Robert's Stochastic thoughts

Tuesday, April 24, 2007

In Which I semi defend Alan Reynolds' article in the Washington Times from Brad DeLong

Reynolds writes

...Thomas Piketty and Emmanuel Saez, ... half of that increase happened in just two years, 1987 and 1988. ...
Increases in the top 1 percent's income after the 1986 Tax Reform came from more business income being reported on individual tax returns, rather than corporate tax returns. The share of the top 1 percent income coming from business profits jumped from 11 percent in 1986 to 21 percent in 1988, ... How and why that happened is a textbook example of why tax return data cannot be used to measure income distribution...

Brad writes

29% of 17% is 5% as the tax-return-estimate based share of business income reported by the top one-hundredth. If the tax law were different today, a good chunk of that 5% would be reported as capital income, and a smaller chunk as labor income. The estimates the people I talk to come up with is that the 1986 Tax Reform boosted the long-run measured share of the top one-hundredth relative to the true share by between 0 and 2 percentage points, leaving between 7 and 9 percentage points as the true underlying increase in the income share of the top one-hundredth.

I write

Hmmm I am about to give a lecture on measuring inequality in which I will have something good to say about Reynolds' argument (which I made in a comment to an earlier post). Part of what happened in 86-89 was reduced disguising of personal income as capital gains via tax shelters. Another part was reduced disguising of personal income as corporate income which should show up as capital gains eventually.

If fact a google images search for piketty Saez shows this

(just search for Saez and you get some rock singer giving you the finger

Back to E Saez. an image
in the ratio of capital gains and income going to the richest 1% over GDP even greater over all but just wildly bouncing around then as people replanned their tax avoidance schemes (also something odd seems to have happened in October 1987 what was that ?).

Photo Sharing and Video Hosting at Photobucket

Mehra and Prescott remind us that, over the short run capital gains are very noisy but in the long run they are predictable. A look at the top 1%'s income plus capital gains shows that the effect of tax reform on reported income was huge and that the apparent long run increase in inequality is genuine and gigantic.

8 comments:

Anonymous said...: http://www.nytimes.com/2007/04/24/business/24hedge.html

April 24, 2007

Top Hedge Fund Managers Earn Over $240 Million
By JENNY ANDERSON and JULIE CRESWELL

James Simons, a 69-year-old publicity shy former math professor, uses complex computer-driven mathematical models to make bets on stocks, bonds and commodities, among other things.

His earnings last year were $1.7 billion.

As one of the leading hedge fund managers, Mr. Simons makes a sum that dwarfs that of the top chiefs on Wall Street. The highest paid on the Street, Lloyd C. Blankfein of Goldman Sachs, earned $54.3 million in salary, cash, restricted stock and stock options last year. (Unlike the total for Mr. Simons, Mr. Blankfein's reported compensation does not include gains on investments.)

And Mr. Simons, the founder of Renaissance Technologies, is not the only member of the billion-dollars-a-year club.

Two other hedge fund managers, Kenneth C. Griffin and Edward S. Lampert, each took home more than $1 billion last year, with George Soros missing the hurdle by a hair, give or take $50 million, according to an annual ranking of the top 25 hedge fund earners by Institutional Investor's Alpha magazine, which comes out today.

The rewards for managing hedge funds — lightly regulated private investment pools for institutions like endowments and wealthy individuals — have been lucrative for some time. Yet the survey also shows that for the hedge fund elite, the rich are getting much richer in a hurry.

To make Alpha's list, a manager needed to earn at least $240 million last year, nearly double the amount in 2005. That is up from a minimum of $30 million in 2001 and 2002. Combined, the top 25 hedge fund managers last year earned $14 billion — enough to pay New York City's 80,000 public school teachers for nearly three years.

With the modern gilded age in full swing, hedge fund managers and their private equity counterparts are comfortably seated atop one of the most astounding piles of wealth in American history.

Their ascendancy has been aided by an inflow of money from pension funds and other big investors, robust markets and fee-based compensation that can produce staggering amounts of individual wealth.

