Three Cheers for Wealth Inequality

One can’t but hear the almost daily drumbeat from the left about how unequal things are in the United States. There is an income disparity between the haves and the have-nots where Wall Street bankers take millions of dollars home to their Greenwich mansions while millions of others work for minimum wage and can’t afford their own home, never mind something resembling a mini-Versailles.

That may be true, but the reality is, inequality exists today, inequality has always existed, and inequality will always exist. Why? Because people are simply different. People have different motivations, different skillsets, different temperaments, different passions, different work ethics… essentially, everyone is different. As such, why does it make sense that everyone would be equal? It doesn’t.

It doesn’t matter if it’s at work or at school or volunteering for a church fundraiser, different people perform differently. In school I remember friends who earned straight A’s with seemingly little or no effort while I struggled to get Bs or Cs. Of course, even though I recognized how challenged I was, I rarely did the work I knew was necessary to merit anything other than a passing grade. I always told myself that I could have earned straight A’s had I applied myself. Maybe I was right, maybe I was wrong, but the reality is that I didn’t care enough about earning A’s to do the work to earn them.

And so it goes in life. Most people get out of it what they put into it. The United States is a nation where, for the most part, people have the opportunity to achieve the success they seek if only they work hard enough and smart enough to get it.

No nation of any size has ever created an environment where everyone was equal in outcomes. Lots have tied however from Revolutionary France to the Soviet Union to Communist China. Economic equality has been tried on our shores as well, from the Mayflower Compact to New York’s Oneida Community to the 1960s communes. All failed to achieve anything resembling a sustainable equality and are gone, other than Communist China, which is anything but egalitarian in any sense of the word.

Today in the United States it’s fashionable for union activists and college students to protest the inequality in society where the rich get richer and the rest of us get poorer. The problem with that logic is that while the rich have gotten richer, so has everyone else. Does it matter if the rich are 25 times richer than the poor if everyone is twice as well off as they used to be? Poverty used to mean that someone had little if any food and possibly a ramshackle place to live if they were lucky enough to have a roof over their head at all. Today, poverty in America means something quite different… Refrigerators, air conditioners, televisions, DVD players and cell phones.

Indeed, in America today poor people have far more in common with rich people than perhaps any point in human history. In 15th Century the King of France had hundreds of courtiers whose jobs were to do everything from cook his food, put his clothes on him to literally wiping his behind when he was done with his business. Paupers not only could never afford the King’s luxury, they didn’t have access to the same basic amenities in life from nutrition to leisure time to entertainment. The discrepancy was not something that could ordinarily be erased by hard work or ingenuity. In this respect Royal France was not so different than most periods of human history. Similar disparities existed in Cleopatra’s Egypt, Victorian England and Tsarist Russia as well.

In America however, not only are those listed in poverty far better off than at any time in human history – and indeed better off than many middle class Europeans today – they also have opportunities for upward mobility that have rarely existed anywhere at any time.

Given that we all have unique DNA, we all live unique lives, we are all motivated by and drawn to different things, economic equality and prosperity tend to be mutually exclusive. As William Bradford learned, imposing equality of outcome leads to economic ruin.

Luckily for Americans and the rest of the world, the United States learned early that a society that seeks to be truly egalitarian doesn’t start by declaring everyone share everything they have or that somehow citizens were to become robots where everyone produced the same amount and consumed the same amount. No, the Founding Fathers delivered something far more powerful. They created a nation where everyone (eventually) was able to harness their unique abilities to invent, innovate and simply work to create a better life for themselves and their families. In doing so the United States has led the march of the improvement in the condition of man over the last two centuries.

With that improvement came great disparities. At one point after the turn of the century when the average American was earning $750 per year, John D. Rockefeller’s wealth was $1 billion, or about 1.5% of US GDP. (For comparison, an equivalent net worth today would be approximately $210 billion, four times Bill Gates’ wealth.) Despite the wealth disparity, the average American was far better off because of Rockefeller as energy prices declined by more than 90% between 1865 and 1910 even while demand skyrocketed. The average American benefited from similar disparities with giants like Carnegie, Vanderbilt and continue today with men like Bill Gates and Jeff Bezos.

