Law and Economic Justice

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1 University of Oklahoma College of Law From the SelectedWorks of Jonathan B. Forman April 29, 2011 Law and Economic Justice JONATHAN B FORMAN, University of Oklahoma Available at:

2 Law and Economic Justice Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Central Oklahoma Association of Legal Assistants Oklahoma City, Oklahoma April 29,

3 Percent Share of Household Income Poorest 20% Middle 20% Richest 20% Free market After taxes & transfers 2

4 U.S.: Share of Household Income & Gini Index, 2005 Market income Disposable income Quintiles Lowest Second Middle Fourth Highest Gini Index

5 Education Wage Premium 20 Facts About U.S. Inequality that Everyone Should Know, 4

6 Job Losses 20 Facts About U.S. Inequality that Everyone Should Know, 5

7 Productivity and Real Income 20 Facts About U.S. Inequality that Everyone Should Know, 6

8 CEO Pay 20 Facts About U.S. Inequality that Everyone Should Know, 7

9 Office of Management and the Budget, A New Era of Responsibility: Renewing America s Promise (2009). 8

10 Deregulation of the Labor Market 20 Facts About U.S. Inequality that Everyone Should Know, 9

11 Intergenerational Income Mobility 20 Facts About U.S. Inequality that Everyone Should Know, 10

12 Rising Poverty U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, (Current Population Report No. P60-238, September 2010), 11

13 Number Figure 11. Persons in Jail and Prison ,500,000 2,000,000 1,500,000 1,000, , Year 12

14 Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 24, 13

15 Ratio Rising Inequality Ratio of Average Household Income of the Top 5 and 20 Percent of Households to the Average Household Income of the Bottom 20 Percent of Households, Top 20%/bottom 20% Top 5%/bottom 20% Source: U.S. Census Bureau, table IE-3, Year 14

16 Average Annual Earnings of Full-time Workers, 2008 Doctors (Family & GP) $161,490 Lawyers 124,750 Economists 90,830 Nurses (RN) 65,130 Police 52,810 Auto mechanics 38,967 Secretaries 29,990 Garbage collectors 37,540 Orderlies 24,620 Waiters and waitresses 19,580 15

17 Percent of workers Figure 6. Distribution of Workers by Earnings Category, < >250 Earnings (thousands of dollars) 16

18 Dollars per hour 2003$) Figure 7. Wages by Percentile, $40 $35 $30 $25 $20 $15 $10 $5 $ Year 95th percentile 90th percentile 80th percentile 50th percentile 20th percentile 10th percentile 17

19 Percent Figure 8. The Size Distribution of Wealth, 2004: Percentage Share of Wealth Held by Top 1% Next 4% Next 5% Next 10% Top 20% 2nd 20%3rd 20% Bottom 40% 18

20 Percent 60 Figure 10. Share of Household Income Poorest 20% Middle 20% Richest 20% Egalitarian Free market After taxes & transfers Just? 19

21 Percent of household income 100% How Taxes and Transfers Improved Equity, % 60% Line of perfect equality 40% Lorenz curve (income before taxes and transfers) Lorenz curve (income after taxes and transfers) 20% 0% 0% 20% 40% 60% 80% 100% Percent of households 20

22 Income Inequality Gini Interdecile Interdecile ratio coefficient ratio P90/P10 P50/P10 Level Rank Level Rank Level Rank Australia Canada Mexico Sweden United Kingdom United States OECD

23 Inequality and Redistribution Country Gini Before Gini After Poverty Before (50% of median income) Poverty After (50% of median income) Tax % GDP Social Spending %GDP Australia Canada Mexico n/a Sweden United Kingdom United States OECD

24 Social Spending & Child Poverty in Selected Countries 23

25 Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), Joint Committee January on 18, Taxation, 2011, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 70, 24

26 Percent paid jointly by employee and employer U.S. Payroll Tax Rates: Selected Years Medicare Social Security Year 25

27 Tax-to-GDP ratio, 2008 OECD Tax Database, 26

28 Earned Income Tax Credit (EITC) Increase New credit percentage for 3 or more qualifying children I.R.C. 32 (ARRA 2002) Temporary increase 2009 & 2010 Computed as 45% of earnings (up from 40%) Maximum credit increased to $5,666 in 2010 Maximum AGI increased to $48,362 in

29 Child Tax Credit $1,000 per qualifying child I.R.C. 24 (ARRA 1003) Temporary expansion of eligibility for refundable credit More lower income families qualify: 2008 threshold amount was = $8, and 2010 threshold amount = $3,000 28

