The latest version is from the Congressional Research Service (CRS), and the author concludes:

“Changes in income from capital gains and dividends were the single largest contributor to rising income inequality between 1996 and 2006. Changes in tax policy also made a significant contribution to the increase in income inequality, but even in the absence of tax policy changes income inequality would likely have increased.”

And about those years:

“The years 1996 and 2006 are examined for several reasons.  First, both years were at approximately similar points of the business-cycle with moderate inflation (about 3%), a modest unemployment rate (about 5%), and moderate economic growth (3.7% in 1996 and 2.7% in 2006).  Second, 2006 was the year before the August 2007 liquidity crunch and the onset of the severe 2007-2009 recession.  Third, there were major tax policy changes between these two years.  Fourth, both 1996 and 2006 were three years after the enactment of tax legislation that affected tax rates and are unlikely to be affected by short-run behavioral responses to these changes.”

In fact, 1996 and 2006 are not even close to similar points in the business cycle: 1996 was at the beginning of an economic expansion that lasted another four years, while 2006 was at the end of an economic expansion that ended the following year.    

It is deeply misleading to talk about income inequality without properly taking into account the business cycle.  The financial crisis of 2008 and ensuing recession has devastated personal incomes to a degree not seen since the Great Depression.  The most dramatic collapse has been in high incomes, as can be seen with the most recent IRS data.  For example, since 2007 the number of millionaires has dropped 60 percent, while income reported by millionaires has dropped in half.   

Much of this volatility is due to the collapse of capital gains, as the charts below indicate.  Based on IRS data, as a share of income, capital gains went from 9.5 percent in 2006 to 3.0 percent in 2009, and this while the tax rate on capital gains remained 15 percent.  The second chart shows capital gains in dollar terms and compares it to the S&P 500.  First, capital gains track the stock market – that should be obvious.  Second, capital gains realizations went from $771 billion in 2006, peaked at $896 billion in 2007, and then collapsed to $231 billion by 2009 – a drop of 74 percent in two years.

Why is this important?  The CRS acknowledges that capital gains mainly accrue to high-income earners, and this too can be seen from IRS data.  In 2009, it is in fact the largest source of income for those making $10 million or more.  Thus, the collapse of this income since 2007, as well as other sources of income such as business income, completely disrupts the story that income inequality has increased since 1996.

Lastly, the third chart below shows a standard measure of income inequality, the Gini coefficient, for the years 1986 to 2009, again based on the most recent IRS data.

It shows just how much measures of income inequality depend on the business cycle, and why 2006 or 2007 are terribly unrepresentative years.  They are in fact the two peak years for the Gini coefficient over this time period, at 0.567 in 2006 and 0.574 in 2007.  From there, the Gini coefficient falls 7 percent to 0.535 in 2009.  This is not quite as low as it was in the 2002 recession, but then we haven’t seen 2010 data yet.  From the trajectory it seems likely that 2010 will be still lower.  As it is, the Gini coefficient in 2009 is lower than it was in 1998, and close to where it was in 1997.

It must be acknowledged that the Gini coefficient has an underlying upward trend between 1986 and 2000.  The steepest increase follows the 1986 tax reform, which dramatically lowered the top marginal rate on ordinary income (see the last chart below), and began a long trend of business income moving from the corporate code to the personal code in the form of pass-through entities such as partnerships and S-corporations.  This alone might explain much of the measured increase in income inequality over this period.   However, Clinton raised the top marginal rate in 1993 to 39.6 percent, and this also ushered in a long period of increasing income inequality.  The Gini coefficient went from 0.498 in 1993 to 0.555 in 2000 – an increase of 12 percent.

In contrast, the period since 2000 has exhibited no underlying trend in income inequality, but rather dramatic fluctuations resulting from the business cycle.  The CRS is right to connect this to capital gains, which have likewise cycled up and down, but wrong to conclude this represents an underlying trend.  Income inequality at the beginning and end of the Bush years was virtually unchanged, with the Gini coefficient going from 0.555 in 2000 to 0.557 in 2008.  In 2009 the Gini coefficient fell further, to 0.535, for a 4 percent drop since 2000.  There is therefore no evidence that the Bush tax cuts in either the top marginal rate or capital gains rate had any long term effect on inequality.

