS only publishes statistics on "adjusted gross income," the sum arrived at on our tax forms after deductions for a whole slew of things—business employee expenses, capital losses, investments in individual retirement accounts, moving expenses, etc...

...The paper breathes with equations, but the basic ideas represented are not far from ordinary experience...

...The voice of reason says that it's pretty hard to eat on an annual net loss of $23,000...

...Reading this, it occurred to me that by fusing the two laws we could arrive at a "natural" law of income distribution for the entire population...

...There would still be diamonds and round-the-world trips, but fewer of them...

...There is undoubtedly some logic to this position, although countries like Sweden have taxed their superwealthy heavily and enj oy a high standard of living—some would claim higher than ours...

...In 1981, about 138,000 taxpayers had adup of tax burdens at the uppermost levels would be crushing...

...Had there been enough Robin Hoods and had all of them been able to avoid their local sheriffs, presumably everyone would have ended up with equal income and wealth...

...What we get is the familiar bell-shaped curve—for numbers of people versus logarithms of income— demonstrating that income is lognormally distributed...

...up to about 54 per cent from 197780, and back to 50 per cent by 1982...

...For example, there are more people in the lower income brackets than we might expect on the basis of the lognormal distribution, due to such things as part-time work and artificial losses...

...I have not been able to find any relationship between the marginal tax rate on the highest incomes and economic good or bad times...

...The largest number of them would probably be around 5ft...

...Income" and "wealth" are not listed in the index...

...In strongly democratic socialist countries like Sweden there is no limit on the amount a person may earn, although income taxes rise steeply with earnings...

...By the time of Christ, things appeared to have become worse for the rich: They were told it was easier for a camel to go through the eye of a needle than for them to get into heaven...

...Before we take up the richest among us, the term "income" needs to be clarified...

...for the top tenth of a per cent, or about 95,000, from $300,000 to $80,000...

...Here we descend—some would say ascend—into discussions of moral judgment, justice and equity...

...Where, then, is the balance to be struck...

...Clearly, we do not have a normal distribution...

...These fluctuations took place under both Democratic and Republican administrations...

...Rather, they concentrate on how particular groups—Social Security recipients, food stamp beneficiaries, those on welfare rolls, and the like—have been adversely affected by specific policies...

...A common characteristic of such times is that the daring may use their easy money to acquire some speculative commodity with a small margin payment plus promises to pay the remainder later...

...This, too, suggests that for at least some taxpayers in the highest brackets, substantial earnings do not show up in the adjusted gross income...

...Nevertheless, it hits upon something that has eluded us throughout history...

...Next, let's take the logarithm of the average for each category—$2,500 and $3,500 in the two groups cited...

...John Rawls, in his influential A Theory of Justice, practically ignores the subject...

...The "loopholes" have been cheerfully supplied by Congress...

...Since moralists apparently have almost nothing quantitative to say about how rich the rich should be, let us look elsewhere—namely, at a recent book by economist Lester Thurow...

...Subsequent changes in income patterns have altered the shape of their curve somewhat...

...In the ordinary course of events, one would expect a few taxpayers to qualify...

...the $500,000 -$1 million bracket paid about 42 per cent...

...9in., sloping down to tiny numbers of men the height of jockeys and basketball players...

...In their estimation, riches are no menace if dollars are not divorced from sense...

...Meanwhile, we had prosperity and recessions, high and low inflation rates, plus all sorts of economic peculiarities...

...Understanding the normal, we can go on to the lognormal distribution, a similar concept involving the additional step of a logarithm...

...There seems to be little enthusiasm, at least at present, for any fundamental re-examination of tax structures to promote income equity...

...Exactly how much wealth disqualified you from heaven or qualified you for greater wealth was never made clear...

...for the top 1 percent, or about 1 million people, from $85,000 to $63,000...

...Should we accept the condition described mathematically by Montroll and Shlesinger as something fixed and immutable, or is there a reason to propose altering it...

