econscius

Posts Tagged ‘Share of Income’

Which City Has The Most Inequality: New York or Salt Lake?

In Gini Ratio, Inequality on October 28, 2011 at 1:44 am

Following up on my state level inequality post, the Census Bureau has now released metro area details, also based on Gini ratios.  [1]  New York City has the greatest level of inequality, which is quite consistent with the hypothesis I advanced in https://econscius.wordpress.com/2011/10/21/which-state-has-the-most-inequality-texas-or-new-york-why/.

Salt Lake City was the most equal metro area. 

Coincidentally, Salt Lake City’s Utah is arguably the most Republican in the nation, whereas New York City and New York State are amongst the most Democratic.  This presumably is the opposite of what many expect.  As shown in my state inequality post, higher income tax rates are not even correlated with equality.

The least equal metros are:

1. New York City [labor specialization in finance, fashion, advertising and media]

2. Miami-Fort Lauderdale [home of many wealthy retired New Yorkers]

3. Los Angeles [a city with a high degree of labor specialization in entertainment, as mentioned in my post]

4. Houston [a city with a high degree of labor specialization in energy]

5. Memphis

6. New Orleans

7. San Francisco [a city with a high degree of labor specialization in technology]

8. Birmingham, AL

9. Chicago [a city with a high degree of labor specialization in finance]

10. Boston [labor specialization in biotech and technology]

It is interesting and perhaps not coincidental that other highly unequal cities are located in the Deep South and smaller than the other top 10 (Memphis, New Orleans, Birmingham).  One might hypothesize some vestiges of historic racial discrimination might possibly be a factor.  But, some of the least unequal (e.g. Virginia Beach-Norfolk #2 least unequal is Deep South and Raleigh-Cary, NC and Richmond, VA are also below average inequality).  The trick with testing such a theory is it is difficult to measure city by city “racism” in an objective statistical way.   Other factors, such as education systems, might also be a contributor to inequality in those Deep South cities.

My urbanization-concentrated specialized skills theory was as follows:

“Why would sparsely populated states be more equal and densely populated states have a greater gap between the rich and poor?  I hypothesize higher density means more urbanized areas, which means more specialization of skills.  The economic concept of division of labor shows how the greatest economic benefits come from having each person focus on what they are most economically productive at and then trading their output with the output of someone else for all other items.  One way to think of it is to imagine Steve Jobs working in isolation in a rural area.  He would have less time to spend inventing computers and whatnot if he was unable to employ other people to mow his lawn, clean his car and other household chores.  Imagine if he had to do his own legal work, build his own house, cook his own food because there were no restaurants, etc. 

Large cities allow a high degree of division of labor.   Urban areas tend to be centers of economic specialization.  There are centers of specific industry specialization such as entertainment in Los Angeles, energy in Houston, finance and media in New York, insurance in Hartford, government in Washington DC, pharmaceuticals in New Jersey, autos in Detroit and technology in San Jose.  Most cities provide network benefits for commerce.  Corporate headquarters are mostly found in large metropolitan areas as employers can easily find necessary skilled workers in management, marketing, human resources, accounting, law, consulting and finance. 

The concentration of highly paid professionals in these large cities also leads to a concentration of poorly paid service workers because of the high degree of division of labor.  Whereas a small town worker may handle many household chores on their own, the highly compensated professionals around big cities like Los Angeles and New York hire maids, nannies, gardeners and even dog walkers.  They outsource some of their work to dry cleaners and restaurant employees.  They also may do more retail shopping, which means more need for low skill, low wage workers at retailers plus truck drivers and distribution center workers to deliver the goods.  It is no surprise, then, that large cities like Chicago, New York, Detroit and Los Angeles are both very rich and very poor at the same time.” 

The wealthy professionals living in Atherton, CA, Huntington Beach, CA, Wilmette, IL, Grosse Point, MI and Irvington, NY trade some of their copious amounts of money for leisure time by sub-contracting low skill work like house painting and pizza delivery to low skill workers.  These low skilled workers are generally paid below average wages, which helps explain why the large cities, and the states they reside in, are both rich and poor.  This helps explain the high Gini ratios in the more densely populated states.” [2]

 

[1] http://www.census.gov/prod/2011pubs/acs-16.pdf.  Technically, the non-state District of Columbia is less equal than any state.

[2] https://econscius.wordpress.com/2011/10/21/which-state-has-the-most-inequality-texas-or-new-york-why/

Who Pays What Average Income Tax Rates

In Income Tax Rates, Political Rhetoric, President Obama, Warren Buffett on October 9, 2011 at 2:23 am

Average Tax Rate by Share of Income, Source: IRS 2008 Data

There is an awful lot of misinformation floating around about what average tax rates are paid at different income levels.  It is actually very simple, which is why I put together this graph. 
 
Some would have you believe the richest of the rich pay a lower average rate than “a secretary”.  On average, that is simply not the case.  The Bottom 50% of taxpayers paid an average of 2.59% of their Adjusted Gross Income (“AGI”) as income tax.  The Top 1% paid 23.27% of their AGI as income tax.
  

Share of Income Average Tax Rate
Bottom 50% 2.59%
25-50% 6.75%
10-25% 9.29%
5-10% 12.44%
1-5% 17.21%
Top 1% 23.27%
 
The bottom 50% of taxpayers paid 2.7% of all income taxes paid, and the top 5% paid more than half of the total.
 
 

Share of Income Group’s Share of Income Taxes
Bottom 50% 2.70%
25-50% 10.96%
10-25% 16.40%
5-10% 11.22%
1-5%

  20.70%

Top 1% 38.02%
 
Data source: 2008 IRS data from http://www.taxfoundation.org/news/show/250.html