The Redistribution of Wealth in America

Posted by Jason Douglas on 10.02.2009

Are we headed in the right direction?

My debut article was about Obama's health care speech, because it was not only a current event but a moment of potential historic significance. Since then I've sought to create a flow from one article to the next, rather than hopping from one somewhat random topic to the next. I've put forth the "I got mine" theory, and challenged the us vs. them mindset of modern debate. Today's topic touches on everything I've written about so far. We are going to take a look at the distribution of wealth in America, and how it has changed over the last twenty years. This article is not about Republicans and Democrats, left vs. right, or any other conventions we get bogged down in all the time. It is about looking at cold, hard facts to draw conclusions. We must establish what reality is before debating whether we need to change course. Not everyone regularly prepares and uses spreadsheets as I do, so I will try my best to make points without being too dry with numbers. All stats cited in this article are taken from the IRS website, so that saves a lot of bickering about reliability. While we all know that some people are creative about what they report as income to the IRS, for argument's sake we're going to assume it's a wash across income levels. Let's also keep in mind that those who make less than a certain threshold don't have to file, so they are left out of these stats completely. To put it another way, the unemployed are not included here, so no comments about deadbeats today. I'm also targeting percentage stats rather than dollar figures, so we don't have to worry about pesky variables like inflation. Full disclosure: Personally, I'm just barely within the top 25% of income earners, which includes anyone whose adjusted gross income was over $64,702 in 2006. Now, let's get fiscal.

Whenever the subject of taxes comes up, those at higher income levels complain that they shoulder a disproportionate tax burden. This statement is based on the idea that a higher percentage of their incomes are taken by the government than from those making less. In this sense, the numbers back up their claim. Of all federal income taxes collected in 2006, almost 40% of the revenue came from the top 1% of taxpayers. Over 135 million returns were filed that year, so that's roughly 1.35 million Americans paying two fifths of the taxes. This represents a dramatic increase over the last 20 years. Back in 1986, this same group was paying 25.75% of all income taxes. A look at the top 10% of taxpayers reveals a less dramatic increase but a huge overall burden. In 2006, the top 10% of taxpayers accounted for over 70% of taxes collected. Think about that for a moment. As a nation we are reliant on fewer than 14 million people for 70% of our federal income tax revenue. On the other end of the spectrum, the bottom 50% of those who filed returns paid only 3% of all taxes collected.

How is it possible to extract so much revenue from such a small portion of the population? Of all the individual income made in 2006, the top 1% of the people made 22% of the money. This proportion has doubled over the last twenty years. That bears repeating. Of all the personal income made in this country, the top 1% are taking in twice as high a percentage as they were twenty years ago. The wealthiest Americans are paying a tax rate which is over 30% lower than the rate they paid in 1986, and they are paying it on twice as high a share of income. Over the last twenty years, the top 10% of taxpayers have gone from making 35% of the income to 47%, while their tax rate has fallen by 20%. The bottom half have lost ground, going from making 16.66% of total income to just 12.5% in 2006.

These numbers tell us several things. The well off do pay a much higher portion of taxes than the middle or lower class. They also make a substantial share of total income, and have dramatically gained ground in that area over the last twenty years. But it's not just the super rich who are prospering, it's the merely well off too. In fact until you reach the bottom half of income earners, every group has seen an increase in their portion of national income. In other words, there has been a dramatic redistribution of wealth where not only have the rich gotten richer, those who merely make $100K+ are also holding a higher share of total income. The bottom half, on the other hand, have seen their share of total income fall by 25% over the last twenty years. This shift has been facilitated in large part by substantially lower tax rates on those making the most money.

So fiscal reality is quite clear. The standard of living in America has improved for the top half of the country, and lowered for the rest. In simplest terms, one set of people are enjoying better lives at the direct expense of the other. I will refrain, however, from going on a bleeding heart liberal rant here. That ground has been covered, and there's a more practical way to look at the situation. With pensions almost extinct, and benefits slowly but surely following, there is no reason to think this trend of wealth being concentrated toward the top will end without intervention. What will happen if no action is taken?

The theory most commonly known as trickle-down economics is fundamentally flawed. As mentioned, less than 14 million people currently account for 47% of the income and climbing. Who will be able to afford a home or a car at this rate? Major appliances, remodeling, tourism, restaurants, you name the business and it is reliant on a large customer base to prosper. If the masses aren't paid well enough to buy things, their employers will go out of business, and the theory of fair wages being a job killer will be disproved with catastrophic results. Capitalism spurs innovation, and helped us prosper in the 20th century. The problem today is that the ambition which helped us thrive has turned to rampant greed. Some say we need to start producing again rather than be a service economy. The danger is that we will end up like the very third world countries we have exploited in the past, making goods to be used by foreigners for wages that don't cover food and shelter. At its core, our system functioned because we merely used cash to facilitate trading the sweat of our brow for stuff we need. As long as the money kept circulating, the system worked. Now we have those on top cheating the workers by hoarding the cash. An increase of less than 5% in total unemployment is enough to put us in a deep recession. The same thing happens when people have a job but make less for doing it. It only seems harmless because people don't lose their homes right away, and easy credit facilitates the illusion that nothing has changed. Capitalism is a tremendous economic model, and I defy anybody to point to one that has yielded better results. But left unchecked, it threatens to consume us all.

It's clear we cannot go on as we are now. The working class, on whom we depend for our economy to work, are being squeezed out by those who are already on top. The growing concentration of wealth at the top has to end as soon as possible. We can do this in two ways. First, we need tax rates to be brought back in line with what they were during the Reagan Administration. Second, we need to have an honest social contract with those doing the most work for the least pay. If their wages cannot be brought up, their living expenses should be brought down. We must properly fund public transportation so they can get to work, and take the crippling cost of health care off their backs. We also have to make higher education accessible so bright minds which happen to be born into poverty are allowed to thrive and make our nation stronger. This is not communism or socialism, it's what must be done for the 21st century to be one of prosperity, and to stop the slide toward feudalism we are currently on.