Wednesday, December 28, 2011

Got equality 'cuz you want it?

I don't always read the work of other "community columnists" in the Journal Sentinel. I should do better with that, but I did note with interest today's contribution by George Wagner because it plays off a theme - perhaps the only theme - that might result in President Obama's reelection.
Income inequality.

Mr. Wagner goes after the unequal distribution of income with about as nuance and appreciation for economics as does the President. "We" want incomes to be more equal so all that "we" must do is pass a law to make it so. All we need to is tax away what the awful one percenters don't need or, perhaps more accurately, whatever amount it is that "we" want.

It is not my intent to make a brief for the fireside equities of millionaires and billionaires. There is a case to be made but no one really wants to hear it. We live in coarse times in which the notion that someone has a right to keep what they earn is regarded as antiquated and insufficiently sophisticated. Because fortunes can't be accumulated without some publicly provided infrastructure and the rule of law enforced by the state, there is no such thing as property rights free from the claim of the state.

If the logic of that eludes you, you're not the first.

But, in fairness, no one (at least not since FDR) proposes to take it all and what could be the harm of evening things out a bit?

Within certain ranges, the answer, I suppose, is not all that much. We do it today. One of the most startling things about the Democratic calls for the rich to pay their "fair share" in taxes, by most measures they already do. Top income earners pay a higher share of both federal income tax than their share of the national income and, Warren Buffett notwithstanding, they pay, as a group, a higher percentage of their income in taxes than the less well to do.
So the issue is not whether our tax system should be progressive and redistributive, but whether it should be more progressive and redistributive.

Mr. Wagner thinks so but his argument assumes that wealth is simply "there" - something that can be allocated in any way that we want it to. It's not. Higher tax rates affect economic behavior. They create disincentives and distortions in the allocation of resources and effort which, as rates increase, shift from the most productive use to the most tax efficient use. While higher tax rates may lead to additional revenue, they may also lead to reduced economic growth.

We've seen this in the past. The confiscatory tax rates of old - 70, 80, 90 % - did not result in revenues that were much higher than the lower rates of the Reagan era.

You can take that observation too far. Higher rates can result in more revenue but there is a strong case to be made that lower rates on a broader base lead to more equitable and productive results.

Don't believe me? Yesterday I read an article in The Nation (yes I do) that commended a new form of class based progressivism drawing upon lessons from the UK. The point was that, since the rich will always find ways to avoid redistributive taxes, the better path is to control incomes, i.e.. prevent those high earners from getting the money in the first place.

This would, of course, be economic suicide and far worse than moderately progressive taxation, but you get the point. The rich are not necessarily the middle class' oyster.
In any event, the rosy scenario that Mr. Wagner envisions is befouled by the math. You could
double their current tax bills without coming close to eliminating the federal budget deficit or generating more than several hundred dollars per head to redistribute to everyone else.

Still, I give Mr. Wagner credit for moving the debate. My next Journal Sentinel column will be on the came topic.















13 comments:

Anonymous said...

Ah, yes, the good old days when there were property rights free from the claim of the state. That was when, exactly? Ancient Rome, maybe? Nah, render unto Caesar and all that. Olde England? No, all those kings kept taxing their nobles and the nobles' serfs. Was it the young Republic? Was D.C. built with voluntary contributions from the Tea Party Express?

Surely, Rick, you can enlighten us about the good old days when there were no taxes.

Dad29 said...

Your columnist misses the point.

If he wants "budget restraint", he should be looking for (gross) revenues for the Gummint.

IOW, a tax hike for all, which is the only way to obtain the cash the Gummint is spending.

By the way, Anony: when, exactly, was the 16th Amendment enacted?

We did rather nicely with tariffs before that. Of course, there was no Department of Education, nor EPA, nor Labor, nor Transportation, nor Energy, nor Homeland "Security,"....

S said...

Ah, yes, "Goose-Punch" economics.

Rick Esenberg said...

Anon

You're building a straw man and doing just what I criticized. Because one can construct a rationale for some taxes, why the sky must be th limit.

JB said...

"Top income earners pay a higher share of both federal income tax than their share of the national income and, Warren Buffett notwithstanding, they pay, as a group, a higher percentage of their income in taxes than the less well to do."

