As I promised on today’s show, this commentary includes graphics and links upon which I based this opinion. This is a slightly longer, more detailed version since I don’t have to worry about air time.
So you can do your own research and validate me … Or not. ;) Let me know what you think.
Thanks to Elizabeth, Scott and Greg for calling in and participating.
Mike
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You’ve been hearing a lot lately about the end of the Bush tax cuts. You’ve also been hearing lots of different opinions on what we should do about it.
Extend it for everyone? Let it expire for everyone? Extend it for the middle class but not for the rich?
And then we get into, What is the middle class? What qualifies as rich? Where are the cut-offs? Who decides? Why should the rich pay a higher percentage of their income in taxes than the middle class, or the poor?
Once we’ve thrashed that around for a while, we get to ask, Do tax cuts stimulate the economy? How much? Who gets them? Is it better for the economy to give big cuts or small ones? Are there better ways to do it? Does cutting taxes for the rich really provide an incentive for them to create jobs?
And on and on, blah, bl-blah, bl-blah.
At the end of the day, this boils down to only one question that matters: What taxing and spending policies most benefit America and the greatest number of Americans?
As you listen to this, it’s going to sound like I just want to beat up the rich with taxes, but there’s a punch line at the end that literally changes the equation.
Let’s start with some basics. And I’ll be providing links to my sources when I post this commentary on my website, ThinkwingRadio.com, so you can check them out yourself.
According to the U.S. Census, 2009 median income by state ranged from about $69,272 in Maryland to $36,646 in Mississippi. Average median for the U.S. was $49,777.
What qualifies as median income varies quite a lot depending on where you live in the United States. So based on the national Census figures, let’s call middle-income somewhere between $40k and $70k per year.
In a recently updated study, in the United States as of 2007, the top 1% of households owned 34.6% of all private wealth.
1% … 34.6% of all private wealth. In terms of financial wealth, the top 1% of households had an even greater share: 42.7%.
The next 19% had 50.5%. So, just 20% of the people owned 85% of all the nation’s wealth. These are a lot of numbers to digest on the radio, so I’ll repeat that: Just 20% of the American people owned 85% of all the wealth.
This left only 15% of the wealth for the bottom 80% of American workers. That same 80% owns only 7% of total financial wealth. Let me put this another way.
If you had a pizza that was divided up like this in front of five people, 4 of them would have to share about 1/2 of a slice. That’s how wealth is divided up in this country.
According to FactCheck.org and The Tax Policy Center, those reporting adjusted gross income of more than $250,000 are projected to make up about 2 percent of households in 2010. Adjusted gross is usually a lot less than actual earnings.
It is estimated that 2% will earn 24.1 percent of all income, and pay 43.6 percent of all personal federal income taxes.
Letting the current tax rates expire for those folks costs them nothing unless their adjusted gross income exceeds that $250,000 adjusted gross.
But you know what? While that’s all interesting, it’s actually a little besides the point. Here’s the point.
Rich people actually make more money when they pay a higher share of the tax burden. That seems counter-intuitive at first, but it makes sense when you think about it.
In a Slate.com article, Timothy Noah pulls together a lot of different sources of information into a very readable 40 page article that examines a lot of disparate data and reaches some very interesting conclusions. On Page 16 of the PDF version, there’s a particular chart based on work done by Larry M. Bartels at Princeton. I’m supplementing that chart with another which is more intuitively understood, which again will be on my website.
This data shows that under Democratic presidents, everyone makes more. Even the top 5% of earners whose marginal tax rates went up.
Reading the article, I don’t think that Noah risks suggestion as to why that is, but I think I will try.
There are lots of interesting and informative charts and graphs, but there is one that’s particularly interesting.
Under Republicans, tax rates tend to be less progressive. That’s to say that the rich pay a lower fraction of income as taxes, and that’s made up by higher taxes on people much further down the wealth chain. The result is that rich people have more money to slosh around (theoretically investing in new business and new jobs), but mostly put it into financial instruments, collectibles like art, and perhaps investments overseas.
Why? Because in spite of the Supply Side common wisdom, people in the lower 80% of earners just don’t have enough spending power for discretionary purchases. They hunker down. And that’s why Supply Side economics is a fundamentally flawed theory.
Rich people don’t invest money until there’s demand for whatever product or service they want to provide.
