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Philip Mause
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My name is Phil Mause. I am a Senior Advisor with the Pacific Economics Group, focusing on energy, regulatory and valuation issues. I retired from 40 years of law practice earlier this year. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds,... More
  • Some Musings On Income Distribution - Part 2 0 comments
    Dec 21, 2013 1:44 AM

    6. Small Families, Inheritance Tax, and Prenups - I think that a variety of factors that are often ignored may have increased the concentration of wealth. If one very wealthy person has 5 children and leaves his wealth in equal shares to the five, it will create five individuals each of which has somewhat less than one fifth the wealth of the person leaving the money. On the other hand, if he has an only child the wealth is concentrated in one person. This becomes a much bigger issue when we think of "extended families" in which one "rich uncle" can benefit numerous nephews and nieces by providing them money for college or to start businesses. After a generation or two of multiple only child families rather than five child families, extended families are much, much smaller. There definitely has been a trend toward smaller families; I am not sure how pronounced it has been among the affluent. I also get the sense that the inheritance tax has been weakened and that avoidance is easier and more widespread than it used to be; this obviously concentrates wealth. Wealthy individuals who marry multiple times and have to divide assets each time wind up creating multiple affluent households. Prenups allow the wealthy to avoid this problem and again probably concentrate wealth. Whether any or all of these factors are significant is hard to tell and statistical analysis of the issue would probably be a daunting task but they each tend to push things in one direction.

    7. Government Regulation - I suspect that various forms of government regulation (and policy) tend to concentrate wealth. Certainly, the policy that primary and secondary schools are funded primarily by local property taxes allows wealthy jurisdictions to have better schools at lower levels of tax effort. The concentration of the wealthy in certain areas is probably assisted by zoning laws and regulations which can effectively exclude low and middle income housing. While many think of government regulation as harming business, the truth is that a great mass of government regulation is aimed at (rightly or wrongly) erecting barriers to the entry of new competitors into professions, occupations, businesses and other enterprises designed to generate wealth. The medical profession is most notorious in this regard. We have a "nursing shortage" and import nurses from all over the world but Americans find it next to impossible to get into nursing schools. Why not import nursing school teachers rather than nurses so that we could educate Americans to become nurses? I am convinced that much of the work done by doctors and nurses could be done by individuals with much less training at much lower cost and it would create lots of nice middle income jobs but professional licensing is the barrier. Finally, all sorts of government largesse is parceled out on a superficially egalitarian basis but in fact only the wealthy can devote the resources to bid on oil leases, participate in FCC spectrum giveaways, apply for various complex grants, etc.

    8. The Problem of the Safety Net - The government has toyed with the idea of a negative income tax or other single shot subsidy designed to alleviate poverty. What we have instead is a confusing complex of programs including Medicaid, Food Stamps, housing assistance, etc. Putting aside the difficulty of navigating one's eligibility for these programs, it is also true that they may tend to create a web from which it is difficult to extricate oneself. Even with a simple negative income tax of say $20,000 a year, there is the problem of perverse incentives. What do you do with the applicant who earns $15,000 a year? If you simply give him $5,000, you destroy all incentive to enter the job market - you have effectively imposed a 100% tax on his first $20,000 of income. If you let him keep, say, 60% of his earnings (and impose the equivalent of a 40% marginal tax on him), then you will wind up sending checks to people earning all the way up to $50,000 (at a $40,000 income, you would still pay out $4000). Of course, at that level, he may start paying actual taxes as well and further incentive problems would occur. These issues become incredibly complex with our intricate programmatic approach as, for example, some people learn that they are not longer eligible for Medicaid once they get a decent job. Does all of this have the effect of "trapping" people in poverty? I am not sure, but it certainly reduces the incentive to move up a notch.

    9. Inflation - Although inflation is decried as penalizing those on fixed incomes, it may, in fact, help the middle class. Inflation tends to undermine the value of paper assets (stocks and bonds) and increase the value of real estate. In the United States, the middle class has a huge percentage of its gross wealth tied up in homes which tend to appreciate in value robustly during a period of inflation like the 1970's. I am not saying that inflation is good or that the Fed should not strive for price stability but it may well be that one of the unintended consequences of very low inflation is a greater concentration of wealth as paper assets increase in value faster than homes. Starting in the early 1980's, we conquered inflation and have had a long term trend of lower and lower interest rates. Perhaps, it should not be that big a surprise that this period to time has also seen increased concentrations of wealth.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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