I'd like you to cite some sources on this, Mr. Esenberg. Income tax rates notwithstanding, a large number of the wealthiest Americans are paying taxes on capital gains income, which, taxed at 15%, is a lower rate than that paid by Mr. Buffett's secretary. Similarly with all those hedge fund managers, and people like Mitt Romney who made their money from hedge funds. They are NOT paying the higher earned income tax rate, but the capital gains rate.

As for the wealthy paying in total dollars a greater portion of the US tax than their incomes would suggest, that is not surprising, since we have an understanding in this country that those at the bottom need as much of their earned income as possible to keep bread on the table and their bodies in homes rather than on the streets. That is the nature of progressive taxation.

The real issue, which you gloss over, is that that share of income tax paid by those in upper income brackets has gone down drastically since the Bush years, but the wealthy continue to get the lion's share of the benefit from living in this country, in terms of infrastructure (for their businesses if they have them), subsidiesfor their companies (think defense industries and energy, esp. oil), defense of their wealth, relatively low cost education for their children if they choose it, etc.

No one expects total equality and you know it. Try to argue honestly.

Tom said...

JB - http://www.irs.gov/pub/irs-soi/08in04atr.xls

Most recent tax statistic year. Shows a steady upward increase in income tax paid as a percentage of income, with even those making $10 million or more paying 28.5% of their AGI in taxes. (Although that 10M+ group ticks downward slightly from the 5M-10M group, the 10M group is so small (398 people) as to be statistically insignificant, and they still pay more than the 1M-2M group)

Same chart - crunching a few numbers you find that those making 1M or more earn 1.3% of all AGI yet pay 4.2% of all income taxes. Those making 100k or more earn 32% of all AGI yet pay 51.5% of all income taxes.

There's your stats to back up both of Rick's claims.

Anonymous said...

JB

I'm all for ending subsidy programs but keep in mind that we all benefit from the "wealthy" operating businesses here and locating their capital here. Who do you think employs people and invests in new products and technologies? Profitable businesses get the benefit of the infrastructure here it is true but they also result in lots of taxes being paid even if you exclude the income taxes paid by the "wealthy" owners or the business itself. They have employees who all pay taxes (income, property, and sales taxes) and the companies themselves, at least in wisconson, pay some pretty significant property taxes and sales taxes.

Anonymous said...

Another thing to keep in mind about taxes and regulation is that you don't see the result of the economic activity that was not taken because of the taxation and regulation. There is a hidden cost to this stuff. It affects behavior. On the margin people will say, why bother doing this deal or going the extra mile when I have to worry about all these compliance issues and I will have to give the government 40% of the action.

Anonymous said...

"This would, of course, be economic suicide." Beware any time a lawyer says "of course" or "clearly." Typically this shows the point being made is by no means clear. Abundant research shows that societies in which income and wealth are relatively more equally distributed enjoy faster rates of economic growth than nations in which income and wealth are more inequitably distributed. In the United States, for example, we enjoyed faster rates of growth when Fortune 500 CEO's made 40 times what the average worker made instead of 400 times what the average worker made. Confiscatory levels of taxation deter initiative; but it's by no means clear that a culture that discourages conspicuous excess and greed is inconsistent with economic growth. The bourgeois virtues of thrift and moderation are engines of prosperity.

jimspice said...

My most oft repeated blog comment gurgitated yet again: conservatives are mean, liberals are naive; I'd rather be naive than mean.

JonathanN said...

This is a great read,Rick ! Really enjoy all your blog posts!

Rick Esenberg said...

Anon 3:00

I understand that there are studies that purport to show that but I am skeptical that there is a causal relationship running from greater equality to growth. I can think of periods of great growth accompanied by rising inequality and suspect that's caused by innovation and new development. But I can also imagine how that would ultimately result in a move back towards greater equality as the market drives out excess profit and moves to a new equilibrium.

Comparisons to the US post war period are dangerous because we there was a lot that was unique about that area. And having represented a Scandanavian country for a number of years, I am not enamored of that comparison either. It would take a hell of a transformation to make the US into Denmark and the results wouldn't be all good.

Anonymous said...

"It would take a hell of a transformation to make the US into Denmark and the results wouldn't be all good."

Says who? YOU? Ok!

indsay-mylifeasaforeigner.blogspot.com/2011/03/denmark-happiest-place-on-earth_04.html

knowledge.insead.edu/contents/Soumitra2.cfm