Naturally, some look upon these masters of the new universe as this generation's robber barons, using wealth to create wealth, often in secretive ways, and leaving little that is tangible in their wake....

anne; 4:56 PM
Anonymous said...: Make more more more more more, remember, though, pay less:

http://www.nytimes.com/2007/04/17/business/17hedge.html?ex=1334462400&en=b5ff21cd7e423b0a&ei=5090&partner=rssuserland&emc=rss

April 17, 2007

Managers Use Hedge Funds as Big I.R.A.'s
By JENNY ANDERSON

Many Americans squirrel away as much as they can into retirement investment accounts like 401(k)s and I.R.A.'s that allow them to compound their earnings tax free. The accounts also reduce what they owe when tax day rolls around. For the average person, however, the government strictly limits the contributions to about $20,000 a year.

And then there are people who work at hedge funds.

A lot of the hedge fund managers earning the astronomical paychecks making headlines these days are able to postpone paying taxes on much of that income for 10 years or more.

The key to the hedge fund tax boon is that many managers of these lightly regulated private pools of capital have the ability to earn the bulk of their compensation offshore and invest it in their funds where it grows tax-free....

anne; 4:58 PM
Anonymous said...: Why I love Brad DeLong....

http://delong.typepad.com/sdj/2007/04/falling_indicat.html

Again, what Brad has elegantly but sadly done is show just how devastating cuts in Medicaid in Mississippi have been. General Mississippi problem nonetheless, the infant mortality increase is statistically shown to be policy driven. I know this and am still amazed.

anne; 6:48 PM
Anonymous said...: Brad DeLong simply points to the statistically justified responsibility residing in the policies of Haley Barbour, and there we have the devastating conclusion to a social experiment such as may be unique in a modern developed state.

anne; 6:49 PM
Anonymous said...: Sadly elegant....

http://delong.typepad.com/sdj/2007/04/falling_indicat.html

April 23, 2007

Falling Indicators of Human Development in Mississippi
By Brad DeLong

Governor Haley Barbour manages to achieve a thing that many corrupt dictators have not: to lower the Human Development Index of the people he governs....

I must say that I am surprised that you can--if you are a Republican appointee of Haley Barbour's--get your words into Erik Eckholm's New York Times article while refusing to talk to Erik Eckholm. If there is a point to mainstream journalism at all--rather than dueling press releases--it is that reporters get to ask questions. I have a call into Erik. I hope to have further insights into his thinking soon. Had I been him, I would have told Barbour and Robinson that inclusion of their words in the story depended on their making themselves available for questioning.

And, of course, Erik Eckholm doesn't have control over the data or the statistics.. He doesn't seem to know that there are 2.8 million people in Mississippi. He doesn't seem to know that about 15% of the non-elderly population--make that 350,000--were on Medicaid. Cut Medicaid enrollments by 50,000, by 1/7. 42,000 babies born in Mississippi each year. For the share who die to jump from 0.97% to 1.14%... That's a less than 1/3000 chance. That's worth saying.

anne; 6:50 PM
Anonymous said...: Attend to what Brad has done here and know what elegance in presentation can be. We have had a social experiment in Mississippi such as may never have been duplicated in any modern developed country. We must have no such experiments ever again, though the cuts in medical care in Mississippi and surrounds have not lessened.

anne; 6:54 PM
Anonymous said...: Though we do not know the wealth and income concentration data for 2005, there will be a worsening when the data are know, for we are passing through what is one of the most powerful international bull markets ever, and tax structure is made to reward investment income.

anne; 7:51 PM
Anonymous said...: http://economistsview.typepad.com/economistsview/2007/04/infant_mortalit.html

http://delong.typepad.com/sdj/2007/04/falling_indicat.html

Though Mark Thoma titles the post "Infant Deaths and Obesity," and I drew just the same inference. Brad DeLong drew the inference from the beginning that I also drew, which is that health care policy really can and really does here mean life or death. So Brad's title was "Falling Indicators of Human Development in Mississippi." We should not lose sight of either link, but immediately policy is the issue.

anne; 9:38 PM