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October 27, 2008

Spreading the wealth-6: Understanding the opposition

Recently, Joe Biden said it would be patriotic of rich Americans to pay more taxes and Sarah Palin chided him for it, saying that no one should pay more taxes and that everyone should want to pay less. This is the mantra of the right-wing ideologues. While I disagree with Biden's choice of the word 'patriotic' (a word that has long since ceased to have any operational meaning but instead is just used as a political weapon), I cannot understand the logic of people who think that paying less taxes is always better. Even the ever-conventional New York Times columnist Tom Friedman took issue with Palin on this fetishization of lower taxes for everybody. (Thanks to Norm for the link.)

Recall that what is being proposed is to make the income tax structure more progressive by raising the rates on the highest slabs of income and reducing it for the lower tax slabs. This seems so eminently reasonable, even downright common sense, that we should try to understand the sources of the opposition to it.

One group consists of rich and greedy and callous people. Such people simply do not care about the poor. They have made (or inherited) a lot of money and it gives them a weird sense of entitlement, that this somehow makes them superior to those who have less. They seem to take pleasure in ostentation. Such people enjoy being much richer than others and think that creating a more a more progressive tax scale is somehow unfair to them.

There are also those ideologues that think that the best system is one in which there is no government at all and that all taxation should be abolished and a pure unadulterated free market should reign supreme. Of course these people are nuts. Such a system has never existed except perhaps in small isolated communities back in hunter-gatherer times. Modern societies are far too large and complex to function without significant government involvement and the only meaningful debate is about the proper balance between the private sector and government.

In fact it is the presence of government that has enabled people to be highly productive by specializing in one or two areas of activity and excelling at it, rather than having to take care of all their needs themselves.

Then there are others, who while not rich themselves, subscribe to the economic theory that says that having a few people make enormous amounts of money is good for all of us because this gives them the incentive to work, hard create new inventions, make new discoveries, and use the wealth generated by the fruits of their labors to invest in more businesses that will create more jobs and so we all benefit in the long run. This is the theory of trickle-down economics.

But does this happen? Do people who make enormous amounts of money use the excess after meeting their living needs to invest in new businesses that create well paying jobs? Or do they largely use it for ostentatious living that results in the creation of mainly low-paying service sector jobs (waiters, valet-parkers, maids) to support that lifestyle?

In other words, is trickle-down economics a good theory? That is a question that one should be able to answer empirically and I will leave it to the economists to provide a definitive answer. But there is clear evidence that the rapid rise in income inequality that started around 1980, with huge gains for the very rich has not produced a commensurate rise in the general well being.

Look at figure 2 in this paper that analyzes the rising inequality in incomes from 1980 (which is the year that the stock market started to rise like a rocket) and 2000. Notice that while the lowest four quintiles of family income have stagnated and even decreased slightly over that period, the share of the national income earned by the top 1% rose steeply, doubling its value. So we know who actually benefited from the so-called boom years of Reagan, Bush I, Clinton, and Bush II.

In fact, as we see from the graph below taken from this paper, the share of the total income of the top 1% of households rose from about 8% in 1980 to 20% in 2006.

incomeinequality.jpg

As Table 1 in the same paper shows, from 2002 to 2006, when George Bush and the Republican congress gave massive tax cuts for the rich, the income of the bottom 90% of households rose by only $1,446 (4.6%) while the incomes of the top 0.1% rose by a whopping $1,809,824 (57.6%).

Note that the only time in the past when the wealthy had this large a share of the national income was in 1928, just before the Great Depression. That is not a good indicator of what lies ahead. The idea that allowing a few to amass great wealth is good for all of us is an argument that is hard sustain.

POST SCRIPT: The people in your neighborhood

Stephen Colbert looks at the new middle class loved by McCain and Palin, which consist of those people who are identified solely by their first names and occupations, like the famous Joe the plumber and Tito the builder.


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Comments

What about a flat tax? I think that seems more fair than anything, everybody suffers the same tax policies and it'll unite everybody in that subject.

Posted by Dan K on October 27, 2008 10:51 AM

The fact the the richest people hold a larger percentage of total income than they did some years ago does not, by itself, imply that anyone has less income in absolute terms. Any time money changes hands, that's income for somebody, so if the richest people are passing money around among themselves (sounds to me like a good description of finance) faster than they used to, then that increases the total amount of income, as well as their percentage of it, without really affecting anyone else.

More fundamentally, wealth is not conserved. It can be created (through labor, invention, etc.) and destroyed. So even ignoring the speed at which wealth or money gets passed around, some people can make themselves richer without making anyone else poorer.

All that said, I'm still very much in favor of progressive taxation. But I'm not convinced that that graph makes a strong case for it.

Posted by Paul Jarc on October 27, 2008 03:21 PM