Income Disparity and Sources of Income

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SUMMARY

Regardless of how one views the Occupy Wall Street (OWS) movement and “We are the 99 percent”, it has succeeded in raising awareness about wealth distribution. Also in October, 2011, the Congressional Budget Office (CBO) published an analysis of household incomes addressing that subject.

 CBO first grouped households by quintiles (1/5 in each) and clearly the top fifth have done far better than the bottom fifth. CBO then divided the top 20% (fifth) into 10%, 5%, 4%, and the highest 1% of households. The income disparity was even more striking with the highest 1% far greater than the others. 

This analysis further drills down within this top 1% and finds income disparity wider yet, and vastly greater than all other group comparisons. Pre-tax income for the top 1/100 of 1%, (or 12,000 households) totaled some $450 billion, greater than the combined pre-tax income of the 24 million lowest income households. To rephrase, income of just one of these richest households is more than 2,000 lowest income households. Continue reading

Worsening Inequality of Wealth and Incomes

SUMMARY

In October 2011, the Congressional Budget Office (CBO) released an analysis at the request of the Senate Committee on Finance. The analysis documents changes in household income distribution from 1979 to 2007. That analysis titled “Trends in the Distribution of Household Income notes that the share of average after-tax income for the top 20% gained, while the lower 80% declined seen in Summary Figure 2.

Further, within the top 20%, the share of after-tax income of the top 1% grew from less than 18% to over 30% of the top 20% income bracket. While actual incomes for all quintiles increased, only the share of total after-tax income of the top 1% increased. The 81-99% remained essentially flat while the lower 80% of all households declined over 28 years.   Continue reading

Inequality of Wealth and Income

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This article is related to health care costs because new sources of revenue will be needed to help balance the federal budget.  There simply are not enough reasonable cuts in spending to close the deficit gap.  Tax increases will be necessary and this analysis examines effects of past tax policies.

SUMMARY

After years of neglect, political America has awakened to the problems of rising deficits that are developing  at all levels of government. Economists and politicians may argue endlessly about  causes and solutions.  Cutting spending, raising taxes, growing the economy all have their place.  This essay examines income, wealth, and taxes, not just in terms of rates but also where those rates have affected income growth.

By every measure, U.S. wealth and income have skewed heavily and continue to tilt to the top 1%, approaching an unhealthy situation. A robust middle class will spend more of its earnings than the wealthy, and in this country consumer spending constitutes the largest economic component.

METHODOLOGY OF REPORT

All the data used in this report are derived from government sources. Income and tax data are from Congressional Budget Office (CBO).  CBO published tax and income data from 1979 through 2007, dividing data of households into five quintiles (20% each) as well as the top 10%, 5%, and 1%. Wealth data come from the Federal Reserve’s 2007 Survey of Consumer Finances Chartbook divided into four quartiles plus top 10%.

DISCUSSION – Tax Rates

Beginning in the Reagan administration, there has been an overall trend towards lower tax rates as shown in the graph below.  Despite differences in timing, the total average tax rate for middle America has declined virtually the same as for the highest 1% of households.

The next graph shows trends in who is paying how much in total federal taxes.  Here clearly shows tax rate reductions have brought down the share of lower 80% of all taxpayers from 45% of total taxes to 35%. One group that has an increased share is the top 1%, rising from 15% to a 28% share.  With declining rates and overall increases in share of tax payments can mean only one thing.  The top 1% are increasing income at a significantly faster rate than other taxpayers. Continue reading

Inequality of Wealth and Income – Paged

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This article is related to health care costs as new sources of revenue will be needed to help balance the federal budget.  There simply are not enough reasonable cuts in spending to close the deficit gap.  Tax increases will be necessary and this analysis examines effects of past tax policies.

SUMMARY

After years of neglect, political America has awoken to the problems of rising deficits being incurred at all levels of government. Economists and politicians may argue endlessly of causes and solutions.  Cut spending, raise taxes, grow the economy all have their place.  This essay examines income, wealth, and taxes, not just rates but where those rates have affected income growth.

By every measure, U.S. wealth and income has skewed heavily and continues to tilt to the top 1%, approaching an unhealthy situation. A robust middle class will spend more of its earnings than the wealthy and in this country consumer spending constitutes the largest economic component.