...Using the same 1981 IRS figures, let's tabulate the number of tax returns in each income category—3.9 million between $2,000-$3,000,3.8 million between $3,000-$4,000, and so on up to the top 3 per cent...

...Hence the term lognormal...

...In essence, he would find the "natural" rate of unemployment for white males and measure justice by how joblessness among minorities compares...

...Although Rawls does imply at one point that income taxes should be progressive and that fair wages should be paid, he does not offer any moral or logical basis for his view, nor indicate exactly how progressive taxes should be or what is meant by fair wages...

...This would undoubtedly be true as well for any height we picked in either direction from the average, and plotting our findings on graph paper would give us a bell-shaped curve—with a maximum at 5ft...

...and 6ft.— we would probably find equal numbers of men in each category...

...The authors, it should perhaps be noted, used rather old data...

...Suppose we were to write down the heights of the first few thousand men we met...

...As the authors explain: " [The top 3 per cent] frequently collect their extreme wealth through some amplification process that is not available to the rest of us...

...It can be illustrated by using weight instead of height...

...Plotting men's weights on graph paper, we would get a curve that was bigger for the higher than the lower weights—what statisticians speak of as "skewed...

...If you seemed wealthy, you were knocked on the head and your money given to the poor...

...Certainly none of the Democratic Presidential contenders in the primary debates or in their respective platforms, have proposed any measure that would meaningfully alter the existing situation...

...Using the 1981 IRS figures, though, we can estimate the impact if everyone were subject to the same lognormal distribution...

...The threshold for the top 2 per cent, or about 2 million taxpayers, would drop from$63,000 to about $55,000...

...Occasionally, though, a paper that doesn't quite fit the usual categories shows up, offering unanticipated illumination...

...Mathematicians call this curve a normal distribution, partly because many natural phenomena, such as the diameter of peas or the numbers of hairs on our heads, tend to produce a bell-shaped curve...

...So now we come full turn...

...Theoretically, the 19th- and 20th-century socialists have been modern Robin Herbert Inhaber, a newNL contributor, coordinates the Office of Risk Analysis at Oak Ridge National Laboratory...

...At the height of the Beatles' popularity, any new recording by them was soon sold to millions of fans...

...The specific ways society as a whole might benefit from the resultant additional funds available to the Federal government would presumably be for Congress to decide...

...The journal of the most prestigious science body in the country, perhaps in the world, ordinarily devotes its pages to such subjects as physics, biology and chemistry...

...Moving 30 pounds in either direction from the "midpoint" of 170—to 140 and 200 pounds—chances are we would find more men weighing 200 than 140...

...As far as we know, Robin Hood made no objective determination of relative income levels...

...Nonetheless, as the test of the 1981 data confirms, their essential conclusions remain accurate...

...that process varies from case to case...

...And the wealthier people in the country constitute the major group able to take advantage of these legal subtractions...

...Certainly, all through the Old Testament there are exhortations for the rich to give to the poor through alms and other methods, implying that some type of distribution was morally necessary...

...For many, this is a region of enough woolly arguments to clothe all the sheep in Australia...

...According to the Statistical Abstract of the United States, the marginal rate—i.e., on the last dollar earned—for those who in 1981 were in the high bracket of $75,000and had two dependents, was 43 percent from 1954-65...

...Whatever the case, Mont-roll and Shlesinger demonstrate that for those they call the "superwealthy" the earnings curve is much higher than we would expect judging from the preceding 97 per cent...

...Their average net loss was not a few hundred or thousand dollars justed gross incomes of over $200,000, but another 37,000, or 27 per cent, would be in this bracket if Lerman's measure were applied...

...Put briefly, their analysis uncovers a "natural" law of earnings that seems to apply to 97 per cent of the population, and a second "natural" law that applies only to the remaining 3 per cent in the very top income brackets...