It may be the case that lowering the tax rate on capital gains created more volatility in the stock market and thus capital gains realizations and personal incomes.  More likely, the stock market moves for many reasons more important than the tax rate on capital gains, such as the internet revolution, war, monetary policy, demographics, and the housing bubble. 

Here is our earlier critique of a CBO study that claims income inequality increased between 1979 and 2007. 

Follow William McBride on Twitter @EconoWill

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“With his re-election prospects hinging largely on the economy and jobs, President Obama today highlighted what he said is a growing trend under his administration:  the “insourcing” of jobs back to America.”

Yes, this is all very good for America, but it reflects mainly the fact that Europe is going down the tubes, with many countries reporting economic contraction in the 4^th quarter.  Add to that the fact that many emerging economies, like China, are slowing down and showing signs of a burst credit bubble.  But the danger is here:

“Obama plans to propose “in the next few weeks” a series of new tax breaks for companies to help accelerate the return of jobs to the U.S. and end special tax treatment for those that ship work overseas. Neither he nor administration officials offered further details.” 

The only special tax treatment that U.S. companies face in operating overseas is our antiquated and out-of-step system of worldwide taxation, whereby the IRS attempts to track down the foreign profits of U.S. corporations and applies a toll charge for bringing those profits back home.  Any attempt to further restrict the free movement of capital or labor makes about as much sense as restricting the flow from California to Ohio.  Imagine if the governor of California tried to prevent California companies from expanding outside the state.  Would that create California jobs?  No.  Companies like Apple would curtail their out-of-state operations, such as manufacturing, distribution, and retail, and in turn curtail their complementary in-state operations, such as headquarters and research and development.  There might be some “insourcing” of out-of-state manufacturing jobs, but at a higher cost, such that Apple as a whole would have to shrink, hurting workers, consumers, and shareholders, many of whom are Californians.

Protectionism doesn’t work at the state level, or the national level.  President Obama seems to recognize that domestic jobs come from lowering the costs of hiring, including the tax costs.  The most straight forward way to accomplish this is by cutting the corporate tax rate for all corporations.

Follow William McBride on Twitter @EconoWill

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Leading football clubs are being heavily targeted by HMRC over perks afforded to players and WAGs partially because the taxman has already received information and tip-offs relating to major financial discrepancies at at least one top Premier League club,Sportingintelligencecan reveal.

The finance directors at all Premier League were recently sent a questionnaire containing 181 questions looking closely into the financial affairs of the clubs and players, specifically the issue of perks, as HMRC looks to crack down on blatant abuses of the system.

And as they also note:

The sheer scale of the questionnaire has surprised even tax experts.

Sportingintelligencecan exclusively reveal the questions from the questionnaire, including:

• 4.14 Are any payments made into trusts or sub-trusts, whether in the UK or abroad, for which employees or family members are, or are potentially, the beneficiaries?
• 1.2 Are any expenses paid, or benefits provided, to players or other employees spouses, partners or other family members, whether in the UK or abroad?
• 11.6 Has the club paid any expenses relating to an employees private holiday costs? If so please provide details.
• 11.7 Are there any circumstances where the cost of spouse travel will be paid for by the Company? If so please provide details.
• 22.1 Are complimentary tickets, use of a box, etc. provided for employees? If so please provide full details.

Sportingintelligencealso understands the tax affairs of foreign players will come under greater scrutiny. In some cases players have been found not to have paid National Insurance contributions (NIC).Other questions asked:

• 5.3 How does the club treat payments to foreign players for payroll purposes?
• 4.2 What controls are in place to ensure that any amounts which are paid out are treated correctly for tax and NI purposes?

Quite right too.

Rumour has it there’s not just smoke in this case, but a fire too. And tackling such issues in such a high profile way is wholly appropriate.

And there’s muchmorein thearticlethan the bits I’ve noted.

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Likewise, the top 0.1 percent—138,000 taxpayers—paid a greater share than the bottom 75%.  In other words, a city the size of Dayton, OH would have paid more than a country the size of Germany.

Would Dayton San Antonio be agreeable to such a reality?

Doubtful. 

Follow David S. Logan on Twitter @Loganomix

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The Dean & Chapter of St Pauls Cathedral issued the following statement this morning (Monday 17th October):

“Services at St Pauls Cathedral were able to take place as normal this weekend but the last few days have not been without various challenges. Our chief concern is that St Pauls be allowed to operate as normally as possible and for all people to be respectful of this need.

