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2009 July 30 Thursday
The Upper Class Funds The US Government

Inequality and high marginal tax rates mean that a small fraction of the population pays an outsized share of taxes.

Washington, DC - The top 1 percent of tax filers earned about 22.8 percent of the nation's income in 2007 (the latest IRS data available), and paid 40.4 percent of all federal income taxes - more than the bottom 95 percent of tax filers combined, according to a Tax Foundation analysis of just-released IRS data.

Do you know why this is great news for the government? Granted, getting such a large fraction of revenue from top earners makes tax revenues more volatile. But why is income inequality great for the leviathan? Think about it. I'll explain below.

You might think that the top 1% pays to fund government programs for a large chunk of the rest of the population. But there's more going on here than that.

Both income and income tax shares for the top 1 percent of tax returns (AGI over $410,096) hit all-time highs in 2007. In Fiscal Fact No. 183, "Summary of Latest Federal Individual Income Tax Data," Tax Foundation Senior Economist Gerald Prante notes that the record-setting trend for income and income tax shares is likely to end with 2007, given the economic downturn in 2008.

"This pattern at the top of the income spectrum is the same during almost every recession and recovery," according to Prante. "Unlike middle-income wage-earners whose incomes and tax liabilities are fairly steady, high-income people have incomes and tax liabilities that fluctuate wildly with the economy. The sharp rise in federal government tax revenue from 2003 to 2007 is likely to be followed by a substantial dip in 2008, 2009 and perhaps 2010 as the economy struggles through the worst recession since the early 1980s."

Unstable revenue, sure. But since the top earners earn such a large fraction of total income inequality makes it easier for government to raise revenue. Imagine income was more evenly distributed. In that case government would need to anger more people with higher tax rates in order to collect just as much revenue. Yes, inequality is a ravenous democratically elected government's friend because inequality allows high tax rates on a small fraction of the population to bring in such a large chunk of revenue. No need to anger most voters in order to collect a lot of tax revenue.

141,000 tax returns (probably some of those are couples) bring in a fifth of all revenue but only 12% of all adjusted gross income.

Fiscal Fact No. 183, available online at http://www.taxfoundation.org/publications/show/250.html, also takes a look for the first time at the top 0.1 percent of tax returns (the top 10 percent of the top 1 percent), which amounts to only 141,000 tax returns, but accounts for nearly 12 percent of AGI earned and around 20 percent of the nation's federal individual income taxes.

I expect inequality to increase because demographic trends mean a larger fraction of the population will not have high school diplomas. Texas style demographics mean greater wage inequality. Great for the leviathan.

Share |      By Randall Parker at 2009 July 30 09:32 PM  Economics Inequality


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James Bowery said at July 30, 2009 10:45 PM:

Herbert Butterfield’s “The Origins of Modern Science” ISBN 0-684-83637-8, p15:


Of all the intellectual hurdles which the human mind has confronted and has overcome in the last fifteen hundred years, the one which seems to me to have been the most amazing in character and the most stupendous in scope of its consequences is the one relating to the problem of motion.
...
The Aristotelian doctrine of inertia was a doctrine of rest—it was motion, not rest, that always required to be explained. Wherever this motion existed, and however long it existed, something had to be brought in to account for it.
...
The essential feature of this view was the assertion or the assumption that a body would keep in movement only so long as a mover was actually in contact with it, imparting motion to it all the time… If resistance were reduced to nought, the speed would be infinite; that is to say, if the movement took place in a vacuum, bodies would move from one place to another instantaneously. The absurdity of this was one of the reasons why Aristotelians regarded a complete void as impossible, and said that God Himself could not make one.

I can't help but think the on-going conflation of "wealth" with "income" is a similar intellectual hurdle facing the humanities with equally profound consequences once it is recognized -- in actual practice of political economy -- that they aren't the same.

