Incomes are neither distributed nor shared; they are earned

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For decades, our media have bombarded us with income pie charts and bar graphs, showing the share of the nation’s annual income that is said to be distributed to various economic groups (labor, landlords, and so forth). The size of each slice represents total income attributed to individuals in that group.

These charts are dangerous. By making comparisons of slice sizes over time, authors attempt to draw inferences as to the fairness of each group’s share. But this effort obscures, misleads and distorts the true process by which income is really produced and earned.

TO BEGIN, IN this context there are severe semantic obstacles with the use of the word “distribute,” or “distribution.” While defined by my Webster’s Dictionary as an apportionment, a sharing, a dispensing; earned income (which is obtained by personal sacrifice), however, is never apportioned or shared, and hence, never distributed. Unless obtained by illegal means, it is earned.

The words “apportionment” and “sharing,” however, can leave the reader with the connotation of a receipt unrelated to effort or hard work, such as a windfall. A pie chart, simply stated, may express labor’s earned income in absolute terms, or as a percent of society’s total earned income. Either expression is clear, precise and sufficient. It is not only redundant to require that these earnings be apportioned or distributed when they have been already earned, but mischievous as well. Labor’s portion of the nation’s income is not “shared” – it is earned.

The apportionment concept marks only the beginning of our semantic difficulties. The income-sharing analogy also tacitly assumes that the size of the pie is given, that it figuratively fell from heaven and is now resting comfortably on a windowsill, cooling, waiting to be sliced and “distributed” to society’s claimants. But the causal connection is just the reverse!

As shown below, this relationship involves productive agents first producing income, and then simultaneously being rewarded! The income sharing analogy, unfortunately, is most misleading and masks the fundamental role that incentives play in the income-productive processes.

The verb “to share” is particularly troublesome. “To share” literally embraces the acts of giving, allocating and earning. But labor income consists of wages and salaries. This income cannot be shared or received as gifts. It is earned. A correct statement would be that labor’s slice, for example, is the proportion of the nation’s total income contributed by wages and salaries. Occasionally, journalists say exactly that.

In our free-choice society, millions of us freely contract with one another to exchange products or services for agreed upon rewards. This provides incentives for work, for savings to be made and provided to entrepreneurs, for land and buildings to be rented, literally to provide the “blood, sweat and tears” for producing, in the first place, the total pie.

ONLY WHEN THESE millions of contracts are performed do individuals receive an earned income! Instead of being a fortuitous gift, the size of the pie is bound inextricably with the manner in which it is produced. This involves masses of individual contracts of production, which reflect rewards for incentives and work. But the underlying income-producing process determines who is rewarded and the size of the pie, which is generated by the totality of these freely negotiated contracts.

This fact is frequently overlooked by income redistributionists who start with the premise that the size of the pie is given; all we need do is redistribute it. Naïve, yes, but a view widely shared by politicians and members of the chattering classes.

Unfortunately, erroneous interpretations do not end here. They extend into many areas where the reader easily forgets that income earned is firmly tied to output contracts. For example, since incomes above ours are easily viewed as windfalls, it only takes a glance at a bar graph of income earned by groups to carelessly infer that income can be transferred by legislative decree without impairing its production or its size.

Of course, this overlooks that the existing level of income is fundamentally bound with the millions of contracts that produced it. Tinkering with freely negotiated contracts to redistribute income, including the popular pastime of imposing higher and higher taxes on high incomes might make some feel better but, because it ignores incentive effects, it incurs the great risk of reducing the size of the subsequent pie.

Reinforcing the windfall misconception is the widespread view that interest, dividends and rents are unearned income. Savings, which enable us to earn interest and dividends and provide for our retirements, represent current sacrificed consumption opportunities, which are not pleasant experiences. Hence, interest, rents and dividends are generated by personal sacrifices – in short, they are earned income. Further, it does not help clarify matters when politicians, the media and especially the IRS regularly refer to dividends, rents and interest as unearned income.

IN SUM, INCOME pie charts and their close cousins, income bar graphs, are misleading devices. By referring to them as representing income distributions, they create unnecessary semantic obfuscation. They are not apportionments of income to members of participant groups. Instead, they are rewards earned by individuals in these groups for worthwhile contractual performance. Their performance and rewards help determine the size of the pie.