Public safety has been a major concern. We have been in constant touch with the police and community leaders. As the City of London returns to work this morning we are monitoring the situation carefully.

On Sunday the protestors did reduce their presence on the landing and steps of the West Doors enough to allow people to come in to worship throughout the day.

It is also now important that the thousands of visitors wishing to visit the cathedral and to enjoy our hospitality this week are able to do so freely and that the daily life of St Pauls Cathedral can continue without serious interruption.”

It’s an extraordinary comment to issue. What’s important to them? That the Cathedral can carry in as normal. What does that really mean? That its turnstiles can continue to take the money. That is what that statement really means. This, as they make very clear, is their chief concern.

Any mention of the poor and those protesting on their behalf? No, none at all. Any Christian message at all? No, none. Just a wish that things carry on as normal and the cash keeps flowing.

That’s appalling. And what it confirms is that they really do think two things. The first is that their neighbours in the City have no questions to answer. The second is that the prime concern of the Dean and Chapter is running a tourist attraction.

Shame on them.

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However, there have been a number of changes to the way that IHT works in the UK over recent years, and more and more people are becoming aware of their potential tax liability.

So, here is our guide to four things everyone should know about Inheritance Tax.

The Inheritance Tax threshold

Not everyone has to pay IHT on the value of their estate when they die. Every UK taxpayer has an Inheritance Tax threshold (or ‘nil rate band’.) This is the amount up to which an estate will have no Inheritance Tax to pay.

If a deceased persons estate – including any assets held in trust and including gifts made within seven years of death – is more than the threshold, Inheritance Tax will be due. If the value of the estate is below the IHT threshold, there will be no tax to pay.

In the tax year 2010/11 the inheritance tax threshold is 325,000.

Spouse or civil partner IHT exemption

Every individual has an inheritance tax nil rate band. In addition, married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or when they die without having to pay inheritance tax. As long as the person receiving the assets lives permanently in the UK, there is no IHT to pay.

This is known as ‘spouse or civil partner exemption’.

Tax Returns for 99

Transferring an unused IHT threshold to a spouse or civil partner

In addition to spouse or civil partner exemption, leaving your estate to your spouse or civil partner in this way means that the deceased person has not used any of their own IHT nil rate band.

This means that the IHT nil rate band of the second spouse or civil partner can be increased when they die even if the second spouse has re-married.

In the 2010/11 tax year, it means that the second persons estate can be worth up to 650,000 before any inheritance tax will be due.

HMRC call this transferring the nil rate band from one partner to another and certain forms and supporting documents will need to be supplied to HMRC by the executors or personal representatives of the deceased persons estate.

Inheritance Tax exemptions and tax reliefs

Even if the value of your estate is over the IHT threshold, there are certain ways that you can pass on your assets without paying IHT. The most common ways are:

• Leaving gifts to a qualifying charity
• Spouse or civil partner exemption (as above)
• Leaving gifts to someone more than seven years before you die (these are called potentially exempt transfers)
• Giving gifts of up to 3,000 on an annual basis
• Leaving gifts of up to 250 (called small gifts)

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Reacting to proposals to loosen the protections of Prop. 13 on business property, Runner said:

It comes down to the fact that there’s this misguided idea that somehow the state and local governments are owed more money because taxpayers – focused now on business taxpayers, on the property tax – aren’t paying their fair share, and as a result of that, if they’d just pay their fair share, government would have enough money. I kind of back away a little bit at that discussion and say, hey look, government has enough money. These are tough times for everybody and they ought to be tough times for government too, and government just needs to react to the revenues that are coming in.

The fact is California is the sixth highest taxed state in the nation, and in property tax we’re about in the middle. So this effort to then try to go after businesses and have them reassessed differently than homeowners is only going to drive California to be one of the highest property tax states also. And again, the lens that I look through all these issues on is will this increase employment in California or will this decrease employment in California? And I don’t think anyone could doubt, if you’re going to go to business landowners and ask them to pay a higher property tax, that that is not going to create a new job. That is only going to create less jobs in the state of California.

Listen to the show here.

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How much are candidates charged to be on the ballot? Do they pay a percentage of the campaign contributions or [a fee] for the cost of processing their run for president, senator or congress, governor, mayor, and other elected positions in the way of voting equipment expenses? If not, why?

