A new paper on wealth inequality from economists Emmanuel Saez and Gabriel Zucman – who have written frequently on the subject – was released earlier this month. This paper is far better than previous attempts to measure inequality. It includes pensions and other sources of wealth not taxed by the IRS – a shortcoming for which I have previously criticized measurements of inequality. One of the most interesting findings in the paper was the finding that the saving rate had fallen extremely far for the lower 90% of America’s income distribution: This is a trend I wrote about in a recent paper on the decline of saving and investment in America. It is worrisome that saving – which I believe is beneficial to society at large, but even more beneficial to the saver – is becoming an activity only for the rich. Saez and Zucman further found that “saving inequality” actually drove wealth inequality even more than income did: This is a problem worth correcting. Some people simply earn too little to save. This is a problem that can only be addressed with a stronger, more competitive labor market. But the “bottom 90%” is a group that, as a whole, earns a lot of income. It includes plenty of people with six-figure salaries. It is puzzling and distressing to see savings so low for people who are, by all means, some of the richest on earth. Many of these households have six-figure incomes. One would think that they could put aside more. Increasing the caps on IRA contributions – or finding a more comprehensive tax treatment of saving – would probably help. Saving cannot and should not be for the rich only.

According to 2011 Census data, there are approximately 27 million businesses in the United States. Of these 27 million businesses, 90 percent of them are what are called “pass-through” businesses. In regard to taxes, the most distinct feature of a pass-through business is that its income is taxed once on the owners’ individual tax returns. Contrast this with c corporations, which pay their taxes directly at the entity level through the corporate income tax then again at the individual level through dividend and capital gains taxes. Many people think of pass-through businesses as synonymous with small business. However, this isn’t always the case. In fact, there a significant number of pass-through businesses that have 500 or more employees. Census data shows that the stereotype holds when you look at the distribution of the size of pass-through businesses: 82.5 percent of all pass-through businesses are owned and operated without any employees. Only .22 percent of all pass-through business establishments employ more than 100 workers and 0.04 percent employ 500 or more workers. Compared to c corporations, pass-through businesses are still much smaller on average. The same Census data shows that 1.6 percent of corporate businesses employ 100 or more employees and 0.36 percent employ 500 or more employees. 44 percent employ between 1 and 100 employees. However, in absolute terms, there are about as many pass-through businesses with 500 or more employees than there are traditional c corporations. According to the Census, there are approximately 9573 pass-through businesses with 500 or more employees and 9434 c corporations with 500 or more employees. Pass-through businesses seem a lot smaller due to the fact that 21 million of them have zero employees. To be fair, corporations with 500 or more employees average about 4000 employees a piece while pass-through businesses average 1000 a piece.  Number of Businesses by Employment Size and Type Size of Business (Employees) C Corporations Pass-Through Businesses Zero Employees 1442732 21048348 1 to 100 Employees 1165629 4010967 Greater than 100 35117 54596 Greater than 500 9434 9573 Nonetheless, it still isn’t entirely accurate to conflate pass-through businesses with small businesses. Many of them are significant employers.  

Michigan’s Senate approved a bill yesterday to extend the state’s film tax credit program, which was limited and reduced in 2011 and set to expire in 2017. It’s now up to the House to decide whether to proceed. From Mlive : The bill would eliminate a 2017 sunset on funding for the film credit program, revise funding caps starting in 2015 and require employer organizations providing labor to be organized under Michigan law. The state’s contribution to a film’s production and personnel expenditures would be capped at 25 percent, with another 3 percent for production expenditures at a qualified facility or 10 percent for expenditures at a postproduction facility. Governor Rick Snyder (R) has consistently sought to cap the program at $25 million, but the Legislature doubled the subsidies to $50 million last year. The pre-2011 Granholm program was uncapped and Michigan taxpayers were subsidizing Hollywood productions at well over $100 million annually. A big reason why Michigan pared the program back was a 2010 state-commissioned study that found the incentives cost $117 million and created 1,039 full-time equivalent jobs, for a cost of $112,800 per new job. Due to the nature of the film industry, most of the jobs are temporary and transient, with production companies using out-of-state labor to fill many positions. Since then, California has tripled its film credit spending to over $300 million per year, and New York is over $400 million per year. To do battle with these states requires writing enormous checks to one of the most profitable industries in America. I would think Michigan has bigger priorities for its tax dollars than handouts for Hollywood.

A wealth tax would not be good for the U.S. economy. In his book, Capital in the 21st Century, Thomas Piketty suggests a wealth tax to fight income inequality. In a recent report, we used our Taxes and Growth model to evaluate the impact of such a tax on the U.S. economy. Piketty suggests a couple variations on a wealth tax with different rates starting a various income levels. One suggestion would create a 1 percent tax on net wealth between 1 and 5 million euros ($1.3 to $6.5 million) and a 2 percent tax on income over 5 million euros ($6.5 million). He also mentions a tax on “modest to average wealth” with a 0.5 percent tax rate on net wealth between 200,000 and 1 million euros ($260,000 to $1.3 million). Our model estimates that this tax would have a significant negative impact on the economy. The Piketty wealth tax would shrink the economy by close to $1 trillion in total size (down 6.1 percent), decrease wages by 5.2 percent and total investment would drop by over 16 percent. Additionally, it would eliminate 1.1 million jobs. Overall, the tax would reduce after-tax income by 9.2 percent and, while the top 1 percent would see their incomes drop 13.2 percent, the bottom 20 percent would also see they income drop 7.3 percent. In the end, Piketty’s wealth tax—in pursuit of reducing income inequality—would make everyone worse off due to decreased economic activity. In a previous paper we evaluated the effect of Piketty’s 80 percent tax rate on wage and investment income and found that it would shrink the economy by nearly $3 trillion.