A.Prole said at July 31, 2009 12:16 AM:

Of course, this inequality is all the result of the so-called 'neo-liberal' policies which gained the ascendancy after Reagan.
The policies were promoted by the WSJ and the 'Economist' amongst others.
Basically, massive unrestriced immigration destroyed wages for the working and middle class and this was combined with the huge trade imbalance that destroyed working class jobs.
Basically, the American working class was fucked - and no politician gave a shit.
This was copuled with Reagans tax cuts for the super rich, which lead to the acceleration of 'corporate compensation' in that period.

Some wordy bastard said at July 31, 2009 8:16 AM:

It might be that a significant proportion of the upper classes are prepared to live with the imposition for the control it gives them over government ...

Daniel said at July 31, 2009 8:18 AM:

Squeeze the rich (and maybe the not so rich. Say, those making 200K+). I don't give a damn. The fraud that is Wall street has opened my eyes. Few of the rich actually earned that money as we generally understand the meaning of the word earned. As I see it, the rich don't come close to paying a fair share of what they take from the rest of us. And they bend the rules to always suit themselves. The old line was that with outsourcing new opportunities with more value added would be available to displaced workers. But the rich don't like paying the servile class a fair wage so they flooded the market with immigrants, legal and illegal. The rich rig the system for their benefit, always.

And if this is a case of cutting the nose to spite the face, well, so be it.

I wonder, are my feelings typical of my demographic - white, lower middle class, generally conservative, in other words, a Reagan Democrat? If they are, the Republicans are history. Good riddance.

Maybe, good by America? Well, nothing is permanent.

Engineer-Poet said at July 31, 2009 8:43 AM:

Nobody BUT the upper class can fund the US government, because one-third of total compensation goes to executives and other highly-compensated employees.  That's just wages; it doesn't include the value of stock options.

The USA needs to be financed by the people that gots.  Maybe a 2%/year property tax, on all property, so wealthy people with small incomes are forced to pay their fair share for the military, police and courts which protect it all for them.

not anon or anonymous said at July 31, 2009 10:17 AM:

Daniel:

As I see it, the rich don't come close to paying a fair share of what they take from the rest of us.

Could you illustrate that process, please?

Old Stock Yankee. said at July 31, 2009 1:15 PM:

In retrospect Ronald Reagan will be seen for what he was - calamitous disaster of a president.
Notwithstanding the fact that in any European country a man with Reagan's obvious lack of inteligence and accomplishment would be lucky to be a janitor in the parliament building, the fact remains that Reagan was controlled by a syndicate of rich Californian businessmen (of whom the name Bloomingdale is conspicuous), as a political puppet to bring in policies that benefitted their selfish interest.
The story from washed-up ageing B-movie actor to playing the part of politician is a familir one, perhaps best told by Gore Vidal.
Reagan realy represents the stereotype of the 'jovial' as opposed to 'temperamental' Irishman.A stock type, such Irishmen are known for the uncanny ability of talking shit for hours on end, (often ghost stories),muttering to themselves and a general happy-go-lucky, unfocussed attitude.It is this type that gained in England the appellation of 'thick Paddy bastard'.They are not to be confused with the other polar type of Irishman, the latent aggressive, violent drunkard type, who could kill you as soon as look at you, a pleat enough fellow until you've seen the other side of him, but who generally wallows in excrement and filth and is capable the most unspeakable violence possible.
Jimmy Carter - now there was a genuinely good man, who Americans in a fit of stupidity rejected and humiliated.Carter had the characteristics of the best type of Englishman - genuine, intelligent and capable.The worst type of the English character - pomposity, arrogance, selfishness and ndifference to others was displayed in spades by that other wanker George W. Bush.
The Irish are believed to be a relict Eurpid populstion pushed out to the furthest Atlantic margins, and it is believed a lot of Cro-Magnid blood flows in their veins.Generally I like the Irish, finding their down-to-earth honesty an ntidote to Anglo-Saxon snobbery and deceit, but one must be warned of their 'primitive' character and wildness.Being a relict population they are fascinating as a window into early Europid populations.
A particular insight is a study of the actions of the two Irish murderers Burke and Hare in 19th century Edinburgh, who, of course murdered 16 victims for sale to anatomists for dissection.A study of the many books written on the subject give a fascinating insight on the meaning of 'Irishness'.

