Rising Income Inequality: An Excuse for Bigger Government: Part III

Flickr image by mSeattle.

Link to Part I of Rising Income Inequality: An Excuse for Bigger Government

Link to Part II of Rising Income Inequality: An Excuse for Bigger Government

Although much public opinion claims that the rich aren’t taxed enough, empirical data shows otherwise. According to Steven Horwitz, an economist at St. Lawrence University, Warren Buffett, one of America’s richest, contributes more than his fair share. Calculating Buffet’s total tax receipts corresponding to his income’s percentage of total taxes paid (in the US), Horwitz found that “[the millionaire’s] income was about 0.00065 percent of total income. Total income taxes paid by Americans in 2010 was about $900 billion. Nine-hundred billion multiplied by 0.00065 percent is $5.85 million, hence, Buffett’s ‘fair share.’ Except Buffet paid $6.9 million” (Horwitz).

There is no sound economic reasoning or data proving that taxing the rich more will help people’s standard of living. Art Laffer, a famous economist, made the argument that because people don’t work to pay taxes, but work to earn money for themselves, they will change where they earn their income, how they earn it, how much and when they earn it just to escape paying more taxes. Statistics show that federal revenues have rarely fallen to 17% or increased to over 20% ever since the 1960s, suggesting that the rich are adjusting to their tax burden. Increasing their taxes actually may not help others (Stossel).

The real causes of the income gap is people’s ability to choose according to the conditions around them. As previously mentioned, more people going to college, early retirements, and having more income mobility are causes of income inequality rising; but they are effects of people making decisions by way of free market capitalism. If taking into account these real causes, income inequality may be rising, but in reality is just offset by the gains society is overall making by these increases in educated people, people able to retire early due to innovations in healthcare, and overall living standards due to income mobility (Smith & Freeman).

The correctly presented data also proves that income inequality is not increasing if looking at the big picture of after-tax income, average market income, the adjusted cost of living index, and the Gini coefficient. In addition, the fallacy of taxing the rich in attempt to improve living conditions for the poor and overall decrease income inequality is proven by the destruction of increasing taxes on the rich using as an example famous economist Thomas Piketty’s tax plan. 

Redistribution programs to the poor do not help either. Social Security and Medicare, the two largest transfer programs, send most of the funds to the elderly – who are mostly not poor. These two government bureaucracies make up 1/3 of federal spending – mostly going to the well-off, contrary to what is normally believed. And ironically, the programs that do send most of the funds to the poor just stagnate the poverty. “When the poor make an effort to improve their skills and work hard to increase their incomes, the government money and benefits they receive are reduced by a large percentage of their additional earnings. Sometimes it’s more than 100 percent, leaving them with less take-home income than before” (Lee). Government trying to redistribute the wealth is going about incentives all wrong (Lee).

And really, is government capable of deciding what is best for the poor? After all, we can’t group every poor person into one group and determine what they all need – it becomes mostly wasteful and likely can’t solve all the problems that contributed to the person’s poverty. The best solution to help the poor is the freedom to help themselves and/or get help from private charities, organizations, churches, and communities. Private funds means that the people who are in charge of and/or gave those funds want to see that the money gets used correctly and not wastefully. A private charity is able to give much more than money as well. They can give opportunities for the future in addition to human care and compassion. A church is able to give spiritual help. Private help to the poor aligns incentives to make sure the people are actually helped, while government misuses money because it was not “the government’s” money in the first place (Hebert).

Reducing poverty should be the focus rather than on income inequality between the rich and poor. The best solution to reduce poverty is to allow more economic freedom. Nathan J. Ashby and Russell S. Sobel of West Virginia University “found that increasing the economic freedom of a state by one unit (equivalent to moving from 40th-freest state to 7th-freest-state) increased the incomes of its poorest residents by 11 percent. By contrast, the same change increased the incomes of the richest quintile by just over a third of that (4.3 percent). The middle class also saw increases, greater than the rich but less than the poor. Increasing a state's economic freedom by reducing taxation and regulation creates broadly shared prosperity across all quintiles” (Adorney). By enabling more people more economic opportunity, more people, especially the poor, are able to move up into higher incomes (Adorney).

Economic research clearly proves over and over again that income inequality is not rising; even accounting for rising numbers of college students, more people retiring early, and rising income mobility show that income inequality is not a problem, but rather a feature of a free market economy. If all people were equal, their incomes and their standard of living would be low. People living in countries like China and Germany in the past under Mao Zedong and Adolf Hitler respectively, had low standards of living under their rulers because taxes were high on the rich and income inequality was attacked (Robinson). 

Free market capitalism is the solution to allow the opportunity for people to flourish, and make their own decisions according to opportunities that arise from their own work and of the interactions of people and businesses in the market. America was founded upon being a land of opportunity, not on being a nation of people that are given equal results by way of redistribution programs or taxes (Reed). Thomas Sowell says it best: “Life in general has never been even close to fair, so the pretense that the government can make it fair is a valuable and inexhaustible asset to politicians who want to expand government” (Sowell).

Adorney, Julian. "Free the Poor." The Freeman 7 March 2014: 1. Web. 15 April 2015.

Freeman, Daniel J. Smith and Rachel H. "Income inequality may actually be good news." AL.com 6 February 2015: 1. Web. 6 February 2015.

Hebert, David J. "The Paradox of Public Assistance." The Freeman 24 January 2014: 1. Web. 15 April 2015.

Horwitz, Steven. "The Tax-the-Rich Truth Squad." The Freeman 22 September 2011: 1. web. 7 February 2015.

Lee, Dwight R. "Reducing Income Inequality at the Expense of the Poor." The Freeman 5 February 2013: 1. Web. 15 April 2015.

