If we focus on the .01%, I am not sure what we are observing says much about inequality in our society. More to do with the fact that 50 years ago, a successful US entrepeneur would sell its products to a few millions americans, if he was lucky enough to be a national success. And if it was international (even more rare, and taking many years) a few more millions western europeans. The rest of the world was basically not a potential customer.

Today a successful entrepeneur can go directly international, and with a client base that includes not only the US and Western Europe but also a huge (and quickly growing) middle class all over the world. This is several orders of magnitude the potential reach than 50 years ago. Successful entrepeneurs make billions not millions anymore.

So it's not absurd that we end up with more extreme wealth in the top .01%, and I think it is kind of structural to a modern, global society.

If we focus on the 1%, or rather the delta between the 1% and the 99%, I think we are rather observing skill supply/demand mismatch. In the US and Western Europe there is an oversupply of unskilled or low-skills labour, driving their wages down (relatively to skilled labour). So they will do worse than the more sought after skilled labour. It can partially be mitigated with better education. But part of it is also structural. Not everyone can be a good programmer or engineer. Unless we find a way to change IQ distributions, we may have a long term problem here that we may not be able to solve.

I'm actually one of the people who think that the top 0.001% are fine. People like Buffett and Gates own valuable companies. There's not much we can do to change income inequality there, largely because it's not income, it's someone's private property.

I think the truly disgusting income inequality is at the top 0.01-0.001%. The overpaid CEOs who make absurd amounts of guaranteed cash. We have a tax code that absolutely incentivizes CEOs to look out for their salaries and one time cash bonuses rather than any stock grants they get.

We used to have a tax code that favored capital gains in the extreme, but now we overly favor income. Which would your rather have? A grant of 10 million dollars in a volatile asset that has a one year lock out period and a 20% haircut, or a guaranteed 10 million dollars with no lock out and an effective haircut of ~40%. You're losing only 20% of the money as a guarantee. Most people seem to be interested in the latter option.

Whenever we have debates about raising capital gains tax Republicans rightly point out that capital gains tax doesn't actually generate that much revenue for the US government. They're right, but that's insane, given how much wealth we generate every year.

I'm all for paying people well, but make them earn it!

The problem is, if you make all your income from investing, via dividends and capital gains, you pay 15% tax on it.

The 'wedge' on the first dollar earned by a minimum wage worker is 15.3%.

And then don't get me started on the deductions, Mitt Romney's IRA etc. that mean those guys can don't even pay the 15%.

I don't think your math adds up...in NYC a huge cash bonus gets taxed at > 50% combined Fed, state and local. The CEO will always take something that's structured as future capital gain, not in 1 year, but whenever he decides to cash out.

The tax system and rent seeking in this country is a disgrace.

Minimum wage workers aren't paying any taxes after standard deduction and exemption.

Capital gains is now 20%.

fair enough, the top bracket (over $400,000) now pays 20% on long-term capital gains and dividends.

http://www.fool.com/retirement/general/2015/12/14/long-term-...

the idea that minimum wage earners aren't paying taxes is a nonsensical talking point with no basis in reality. It only works if you disregard FICA, which is economically unjustifiable and not done in other contexts (like quantifying big government's size and tax bite). The bottom line is there is a 15.3% wedge between what the minimum wage employer pays and what the employee receives, and that's what has economic impact. The EITC offsets a part of the wedge, but only a part of it.

This Planet Money podcast is worth listening to, "When CEO Pay Exploded." A good exercise in the law of unintended consequences: http://www.npr.org/sections/money/2016/02/05/465747726/-682-...

What's the difference between income and private property? Nothing relevant here. Owning stock is just a ticket to future income, a share of wealth created by employees. Same as a hired CEO payment.

> In the US and Western Europe there is an oversupply of unskilled or low-skills labour, driving their wages down (relatively to skilled labour).

You're right, but the reality is that even skilled workers rarely make it to the top 1%. In fact, they might not even find a job in their field.

Even if you're super-high-skilled and work in Silicon Valley as a programmer, your net income probably doesn't come close to the entry bar of the top 5%.

Haha... Try being a programmer outside Silicon Valley... Or outside the USA... Disparity comes in many forms.

That's exactly my point.

The bar for top 5% is like 90k/year.

I believe it's significantly higher than that, though probably still well within the norm for a market-paid, highly skilled, SV SWE.

http://www.kiplinger.com/article/taxes/T054-C000-S001-your-r... suggest that it was ~$180K in 2013 (this is presumably on a per-return basis, which is neither individual nor household income, but likely much closer to the latter).

$90k household income is too 29%.

Top 5% household income is $220k.

As of the 2014 census.

> Even if you're super-high-skilled and work in Silicon Valley as a programmer

At Google or equivalent, programmers can hit the household 5% bar ($220,000) within 2-3 years.

