Wednesday, February 24, 2010
Wealth, taxation and wealth envy in the US
The following is a response to my friend Will, who struggles with what he apparently perceives as inequality in income and taxation in the US. This came out of a wall post he made on my facebook page:
Remember when we were talking about the highest tax bracket. It appears they pay less than 17 percent taxes on their income. Most of it was from capital gains which is a maximum 15 percent tax.
Personally I'd like to see progressive capital gains after data like this. 400 people in the united states make up 30 percent... of the total wealth in the US, but only pay 17 percent taxes, and since the poorer pay more like 20-30 percent taxes when you take into account social security, medicare and other capped taxes too. So how much medicare social security and such before it's capped?
Ya know, it's possible they didn't teach statistical analysis in high school, or that you can look at one small area and miss the whole picture. So, first, the data quoted is for 2007, it fails to take into account current stats. The current data isn't yet available except as estimates. The IRS typically runs 2 years behind in getting this data out; I've followed it for several years. So let’s just dive deeper into the numbers.
When you look at all the IRS statistics for the 2007 tax year in question, you may want to notice that the top 1% of income earners paid 40.42% ($450,926B) of all income taxes. The top 50% paid 97.11% (%1,083,243B) of all income taxes. This means that the bottom 50%, those with an annual AGI of $32,897 or less paid cumulatively 2.89% ($32,261B) of all income taxes. That kinda blows that old liberal mantra that the wealthy don't pay taxes, doesn't it.
According to IRS statistics, in 2007 the average tax rate for the top 50% of income earners was 14.03%, for the top 1% of income earners it was 22.45%. Now that is just income tax, not total payroll taxes lest you start getting your panties in a wad.
One thing that isn't clear in the data is how much negative tax payments, i.e. earned income tax credit, and other "entitlement" payments such as food stamps, welfare, etc were received by those in that bottom 50%, effectively a wealth transfer from the top 50% to the bottom 50%. There was $371.9 Billion in means tested entitlements which includes Medicaid, food stamps, family support assistance (AFDC), supplemental security income (SSI), child nutrition programs, refundable portions of earned income tax credits (EITC and HITC) and child tax credit, welfare contingency fund, child care entitlement to States, temporary assistance to needy families, foster care and adoption assistance, State children’s health insurance and veterans pensions. You can be pretty certain that all those "payments" went to the bottom 50%. (The Budget For Fiscal Year 2007)
There was $581.2 Billion in Social Security payments which would include payments to those above and below the 50% threshold so for simplicity, let's just say the bottom 50% got half, or $290.6 billion of Social Security payments.
After combining both categories together, we can extrapolate that there was a wealth transfer of about $662.5 billion to the bottom 50% who cumulatively paid in 2007 $32.261 billion in income taxes.
Now you said that "the poorer pay more like 20-30 percent taxes when you take into account social security, medicare and other capped taxes too." Actually, the Medicare tax rate is 1.45% and the Social Security part is 6.2%. By my rudimentary math skills that comes to 7.65%. If you assume that the bottom 50% paid an average of 2.89% in income taxes (IRS figures), that totals 10.54%, a far cry from your 20-30%, and that's before those pesky negative tax payments that brought the real rate for much of this group to zero, or less.
Now, I'll grant you that when it comes to payroll taxes, i.e. social security (I use that term advisedly) and Medicare, the lower income percentiles pay a greater portion of their income than the higher percentiles. That is a function of the tax code and Congress, not the income earners. But one thing that isn't clear in the Tax Analysis statement is whether their analysis takes into account only those payroll taxes paid by the income earner, or if they also include those paid by the employer, which effectively double the tax payroll tax paid.
I'll also have to say at this time that I would support a change in the law that would means test both social security and Medicare, provided that those who didn't receive the benefit were not required to make the contribution (sic).
The other thing that must be considered is the source of some of the analysis. Professors Emmanuel Saez and Thomas Piketty are economists at the University of California at Berkeley, an institution well known for it decidedly liberal bias.
Nevertheless, I was somewhat surprised to see the opening hypothesis of their 1998 study "Income Inequality In The United States" (pdf) make the statement, "...steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks (the Great Depression and WWII).
They go on to predict that "...the decline of progressive taxation observed since the early 1980s in the United States could very well spur a revival of high wealth concentration and top capital incomes during the next few decades."
The apparent despair of Messes. Saez and Piketty isn't limited to the "income elite." They also bemoan the increasing wealth disparity of the working class in "The Evolution of Top Incomes in the United States"(pdf).
"The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains...We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional reforms should be developed to counter it."
So it would seem that the authors would have issue with even working class individuals who aspire to escape the bounds of their entry level hourly incomes and seek higher incomes and personal wealth. That apparently doesn't fit into their paradigm of the Marxist dogma, "From each according to their ability, to each according to their need."
Now, the bottom line is, are you a victim of wealth envy. Of course "victim" is a misnomer. The term victim implies there wasn't a choice in the matter, but, wealth envy is a choice.
So is it your choice that that higher income earners should be penalized for their success? If so, where will you make the cutoff? Or will there be a cutoff? You just decide that everyone makes X amount, say $20K, a year.
The Soviet Union and other communist/socialist based economies used this methodology. Only those in power and position, or in the favor of those in power, were able to enjoy the wealth of the nation. The rest of the bourgeoisie lived a subsistence existence, waiting in bread lines, stores had minimum amounts of inventory, families living squeezed together in tiny apartments waiting on a list for years for the opportunity for a larger apartment, or a separate one for adult children.
And what happens when you take away the incentive for entrepreneurship, for individuals taking risk to chase their dreams and goals? What happens is, dreams die. Goals go unrealized, and with them jobs, income for those who would have been employed, innovation and economic growth.
You see, this is not a zero sum game where you can penalize an achiever on the one hand and not see a change in behavior or income or success on the other. There is a penalty. It may not be at 20% or 30% or 40% or even 50%, but at some point, the achiever says, why should I continue to work so hard if I'm not going to be compensated for it.
Think of it in your own life. If you were going to have the opportunity to double or triple or quadruple your income if you contributed another 30% of your time would you do it? Would you want the opportunity even if you decided not to? How about giving another 30% of your time if you could only increase your income by 10%? I dare say you'd laugh at them, if not in their face, behind their backs.
So what makes you think penalizing the entrepreneur for his time and effort and intellect would have no effect on what he is willing to do?
"We are all in the same boat on a stormy sea and
we owe each other a terrible loyalty." - G. K. Chesterson
Labels: income, IRS, progressive, taxes, wealth envy