The proof is definitive; capitalism makes people richer, both the capitalists themselves and everyone else. As such, the question for the left is: Is their goal to make the lives’ of everyone better or simply destroy the capitalists? Their actions seem to suggest the latter, but if their true goal is the former, they should throw down their “I am the 99%” banners and storm Washington. Not to demand the heads and wallets of the rich, but rather to inveigh against Congress for creating a bureaucracy that hinders a citizens ability to harness their passions, skills and ingenuity to earn themselves millions of dollars as they enrich consumers willing to pay for whatever goods or services they provide.

It’s no coincidence that six of the ten richest men in human history are Americans, three of whom started their lives as paupers. We should celebrate their wealth and success as we benefit from their efforts. Perhaps such celebration would inspire millions of would-be entrepreneurs, inventors and innovators to follow their examples. We should be so lucky.

Representation without Taxation...

In the United States we take taxes very seriously. Indeed it’s in our blood. One of the key reasons for the American Revolution was taxation without representation. The Colonists did not like the idea of paying taxes to England without having a voice in how those funds would be levied or spent, i.e. they didn’t have representation in Parliament. In some cases they had representation in a state assembly, but the local legislature was in all cases trumped by the government in England.

Building on that initial connection between voting and taxes, in 1964 the 24th Amendment to the Constitution made it explicitly clear that no one could be barred from voting because of a failure to pay any tax. The primary target of the Amendment was Southern states who were limiting the rights of blacks by imposing a poll tax. The Amendment however did not ban simply poll taxes but rather any “other tax” as a bar to elections.

The goal of barring discrimination of black voters was of sufficient consequence that it deserved a Constitutional Amendment. The problem however is that by adding the words “or other tax” the government sowed the seeds for its own demise.

How? By permanently severing the relationship between those who finance the government and those who control it. Today, 51% of income earners pay no income tax at all, while the top 10% pay 70% of all income taxes. In addition, 30% of “taxpayers” actually earned money from the government in the form of refundable tax credits while those on welfare are not counted in the pool in the first place.

Progressives often respond that everyone pays Social Security and Medicare taxes. That is true – assuming someone is employed. In the federal system we have five primary forms of taxes:

First of course is the aforementioned Social Security. Social Security taxes are ostensibly taken from employees to fund (or ideally to supplement) their retirement.

Then there is Medicare, also taken from paychecks, which is intended to provide health insurance to those over 65.

Next there are excise taxes, taken with the specific purpose of supporting particular government programs and funded by the people who use those services. These would include things like gasoline taxes going to pay for transportation projects and airport fees to support airport maintenance and operations.

Then we have the corporate income tax, which is levied on corporate profits. These taxes go into the general fund and are intended to pay for the normal operations of the federal government.

Finally there are personal income taxes. These taxes are often the largest single component of the federal government’s revenue, and like corporate income taxes they are intended to fund the general operations of the government.

Here is the error of the progressive argument. The taxes paid by the bottom 50% of income earners (and those who earn no income) are for either retirement support or to pay for a used service, not the general operation of the government. As such, they are paying no taxes to support the actual functioning of the government. The fact that Congress has been raiding the Social Security “Lockbox” for decades does not change this fact. As long as the government is functioning, Social Security recipients will be the senior creditors on any government expenditures… and it is the people who pay the taxes who will have to make good on those IOUs.

Neal Boortz asks the question: should the vote of a welfare matron on the government dole with a five children be equivalent to the vote of a small businessman who pays $25,000 in income taxes and has 10 employees who support 20 other family members? The obvious answer would seem to be no. Certainly no more than it makes sense to allow your neighbor to negotiate with your boss how much of your salary you will be allowed to keep and how much your neighbor gets to take home in exchange for a kickback to the boss.

Is it now time to flip the colonist’s battle cry on its head? Should there be representation without taxation? Can the United States survive with a growing majority of her population contributing nothing to the running of the government, or increasingly, being net consumers of government largesse? This is not a new issue. "A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy." That quote is sometimes attributed to Alexis de Tocqueville and sometimes to Alexander Fraser Tytler. Regardless of its provenance, the notion is spot on. One need look no farther than today’s dysfunctional federal government to recognize the writer’s prescience.

