INCOME INEQUALITY

The Congressional Budget Office (CBO) just updated their invaluable data series on income inequality.

In looking at them I came up with a couple of very interesting charts.

In recent years there has been one big factor in this redistribution of income that
has not been discussed much. That is the massive increase in profits share of GDP
that happened this cycle.

The primary factor behind this large increase in profits has been firms ability to
capture the large productivity gains this cycle in higher profit margins rather
than in labor compensation.

Standard economic theory says this large gain in profits should be reflected in higher
savings and/or higher capital spending. But we have not seen either response.
However, the much higher income inequality and large cyclical increase in profits
have generated somewhat higher tax receipts than we had at the bottom of the cycle.
So through these mechanisms we do seem to be getting something of a supply side
impact on tax receipts, but given these other developments it is amazingly small.