1

Making America Work*Jon Forman

Alfred P. Murrah Professor of Law

University of Oklahoma

www.law.ou.edu/faculty/forman.shtml

Law and Society Association

Law, Society, and Taxation Panel 07

Montreal, Canada

May 30, 2008

*A presentation based on Jonathan Barry Forman, Making America Work (Washington, DC: Urban Institute Press, 2006).

2

Figure 1. Share of Household Income

0

10

20

30

40

50

60

Poorest 20% Middle 20% Richest 20%

Per

cent

Free market After taxes & transfers

3

Figure 2. How Taxes and Transfers Improved Equity, 2004

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Percent of households

Per

cen

t of

hou

seh

old

inco

me

Line of perfect equality

Lorenz curve (income before taxesand transfers)

Lorenz curve (income after taxes andtransfers)

4

Figure 3. Family Income by Percentile, 1950-2003 (2003 dollars)

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

1950 1960 1970 1980 1990 2000

20th percentile

40th percentile

60th percentile

80th percentile

95th percentile

Source: U.S. Census Bureau (2005b), table F-1.

5

Figure 4. 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, 1970-2000

10.6 9.8 10.211.3 11.9

13.2 13.8

16.214.5 14.7

17.0

19.1

22.7

24.6

0

5

10

15

20

25

30

1970 1975 1980 1985 1990 1995 2000

Year

Rat

io

Top 20%/bottom 20%

Top 5%/bottom 20%

Source: U.S. Census Bureau (2004b), table IE-3.

6

Table 1. Average Annual Earnings of Full-time Workers, 2004

Doctors $128,689

Lawyers 105,716

Economists 71,672

Nurses 53,289

Police 50,063

Auto mechanics 38,967

Secretaries 32,349

Garbage collectors 31,284

Orderlies 20,959

Waiters and waitresses 8,789

7

Figure 5. Distribution of Earnings, 2004

$15,600 $26,000 $36,000$50,000

$84,000

$0

$100,000

$200,000

$300,000

$400,000

0 10 20 30 40 50 60 70 80 90 100

Percentile

Ear

nin

gs

8

Figure 6. Distribution of Workers by Earnings Category, 2004

0

1

2

3

4

5

6

7

8

9

10

11

12

< 0 15 30 45 60 75 90 105 120 135 150 165 180 195 210 225 240 >250

Earnings (thousands of dollars)

Per

cent

of

wor

kers

9

Figure 7. Wages by Percentile, 1979-2003

$0

$5

$10

$15

$20

$25

$30

$35

$40

1979 1985 1991 1997 2003

Year

Dol

lars

per

hou

r 20

03$)

95th percentile

90th percentile

80th percentile

50th percentile

20th percentile

10th percentile

10

Figure 8. The Size Distribution of Wealth, 2004: Percentage Share of Wealth Held by...

34.3

24.6

12.3 13.4

84.7

11.33.8

0.20

10

20

30

40

50

60

70

80

90

100

Top 1% Next 4% Next 5% Next10%

Top20%

2nd20%

3rd 20% Bottom40%

Per

cent

11

Figure 9. The Distribution of Various Resources, by Quintiles

0%

20%

40%

60%

80%

100%

Lowest Second Middle Fourth Highest

Consumer unitconsumption, 1999

Household earnings,1998

Household income,1998

Household wealth,1998

12

Figure 10. Share of Household Income

0

10

20

30

40

50

60

Poorest20%

Middle 20% Richest20%

Per

cen

t

Egalitarian Free market After taxes & transfers Just?

13

Recent Policy Trends Encouraging Work

• Welfare reform

• Cutting tax rates on earned income

• Outlawed employment discrimination

• Social Security, pension, labor markets

14

Figure 11. Persons in Jail and Prison 1980-2005

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1980 1985 1990 1995 2000 2005

Year

Num

ber

15

Figure 12. How a 30 Percent Payroll Tax Can Reduce Work Effort

$0

$5,000

$10,000

$15,000

$20,000

$25,000

05001,0001,5002,0002,500

Hours of work

Inco

me

afte

r ta

x

Income $10/hour

Income after tax

Utility curve 1

Utility curve 2

After: 1,750 hours, $12,500/year

Before: 2,000 hours, $20,000/year

16

Top 10 Income Tax Expenditures, 2009(Billions of Dollars)

Health insurance exclusion $168

Mortgage interest deduction 101

401(k) plans 51

Charitable contrib. (other than health & education) 47

Accelerated depreciation 44

Capital gains (except timber, iron ore, coal) 55

Deductible nonbusiness state and local taxes other than on houses

33

Employer plans 46

Step-up of basis at death 37

Capital gains exclusion on homes 34

2009 Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3

17

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

18

Fig. 13. Percentage Composition of Federal Receipts by Source: 1940-2005

0

10

20

30

40

50

60

1940 1950 1960 1970 1980 1990 2000

Year

Per

cent

Individual Income Tax

Corporation Tax

Social Insurance

Excise Taxes

Other

19

Figure 14. Income Tax Rates, Single Parent with Two Children and Earned Income Only, 2006

