Monday, May 16, 2011

Deconstructing the Left's Argument for Increasing Tax Rates on the Rich

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May 16, 2011


By Jim Stuart
In response to the deficit and to the debt crisis, the left repeatedly and forcefully argues for higher taxes on the "rich."  Aside from the fact that the entire income of the rich -- beyond what they already pay -- is insufficient to eliminate the deficit, conservatives argue that the top earners already pay a disproportionate share of federal income taxes.  In addition, conservatives argue that raising taxes on the rich, and particularly on small business owners, would suppress job creation, making the already serious unemployment problem worse at a time when we can least afford it.  The left responds that the rich should pay the lion's share of taxes because they earn the lion's share of income, arguing that since Reagan, almost all growth in income has gone to the rich.  The top 1% (the rich) earned 20% of all personal income in 2008 versus 8.51% in 1980 (See Figure 2 at the end).  Meanwhile, the bottom 50% of earners (the poor) earned 12.75% of the total income in 2008 versus 17.68% in 1980 (Figure 2).  Given that the income share for the rich went up while the income share for the poor went down, the left argues that it is unfair to pursue policies that will continue to disproportionately benefit the rich.

Let's examine the numbers a little more closely, looking at the tax share relative to income share for the two groups between 1980 and 2008.  The share of income tax paid by the rich in proportion to the share of their total income went from 2.25 to 1.9 between 1980 and 2008, while the same ratio for the poor went from .40 to .21 (Figure 2).  The effective tax burden (tax share in relation to income share) was 5.62 times higher for the rich than for the poor in 1980 and 9.0 times higher in 2008.  Thus, the relative tax burden on the rich -- relative to income -- compared to the poor nearly doubled from 1980 to 2008 -- from 5.62 to 9.0 (Figure 3).  Nevertheless, and despite the heavier and increasing tax burden on the rich, the fact that the income share for the rich increased while the income share for the poor decreased creates a seemingly irrefutable talking point for the left in the current budget debate.
Like many seemingly straightforward arguments, however, the claim that income growth has primarily benefited the rich does not in fact signify inequity, as it would appear.
The key is that the individuals paying taxes in the top 1% or bottom 50% in 1980 are not the same individuals as the taxpayers in the top or bottom segments thirty years later.  Over a period of many years, people move up and down the income ladder, depending on their ability, ambition, and experience and other factors.  The income categories more appropriately refer to classes of jobs or positions, not classes of people, and most individuals change jobs over their lifetime.  Arguably, it would be unfair for John, CEO, to have benefited from tax policy over the last thirty years, while Frank, dishwasher, did not.  It makes no sense, however, to argue that it is unfair to Frank that CEO salaries in general have gone up relatively more than dishwashers', particularly when John, 50, started out his career thirty years ago as a dishwasher and rose to become CEO through hard work, and Frank, 19, dishwasher, is in his first job and aspires to be CEO some day in the future.  It is not at all obvious that Frank is harmed rather than benefited by the fact that opportunities for him at the upper end of the income spectrum are improving over time, and if he is able to prepare himself, work hard, and advance, his prospects of earning an excellent living will get better as time goes by.
It is interesting to speculate about the reasons why higher-level positions have appreciated more than lower-level positions.  The compensation of nonunion workers, whether dishwashers, engineers, CEOs, or media celebrities, is determined by supply and demand in the free market.  The salaries of surgeons and engineers may be high because too few are willing to undergo the rigors of science and mathematics curricula and could perhaps be pushed downward by policies encouraging the education of more doctors and engineers, as well as policies facilitating entrepreneurship.  The salaries of dishwashers could perhaps be pushed upward by policies that reduce the competition from unskilled illegal aliens or reduce the number of high school dropouts and instead prepare them for better jobs.  Factors such as the increasing pervasiveness of computers may put added emphasis on knowledge and information-processing skills and concentrate more and more economic value in top positions and high-tech, fast-growing companies.  In any case, railing against the fact that economic compensation for unskilled positions isn't increasing faster than GDP makes no more sense than railing against the prices of food, energy, or raw materials, whose markets are increasingly global in scope and are largely unrelated to tax policy.
A ladder of opportunity will always exist that starts at the bottom with minimum wage jobs for new and unskilled workers and rises to the most competitive and demanding positions at the upper end of the scale.  How rich a person becomes depends on how far he or she is able to advance up the ladder and not on how much any particular position at any particular level at any particular moment in time is worth.
Whatever the explanation for pricing trends for high-paying versus low-paying work categories, the tax code should not be used in a misguided attempt to level after-tax income, when the result will be to discourage ambitious workers from preparing and competing for much-needed but demanding high-value positions.
A further reason for not increasing the relative federal income tax burden on the rich is that since the bottom half pay only 2.7% of the total federal income taxes and since nearly half of taxpayers pay no income federal income taxes at all, an incentive exists for a majority constituency to vote to accelerate the growth and spending of the federal government and to increase income taxes that they themselves do not pay.  Perhaps the solution would be "no representation without taxation."
Finally, as can be seen in Figure 1, showing adjustable gross incomes in 1980, 2007, and 2008, the income of the rich is much more volatile than that of the poor.  The income of the rich decreased by 16% between 2007 and 2008 as a result of the recession; compare that with less than 1% for the poor.  Overdependence of federal revenue on the rich thus exacerbates the problem for the federal government of falling tax revenue and resulting deficits during recessions.
In summary, there is a high and increasing progressivity in our tax code, which results in the rich currently paying nine times as much as the poor after taking income into account, and this progressivity has increased dramatically since 1980.  Both for maintaining individual economic independence and federal income stability, a broader tax base is desirable. Finally, when we look at how the benefits of growth are distributed from the perspective of individuals rather than income groupings, we realize that income is not static and that workers realize their hopes and dreams through preparation, advancement, and promotion or entrepreneurship, not through magically gaining higher wages for the same, static position.  What conservatives seek to offer are conditions of full employment in a dynamic, prosperous economy that permits new entrants in the labor market to readily find jobs at the start of their working lives and that at the same time, provides an abundance of higher-paying jobs that workers at all stages of their work life can aspire to.
Figure 1: Adjusted Gross Income between 1980 and 2008 ($ Billions)


Adjusted Gross Income
Top 1%

Adjusted Gross Income
Bottom 50%










Figure 2: Federal Income Tax Burden, 1980 and 2008


Share of Tax %

Share of Income %

Tax Share/Income Share Ratio









Top 1%









Bottom 50%

Figure 3: Ratio of Tax Burden Top 1% to Bottom 50%, 1980 and 2008


Tax Burden Ratio -- Top 1% Relative to Bottom 50%






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1 comment:

Anonymous said...

At this point it is all academic anyway. It is too late to get a balanced budget in the US. The cuts would be too large. The tax increases also too large and there is no political will for either. The only course of action is to print more money a recipe for hyperinflation.