Redistribution of Wealth

October 16th, 2010 by Lee Eldridge

Three words that carry a lot of weight. Redistribution of wealth. This phrase has been thrown around a lot lately. We hear from the Republicans that it’s bad. We hear from the Democrats that it’s good. They’re both right. And they’re both wrong.

Our government has responsibilities. We may have differences of opinion about how BIG the role of government should be. But virtually all Americans agree that the government has to protect us (military and consumer protection) and help those of us who need a little help along the way (typically termed as welfare programs though they exist in many forms). To fulfill these responsibilities, the government requires money. And they generate money by taxing us.

So what is redistribution of wealth? That’s when the rich pay a higher rate in taxes (or pay a heavier tax burden) than the middle class or the poor to pay for programs that are mostly for the BENEFIT of the middle class and the poor.

When Redistribution of Wealth is Good
So why is redistribution of wealth good? Because we have more needs and more priorities for our federal government than what can be achieved without redistribution of wealth. The rich must bear a larger financial burden to fulfill these obligations. And they do. And truthfully, most of them do not complain about it. They understand that it is needed and required of them. (They DO complain when tax money is wasted, as they should. Or when the government is growing at an unsustainable rate. But that’s another discussion that’s not relevant here.)

We need to understand that almost EVERY federal expenditure IS redistribution of wealth.

Do you want to be able to mail a letter for $.44? Did you know that the USPS reported a $3.5 billion loss for its fiscal third quarter this year? Who makes up the difference? The rich through their taxes. Who pays for the military? Who pays for farm subsidies? Who pays for the research of green energies? Who pays for cancer research? The rich.

The Bush Tax Cuts
Even the republicans, who typically complain the most about redistribution of wealth, engage in it. Many (mostly on the left) criticize that the Bush Tax Cuts were “only for the rich”. The numbers do not back up this claim. As an example, in 2000, the top 20% of earners paid 81.2% of ALL income taxes. In 2004 (following Bush’s 2001 and 2003 tax cuts), the top 20% of earners paid 85.3% of all income taxes. Bush shifted a greater tax burden to the rich, and decreased the tax burden on the poor.

Bush Tax Cuts and Tax Burden

Click on the image to enlarge.

Yes, Bush cut tax rates on the rich. But he cut taxes on ALL Americans. And comparatively he reduced the tax burden on the lower 60% of wage earners. His tax policy removed the burden of income taxes from many Americans all together. The Bush Tax Cuts furthered the cause of redistribution of wealth.

(For more info on the Ten Myths About the Bush Tax Cuts, read this from the Heritage Foundation. The Heritage Foundation is a conservative think tank.)

When Redistribution of Wealth Becomes Bad
I have attempted to make the case that redistribution of wealth is not bad. That it is required if we’re to pay for the federal programs that are important. (Discussing the size and scope of these programs can wait for another day, and is another issue entirely.) The goal of our tax policy should be to provide enough money to the federal government to fund our priorities. But when the GOAL becomes redistribution of wealth, then we’ve lost our way. Raising taxes on the rich because somehow they don’t DESERVE to keep the money they’ve earned is when redistribution of wealth becomes bad. I was reminded the other day of this exchange between ABC’s Charles Gibson and then candidate Obama during a debate with Hillary Clinton (see full transcript here):

GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, “I certainly would not go above what existed under Bill Clinton,” which was 28 percent. It’s now 15 percent. That’s almost a doubling, if you went to 28 percent.

But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.

OBAMA: Right.

GIBSON: And George Bush has taken it down to 15 percent.

OBAMA: Right.

GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.

So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.

“Fairness”. This really gets to my disagreement on tax policy with the far left. “Fairness”.

Let’s ask this question in a more hypothetical way: “Candidate Obama, would you be in favor of lowering taxes on the rich if by doing so it would increase tax revenues to pay for your social programs?” According to his comment above, the answer would be “No”.

