Let’s not spread the wealth around

Published 6:13 am Friday, September 21, 2012

Earlier in the summer, the Federal Reserve released a report on income in America. According to the report, median real (inflation-adjusted) pre-tax family income has fallen from $49,000 in 2001 to $45,800 in 2010. The median income for the bottom 20 percent of families was just $13,400 per year; the income for the top 10 percent, meanwhile, was $205,300.

A 15-fold difference in income between the richest10 percent of Americans and the poorest 20 percent is, no doubt, fueling President Obama’s Democratic call for America’s wealthiest households to pay higher tax rates. He has painted Mitt Romney as a defender of the rich and called on Americans to “do the math” when it comes to the tax reform proposals laid out by Romney and his running mate, Paul Ryan.

Much of Obama’s attack is dishonest, disingenuous, and pure political theatre. Moreover, when anyone takes him up on the invitation to do the math, the beneficiaries of our current tax code are pretty clear.

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Let’s start with the rich. They pay plenty of taxes. For all of President Obama’s talk about loopholes in the current system and tax breaks inherent in the Romney/Ryan plan, the top 1 percent of earners—the people reviled by “Occupy Wall Street” protesters—paid 36.7 percent of all federal income taxes in 2009 and the top 50% of Americans—people making $66,193 or more—paid 97.75 percent of all taxes.

If 50 percent of earners are paying 97.75 percent of federal income taxes, you do the math…the other 50 percent of Americans—people making less than $66,193—are paying just 2.25 percent in federal income taxes. In fact, according to a 2012 Heritage Foundation report, 49.5 percent of Americans paid no federal income taxes in 2009; in other words, 151.7 million people did not pay a dime of federal income taxes!

My point in bringing up the data on tax liabilities in America is not to say the bottom 50 percent should pay more, but, rather to say the rhetoric about the rich not paying their fair share is misleading and overblown. Moreover, using the tax doe to “spread the wealth” around is dangerous because it treats income statistics as static when, in fact, one’s place in the distribution is constantly changing.

For example, median incomes for young adults are lower than for middle-aged adults. The pattern of lower earnings for young adults has been true for as far back as we can collect data, and it results from people becoming more productive as they spend more years in the workforce. To ignore the pattern (and reject a basic point of agreement in labor economics) by instead taxing middle-aged people and giving to younger adults creates distortions in the economy and lacks any sound economic rationale.

The data are also clear about multi-earner families: Households where both adults work have higher household incomes than households with one earner. When it comes to taxes, however, multi-earner families get lumped together with single earner families. Even though their households have more children, and even though they are working far more hours per week, the multi-earners get taxed as though they are one large single earner.

“Spread the wealth around” policies lack a coherent rationale and ignore the important underlying factors driving income differences. Through much of American history, taxes were used to raise revenue for wars and public works projects. Explicit “spread the wealth around” policies are a recent phenomenon, and they are a huge departure from our constitutional roots.

“Spread the wealth around” policies divide us and encourage class warfare. They are seldom backed by argument and instead appeal to our ignorance and knee-jerk instinct to be envious and jealous of others. They treat income like it’s a fixed pie when, in fact, the pie can get bigger with the right mix of policies. In their extreme form, they eliminate uniqueness, punish creativity, and thwart effort and innovation. They could, of course, help get a president re-elected, but a little of America’s greatness will be the price we all pay as a result.


*Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.