Conservative Myth – Income Inequality is Fine

We’ve already gone through the question of whether or not an unregulated free market really exists in this country (it doesn’t) and whether that market is a fair distributor of wealth (it isn’t).

Just as a reminder. I’m not attempting to suggest any solution to the problem, but just addressing the conservative myths. I want to separate those two discussions, because so often the defense of a myth is the suggestion that there is nothing reasonable you can do to prevent it. We can get into solutions in future posts. Let’s focus these discussions on existence rather than remediation.

So now let’s dig a little deeper into the related conservative myth regarding their tolerance of income inequality. That myth has three parts.

The first, like many conservative myths, ignores the facts and suggests that income inequality isn’t really that bad for the individual. Everyone has a higher standard of living after all and so those who are concerned about income inequality are really just engaged in class warfare.

The second, is that a concentration of wealth in the hands of a few is good for the economy. It is the ultimate expression of a free market at work and it is the wealthy who create jobs, so any attempt to limit their ability to maximize their income is going to hurt the economy.

The third, is related to the second, but more philosophical. Wealth is the natural outcome of a free market. So progressive taxes and other methods which require the wealthy to pay more than everyone else is unfair. These methods punish success and by implication discourage others from making the same sacrifices that these special individual are willing to make.

Let’s take these in order.

Income Inequality is Harmless

Hopefully we all can agree that income inequality is great if you are part of the small group whose share of the income pie has been growing. We’ll talk about that group in more detail in the next two parts of this myth.

For the purposes of this portion of the discussion let’s focus on the rest of those who are primarily wage earners and whose incomes have been basically flat since roughly 1970.

Here’s how life has changed for this group.
1. Mom’s went to work. They did this to allow their families to remain in the middle class, or as an effort to get into the middle class. One wage earner used to be sufficient for a comfortable middle class life, but it isn’t anymore. The nature of middle class jobs changed for a number of reasons. One of those reasons is that executives began taking a bigger piece of the compensation pie. Up until the 1970’s, workers’ wages kept pace with productivity. After the 1970’s only executives benefited from increased corporate productivity.
2. Families got smaller. Middle class families could no longer afford four kids. The costs to raise kids went up in part because mom’s were no longer at home to help. Smaller families mean smaller schools, slower growth in the consumer economy, and long term fewer workers paying taxes and supporting Social Security and Medicare.
3. Commutes got longer. Middle class work weeks got longer. Middle class workers took less vacation. The United States in some ways turned into Japan in terms of the 24-7 nature of middle class jobs. As a result, the health of middle class workers declined as their stress levels went up.
4. The bargaining power of middle class workers decreased. Several factors at work here. One was an aggressive union-busting strategy championed by Ronald Reagan. Another was an aggressive outsourcing of manufacturing to right-to-work southern states and offshore low cost of labor centers. The third was decimation of the white collar workforce as a result of automation. Many middle management jobs simply disappeared as factory work contracted, clerical work disappeared, and software replaced paper and the workforce that managed that paper.
5. The cost of college skyrocketed as Republicans purposefully cut funding to higher education as part of the larger supply side economic fantasy. The middle class did get a tax break, but that modest increase in income fell far short of the cost to send their kids to college. So those families pulled money out of the only other asset they had, their homes. That asset was dramatically devalued in the financial crisis of 2008. The result is that those families are no longer able to pay for a college education. That burden has now shifted to students who leave college with huge debt burdens that previous generations did not have to deal with. The result of those burdens are being felt across the economy as college graduates spent a decade or more paying off debts rather than buying houses, starting families, or starting new businesses.
6. College education used to be the huge social melting pot where smart kids from modest means could make the jump to high paying jobs based on their willingness to work hard. Now college, particularly the elite colleges that are the gateway to the executive level jobs in this country, are only available to the children of those executives. The meritocracy of the 1950’s has been replaced by an oligarchy.

