Music to read by:
"So the maples formed a union
And demanded equal rights
'The oaks are just too greedy
We will make them give us light'
Now there's no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet, axe and saw."
- Rush, The Trees
 |
Any analysis of taxes paid in high tax-and-spend countries shows that the U.S. has the most progressive income tax system in the world.
In the stagnant days
of the Carter administration, when inflation was approaching 13.5% and
interest rates were peaking at 21.5%, income was more evenly distributed
than in any period in 20th-century America.
Since the days of that
equality in misery, the measured income of the top 1% of income tax
filers has risen over three and a half times as fast as the income of
the population as a whole.
This growth in income inequality is largely the result of three dynamics:
1) Changes in the way Americans pay
taxes and manage their investments, which were a direct result of
reductions in marginal tax rates.
2) A dynamic shift in the labor-capital ratio, resulting from the adoption of market-based economies around the world.
3) The flourishing of economic freedom
and technological advances in the Reagan era, which were the product of
lower tax rates, a reduced regulatory burden, and an improved business
climate. These changes have not only raised the measured income of the
top 1%, they benefited the nation and the world.
While income distribution has become a source of protest and political debate, any analysis of taxes paid in high tax-and-spend countries shows that the U.S. has the most progressive income tax system in the world. An inconvenient truth for the advocates of higher taxes on America's rich is that big governments in developed countries are funded not by taxing the rich more than the U.S. does, but by taxing everybody else more.
"A society that puts equality...ahead of freedom will end up with neither equality nor freedom."
- Milton Friedman, Nobel Laureate
While income distribution has become a source of protest and political debate, any analysis of taxes paid in high tax-and-spend countries shows that the U.S. has the most progressive income tax system in the world. An inconvenient truth for the advocates of higher taxes on America's rich is that big governments in developed countries are funded not by taxing the rich more than the U.S. does, but by taxing everybody else more.
In 1986, before the top marginal tax
rate was reduced to 28% from 50%, half of all businesses in America were
organized as C-Corps and taxed as corporations. By 2007, only 21% of
businesses in America were taxed as corporations and 79% were organized
as pass-through entities, with four million S-Corps and three million
partnerships filing taxes as individuals. By reducing personal tax rates
below the level of the corporate rate, the Tax Reform Act of 1986
dramatically influenced how entrepreneurs structure businesses.
This has had a profound effect on what
is now measured as the income of the top 1%, since a significant amount
of what is now declared as personal income is actually income from
businesses that are now taxed as individuals.
In the mob's frenzied quest for liberté, égalité, et fraternité, the French Revolution consumed its own. Robespierre perished in le Règne de la Terreur that he started. This convulsion of humanity that sought to equalise everything and everyone, ironically, ended with a tyrant in the form of a diminutive tyrant, Napoleon. In nearly the same span that America has existed in time, France has had two emperors, two kings, a Kaiser, a Führer, the Vichy government and 5 republics. Maybe, that whole "liberté, égalité, et fraternité" would have worked out better for them if they had just focused on the "liberté" and made it for all. - Sophie
In 1986,
just 5.6% of the income of top 1% filers came from business
organizations filing as Sub-chapter S-Corps and partnerships. By 2007,
almost 19% of income declared on tax returns filed by the top 1% came
from business income. A significant amount of income that critics claim
is going to John Q. Astor actually is being earned by Joe E. Brown &
Sons hardware store.
The reported income of the top 1% also
significantly increased as tax rates on capital gains were lowered,
first under President Bill Clinton and then under President George W.
Bush. At a top tax rate of 28%, realized capital gains were 2.5% of GDP
and made up 17.7% of the income of top 1% filers. As the top tax rate
fell to 20% in 1997 and 15% in 2003, realized capital gains rose to 4.6%
and then to 5% of GDP. The percentage of the income of top 1% filers
coming from capital gains grew to 26% in the 1997-2002 period and 28.1%
during 2003-07.
By reducing the penalty for
transferring capital from one investment to another, these lower tax
rates increased the mobility of capital. High-income taxpayers sold more
assets, declared more income, and paid more taxes.
Similarly, when the tax rate on
dividends fell to 15% in 2003, dividend income for the top 1% grew 178%
by 2007 to make up 5.6% of the income of these filers. In 2007,
immediately prior to the recession, capital gains and dividend income
combined was equal to the amount of salary, bonus and exercised stock
options earned by the average top 1% filer.
Lower tax rates made dividend-paying
stocks more attractive to high-income investors and made dividend
payouts more attractive for companies that would have previously
retained those earnings or bought back their stock. Capital trapped in
companies with below-market rates of return was redeployed and the
entire economy benefited.
All of this has had a huge impact on
the measured income of the top 1% and the growth in income inequality.
This impact can be estimated by examining what would have happened to
the income of the top 1% if tax rates had not been lowered and these economic transformations had not occurred.