Not only is the government taking all of its income taxes from the top 49% of income earners, but at the same time it’s borrowing trillions of dollars (that those same taxpayers will have to repay) to redistribute to tens of millions of others who are not paying any income taxes. The logical progression of this cleptocracy will be that eventually the most productive members of society will seek refuge in countries where they can enjoy the fruits of their labor. Where will the government look to then as it seeks to fund its redistribution of wealth?

Perhaps now is the time for another Amendment. One that states simply: “In order to be eligible to vote in federal elections a citizen must have paid federal income taxes in one of the previous three years.” Absent that, perhaps it’s time to consider a flat tax, or even better, the Fair Tax. None of these solutions will solve our fiscal problems on its own. Without spending cuts and a smaller, limited government the Grand Experiment is doomed. Creating an exclusive connection between voting and those who pay the government’s bills is a good first step however.

The rich don't pay their fair share... unfortunately that's true.

There’s an old saying; A picture is worth a thousand words. Pie charts will likely never be confused with great art in terms of story telling, but they have a way of making complicated issues clear. Income taxes are one of those things that are naturally difficult to grasp and the issue is made that much more opaque because liberals love to obscure the facts.

One of the shibboleths of the left is that the rich don’t pay their fair share of taxes. One of the more amusing segments of the 2008 Presidential campaign involved Neal Boortz asking then Democrat hopeful Dennis Kucinich two simple questions:

1. What percentage of total income is earned by the top 1% of income earners?


2. What percentage of total federal income taxes are paid by the top 1% of income earners.

Congressman Kucinich answered: He thought the top 1% of income earners earned 60% of the income and paid about 15% of the taxes. He was a little off. In fact, the top 1% of income earners earn approximately 17% of all the earnings in the country. That’s certainly higher than the 1% they represent of the population but a far cry from Congressman Kucinich’s 60%. More astounding however, is that they pay fully 39% of all of the federal income taxes - according to a 2009 Congressional Budget Office report. The below chart demonstrates clearly the absurdity of the notion that the rich do not pay their fair share of taxes.

The first chart shows that the rich do indeed pay far more than their oft cited “fair share” of income taxes. Not only that, it also shows that the bottom 40% of wage earners actually have a negative tax rate and get money back from the government in the form of income tax credits!

Another of the left’s arguments is that the lower income wage earners pay a disproportionate amount of the Social Security / Medicare tax. That too is false. The second chart states that the top 10% of wage earners pay 43.5% of all social insurance taxes while the bottom 40% pay just 15%.

Why does any of this matter in the first place? The third chart (taken from a 2010 report from the Tax Foundation) demonstrates why…Jobs. It compares wage & salary, capital gain, and dividend income for all income earners. As you can see, for the 80% of income earners below $200,000 per year, wages (i.e. a job) make up almost their entire incomes. Without jobs that someone else creates they would have no income... except government transfer payments.

At the $200,000 and above level, business and dividend income starts to take off and by the $1,000,000 and above level the three are almost equivalent. Those are the telltale signs of success. Those people earning those $200,000 and above incomes are the people creating the jobs that employ most of the remaining 80% of the population.

Put another way, jobs are not created by wage earners. Jobs are created by entrepreneurs risking their capital to start businesses… And those entrepreneurs are the usually found in that $200,000 and above group. The businesses they start generate 65% of all new jobs created in the United States.

While the first two charts debunk the myth that the rich do not pay their “fair share” the above chart demonstrates why it matters: The rich are the ones starting small businesses and creating jobs and prosperity.

Myths die hard, particularly when their proponents willingly ignore the facts. The myth that the rich don’t pay their fair share should soon be headed the way of the global warming hoax. Clearly it is the people at the upper end of the income spectrum that are being treated unfairly. They are not paying their fair share... They are paying more. Not only are they responsible for 2/3 of all new jobs created, but in return they are rewarded with being allowed to keep even less of their income as they become more successful. Perhaps as more Americans examine and understand what it takes to generate and sustain a dynamic and growing economy the “tax the rich” cries will begin to fall on deaf ears. That’s exactly what America could use right now, a reinvigorated entrepreneurial class striving to put more money in their pockets… and generating millions of jobs in the process.