The L-curve: distribution of income

This page illustrates just how skewed the income distribution is in the United States. Wealth distribution is even more highly skewed, with 1% of the population controlling 40-50% of the nation’s wealth.

It’s astounding and it’s wrong.

I’m not advocating communism here. I think meritocracy is a great thing. I also believe that capitalism, in one form or another, is here to stay.

But does the skew need to be so extreme? Can’t we spread the wealth out a little while still preserving a system that rewards hard work, skill, and dedication? Does Bill Gates really have 50 million times more merit than one of his software engineers?

How can we fix this?

I’ve considered this question myself, many times, and eventually realized something.

A significant portion of the upper 1% get their wealth from inheritance. They have done nothing to deserve it or earn it other than simply be born. This is against one of the basic ideas of capitalism.

The solution? When a person dies, leave up to a set amount to their heirs (maybe 1 million or so, certainly a significant inheritance) and give the rest to the government.

The wealth is redistributed, and while the family of the deceased may complain, they really have no claim to the money whatsoever.

Do that, Mister V, and you’ve just created a huge disincentive to wealth creation. Why bother accumulating wealth (and thus creating jobs, etc) beyond your ability to spend it in your lifetime if you can’t pass it on to your heirs?

You can’t, its called Pareto’s Law

Us inventory folks live and die by Pareto, 80% of sales is from 20% of your products. Therefore you identify that 20% and make sure you have enough on hand.

Why does the government have any claim to their money?

You are missing a very basic point I believe. Wealth is not a zero sum game. Why should we care if the wealthiest Americans have 10, 100, or 100,000 times as much wealth as the average middle class citizen. Most of this wealth was created by something that they or their ancestors brought successfully to the market. This benefits everyone.

I would argue that the average middle class American already has a perfectly acceptable amount of wealth. The poor have a different set of problems entirely that redistribution aggrevates as often as it helps. The truly wealthy have a lot of money, but, so what.

I say good for them and those that are worried about it should cocentrate on their own affairs.

I think the reason why the wealthy have such a disproportionate amount of assets is because they are able to save and invest all money above the amount needed to maintain their lifestyle.

Some people live paycheck to paycheck, never building any assets.

Some people are able to save a bit of money over time, and will accumulate some assets over time.
People in the million dollar a year range can live great lifestyles on a fraction of that, and are able to invest the rest and become even more wealthy.

Some people have no choice but to live paycheck to paycheck. Think about it-the choice is either put a little money into an investment, or buy the kids medicine. Not a difficult choice there.

Partially right. The wealthy get wealthier because they invest in assets that generate additional cash flow. Most peoples biggest asset is their house. And this asset is highly leveraged with debt (ie the 30 year mortgage) and generates no cash. Most people’s only source of cash comes from their job. Whether you drive a forklift or are a $400,000 a year working Wall Street stiff, if you stop working, no more income.

The truly wealthy own businesses and real estate that generates cash for them even when they aren’t there.

The problem is that schools don’t teach people how to become wealthy. How can they, they are government run institutions run by people who make $40,000 a year? What does a schoolteacher or even the superintendent know about accumulating wealth? Schools teach people how to become good employees. Not good entrepreneurs.

It may be wrong, but it’s hardly astounding. The “L-Curve” you refer to, aka the “Lorenz curve,” looks pretty similar for the US, the UK, and for many Western democracies. It’s slightly worse for the US, but not by much. It’s much worse for a lot of third-world dictatorships, and, surprisingly, not much better for former communist countries in Eastern Europe.

Cite: Amartya K. Sen, On Economic Inequality.

I think it might be important to note that corporate machines are geared to swallow more and more resources in an effort to avoid taxes. This is why big corporations are often said to pay very little taxes: because they use tax dodges like, oh, excessive research spending, taking risks in aquiring new markets, buying up property and little businesses, etc etc. It is either that or get raped on corporate tax rates, and if the corporation is going to be losing money anyway, might as well put it somewhere where it can do work instead of vaporizing into the Treasury.

Because of the high tax rates on the wealthy, they push as much money as possible into tax-free ventures, tax-free growth, etc etc, which generates huge amounts of money at a tax rate that, if it isn’t nil, is significantly lower han it would be otherwise.

Taxing as a means of redistribution, I think, can be seen (IMO) to be a factor of income disparity.

It’s unclear just what measure of wealth or income is being used in the cite. Quite often, statistics are presented in a way tthat overestimates income disparity, by means such as:

  1. Ignore income tax
  2. Ignore welfare payments, food stamps, medicaid, etc.
  3. Ignore family size
  4. Ignore changes over time

#2, #3, and #4 are almost always done. Official government statistics do not include in “income” most of the benefit programs. As a result, the poor never seem to improve their lot, no matter how much these progams expand. Duh! Actually the true total income of the poorest Americans is substantially larger than shown.

Most government income statistics show family income. This causes two misunderstandings. One sometimes sees articles crying about the low growth rate in average income. Average family size has declined, so per person income has increased a lot more than family income.

