Edward Conard

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Macro Roundup


Wednesday, May 12, 2021

AI Summary. The authors estimate that aggregate markups over cost rose from 18% to nearly 67% between 1980 and 2014, concentrated among firms that already had high markups, which they interpret as a rise in market power. They associate this increase with declining labor and capital shares, lower low-skill wages, reduced labor force participation, fewer startups, and wider wage inequality.

De Loecker, Jan, Jan Eeckhout, and Gabriel Unger National Bureau of Economic Research
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According to @DeLoockerJan @JanEeckhout @GabrielUnger, aggregate markups have surged from 18% to nearly 67% since 1980, driven by firms with already high markups, indicating a rise in market power.

Have rising markups reshaped wages, labor shares, and business formation?

Core argument: Aggregate markups rose from 18% in 1980 to nearly 67% by 2014, driven by firms that already had high markups, indicating a rise in market power.

Since 1980, aggregate markups have surged from 18% to nearly 67% by 2014, driven by firms with already high markups, indicating a rise in market power. This increase correlates with several macroeconomic trends: a decline in labor and capital shares, reduced low-skill wages, and decreased labor force participation. Additionally, the startup rate of new firms has fallen due to higher barriers, while wage inequality has risen as low-skill wages decrease and skilled wages increase. The rise in market power has also led to higher inflation rates than would have occurred without it, suggesting that anti-trust policy, rather than monetary policy, is needed to address this inflation. Furthermore, the stock market is overvalued relative to a competitive economy, as current profit levels are significantly higher than in 1980. Technology plays a crucial role in enabling firms to maintain market power, with no signs of a substantial decrease in markups in the near future.

Takeaways by Macro Roundup® AI

  1. Aggregate markups rose from 18% in 1980 to nearly 67% by 2014, driven by firms that already had high markups, indicating a rise in market power.
  2. The rise in market power correlates with declining labor and capital shares, lower low-skill wages, reduced labor force participation, a falling startup rate amid higher barriers, and wider wage inequality.
  3. Market power has produced higher inflation than would have occurred otherwise, suggesting anti-trust rather than monetary policy as the remedy, and leaves the stock market overvalued relative to a competitive economy.

New NEBR paper, suspect will be hearing for about it from the left as it's arguing that the decline of the labor share, decline of capex, as well as the decline in low-skilled wages all are given a tailwind by the increase in markups and market power

given that within industry they found the highest markups went to firms that already had the highest markups seems like it could be the rise of superstar firms as opposed to market power.

"...Using micro data on the accounts of publicly traded firms in the US starting in 1950, we find that markups have been relatively constant between 1950 and 1980 at around 20% above marginal cost. From 1980 onwards, there has been marked change in this pattern with markups steadily rising from 18% to nearly 67% in 2014, a three and a half fold increase. We have documented the properties of this rise, which is mainly due to a change within industry, and which can be attributed mostly to the increase of markup of the firms with the highest markups already.Markups tend to be larger in smaller firms, but this seems to be due mainly to a composition effects across industries as this disappears when we decompose the markup at the fine industry level. We use this increase to investigate the implications this has for secular macroeconomic trends in the last decades: 1. decrease in labor share; 2. decrease in capital share; 3. decrease in low skill wages; 4. decrease in labor force participation; 5. decrease in labor flows; 6. decrease in migration rates; 7. slowdown in output and GDP. There are of course other secular trends that happen to coincide with the increase in market power: 1. decrease in startup rate of new firms due to higher barriers erected by incumbents 2. decrease in the long term interest rate due to the fall in demand for capital (due to quantity reduction of firms with market power) and an increase in the supply of capital (due to higher profits); 3. the increase in wage inequality46 from to the decrease in low skill wages as documented above together with an increase in skilled wages due to profit sharing by managers; 4. the great moderation, or the idea that output fluctuations have decreased since 1980, has lost appeal since the great recession, but which is still very much observed in the data, especially in the last decade, with of course, the notable exception of 2008. As we have shown, with incomplete pass-through the same individual firm level productivity shocks lead to lower output adjustments. There is evidence however that the transmission of aggregate shocks is also incomplete. As a result, higher market power would translate in smaller aggregate fluctuations GDP in response to aggregate shocks as well. While we believe that each of these four secular trends are as important as, if not more important than, the ones we have analyzed, we leave them as a priority for future research. There are two profound policy consequences that result from the rise in market power.The first relates to inflation. Relative to a scenario without a rise market power and with the same evolution of technology, prices would have gone up by 1% per year (42% over 35 years, from 1.18 to 1.67). This implies that inflation has been higher than it would have been without the rise in market power.This is surprising given the low inflation rates in the last decades - and particularly low ones since the great recession. Of course, monetary policy is not the appropriate policy tool to remedy that source of inflation. That would be the prerogative of anti-trust policy. The second consequence pertains to the value of the stock market. Stocks prices reflect the discounted flow of dividends and thus profits. The stock market under market power is therefore overvalued relative to a competitive economy. If investors believe that the current profit level that is four times higher than in 1980 is permanent, then we would expect that the stock market capitalization would be four time higher than under perfect competition. That would put the Dow Jones at 5,500 instead of its nearly 22,000 level today. Of course, that is a naïve calculation since market capitalization also reflects the extensive margin, the total value of goods sold, and that decreases with market power. How big the effect of market power is on the stock market value depends on the elasticity of demand. Note also that the stock market can go up if output deceases, for example when productivity growth is zero and market power and hence profits increase. In the presence of market power, the stock market is therefore not a good gauge of an economy’s output. While we have focused on the consequences of the rise in market power, in this paper we have remained silent on the causes. Especially when it comes to finding remedies, it is essential to understand the causes. We limit ourselves to listing a number of candidate explanations: the rise of merger & acquisition activity (Figure B.9 in the Appendix), deregulation, the higher share of network goods, the increase in wholesale transaction (Ganapati (2016)), private equity, improved product differentiation, increased vertical and financial integration of competitors. A common factor in each of these is technology. Rapid technological change allows firms to better create and preserve situations of market power. Markups are reaching heights multiple times higher than ever seen, at least since the second world war when our data start. It is open to speculation whether this trend will continue, but for now there are no signs that markups will decrease substantially any time soon..."

