Sunday, March 1, 2009

New Taxes on the Wealthy Unfair?

Are higher taxes for the nations top 5% a clear example of governmental overreach? 

Anyone who followed the presidential campaign could see this battle coming for months. President Obama recently announced his budget, which includes plans to expire the tax cut for Americans that make over $250,000 annually. As soon as it was announced, the debate began -- just on time -- about whether or not this is fair. 

In a recent LA Times article, Brian Riedl of the Heritage Foundation, a think tank, said that under Obama's plan, the top 20% of taxpayers in the US will pay 90% of all taxes. I had a hard time finding information that verified this claim. But let's suppose that Riedl's numbers are accurate. Initially, this may sound like a crime. Yet a look at reality would tell you that such a tax burden is actually in line with the distribution of resources in America.

In 2001, the top 20% of the richest in America owned 91% of financial wealth and 84% of net worth. The top 10% also had about 85% of all investments (stocks, bonds, trust funds, etc.) and 71% of net worth. This book (see pp. 28-34) and this study (chapter 5) -- among many others -- find the same results. And all of this was before the Bush tax cuts had a chance to accelerate the rate of inequality.

In reality, then, the new taxes match the reality quite well. On principle, it is simply fair. But there are other concerns.

One complaint is that these taxes are simply meant to redistribute wealth and make everyone economically equal. But this is not even a possibility. Just because the wealthiest pay most of the taxes doesn't mean that it reduces their wealth. To the contrary, the richest Americans' wealth is increasing far faster than taxes can reduce their wealth. According to Congressional Budget Office data, from 1979-2004, the top 1% saw their annual income rise 176%. The top fifth gained a 69% rise in their income.  The middle 3/5 saw a 20-30% increase, and the poorest 20% saw only a 6% increase in their income. Compared to the median income increase over the same time period (about 10%), the poorest fifth in the country are actually more poor than 30 years ago! (And the top 1% made out like gangbusters.) 

So the wealthiest in America have nothing to worry about if they think that they'll be taxed out of prosperity. Their huge income advantage and almost total ownership of investments will prevent higher taxes from regressing their wealth.

Another complaint goes something like this: rich people work harder for their wealth and should not have to give any more of it back to society. This is essentially saying that 20% of people in the United States work four times harder than the other 80%. Please! I won't even dignify that with a response.

Then there is the pragmatic side of this whole issue. The bottom 80% of American wealth-owners, and especially the bottom 60%, are struggling. The bottom 90% of wealth-owners have 74% of the nation's debt. True, some blame can be relegated to irresponsbility of borrowers and lenders -- living beyond means and trying to make money off of predatory lending. But many people are in debt simply because they have to be. Very few Americans can attend a university, own a home (no matter what size), or start a business without significant debt.   

And these debts were already a problem before the recession. Now they are breaking people's back. 

The point here: the government needs revenue to provide the services, projects, and credits (for school, homes, and businesses) that the far majority of Americans require. That money must come from somewhere (other than borrowing abroad). Some of it will come from cuts in ineffective programs; some of it will come from taxing the wealthy. It's dollars and sense (pun intended). 

Therefore, these tax measures are both principled and pragmatic. The wealthiest are going to be just fine.


  1. Kevin,

    This is an excellent arguement for a contraversial issue. I am afraid that like the lobbyist when ever people with money & power are infringed upon to take responsibility equal to thier wealth, the cries are heard all the louder, because they have the capacity to do so! I am glad you have written this article and researched it and backed it up with some startling data. There is a saying in the bible that right wing conservatives [seemingly amongst the wealthiest of us] are so prone to quoting- To those that are given much, much is expected! the arrogance of the self made man and his self centeredness is discouraging. Another quote regarding this topic- and the arrogance of the greedy nongenerous among us that are self made is- "The self made man worships his maker." The humble and truely selfless charitable wealthy man is a blessing and insiration to all of us.The greedy and fearful nature of these self involved people disparage the kindness and condem these generous souls , while the majority of humanity is thankful for and to them! Michael Fury

  2. What a great argument! And nicely cited, too. I agree with everything you said and wanted to cite one more interesting fact that I read awhile back (and just found again online). It is related to the idea presented in your article that while the rich keep getting richer, the rest of us are, by comparison, either the same or only a little better off than we were 20 years ago (especially when inflation, cost-of-living and other things I don’t understand are factored in). Apparently, Business Week runs an annual survey of average CEO pay to factory worker pay. According to them (and cited at, “the ratio of CEO pay to factory worker pay rose from 42:1 in 1960 to as high as 531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing in big stock options. It was at 411:1 in 2005. By way of comparison, the same ratio is about 25:1 in Europe.” I find that mind-boggling and also very depressing. When compared to other industrialized nations, we rank almost last in terms of the gap between the wealthiest and the poorest people in our country. Apparently, I read somewhere that Japan has the best ratio, but I can’t find the citation anymore, so you don’t have to trust me – sorry …

    I have always been fascinated by taxes – particularly since I visted Sweden in 2002 and saw how happy everyone seemed to be with the way their society was run – high taxes and all. The people there seemed to expect more from their government in the way of providing services for people and also seemed capable of seeing the long-term benefits of tax funded social programs. I wish there was a way to get Americans to feel the same way!