Is the economy really as strong as you think?
Most people agree that America is in a recovery compared to a few years ago, still there’s a lot of talk about income gaps are getting deeper.
Many of our economic gains are at the top 1 percent of society, where the political power and influence lie. Hence the “Occupy” movement and its rallying cry: “We are the 99%.”
It makes sense. The wealthy are in the minority, and the majority (the lower-class and middle-class) often feel their wealth is unfairly earned. So jealousy is most certainly a factor. “Take from the rich and give to poor” has been the populist rallying cry of the masses since before the Robin Hood tales were created, no doubt about it.
Globally, a lot of people think the 99 percent isn’t doing so well. The imbalance is affecting entire economies, as financial train wrecks in Greece and Puerto Rico show us how connected—and fragile—our financial system can be.
Puerto Rico is $73 billion in debt. Meanwhile, Greece found itself unable to make debt payment of 1.6 billion euros to the International Monetary Fund. The crisis in Greece and Puerto Rico contributed to the U.S. stock market having its worst day of the year last week as the DOW plunged 350 points.
The International Monetary Fund itself holds that inequality is corrosive to growth and to society, yet the IMF’s policies are harsh in their treatment of southern European states and responsible for the impoverishment of “large sections” of their citizenry.
So what’s the answer to income inequality?
Some say it is wealth redistribution through taxes.
Let’s look at how income redistribution works. The idea behind Robin Hood (and Marxism) is that a lower tax burden would give the poor more spending power. The rich tend to save their money and invest it, but the poor will spend what they get right away, which (as we all know) is great for the economy.
But higher taxes on the rich would lead to decreased investment. This would be bad for the economy, but redistribution proponents say the damage would be more than offset by the purchases made by the poor on much-needed goods and services.
There are three kinds of wealth we need to consider when we talk about taxes and wealth redistribution:
- Income: This includes salary, public handouts and private transfers such as alimony
- Liquid wealth: This includes cash in bank accounts, bonds and stocks or anything that can be
- quickly sold
- Illiquid wealth: Assets that can’t be quickly sold, like the equity in your home
A recent Gallup poll shows that about half of Americans are pro-wealth redistribution, particularly the young and the low-income. When these groups suffer a financial disaster (loss of a job or a medical emergency, for example), they usually don’t have a buffer of liquid assets to fall back on. Their consumption fluctuates with changes in their income, and they often live “hand to mouth.”
Wealth redistribution is already a part of American policy: Social Security and Medicare redistribute wealth from the young to the old, and the earned income tax credit redistributes wealth from the wealthy to the poor. Thanks to the earned income tax credit, 32 million Americans even got money back instead of paying any income tax at all.
Income inequality is a real phenomenon—one with damaging effects. But if you believe the rich aren’t paying their “fair share,” think again.
You may be surprised to learn that while the average American pays about 10 percent in income taxes, the rate for the richest (those who make more than $1 million annually) is closer to 27 percent.
In fact, the top 10 percent of income earners paid 68 percent of all federal income taxes, though they earned 45 percent of the income. The bottom 50 percent paid 3 percent of income taxes, but earned 12 percent of income.
However, in some areas of taxation, the poor and middle class get hit the hardest.
Everyone pays the payroll tax (Social Security and Medicare) on wages up to $118,500. So the poorest Americans (those who make under $10,000) pay over 10% in payroll taxes, while those making over $1 million pay only 1.8 percent.
Excise taxes also weigh heavily on the working poor. $93.4 billion is collected annually for these taxes on fuel and certain goods.
Nonetheless, because income taxes make up the bulk of taxes collected, if you combine the different taxes and you’ll see that the wealthiest pay the highest percentage of their income (about a third) in taxes.
People with illiquid assets (homeowners, for example) would probably react to higher taxation by halting their discretionary spending. That’s why a lot of economists actually think higher taxes on higher income brackets won’t be that great for the economy.
In the U.S, you may be surprised that support for redistribution has remained flat or fallen as inequality has risen. So what’s the REAL moral of the Robin Hood story?
Social inequalities exist, and there are problems with the tax code. However, the wealthy usually pay more than their fair share. The real enemy—which we should address together as united citizens—is out-of-control government spending.
PREVIOUS POST: 6 MORE KILLER QUOTES FOR INSPIRATIONAL LEADERSHIP