Also,“rich families” have larger sizes than “poor families” (partly because the large families include more workers.) Thus the difference between rich and poor in per person income is less than the difference in per family income.

#4 is particularly key. Distributions of income are generally shown as a point in time. It’s easy to fall into the trap of assuming that most of us stay in the same income bracket our whole lives. This is not so. IIRC a majority of people move 2 or more income quintiles during their lives. I, personally, have been in all 5 income quintiles at one time or another.

You ask about “doing something.” Something is already being done. Rich people are continually becoming middle class or poor and vice versa. There are all kinds of opportunities to make money and to use it up or lose it.

Just a nitpick. Taken from

Selected items from Microsofts Balance Sheet (in millions)
Period Ending: Dec 31, 2001

Total Revenue $7,741
less: Cost Of Revenue $1,544
Gross Profit $6,197
less: Operating Expenses
Research And Development $1,044
Selling General And Administrative Expenses $2,312
Operating Income $2,841
Total Other Income And Expenses Net $516
Earnings Before Interest And Taxes $3,357
less: Income Tax Expense $1,074
Net Income $2,283

Over a BILLION dollars in taxes? I would hardly call that very little.

Someone out there have a handy cite showing the historical income distribution in the US? IIRC, the percentage of wealth controlled by the top 1% of the US population increased significantly during the Reagan/Bush Sr years. Supply side economics and tax breaks for the rich were some of the culprits that resulted in increasing the distribution skew.

Anyone have a cite as well for other industrialized G7 nations as a comparison?

Oh, hey, I didn’t say they paid very little. :slight_smile: But the tax write-offs are geared to encourage juggernauts out of big business. Right up until the time when we bust them for monopolizing.

Well, some like Andrew Carnegie (and Warren Buffet, BTW) believed that huge inheritances tend to corrupt their heirs, and were therefore inappropriate. That didn’t stop them from amassing oodles of dough.

How much of a disincentive this would be is an empirical question.

The link in the OP is a little weird. Essentially, it graphs the incomes of the entire US population against the income of Bill Gates in one year. Hence the L shape: the value of Bill Gate’s Microsoft stock apparently increased by $50 billion in an (unidentified?) year. (In 2000, the shape of the curve would be an inverted L, taking into account Mr. Gates’ massive paper losses that year.)

Still, the general question is interesting.

Avoiding the question of whether Bill Gates owes us his money or not.

Suppose we institute near-100% taxation on inheritences over $1 million. The trouble with that approach is that the rich who want to leave their money to their kids (or the home for unwed cats, or whatever) will still be able to do so, albeit with some legal maneuvaring.

Why can’t Bill Gates immigrate to the Caiman Islands, a sovreign country with no estate taxes? His kids get Caiman Islands citizenship, he dies, they inherit the cash. Then they move back to the US and spend, spend, spend. Or maybe they just move the assets to the Caiman Islands and don’t have to give up US citizenship. Or maybe Bill simply gives his fortune to a trust and signs the whole thing over to his heirs one minute before he dies. Or maybe Bill makes Bill Jr. Vice-CEO of Microsoft and pays him $billion a year. Hey, it’s not a gift, right?

Or if you make the whole thing airtight enough people and industry are going to start to flee the US for a more friendly climate. And millions…wait, billions…wait, trillions of dollars are going to be wasted on inheritance tax dodges and schemes.

You have to keep taxes low enough that it is worth it for the average millionaire to pay his taxes rather than figure out schemes to evade or avoid the taxes.

Plus, I still don’t see how you can count a higher valuation of Microsoft Stock as income for Bill Gates. It only becomes income if he SELLS the stock.

Do you have a cite for that? I doubt it because, for the most part, it isn’t true. Did Bill Gates, Jim Walton, Steve Case, Larry Ellison and Warren Buffet have their billions handed to them? No, they earned it. If there is an idle rich class in the US it would be actors-sports stars. Yeah, there are a few idle rich people who inherited some money but most rich folk earned it through hard work and long term planning.

That is already happening. It’s called the death tax. My grandmother passed away last year. If she had died 6 months later it would have saved $700,000 in taxes due to a change in the tax laws.

And how exactly does the government, or the people who the government gives the money to, have a valid claim to the money? The government did not create the wealth.


As others here have already stated, the government, even after death, has no real claim to the finances as long as all taxes were paid. It had nothing to do with the creation of said funds, which are solely the property of the deceased.

Um, if the deceased says they do, they do.

People have a right to ensure what they’ve accrued over their lives stays with their families. If they choose to do so before they die (as most do), that inheritance is not within the government’s domain. It’s funny that what you’ve touched on is basically the American Dream - work hard, spend wisely, and somehow, someway, your kids will be better off than you were. That depends, of course, on your ability to pass on to them what you’ve earned.

What I do think would work here is some form of heavy tax reform. But that’s another thread, I suppose.