The Concentration of Wealth is Good for the Economy

I’ve dealt with this in previous posts. But here is a quick summary.
1. There is no trickle down economy. Wealthy people only buy from other wealthy people.
2. The wealthy get a substantial amount of their income from the stock market. As a result, their spending habits fluctuate based on the market. This makes for a far more volatile economy than one based on a large set of middle class consumers.
3. The wealthy are NOT job creators. Most jobs in this country are generated by medium size high growth companies. Most of these companies are privately owned. Those owners are not taking big salaries. They may have high net worth because of the value of their business, but all of their assets are tied up in their business. So they aren’t generally reporting high incomes. Too many small businesses fail or get acquired, so the gains of small business are pretty much offset by the loses. Big companies that can afford high priced CEO’s are the ones doing the acquiring. As a result, they lay off more people than they hire. So they also are not a long term significant contributor to job growth.

Wealth is the Natural Outcome of a Free Market

While it is true that in a free market income distribution is going to produce some wealthy people, we have already proven that in this country, markets aren’t free. Worse yet, markets have become warped by the political influence of wealth. Because we’ve allowed markets to become biased to benefit the wealthy at the expense of everyone else, we shouldn’t be concerned that an effort to remove some of this bias is “unnatural”.

While it is true that wealth is an incentive, there is no evidence that progressive taxes are a disincentive, or that a multi-millionaire is any less driven than a billionaire. If higher marginal tax rates were a disincentive to wealth, we would see it reflected in slower economic growth during times of high marginal tax rates and higher growth during times of low marginal tax rates.

During the period 1951-63, when marginal rates were at their peak—91 percent or 92 percent—the American economy boomed, growing at an average annual rate of 3.71 percent. The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm—just the opposite. And during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent.

Finally there is the myth that a progressive tax system removes the incentive for those who aspire to wealth to make the same sacrifices that those who achieved it where willing to make. The reality as we covered in the previous post is that great wealth in this country is much more an accident of birth than the product of hard work. Less than 20% of the billionaires in this country earned all of that income themselves. The other 80% inherited a substantial amount of money, in some cases more than a billion dollars.

That is not to say that those who achieve great wealth weren’t willing to work hard and make sacrifices. They were. But it wasn’t their hard work and willingness to sacrifice that distinguished them from those who didn’t achieve great wealth. The difference is that they were lucky. They stood at the table of life and rolled a 7. They were born into the right family at the right time with the right skill set to take advantage of a disruptive moment in our economy. There is nothing wrong with being lucky, but there is something wrong when we suggest that taxing the lucky will somehow diminish their ability or desire to take advantage of their good fortune.

But that still leaves one question unanswered. What sort of incentive does wealth provide for those who are already wealthy? Turns out that the major incentive is preservation of their family’s wealth through investments to minimize their taxes and secure the future for their children. Over the past 50 years or so, those investments have include political contributions to influence favorable rule making.

Again I’m not trying to make value judgments here, though obviously I do have an opinion. I’m just stating facts. For example, it is entirely natural for parents to try to make a better life for their children. By not paying closer attention to the influence that wealth has in this country, however, we are witness to the meritocracy of the 60’s becoming an aristocracy. That’s because those who benefited from the ability to make the jump from the middle class to wealth have had the means to change the system so that it benefits the children of the wealthy rather than all talented, gifted, and hard working children. There are still the same number of opportunities for Ivy League grads now that existed in the 60’s, but a much higher percentage of those grads are coming from wealthy families.

So it raises the inevitable question of which is more beneficial to our society, one billionaire or 20,000 middle class wage earners. In other words, what kind of a society to we want ?

Here are our choices. The society we have today concentrates wealth in the hands of a few who control the rules of the game for their own benefit. Those rule changes have greatly impacted the middle class which is in steep decline. The society we had during the most prosperous years in our history concentrated economic and political power is in the hands of a middle class. They received a fair share of the productivity gains that they delivered because of strong unions. That fair share was sufficient to allow them to provide their children all of the advantages and support required to also be part of the middle class. The result was a growing middle class that sustained economic growth through the 1970’s when the rules began to change.

Economic prosperity doesn’t trickle down, and neither does civic prosperity. Both are middle-out phenomena. When workers earn enough from one job to live on, they are far more likely to be contributors to civic prosperity — in your community. Parents who need only one job, not two or three to get by, can be available to help their kids with homework and keep them out of trouble — in your school. They can look out for you and your neighbors, volunteer, and contribute — in your school and church. Our prosperity does not all come home in our paycheck. Living in a community of people who are paid enough to contribute to your community, rather than require its help, may be more important than your salary. Prosperity and poverty are like viruses. They infect us all — for good or ill.