METHODOLOGY

All the data used in this report are derived from government sources. Income and tax data are from Congressional Budget Office (CBO).  CBO published tax and income data from 1979 through 2007, dividing data of households into five quintiles (20% each) as well as the top 10%, 5%, and 1%. Wealth data come from the Federal Reserve’s 2007 Survey of Consumer Finances Chartbook divided into four quartiles plus top 10%.

GO TO DISCUSSION – Tax Rates

GO TO DISCUSSION – Household Income

GO TO DISCUSSION – Household Wealth

CONCLUSION

The wealthy always had the lion’s share of income and assets.  At some point, however, excessive accumulation of wealth can tend to stymie economic growth.  A robust middle class will spend more of its earnings than the wealthy and in the US economy, consumer spending constitutes the largest economic component.

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Non-Partisan CBO Estimates of Healthcare Reform

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SUMMARY

Few doubt how unsustainable current medical trends are.  With medical inflation consistently outpacing the CPI, health costs will continue to take a greater share of the economy. Private insurers claim they can solve the problem with reform but without a Public Option.  History suggests this is a dubious claim at best.  Looked at from multiple angles, private insurers are not likely to succeed.  Profits gains have far exceeded key indices, medical loss ratios have gone way down while costs have gone way up, competition is diminished by concentration of major insurers, and tort reform complaints carry little water.

DISCUSSION

The graph below shows CBO projections of under 65 population by insurance group. The top, red bars are the uninsured that continue to grow each year.  While insurance through employment is fairly consistent, greater employee cost sharing is an increasing burden.

Neither the Senate nor House reform proposals provide financial support to unauthorized immigrants.  When analyzing various effects of reform, this group has no effect. For data consistency for both before and after reform, unauthorized immigrants are not included in the populations.  Removal lowers uninsured population between 5 and 8 million over the 10 year period.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

While the country may be coming to some agreement that reform is needed, differences exist on how to achieve reform. Health Insurers want to have participation mandatory which is a valid point. Except they have offered no other steps on how to reduce costs and are against Public Option that would offer real competition. However, they would be beneficiaries of millions of new customers.

Those customers would come from those currently uninsured, or insured through individual and employer groups. In the graph next column, CBO assumes reform includes an Exchange that would shift nearly 40 million from uninsured, individual and employer groups (left side of graph) to Medicaid and the Exchange (right side).  Note that not all the movement is to the Exchange.  A large number of uninsured poor would switch to Medicaid.  Still, the Exchange is expected to grow quickly to nearly 25 million. This group is the target for private insurers and Public Option.

So why is it necessary to have a Public Option on the Exchange?

 On its face, private insurers could certainly cover 25 million new enrollees without government involvement. But the catch is that the government IS involved because of another feature of reform.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

That reform feature is “affordability credits”.  Even those with insurance find their total health care costs consume so much of their income that they do not get needed care. Affordability credits help those with lower incomes pay premiums and shared health costs. The effect is shown in the chart below. Medicaid pays for the very poor while credits help less well off people in the Exchange.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

In short, the Government will be paying some $100 billion each year in credits to Exchange enrollees, much of it going towards insurance premiums.  Will private insurers provide good value for this outlay? Their track record is not encouraging. 

Health care costs fall into two categories: medical cost outlays and administration / overhead costs. In 1993, 95% of premiums went for medical costs at Investor-owned insurers as shown below.  Over the next 14 years, this decreased to just above 80%, a shift of about 14% or one percent per year.  Meanwhile Medicare administration and overhead costs have remained fairly constant through the period.  While some may argue this is not a direct comparison, the fact that Medicare medical loss ratio stayed constant while investor-owned insurers drop significantly cannot be denied.

 Sources: PricewaterhouseCoopers’ Health Research Institute, and U.S. Center for Medicare & Medicaid Services

14% becomes urgent when you consider premium dollars as shown in the chart below. Private insurance runs over $600 billion. 14% of this is nearly $90 billion per year.  Fortunately, one-third of private insurers are non-profit.  But that leaves some $60 billion added overhead including contribution to profits since 1993.

Source: Center for Disease Control – Health, United States 2008 Figure 19

Profits did not grow to $60 billion, but they sure did grow as shown below, exceeding by a huge margin the S&P 500 and CPI for urban wage earners.  All the growth occurred since 2002.

Sources: U.S. Dept. of Labor, Bureau of Labor Statistics, Standard and Poors, and Health Insurers’ 10K’s

Not only did investors do well, but so did executives and all at the expense of people paying for health insurance. 7 insurance CEO’s drew nearly $70 million total compensation in 2008.

