Inequality: Recut or Make Pie Bigger?

"Economic growth is the sine qua non for generating prosperity in the U.S. As economic growth increases, the prosperity of families and individuals in the U.S. increases in step. Higher income growth benefits government revenues too. The dynamic impacts created by the increased economic activity will lead to higher tax revenues for the federal government as well as state and local governments."

--Arthur Laffer

Laffer, more than anybody else, is guru of the American prosperity (rising GDP and wages, job growth) from 1982 to 2007 we loved but eventually took for granted. Laffer, then a USC economist, and happy-face politician/ex-NFL quarterback Jack Kemp convinced Ronald Reagan in the late 1970s that he could generate more revenue thereby closing the deficit by lowering taxes, not raising them. And “the rest is history.” Reaganomics led to 25 years of prosperity.

Democrats, however, don’t focus on growth. Obama talks about preserving “the basic social compact in America,” about “tak[ing] responsibility for each other.” He favors recutting the pie so that “the bottom 90%” get more from the government, while “the top 1%,” who “saw their income rise by an average of more than a quarter of a million dollars each,” take a hit in higher taxes.

Looking at this, Peter Wehner of the Weekly Standard commented:

What liberals are interested in isn’t growth so much as egalitarianism and redistribution for its own sake. For many on the left, increasing taxes isn’t about economics as much as morality. They believe taxing the wealthy is a virtue, to the point that they would penalize “the rich” even if that has harmful economic consequences.

Recall that during a campaign debate, when asked by Charles Gibson about his support for raising capital gains taxes even if that caused a net revenue loss to the Treasury, Obama sided with tax increases “for purposes of fairness.” The point cannot be made often enough: Modern liberalism, as embodied in the Obama presidency, is the defender of the status quo.

And, Wehner editorializes, “the status quo is a road to economic ruin.” Since the “status quo” is big government, and since big government takes resources that would otherwise generate growth, the status quo could well mean economic ruin.

But what about the morality of “the top 1%” having 40% of wealth and 25% of income? Bothers you, doesn’t it?

Well, Alan Reynolds, writing in the Wall Street Journal (where else?), tells us that the top 1% made 20% of total income before tax in 2004, and paid 41% of the individual federal income tax that year. That means those with 40% of the wealth paid 41% of income taxes, which seems fair. According to Reynolds, "No other major country is so dependent on so few taxpayers.”

Reynolds also reports on a study that documented how when tax rates go up, the top 1% step up their efforts to dodge taxes; that there is a statistical ceiling on how much they will pay.

Steven R. Cunningham of the American Institute for Economic Research has with facts answered the larger moral argument for “equality,” for re-cutting the pie:

➢ While there's obviously a correlation between wealth and income, they're not the same. . . A retiree who has $1 million invested in CDs . . . at a 2.5% rate of return . . . could have an annual income of just $25,000. [In fact,] households of people ages 70 to 74 have the highest average wealth of any age group in America, but less than half the income of those . . . 35 to 44.

➢ from 2000 to 2009, inflation-adjusted household income fell 4.5%, but consumer spending increased 22.4%. This raises an obvious question: How did [this happen? Answer:] the number of individuals per U.S. household was shrinking, which lowered the average. [While] after-tax income rose 25.2% from 2000 to 2009. . . households got smaller, as more people divorced, or rejected or delayed marriage. So total spending went up, while average household income [dropped].

➢ the top 20% of U.S. households receive roughly 50% of total income, while the bottom 20% receives less than 4%. [But] the top 20% of households includes four times as many workers as the bottom 20%, and nearly six times as many full-time, year-round workers.

➢ economic mobility [differentiates] the U.S. from many other countries. Between 2004 and 2007, for example, roughly a third of the households in the lowest income group moved up to a higher income group. . . while roughly a third of the households in the highest income group moved down.

➢ [A] U.S. Treasury [study of] income tax returns from 1996 and 2005 [found] the median income of the study group rose by 24%. . . 58% of those in lowest income group in 1996 moved to a higher group by 2005[, 25%] to middle- or upper-middle class incomes; more than 5 % [to] the highest income group -- in 10 years. The only group [declining] was the richest 1%.

Cunningham concludes the assertions that U.S. income growth is stagnant and that the rich get richer while the poor get poorer are both untrue. The American economy provides opportunity, and income mobility numbers prove it.