Inclusive economies always outperform and outlast plutocracies. That’s why investments in the middle class work, and tax breaks for the rich don’t.

85 Responses to “Conservative Myth – Income Inequality is Fine”

  1. Keith says:

    Hillary said the problems are glitches and the answer is more regulation. The only answer is the desired result, SINGLE PAYER…

  2. Keith says:

    Here comes Bernie with single payer, right on que.

  3. Keith says:

    His hand waving finger pointing is really annoying.

  4. Keith says:

    Single payer also doesn’t let us go to the doc for whatever we want when ever we want.

  5. Keith says:

    College debt.

    Why is the cost of college rising soooo fast?
    You know what I think.

  6. Keith says:

    Bernie wants to tax wall street to pay for free tuition…
    Question, who is Wall Street?

  7. Keith says:

    Did Hillary get filler in her checks?

  8. Keith says:

    We pay more for healthcare but do we have more healthcare activity?

  9. Keith says:

    How can there be a middle class tax raise when most the middle class does pay hardly any at all?

  10. Keith says:

    I’m for the Clinton tax rates of the 90’s

  11. Keith says:

    45% top rate Mr O’mally
    Cap gains the same rate also.
    Wow.

  12. Keith says:

    Under my Clinton tax plan the everyone’s rate would go UP except to top rate. Why? BUSH LOWERED THEM and Obama left all rates in place except the top one. Sooooo as I see it the only ones NOT paying their fair share is those not in the top rate. Agree?

  13. Keith says:

    They are now talking about the divid between the divide between law enforcement and civilians. Typical liberal framing of the issue. This it an urban problem in some areas. This is not a statement all Americans understand so here’s another issue being blown out of proportion. It’s a false narrative.

  14. Keith says:

    Here’s a big conservative difference from liberals. I can’t tell you how many times tonight these candidates have said ” this is complicated, these aren’t simple solutions” where as conservatives arrive at simple solutions. You and I have had these differences also.

  15. Keith says:

    I wonder if any progressives see three old white people on the stage and feel they are not represented by the party. Conversely there is 2 Hispanics, a black and a women on the republican stage. Young people and old people. Do you think they feel they have more in common with them as they are represented?

  16. Keith says:

    If as Bernie just said the govt belongs to just a few, as you’ve been arguing also, how did gay marriage come about when this effects about 300,000?

  17. Keith says:

    Hillary can only sell fear in her closing.

  18. Keith says:

    They finished early again.

    Summery – all our problems will be solved by two things.

    Forming cololitions in the Middle East

    Taxing the crab out of either 1% or a few billionaires, depending on which one was speaking.

  19. Keith says:

    Nothing said about the debt or future unfunded liabilities…

  20. Keith says:

    http://bloom.bg/1OCSO9c

    She’s being dishonest here!!!!!

    #1)22.9% is a tax on capital gains and qualified dividends.
    That IS NOT INCOME!!!!

    #2) they are not “gaming the system!” It’s the tax code. Long term capital gains are taxed at 20% and the ACA requires a tax of 3.8%… It’s the law. For her to call this gaming the system is dishonest AT BEST!!!!

    #3) show me a truck driver who pays an effective tax rate of 22.9%. That probably requires an income around $200k-$250k

    #4) the comparison of the “high income” paying less tax comes from prior to the Obama raise in capital gains rates from 15% to 20% plus the ACA 3.8%. It compares federal income tax rates to capital gains rates. Capital gains by the IRS code, and correctly so, treats investment differently the income and rightly so!!! Every time you hear someone make this claim please shout at the TV “so and so is being dishonest.” If they continue to do so, please write a blog calling that person a liar!!!!

    Hope you and you family is well. God bless you in the new year my friend!!!

  21. Jeff Beamsley says:

    1. Only realized capital gains, like dividends are taxed. They ARE income. They currently have a different rate than salary income, but they ARE part of the income that you are required to report with you submit your INCOME tax filing.