The notions of apportionment and sharing carry the unfortunate connotation that somehow, total income falls from heaven, preceding its allocation, rather than being a product of incentives, rewards, hard work, and careful risk-taking by industrious citizens. Therefore, it is easy to infer that individual incomes, especially of the wealthy, may be taxed with impunity without impairing incentives to the productive process.

Preposterous, of course, but an easily discernible conclusion from the words “distribution” and “sharing.”

(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)

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corgimom
38230
Points
corgimom 08/26/12 - 04:45 am
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5
I only got through the first

I only got through the first 4 paragraphs and then my eyes glazed over. And I hold an MBA.

Martinez
154
Points
Martinez 08/26/12 - 05:07 am
2
2
someone needs a lesson ...

someone needs a lesson in clear & concise communication. Mr. professor emeritus, I sure hope you teach more directly then you write.

Dixieman
17214
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Dixieman 08/26/12 - 06:11 am
4
0
Awkwardly written but true

Can anyone reading this remember standing in line to receive the distribution of income? I don't. Author is right, you work for it.

TruthJusticeFaithHope
244
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TruthJusticeFaithHope 08/26/12 - 06:49 am
4
0
You work for it !

Yes, you work for it... just like you had to work to understand Professor Baranek's article. Yet, he presents some excellent points. Fewer sentences or more periods please ! Work and labor are encouraged, and good, and are the basis of a strong economy, and society. "Income redistributionists.... and the chattering classes... " (Gotta love those terms...) justify income sharing, and, forgive me professor if I jump ahead... the weaking of our society... and economy. I deserve a B on this analysis... I would have to read it a few more times to earn an A. Thanks for making my brain wake up this morning Professor.

seenitB4
96837
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seenitB4 08/26/12 - 08:24 am
3
0
Easy peasy

If you want something--work for it!
:)

dichotomy
37344
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dichotomy 08/26/12 - 10:22 am
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The more you attempt to

The more you attempt to apportion income, the less income there will be to apportion.

I cannot believe that there are people so stupid that they think others will work harder and take risks investing their money in order to have more of their earnings redistributed by the government. Well, after watching the last two local elections I guess I can believe it. But I digress. Obama wants to raise taxes on folks who make over $250K by 5% or more. In case you haven't noticed, it's not easy to make 5% on investments today. Banks are paying basically nothing. 5 year CDs are paying like 1.3%. If you want to make 5% you have to take on considerable risk either in the stock market or the bond market. If you are going to take 35% or 40% of anything I make, and I have to risk losing everything to try to make it, guess what? I will put my money in tax free, low risk bonds and the government will get nothing. When it comes to taxing capital gains and dividends, more taxes gets the government less money. Investors always have ways to avoid more taxes. They can invest in tax free bonds, move their money offshore, or simply let their money sit in the bank and do nothing with it. The only tax that actually raises money for the government is the income tax on the lower and middle class. Those people cannot hide their income. That's where the tax money is.....the lower and middle class.

People would do better to ask themselves why they are not doing so well instead of why they can't have some of what others have made. Are they too lazy? Did they shuck and jive through school and come out with a 12 year diploma and a 6th grade education? Did they go for that degree in 18th century poetry instead of the engineering degree? Did they sit for years in a dead end job and do nothing to improve themselves until automation or new technology did away with a need for them? Are they just too firmly attached to the government teat? Or did you actually make a good income but just had to have that house on the golf course, two new cars, and max out 5 different Mastercards and Visas before you got laid off when the economy burped?

Quit blaming me for your failure and quit trying to take what I have earned. You want more money? Do the things necessary to go out and earn it. I know that's a foreign concept to a lot of you nowadays but it works. Give it a try....because you are not getting any higher taxes from me. I already have two plans laid out for the day after the elections in November and neither of them includes paying more taxes for less income. Sorry Charlie...the ATM is offline. If you want more tax revenue you need to be looking to the 49% who do not pay any federal income taxes. Get them to start paying some income taxes and that will encourage them to pay attention to who they vote for and how those people waste THEIR money.

Techfan
6462
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Techfan 08/26/12 - 11:59 am
1
6
Ignore the facts and numbers.