The 80% of cash-strapped Americans can’t create much new demand, so the rich bide their time and do other things with their money. The rich stay rich, buy don’t tend to get much richer because they have no customers. Most of them still save their money and invest it in economically non-productive assets like land, art, etc., perhaps even sending surplus assets overseas for international investments.
Under Democrats, everybody makes more money after taxes. The lower 80% of earners get a few more dollars in their checks every week, and they tend to spend it. The rich pay a few more dollars in taxes from their income, and are annoyed, but not much hurt.
But here’s the magic! Because rich people take more of the tax bullet for the average Joe, Joe has more money to spend. Joe buys gifts for the wife and kids. Maybe Joe can now qualify for a mortgage on a new small house or a modest car loan. Joe’s not feeling rich, but he feels like he’s got a little room to breathe, and so much stuff is wearing out, or the kids need new clothes and stuff. Joe is grateful to have the money to buy those things which will make his family’s life better. It’s called ‘pent-up demand’, and Joe’s got plenty of that.
So Joe, and his neighbor and his trash collector and his sales clerk all have a few more bucks every week, and they all have pent-up demand.
Rich people notice this. Their money has been pretty much parked in financial instruments with low-but-safe yields. Their stocks have been languishing, though, because the companies they own haven’t had any customers… Until after the middle class tax cut.
Suddenly, things are picking up. Store stocks are running a bit slow, so they place bigger orders which put’s more folks back to work, and they have their pent-up demand, and now the cycle has been flipped and is once again heading uphill.
What we see here is the fundamental failure of the Supply Side Model of economics. No entrepreneur will invest in a business until he sees potential demand. Customers with extra money in their pockets ARE that demand.
This might be called the “Rising Tides Lifts All Boats” side of economics.
Under Democratic leadership, taxation becomes more progressive, which is a nicer way of saying that the rich bite the bullet and take a larger share of the tax burden in the interests of the greater good.
On its face, on an abstract philosophical level, that seems unfair. But IS it unfair if the rich end up also making more money at higher tax rates?
Let me try to summarize this for you, but remember: I’m going to be posting all this online with my links and side notes. That way, if you want to dig deeper and reach your own conclusions, you can.
In the chart I have in front of me, over a span from 1948-2005, a span of 57 years, every income group did better under Democratic presidents, including the rich.
Under Democratic presidents, the highest 5% of earners made an extra 0.2%/yr.
- The Top 20% made an extra 1% per year.
- The top 40% made 1.4%
- The Bottom 40% did better by 1.7%
- The bottom 20% did better by a whopping 2.2%/year
And the reason that the rich did better by sharing more of the tax burden? Because their investments were worth more. Their businesses did better, so their stock prices went up. With increased business activity, their savings and financial instruments became worth more and their interest yields grew.
In this sense, taxes on the rich — whatever your views about the justice of a progressive tax system — turns out to be a good investment for the country AND the rich.
In 1953, GM President Charles Wilson was testifying before Congress for the position of Secretary of Defense. When asked a question about potential conflicts of interest, Wilson’s actual but frequently misquoted response was “… for years I thought what was good for the country was good for General Motors and vice versa”.
This is how we all have to see it, especially those with wealth who are understandably concerned about their taxes. “What’s good for America is good for the Rich, and vice versa.”
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[NOTE: Click on graph image for larger version. Click here for Rachel Maddow’s video explanation about it. – MH]
State Median Income http://www.census.gov/hhes/www/income/data/statemedian/index.html
American Community Survey
- State Median Family Income by Family Size [XLS – 49k]
- State Median Family Income by Numbers of Earners In Family [XLS – 41k]
Annual Social and Economic Supplement
- Income of Households by State Using 2-Year-Average Medians [XLS – 37k]
- Income of Households by State Using 3-Year-Average Medians [XLS – 27k]
- Income of Households by State Ranked from Highest to Lowest Using 3-Year Average [XLS – 27k]
Income, Poverty, and Health Insurance Coverage in the United States: 2009
Page 7 (PDF 12)
INCOME IN THE UNITED STATES
Highlights
- The real median household income in 2009 was $49,777, not statistically different from the 2008 median (Table 1 and Figure 1).
- Real median income declined by 1.8 percent for family households and increased 1.6 percent for nonfamily households between 2008 and 2009 (Table 1).