Ballot access requirements vary by state. Ballot Access News, published monthly by expert Richard Winger, breaks down the state-by-state signature or registration requirements for presidential candidates. I’m not sure as to filing fees but I haven’t heard of special taxes that go beyond recouping a fraction of the cost of running the election. For the most part, these are paid for by taxpayers. Elections are expensive: nationally the cost of running elections is probably over $1 billion. Recovering all that cost from candidates could prevent all but the wealthy and well-connected from running for office. (In some cases, however, parties consider paying for primaries.)

A contrasting example, though, is the British system, where candidates for Parliament pay a £500 fee to be listed on the ballot. This “deposit” is returned in full if the candidate receives at least 5 percent of the vote.

The reader goes on to suggest setting up a fund similar to the Presidential Election Campaign Fund, which has a line on the IRS 1040 income tax form taxpayers can dedicate $3 of their taxes to the fund. She asks why a similar Debt Buy-Down Fund couldn’t be set up, using the revenue to reduce the federal debt. The reason is that the $3 presidential election check-off simply redirects tax revenue, rather than generating more. Such a fund would neither increase revenue nor reduce spending, so it would have no impact on the deficit.

Alternatively, the federal government could copy many states’, which list various contribution opportunities on their state income tax forms. For example, on the Maryland income tax form, taxpayers can donate additional funds to Chesapeake Bay and Endangered Species Fund, the Developmental Disabilities Waiting List Equity Fund, and the Maryland Cancer Fund. For now, if you want to donate extra to the federal government, you can send it here or here.

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Lovers of legal movies and Facebook enthusiasts are bound to enjoy the movie The Social Network. The film is about the famous social networking site Facebook and some of the lawsuits that emanated as a result of the site. David Fincher directed the movie and it has a cast that includes Andrew Garfield, Jesse Eisenberg, Brenda Song, Justin Timberlake and a few other actors. The movie is adapted from the book The Accidental Billionaires.

None of the owners or anyone else associated with Facebook was involved in the making of this 2010 legal drama. Critics were quick to praise the film based on screenplay, score, editing and acting. Some even went on to say that it was the film of the year. In fact the movie received 8 Academy Award nominations and it won 3 awards for best film editing, best original score and best-adapted screenplay.

At the Golden Globe Awards it won best motion drama picture. There were a host of other awards for the movie including screenplay, director and best original score. The story begins with Mark Zuckerberg played by Jesse Eisenberg is dumped by his girlfriend Erica Albright who is played by Rooney Mara.

Zuckerberg then gets drunk and writes a vindictive blog about his ex girlfriend and this is where the idea of on an on campus website is born. The site is called Facemash and it permits members to score attractive women on the site.

The website affects the Harvard network and this causes Zuckerberg to get found out. The result is that he is placed on 6 months probation at the university. Most of the female fraternity at Harvard is now against Zuckerberg for this prank. All of this leads Zuckerberg to join forces with the Winklevoss twins where Zuckerberg agrees to be a programmer for a dating website called the Harvard Connection.

Later, Zuckerberg approaches his friend Eduardo Saverin played by Andrew Garfield and he discloses his plan to launch a website called Thefacebook which will be social networking website that is exclusive only to students at Harvard University. The plan is to make this site similar to Facemash, however all previous legal problems would be eliminated, as people would consent to signing up with the site.

Saverein becomes involved by sponsoring $1000 to get the site started, and helping to distribute the link through his friends at a club. The twins with whom Zuckerberg was originally involved want to sue Zuckerberg, as they believe that he stole the idea while working for them. The events that unfold thereafter make this movie worth seeing.

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KPMG are heavily invested in the plan to makeNorthernIrelanda taxhavenso I am not surprised by the comments. They are, ofcourse, amongst the very few who would gainfromthis plan which would be massively onerous for the ordinary people ofNorthernIreland.

In response the Belfast Telegraph reported:

But anti-poverty campaigner and blogger Richard Murphy said that harmonisation was “inevitable” and called for Ireland to “stop looting other European economies”.

“There is no way this tax competition can continue while the Eurozone is so desperate for cash, it is now not a case of ‘if’ but ‘when’,” he said.

“Ireland will be picked on, it can bluster all it likes but harmonisation will happen. We must question why Northern Ireland is so desperate to copy a system that is doomed to fail and does not work.

“Ireland has already had preferential treatment, it is time for Ireland to grow up and play its part in the international economy and to stop looting other European economies.”

Thataboutsums it up.

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