But the examples cited in the article all relate to an undersupply of physicians or lawyers, or professions that have not learned to scale.

Learned to scale? It is quite intentional. The medical boards are controlled by the doctors themselves. They decide how many residents to train for their specialty each year. The usual figure is about under ~300students/yr for the most sought-after (and "undersupplied") specialties. That keeps wages up. This is not like programming where you get a gamut of skillsets and 120,000 extra immigrants hopping into the pipeline each year. There is no supply/demand equation here other than what is allowed by specialty medical boards themselves.

But they still have the concept of one very highly skilled and expensive doctor in front of every patient. It is a form of craft industry. It hasn't moved on to the industrial area, where you only need very skilled workers to create and prototype, but that scale well by not putting these expensive workers in front of every customer. Even banks have done that.

I am not saying it is easy, and perhaps the technology doesn't allow it yet, but undoubtfully this is a next step in the medical profession.

Part of the problem is the US education system seems to not be turning out enough people with quality educations, even when there isn't a shortage of of credentialed people. For instance, there are plenty of lawyers. Most of them don't make much money and leave the industry quickly. Yet it is difficult to find a highly qualified lawyer to handle difficult issues.

With medical professionals, there is simply a huge shortage. Same with researchers, engineers, etc.

My company hires H1B visas not because they are cheaper, but because we can't get anyone here to do the job at reasonable rates. Reasonable being new graduate hires start out at CPI adjusted rates to near top end in silicon valley.

"My company hires H1B visas not because they are cheaper, but because we can't get anyone here to do the job at reasonable rates."

Sounds like "H1B visa holders are cheaper" to me. High quality engineers should be commanding on the order of $250k. In the absence of H1B visa holders lowering wages, that's what high quality engineers would command as an average salary; same as a good doctor or lawyer.

The main reason doctors and lawyers cost that much: you can't H1B them. Lawyer skills are too specific to a locality and subsection of the trade; for whatever reason, law school doesn't actually help with this -experience, networking (particularly for criminal law) and apprenticeship is how it ends up working. LLD is just a hoop that needs to be jumped through to get such apprenticeships. The AMA is the most effective labor union in America, keeping out highly skilled doctors from abroad by denying their skills validity.

Layer's pretty much world wide, have some form of 'local certification' in the form of 'Passing the bar', or equivalent local requirement. Its not that the skills are specific to a locality, its that in order be allowed to practice law in a jurisdiction you must complete the local requirement.

"not because they are cheaper, but because we can't get anyone here to do the job at reasonable rates."

Um... that is the definition of cheaper. In your own justification sentence. H1B must (should) be paid at your prevalent rate -- and this may not be what you consider a "reasonable" rate.

Middle classes shouldn't be in the top percentiles but it seems to be so.

You're off on that. Plenty of sfba engineers in the top 5%.

It's a proxy to take a look at potential resource reallocation.

It seems grotesque when human beings in Silicon Valley are left with no viable option but to live in their cars or under a bridge, while folks tool around in their latest Lamborarri/Ferrambo. If some people can't be meaningfully trained or can't find a means of self-sufficiency, we cannot just allow them to freeze to death on the street. It's not civilized. (I asked and found out that a male on street without disabilities in Santa Clara County receives only ~$5/day in cash and ~$4/day for food.)

Certainly more people in the upper brackets may need to pay something more than now in order for all reach a minimum standard of living, but perhaps not quite as much as billionaires. A gradual tax on all income seems like the fairest, least complicated and straightforward method... say tax starting at $25k USD (adjust for inflation/cost-of-living) , then slope up to something like 35% for most people and 50% for the top end. It's a question really of what quality of infrastructure and social investment is desired, because debt isn't free.

I've also noticed the gradual labor oversupply in first-world, white-collar jobs... there's just not enough work to go around. China, India and others also have tons-tons-tons of unskilled labor as evidenced by frequent usage of more people in-lieu of mechanical equipment for small- & medium-scale jobs. This labor supply/demand imbalance seems attributable to peak global population and increasing productivity/automation.

Perhaps an underestimated crisis is the desperate need for more entrepreneurs to create new businesses which add more jobs in order to utilize more untapped, idle value, especially of groups which are traditionally marginalized from interviews, not just because of PR value, but some groups are really good at some things. (Autistic spectrum personalities seem to be quiet good at sorting/organizing/labeling, etc.)

Your understanding of what high earners are doing to reduce their taxes is mostly incorrect.

They're just earning most of their income as capital gains or qualified dividends instead of ordinary income, so it's taxed at a lower rate. It's not really all that complicated.

