Saturday, October 14, 2006

Significant Income Inequality for the NFL?

1. USA Today has a database of salaries for all professional athletes in the NFL, NBA, NHL and MLB, annually from 1988 to 2006. As one example, the Minnesota Vikings in 2005 had a payroll of $85.4 million for a roster of 61 players, a median salary of $596,100, and an average (mean) salary of $1.4 million. The lowest paid player was T.J. Cottrell ($139,840), and the highest paid player was Fred Smoot ($12.3 million).

2. The IRS keeps a database of income tax returns, and does an analysis of the
share of total income earned by different groups of taxpayers. For example, in 2004 (most recent year) here are the shares of total income earned by differnent groups of taxpayers:

Top 1% earned 19% of all income ($328,000 income or higher)
Top 5% earned 33% of all income ($137,000 income or higher)
Top 10% earned 44% of all income ($99,000 income or higher)
Top 25% earned 66% of all income ($60,000 income or higher)
Top 50% earned 86% of all income ($30,000 income or higher)

3. Many people express concern about the inequality of income across all taxpayers.

How are the above items connected?

Well, even the lowest paid Viking is in the top 5% of all taxpayers, most Vikings are in the top 1%, and many are in the top 1/2 of 1%. So I am sure nobody feels sorry for them. But wait a minute! Couldn't there be significant income inequality among this group of "the rich."

Here is the breakdown for the Minnesota Vikings:

The top 1% of the team earned 14.5% of total income (payroll)
The top 5% of the team earned 31.4% of total income (payroll)
The top 10% of the team earned 48% of total income (payroll)
The top 25% of the team earned 71% of total income (payroll)
The top 50% of the team earned 88% of total income (payroll)

Hmmmmmmmmmmm. If you compare the percentage breakdowns above, it seems like there is about just as much income inequality among the "super-rich" Minnesota Vikings, as among the general population. Maybe such income inequality is natural, and should be expected, regardless of whether it is all taxpayers, or various sub-groups of taxpayers. That is, you could take the top 1%, the top 5%, the top 50%, or the top X%, all the way to the top 100% (all taxpayers), and you would probably always find a significant, and possibly similar and consistent pattern of income inequality.

See my article on this topic. For Nobel prizes, the top 20% of countries receiving Nobels have received 85% of all prizes awarded. For Olympic medals, the top 20% of countries receiving medals received 70% of all medals. In most sales environments (real estate, securities, insurance, etc.), it is expected that the top 20% of salespeople generate 80% of all sales. It is probably the case that the top 20% of students at a university receive 80% of all grade points every semester. In the NBA, the top 20% of the players probably generate 80% of the total points scored. For movies, the top 20% of the highest grossing movies probably generate 80% of all revenues. For books, the top 20% best-selling book probably generate 80% of all sales. The list could go on... If this is a natural outcome in any competitive process, the process of earning income should be no different.

If talent, ambition, skills and luck are distributed "unequally," should we not expect unequal outcomes? And suppose you don't like the inevitable result of an inequality of outcome? What is the logical solution to correct such a "problem"? The use of the coercive force of the government to redistribute income, sales revenue, grades, Olympic medals, Nobel prizes, or grade points?

And now think about this scenario: what if professors started "grade redistribution" at the end of each semster, and took grade points away from the A students and gave them to the D students, to achieve a more "equal" distribution of grade points and final grades, possibly resulting in all Cs? Who would study?


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