Still, Investor-owned insurers argue that their profits are a mere 3% of revenue.  Another and better measure is Return on Equity (ROE) which is profitability based on investment.  By this measure, health insurers are earning 17%.  From the chart below some industries do have greater returns, but 17% should be nothing to complain about.  The 10 insurers are even higher than credit card issuers.

Sources: 10K reports for top 10 Investor-owned Insurers and  CCH Almanac of Business and Industrial Financial Ratios, 2009 Edition

Now high returns to executives and investors might have some justification if private insurers were successful in containing and bringing down the major component of health care – medical costs.  Yet, year after year, medical costs outpace the CPI.  One could almost argue that insurers “administer” health care costs rather than provide a value added “management” of those costs.

Competition often has something to do with companies holding down costs.  In competitive markets, insurers need to maximize cost control efforts to maintain market share.  But is there really competition?  The graph below shows the market share of the top two insurers in each state weighted for population covered.

 Sources: AMA, Consumer Union, Sector & Sovereign analysis

Over half the U.S. population lives in states where two insurers control over 60% of the market.  That is not a good omen for competition.  For instance, insurers claim that their market share allows them to negotiate lower rates with providers.  It would not be fair to paint all insurers with the same brush. But a number of insurers have been found not to be driving down rates, but of negotiating with providers to NOT contract lower rates with their competition.  Instead of reducing costs, these illegal acts increase medical costs compared to a truly competitive environment.

Insurers and others also argue that tort reform would bring down medical costs owing to current waste of defensive medicine. There is no argument about the waste. But is it due to defensive practice or simply practice? Data suggests that the latter is more prevalent.

The graph below, derived from Dartmouth College data, groups two sets of hospitals, the 100 highest cost, and 100 lowest cost hospitals for Medicare spending per decedent during the last two years of life.  The bars represent average costs by states that have enacted tort reform setting caps on non medical damages.  For the lowest cost hospitals, tort reform shows virtually no effect on hospital costs. For the highest cost hospitals, it is mixed. But there is no clear evidence that tort reform will substantially lower costs.

Source: Dartmouth_hosp_DAP_Hosp_HRR_ST_01_05.xls

So far, private insurers’ track record suggests that left to the free market, they will not be very successful in lowering costs, either administrative or medical costs, with or without tort reform.  It may be unrealistic to even expect investor-owned insurers to succeed given that their number one priority is to their investors.

Instead of using their actuaries to data mine patterns to help providers reduce costs, their efforts are focused on denying claims and raising premiums to high claims groups.  Instead of returning surpluses to people paying premiums, they are buying back billions of dollars of their own stock to increase value to their shareholders.

Thus far the focus has been the cost of illness. Another aspect is the benefit of staying healthy. Corporations have had success in wellness programs. They not only reduce health care costs, but lower absenteeism. (http://www.uscorporatewellness.com/USCW White Paper 2009.pdf)  Some insurers offer wellness programs, but they often include a health risk assessment on employees and that runs a risk that insurers may use that data in setting rates for the company: if towards lower rates, good. If higher rates, not so good.

Fortunately, large corporations are the biggest block of insured people, and their wellness efforts can have a broad effect.  The graph below shows the U.S. population by source of health care coverage. Big business covers 45% of the population, 28% who self insure and another 17% who shift risk to insurers.

Source: CBO, EBRI, CMS, Goldman Sachs Research estimates

Groups at a disadvantage to big business include individual and small group business and the uninsured that together make up over a quarter (27%) of the population. If private insurers are unable or unwilling to lower administrative and medical costs for them, then the next best alternative is to offer a Public Option.

Without progress in both lowering administrative and medical costs, the affordability credit paid for by the government is going to cost taxpayers more than can be justified.  The question is not whether a non-profit Public Option will succeed. The question is whether private insurers can succeed after years of failing to take the needed steps to contain costs.

The stakes are huge. CBO projects that with a Public Option, the insurance picture changes dramatically as the graph below shows. Medicaid grows a bit for the poorest, but the uninsured and non employer based population can look forward to more affordable insurance.  Meanwhile the majority of the population is unaffected.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

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Who Should Help Pay for Healthcare Reform

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 Summary

Health care is expensive and is getting more so.  Further, the government is taking on a greater share as people age and move into the Medicare system.  Attempts that tweak the current system will likely fail to lower costs.  What is needed is a new model that would be phased in.