Sgt. Joe Friday said at July 31, 2009 2:56 PM:

"Jimmy Carter - now there was a genuinely good man, who Americans in a fit of stupidity rejected and humiliated.Carter had the characteristics of the best type of Englishman - genuine, intelligent and capable."

Let's review Carter's record: 13-15% inflation, 21% interest rate, 52 hostages taken by the Iranian "students," making kissy face with Brezhnev, pulling the rug out from underneath a dependable ally in Nicargua (and yes, I know Somoza was an SOB, but he was our SOB, not Castro's), the "Malaise Speech" (which actually kind of reminded me of Capt. Queeg's speech in the wardroom), I could go on and on.

"Genuine, intelligent, and capable?" More like a pompous, self-important, petty, sanctimonious prick. I do agree with you Old Stock about George W. Bush however. He and Carter are a lot more alike than you might think, though.

Mthson said at August 1, 2009 4:36 PM:

"The rich don't like paying the servile class a fair wage."

If a type of labor can be attained overseas for $5/hour, it's a drain on society to pay a local worker $20/hour to do it. The problem is most humans don't value proactivity and intelligence, instead preferring sentimental behavioral models, so their labor is of reduced value in an honest market.

Peter North said at August 2, 2009 2:08 AM:

Mthson,
You really are a contemptible lump of shit.
The fact is that wages for the *vast majority* of the US population are in fact lower now than in 1968.
A Chinaman can live off $1 a day to a good standard Joe Sixpack can't.
So what is your dumb-assed stupid point?

Mthson said at August 2, 2009 3:20 AM:

1. Our mutual goal is probably to direct the economy toward expanding sectors and away from shrinking sectors. The desire to resist technology that causes short term costs of lost jobs will always be with us, but if we had stopped technology when the original luddites first made that argument, we wouldn't today have computers and all the things we take for granted.

The Luddites were a social movement of British textile artisans in the early nineteenth century who protested—often by destroying mechanized looms—against the changes produced by the Industrial Revolution, which they felt were leaving them without work and changing their entire way of life. http://en.wikipedia.org/wiki/Luddite

2. "Wages" might have stagnated, but "compensation" is a less misleading narrative.

Although wages have fallen behind inflation for over a generation now, other nonwage components of worker compensation, particularly health care benefits, have grown more quickly than inflation. The graph below shows that in fact total compensation shows a steady long-term upward trend relative to inflation that has if anything accelerated in recent years. [Total compensation is up around 50% since 1974.] http://www.econbrowser.com/archives/2005/12/declining_real.html

Also, if you factor in the things we take for granted today that couldn't have been bought for millions of dollars in 1968, like cures for previously fatal diseases, and a $200 iPhone with access to the internet and the sum total of human knowledge, it seems like total compensation is actually up more than 50% since 1974. (Possessing an iPhone makes you more than a millionaire by 1968 standards.)

Mthson said at August 2, 2009 3:47 AM:

Also, most of the jobs with the lowest wages are done by new workers who entered the economy from other countries. Our economy has been able to raise the standard of living for those workers compared to their previous countries, but including their wages in the present calculation artificially lowers our estimate of how wages compare between the Americans of 1968 and their descendants today.

Engineer-Poet said at August 2, 2009 6:56 AM:

The "new workers" from other countries depress wages for the lower tier of citizens; the benefits go to those upper tiers, like the execs and others who are now taking ONE THIRD OF ALL COMPENSATION (that's the WSJ talking, folks!).  The US citizen pays the costs for these "new workers" in property and sales taxes for schools, roads, hospitals, and so forth; they pay AGAIN in higher health-insurance costs because of cost-shifting to finance the uncompensated care the "new workers" receive.  They are paying this on top of depressed wages so that the upper tier can pay less for more.

