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.
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.”
American Community Survey
Annual Social and Economic Supplement
Income, Poverty, and Health Insurance Coverage in the United States: 2009
Page 7 (PDF 12)
INCOME IN THE UNITED STATES
- 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)
MEDIAN HOUSEHOLD INCOME
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.