Unequal Pennsylvania

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For those of us that follow inequality statistics, this December has been a blockbuster month.  Most recently the Center on Budget and Policy Priorities (CBPP), in a prelude to a full reboot of its seminal report "Pulling Apart" (jointly produced with the Economic Policy Institute), released data (see the PA Fact Sheet) on family incomes in Pennsylvania by income fifth for 2015. In slightly less wonky language, CBPP sorted family incomes from lowest to highest and compared the distance between the highest and lowest earning families. According to CBPP, on average the top 5% of families in Pennsylvania earned $313,265 in 2015, a figure slightly less than 14 times the $22,638 earned on average by the bottom 20 percent of families. Ranked against the rest of the country (highest to lowest) the distance between the top 5% of families and the bottom 20% of families in Pennsylvania is in the middle of states (23rd). The distance between family incomes matters because income shapes our access to transportation, voting, quality of education for our children, health care, paid sick days, paid family leave and so on; and the more spread out incomes are the more you get communities of concentrated poverty and wealth.

Along with the CBPP release we published new data on the average incomes of the highest earners in Pennsylvania in 2014 based on tax returns filed with the Pennsylvania Department of Revenue. This data complements the CBPP release by going beyond what is possible in Census data and tracking more closely trends in the very highest incomes. We find that the average income of the top 1% of Pennsylvania taxpayers rose 9% from 2013 to 2014. With an average income in 2014 of $1,175,600, incomes for the highest earners are up 19% (an increase of $189,800) from their 2009 levels. The upper middle class in Pennsylvania, taxpayers with incomes higher than the 90th percentile of $123,849 but less than the 99th percentile of $445,841, saw their incomes rise in 2014 by 3%, bringing their income gains since 2009 to 8%.  We will be back in 2017 to examine trends of the incomes of the rest of us (the bottom 90%) in this period (if you haven’t seen it here is our review of trend in top incomes from 1917 to 2013).

ZERO ECONOMIC GROWTH FOR BOTTOM HALF OF INCOME EARNERS

The first two weeks in December also saw the release of groundbreaking and frankly breathtaking research from income inequality researchers.  The first eyepopping paper from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman does something entirely novel. To understand that, consider the top incomes figures for Pennsylvania I just summarized above. Our data summarizes taxable incomes and thus misses things like the income from pensions and health care which have become a larger (although still relatively small) part of compensation over time. This new data from Piketty and company measures ALL income both pre- and post-tax and assess how much goes to the bottom 50% compared to the top 1%.  It’s a stunning piece of work. Here is one of many insights from the paper:

“Perhaps the most striking development in the U.S. economy over the last decades is the stagnation of income in the bottom 50%...Figure 3 shows how the pre-tax and post-tax income shares of the bottom 50% have evolved since 1962. The pre-tax share increased in the 1960s as the wage distribution became more equal - the real federal minimum wage rose significantly in the 1960s and reached its historical maximum in 1969. The pre-tax share then declined from about 21% in the 1969 down to 12.5% in 2014. The post-tax share initially increased more then the pre-tax share following President Johnson's \war on poverty"-the Food Stamp Act was passed in 1965; aid to families with dependent children increased in the second half of the 1960s, Medicaid was created in 1965. It then fell along with the pre-tax income share. The gap between the pre-and post-tax share of income earned by the bottom 50% increased over time. This is not due to the growth of Social Security benefits because pre-tax income includes pension benefits but owes to the rise of transfers other than Social Security, chiefly Medicaid and Medicare. ..almost all of the meager growth in real bottom 50% post-tax income since the 1970s comes from Medicare and Medicaid. Excluding those two transfers, average bottom 50% post-tax income would have stagnated around $20,000 since the late 1970s. The bottom half of the adult population has thus been shut off from economic growth for over 40 years, and the paltry increase in their disposable income has been absorbed by increased health spending.

Our colleague, Colin Gordon, from the Iowa Policy Project has a very easy to follow summary of what’s in the new data; you should check it out.

BARRIERS TO UPWARD MOBILITY

Finally Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, and Jimmy Narang tackle a different dimension of inequality, absolute income mobility. Or as they have constructed it, what fraction of people at age 30 earn more than their parents did at that same age.  For children born in 1940, 90% had incomes at 30 that were higher than their parents at that age. That fraction has fallen steadily over time such that for children born in 1980 only half had incomes by age 30 that were greater than their parents at that age. As Jared Bernstein explains, the researchers conclude that the growth in the distance between family incomes plays the more important role in explaining this unsettling trend than slow economic growth.

POTENTIAL SOLUTIONS

It's clear that opportunity and shared prosperity are not what they once were in Pennsylvania and in America. It is possible to push back on these trends, for instance, by raising the minimum wage and funding increased education spending with a higher tax on high income households. KRC’s “Agenda to Raise Pennsylvania’s Pay” includes a host of other ways Pennsylvania lawmakers could reduce the inequality of incomes before taxes and transfers (the “pre-distribution”).

The CBPP report and recent reports of the Pennsylvania Budget and Policy Center (PBPC) also offer recommendations for how state tax policies reduce inequality. Currently, Pennsylvania’s tax system takes a larger bite out of the incomes of working people and the middle class than from top earners. Policies that would raise revenue to make critical investments in education while making the tax code fairer include:

  • Raising tax rates on non-wage income (“income from wealth”) which goes mostly to high earners, a change that is permitted by Pennsylvania’s constitution even though it does not permit graduated income taxes.
  • Closing costly and ineff­ective corporate tax loopholes that allow many large corporations in Pennsylvania to pay little or nothing in taxes.
  • Broadening the sales tax base to include more services consumed by wealthy individuals — such as investment counseling or country club memberships.
  • Enacting a state earned income tax credit or expanding the state’s income tax forgiveness program, which boost incomes among low-and moderate-wage working families.

We have the tools for creating more broadly shared prosperity; our task is to build a consensus in support of change.

 

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