Equally Poorer

President Obama does not understand economic inequality.

Michael Tanner
Wednesday, October 26, 2011

As President Obama continues to base his reelection hopes on resentment toward the “1 percent” who are supposedly not “paying their fair share,” the latest evidence suggests that his attacks are still off-target.

According to data just released by the Tax Foundation, the top 1 percent of the wealthiest Americans earned 16.9 percent of all adjusted gross income in the United States. While no doubt that’s a lot of money, it actually represents a decline from 2008, when the rich earned 20 percent of all income. That’s right; the rich are earning a smaller proportion of U.S. income.

In fact, there has been a 39 percent decline in the number of American millionaires since 2007. Among the so-called super rich, the decline has been even sharper. The number of Americans earning more than $10 million per year has fallen by 55 percent. Perhaps someone should tell the folks in Zuccotti Park: Inequality is actually declining.

Interestingly, the decline in earnings by the rich has corresponded with higher unemployment and rising poverty overall. We are all poorer, but at least we are more equally poor. Hooray.

Could it be that the rich might actually perform a valuable service in our economy by, say, creating jobs? After all, what does the president think that the rich do with their money: Bury it in their back yard? In reality, individuals either spend that money or they save and invest it. If they spend it, it helps provide jobs for the people who make and sell whatever it is they buy. If the money is instead saved and invested, it provides the capital that is needed to start businesses and hire workers. It is trite but true — not many Americans have been hired by a poor person.

As for their not paying their fair share, according to the Tax Foundation report, that top 1 percent of earners paid 36.7 percent of all income taxes, an amount that truly does seem disproportionate. The top one-tenth of 1 percent, the truly rich, earned nearly 8 percent of all income but paid a hefty 17 percent of all income taxes.

And while Warren Buffett may, as he claims, be paying a lower tax rate than his secretary, he is clearly an exception. In fact, the effective tax rate paid by the rich has actually gone up in recent years, and now averages roughly 24 percent, compared with an average of 11 percent for all taxpayers. Moreover, as the Tax Foundation points out, the reason that Buffett and those like him pay low effective tax rates is that much of their income is derived from capital gains and dividends, but “income derived from these sources has already been taxed once by the corporate income tax, which is not included in the current study, meaning the average effective tax rate numbers can be somewhat misleading.”

All of this may be one reason why, despite the protestations of the Occupy Wall Street crowd, support among Americans for redistribution of the wealth is actually declining. According to the General Social Survey, the number of Americans who believe that “government should reduce income differences between the rich and the poor” has fallen dramatically, with barely a quarter of the population strongly supporting the proposition. And, the biggest decline for redistribution has actually occurred not among the rich but among the working class.

Perhaps the “99 percent” are not quite so seduced by class warfare as President Obama thinks. Or perhaps they understand that, as William J. H. Boetcker once said (in a quotation often misattributed to Abraham Lincoln), “You cannot strengthen the weak by weakening the strong. You cannot lift the wage earner by pulling down the wage payer. You cannot help the poor by destroying the rich.”