This may sound like a liberal parody of conservative economic thinking, but let me put it out there: America’s problem is that the rich don’t have enough money.
There, I said it. Let’s rumble.
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When it comes to the Scrooge McDuck set, the problem isn’t that they’re not rich enough, it’s that there aren’t enough rich — not enough to do what liberals want to do, anyway, which is to balance the budget by increasing taxes on them. Let’s deploy some always-suspect English-major math:
There are lots of liberal definitions of “rich.” When Pres. Barack Obama talks about the rich, he’s talking about people living in households with income of more than $250,000 or more, the rarefied caviar-shoveling stratum occupied by the likes of second-tier public-broadcasting executives, Boston cops, nurses, and the city manager of Lubbock, Texas (assuming somebody in her household earns the last $25,000 to carry her over the line). Club 250K isn’t all that exclusive, and most of its members aren’t the yachts-and-expensive-mistresses types.
Nonetheless, there aren’t that many of them. In fact, in 2006, the Census Bureau found only 2.2 million households earning more than $250,000. And most of those are closer to the Lubbock city manager than to Carlos Slim, income-wise. To jump from the 50th to the 51st percentile isn’t that tough; jumping from the 96th to the 97th takes a lot of schmundo. It’s lonely at the top.
But say we wanted to balance the budget by jacking up taxes on Club 250K. That’s a problem: The 2012 deficit is forecast to hit $1.1 trillion under Obama’s budget. (Thanks, Mr. President!) Spread that deficit over all the households in Club 250K and you have to jack up their taxes by an average of $500,000. Which you simply can’t do, since a lot of them don’t have $500,000 in income to seize: Most of them are making $250,000 to $450,000 and paying about half in taxes already. You can squeeze that goose all day, but that’s not going to make it push out a golden egg.
But like certain other exclusive clubs, Club 250K has an inner sanctum, a special club within the club, the champagne room of socioeconomic status. And that is Club 1: the million-dollar-a-year club. Not the millionaires’ club — lots of the people earning $1 million in any given year do not have $1 million in assets — but, still, a million a year, even in rapidly depreciating U.S. dollars, is not too shabby. But the trouble for liberals is, Club 1 is really, really exclusive: Only 0.2 percent of U.S. households have incomes that high, meaning that there’s only about 200,000 of them. And like Club 250K, Club 1 is bottom-heavy: There are a lot more $1 million men than there are $6 million men. And there are a whole heck of a lot more $6 million men than there are $60 million men.
You want to tax Club 1 to get rid of the deficit, you have to hit each of those 200,000 households with an average tax hike — not an average tax bill, but tax increase — of $6 million. And a lot of those Club 1 households don’t have $6 million in income to start with, much less $6 million left after the taxes they’re already paying.
Every time you raise the threshold for eating the rich, you get a much, much smaller serving of meat on the plate — but the deficit stays the same. The long division gets pretty ugly. You end up chasing a revenue will-o’-the-wisp.
So, what about Lloyd Blankfein and Charlie Sheen and Tiger Woods? What about these people? You can tax the striped pants off of them, but you won’t get enough money to balance the budget. If you’re doing it, you’re probably mostly doing it because it feels good. (And, yes, that does make you a bad person.)
One thing this artice does not cover is, what do rich people do with their money once they have earned it. Answer, most of them spend it on things like cars,yatch's,expensive restraunts,large homes... you know all the things us second class non unionized public sector wage earners live on.If you want evidence of this park your car on the east bound lane of sunrise highway and count the work trucks as they pass you on the way to all those millionaires houses. They have an name for this traffic, it's called the trade parrade.
Neither the progressives or the tea party libertarians are going to be pleased with what need to happen over the next few decades.
Spending cuts must happen - and they must happen in the entitlement programs - that is the only place where sufficient payment reductions can be made to actually impact not only our annual revenue shortfalls but our long term debt. This requires means testing so the Charlie Sheens and Bill Gates of the world don't receive SS payments or medicare help.
Tax's will have to rise - there is no option. And only the middle class -as this report highlights have the breadth of income to patch some holes. Taxes should be increased across ALL income levels. Tax hikes should be linked to spending cuts though. No spending cuts - no tax hikes. Incenting politicians to refrain from spending when they see the income projections on tax increases will require the tools of a lion tamer - and linking those tax increases to spending cuts and overall debt reduction will accomplish that.
1. Last time I checked, the top 1% of American households had a total net worth of about $17.5 trillion, and the total US deficit is a little over $14 trillion. This is just an illustration of scale, NOT a suggestion that we strip these people of their wealth to pay down the deficit (most of that wealth is probably illiquid in any event).
2. What is of great interest to me is the tone of Mr. Williamson's article, especially the first part. After weeks of hearing from various contributors to this magazine how public sector employees are vastly overpaid, now we hear that $250k a year ain't so much after all. So which is it? Are a teacher-cop husband-wife team just your basic working stiffs, or are they high-life pigs?
I have two points of disagreement here.
1) you can not "fund" a deficit, you either increase it or close it.