If the share of income coming from
businesses, capital gains and dividends had remained at the levels
before the tax rate changes of 1986, 1997 and 2003 respectively, the
income of top 1% filers would have been 31% lower in 2007. The growth in
income since 1979 for top 1% filers would have been only 2.5 times as
large as the income growth of all taxpayers—not 3.6 times as large.
More businesses would have remained
C-Corps and been taxed as corporations, fewer assets would have been
sold and thus fewer capital gains would have been declared, and fewer
dividends would have been paid. All of this would have lowered the
income declared by the top 1%. Economic growth would have been lower and
aggregate measured income of all taxpayers would have fallen, but the
distribution of income would have been flatter.
The growing participation of China,
India, Brazil, Russia and Turkey in the world economy has also affected
income inequality. The vast expansion of labor engaged in world commerce
has raised the return on capital and reduced the relative return on
labor. The share of income flowing to capital—both traditional and human
capital such as education and training—has risen.
In relative terms, the return to
unskilled labor has fallen. Short of a crippling reversal in world
trade, which would reduce the value of both labor and capital, this
effect will dominate world markets for the foreseeable future. Since
high-income Americans own more capital and have higher levels of
education and training, their incomes have grown faster than everyone
else's.
The flowering of talent from the
expanded freedom and technological progress ushered in by the Reagan era
has also played a role. Inequality is a natural result of the expansion
of liberty and the development of new technology and new products.
Henry Ford, Andrew Carnegie, Sam Walton and Bill Gates caused the income
distribution to become more uneven, but they enriched the world.
To vilify success and the rewards it
garners is an assault not just on capitalism but on liberty itself. As
Will and Ariel Durant observed in "The Lessons of History" (1968),
"freedom and equality are sworn and everlasting enemies, and when one
prevails the other dies . . . to check the growth of inequality, liberty
must be sacrificed."
Nowhere is the political debate over
income inequality more detached from reality than the call for the top
1% of American income earners to pay their "fair share." The
Organization for Economic Cooperation and Development (OECD) data on the
ratio of the share of income taxes paid by the richest taxpayers
relative to their share of income show that the U.S. has the world's
most progressive tax burden.
The top 10% of earners in the U.S. pay
35% more of the income tax burden than in Sweden and 22% more than in
France. These figures—from the 2008 OECD publication "Growing
Unequal?"—include all household taxes imposed on income at the federal,
state and local level, including social insurance taxes.
In an eternal irony unique to large
welfare states, it is the expansion of government in the name of the
poor and middle class that always costs poor and middle-class families
the most. When the U.S. collects 16.1% of GDP in income taxes, the top
10% of taxpayers pay 7.3% and the other 90% pick up 8.9%.
In France, however, they collect 24.3%
of GDP in income taxes with the top 10% paying 6.8% and the rest paying a
whopping 17.5% of GDP. Sweden collects its 28.5% of GDP through income
taxes by tapping the top 10% for 7.6%, but the other 90% get hit for a
back-breaking 20.9% of GDP.
If the U.S. spent and taxed like
France and Sweden, it would hardly affect the top 10%, who would pay
about what they pay now, but the bottom 90% would see their taxes
double.
Since OECD members have significantly
higher consumption taxes on average than the U.S., the total tax burden
of bigger government is even more heavily borne by lower-income citizens
in developed nations than these numbers suggest.
The real and alarming message in these
OECD numbers is that there appear to be limits in the real world to how
much tax blood can be extracted from rich turnips. With much higher
marginal income-tax rates, countries that are clearly willing to soak
the rich have proven to be incapable of doing so.
Proposals to raise taxes on
high-income Americans in the name of "fairness" not only threaten
economic growth. The experience of nations with large governments shows
that this argument is simply a red herring for a massive tax increase on
middle-income Americans.
In the end, taxing is about feeding
government, not redistributing wealth. What nation ever set off on the
road to big government promising to tax middle-income workers, and what
nation ever got big government without doing it?
Mr. Gramm is a former Republican senator from Texas
and senior partner of U.S. Policy Metrics, where Mr. McMillin, a former
deputy director of the White House Office of Management and Budget, is
also a partner. This article appeared in the Wall Street Journal on 6 April 2012 entitled Gramm and McMillin: The Real Causes of Income Inequality.
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"The Trees"
There is unrest in the forest
There is trouble with the trees
For the maples want more sunlight
And the oaks ignore their pleas
The trouble with the maples
(And they're quite convinced they're right)
They say the oaks are just too lofty
And they grab up all the light
But the oaks can't help their feelings
If they like the way they're made
And they wonder why the maples
Can't be happy in their shade
There is trouble in the forest
And the creatures all have fled
As the maples scream 'Oppression!'
And the oaks just shake their heads
So the maples formed a union
And demanded equal rights
'The oaks are just too greedy
We will make them give us light'
Now there's no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet, axe and saw