Robinson, Ron. "#43 – Income Inequality Is the Great Economic and Moral Crisis of Our Time." The Freeman 6 February 2015: 1. web. 7 February 2015.

Sowell, Thomas. n.d. Web. 20 April 2015.

Stossel, John. "Taxing the Rich." Townhall 29 September 2010: 1. web. 7 February 2015.

Rising Income Inequality: An Excuse for Bigger Government: Part II

Flickr image by mSeattle.

Link to Part I of Rising Income Inequality: An Excuse for Bigger Government

The argument that rich people need to be taxed further to prevent income inequality from rising further doesn’t make sense economically. According to the Michael Schuyler of the Tax Foundation, if esteemed economist Thomas Piketty’s tax plan to change the face of equality in America were put into place, it would be ineffective at preventing income inequality from increasing and would not help the poor at all. “The basic version of Piketty’s wealth tax would impose a tax rate of 1 percent on net worth of $1.3 million and $6.5 million and 2 percent on net worth above $6.5 million. Piketty contemplates additional tax brackets, including a bracket of 0.5 percent starting at about $260,000” (Schuyler).

Schuyler completed two case studies about Piketty’s wealth tax. Both find that it does nothing to help the poor. The first: the basic plan of “1 percent on net worth between 1 and 5 million euros, and 2 percent on net worth above that.” Using purchasing power parity and rounding up a little, in US dollars $1.3 million is the starting point for the 1% tax and $6.5 million is the starting point for the 2% tax. The second: “Piketty’s recommendation for a more comprehensive wealth tax, adds a starting bracket of 0.5 percent on net worth between 200,000 and 1 million euros. Converted into dollars and slightly rounded up, the bracket runs from $260,000 to $1.3 million” (Schuyler).

Those seem like small tax percentages, but in reality will augment the possibility of injury to the economy. A wealth tax is equal to a much higher income tax – an example being “if the pre-tax return on an asset is 8 percent, a 1 percent wealth tax on the asset would take away one-eighth of the income. That is the same tax bite as a 12.5 percent income tax rate” (Schuyler). Also, a majority of some people’s wealth is capital; its accumulation is delicate to expected after-tax returns. This wealth tax would hit capital hard, and in turn, job formation, productivity, and innovation (Schuyler).

The first case “estimates that after the economy has adjusted to the wealth tax, the stock of private business capital will be down 13.3 percent, the wage rate will drop 4.2 percent, there will be 886,000 fewer jobs, and the economy’s total output of goods and services (GDP) will be 4.9 percent lower than otherwise” (Schuyler). The poor will obviously not been helped, but hurt by the supposed wealth tax that was meant to decrease the income gap. The standard of living overall will decrease, not just for the poor. (Schuyler).

The second case increases the number of people having to pay the wealth tax dramatically. It estimates, after adjustments, that “the capital stock will be 16.5 percent smaller than otherwise, wages will be 5.2 percent lower, 1.1 million jobs will be lost, and the overall economy will produce 6.1 percent less output than otherwise” (Schuyler). The severity of the effects of the tax has just increased, not the overall effects. Piketty is but an example of someone coming up with a plan that is believed to decrease inequality if implemented, but in reality, would lead to big problems and big losses if put into action. “The Tax Foundation model estimates that the GDP loss, expressed in terms of the 2013 economy, would be about $800 billion annually under a two-tier wealth tax of 1 and 2 percent. The estimated loss would rise to about $1 trillion annually if a half-percent bracket on smaller wealth holders were also imposed” (Schuyler). The attempted fix to income inequality is estimated to decrease the supply of services and goods, decrease the number of jobs, and lower wages. Everyone would be affected and hurt (Schuyler).

Real factors of income inequality are good news of increasing standards of living. For example, more people going to college causes inequality. The Tax Foundation’s Alan Cole found that in 1968, there were 7 million college students in the US and now there are over 200 million (Cole). Because many college students either delay working or earn very little money at low-skilled jobs, this shift in the number of students increases income inequality. However, a more educated American population is great news for everyone (Smith & Freeman).

In addition, healthcare innovation enabling elderly to have longer retirements is a factor of “rising” income inequality. Mark Perry of the Tax Foundation found that the number of active workers per retired worker has decreased almost 32% since the 1970's (Aging Population). Most retirees using their savings instead of income after retirement results in less wealth for the elderly. The Economist says that since the 1960s, the average number of years people spend in retirement has doubled (The Economist). However, retirees not living from direct incomes primarily doesn’t make them poor nor do retirements hurt productivity (Smith & Freeman).

And most importantly, another reason for income inequality “increasing” is increasing income mobility (Smith & Freeman). Almost 60% of taxpayers who began in the lowest income group in 1999 moved up to a higher income group by 2007. The myth of the population decline of the middle class is busted. Because of increasing income mobility, everyone will have a better standard of living (Hodge & Lundeen).

Interestingly, 40% of people in the highest income group dropped down to lower income groups within eight years of the time that they moved to the highest income group. This is a direct denunciation of the misconception that rich people stay rich and take up a large share of the nation’s wealth for long periods of time (Hodge & Lundeen).

Cole, Alan. "Income Data is a Poor Measure of Inequality." 2014. Web. 1 April 2015.

Freeman, Daniel J. Smith and Rachel H. "Income inequality may actually be good news." AL.com 6 February 2015: 1. Web. 6 February 2015.

Hodge, Scott A. and Andrew Lundeen. "Americans Are Economically Mobile." 2013. Web. February 6 2015.

Perry, Mark J. "Can Aging Population Explain Income Stagnation?" Carpe Diem 23 October 2011: 1. Web. 6 February 2015.

Schuyler, Michael. "The Impact of Piketty’s Wealth Tax on the Poor, the Rich, and the Middle Class." 2014. Web. 8 April 2015.