30 Poverty Levels & Net Federal Tax Thresholds, 2010 Unmarried individual Single parent w/ 1 child Married couple w/ 2 children Married couple w/ 3 children 1. Poverty levels $10,830 $14,570 $22,050 $25, Simple income tax $9,350 $15,700 $26,000 $29,650 threshold (before credits) 3. Income tax $13,395 $32,380 $50,250 $60,567 threshold after credits 4. Employee payroll $0 $0 $0 $0 tax threshold 5. Combined income & payroll tax threshold $9,348 $25,717 $38,635 $43,788 29

31 Taxes at Poverty Level, 2010 Unmarried individual Single parent w/ 1 child Married couple w/ 2 children Married couple w/ 3 children 1. Poverty levels $10,830 $14,570 $22,050 $25, Income tax at -$453 -$4,450 -$7,712 -$8,554 poverty level (after credits) 3. Employee Social $829 $1,115 $1,687 $1,973 Security & Medicare tax at poverty level 4. Combined income & $376 -$3,335 -$6,025 -$6,581 payroll tax at poverty level 5. Combined tax as a % of income at poverty level 3.5% -22.9% -27.3% -25.5% 30

32 Tax Liability Net Federal Tax Liabilities for Selected Households, 2010 $15,000 Unmarried Individual $10,000 Head of Household, 1 Child $5,000 Married Couple, 2 Children $0 Married Couple, 3 Children -$5,000 -$10,000 Income 31

33 Outlays for the Principal Federal Benefit Programs in the United States (billions of dollars) 2009 actual 2015 estimate Social Security $678 $893 Medicare Medicaid Unemployment compensation Supplemental Security Income Earned income tax credit Child tax credit Making work pay tax credit <1 n/a Food assistance Family support Housing assistance 10 5 General retirement and disability 8 10 Federal employee retirement and disability Veterans benefits and services

34 Some Specific Recommendations Making Taxes Work Making Welfare Work Modestly Raising the Minimum Wage and indexing it for Inflation A Two-Tiered Social Security System A Restructured Pension System Universal Health Care Move Toward Full Employment 33

35 Percent 60 Percentage Composition of Federal Receipts by Source: Individual Income Tax Corporation Tax Social Insurance Excise Taxes Other Year 34

36 Tax rate Income Tax Rates, Single Parent with Two Children and Earned Income Only, % 50% 40% 30% 20% 10% 0% $0 $50,000 $100,000 $150,000 $200,000 Earned income 35

37 Tax rate Social Security Tax Rates on Earned Income, % 50% 40% 30% 20% 10% 0% $0 $50,000 $100,000 $150,000 $200,000 Earned income 36

38 Effective tax rate Actual Tax Rate on Single Parents with Earned Income Only, % 40% 20% 0% -20% $0 $50,000 $100,000 $150,000 $200,000 Earned income -40% Effective tax rate Linear trend line 37

39 Average Cumulative Tax Rates Confronting Low-to-Moderate-Income Families ($10k - $40k) 100% 88.6% 80% 60% 58.8% 40% 35.9% 20% 0% Tax Plus Food Stamps & Health Plus TANF, Housing, Child Care 38

40 Credit Amount t $2,000 per Worker Earned Income Credit, with or without a Phase-out $5,000 $4,000 $3,000 $2,000 $1,000 $0 $0 $20,000 $40,000 $60,000 $80,000 Earned income $2,000 per worker credit $2,000 per worker credit with phase-out 39

41 How a Comprehensive Tax and Transfer System Would Affect a Single Parent with Two Children Pre-transfer Earnings plus Universal Grants plus Worker Credit less Tax Imposed Equals Aftertax Income 0 $6, $6,000 $5,000 $6,000 $1,000 $1,000 $11,000 $10,000 $6,000 $2,000 $2,000 $16,000 $20,000 $6,000 $2,000 $4,000 $24,000 $30,000 $6,000 $2,000 $6,000 $32,000 $40,000 $6,000 $2,000 $8,000 $40,000 $50,000 $6,000 $2,000 $10,000 $48,000 $100,000 $6,000 $2,000 $27,500 $80,500 $150,000 $6,000 $2,000 $45,000 $113,000 $200,000 $6,000 $2,000 $62,500 $145,500 40

42 Post-tax, post-transfer income How a Comprehensive Tax and Transfer System Would Affect Single Parents $200,000 $150,000 $100,000 Pre-transfer earnings $50,000 Post-tax, post transfer income $0 $0 $50,000 $100,000 $150,000 $200,000 Earnings 41

43 Health Coverage 2009 Source of Coverage millions percentage Total population Employment-based coverage Individually Purchased Public Medicare Medicaid Military health care No health insurance

44 Summary Government should intervene To encourage work Promote economic justice Tax, spending, and regulatory proposals Increase the size of the economic pie Allow us to divide it more equally 43

45 About the Author Jonathan Barry Forman ( Jon ) is the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law; Jon is the author of Making America Work (Washington, DC: Urban Institute Press, 2006); and Jon was the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the academic year. Jon can be reached at , 44

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