Although today's Joint Economic Committee press release was intended to bemoan the absolutely crushing burden of income taxes paid by the top 50% of income earners which has stymied all attempts to get this economy moving [/sarcasm], it actually underscores a troubling trend in income distribution.

According to the new data, the top half of taxpayers ranked by income paid 96.70 percent of the individual income taxes paid in 2004, compared to 86.05 percent in 1949, 89.35 percent in 1959, and 90.27 percent in 1969.

One way to characterize these data is to say what committee chair Rep. Jim Saxon (R-NJ) says: "The new IRS data confirm once again that the tax burden is disproportionately borne by taxpayers in the top half.”

Another way to explain them is to point out the reason for the increasingly disproportionate share of income taxes: the top half of the income distribution is earning disproportionately more income.

Average tax rates for all the groups mentioned in the committee's press release (top 1%, 5%, 10%, 25%, 50%) have been consistently declining since 2001. So, the only way that their burdens of the share of income taxes would increase disproportionately is if their share of income increased disproportionately.

I'll let the charts do the talking.

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Paul Krugman crystallizes the issue of income inequality(sub. req'd).

Yet in spite of all this technological progress, which has allowed the average American worker to produce much more, we’re not sure whether there was any rise in the typical worker’s pay. Only those at the upper end of the income distribution saw clear gains — gains that were enormous for the lucky few at the very top.

That’s why the debate over whether the middle class is a bit better off or a bit worse off now than a generation ago misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely.[emphasis mine - CJ]

The whole point of economic efficiency is to spread the benefits of a market economy to all members of that society. So, if "a rising tide raises all boats," as supply-siders so frequently claim, why then is it that only yachts seem to be buoyant in this economy?

Wall Street fatcats, beware! The Senate Finance and Banking Committees are watching you, and they're sick and tired of your greedy, cheatin' ways.

Seriously. They each called hearings today on executive compensation.

What these committees were upset about are rather (ahem) expansive interpretations of the 162(m) section of the tax code. Under 162(m), corporations can deduct up to $1 million in executive compensation from their tax returns. However, they can deduct more if compensation is "performance-based." This qualification created an enormous loophole, and helped executive compensation reach new heights in the late '90s. See this Slate article for more.

Harvard Law School Professor Lucien Bebchuk estimates that abuse of 162(m) has cost the Treasury at least $20 billion. The IRS has launched a "Corporate Executive Compliance" initiative in response. See here for more.

162(m) also encouraged corporations to offer stock options, which are automatically considered "performance-based". The Securities and Exchange Commission (SEC) is now investigating more than 100 corporations that "backdated" stock options in CEO compensation packages, thereby eliminating much of the risk (and performance-incentive) tied to stock options. The Wall Street Journal explains why better than I can:

Though backdating options isn't necessarily illegal, trouble can arise over such issues as disclosure, said Alan Dye, a securities attorney at Hogan & Hartson LLP in Washington. For instance, companies may report in proxy statements that the strike prices for options are always equal to the market value on the date of a grant -- generally when directors vote on the award -- but then choose a different date when the market value is lower.

That could constitute a securities-fraud violation for misleading disclosures, Mr. Dye said. Moreover, companies that engage in backdating may have violated accounting rules, by failing to include as an expense the extra compensation they gave employees in the form of discounted stock options, he said.

Almost everyone agrees that the SEC and IRS should crack down on fraud. The main points of contention here are whether to change the code, and how to do it. Should the code be better designed to discourage extravagant executive salaries? Should it just be clarified to encourage disclosure and tax compliance?

Interviewed in the WSJ (subscription), Senate Finance Chairman Sen. Chuck Grassley said that "the original purpose of the 1993 law [which created the "performance-based" clause] was to 'make sure that there wasn't a great deviation between what executives got paid and what people further down the ladder' got paid. 'It really hasn't worked at all,' Sen. Grassley said. 'I want to know what went wrong and how we can fix it.'"

And Sen. Grassley came to a similar conclusion in his closing statement at today's Finance Committee hearing.

I am a great believer in conducting oversight of the tax code and we need more of it from the press, GAO and the Inspector General. Clearly, we’ve learned today that 162(m) is broken.

Sen. Grassley says he wants reform that reduces inequality. We should hold him to that.

While wage increases have failed to outpace inflation, real housing prices have nearly doubled in the past ten years. Astronomical housing prices made it impossible for many families to purchase a home. The market responded by introducing and aggressively marketing new mortgage "products" like ARMs (adjustable rate mortgages) and interest-only loans. These mortgages made monthly payments affordable, but their continuing affordability hinged on two things: 1) that interest rates would not rise and that 2) the housing market continued to sizzle. Of course, what goes up, must come down (or in the case of interest rates, what goes down, must come up).

BusinessWeek:

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

One may be tempted to blame gullible buyers for the plethora of outstanding ARMs and IO mortgages, but that would be a somewhat shallow analysis of history.

So how did these unusual loans get into the hands of so many ordinary folks? The sequence of events was orderly and even rational, at least within a flawed system. In the early years of the housing boom, falling interest rates made safe fixed-rate loans attractive to borrowers. As home prices soared, banks pushed adjustable-rate loans with lower initial payments. When those got too pricey, banks hawked loans that required only interest payments for the first few years. And then they flogged option ARMs -- not as financial-planning tools for the wealthy but as affordability tools for the masses. Banks tapped an army of unregulated mortgage brokers to do what needed to be done to keep the money flowing, even if it meant putting dangerous loans in the hands of people who couldn't handle or didn't understand the risk. And Wall Street greased the skids by taking on much of the new risk banks were creating.

But it won't be just unfortunate borrowers who will feel the pain; the housing boom has been the cornerstone of the current economic recovery. As interest rates increase, less spending on new housing construction, and shrinking growth in home equity set in, we can look forward to a cooling economy.

BNA (sub. req'd.):

In 2004 and 2005, housing as a whole accounted for more than one-fourth of the nation's economic growth--equal to nearly 1 percentage point of increase in real gross domestic product, Zandi said. Half of the contribution to GDP came from new homebuilding, while the other half came from the wealth effect "generated from rapid appreciation in housing values and aggressive mortgage equity withdrawal," he said.

In 2006, homebuilding has declined, home price appreciation has slowed to single digits from double-digit growth in 2004 and 2005, and credit problems are likely to mount because of higher interest rates, Zandi said. As a result, he predicted housing will contribute "very little" to economic growth this year and "will be a substantial negative in 2007 as homebuilding contracts and the wealth effect turns negative," reducing growth in consumer spending.