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Monday, October 03, 2011

The Taxman Cometh


Well, here's an oddity.

As I was doing research for a class I'm teaching this quarter, I ran across an article on the accumulation of wealth in America.
The sociologist was trying to show that most of the wealth (stocks, land, etc) in the country was held by a very small subpopulation (top 1%). 
So, he built the first three columns of the two tables below: Total Net Worth and Financial Wealth.

As I studied the tables, I wondered how the amount of taxes paid by the top 1%, 20% and bottom 80%  corresponded to Total Net Worth and Financial Wealth. So I added the last three columns to each table and did a quick Google to try to find the numbers.

I couldn't find the exact numbers, but I found some approximations.
I plugged the rough numbers into the appropriate slots in the left-most columns of each table.
That's why many of those cells are blank - I couldn't find all the data I wanted.
Now, there's a couple of interesting things here.

One:
The politicians and the pundits on both the left and the right seem to be misrepresenting the situation.

The left insists the rich don't pay enough.
The right insists the rich pay 'way more than their fair share.

But if you look at just these rough numbers, on a per dollar wealth/tax ratio, it looks like the current federal tax code is actually not that far off from essentially fair.

The top 20% own 85% of the wealth and pay about 87% of the taxes.
The bottom 80% own 15% of the wealth and pay about 15% of the taxes.
Yes, I know the percentages don't exactly add up correctly, but I'm working off other people's rounding errors, so we can only do ball-park work here.
But even so, you can't ask for much better than that.

Of course, these numbers only account for federal tax, not state, local or - worst of all - sales tax.
All of that would definitely affect the tables, and probably not in a good way for the poor.

But as far as the federal tax goes, it actually works.
Of course, we're not done yet. 

Two:
At least as far as the federal tax goes, another interesting thing seems to be happening.
It looks like the MORE the rich pay in taxes:
(a) the WEALTHIER the rich get and 
(b) the LESS the lower 80% share in the wealth.

Look at the table below.

In 1983, the top 1% owned roughly 34% of the country's wealth, but paid only 19% of the taxes. 
In that same year, the bottom 80% owned nearly 19% of the country's wealth.

But, by 1989, when the federal taxes paid by the top 1% went up to 25%, the bottom 80% saw their share of the country's wealth drop to just 16.5%. 

Today, the top 1% own nearly 35% of the country's wealth and pay 40% of the taxes.
Meanwhile, although the bottom 80% pay less taxes than they ever have, they also own less of the wealth than they ever have.

Now, call me crazy, but I find that somewhat counter-intuitive.
If you're rich, paying more taxes makes you richer.
If you're poor, paying less taxes makes you poorer.

Now, you could argue that I have it exactly backwards - the rich pay more because they are rich, and the poor pay less because they own less to tax. 

Unfortunately, from the few numbers I've been able to find, that interpretation doesn't really fit.

For the 25 years covered in these tables, the rich have always owned between 33% and 38% of the country, but the actual percentage of taxes they pay has fluctuated anywhere between 19% and 40%.

There's no obvious correlation between the two. A low rate of taxation (the 19% in 1983) yields a wealth ownership for that top 1% that is not much different from a high rate of taxation (the current 40%). 

That is, the percentage of wealth held by the top 1% doesn't really change regardless of how much you tax them. 

Instead, what does change as a function of taxation on the rich is how much wealth the rest of the country has. The more taxes the wealthy pay, the less wealth everyone else has. I don't have all the numbers, but all the numbers I have show that effect.

It's almost like Reagan was right about this whole "trickle-down economics" thing. 

It's also got very obvious repercussions for the political arguments over taxes that currently shake the airwaves.

It makes me yearn for a low rate of taxation on federal income and corporate tax... say something around 9% for each...


In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%. Table 1 and Figure 1 present further details drawn from the careful work of economist Edward N. Wolff at New York University (2010).

Table 1: Distribution of net worth and financial wealth
in the United States, 1983-2007


Total Net Worth



Top 1 percent
Next 19 percent
Bottom 80 percent
% Fed Tax Paid by Top 1%
% Fed Tax Paid by Top 25%
% Fed Tax Paid by Bottom 80%
1983
33.8%
47.5%
18.7%
~19%


1989
37.4%
46.2%
16.5%
~25%


1992
37.2%
46.6%
16.2%



1995
38.5%
45.4%
16.1%



1998
38.1%
45.3%
16.6%



2001
33.4%
51.0%
15.6%
~38%
~83%
~20%
2004
34.3%
50.3%
15.3%
~37%
~85%

2007
34.6%
50.5%
15.0%
40.42%
87%
~15%





Financial Wealth



Top 1 percent
Next 19 percent
Bottom 80 percent
% Fed Tax Paid by Top 1%
% Fed Tax Paid by Top 25%
% Fed Tax Paid
Bottom 80%
1983
42.9%
48.4%
8.7%
~19%


1989
46.9%
46.5%
6.6%
~25%


1992
45.6%
46.7%
7.7%



1995
47.2%
45.9%
7.0%



1998
47.3%
43.6%
9.1%



2001
39.7%
51.5%
8.7%
~38%
~83%
~20%
2004
42.2%
50.3%
7.5%
~37%
~85%

2007
42.7%
50.3%
7.0%
40.42%
87%
~15%

Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds.
Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2004, 2007, & 2010).




4 comments:

love the girls said...

"But if you look at just these rough numbers, on a per dollar wealth/tax ratio, it looks like the current federal tax code is actually not that far off from essentially fair."

'Fair' is a term which is relative to some fixed standard. What is the standard you are using?

Steve Kellmeyer said...

My standard:

"The top 20% own 85% of the wealth and pay about 87% of the taxes.

The bottom 80% own 15% of the wealth and pay about 15% of the taxes."

The two broad groups are paying taxes roughly proportionate to the percentage of wealth they own.

I'm going by total wealth.

Now, you might argue that everyone has a basic sustenance level, the poor are a lot closer to that level, and therefore the tax should really be on the difference between that sustenance level and anything over it.

If you used that standard, you could easily say this isn't really fair.

However, given how wealthy even our poorest are, given the fact that the government already redistributes in order to subsidize that basic level, I'm not sure that argument works well in this country.

Flambeaux said...

Steve,
The problem we keep running into, and you're well aware of this, is that the definition of "fair" is fluid.

To you or I, if people generally pay a share of taxes equivalent to the rough average of the economy they control, that's approximates "fair".

But for many people, on both sides of the political divide, "fair" would mean that each 20% of the population only controlled about 20% of the wealth...a "fair" distribution of the wealth being the main concern.

And so long as a big chunk of the country's voters are more hung up on "fair" meaning equal distribution, we'll continue to have politicians destroy the country and the economy in the name of what is fair and equitable.

It's stupid. But you and I both know that.

Steve Kellmeyer said...

You're right on all counts.

In order for there to be different economic classes of people, some people have to own a different amount of wealth than others.

If every segment owned 20% of the wealth, there wouldn't BE five segments - everyone would own the exact same thing.

But, if the first segment is at the bottom, and the next one owns, say, 20% more than the first one, then by the time you get to segment five, they own most of the economy compared to the bottom segment.

It's a simple geometric progression, but most people don't know math well enough to realize that - by definition - the top 1% of ANYTHING is going to have an unusually large share of the goods.

That's why they are the top 1%, after all. They are UNusual, and not USUAL.