Household Income for States: 2008 and 2009 (Total of 4 pages, PDF)
http://www.census.gov/prod/2010pubs/acsbr09-2.pdf
American Community Surveys (ACS)
Real median household income in the United States fell between the 2008 and 2009 ACS— decreasing by 2.9 percent from $51,726 to $50,221. State estimates in the 2009 ACS ranged from $69,272 in Maryland to $36,646 in Mississippi.4 The median household incomes were lower than the U.S. median in 29 states and higher in 20 states and the District of Columbia. Wisconsin had a median household income of $49,993, which was not significantly different from the U.S. median.
Thinkwing Radio with Mike Honig 
Saying that investing in Land and Art is economically unproductive is a complete lunacy. Saying that when the rich Save is also a complete lunacy.
Here is what happens when a rich person who paid $150,000 less in taxes decides to spend the money on “economically unproductive” (as you put it) things like art. Joe the millionaire takes the money he did not pay to the government and gives it to the Art Gallery (providing jobs for employees of the gallery and the artists). The gallery takes the money and invest in its business. The Artists take the money and buy canvases, paint and brushes, providing more jobs in the art supply store.
Now let’s examine what happens when that same Joe the millionaire takes the 150K and gives it to the government. The government is not in the business of producing. It is in the business of spending. There are literally hundreds of thousands of government agencies that exist with the sole purpose of spending the taxpayer’s money. So the government gives it to one of these agencies. Whether it is the agency that is supposed to monitor the migration of Canadian geese in the Western Texas during the months of January and February or the commission to assist the Transportation workers in Oklahoma with a speech impairment, these agencies do not produce anything or don’t create jobs.
Let’s assume for a second that the $150K was given to the failing school in Philadelphia to make the school more competitive. The superintendent of the school realizes that no matter how bad of a job he is doing – he is going to get a hand-out from the government. In fact, he realizes that the worse he is doing, the bigger hand-out he is going to get. Hence he has an incentive to perform really, really poorly.
The other, better performing schools that actually try to provide value for the money they charge for the education also see that the poor performance earns the financial reward from the government – hence they learn their lesson as well. They either close the doors, because they can’t compete financially with the government-sponsored institution or they start to perform poorly to compete for the government handout.
This situation actually kills jobs and destroys the economy.
It has been proven over and over that the rich in any society are the productive class that is the engine for prosperity. They are also a very mobile class. You tax them enough and they just leave and go to live in Hong Kong. In fact – it has been happening over the decades.
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Samy, thanks for taking time to listen to the show and/or visit the website, and thanks for sharing your views.
“Lunacy” is a pretty strong and even disrespectful way to start a discussion, don’t you think? It kind of delegitimizes any possible response and makes your own contention seem unassailable.
But to the point…
The point is, What creates economic activity and gives you the biggest bang for your economic buck? Saving produces a little economic activity for the people in the bank. Spending thousands or millions of dollars on art or land make some sales people and paper pushers a few bucks in commissions or salaries.
But just selling or trading stuff, while an essential part of a functioning economy, doesn’t actually produce anything in a tangible, physical sense.
Building a bridge creates construction jobs at the outset. It provides maintenance jobs in the future. It makes commerce more efficient by saving time and fuel for shippers and commuters. It’s a dollar that, in a way, keeps turning over and over in the economy creating more jobs and more efficiencies for the life of the bridge.
A painting doesn’t do that.
Real estate, often a good investment, also doesn’t produce any economic activity. It just sits there paying real estate taxes and maybe employing some folks to maintain the land by controlling plant growth. The money that changed hands for the property didn’t make anything of use.
Interestingly, your statement, ” Joe the millionaire takes the 150K and gives it to the government. The government is not in the business of producing. It is in the business of spending,” makes the point while entirely missing it. The government is in the business of spending, which creates actual long-term jobs. It also often results in long-term infrastructure improvements.
Employers today often complain that their employees are poorly educated. We can discuss the quality of education today and what can be done to improve it, but you surely can’t deny the need for teachers. That $150,000 might pay 3-4 teachers for a year, each of whom will instruct 20-30 kids. Those kids can be viewed as infrastructure development; human infrastructure.
That $150,000 might pay 4 trash collectors. Trash collection is essential to public health. A healthy public is more productive that one which is unwell.
Yes, you’re right. The government is in the business of spending money, but it doesn’t go into a black hole. It provides infrastructure for better living and more efficient business. It creates jobs that provide essential services to the country, like police, firemen and military people and equipment.