    2. When the wealthy are able to use their wealth to buy political influence, and then use that political influence to alter the rules of the marketplace and the IRS to their benefit, they are “gaming the system”. When they are able to flaunt the enforcement mechanisms against things like insider trading because the gains outweigh the penalties, they are “gaming the system”. The first major reduction in capital gains rates occurred at the end of the Carter administration and was passed with majority Republican and minority Democratic support. The next three major reductions in capital gains rates came from Reagan in 1981, Clinton in 1997, and Bush in 2001.

    3. The effective tax rate includes ALL taxes and deductions, not just income tax. One of the advantages of wealth is that you can take advantage of tax avoidance schemes that are just not available to truck drivers.

    4. The effective federal tax rate of the wealthiest individuals in this country is under 17%

    Operating largely out of public view — in tax court, through arcane legislative provisions and in private negotiations with the Internal Revenue Service — the wealthy have used their influence to steadily whittle away at the government’s ability to tax them. The effect has been to create a kind of private tax system, catering to only several thousand Americans.

    The impact on their own fortunes has been stark. Two decades ago, when Bill Clinton was elected president, the 400 highest-earning taxpayers in America paid nearly 27 percent of their income in federal taxes, according to I.R.S. data. By 2012, when President Obama was re-elected, that figure had fallen to less than 17 percent, which is just slightly more than the typical family making $100,000 annually, when payroll taxes are included for both groups.

    http://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html

    The issue is not whether or not this is legal. In many cases it is entirely legal.

    The issue is WHY do we have a tax system where those with the most money have opportunities to reduce their taxes that are not available to the rest of the tax paying public?

    This speaks to fairness, not legality.

    Your comments regarding different tax rates for different income speak to how the tax system has been used to “bias” particular economic decisions.

    We tax long term capital gains less than short term capital gains because we want to reduce speculation and encourage long term investment. But that also has created an unequal system that benefits the top 1% who earn 36% of their income from capital gains rather than wages. The middle class earns less than 3% from capital gains.

    http://fivethirtyeight.com/datalab/the-top-1-percent-earns-a-lot-from-cashing-in-on-investments/

    That again may make sense because we want to encourage the wealthy to invest their money, but creating a system where the capital gains rate is significantly lower than the top marginal income tax rate creates a disincentive for the wealthiest in this country to work at all. And that’s what’s happened.

    Instead those with great wealth use it to effect change. Some, like Bill Gates, Warren Buffet, and Mark Zuckerburg (to name a few), have funded foundations to promote social goals like eliminating disease, improving education, and combating climate change.

    Those who use their wealth to influence the political process for their benefit are the problem.

    There is no philosophical difference between enacting tax policies to encourage investment patterns that we like, and behavior that we like (working versus not working), and enacting tax policies which benefit the largest group of voters – the middle class.

    Right now we have tax policies which are “biased” toward the wealthy. If you think that is a lie, then please produce some data to support your claim. I’ve certainly posted a lot on this already. Even Trump agrees with me.

    http://www.theguardian.com/us-news/2015/sep/06/donald-trump-us-economic-system-unjust

    The political discussion we are having in this country is whether or not a “wealthy bias” in tax policy in particular and government rule making in general is the best way to run the country.

    That seems like the sort of debate we should be having and the sort of choices that voters should have in November.

  22. Keith says:

    Jeff,
    You continue the dishonest spinning. I’m will to give you the benefit of the doubt as you maybe haven’t keep up with the tax law and tied that back to my comment.

    You site data from 2012. THATS THE PROBLEM!!!!
    president Obama and congress raised the long term capital gains rate from 15% to 20%. The ACA leveled at 3.8% tax on the wealthiest bring to total paid on long term capital gains to 23.8% straying in 2013. That’s a 63% INCREASE!!!! So the 17% rate you sites is incorrect and the deceptive statistics the progressives keep spinning.

    This is the deception I asked you to. Join me in stopping. 2012 data is not relevant as it is prior to the last tax increase.

    Top income rate is 38.8% long term capital gains rate is 23.8%. If you raise it any more then there will be little if any difference.

    Please also at least do the home work on the 1% verses the .0001%. I’ve provided plenty. Your beef isn’t with the 1%.

    Finally if policey is unduly influence by the .0001% then why does 47% of all income filers pay no federal taxes. Seems they are represented well.

  23. Jeff Beamsley says:

    Sorry, no dishonest spinning here.

    The issue is effective or actual tax rate and the statutory rate.

