Friday, February 17, 2017

We are the 100% follow up.

Earlier, I was lazy, and I compared compensation and capital income over time with a measure of capital income that included corporate tax.  But, over the long term it is after tax capital income that will equilibrate in domestic incomes.  So, I subtracted corporate tax from the "operating surplus" measure.  This makes the relationship stronger.  Over time, real compensation and real capital income before tax have a .9724 correlation.  Compensation and real capital income after tax have a .9756 correlation.  This is especially interesting, since corporate taxes are pro-cyclical, and so on a cyclical level, corporate income is more noisy after taxes.  (Effective corporate tax rates go up during contractions because losses aren't fully and immediately deductible.)  Even with that extra cyclical noise, removing tax from capital profit strengthens the relationship.

Taxing capital income is not an effective way to break us apart.  We are the 100%.

PS: As commenter Blissex pointed out on the earlier post, this should probably also be adjusted for population.  Adjusting both income levels with the size of the labor force reduces the correlation to about 92%.

1 comment:

  1. Great post. Further muddying waters is many pension plans own stocks.

    That said, good macroeconomic management should target tight labor markets, cheap housing, and cheap medical care.

    And absolutely take fire hoses to anything that prevents people from starting up their own businesses, right down to push-cart vending.