It’s April and people have taxes on their minds — not because they have to pay their Bush-era taxes for the last time but because they fear what’s to come. With the two-year middle-class tax cut in the books and a rather sizeable budget in negotiations now, it is now dawning on America’s wealthy class that the times are a changin’ and they’ll soon be paying much more in taxes. With this realization, the desperation chorus of “it’s not fair” has again begun to emanate from the pages of The Wall Street Journal and from Americans for Tax Reform, and unfortunately, this strategy of complaining has paid off in the past. According to a Gallup Poll, 50 percent of Americans are opposed to a seriously progressive income tax. Even some Democrats have started to worry about the electoral ramifications and have joined Republicans in suggesting a massive estate tax cut to benefit the super-rich. Should voters buy it? No, and here’s why.
This quotation from the editorial page of The Wall Street Journal pretty much sums up the libertarian argument:
“The top 1 percent of taxpayers — those who earn above $388,806 — paid 40 percent of all income taxes in 2006, the highest share in at least 40 years. The top 10 percent in income — those earning more than $108,904 — paid 71 percent. Barack Obama says he’s going to cut taxes for those at the bottom, but that’s also going to be a challenge because Americans with an income below the median paid a record-low 2.9 percent of all income taxes, while the top 50 percent paid 97.1 percent. In other words, the tax code is already steeply progressive.”
Looks pretty unfair, right? Wrong. First, according to a report issued by the Congressional Budget Office this month, the average after-tax income of the top 1 percent (1.1 million households) of American households was $1,200,300 in 2006. Compare that to the lowest quintile of households (23.8 million households): an average after-tax income of $16,500. Think about that for a second and tell me it’s fair for the lowest quintile. Looking at the data another way, the top 1 percent currently loses about 2.5 percent of their income after they pays taxes — hardly a real redistribution of wealth.
Second, and more importantly, let’s take a closer look at just what the numbers from The Wall Street Journal editorial mean. The article is comparing “income share” with “tax share.” In doing so, the article is making a very common but very simple-minded mistake which will inevitably skew the numbers.
The problem is that this is a very distorted portrait of well-being in our country. Any scholar would tell you that once you get above a certain threshold, quite frankly, your income hardly matters — what really matters is your net worth (any assets you have minus any debts you have). Scholarly studies of wealth distribution show income and wealth are actually not even correlated (that is, you can make hardly any income but still have tremendous spending power and quality of life from your inherited or “earned” assets, which is often the case with America’s rich) and that the distribution of net worth is far more static than income (that is to say that it is almost impossible to raise your net worth even when you acquire higher income through “working harder”). Because of who they are, who they were born to and other completely uncontrollable circumstances, many of these people probably don’t use a dime of their salary — if they even have to work at all.
There are a couple of points that I want to make. First, we’d all be a lot better off in our analysis of our current situation if we made use of good data and carefully conceptualized analysis of the data, the kind you simply cannot get from the The Wall Street Journal or even The New York Times and certainly not from pundits. Second, we live in a country where quality of life is not determined by how hard you work. It is such a tempting thing to fall into the trap of those who would argue the super-rich are not even earning all that much, pointing to the low-end income of $388,000 and the fairly high taxation of that income.
The truth, however, is that the vast majority of wealth in this nation is hidden from our eyes and purposely disguised by clever advocates in the media. Not only do we need the progressive income tax, but we need it to be more progressive than ever in this time of economic worries. The fact is that capitalism won’t work with this poor distribution of wealth.
Dan Walters ([email protected]) is a graduate student in political science.
