tax rates

Let’s Make a Deal

Let's make a deal

The last deal negates all of the concessions made in the other deals — for those of us who will choose to live in Free States.

More about Taxing the Rich

This is a sequel to “Taxing the Rich,” which reproduces my correspondence with a correspondent who laments the unequal “distribution” of income and wealth. This installment is heavily edited, for the sake of brevity. And, for the sake of clarity, I have reorganized our exchange so that each of his points (in italics) is followed immediately by my response (in bold type).

My correspondent opens by referring to a link that I sent him about the distribution of wealth in the United States:

Granted 25% owning 87%  is a lot better than 2% owning 90% like in S. America, but satisfactory? Warren Buffett doesn’t think so. Nor George Soros. Nor do I. So certainly not revolution, but reformation seems in order.

It may be that George Soros and Warren Buffet don’t like the way things are, but their own wealth merely proves that they’re good at making money, not at setting economic policy for the country. Experts who venture outside their own fields of expertise remind me of the doctors who used to endorse Camel cigarettes.

I’m not sure why it’s “bad” that one-fourth of the people in this country own a relatively large fraction of the wealth in this country. The composition of the one-fourth has changed greatly over time, and will continue to change greatly. There’s no entrenched aristocracy that somehow controls the country or determines who gets how much income, except to the extent that money buys a certain amount of political influence. But you will have noticed that the left has been far more influential than the right for a long time, and that a lot of the very rich (perhaps most of them) tend to favor government welfare programs, highly progressive taxes, and other things associated with your party.

In any event, big fortunes are (usually) made by people who did something for their money — invented computer software, picked good businesses in which to invest — and so on. They don’t steal their money from anyone. (The same is true of John D. Rockefeller and the other so-called robber barons of the late 1800s and early 1900s, popular mythology to the contrary.) What they really do is make a lot of money from their investments while — and this is important — also creating better jobs and higher incomes for a lot of Americans. It’s a win-win thing. And it’s been going on for more than 200 years.

So, I can’t understand why it’s thought of as “bad” that some people earn large fortunes in the process of contributing to the growth of the country’s economy. The “concentration” of wealth in a fraction of the populace is just something that happens — it’s not part of a plot. And it means that the wealthy are doing something good, for their own benefit and the benefit of a lot of other people, not that they’ve stolen from others or are somehow oppressing them.

I do understand why this theme is popular now, in a time of economic stress and concerted efforts to reduce the size of government. But, as I’ve said before, I don’t think those efforts can be pinned on “the rich,” though some of them are sympathetic and supportive — just as some of them, like Soros, are unsympathetic and opposed. There are millions of taxpayers who are also feeling the pinch, and they are fed up with the inexorable rise of government spending. The push to cut the size and cost of government is about as “grass roots” as anything I’ve seen in my lifetime.

I do think experts can develop more than one field, especially when they can afford to, and weren’t the doctors endorsing camels paid to do so? Probably not your best example.

And it may not be so bad that 25% own 87%, may be the inevitable Darwinian sort out as you suggest, and it’s not ownership I find so objectionable if I felt they paid their fair share.

I agree that it’s possible for someone to be expert in more than one field, but I haven’t yet read any utterances by Buffet or Soros on economic policy that go beyond pushing their political views. Perhaps I’m not paying enough attention to them, but I doubt that they have anything to offer that I don’t get from reading a variety of “real” economists. It’s probably true that the doctors were paid for endorsing Camels, but the analogy holds true: doctors aren’t necessarily experts in all aspects of medicine. I wouldn’t ask a thoracic surgeon for advice about how to deal with allergies, for example. But that’s beside the main point, which is the question of economic policy and whether there’s something “wrong” with a skewed distribution of income and wealth, and whether high-income people are paying a “fair share” of taxes” (given that they’re already paying the lion’s share).  Bear with me to the end, because you’ll find out that my objective is to defend all taxpayers, and to promote growth that benefits all Americans. My defense of high rollers is merely incidental.

My thoughts about “fair share” and “Darwinism” are given below.

Is it not true that real wages/earnings of middle class or those less than or = $250,000/yr have shrunk or remained stagnant over last 30 years while income of top 2-3% (say, over $1,000,000/yr?) has grown exponentially? I’ve certainly seen studies re CEO pay.

The income of households in all quintiles of the income distribution has been rising, with some bumps along the way. This graph covers 1967-2003: http://en.wikipedia.org/wiki/File:United_States_Income_Distribution_1967-2003.svg. There’s been no significant change since 2003, as indicated by this Excel spreadsheet from the Census Bureau: http://www.census.gov/compendia/statab/2011/tables/11s0689.xls.
Also, it’s important to keep in mind that people aren’t “stuck” in a particular quintile; there’s a general tendency to move up as one ages, and then to drop down a bit after retiring. For more, see this: http://mjperry.blogspot.com/2008/02/rich-getting-richer-and-poor-are.html.

