Bernie Sanders and AOC just completed their tour of America to sell-out crowds. Their message was a familiar one: oligarchs (mainly Republicans) are becoming more and more wealthy at the expense of everyone else. Is this true?
In reality, this is not a true or false proposition. The answer is much more intriguing and way too subversive of their politics for Bernie and AOC to even contemplate.
I spent much of my working life in the field of taxation. I have heard all the jokes about death and taxes, green eyeshades, and accountants walking into bars. So, bear with me as we take a closer look at the government’s efforts to narrow the wealth gap.
The data are pretty clear. In 1990, the top 21 percent owned 61 percent of the country’s wealth. By 2023, they owned 70 percent. So, yes, the rich are getting richer.
Bernie offers a number of suggestions to close the wealth gap: more taxes on the affluent, higher minimum wages, more welfare. He has in the past supported basic universal income, a scheme whereby everyone is guaranteed a minimum income, regardless of the individual’s ability, education, or work ethic.
These remedies ignore existing government policies that redistribute wealth from the top to the bottom — a rather glaring oversight in view of the magnitude of these programs.
To start with, the U.S. tax code is highly progressive. As noted by the Wall Street Journal, “IRS data for 2022 show that the top 1% of filers paid 40.4% of income-tax revenue. The top 10% shouldered 72% of the revenue burden. The bottom half of filers, combined, paid 3%, and that’s an overstatement because it doesn’t account for “refundable” credits.”
So how about those “refundable” credits? If your income is low enough, the IRS will give you a cash refund — a kind of negative income tax. When you add in “refundable” credits, the bottom half receives more than they pay in taxes.
Capital gains are taxed at lower rates than earned income, prompting the Left to cry out that the wealth of the patrician class is taxed more lightly than the wages of the plebs. But let’s remember that shareholders are taxed three times — once as corporate earnings, then again as dividends and finally as capital gains. (Let’s not even get into the estate tax.) When you add it all up, tax rates are considerably higher on capital than on labor, especially in the lower brackets.
Turns out, all forms of the income tax are highly progressive. So how about those payroll taxes?
It’s true that Social Security phases out at $176,100, absolving higher earners from any further contributions. But it’s also true that employers are required to fund one-half of the Social Security nut. Self-employed people (like I used to be) get to pay both the employee and employer portions. When it comes time to retire, benefits paid to low earners (relative to their contribution) are five times greater than high earners. (The Myth of American Inequality, Robert Ekelund)
Medicare operates along similar lines, except there is no phase-out for higher wages. Beneficiaries all receive the same insurance without regard to the taxes they paid in.
My inner accountant notes that redistribution is baked into the revenue collection process itself, before the money even arrives at the Treasury, before even a dollar of expenditures.
Phil Gramm has done extensive research into this very question. The results are astonishing, at least to me.
Gramm compared the income of the bottom three quintiles of American households — after taking government transfer payments and income taxes into account. In 2017, the first quintile, the lowest, had an average income of $48,806, the second quintile had $50,492 and the third quintile had $61,350. Not a whole lot of difference, especially when you consider that the third quintile is working a lot more hours than the first.
Gramm took another cut at the data, presenting it on a per capita basis. This is the astonishing part. The bottom quintile household received $33,653, which was 14% more than the second quintile and 3.3% more than the third quintile. After accounting for federal redistribution policies, the bottom quintile makes out better than the second and third. More to the point, 60% of American households receive essentially the same income.
I warned you this was going to get geeky.
Gramm concludes that federal policies have leveled out the lower-middle reaches of society and introduced a good deal of disincentives into the bargain. Why work at all when the best outcome is a 3.3% setback? This provides a kind of economic floor for three-fifths of the country. (Dare I say basic universal income?) But it also imposes a kind of ceiling that keeps people from rising, especially if moving up risks the loss of benefits and, worse, the payment of income taxes.
It appears that both Bernie and Gramm are right. The wealth gap has indeed widened over the past 33 years. But the full weight of the government has mitigated the harsher edges of capitalist excesses.
Bernie wants even higher taxes at the top to fund even more benefits for everyone else. But how much higher? Should the top 10 percent increase their revenue contribution from 72 to 100 percent? If yes, the remaining 90 percent of the country will pay no income tax and they will all make roughly the same amount. This appears to be where Bernie is going, a true socialist paradise where the wealthy pay to flatten the rest of society — all through the graces of a benevolent state.
Such a society would compress income, destroy mobility, and entomb a rigid class structure within the tax code. Such a government would strong-arm the wealthy and control the rest through state-sponsored enticements. Such a country is unhealthy, unstable, unviable, unbalanced, unjust and un-American.
The last word goes to Ronald Reagan, who said: “You cannot help the poor man by destroying the rich man.”
My inner accountant peeked out from under his green eyeshade and had to agree.
Image: Pixabay
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