While the US does enjoy a quality system, it is not the top in comparison to many other industrialized countries.  However, the US does pay 50% or more of its GDP than do these same countries. And with its transaction based model, future cost increases will squeeze our productive sector.

Looking at several other countries, there is a clear difference in the health payment model.  In the U.S. the model has been relatively unchanged over decades.

One goes to a doctor or hospital, is billed for the encounter and the bill is paid by him, a health insurer or both.  It matters less whether the treatment resolved the health issue.

Other countries rely more on outcomes, where “bonus” payments are made to providers who solve the health issue.  Of course, it is risky to completely switch to this method overnight.  Rather it should be phased in over years.

Short term, however, increased costs are expected. And the fairest way to pay is to tax those who benefited more in the past.  Those who did benefit are a small group – the top 5%.

Some will argue that taxing the wealthy will cost jobs. But jobs are created not from income but from net worth, and gains there suggest that other factors weigh more heavily than marginal tax rates in job loss or creation.

Who is paying for healthcare today in the U.S.

The graph below shows 2006 funding of healthcare. With the aging of the population, Medicare creates increased government spending. Close to half of all health care is paid for by government.  For those worried about government getting involved, they are a little late. It’s already involved.

Private insurance is a major funds source, and most of that is provided through employers. Consumers with insurance through work see only out-of-pocket expenses. Even with costs rising, and with insured seeing higher cost sharing, they are still somewhat shielded from total health costs.

Conversely, those without insurance are exposed to the full brunt of higher health care costs.  Combining all people, the costs are not only a heavy burden, but that burden falls heavily on those who lose and do not have insurance.

Source: Center for Disease Control – Health, United States 2008 Figure 19

 What are others paying for healthcare today 

Some believe that the US costs are worth it.  We have high quality care and we pay for it.  But while quality is high, it is by no means the highest in the world.  And as the graph on the right shows, the US stands alone in how much it spends – some 50% more than other highest countries and almost doubles that of Japan.  These other countries must be doing something different and they are.

One factor is the payment business model. The US is primarily a transaction based system.  Higher rates, more revenue. More procedures, more revenues. The combined effect is healthcare costs that are not only more expensive, but rising faster than in the rest of the world.

As for tomorrow, we can learn by looking at components of growth in US health care spend, and how those trends portend future expenditures.

Source: OECD Health Data 2009, June 09

What healthcare increases may look like tomorrow

Aside from any current inequities in who pays for health care, these expenditures are not only rising but at an ever-increasing rate. The graph below shows the growth in costs from 1965. The spike in 1965-1970 was Medicare.

Population and general inflation are reasonably expected factors.  In addition, however, there is medical (price) inflation and intensity (more procedures) driving up costs.

Unless there is a major change in these trends, healthcare costs will consume an ever greater portion of GDP, and squeeze out productive output.

To bring this under control requires more than tweaking around the edges of the current healthcare model.  Other countries spend less on healthcare so how do other countries cover costs for less.

Source: Center for Disease Control – Health, United States 2008 Table 126

U.S. insurers & Medicare are very Transaction based

For decades, the U.S. has had a primarily transaction based model like figure 1 below.  You get treatment from a physician or hospital and pay for their time and expenses.

When Medicare began, it used this traditional model but quickly learned that costs were rising out of control. So they changed to a fixed price model like figure 2 below. But when Medicare squeezed down prices, some providers increased their volume to recoup part of their losses.

Managed care or HMO’s (not shown) had limited success in freezing total payments. But healthier groups can often select traditional coverage at lower cost, leaving HMO’s with more of the higher cost people. In short, reform with only a transaction based model will not likely succeed.

 

Other countries are more Outcomes based

What other countries did was adopt normal profit-making business models like figure 3 below where the goal is to offer rewards for greater productivity and improved quality, in a word — outcomes. 

It is the basis for most bonuses.  Also many contracts are include a bonus if a project comes in under budget and ahead of time. Healthcare payments in other countries rely far more on outcomes than the does the U.S. And it works.

Medicare is piloting this concept, paying small bonuses to providers who show better outcomes. As data is obtained, base amounts can be reduced and the outcome gradually increased bringing the U.S. closer to the world model.

Will private insurers adopt this model? Unless all insurers are required to do so, it is doubtful.  Alternately, a public option using this model would cause private insurers to voluntarily adopt as a way to remain competitive.

Can the U.S. afford more income taxes

Other industrialized countries are clearly providing quality health care at significantly lower costs than in the U.S.  But what about other taxes or more specifically, total taxes.

