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).
1
Figure 1. Share of Household Income
60
50
Percent
40
30
20
10
0
Poorest 20%
Free market
Middle 20%
Richest 20%
After taxes & transfers
2
Percent of household income
100%
Figure 2. How Taxes and Transfers Improved Equity, 2004
80%
60%
Line of perfect equality
Lorenz curve (income before taxes
and transfers)
Lorenz curve (income after taxes and
transfers)
40%
20%
0%
0%
20%
40%
60%
80%
Percent of households
100%
3
Figure 3. Family Income by
Percentile, 1950-2003 (2003
dollars)
$180,000
$160,000
$140,000
20th percentile
40th percentile
$120,000
60th percentile
80th percentile
$100,000
95th percentile
$80,000
$60,000
$40,000
$20,000
$0
1950
1960
1970
1980
1990
Source: U.S. Census Bureau (2005b), table F-1.
2000
4
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
30
T op 20%/bottom 20%
T op 5%/bottom 20%
24.6
25
22.7
19.1
20
17.0
Ratio
16.2
14.5
15
14.7
13.2
10.6
11.3
9.8
13.8
11.9
10.2
10
5
0
1970
1975
1980
1985
Year
S o urc e : U.S . C e ns us B ure a u (2004b), ta ble IE-3.
1990
1995
2000
5
Table 1. Average Annual Earnings
of Full-time Workers, 2004
Doctors
Lawyers
Economists
Nurses
Police
Auto mechanics
Secretaries
Garbage collectors
Orderlies
Waiters and waitresses
$128,689
105,716
71,672
53,289
50,063
38,967
32,349
31,284
20,959
8,789
6
Figure 5. Distribution of Earnings,
2004
$400,000
Earnings
$300,000
$200,000
$84,000
$100,000
$36,000
$15,600 $26,000
$50,000
$0
0
10 20 30 40 50 60 70 80 90 100
Percentile
7
Figure 6. Distribution of Workers by
Earnings Category, 2004
Percent of workers
12
11
10
9
8
7
6
5
4
3
2
1
0
<0
15
30
45
60
75
90
105 120 135 150 165 180 195 210 225 240 >250
Earnings (thousands of dollars)
8
Figure 7. Wages by Percentile, 1979-2003
$40
Dollars per hour 2003$)
$35
$30
95th percentile
$25
90th percentile
$20
80th percentile
$15
50th percentile
$10
20th percentile
$5
10th percentile
$0
1979
1985
1991
1997
2003
Year
9
Figure 8. The Size Distribution of
Wealth, 2004: Percentage Share
of Wealth Held by...
100
84.7
90
80
Percent
70
60
50
40
30
20
34.3
24.6
12.3
13.4
11.3
3.8
10
0.2
0
Top 1% Next 4% Next 5%
Next
10%
Top
20%
2nd
20%
3rd 20% Bottom
40%
10
Figure 9. The Distribution of Various
Resources, by Quintiles
100%
80%
Consumer unit
consumption, 1999
60%
Household earnings,
1998
40%
Household income,
1998
Household wealth,
1998
20%
0%
Lowest Second Middle Fourth Highest
11
Figure 10. Share of Household Income
60
50
Percent
40
30
20
10
0
Poorest
20%
Egalitarian
Middle 20%
Free market
Richest
20%
After taxes & transfers
Just?
12
Recent Policy Trends Encouraging
Work
•
•
•
•
Welfare reform
Cutting tax rates on earned income
Outlawed employment discrimination
Social Security, pension, labor markets
13
Figure 11. Persons in Jail and Prison 1980-2005
2,500,000
Number
2,000,000
1,500,000
1,000,000
500,000
0
1980
1985
1990
1995
2000
2005
Year
14
Figure 12. How a 30 Percent Payroll Tax Can Reduce
Work Effort
$25,000
Before: 2,000 hours, $20,000/year
$20,000
Income after tax
After: 1,750 hours, $12,500/year
$15,000
Income $10/hour
$10,000
Income after tax
Utility curve 1
Utility curve 2
$5,000
$0
2,500
2,000
1,500
1,000
500
0
Hours of work
15
Top 10 Income Tax Expenditures, 2009
(Billions of Dollars)
Health insurance exclusion
Mortgage interest deduction
$168
101
401(k) plans
Charitable contrib. (other than health & education)
Accelerated depreciation
Capital gains (except timber, iron ore, coal)
51
47
44
55
Deductible nonbusiness state and local taxes
other than on houses
Employer plans
33
Step-up of basis at death
Capital gains exclusion on homes
37
34
2009 Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3
46
16
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
17
Fig. 13.