Tax policy is no longer about generating revenues to pay for social programs. It is NOW to be designed to punish the rich. Candidate Obama does not care if a lower tax rate on the rich generates GREATER tax revenues than a lower tax rate. Why? Because allowing the rich to keep their money is not “fair”. Those increased tax revenues from the lower tax rates can help pay for social programs — welfare, education, health care, etc. But that doesn’t matter. What MATTERS is taking MORE money from the rich, even if it’s to the detriment of total tax revenues, and the detriment of social programs.

That’s when redistribution of wealth becomes bad.

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15 Responses to “Redistribution of Wealth”

  1. Bobby Says:

    Soak the rich. That helps the economy every time. Nothing more than class warfare.

  2. Bobby Says:

    Why are their negative numbers for the lower brackets?

  3. Ralphie Says:

    Is it fair for an investor to pay a substantially smaller income tax rate than a dishwasher? Warren Buffet and Bill Gates don’t think so and neither do I.

  4. Ralphie Says:

    http://www.huffingtonpost.com/2010/08/01/alan-greenspan-extending_n_666549.html

    Are the investment bankers creating jobs with their billions of profits just reported? Hell no, they are bonusing the money. Big business and big investors are not going to save this economy. there is no documented benefit if Bushs cuts

  5. Lee Eldridge Says:

    Ralphie, your comment is misleading and inaccurate. A dishwasher does not pay a higher tax rate than an investor. A dishwasher is likely in the first or second bracket, which is either 10% or 15%. Not likely to be in the third bracket paying 25%. And currently capital gains is at 15% for most people.

    But even this misses the point. The dishwasher isn’t likely paying ANY income taxes at all.

    About 47% of the population does not pay federal income taxes at all, and a dishwasher is likely to be among this 47%. So even though he likely has a tax rate of 10% or 15% (the first two brackets), he likely is getting more money back from the government than he paid in with income taxes. (This also answers Bobby’s question from earlier. People in the bottom brackets often have so many deductions and tax credits that they often get back more money than they paid in during the year, thus giving them a negative number in the chart.)

    http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0

    And Ralphie, I’m also not defending our tax code. I’d junk the whole thing and start over.

  6. Ralphie Says:

    Ok, let me quote the Oracle of Omaha, is it fair for WB’s secretary should pay a higher tax rate than him? I’m assuming he pays his secretaries decently. You’re naive and cherry picking your research to think tax cuts for the already-wealthy are the answer. Everyone loves to refer to Reagan era curs but the wirld is a massively different place now. I do strongly believe we should instead give breaks to those that do want and need to grow their businesses, the small business owners and upstart entrepreneurs. Again, even Paul Oneil was nauseated by the greed and unwiseness if the bush/Cheney good friend giveaways. $2.7T lost net on these cuts.

  7. Ralphie Says:

    Typing on a phone, I actually can spell.

  8. Frank Says:

    The amount people pay in this country is not fair. Never has been, never will be. And it shouldn’t be fair. But come on! I am curious what happens to people when they make $250K/year. Is it a sudden stroke of irresponsibility? Is that when the devil on their shoulder wins out? Is that when they become cruel, holding onto their money with vice grips, losing all of their senses? I hate to hear politicians talk about the “rich” and how they can’t be trusted with their money that they earned, fair and square. It would be great to give small business owners and upstart entrepreneurs tax breaks – after all, they can help create some jobs. But better keep a good eye on them. There will be a point when even they turn to demons. You know what would be really fair? Accountability. Where is the government accountability? Obama says, “There are a whole bunch better ways to spend the money. ”

    http://blogs.abcnews.com/george/2010/09/president-obama-to-pastor-jones-stunt-endangers-troops-full-transcript-of-exclusive-interview.html

  9. Frank Says:

    Oh, and Ralphie, Warren Buffet and Bill Gates can spend their money however they choose. They do a lot of good! They’ve given MILLIONS to some really excellent causes. And I am sure they have thousands upon thousands of requests every year.
    But isn’t that the point? They earned it. They choose.