How does the U.S. compare in total taxes with these other countries?  The graph below shows tax components. Despite complaints about corporate rates, U.S. take is lower than most countries. Sales taxes are high but discretionary (no buy, no tax) as states rely heavily on this source.

Social Security and income taxes are two mandatory taxes affecting individuals and here the U.S. ranks near the bottom.  Without becoming just like Europe, some increase in mandatory taxes should let the U.S. remain competitive with the rest of the world.  And if real reform does come, higher initial costs can be expected to result in savings down the road as the U.S. costs approach other countries.

Source OECD in Figures 2008 – OECD © 2008 – ISBN 9789264055636

Looking at income tax as a source of new funds

Where does one look for new taxes. While there are several options, one key is to see who is earning what today.  The graph below displays the average after tax income for selected percentile groups.  The small blip at the furthest left is the average income of 60% of the U.S. Those in the 61% to 95% range average somewhat better.  Also noted is the greater number of households in these groups’ results in their paying the majority of income taxes.

But look at the highest 5% earners, and especially the top 1%.  That 1% averages over $1 million per household.  So if there is a tax increase, should all taxpayers contribute the same percent increase?  Or should increases be progressive as is the basic income tax structure.

One way to answer this is to see how income for these same households changed over time.

Source: Congressional Budget Office-Historical Effective Federal Tax Rates: 1979 -2005

Who benefited from income gains over 25 years

The graph below employs the same groups as above.  For several reasons, there has been a substantial income shift with enormous increases in income for the top 1%, with modest increase for the 95%-99% group.  ALL the rest of the percentile groups actually lost ground, and the lower the income bracket, the greater the loss.

Over the past 28 years, there has been a very sharp drop in marginal tax rates leading to two results.  First, high income earners keep more of their income.  But with high marginal rates, companies did not pay extremely high salaries and bonuses as most of it went towards taxes.  With lower marginal rates, executive compensation began an upward spiral that far exceeds their counterparts in other countries.

The combined effect of near runaway compensation and lower taxes is primarily responsible for the shift to the rich.

Source: Congressional Budget Office-Historical Effective Federal Tax Rates: 1979 -2005

Why are so many people afraid of higher tax rates

Some note that total revenues rose when Kennedy cut taxes and apply that logic to every tax change since.  But as the graph below shows, the marginal rate at that time was 90%.  Had the IRS run amuck? Actually, the U.S. raised taxes to pay down war debts, a good habit missing today. 

From the prior graph, one could assume that a fair way to apply new taxes to individuals is to tax those who gained the most relative to others from tax cuts in the past.

Today we have low marginal rates, major gains by the very rich, and a national debt that has been almost ignored. Not to increase taxes but to add to the national debt is to put a heavier burden on the next generations.

In conclusion, a logical and fair place to look for new sources of tax revenue is the top 5% of households.

Source: IRS – SOI Tax Stats – Historical Table 23

Net worth – the job generating engine

Some complain that taxing the income of the rich will cause a loss of jobs.  But income is not the prime determinant in job creation.  To start a business, one in fact, may have to give up current income. 

Businesses are started by those with net worth.  And if they are lucky, they can leverage that net worth with loans to fund their new enterprise.

The graph below shows the growth in net worth from 1989 for four selected percentile groups.  As one would expect, those less well off tend to work for others and their net worth (lower 50%) makes barely a blip on the scale.

Even the net worth of the 50%-90% groups is modest.  The greatest concentration of accumulated wealth is in the top 10%. And that group not only grew more in absolute dollars, but also as a percent gain over prior periods.

Source: Federal Reserve Board, 2007 Survey of Consumer Finance (March 9, 2009)

New worth grew more when tax rates were higher

The graph below details the increase in net worth over the prior period.  The lower 50% experienced inconsistent gains up and down.  Higher groups fared better but all were impacted by recessions.  Of note is that the two 3-year periods ending in 1998 and 2001 occurred during Clinton’s term where he had actually raised marginal tax rates.

One should skip the recession period of 2004. By 2007, the tax cuts of Bush’s term resulted in net worth increases, but they were significantly less than those of the Clinton period.

Obviously, there are additional factors at play, but to simply argue that any increase in marginal rates, and especially raises in the top brackets will result in loss of jobs is a tenuous argument not supported by this data.

Source: Federal Reserve Board, 2007 Survey of Consumer Finance (March 9, 2009)

 

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