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
Wednesday, November 12, 2008
How progressive taxes work...
Came across a paraphrase of the following on another networking site I regularly visit. Snope's can't verify attribution so I'll leave that part off.
Still, the analogy is sound and clearly explains the fallacy of a progressive tax system and especially one geared towards wealth envy, such as ours.
How Taxes Work . . .
This is a VERY simple way to understand the tax laws. Read on — it does make you think!!
Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men — the poorest — would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18, and the tenth man — the richest — would pay $59.
That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve (in tax language a tax cut).
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten only cost $80.00.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six — the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"
The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat for free.
But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man who pointed to the tenth. "But he got $7!"
"Yeah, that's right," exclaimed the fifth man, "I only saved a dollar, too . . . It's unfair that he got seven times more than me!".
"That's true!" shouted the seventh man, "why should he get $7 back when I got only $2? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison, "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up. The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!
And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.
Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!
Sadly, in America today, according to a recent Gallup poll 46% of those polled would prefer to be the first 4 or 5 guys. They approve taking from the others, only they don't want it done voluntarily, they want it under the threat of government coercion.
That says much about the state of their self motivation and one might even say moral depravity. What happens when government gets into the business of wealth redistribution? Well, I'm talking more than we currently have and more like has been proposed by the incoming powers of our government, both legislative and executive branches.
In the mid '90's I was in Hungary, a nation that lived under Communism. In 1989 she came out from under that heavy handed rule and while the Budapest was thriving, outside the city the people still labored in a state of despair.
Old world horse carts still traveled the roads as people moved themselves and the fruits of their backbreaking labor in their gardens and fields. Once the socialist economic principles of Communism took hold, breaking their grasp on those weaker, poorer victims of it's failed policies was near impossible.
This is what some in power want for our nation. I have no doubt they don't wish the wearying daily struggle, but we have already seen the results of unintended consequences of well intended government intervention gone wrong.
The Community Reinvestment Act of 1977, at the heart of our current financial crisis. I've written much about that. The 2005 Energy Bill, expanded in 2007, mandating ethanol production. That short-sighted, well intended legislation resulted in dramatically higher grain prices and ultimately grocery prices, with little to show in energy production. There are currently calls to freeze its mandates at the current levels.
Social Security, a well intended product of the Roosevelt era, has had progressively steeper demands placed on it, disability benefits, survivors benefits, constantly increasing the meager monthly payments. All the while the population of those drawing SS checks grows as our population lives longer and the pool of those worker paying in continues to decrease as the birth rate declines.
I have two nephews, a niece, two step sons and two grandchildren who will be footing the bill for my Social Security payments, assuming it is still in force 12 years from now. Currently the estimated benefit for myself and my wife is $2489 in today's dollars. In 2020, at the current rate of growth, its estimated that for every recipient there will be 2.4 workers, and the ratio gets smaller every year. (More info)
That means, on average, out of each of their monthly paychecks, about $520 will be taken off the top to pay the social security for me, my wife and every other recipient. That, my friends, is wealth redistribution.
But for those currently coming into power in Washington, its a non-issue. The wealth redistribution they are pushing takes this much further and in the process the Ponzi scheme known as Social Security, Medicare, National Healthcare, Welfare, Child Credit ad nausem will end up breaking the back of the American economy.
Good intentions? Certainly, though some more skeptical will argue its merely buying the vote of the lower economic classes. But good intentions do not make good policy.
We've already seen in microcosm the results of human nature in the financial bailout. Companies are repositioning themselves to become eligible when they weren't before. Companies not related to the financial crisis are demanding a bailout for their sectors. Citizens are concocting schemes, dreaming up ways they think they should get a piece of this action.
What everyone forgets is that it isn't government who foots the bill. Government doesn't create wealth, it only takes it. Government doesn't produce a salable product. The current model seems to be redistribution.
According to the Tax Foundation analysis of 2006 tax data, if you earned $153,542 you were in the top 5% of income earners and paid 60% if income taxes. If you earned a modest $64,702 you were in the top 25% of income earners and one of the wealthy. You and your group paid 86.27% of all income taxes.
What does this tell us? For starters, the idea that the wealthy don't pay income taxes is a myth. Perpetuated by a political class with an agenda of riding wealth envy to power. Secondly, you could have confiscated the total incomes of the top 5%, those making %153,542 in 2006 ($2.43 trillion), and the total going to the government would come close to to paying the $2.7 trillion budget for that year, but only once.
The only answer to this is to reduce spending. In 2006 the federal government spent $248 billion just on interest on the national debt, that is more than twice the $117 billion spent on the Iraq war that year and $22 billion more than the federal deficit that year.
Confiscating wealth, nor redistribution of wealth, is the answer. A fair review of the data is convincing. The only answer for the fiscal dilemma our government is in, less government.
The only problem with this is the current and the incoming leadership on both sides of the aisle seem committed to more government, more intrusion into the private sector, more spending, more and increased entitlements, more deficits, and a higher national debt.
I've oft repeated this quote from Alexis de Tocqueville, "The American Republic will endure, until politicians realize they can bribe the people with their own money."
Our legislators discovered this long ago, the people are swallowing this hook into their collective gut and it will eventually rip us all inside out.
I want more for my nephews, niece, step sons and grandchildren. They deserve more, yet sadly, I'm afraid their generation may have fallen victim to the elixir of wealth envy and may well be bringing to power those who will orchestrate their own fiscal demise.
"We are all in the same boat on a stormy sea and
we owe each other a terrible loyalty." - G. K. Chesterson
Labels: federal budget deficit, national debt, politics, Social Security, socialism, taxes, wealth envy