  10. Ralphie Says:

    Frank, I would be one of the people affected by the sunsetting of the Bush tax cut, lest you think I’m engaging in class warfare. The “Rich” label thing is purely political and I don’t like it either but the right has their labels for us “liberals” too, many of which are found en masse on this blog. Truth is this country has bills to pay and you can’t get blood from a turnip. If people would man up and elect more democrats, thing would get a lot better, and then the well off could keep more of their money. You can’t tell me the last two republican administrations were anything short of disastrous and VERY costly for everyone.

  11. Lee Eldridge Says:

    Good morning and thanks for the comments.

    Frank: President Obama and like-minded people demonize the rich. The rich are all a bunch of greedy bastards. Bill Gates is a great example. He has NOT donated millions to worthy causes. He’s actually donated BILLIONS!! Not to mention the fact that he’s also likely paid BILLIONS in taxes.

    But as Ralphie points it, it’s just politics. So I guess demonizing them is OK.

    Ralphie: I didn’t cherry pick anything. I worked from the example you provided. And matter of fact, nowhere in this article did I recommend more tax cuts for the rich. If you remember my post from a couple weeks ago, I recommended a compromise that would RAISE taxes on the top earners.

    http://www.leeeldridge.com/solving-the-bush-tax-cuts/

    My philosophy on taxes is this.

    1 – We all bear some responsibility to pay taxes. Even if it’s a little.

    2 – The purpose of taxes is to generate revenue for the federal government to pay for our priorities. Not to implement some type of “social justice” on the rich.

    3 – I’m in favor or a progressive tax code that taxes the rich at a higher rate than the middle class, and the middle class more than the poor.

    4 – We should orchestrate taxes in such a way as to minimize negative effects on our people and the economy.

    5 – The tax code should not be used to try to “alter” our behavior — reward us OR punish us.

    6 – The government needs to be held accountable when they waste our money because it IS OUR MONEY.

    It’s amazing to me that people like President Obama believe that they can spend our money more wisely than WE CAN SPEND OUR OWN MONEY THAT WE’VE EARNED.

    Now having said all that, capital gains is a truly interesting and unique tax. You make the point that it’s not fair that investors pay a relatively low tax rate on income from capital gains, when the middle class must pay a higher rate on their income (capital gains tax rate vs income tax rate). And there’s some validity to that point. (Keep in mind that these investors ARE paying higher tax rates on the rest of their income.)

    Did you know that when Bush lowered the capital gains tax from 20% to 15%, that revenues from this tax DOUBLED within just a few years?

    http://www.ncpa.org/pub/st307?pg=6

    It is the ONLY tax that I’m aware of that behaves this way (at least to this degree). Why? Because it’s volunteery.

    I knew a guy here in Lawrence who owned a building downtown (this was late ’80s). It’s an old building that really was an eyesore. The owner of the building was not rich. Not even close. The building had been in his family for many years. He didn’t have the money to fix up the building. Property taxes in Lawrence have risen substantially over the years, and he was struggling just to pay the property taxes. He had considered selling the building, but between local, state and federal taxes, he was faced with giving up about half the sale price in taxes to the government. (The “capital gain” on the building would have been significant since his family had purchased the building so many years earlier.) HALF! Does he really owe the government so much that they can reach in his pocket and take HALF of what he sells HIS building for? So he didn’t sell it. (Not sure if he still owns it or not.)

    This is what makes capital gains taxes unique because it’s basically a volunteery tax. He decided NOT to sell the building because of the high tax consequences. And the government got NO tax revenue other than the property taxes they were already collecting.

    But what if capital gains taxes were lower? He would have sold the building. I’m certain of it. And the government WOULD have collected taxes on the sale of the building.

    Our tax code has been highly manipulated by BOTH parties for political gain. Raise this tax here. Lower this tax there. Offer a tax credit over there. And because of it, it’s a fu*&ing mess.

  12. Lee Eldridge Says:

    Ralphie, can I ask you a question for a change?

    Raising the capital gains tax is likely to REDUCE tax revenues to the federal government. Who benefits from this?

    The rich? Nope. They don’t benefit. The higher tax rate means they pay more per transaction, but engage in fewer transactions. Ultimately generating less tax revenue.