0%

10%

20%

30%

40%

50%

60%

$0 $50,000 $100,000 $150,000 $200,000

Earned income

Tax

rate

20

Figure 15. Social Security Tax Rates on Earned Income, 2006

0%

10%

20%

30%

40%

50%

60%

$0 $50,000 $100,000 $150,000 $200,000

Earned income

Tax

rat

e

21

Figure 16. U.S. Payroll Tax Rates: Selected Years

0

2

4

6

8

10

12

14

16

18

20

1940 1960 1980 2006

Year

Perc

ent p

aid

join

tly b

y em

ploy

ee a

nd e

mpl

oyer

Medicare

Social Security

22

Figure 17. Actual Tax Rate on Single Parents with Earned Income Only, 2006

-40%

-20%

0%

20%

40%

60%

$0 $50,000 $100,000 $150,000 $200,000

Earned income

Eff

ecti

ve t

ax r

ate

Effective tax rate Linear trend line

23

35.9%

58.8%

88.6%

0%

20%

40%

60%

80%

100%

Tax Plus FoodStamps &

Health

Plus TANF,Housing,

Child Care

Figure 18. Average Cumulative Tax Rates Confronting Low-to-Moderate-Income

Families ($10k - $40k)

24

0%

10%

20%

30%

40%

50%

60%

$0 $50,000 $100,000 $150,000 $200,000

Earned income

Tax

rat

e

Figure 19. Rates in a Comprehensive Tax and Transfer System

25

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$0 $20,000 $40,000 $60,000 $80,000

Earned income

Cre

dit A

mou

nt t

$2,000 per worker credit $2,000 per worker credit with phase-out

Figure 20. $2,000 per Worker Earned Income Credit, with or without a Phase-out

26

Figure 21. How a Simple 50 Percent Earnings Subsidy Can Increase Work Effort

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

$17,500

$20,000

05001,0001,5002,0002,500

Hours of work

Pos

t-tr

ansf

er I

ncom

e

Income $5/hour

Income after transfer

Utility curve 1

Utility curve 2

After: 1,750 hours, $13,125/year

Before:

1,500 hours,$7,500/year

27

Pre-transfer Earnings

plus Universal

Grants

plus Worker Credit

less TaxImposed

Equals After-tax

Income

0 $6,000 0 0 $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

Table 3. How a Comprehensive Tax and Transfer System Would Affect a Single Parent with Two Children

28

Figure 22. How a Comprehensive Tax and Transfer System Would Affect Single Parents

$0

$50,000

$100,000

$150,000

$200,000

$0 $50,000 $100,000 $150,000 $200,000

Earnings

Pos

t-ta

x, p

ost-

tran

sfer

inco

me

Pre-transfer earnings

Post-tax, post transferincome

29

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1960 1970 1980 1990 2000Year

Ear

ning

s

Poverty level,family of three

Poverty level,family of four

Annualminimum wageearnings

Figure 23. Minimum-Wage Earnings versus Poverty Levels, 1960-2007

30

Figure 24. Life Expectancies at Birth versus Social Security Retirement Age

4045505560657075808590

1900 1940 1980 2020 2060

Year of birth

Age

Life expectancy at birth, males

Life expectancy at birth, females

Full retirement age for people born that year

31

Figure 25. Labor Force Participation of Men Age 55 and Older, 1950-2004

0%

20%

40%

60%

80%

1950 1960 1970 1980 1990 2000

Year

Pa

rti

cip

ati

on

ra

te

Men age 55 and over

Men age 65 and over

32

Fig. 26. Individual Account Benefit in the First Year of Retirement

(3%-of-earnings IA, 2007 Dollars)

Year Cohort Turns 65

Single Male

Low Average High Tax Max

2005 - - - -

2025 $1,137 $2,527 $4,043 $6,166

2045 $3,488 $7,752 $12,403 $18,936

2065 $4,965 $11,033 $17,652 $26,998

33

Fig. 27. Individual Account Replacement Rates

(3%-of-earnings IA as a Percent of Final Wage)

Year Cohort Turns 65

Single Male

Low Average High Tax Max

2005 0.0 0.0 0.0 0.0

2025 5.1 5.1 5.1 5.0

2045 12.5 12.5 12.5 12.5

2065 14.4 14.4 14.4 14.4

34

Table 4. Health Coverage 2006

Source of Coverage millions percentage

Total population 296.8 100.0

Employment-based coverage

177.2 59.7

Individually Purchased 27.1 9.1

Public 80.3 27.1

Medicare 40.3 13.6

Medicaid 38.3 12.9

Military health care 10.5 3.5

No health insurance 47.0 15.8

35

Clusters without Coverage

• Employees of small businesses• Workers who lose their jobs• Workers who decline employer coverage• Low-income parents• Low-income childless adults• The near elderly• Young adults• Children• Immigrants

36

Transition to Expanded Coverage

• Tax Changes: cap the exclusion for employer-provided insurance at a fixed dollar amount and gradually replace it with a tax credit

• Employer Mandate: require employers to offer a plan, and automatically enroll workers

• Individual Mandate: require workers to get coverage

37

Summary—Making America Work

• 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

38

About the Author• Jonathan Barry Forman (“Jon”) is the Alfred P. Murrah

Professor of Law at the University of Oklahoma, where he teaches courses on tax and pension law.

• Professor Forman is also Vice Chair of the Board of Trustees of the Oklahoma Public Employees Retirement System (OPERS) and the author of Making America Work (Washington, DC: Urban Institute Press, 2006), http://www.urban.org/books/makingamericawork/index.cfm.

• Prior to entering academia, Professor Forman served in all three branches of the federal government. He has a law degree from the University of Michigan, and he also has master’s degrees in economics and psychology.

• Jon can be reached at jforman@ou.edu or (405) 325-4779. His web page is www.law.ou.edu/faculty/forman.shtml.