My thoughts about CEO compensation are given below.

Isn’t the Tea Party focus on cutting government budgets just months after another unneeded/unwarranted huge tax break for the wealthiest a bit disingenuous? There will always be tug between those of us who think wealthy should pay more because they can afford to as either a Judeo/Christian responsibility or just self protection from violence, but…

Although there’s nothing new about organized efforts to cut government spending (it was a main theme of the GOP from the 1920s to the early 1950s), the current Tea Party movement began in February 2009. It had been gaining ground as an anti-spending movement well before the extension of the Bush tax cuts late in 2010.

Anyway, I don’t think of the two things — spending cuts and tax cuts — as contradictory. They are really complementary. If you see them as contradictory because tax cuts can exacerbate deficits, that may be because you don’t want to see the spending cuts. (I don’t know that for sure, it’s just a guess.) I, on the other hand, see tax cuts as putting more pressure on the folks in Washington to make some spending cuts. The serious problem with the looming deficits isn’t so much the mounting pile of government debt and high interest payments (though those are problems). The serious problem is that government spending absorbs resources that could be put to work building the economy through the operation of the market mechanism — which is how this country’s economic progress has been achieved. (Economic “Darwinism” is a matter of offering things that people value in their daily lives and business operations. If you’re good at it, you’ll prosper; if you’re not, you won’t. I can’t think of a fairer system; any alternative rewards people for doing the wrong things or doing them badly. In that respect, corporate welfare is no better than the other kind.)

As you know from our earlier exchange, high-income people already are paying the lion’s share of taxes in this country. (And, surprisingly, more than their peers in the other industrialized nations: http://www.taxfoundation.org/blog/show/27134.html.) I don’t think it has much (or anything) to do with Judeo-Christian ethics or protecting themselves from violence. It’s the law, and governments have a lot of power when it comes to enforcing the law. Some would gladly pay more, which they can do by sending a donation to the U.S. Treasury. But it isn’t their place to speak for all high-income people, which is gross presumption. A mega-millionaire or billionaire who invests his money in new technologies is doing more for working people than a billionaire who sends the same amount of money to D.C.

The U.S. was prosperous resulting in surplus under Clinton, so we couldn’t go back to the higher tax rates of the Clinton years?

The prosperity under Clinton was a continuation of the growth that began with Reagan’s tax cuts and the success of the Fed’s anti-inflationary efforts in the early 1980s. There was a minor recession in 1990-91, but growth had resumed before Clinton took office. The surpluses that he eventually realized had a lot to do with the fact the his spending proclivities were reined in by the GOP-controlled Congress. So, no, I don’t see any magic in the higher tax rates of the Clinton years. The real magic is a combination of reduced government spending and more incentives for people to do things that create wealth for themselves and jobs and higher incomes for others — that is, lower tax rates across the board.

I know that you’d call this “trickle down economics,” but it’s not really. I’m not just trying to defend high-income earners from ill-advised taxation, I’m trying to defend everyone from it. Economic growth requires not only big investments by high rollers but also small investments by “little people.” Why? Because (a) most new jobs are created in smaller businesses (http://www.sba.gov/advocacy/847; http://www.sba.gov/advocacy/7495/8424), and (b) from acorns do mighty oaks grow (think Ford, Microsoft, and the like). And growth benefits working people generally, and everyone who has a spare dollar to invest in a mutual fund (stocks for the risk-takers, bonds for the risk-averse).

Mega millionaires & billionaires continue to make off with a disproportionate share have pitted us against each other.

I’m not sure what you mean when you refer to “disproportionate share.” Let’s take highly paid athletes. The top-100 single-season salaries in baseball (through 2010) range from A-Rod’s $33 million in 2009 to Richie Sexson’s $16 million in 2008. The average major-league player’s salary in 2010 was $3.3 million (http://baseball.about.com/od/newsrumors/a/2010baseballteampayrolls.htm). Are those multi-millionaires making off with a “disproportionate share,” relative to (say) a member of the grounds crew? Or are they simply being paid a requisite amount for their expected contributions to their teams’ bottom lines?

Is the case of CEOs vs. floor sweepers any different? If so, why? In any event, high CEO compensation is mainly a symbolic thing that’s a handy target for griping. Top CEOs don’t make any more than baseball players (http://www.theglobeopinion.com/section/business/executive-compensation), and they’re on the line for the performance of companies that are vastly larger than baseball clubs.