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De Loecker, Jan, Jan Eeckhout, and Gabriel Unger. November 22, 2018. “The Rise of Market Power and the Macroeconomic Implications.” NBER.http://www.janeeckhout.com/wp-content/uploads/RMP.pdf

Thursday, May 13, 2021

AI Summary. Tax data show high top marginal rates have rarely been paid by many filers: with a 91% top rate, 447 of 71m filers faced it and the top 1% paid 16.1% of income in taxes, versus 21.5% when the top rate was 28%.

David Splinter Oxford University Press
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Top Tax Rates And taxes Actually Collected As A Percentage of Income For Top 1%, Top 10%, And Bottom 50%.

Do high top marginal rates raise taxes paid by top earners?

Core argument: In 1962, only 447 of 71m U.S. tax filers paid the 91% top marginal rate, and the top 1% paid just 16.1% of their income in taxes.

Analyzing tax data reveals that while top marginal tax rates have historically been high, the actual taxes paid by top earners as a percentage of income are significantly lower. In 1962, the top tax rate was 91%, yet only 447 out of 71m filers paid this rate, with the top 1% paying just 16.1% of their income in taxes. By 1988, the top rate fell to 28%, but the top 1% paid 21.5% of their income in taxes, illustrating that lower rates did not reduce the tax burden on high earners. The top 10% of earners in the U.S. pay a higher share of income taxes compared to their counterparts in other developed nations, with a progressivity ratio of 1.35. This data suggests that while high marginal rates are proposed, they have rarely been collected from a significant number of taxpayers, raising questions about their economic impact and effectiveness in increasing revenue without stifling growth.

Takeaways by Macro Roundup® AI

  1. In 1962, only 447 of 71m U.S. tax filers paid the 91% top marginal rate, and the top 1% paid just 16.1% of their income in taxes.
  2. By 1988, the top U.S. marginal rate had fallen to 28%, yet the top 1% paid 21.5% of their income in taxes, more than in 1962.
  3. The top 10% of U.S. earners pay a higher share of income taxes than their counterparts in other developed nations, with a progressivity ratio of 1.35.

Gramm/ Solon on effective tax rates, “it’s worth examining how many taxpayers actually paid those top rates and what percentage of their income high earners actually paid in taxes. Economists Gerald Auten of the Treasury Department and David Splinter of the Joint Committee on Taxation have compiled an extraordinary new database using Internal Revenue Service data on taxes actually collected since 1962. The top marginal income-tax rates and the taxes actually paid, including payroll taxes, as a percentage of income for the top 1%, top 10% and bottom 50% of income earners are shown in the nearby chart. The figures for 2016-20 are comparable estimates by the Urban-Brookings Tax Policy Center. The top tax rate of 91% in 1962 applied to families with joint incomes, in today’s dollars, of $3.38 million. After deductions and credits, only 447 tax filers out of 71 million paid any taxes at the top rate. The top 1% of income earners paid only 16.1% of their income in federal income and payroll taxes, while the top 10% paid 14.4% and the bottom 50% paid 7%. This followed the pattern set by the top Depression-era and wartime tax rates. Only three filers out of six million paid any taxes at the top Depression rate and only 13 out of 50 million paid any taxes at the top wartime rate. The top 1% of earners paid 12.6% and 23.5% of their income in federal income and payroll taxes in 1938 and 1945, respectively….”

Phil Gramm and Mike Solon, "The Biden Tax Mirage,"Wall Street Journal, May 12, 2021, https://www.wsj.com/articles/the-biden-tax-mirage-11620837568

The Biden Tax Mirage

With deficits at levels not seen since World War II, the March $1.9 trillion stimulus only beginning to spend out, and President Biden calling for significantly higher marginal tax rates to help fund another $4 trillion of spending, maybe it’s time for a reality check on how high marginal tax rates, and the actual tax rates paid by Americans, can be raised without crushing economic growth. Proponents of massive tax increases will argue that economic growth and prosperity are compatible with high tax rates by pointing to the 35 years of postwar prosperity in America, when the top federal tax rate was 70% or higher.

