Wealth Distribution and Taxes: What’s Fair?

There’s a lot in the news lately about the George W. Bush tax cuts that are set to expire. These cuts were part of a larger tax cut program Bush put into place during the years 2001 through 2003. The only part of the tax cuts that is still up for debate is the tax rate for the top income bracket. It is 35% and is set to go back to 39.6%.

Opinions, interestingly, are coming from all sorts. For instance, billionaire Wilbur Ross said he was OK with his taxes rising, as long as the tax income goes to something worthwhile like R&D. And plenty of uber rich people have pledged their income to causes they support , like the Bill Melinda Gates Foundation or other charities. Alan Greenspan, once an advocate for the tax cuts, is expressing the need to let them run their course. $700 Billion in revenue is too great a haul for the US to ignore, especially since it comes from a small portion of citizens.

Or at least you think it does. The tax code is fairly arbitrary in how it separates out income brackets. As James Surowiecki points out in his New Yorker article titled Soak The Very, Very Rich , the top bracket is 3% of the US population and that tier starts at  two hundred thousand dollars a year as an individual or two hundred and fifty thousand dollars a year as a household. This number encapsulates many small business owners and people who live in expensive geographies like NYC or San Fransisco. I don’t agree with increasing the tax burden of these people. Small business can be a hiring machine in the right environment, so sapping income isn’t a good idea. Plus, there’s a big difference between $250,000, $1,000,000, and $10,000,000.

Here are some stats from James Surowiecki’s article:

  • Top tier tax bracket starts at $200,000 for an individual and $250,000 for a household
  • $250,000 is the top 3% of American households
  • $250,000 is four times the national median
  • In a place like Manhattan, an apartment can cost $900,000
  • Between 2002 and 2007
    • The bottom 99% of incomes grew 1.3 % a year in real terms
    • Incomes of the top 1% grew 10% a year
      • That 1% accounted for two-thirds of all income growth in those years
    • People in the 95th to the 99th percentiles of income have represented a fairly constant share of the national income for 25 years now
      • But in that period the top 1% has seen its share of national income double
      • In 2007, it captured 23% of the nation’s total income
      • Even within the top 1%, income is getting more concentrated: the top 0.1% of earners have seen their share of national income triple over the same period
      • All by themselves, they now earn as much as the bottom 120 million people

So at the same time that the rich have been pulling away from the middle class, the very rich have been pulling away from the pretty rich, and the very, very rich have been pulling away from the very rich.

Just to be clear, I don’t necessarily want to increase the tax rate for the super wealthy per se. They already pay a huge portion of the tax income for the US (35% of a lot of money equals a lot of money). What I do want though is to consider the unequal distribution rate of the top 1%. From the years 1995 to 2004, the most wealthy in the US went from being 3.68 times more wealthy than the average person to 4.81 times. Here is a graphic and stats :

Net Worth Measure

1995

1998

2001

2004

Change

% Change

Median

70.8

83.1

91.7

93.1

22.3

31%

Mean

260.8

327.5

421.5

448.2

187.4

72%

Mean/Median

3.68

3.94

4.6

4.81

 

 

  • 1980 – the top 1% richest Americans accounted for 8% of total national income
  • 2008 – the top 1% richest Americans account for 20% of total national income
  • The last time the top 1% accounted for 20% of total national income was 1928

Another chart I created a couple of years ago shows how the richest 400 people in the US has the same amount of wealth as the first 51% of the US population. 400 people have more wealth than over 50% of the population combined.

The question is about sustainability. Can the top 0.1% continue to grow their wealth and is it at the expense of the rest of the US population? If so, then taxing them a variable amount based on income distribution rates is a better idea.

Working Thoughts 8/9/07
Other Work Related Blogs

Working Thoughts 8/9/08
Cost of Living Driving Executives

About benleeson
My name is Ben Leeson. I currently work for a large financial company in IT. I went to school at Marist College in Poughkeepsie, NY. I graduated with a B.S. in Business Administration concentrating in HR. Professor William Brown taught me and I enjoyed his classes; even acquiring an appreciation for just about all things HR. I didn’t pursue a job in that field after college but I’ve kept up with it. This blog will further my fascination with all things HR. I hope to grow my knowledge of the area through thoughtful writings and spirited feedback. I will attempt to have a fairly routine style so anyone reading can come to expect certain segments. Please excuse my incorrect grammar and occasional misspelling.

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