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.