Ignore the facts and numbers. Obviously those in the upper incomes work so much harder than the others. Take Paris Hilton for example. She deserves that lower tax rate on all of the money she inherited vs that lazy electrician or plumber who crawls around under houses in 100 degree summers and 20 degree winters. The fact is, since 1979, that wages have stagnated for those not at the top, even though productivity has grown, while wages for the very top have increased around 275%. We're still operating on Bush's tax rates for those at the the top. How many decades does it take for them to start creating jobs and the money to start "trickling down"?

Gage Creed
19372
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Gage Creed 08/26/12 - 02:08 pm
4
0
Funny...I'm one of those guys

Funny...I'm one of those guys that crawl around under and over things...work outside in the heat and cold. My wages have not been stagnant; in fact my wages have improved about 450% since 1977. But you did work in the DNC talking points, right? Congrats!

harley_52
25783
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harley_52 08/26/12 - 03:36 pm
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1
Great Post...

Dichotomy.

Nailed it.

Tots
26312
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Tots 08/26/12 - 04:56 pm
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Very good reading ,

Dichotomy and really easy to understand...

willie7
1047
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willie7 08/26/12 - 04:58 pm
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2
We keeping talking about the
Unpublished

We keeping talking about the 49% who pay no taxes. No, they don't pay income taxes because they don't make enough, period.
Who are these people?
Many of them are the ones who serve us in many capacities: the maid. janitor, nursinghome attendant, teachers aides, hotel maid,etc.In a capitalistic society, you have the top, middle and the bottom.

DMPerryJr
1698
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DMPerryJr 08/26/12 - 05:10 pm
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0
Good Point Willie7

Made me think a little bit.

This fire breathing stuff is catchy sometimes.

Gage Creed
19372
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Gage Creed 08/26/12 - 06:37 pm
2
0
Willie7...what about those

Willie7...what about those that don't pay taxes but still get EIC? I fail to understand why someone who pays no federal income tax is entitled to a earned income credit and gets a refund from the IRS. How can you get a refund when you did not pay anything?

DMPerryJr
1698
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DMPerryJr 08/26/12 - 07:20 pm
3
0
EIC

Wasn't the EIC part of a Reagan Era compromise with ol Tip? I haven't googled it, but I believe a conservative told me that during the round of golf.

Either way, that's a darn good point too.

madgerman
236
Points
madgerman 08/26/12 - 07:20 pm
0
0
Now I know why business is
Unpublished

Now I know why business is thriving in Augusta. Apparently business owners are trying to expand the pie by givimg workers lots of raises commensurate with theoir own increases in ownership revenues. Or am I wrong and business owners have been taking it on the chin just l;ike their workers have for the last five to ten years. What the Prof forgot to mention was the huge increases in CEO pay over the last 25 years, which has accounted for a large slice of any companys pie.

KSL
143268
Points
KSL 08/26/12 - 08:02 pm
3
0
Probably. There are a whole

Probably. There are a whole lot of compromises that have disgusted me.

Aren't the demean accusing the other side of not wanting to compromise? But they did not want to compromise on Obamacare. Now the lies about both the costs and the coverage are starting to come out.

Martinez
154
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Martinez 08/26/12 - 08:23 pm
1
0
Make EIC a credit or get rid of it.....

No one should get a refund of more then they contributed. I can see 0% tax rates but I am definitely opposed to -% tax rates, meaning someone gets back more then they put in. I would like to see some of the top level loop holes closed so that the wealthy aren't paying less then the middle class but also fully support changes at the bottom such as reforming or removing EIC too.

lvtfan
2
Points
lvtfan 08/26/12 - 10:27 pm
0
0
Who gets what?

I commend to the columnist, as well as interested readers, the ideas of Henry George. He wrote about earned and unearned incomes, incomes that belong rightly to the individual and incomes which rightly belong to the community. The distinctions are important, and as a society, we currently are unconscious of them and are leaving to individuals incomes they didn't earn, and taking from them incomes they DO earn. But until we individually and as a society become aware of the distinction, we are doomed to continue to get our tax structures wrong -- at our own peril.

The powers that be are quite content with the current situation, thank you very much. But the rest of us ought not to be. It isn't working; it isn't just, and it keeps too many of us unemployed and underemployed.

And it is unnecessary to continue in the same tax rut. We can fix this, relatively easily, if we educate ourselves.

Search on Henry George, or check out http://answersanswers.com.

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