2) taxing the sub-$250k club is not the answer, although that is where government income can be most effected. The answer resides in reduced size and activity of government, and increased reliance on charity and private Programs.
Kevin, you are exactly right. We don't have a revenue problem, we have a spending problem. I'm one of those "rich". Jack my taxes up and I guarantee the government will get less money from me. I'll work less. I'm in a position where I can choose to work harder and earn more money or work less and enjoy life. It has always struck me as counter progressive to tax the most productive in society at a higher rate. As it is, I leave a lot of money on the table because the added work isn't worth the after tax return to me.
Something else, I own a business and have all of my capital at risk in that business. Ask a politician if in return for a greater share of my profits, the government would be willing to co-sign for all of my business loans and share that risk. Obama and the Dems want to take the lion's share of profits, but who in their right mind is going to risk their private capital in a business that can't retain the majority of its profits? Not me (at least not any more), my money stays home and so do I.
Now is the chance for someone to drop in and remind us the top marginal rate of taxation in the 1950s was 90% and America did just fine with that. Ignoring the fact the world was a completely different, bipolar place, and the USA was about the only safe investment bet around. The Big Three had no competition from Toyota or Honda, Europe was still recovering from WW2, nobody had heard of "Asian Tigers", nobody outsourced customer support to India, nobody built factories in Mexico. In short, the economy wasn't global and American money stayed here to be taxed at those high rates. Just thought I'd bring this up before some liberal shamed himself with this often seen mis-observation.
StuartH, from my experience you're an unusual guy. I come across a lot of high earners in my field, and I find that what they do is not tied to what they earn. That is, they'd do exactly the same amount of work for $10 million as they'd do for $1 million or $50 million.
May I ask: what kind of business do you own (really general is fine -- "services," "professional services," "consumer products," anything like that) and are you in the $0 to $1MM range, the $1MM to $5MM range, the $5MM to $10MM range, above $10MM, what?
@MikeB: I don't think the apparent paradox you note (i.e. whether cops and city managers who make $250k overpaid or just plain folk) is really that incongruous. Such public workers could be terribly overpaid and still not what we think of as "the rich." You don't have to be in the yacht and country club set to be overpaid.
I kind of wish Kevin had restricted himself to examples of non-public paycheck-earners so as not to muddy his smaller point, but all this is a distraction from the larger point that there isn't enough high-income to be taxed to close the deficit.
"1. Last time I checked, the top 1% of American households had a total net worth of about $17.5 trillion, and the total US deficit is a little over $14 trillion."
@MikeB,
I did the math on your figures, and if they are correct the average holdings of the top 1% would be a tad over $1 million/household (based on a base figire of 115 million households). In 2006 the total assets of the US was just over $55 trillion. In 2009 that number dropped to $49 trillion. The loss in equity was mainly in 2 places - real estate valuations and stock investments (401ks, stocks, annuities, mutual funds, etc..). There is a big difference between those whose net worth is in excess of $1 million and those who earn in excess of $1 million per year. You cited a net worth figure and not annual earnings. The GDP is an annual metric.
It wasn't unusual a few years ago for a couple (let's say 2 teachers) in thier upper 50s to have a net worth in excess of $1 million. Depedning on where they lived, this couple in 2006 could have lived in a house worth $350,000; they could have had $50,000 plus in a money market savings; and another $100,000 in an IRA. But thier real net worth would have come in the form of thier pension. On average a teacher's pension guarentees a minimum annual payout until the pensioner dies. On average, this payout is equal to almost $1.5 million over the life on the pension. If one then was to add all of thier assets (home value, cash, investments pluse pension) subtract thier liabilities (mortgage, loans, credit cards, etc..) and you would find that these teachers are worth a combined $3.5 million -the majority of the wealth would be in the form of thier pensions.
If you take another couple (say both are professional accountants) with similar education (MBA), their biggest investmants would either be thier house or thier 401k or IRAs (or perhaps all 3). It is very unlikely that they would have accumulated retirement funds similar to the teachers. Yes, because of thier income status during thier peak earning years (combined $280,000) they could potentially save as much as $50,000/year for 7-10 years.. But markets are fickle. Over $3 trillion was lost in stocks circa 2007-2010. And as the Enron debacle illustrated, a 401k investor could even lose thier investment money as well as any earnings.
And you seem to confuse private earnings with that of public earnings. Every dime that is paid out to teachers whether it be salaries are deferred income is subsidized by the taxpayers. In that light, a retired teacher's pension is being funded by those "rich" people who earn +$250,000. And those teachers would enjoy a guarenteed subsidized retirement that is better than those who paid for it.
It's an accepted fact, as Mr. Williamson points out, that there's only so much to be squeezed from the rich.
But who's rich? As Mr. Williamson also points out, $250k doesn't get you into the caviar crowd.
Public sector employees, by and large, don't live high on the hog. The problem is that non-public sector employees generally have it worse. And the big question, much bigger than Mr. Williamson's, is whether we want our children to grow up in an America where a small class of very well-off people is served by a vast army of low-paid service workers. If we let the market dictate what happens, then that will be the result. What do you want more? Market economics, or a country less stratified? Each outcome has lousy consequences. But we will be making the choice, one way or another.
