Inequality has been Greatly Exaggerated

Peter Coy, the premier economics correspondent of The New York Times, just covered a major study on inequality and fiscal progressivity that Larry Kotlikoff co-authored with Alan Auerbach, an economist at UC Berkeley, and Darryl Koehler, senior software engineer at Economic Security Planning, Inc

The paper revolutionizes the study of inequality and fiscal progressivity. Specifically, it measures inequality based on remaining lifetime spending, not current wealth or income. And it doesn’t mix apples and oranges by comparing, for example, the wealth of a 40 year-old with that of an 80 year-old, where the latter’s wealth may be lower simply because she’s in the wealth-decumulating phase of the life cycle whereas the 40 year-old is the wealth-accumulating phase. 

As the paper shows, inequality, correctly measured, is dramatically lower than many economists, including the headline name on this topic, Thomas Piketty, have advertised. And the U.S. fiscal system is far more progressive than many believe.

The study’s bottom line? We need to measure inequality correctly in order to understand how it’s changing through time and how to best structure government policies for its mitigation.

Our study will, we hope, revolutionize how we measure inequality and fiscal progressivity. But even properly measured, U.S. inequality, is huge. One need simply compare the over a half million homeless Americans with the lifestyles of the super-rich to see we have a terrible problem. And, yes, the fiscal system is highly progressive. But not at the very top. The super-rich use an extremely simple and perfectly legal way to avoid paying taxes, namely borrowing against their wealth for their spending needs, letting their wealth appreciate, and then passing it to their children at death with a step-up-in-basis, ensuring no capital gains tax is paid on the ensuing appreciation.

There are a host of reasons our country has so many poor people and why so many families remain poor from generation to generation. We need to break the cycle of poverty by thinking outside the box. Proposal number nine in this previous newsletter is one essentially free and immediate way we can enhance educational equality — an essential ingredient for promoting wage equality. Let me briefly mention just one other (I have a ton.) out-of-the-box policy, namely, adopting a non-linear negative income tax.

As I’ll document in a future newsletter, federal and state government fiscal policy is locking the poor into poverty. They are doing so by placing large shares of the poor into 70-percent or higher marginal tax brackets and severely discouraging poor young females with children from marrying.

The astronomical net tax rate rates facing so many of the poor in earning more money or getting married is not, primarily, coming from increases in taxes, but from the loss in benefits, whether they be Food Stamps, Medicaid benefits, Obamacare subsidies, Section-8 Housing Support, Supplemental Security Income, child-tax credits, childcare support, the Earned Income Tax Credit, and the list goes on. As I’ll shortly relate, we can eliminate the poverty lock by adopting a non-linear negative income tax. This is not the naive, unaffordable, linear income tax advocated by Milton Friedman. It would, instead, maintain fiscal progressivity, raise revenues, but also eliminate the poverty trap.

The idea of a non-linear negative income tax reflects my recent co-authored studies of inequality and fiscal progressivitymarginal taxation, and marriage taxation. These studies each make use of The Fiscal Analyzer (TFA) — the research tool developed by my personal financial planning software company, Economic Security Planning, Inc. The TFA uses the computation engine of our company’s life-cycle personal financial planning tool — MaxiFi Planner

Let me close with an appeal. These are tough times for many American households. Inflation is biting into our real incomes. Indeed, typical U.S. workers are seeing their real wages (wages adjusted for inflation) decline by some 3 percent. Retirees on fixed incomes are seeing their retirement dreams evaporate — to the tune of 9.1 percent in the past 12 months. Whether I’m talking about you or your sibling or your parents or your children, there are people you know who are hurting financially and need help.

I’ve spent decades trying to help. My new book Money Magic is full of suggestions for how people of all ages can safely raise their lifetime spending. And running my company’s software, either MaxiFi Planner or our social security lifetime benefit optimization tool, Maximize My Social Security, can make a huge difference for Americans of all walks of life. I’ve built these financial life preservers thinking Build It and They Will Come. Unfortunately, that’s not been the case. This is where I need your help. Please help me help you by purchasing the book and the software, if you haven’t already.

Either way, please share the links to the book, our software, and this newsletter with everyone on your contact list. Doing so will help me continue to provide you with high-quality economic and personal financial analysis and help my company navigate these troubled economic times.

Larry Kotlikoff

Read the NYT Article

1 Comment

  1. With the devaluation of the dollar going on as we speak, how will that impact those who are watching their buying power erode? If the system was solid and static, such strategery (sic) might work, but if we are losing 15 % of buying power yearly, how do the poor keep up? Isn’t this a bit like rearranging the deck chairs on the Titanic?

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