Spending money IS economic activity! The government employs people and contractors to build things. The government seeks out vendors to buy things. The government collects money to help you if your house is hit by a flood, tornado or earthquake.
Money kept in financial instruments by the rich do none of those things. From the perspective of economic activity, it’s actually a drag on the economy.
You say that, ” It has been proven over and over that the rich in any society are the productive class that is the engine for prosperity. They are also a very mobile class. You tax them enough and they just leave and go to live in Hong Kong. In fact – it has been happening over the decades.”
I have yet to see that proof, though I hear a lot about it.
On the other hand, I’ve seen lots of data on my position. If you’ve seen data on yours — and I’m not just talking about someone repeating your position or providing theoretical data (aka, the Laffer Curve), but actual historical data. I’d be happy to look at it, if there is any.
Nor do conservatives provide any data on alternative modes of economic growth other than tax cuts. Frankly, it seems more a philosophical position rather than one grounded in facts, history and data.
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>“Lunacy” is a pretty strong and even disrespectful way to start a discussion, don’t you think?
Lunacy is a pretty accurate way to describe what I am reading. For example saying that building a bridge produces more economic activity than painting is something completely pulled out of the air. Open market decides where the $150K that a free-willed person spent will end up. When money is spent on a painting it goes right back into the economy. It can end up building a bridge somewhere, or not. But it will end up where it is needed and where it makes sense. Unless of course the government sticks its hand in it…When the government spends the money it distorts the market equilibrium and creates an unsustainable bubble that leads to great recessions, which cannot correct themselves.
>Yes, you’re right. The government is in the business of spending money, but it >doesn’t go into a black hole.
LOL. uhmmm…. really? Is this why the trillion dollar stimulus produced virtually no new jobs and the unemployment rate stayed the same as it was BEFORE the stimulus? Oh wait… it saved ten trillion jobs, right? :) Or was it hundred gazillion jobs? And now we are printing money to buy our own debt, because the rest of the world is fed up and does not want our worthless junk anymore… I would laugh more if it hadn’t been so sad…
>That $150,000 might pay 4 trash collectors.
No. If the government controls who collects my trash, $150K will pay for 2 trash collectors. $75K per year for a guy that never finished high school. $75 K per year – more than a newly graduated engineer. Plus that guy knows he will never lose his job and he works accordingly. He picks up about half of the trash – the other ends up on the curb. And being a government employee – he knows he really does not have to try harder.
$150K would probably pay for 5 trash collectors if the government did not manage it. 3 more people would have been employed – some new immigrants or students trying to work their way through college. Someone with more appreciation for the job and the job would have been done better.
>I have yet to see that proof, though I hear a lot about it.
There is plenty of proof. People moved to Hong Kong because there is opportunity. Factories, Export/Import companies, Financiers. I personally know people that have done this. This is why Hong Kong became so prosperous. Government did not meddle in free markets. Hong Kong’s prosperity is all the imperical proof that you need to see how it works out (not sure what else you are looking for). In US, rich people have not felt a need to leave in droves yet, because this country has provided more or less acceptable business environment. The current administration tried to start a class war, and thankfully it was put in check before it was able to take it too far.
>Savings produces little economic activity for the people in the bank.
I am trying to hold myself back from using words like Lunacy, but it’s pretty hard. Saying that Savings produces no economic activity is a complete nonsense. Savings end up in a bank that has to employ the money and make more than the interest rate that it will own at the end of the term. What the bank in a free economy does is it lends the money out. It invests. It lends to small businesses, It lends to individuals for purchases of goods and services. Of course this is what the banks do in a free economy. In the “new deal” kind of economy, where the banks are in the business of “encouraging social fairness” or whatever you want to call it, With Freddie an Fannae making ridiculous loans that everyone knows will never get paid back and where the losses are nationalized, but profits are privatized, well…. We all know what happens…
Economic activiy is produced by the private sector. Government spending, while producing economic activity results in a situation like we are experiencing today.
Have a nice day.
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I was going to let you have the last word on this, but I have to make one final comment.
I did a lot of research before saying the things I said, partly because I like to be accurate and partly because I knew the remarks would be controversial. For that reason, I did something I don’t usually do: I included links to most of the authoritative documentation I used.
Samy, do you have anything comparably authoritative that you would like to post?
Mike
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