1

Making America Work*Jon Forman

Alfred P. Murrah Professor of Law

University of Oklahoma

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

U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Education, Workforce and Income Security (EWIS) Speaker Series

Washington, DC

May 15, 2007

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

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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.

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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

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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

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Figure 8. The Size Distribution of Wealth, 2001: Percentage Share of Wealth Held by...

33.4

25.8

12.3 12.9

84.4

11.3

3.90.3

0

10

20

30

40

50

60

70

80

90

100

Top 1% Next 4% Next 5% Next 10% Top 20% 2nd 20% 3rd 20% Bottom40%

Per

cent

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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

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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?

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Figure 11. Persons in Jail and Prison 1980-2004

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1980 1984 1988 1992 1996 2000 2004

Year

Nu

mb

er

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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

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Table 2. Top 5 Income Tax Expenditures, 2008 (millions of dollars)

Provision Revenue Effect

Exclusion of employer contributions for medical insurance premiums and medical care

$160,190

Deductibility of mortgage interest on owner-occupied homes

89,430

Accelerated depreciation of machinery and equipment

64,670

Capital gains (except agriculture, timber, iron ore, and coal)

51,960

Employer plans 48,480

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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

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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

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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

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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

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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

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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)

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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

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$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

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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

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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

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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

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$0

$5,000

$10,000

$15,000

$20,000

$25,000

1960 1970 1980 1990 2000Year

Earn

ings

Poverty level,family of three

Poverty level,family of four

Annual minimumwage earnings

Figure 23. Minimum-Wage Earnings versus Poverty Levels, 1960-2006

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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

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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

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Figure 26. Hypothetical Accumulations – 2005 Dollars

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Figure 27. Hypothetical Accumulations - % of Final Wage

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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