Related posts:
The Causes of Economic Growth
A Short Course in Economics
Addendum to a Short Course in Economics
Enough of “Social Welfare”
The Case of the Purblind Economist
Economic Growth since WWII
The Price of Government
Does the Minimum Wage Increase Unemployment?
The Price of Government Redux
The Mega-Depression
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
Society and the State
The “Forthcoming Financial Collapse”
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Deficit Commission’s Deficit of Understanding
Undermining the Free Society
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
Build It and They Will Pay
Government vs. Community
The Stagnation Thesis
Government Failure: An Example

Taxing the Rich

UPDATED 03/20/11

The quotation below is the text of a private message I sent to a friend who laments the unequal “distribution” of income and wealth. (I use sneer quotes around “distribution” because the use of the word suggests that there is a pie to be divided; a fallacy that I address later.) The friend likens the United States to corrupt Latin American regimes of yore, where wealth and political power were concentrated in the hands of land owners. He then attributes this mythical situation to Reagan’s “trickle down economics.” Emotion trumps facts, as usual on the left.

I’m sending this for your private consideration, in view of your latest post. I’m not sure what prompted that post, or what it’s based on, but there are a lot of misconceptions about income distribution and tax burdens in the United States. First, income rises across the board; it isn’t just “the rich” who get richer (http://mjperry.blogspot.com/2008/02/rich-getting-richer-and-poor-are.html).Second, unlike Latin America, there is a lot of mobility across income groups; “the rich” are not the same set of people from year to year and decade to decade (http://mjperry.blogspot.com/2007/11/despite-mythology-income-mobility-is.html). Third, most of “the rich” in the U.S. got that way by earning their incomes (http://mjperry.blogspot.com/2008/04/inheritance-is-not-main-driver-of.html), unlike Latin American aristocrats. Fourth, “the rich” already pay the lion’s share of income taxes (http://www.taxfoundation.org/news/show/250.html#Data).

Although most people in the United States deserve what they earn, because they’re not stealing it from other people, I agree that there are a lot of high rollers who earn more than they would if they weren’t granted special privileges by government. The giveaways to the financial industry are a notorious example. But bankers are only the tip of the iceberg, which extends down through many income levels. Not far from the top are members of Congress, who have one of the best self-created pension rackets going. (A cushy, guaranteed, taxpayer-funded pension amounts to a substantial, untaxed bonus.) Further down the ladder, but still worthy of note, are government employees — whether unionized or not — whose low quit-rates attest to the fact that their compensation (which usually includes generous pension benefits) is above what they could earn in the private sector. It is only in the past few years that public-sector employees have begun the feel the effects of tight budgets. Which is to say that they’ve had a free ride for a long time, at taxpayers’ expense.

Bottom line: A high income isn’t necessarily a sign of political corruption or special privileges. Nor is it clear that high-income earners are paying less than their “share.” A good case can be made that they’re paying too much, because it’s high-income earners whose investments fund growth-producing, job-creating technology and business start-ups. What bothers me is people — at all income levels — who are given special privileges by government, which the rest of us pay for in taxes and higher prices for certain goods and services.

UPDATE:

My friend replies:

Thanks for offering your views, but I can’t see how 2% essentially owning 90% is good for the country, nor do I think it will stand.

My response:

I don’t know what you mean by 2% “owning 90%” of the country. It’s true that wealth is concentrated, but that has been true since the birth of the Republic, and it’s to be expected because wealth is strongly (but not perfectly) correlated with income. And except where government grants the kinds of privileges I mentioned earlier, one’s income depends on talent and effort. Further, as I pointed out earlier, income disparities aren’t permanent; there’s plenty of mobility in the U.S., up and down the ladder.

The U.S. isn’t a feudal aristocracy, ripe for revolution because of actual oppression. Some people make it, and some don’t; those who make it (excepting the beneficiaries of government privileges) are able to do so because, in this country, they’re free to reap the fruits of their effort and ability.

Moreover, there’s no fixed “pie” of wealth that’s jealously guarded by a ruling clique. There’s a (usually) growing pie, to which each able person adds as he or she is willing and able. And it belongs to those who produce it — not to “the country.”

If you’re interested in actual facts (as opposed to myths and slogans), you should read the links I sent previously (if you haven’t already) and also this one: http://en.wikipedia.org/wiki/Wealth_in_the_United_States.

A Mere Coincidence?

UPDATED 09/10/10

On this morning after Barack Obama indulged in the politics of envy and class warfare by rejecting the continuation of the “Bush tax cuts” for high-income individuals, his unpopularity rating fell to a new low: -24.

By my estimate, rejection of Obama by conservative-libertarian-independent voters gives him a baseline unpopularity rating of -10. Ratings lower than that require the disapproval of Obama by disaffected Democrats who think he isn’t “doing enough.”

Well, if this morning’s poll results are any indication, there are some well-to-do and aspiring-to-do-well Democrats out there who think Obama would be “doing too much” if he succeeds in raising their marginal tax rates.

UPDATE: Despite today’s slight improvement, from -24 to -21, Obama’s unpopularity rating has hit new lows: 28-day average = -17.4; 7-day average = -20.7.