But before accepting this as proof by example, it’s worth examining how many taxpayers actually paid those top rates and what percentage of their income high earners actually paid in taxes. Economists Gerald Auten of the Treasury Department and David Splinter of the Joint Committee on Taxation have compiled an extraordinary new database using Internal Revenue Service data on taxes actually collected since 1962. The top marginal income-tax rates and the taxes actually paid, including payroll taxes, as a percentage of income for the top 1%, top 10% and bottom 50% of income earners are shown in the nearby chart. The figures for 2016-20 are comparable estimates by the Urban-Brookings Tax Policy Center.

The top tax rate of 91% in 1962 applied to families with joint incomes, in today’s dollars, of $3.38 million. After deductions and credits, only 447 tax filers out of 71 million paid any taxes at the top rate. The top 1% of income earners paid only 16.1% of their income in federal income and payroll taxes, while the top 10% paid 14.4% and the bottom 50% paid 7%. This followed the pattern set by the top Depression-era and wartime tax rates. Only three filers out of six million paid any taxes at the top Depression rate and only 13 out of 50 million paid any taxes at the top wartime rate. The top 1% of earners paid 12.6% and 23.5% of their income in federal income and payroll taxes in 1938 and 1945, respectively.

Top Income Shares and the Difficulties of Using Tax Data: Extended Excerpt Image 1


President Kennedy recognized that while confiscatory tax rates collected little revenue, they stifled growth as resources were squandered in the “avoidance of taxes” rather than the “production of goods.” When the top tax rate was reduced to 70%, individual income-tax collections continued to grow and the actual percentage of income paid in taxes by high-income earners barely changed. Only 3,626 out of 75 million filers paid any taxes at the new 70% rate. When the Reagan tax cut reduced the top rate to 50%, gross domestic product grew. Taxes collected from high-income earners as a percentage of their incomes were largely unchanged, as the chart shows. Only 341,000 of 109 million filers paid any taxes at the new 50% top rate.

The 1986 tax reform reduced the top rate to the postwar low of 28%. The reform also closed loopholes, offsetting the rate reductions and other changes in the tax code. Revenues grew as the economy expanded and asset sales surged at the lower marginal tax rate. Twenty-six million out of 115 million filers paid taxes at the 28% rate. The top rate was raised to 39.6% in 1993 and has fluctuated between 39.6% and 35% since. Only 453,000 out of 123 million filers paid any taxes at the 39.6% rate in 1993.

Remarkably, while the top marginal rate fell from 91% in 1962 to 28% in 1988, the percentage of income actually paid in income and payroll taxes by the top 1% and 10% of filers rose to 21.5% and 19.6% from 16.1% and 14.4%, respectively. As the top tax rate fell by two-thirds, the percentage of income paid in federal income and payroll taxes by the top 1% and 10% of earners rose by a third.

The percentage of income actually paid by the top 1% of earners, which the Tax Policy Center estimates to be 25.7% in 2020, is close to the average rate paid during the last quarter-century. Whether the federal government could actually impose a top rate of 50% on a significant number of taxpayers, or actually collect much more than 30% of the income of the top 1% of earners in income and payroll taxes, without crippling economic growth is a question our postwar experience certainly doesn’t answer.

It is also worth noting that the Organization for Economic Cooperation and Development has found that high-income Americans already bear a higher relative share of the income-tax burden than the rich do in other developed nations. The top 10% of American households earn about 33.5% of all earned income but pay 45.1% of all income taxes, including Social Security and Medicare taxes. That progressivity ratio of 1.35 is far higher than the German ratio of 1.07, French ratio of 1.1 and Swedish ratio of 1. As a percentage of their incomes, the top 10% of earners in Germany, France and Sweden paid 21%, 19% and 26% less than the top 10% in America. And the bottom 90% of earners paid 17%, 34% and 21% more as a percentage of their incomes respectively than the bottom 90% in America paid. While the OECD study predates the 2017 Tax Cuts and Jobs Act, the Congressional Budget Office found the act made the U.S. tax code even more progressive.

Before Congress bets the future of America on the federal government’s ability to soak the rich without crippling the economy, lawmakers need to recognize that the marginal rates being proposed have never been collected from any significant number of taxpayers except under the direst circumstances such as a war for survival. Voters might also note that in the rest of the developed world, where government takes a larger share of GDP in taxes, high earners pay about the same share of GDP in income taxes that high-income Americans pay today, but everybody else pays a lot more.

Gerald Auten and David Splinter, "Top Income Shares and the Difficulties of Using Tax Data," Oxford University Press, 2020, http://www.davidsplinter.com/AutenSplinter-TopIncomes-Oxford.pdf

The data sources follow