There is a lot of talk about income inequality around here. Bob Herbert's NY Times article cites statistics from Robert Reich stating that the top 1% of income earners took home 11% of the total income in the nation in the most recent year for which statistics are available (2007). Further, the top 1% took home more than 23% of total income.
I get the sense that the reality of these statistics doesn’t sink in with ordinary Americans. We can go on and on about what percentage of the population has what share of the income or wealth, but I feel that it’s hard for people to comprehend because the numbers are somewhat abstract. So I’m going to try to create a scenario that will hopefully make it clear.
There is a room with 1,000 people. Let’s assume (for the purposes of keeping the math simple) that the average (mean) annual income of the people in this room is $50,000. That means the total annual income in that room is $50,000,000 ($50 million). What that also means is that 1 person in that room is earning $5.5 million per year. Taken a step further, it means that 10 people in that room (the top 1%) are earning a total of $11.5 million (or $1.15 million per year, each), more or less.[1]
The United States is supposed to be a meritocracy. So the obvious question should be what do these people do that makes them so much more valuable to society than the rest? It's pretty clear that they don't have that much more value than the average worker, but those at the top of the income ladder been able (most especially since 1980) to leverage their already sizeable monetary (and by extension political) power to stack the rules more and more in their favor. The first step was Reagan cutting the top marginal tax rate from 70% in 1981 in a series of cuts all the way down to 28% in 1988 (before it was ultimately increased again under George H.W. Bush and Bill Clinton to a post-Reagan high of 39.6% from 1993-2000).
George W. Bush followed with his own income tax cuts as well as cuts to the capital gains/dividend tax and the estate tax. While less obvious to the average person, these cuts were even more disporportionally skewed to top income earners and resulted in the phenomenon where Warren Buffett famously acknowledged that despite his vast wealth, his effective tax rate is lower than his secretary.
The right will argue that taxing the wealthy at a higher rate constitutes "class warfare" and that basic fairness suggests a flat tax, with everyone paying the same rate. There are a couple of different problems with that argument.
First, as an issue of basic fairness, those who have gained the most from being a part of the society should have an obligation to pay more for it. After all, they didn't accumulate their fabulous wealth in a vacuum--without the rest of us, their wealth wouldn't exist.
Second, those in middle and lower income brackets spend a much higher percentage of their incomes on necessities--food, clothing, health care, etc. leaving them with far less (and often zero) disposable income.
Third, those who earn more, use more and purchase more are disproportionately more costly to society. They use more natural resources as well as public services like the court system.
And with respect to the class warfare argument, it's pretty clear that the wealthy have been waging such a war against the middle and lower classes forever and that since Reagan was elected in 1980, they have been winning. Nowhere has that class warfare been more obvious, or created a greater redistribution upward than in Social Security.
In 1983, Reagan created the National Commission on Social Security Reform (NCSSR), chaired by Alan Greenspan. The NCSSR came up with a plan of tax increases and benefit cuts that would create a surplus in Social Security that could be used to pay future benefits, when the program was expected to run at a deficit. This plan disproportionally affected middle and lower income people because the Social Security tax is regressive, with income over a certain amount exempted. However rather than keeping the Social Security Trust Fund separate, that surplus was included with general revenue and used to pay down the deficit. Later, during Clinton's presidency when the government actually began running a surplus (largely due to the Social Security Trust Fund), George Bush used that as an excuse for his massive tax cuts, dishonestly arguing that the government had taken too much of people's money and it was just being returned to them. So George W. Bush and the Republican Congress took money that had been largely paid by middle and lower income taxpayers and sent that back to the wealthy, who received a much greater percentage (in real dollar terms) of the 2001 and 2003 tax cuts.
What's the solution? Well this is a problem 30 years in the making, so it can't be fixed overnight, but it seems clear that a necessary first step is to let the tax cuts for the wealthiest Americans expire on schedule next year.
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[1] This should really raise eyebrows about how crazy rich the top 0.1% really is. Based on these statistics, almost ½ of the total earned by the top 1% (the richest 10 people in the room) is taken by that top guy—said another way, he earns nearly as much per year as the next 9 richest people combined.