MikeB:
"whether we want our children to grow up in an America where a small class of very well-off people is served by a vast army of low-paid service workers."
How is this not the situation now, with the "small class" being retired public sector workers with gold-plated pensions (some double-dipped), and the (relatively) low-paid service workers being everyone under the age of 40?
Excellent article, Kevin, though I've been reading your work long enough to have heard this all before. I wish the President, Congress, etc. would read it.
I think taxes by their nature tend to polarize the incidence of wealth in a society. The poor have nothing to take, the wealthy can find ways to move their wealth into whatever is elast taxed, leaving only the middle class to be taken advantage of. The more benefits provided to the poor, the more likely the lower end of the middle class is to give up and become poor, trading the costs of maintaining a job for the benefits of spending time with family and friends. The rat race has to pay or the rats quit running. The more the middle class is taxed, the more motivated they are to study up on investments and tax shelters, e.g. pre-tax allocations to 401Ks, leaving gradually less to tax from them.
The problem I see is not a financially polarized society, but that the actions of government will make it difficult to get from one stratum to another. Immigrants used to arrive in this country poor and work their way up. So while we always had poor people, they weren't always the same people or the descendants of the same people. Now we have multi-generational welfare recipients, encouraging their 13-year-old daughters to have a baby and contribute to the family income.
If you can move up, it doesn't matter that there is a stratified society. Government uses regulations and taxes to inhibit movement. I would expect more of a continuum of income in the absence of income taxes. I like sales taxes as a substitute for (not in addition to) income tax.
A few other thoughts.
-- Means testing the wealthy before giving them Social Security may be a good idea but think about it. If there aren't that many Warren Buffets, then the checks you don't give them don't add up to much of a savings.
-- It isn't in wages that unionized employees are particularly wealthy, but in their benefits. Great health plans, defined benefit retirement plans, etc. aren't the rule. Having those frees up household income for other things than saving for medical expenses and retirement.
"And the big question, much bigger than Mr. Williamson's, is whether we want our children to grow up in an America where a small class of very well-off people is served by a vast army of low-paid service workers."
Sounds like a description of California. The Middle Class (those fortunate enough) have been emigrating out of California for decade if not longer. In thier wake are millions of low income Hispanics who do "service" work for the wealthy elite (by no means conservative). San Francisco is as about as close as one can get to the Progressive Dream. The effette high income Progressive Elite have made it virtually impossible for anyone earning under 7 figures to live there. And those who do the low end service work must commute over 80 miles a day.
The primary reason why there has been such a widening in income dispersion over the last generation is that we have allowed 60 million immigrants into our country. These people are overwhelmingly poor. Further, they compete with native labor supply by pushing the supply of low-skilled to marginally skilled labor out. A more plentiful supply of this labor causes the equilibrium price for labor to decline. Consequently, immigrants themselves swell the number of poor in our country and they create additional poor people by causing declines in real wages for American citizens.
There are other reasons why we are experiencing a real decline in living standards. One is that we have structured our medical markets so that almost all medical services are paid for by a third party. This creates enormous amounts of paperwork and drives up the cost of basic medical care. In Maryland, an ordinary health insurance policy for a husband, wife, and two children now costs over $26,000 per year. Ordinary people have no idea how much they are really paying for health care because the cost has historically been hidden by employers paying the insurance premiums. This cost is driving down real wages for all wage earners.
The obvious fix is to limit immigration, and use free market principles to greatly reduce the wastefulness of our medical finance system. We should adopt a medical financing system where people can buy subsidized catastrophic health insurance but have to pay the first $5,000 to $10,000 of medical care incurred during a year out of their own pockets. The out of pocket health care expenses should also be subsidized making them fully tax deductible instead of the current law that only allows these costs to be deductible when they exceed 7.5% or 10% of a taxpayer's adjusted gross income. These two measures alone will make a major positive difference in the lives of hundreds of millions of American citizens.
There are numerous other changes we could make that would have a real effect on our peoples' lives, but those two aformentioned policy changes alone will get us more than half-way to where we need to go.
jimmyc: There are two problems with raising taxes.
The first and most obvious is that raising taxes has never decreased the deficits. And no, I'm not talking supply side here. I'm just pointing out that whenever congress is given more money, congress spends that money. This has been true since Hoover upped taxes to try and cut the deficit.
The second problem is that, as a country, we are already over taxed.
I see MikeB is continuing in his tradition of deliberately missing the point. I also see that he continues to beleive that all things would be wonderfull, if only govt were to take enough money from people who have more than he does.
First off, wealth and income are not the same thing.
Secondly, the author of this piece is not drawing any conclusions regarding those who make $250K are making too much money. Nor is he making any comments regarding whether $250K/yr is or is not a lot of money.
Govt employees, for the most part are vastly overpaid for the work they actually do. And there aren't that many people who make more than $250K/yr. Even you should be able to figure out that these two statements have nothing to do with each other.