    Yes, Obama has raised the statutory rate on wealthy tax payors. No question about that.

    The actual or effective tax rate for wealthy individuals is well below the statutory rate because:

    1. So much of their income comes from sources other than salary.
    2. They are able to shelter more of their income from taxes because they have access to methods that are just not available to the middle class tax payer.

    The REAL question is why you seem to care so much about his issue?

    Seems like a lot of CAPITALIZATION and !!!! for a group of people that don’t need your help.

    Just a few more clarifications. The 2012 data wasn’t supplied in the NYT article to fool people, but rather as a twenty year comparison of how the EFFECTIVE tax rate for the top 400 earners according to the IRS has changed.

    If you feel that the actual (not statutory) rate has gone up for those top 400 IRS filers since 2012, please post something to support your claim.

    “Finally if policey is unduly influence by the .0001% then why does 47% of all income filers pay no federal taxes. Seems they are represented well.”

    We’ve gone through this before.

    1. Your statement is an inaccurate restatement of what Romney said. Only 28% of households filing income tax returns pay no federal tax. That’s because they are unemployed, retired, or disabled.

    2. 47% of all filing households (now down somewhere in the mid 30’s) paid no income tax but 19% did pay social security and unemployment taxes. These are working poor with minor children at home who benefited from the earned income tax credits that replace welfare.

    Summary

    We have a progressive tax system. That means that high wage earners are supposed to pay more than low wage earners. This progressive tax system is the sort of thing that is SUPPOSED to shift the burden of paying for our government from those who can least afford it to those who can most easily afford it.

    A progressive tax system is an example of the sorts of things an representative democracy should put in place. It IS a system that is purposely biased to benefit the poor and middle class.

    I don’t have a problem with the majority voting themselves these sorts of benefits.

    I DO have a problem when a very small minority is able to alter our democracy because they can purchase more influence than their votes would otherwise provide them.

    Not sure why you have a problem with the concept of one man one vote.

  24. Keith says:

    Washington post article siting the 2012 effective tax rates.

    Top 50% 14.33
    Top 10% 19.21
    Top 5% 20.97
    Top 1% 22.97
    Top .001% 17.60

    The Wash Post even makes a note at the bottom that these rates are prior to the Obama tax increases. Use your head Jeff do to think they had an effect?

    Also. I think you can agree to stop using the 1% er mantra and start referring to to top .001. At least get that part right.

  25. Keith says:

    As part of the discussion you most not overlook the fact the 99 per centers have had there tax lowered by President Bush and then President Obama agrees to those lower rates. So the only people to have their taxes lowered are the bottom 99%.

    Why am I concerned with this group you asked? Because we shouldn’t be looking to them for our answers. Take all their money and it still does nothing. The answer isnt to tax 400 individuals and feel good about ourselves. It’s class warfare.

  26. Keith says:

    I mentioned a book for your reading a long time ago. The Big Short. Now it’s a movie and a great one at that. Go see it. You gain some understanding of what happened. Finally you’ll see it was not the Bush administration but it was everyone. Greed has no class…

    It’s was the idiots at the bank originating loans to anyone with a pulse.
    It was anyone with a pulse taking a loan who knew they could pay it back.
    It was builders building homes they knew would never be lived in.
    It was govt officials so inept they couldn’t and didn’t over see anything.
    Greed was the motivater for everyone. So when you set your sites on the greed of the .001% know that greed knows no class. It’s “Spritual Wickedness in All Places.”

  27. Keith says:

    I just listened to Bernie Sanders 3 minute video on how he’s going to do to the big banks…I was struck by this comment, paraphrasing of course. “Not one of the executives from a big bank in our history has gone to jail, even those who took down our economy.” That’s interesting from someone who been I congress for decades and he has participated in nearly 20 trillion in debt and unfounded liabilities approaching $100 trillion dollars and not one member of congress has gone to jail for it.

    Jeff, feel free to believe our problems are the sole property of the .001% of wage earners.

  28. Keith says:

    Tax policy center estimates for percentage of house holds that will not pay income taxes this year 45.3%. Published in Forbes 10-6-2015
    171.3 million will file while 77.5 million of those will not pay federal income taxes. This is not a number Mitt Romney made up.

  29. Keith says:

    My friend makes over $80k and pays no federal taxes….