    The middle class and the poor? Nope. The federal government receives less in tax revenues, so they have less money to spend on social programs.

    If nobody benefits, then why on earth is raising the capital gains tax rate a good idea?

  13. Ralphie Says:

    As long as politicians play politics, and every investor believes the next administration will give them a better deal on capital gains, i can see where it would cause some to hold on to their investments. But when you gotta sell you gotta sell. When you should sell you should sell. Is a professional investor not going to sell a stock when the price is right on that stock because of extra tax? I dont think so. Professional investors make a good deal of their income on capital gains and also get to carry over losses as well. Tax is tax man, why should our government favor one group over another. I do agree that low income folks should be spared much tax because its a good investment as a country to see those people get to a place where they can pay more tax.

    Youre wrong when you say that Obama demonizes the rich – he demonizes the mentality and selfishness of the republican – style well off person who wants to preserve the bush tax cut for themselves(who make more than 250k) but yet want to finance that continued tax cut (revenue shortfall in the bush era) on the backs of food taxes, sales tax, medicare cuts, education cuts and a bunch of other stuff that dis proportionally affects the lower income crowd. Capital gains is a separate issue from the Bush tax cut – and again, the data i have seen says that the Bush tax cut really only hurt our finances as a country. Only 3% of small businesses are impacted by the Bush tax cut.
    And speaking of demonizing – what is happening when the right calls us ‘liberals’, ‘Socialists’, ‘communists’, ‘anti-american’, and whatever Karl Rove’s word of the month happens to be. The fact is the overwhelming majority of this country doesnt benefit personally and directly from capital gains cuts or tax cuts for upper income folks. Should that vast majority have a voice? Disregard the politics of the words being used, because both sides have their words they use to market to their crowd, i believe they should have a voice and a government that has a greater strategy for middle america that simply trickle-on economics, which again, hasnt been proven to work in a long time. After 8 years of Bush, tax cuts, capital gains cuts, deregulations left and right, he left us hemorrhaging almost 1 million jobs a month. I dont think greed economics worked Lee, its time to return to share-the-pain economics and do something radical and that is help the small businesses. As for your friend with the building, i dont see why that situation is the governments fault, any more than you think a poor person is your fault as a taxpayer. The line has to be drawn somewhere, especially since we are so massively in debt and with such massive budget shortfalls. Your research might resonate more with me if it came from a bipartisan source, which the NCPA is not. You propose theoretical moon-shots, and time has run out for that. Again, the net net of all you propose (which were all tried in the bush error), resulted in a near-depression.

  14. Lee Eldridge Says:

    You know Ralphie, you’re probably a great guy. There are some things we’ll just never agree on. That’s OK.

    I do think at the heart of it all, politics aside, it’s one basic thing that we disagree on. The role of government.

    Our national debt is more than $13 trillion, and our budget deficit this year is about $1.29 trillion.

    When you see these numbers, your first reaction is “If we had taxed more, we wouldn’t be in this mess.”

    When I see these numbers, my first reaction is “If Congress could have controlled their spending, we wouldn’t be in this mess.”

    Generally, you view government as the solution. Generally, I view government as the problem.

    I’ll keep writing if you’ll keep commenting. Keeps it interesting :)

  15. ralphie Says:

    I agree about the spending Lee, but there are two nuances here.
    The government has the ability to invest in long term outcomes, like the health bill, like investing in clean energy. Costs more up front, but hopefully saves money in the long run. Most americans dont think long term with their own finances (which is why they are broke and have maxed out credit cards). Secondly, we are screwed, right now. We HAVE to raise revenue, now. Since no-one can agree what spending should be cut, we have to raise revenue. If i was president, i would take a radical approach to getting the house in order, both on the expense and revenue side. You cant just say that addressing only one side of this equation will fix our mess, it wont. We need all the change under the current couch pillows and hope one day we can relax things. Today isnt that day. And trust me, i see the government and all those who have been elected as representatives the last 30 years collectively as a gigantic massive failure. We should never have ever ended up where we are financially as a country and it shows utter fiduciary incompetence by our lawmakers that we are in this place.