...If we took the logarithm of the number of men at every weight and then replotted those numbers, however, we would again have the familiar bell-shaped curve...

...It might therefore be argued that any further piling either, it was about $23,000...

...I bring this up because if one looks at the higher income brackets, one finds that those in the $200,000-$500,000 bracket paid about 38 per cent of their adjusted gross income in Federal Tax in 1981...

...I do not believe that the elaborate mathematical discussion in the Mont-roll-Shlesinger article was designed to deal with the matter of how rich we should allow the rich to be...

...Economists have a name for what goes on at the top: the Pareto distribution...

...If I thought it did, checks from me to the Gettys and the Hunts would be going out in tomorrow's mail...

...A number of economists believe this indicates that many in the upper-income brackets manage to shrewdly manipulate their earnings...

...In most cultures, excessive wealth was regarded somewhat negatively, although few religions specified exactly what "excessive" meant...

...This brings us to the Montroll-Shlesinger finding that incomes are lognormally distributed for all except the top 3 per cent...

...The divergence becomes larger the closer we get to the top of the income pyramid...

...Allow me to stress that what is being talked about here is not the equalization of all incomes...

...He speaks of "expanded income," a formula including various items excluded from the adjusted gross income...

...Hoods in a more sophisticated guise...

...It appears that rates for the superwealthy can be adjusted without provoking boom or bust...

...Yet something like 20 million incomes in 1981 were above $28,000, out of a total of some 95 million returns...

...Even those who agree that our current income distribution as described is morally unjust would probably not go beyond advocating more progressive tax rates, the closing of loopholes for the wealthy, etc...

...On the other hand, Matthew seemed to encourage the wealthy: "Whosoever hath, to him shall be given, and he shall have more abundance...

...and the above $ 1 million paid 44 per cent...

...If the commodity doubles in price, a 10 per cent margin payment is amplified to a nine-fold profit...

...and for the top one-hundredth of a percent, or 9,500 individuals, from $600,000 to $100,000...

...These, as you will see, concern who earns what size income...

...Still fewer would want everyone to earn exactly the same...

...Now we are in a better position to appreciate how income is currently divided up in our society...

...Without checking a sample of tax returns, it is impossible to judge how much the wealthy legally avoid reporting...

...We have come to recognize that, as John Rawls says, "Justice is the first virtue of social institutions...

...But the Italian economist, who wrote around the turn of the century, was not interested in why his distribution occurred, or in changing it to make incomes more equitable...

...incomes were in a normal bell-shaped distribution, we would expect an equal number of taxpayers, say, $5,000 above and below the average, at $9,000 and $19,000, but that is not the reality...

...Yet even they have avoided the question of how society's income should be parceled out...

...Suppose we had weighed each of the few thousand men whose height we measured, and the largest number of men were around 170 pounds...

...When we take logarithms of the increases, we find that the distance between $5,000 and $6,000 is the same as that between $50,000 and $60,000—in accordance with our intuition...

...Let's begin by considering the normal distribution...

...9in., the average height for men in this country...

...At the top fifth of a per cent—consisting of approximately 200,000 taxpayers—instead of income beginning around $75,000, it starts at roughly $190,000...

...If we went three inches in either direction— to 5ft...

...50 per cent by 1970...

...For instance, assume that a person earning $5,000 a year receives a $1,000 raise and another earning $50,000 receives $10,000...

...In other words, we have the "natural" law of earning for 97 per cent of the population...

...Gus Tyler, writing in The New Leader ("Farewell to Fairness," June 28, 1982, an installment of his "Charting America's Future" series), bemoans the situation: "What set of scientific facts or unflawed line of logic can be presented to 'prove' that it is unethical to live in luxury while others barely live...

...They worry about upsetting what has been a relatively successful system...

...The distance in dollars is, of course, very different...

...Thanks to Montroll and Shlesinger, we already have a "natural" law of log-normal income distribution for 97 per cent of our society...