Knowledge that Transforms

In his recent study (1985), Joseph Pechman presents estimates of incidence by income classes for several recent years. This study basically updates the earlier work by Pechman and Benjamin Okner (1974), which developed estimates for 1966, using the same methodology but applying it to more recent data to generate estimates of burdens by income class for 1970, 1975, 1980, and 1985. This note points out some peculiarities in the underlying data which suggest there are serious problems with the estimates for the later years. Pechman's major results are displayed in Table 1. Panel A of the table gives average rates for each major by household income deciles in 1966, and panel B presents the estimates for 1980, both for incidence variant ic.' (Ignore the last column in panel B for the moment.) As can be seen, the combined rate for the top decile is estimated to fall between 1966 and 1980 while it rises for the lowest decile. ratio of the rate for the top decile to the rate for the bottom decile declines from 1.8 in 1966 to 1.3 in 1980, a significant decrease in progressivity. Pechman explains the diminished progressivity by noting that the relative importance of various taxes has changed since 1966: The system became less progressive... primarily because the corporation income and the property declined in importance while more emphasis was placed on the payroll tax (p. 10). Although it is true that there has been a change in the relative contribution of various taxes since 1966, this change does not account for the decline in progressivity shown by the 1980 estimates. This is easily demonstrated by scaling up or down each decile's 1966 rate due to each in proportion to the change in the overall rate for that between 1966 and 1980. (For example, since property taxes had fallen from 3.0 percent of total income in 1966 to 2.0 percent in 1980, we would take two-thirds of the 1966 rates, i.e., 1.4 percent for the lowest decile, as an estimate of the 1980 rate due to the diminished importance of the property tax.) last column of panel B shows the results of these calculations, summed over all taxes. These figures suggest that if the only change since 1966 had been due to the change in the relative importance of various taxes, the system in 1980 would have been about as progressive as it was in 1966. Careful inspection of Table 1 clearly indicates that something else besides a change in the relative importance of taxes was responsible for the difference in results between 1966 and 1980. Note in particular the change for payroll taxes (principally the Social Security tax). In 1966, the payroll rate was 2.6 percent for the lowest decile, but in 1980 it is shown as having risen to 8.8 percent, an increase of 223 percent even though payroll taxes as a percent of total income rose by a scant 32 percent over this period. Even more puzzling is how the rate structure of the payroll taxes changed. In 1966, payroll taxes are shown as progressive up through the fifth decile and regressive at higher deciles, but in 1980 they are shown as regressive throughout the entire income distribution. At this point it will be helpful to explain why other studies (as well as Pechman's 1966 estimates) have found payroll taxes to be progressive at the bottom of the income distribution and regressive at the top.2 *Department of Economics, Texas A&M University, College Station, TX 77843. 'Eight different sets of incidence assumptions were used in the Pechman study. Variant Ic tends to embody competitive assumptions regarding the response of the economy to taxes. 2See, for example, my study with William Johnson (1979) or Richard Musgrave, Karl Case, and Herman Leonard (1974).

The concept of an American underclass has become the subject of increasing discussion. Although the term does not enjoy a precise definition, most researchers acknowledge that the underclass condition involves more than being cash poor. Members of the underclass are also believed to have attitudinal and behavioral deficiencies. Other terms that have been used to describe this group over the years include: dangerous classes, other Americans, culture of poverty, and lower classes (see Ken Auletta, 1981). Within this area of inquiry, several researchers have chosen to study what has been termed the black underclass. The purpose of this paper is twofold. First, the appropriateness of the data that are used to characterize members of the black underclass will be examined. Second, the argument that perhaps the most viable solution to the problems of the black underclass are community self-help programs, rather than government programs, will be discussed.

At least since the early 1970's, it has been apparent that the cyclical variations in inflation summarized by the short-run Phillips curve are only one part of the inflation problem that confronts modern industrial economies. Another part is the relative persistence of an established rate of inflation. There is a good deal that we do not understand about this persistence. But I find the most useful way to model it is to start with the concept of a relatively stable wage norm, by which I mean a norm for the rate of wage increase. The model distinguishes sharply between the cycle and the trend in inflation, with the wage norm determining the trend. The variations in inflation of the typical business cycle take place around the existing wage norm and generate the empirical short-run Phillips curve. The wage norm itself is affected little if at all by the typical business cycle. Historically the wage norm has been shifted by prolonged departures from typical business cycles or by other extreme economic developments. Figuring out more precisely what it takes to shift wage norms, or what might keep them from shifting, is a central challenge for understanding inflation better. Before turning to its implications, let me sketch the behavioral underpinnings of the wage norm model and the empirical evidence about wage norms. The norm rate of wage increase has no allocational significance and describes the trend of nominal wages independent of real aggregate demand or relative demand effects. In this respect, it is like the anticipated rate of inflation in many familiar models. Wages are not determined in an auction-like labor market that clears over any reasonable interval of time. Rather they are established by wage-setting firms with a profit-maximizing interest in their long-run relation with their employees, in some cases in a bargaining situation with unions. Under both the implicit and explicit contracts that thus dominate wage setting, keeping up with the norm is the neutral standard for firms. An individual firm that raises wages in line with the norm neither improves nor worsens its relative position as an employer. A firm that wants to expand employment will, typically, offer a higher wage than would be required just to keep up with the norm. Relative wages and relative employment levels are thus codetermined in this process. When most firms want to expand employment, as in a cyclical upturn, the same behavior is part of the process producing the modest cyclical rise in inflation that we observe as the short-run Phillips curve. Thus the onset of cyclical inflation is not a sign that capital and labor resources are being overutilized. Nor is it a sign that inflation is on an accelerating path or even that wage norms are shifting up. In analyzing U.S. postwar data, I have found the wage norm shifted up substantially by the end of the 1960's and down again, though not by as much, by the end of the 1980-82 recession (see my 1983 paper). The first episode was a period with a historic expansion that ended with several years of very low unemployment rates. The second was a recession of unusual length and severity that ended with the highest unemployment rates since the 1930's. There is also evidence of a small shift down in the wage norm after the weak economic performance of 1957-61, which featured two recessions with only an aborted recovery in between. I also found evidence for Germany, the United Kingdom, and Japan of upward shifts in wage norms in manufacturing industries after the 1960's and downward shifts in the early 1980's (see my 1986 paper). All these episodes suggest the kinds of extreme cyclical developments that have shifted wage norms in the postwar period. *The Brookings Institution, 1775 Massachusetts Avenue, NW, Washington, D.C. 20036. In preparing this paper, I benefited from discussions with Charles Schnl t7.e