2005
Percentage Composition of Federal Receipts by Source: 1940-
60
50
Individual Income Tax
40
Percent
Corporation Tax
Social Insurance
30
Excise Taxes
20
Other
10
0
1940
1950
1960
1970
Year
1980
1990
2000
18
Figure 14. Income Tax Rates, Single Parent with Two
Children and Earned Income Only, 2006
60%
50%
Tax rate
40%
30%
20%
10%
0%
$0
$50,000
$100,000
Earned income
$150,000
$200,000
19
Figure 15. Social Security Tax Rates on Earned
Income, 2006
60%
50%
Tax rate
40%
30%
20%
10%
0%
$0
$50,000
$100,000
Earned income
$150,000
$200,000
20
Figure 16. U.S. Payroll Tax Rates: Selected Years
Percent paid jointly by employee and employer
20
18
16
14
12
Medicare
Social Security
10
8
6
4
2
0
1940
1960
1980
2006
Year
21
Figure 17. Actual Tax Rate on Single Parents
with Earned Income Only, 2006
60%
Effective tax rate
40%
20%
0%
$0
-20%
$50,000
$100,000
$150,000
$200,000
Earned income
-40%
Effective tax rate
Linear trend line
22
Figure 18. Average Cumulative Tax Rates
Confronting Low-to-Moderate-Income
Families ($10k - $40k)
100%
88.6%
80%
58.8%
60%
40%
35.9%
20%
0%
Tax
Plus Food
Stamps &
Health
Plus TANF,
Housing,
Child Care
23
Figure 19. Rates in a Comprehensive
Tax and Transfer System
60%
50%
Tax rate
40%
30%
20%
10%
0%
$0
$50,000
$100,000
Earned income
$150,000
$200,000
24
Figure 20. $2,000 per Worker Earned
Income Credit, with or without a Phase-out
Credit Amount t
$5,000
$4,000
$3,000
$2,000
$1,000
$0
$0
$20,000
$40,000
$60,000
$80,000
Earned income
$2,000 per worker credit
$2,000 per worker credit with phase-out
25
Figure 21. How a Simple 50 Percent Earnings
Subsidy Can Increase Work Effort
$20,000
$17,500
After: 1,750 hours, $13,125/year
Post-transfer Income
$15,000
$12,500
Income $5/hour
Income after transfer
$10,000
$7,500
$5,000
Utility curve 1
Utility curve 2
Before:
1,500 hours,
$7,500/year
$2,500
$0
2,500
2,000
1,500
1,000
500
0
Hours of work
26
Table 3. How a Comprehensive Tax and Transfer
System Would Affect a Single Parent with Two Children
Pre-transfer
Earnings
plus
plus Worker
Universal
Credit
Grants
less Tax
Imposed
Equals Aftertax
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
27
$145,500
Post-tax, post-transfer income
Figure 22. How a Comprehensive Tax and
Transfer System Would Affect Single Parents
$200,000
$150,000
$100,000
Pre-transfer earnings
$50,000
Post-tax, post transfer
income
$0
$0
$50,000
$100,000
$150,000
$200,000
Earnings
28
Figure 23. Minimum-Wage Earnings
versus Poverty Levels, 1960-2007
$25,000
Poverty level,
family of three
Earnings
$20,000
$15,000
Poverty level,
family of four
$10,000
Annual
minimum wage
earnings
$5,000
$0
1960
1970
1980
1990
Year
2000
29
Age
Figure 24. Life Expectancies at Birth
versus Social Security Retirement Age
90
85
80
75
70
65
60
55
50
45
40
1900
Life expectancy at birth, males
Life expectancy at birth, females
Full retirement age for people born that year
1940
1980
Year of birth
2020
2060
30
Figure 25. Labor Force Participation
of Men Age 55 and Older, 1950-2004
80%
Participation rate
Men age 55 and over
Men age 65 and over
60%
40%
20%
0%
1950
1960
1970
1980
Year
1990
2000
31
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
32
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
33
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
47.0
15.8
No health insurance
34
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
35
Transition to Expanded Coverage
• Tax Changes: cap the exclusion for employerprovided 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
36
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
37
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.
38