  30. Keith says:

    Wall Street Journal 4-10-2015
    Data by the Tax Policy Center

    Top 20% of earners pay 84% of income tax.
    Pause the Jeff, that’s pretty progressive.

    Bottom 20% get paid by uncle same.
    That leaves the middle class or the other 60%
    Paying 18%, the rest.

    Inside the top 20% the numbers as progressive.
    The top 3 million earners make 17.1% of the income
    And pay 45.7% of the federal taxes. That’s pretty progressive.

  31. Keith says:

    In fact reading further, the bottom 40% gets money back from Uncle Sam. You should stop agreeing for a more progressive tax system and be agreeing for an extremely progressive tax system as currently it is highly progressive.
    The more numbers I give you the more you should be aware your beef is little fly with a very small group of Americans. Again, if you were to confiscate all their wealth it would nothing for you.

  32. Jeff Beamsley says:

    I haven’t argued for anything other than to defend the concept of progressive taxation.

    My claim is that the wealthy are using their wealth to buy political power. They then use that political power to bias the system in their favor. That process has reduced the middle class, replaced a consumer driven economy with a wealth driven one, and is corrosive to democracy.

    From what I can tell, you are saying that the very existence of a progressive tax system disproves all that I have posted regarding the actions of the wealthy.

    The fact that the wealthy pay a lot of tax does not absolve them of insider trading.

    The fact that the wealthy pay a lot of tax does not give them the right to fix prices and create monopolies.

    The fact that the wealthy pay a lot of tax, does not justify changing the marketplace rules to weaken consumer protection and enhance corporate power.

    This IS NOT a discussion of tax rates. So please stop trying to make it one.

    It is a discussion of the conservative myth that there is nothing wrong with income inequality and concentration of great wealth in the hands of a few.

    And please stop suggesting that the solution is to confiscate their wealth. I haven’t proposed a solution for the express purpose of avoiding these sorts of straw man discussions.

    My interest is to reduce the political influence of the wealthy, not eliminate the wealthy as a class.

    So please stop suggesting otherwise.

    If you are interested in discussing my premise, I’m happy to continue.

    I’m not going to continue what has become a fairly silly discussion about progressive taxation.

  33. Keith says:

    I will respond in full soon as I think you are at a point where you will understand mine. If not then I’m not sure I will ever be ae to get you to at least understand my position.

    In the meantime here’s an interesting commentary from an older gentlemen I will paraphrase –

    Global warming has continued to be a huge threat to our future in the eyes of its supporters. Although the shrill forecasts of Al Gore and others have failed to develope, true believers are joe arguing that capitalism itself is at fault, and therefore must be replaced. The scientists who produced the early forecasts have very damaged credibility. The split between developed and developing countries has created a gap that is politically difficult to reconcile. The climate change zealots meeting in Paris are ignoring the French solution which has been to supply 75 percent of their electric energy by nuclear plants.

    Compare the urgency of progressives and liberals of climate change to the $18 trillion federal debt hanging over all of us. Our children could wake up to rising interest rates that would burden our successors for years to come. This threat seems to be ignored by elected politicians on the grounds that this is merely a tomorrow problem. Isn’t is curious that both global warming and the runaway debt are both future problems (if warming is in fact a problem) and one is pursued almost fanatically, and the other almost totally ignored?

  34. Keith says:

    So here we go. I’ve pointed out that your issues is with a very small amount of people. It’s not “the wealthy” but a very small subset of the wealthy. Those you believe have an unfair say in making policy. Let me suggest to you my dear friend that there has been and always will be a very small subset of individual who effect policy. Whether it’s the “wealthy” or a family dynasty, a dictator or ruler. Maybe it’s a King. Or maybe it’s elected officials and union bosses. Our system today is as fair and free as ever.

    Let me ask a simple question. If the wealthy are able to effect policy, doesn’t the wealthy need a willing accomplice within our elected officials? So if the wealthy are self seeking in there interests don’t they need elected officials who are self seeking as well? So who will be your purifier? Govt?

    End the end you are simply changing the hats of who has power. I prefer our version of capitalism to choose.

    Spiritual wickedness is not the sole possession of the wealthy.

    Go see The Big Short.

    You find wickedness only in the wealthy and

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