Economics: Soak the Very, Very Rich

An annual income of two hundred and fifty thousand dollars puts you in the top three per cent of American households, and is more than four times the national median. You're rich, and a small tax increase isn't going to rock your world.

Good luck convincing people of this, though. Judging from surveys of how Americans describe themselves, most of the privileged don't feel all that privileged. Why is that? One reason is the American mythology of middle-classness. Another is geography: in a place like Manhattan, where the average apartment sells for nine hundred thousand dollars, your money doesn't go as far. And then there's a larger truth about how wealth is getting concentrated in this country. As the economists Thomas Piketty and Emmanuel Saez have documented, people who earn a few hundred thousand dollars a year have done much worse than people at the very top of the ladder.

Between 2002 and 2007, for instance,

• the bottom 99% of incomes grew 1.3% a year in real terms
• while the incomes of the top 1% grew 10% a year.
• That 1% accounted for 2/3 of all income growth in those years.

People in the 95th to the 99th percentiles of income have represented a fairly constant share of the national income for 25 years now.

• But in that period the top 1% has seen its share of national income double;
• in 2007, it captured 23% of the nation's total income.

Even within the top 1%, income is getting more concentrated:

• the top 0.1% of earners have seen their share of national income triple over the same period.
• All by themselves, they now earn as much as the bottom 120,000,000 people.

So at the same time that the rich have been pulling away from the middle class, the very rich have been pulling away from the pretty rich, and the very, very rich have been pulling away from the very rich.

[Reformatted and emphasis added].

This is one case where simpler isn't better. In a society that's becoming more stratified, a sensible tax system should draw more distinctions, not fewer. The U.S. is now a place where the rich and the ultra-rich really inhabit different worlds. (A couple of years ago, Barron's declared, “Yes, it takes more than $10 million to be seen as rich these days.”) They should probably inhabit different tax brackets, too.

For more, see Soak the Very, Very Rich by James Surowiecki, August 16, 2010, at The New Yorker.