If these "new workers" were sent home, wages would rise.  There are no "jobs that American's won't do"; meat-packing is attractive to American citizens if wages are even slightly above Wal-Mart levels.  Higher wages for e.g. agricultural labor would make it profitable to replace labor with machinery.  This would move labor from low-wage jobs in the fields to engineers, factory workers and mechanics while eliminating the burden-shifting and crime associated with unskilled immigrants.  Don't we have enough unemployed professionals?

Old Stock Yankee. said at August 2, 2009 9:04 AM:

Basically, as I said before it's all down to Reagan.
That waffling low IQ Irish twit (who was really the front for a syndicate of businessmen), instituted policies that inevitably lead to today's extreme wealth polarization.That was all the 'syndicate' ever wanted out of their stooge, and they got it.
I repeat, the tragedy is that such a good, intelligent and fundamentally decent and honest man like Jimmy Carter was rejected by the Us electorate and mega-klutz Reagan was put in his stead is a disaster of woeful consequences.

Randall Parker said at August 2, 2009 10:53 AM:

Mthson,

Healthy people haven't benefited from the high prices for medical care. I've been watching my health care costs rise for decades and yet I haven't seen a doctor in several years.

As for the benefit of iPhones: I think they've killed more people because of people talking and messaging on them while driving. I do not see the big benefit from them. Mostly they waste time.

Useful info from iPhones? I rarely see anyone use them to look up reference info. I find cell phones too slow and small for serious internet research. PCs are way way more productive for internet research.

So far the biggest economic benefits I see from the internet:

- lower prices by searching online.
- cheaper news.
- more focused news. Find out the news you want to find out in great detail.

Old Stock Yankee,

I see far more continuity between US presidents than the partisans on either side would admit. Carter started the deregulation wave with CAB, ICC, and other market regulation agencies. Remember Alfred Kahn? He worked for Carter, not Reagan.

And how about capital gains tax cuts? Carter. He started the big push of money into venture capital and stock markets by lowering capital gains taxes.

Reagan as stooge: Oh come on. Learn about the man's life. He formed his own opinions by reading lots of books and writing. Some rich people supported him since they obviously agreed with him. But Justin Dart et al seemed to benefit little from their support. He did them no favors in return. Also, Reagan reached his conclusions traveling his own path dealing with communists in Hollywood and learning about the world around him.

As for who screwed us: both parties. They both let in large numbers of low IQ immigrants. They both let large financial institutions place huge risky bets from within financial institutions too big to fail. Robert Rubin and Bill Clinton did as much to deregulate financial markets as Reagan or the Bushes.

averros said at August 4, 2009 2:11 PM:

"Inequality and high marginal tax rates mean that a small fraction of the population pays an outsized share of taxes."

This is, of course, a statement of economic illiteracy.

The rich (who are, with rare exceptions, have their assets in productive form), when taxed, won't spend less on their lifestyles. One needs only so much money to buy pretty much anything one fancies. Where the spending cut goes is _investments_. Lower investments mean fewer workplaces. The rich business owners will also compensate loss for taxes by passing in on to the consumers in the form of higher prices (since the tax applies practically equally to all business owners, this does not create any competitive disadvantage).

The end result - it's poor people who get fucked. It was always like that, it will always be, in all matters political.

It makes little difference who get taxed; it's the total amount of taxation which matters. The only "achievement" of democracy is that these poor people are deluded into thinking that they are soaking the rich - and so keep supporting more and more taxes. In the older monarchist times there was a clear distinction between the subjects and the rulers - and subjects kept rulers in check by resisting attempts to raise taxes. So, on average, the taxation in absolute monarchies was order of magnitude less.

Oh, and since taxes have to be used on something, they tend to go to people who have political connections - meaning the super-rich elite who owns the banks and the military-industrial complex. Higher taxes *cause* higher inequality.

Randall Parker said at August 4, 2009 8:20 PM:

averros,

What is inaccurate about my statement. You insulted it. Then you wrote a bunch of stuff that does not show that I am inaccurate.

Then you conclude by asserting that higher taxes cause inequality. You just assert it. No logic.


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