I think in turn you are describing what 1%ers do to reduce their tax, and not 0.1%ers, which involves all sorts of shady schemes often involving "loans" that are not intended to be repaid.

ex: Larry Ellison taking out a 9 figure loan with Oracle stock as collateral. He prevents a capital gains tax hit, maintains control of Oracle, and gains liquidity.

Kill 3 birds with 1 stone.

And how is this a problem? You would only do this if interest rates are low, and if you believe the stock will appreciate more over the long run than it would cost you to service the interest on the loan. Also, if the value of the stock tanks, the bank will come collecting and sell the shares you pledged as collateral.

Second, this is a part of doing business - you can leverage anything (real estate, stocks, bonds, etc)

Generally speaking I think individuals have the right to minimize their taxes through legal means, no matter how convoluted. But I also think it's reasonable for people to draw the line somewhere for what they consider fair or unfair.

Another example of an instrument that has benefited tremendously from our recent ZIRP + rising equity markets is the Grantor Retained Annuity Trust, which will likely leave a worse taste in people's mouths compared to Ellison's maneuvers. [1]

It is a fair point for people to ask whether these legal maneuvers should remain legal.

[1] http://www.bloomberg.com/news/articles/2013-12-17/accidental...

The problem with a lot of these things is that often you can’t make them illegal, exactly because there are so many use cases that are valid. For example, if you make the above mentioned transaction illegal, with the exception of when it’s used in a valid business transaction or for non tax avoidance motives, his lawyers will just argue that this is the most straightforward way to get liquidity without eroding control of the company.

People like talking about fair and unfair, and the “spirit of the law”, but that all means something completely different to whomever is reading the law. What might seem fair to someone, won’t seem fair to others. I would assume a ton of “normal” people (i.e non entrepreneurs, income tax paying people) consider the loan thing to be unfair, but wouldn’t consider it unfair if they releveraged their own primary residence to achieve a similar result.

Second, if governments want to limit tax avoidance, they should learn to make proper laws (i.e. no half way, rushing something out of the door). A lot of laws are made in a half assed way. Stuff like this comes to mind: http://www.bloomberg.com/news/articles/2014-11-03/malone-gai.... ("He avoided paying taxes on his remaining stake, worth about $260 million, by exploiting IRS regulations meant to block a different loophole.")

> wouldn’t consider it unfair if they releveraged their own primary residence to achieve a similar result.

Spot on! For the less finance lingo savvy, that simply means take a second mortgage/home equity loan or home equity line of credit (HELOC) for a vacation, to invest in another property, pay for college or other large expense, etc.

I completely agree.

Though for better or for worse, we seem to be headed towards an age of populism, which may actually start to affect the consensus manner in which the laws are read.

You can make them illegal by making only one legal way to get money from person A to persons B. Anything over a certain amount per year, basically cost of living, gets taxed. It doesn't matter what path it took to get there.

And thanks for the article. :)

So, if you make $100k per year (and you pay tax on that), and you then go borrow $500k to buy a house, you'd be happy paying tax on that $500k as well? And of course, you would need to repay that debt with after tax income, so you're paying tax twice. Because that's essentially what you're proposing. :)

Debt != income

Mandatory H. L. Mencken quote.

Explanations exist; they have existed for all time; there is always a well-known solution to every human problem — neat, plausible, and wrong.

Nah, Im pulling from high assurance safety and security fields. Only approaches that worked for long periods basically create a design that enforces specific, good properties in every state. Other commenters are talking failed route of open ended design that tries to guess every form of malice. It's whitelisting vs AV signatures.

Let's not make strawman. It's more like you made $500k in income, put that into an asset, borrowed it back, and spent it. That is income. Just not taxable like the rest of us.

> It is a fair point for people to ask whether these legal maneuvers should remain legal.

We can ask all we want, so long as wealthy people buy politicians nothings drastic will happen.

That specific loophole was closed in Norway just half a year ago. Sigh... Lucky you to still have it in the US. (or not, depending on your position)

the one fact many leave out is that the money used to fund those gains was originally taxed. so you/they/me put taxed money into the investment world having already been taxed on it. the lower rate reflects the reality of that fact.

raise capital gains taxes will hit everyone's retirement accounts including those least able to withstand it. the fun of indirect taxation is that when attempting to punish one group there is a lot of collateral damage

But along with those taxes breaks comes increased risks. If a doctor takes their payment as dividends from being a partner at their medical firm, they are one bad local news story from losing a large investment in that firm.

Changing how we tax dividends will cause a massive change in how the highly productive structure their income, and if it reduces risk, it seems to follow it reduce productivity.

For instance, our doctors who invest in their local firm might instead take a salary position at the local big box medical conglomerate and put in their 32 hours a week with Friday for golfing. Instead of 70 hours a week they were putting in at their local firm not counting early morning rounds at the hospital to check on patients.