Adventures in plutocracy

The Times had a piece on Tuesday describing the sharply declining effective federal tax rate of the nation’s 400 richest households over the past 20 years. Back in the days of the cultural revolution Clinton administration, the 400 (blessed be their names) were seeing almost 27% of their income expropriated by our insatiable federal government. Thanks to the No Billionaire Left Behind Act and other assorted legislative reforms passed under the wise reign of Bush the Younger, by 2012 this figure had fallen to 16.7%.

Less than 48 hours later the Times was running another piece, pointing out that the effective tax rate on 2013’s 400 highest “earning” households had shot up to 22.9%, thanks to changes in the tax structure enacted under Obama. The second piece was based on data released by the IRS yesterday. (Inquiring minds might want to know if that release was connected in some way to the previous day’s article).

I’m no tax expert, but I suspect the actual change in the very top end of the US tax structure is not as pronounced as this one-year rise in effective federal income tax rates suggests. This is because the effective rates themselves surely reflect the strategic behavior of the 400 households: that is, in 2012 these people subjected more of their wealth to taxes, precisely because they knew that tax rates on multi-billionaires were going to go up the following year, so they liquidated assets they otherwise would have held, etc. This hypothesis is supported by the fact that the average adjusted gross income of the 400 highest-earning households fell between 2012 and 2013 from $336,000,000 to $265,000,000, even though, for example, stock prices rose much more in the latter year than the former.

Anyway, as I’ve mentioned before, something that helps support what ought to be mind-boggling disparities in wealth is that the human mind isn’t very good at grasping vast mathematical discrepancies in a ready manner. So let’s do some simple calculations.

In 2012, the 400 highest-earning households pulled in, collectively, 134.28 billion dollars. One way of getting a grasp on how much that is would be to ask, how many households making the median household income in the US in 2012 (about $52,000), that is, the income level at the midway point of all 122,500,000 households would it take to add up to $134.28 billion in collective earnings?

Again, this is the kind of thing that’s hard for most people, including me, to estimate off the cuff. Ten thousand households? Fifty thousand? A hundred thousand? The answer is about 2.6 million.

Here’s another fun calculation. The $134.28 billion earned by the highest-grossing 400 American households in 2012 was the equivalent of the total earnings of the lowest X percentage of American households. What is X? This is trickier to calculate, but in 2012 the 20th percentile of household income was about $20,500 and the 10th percentile was just over $12,000. Scribbling on the back of a metaphorical envelope, this suggests that the average income of the bottom 15% of households (that’s more than 18 million households containing around 40 million people) was around $8,500. That adds up to 153 billion dollars, so we probably have to shave off around another percentile of the population to get down to $134 billion.

In other words, the 400 highest-earning families in 2012 probably made about as much as the lowest-earning 14% of the American population made collectively. 14% happens to be just about the official poverty rate, so the 400 richest households made the same amount of money as they would have if they had simply stolen every cent earned by every single poor person in America in 2012, which when you think about it is sort of what happened anyway.