Obama Is Right, Part II

I shocked quite a few people last week when I wrote an article advocating some redistribution of wealth in this country because the concentration of income and wealth has become enormously unfair and widely misunderstood. I believe President Obama was re-elected mainly because he understood and articulated the need for reform, which has become urgent due to the tremendous loss of wealth (mostly by the lower 80%) caused by the housing crash.

I am disgusted with Obama that he made no attempt to explain this situation or work to correct it. He only used the anger of millions to batter Republicans who, like Speaker John Boehner and Minority Leader Mitch McConnell, kept stupidly saying, “no increase in taxes on the wealthy”.

We not only need to reduce spending and reform entitlements, we need to make our income tax system more progressive and also enact a steeply progressive estate tax system – both without the loopholes that very wealthy people use to escape taxes. See my post on this here.

The 99% mostly get it, though, even if most Republicans don’t (including me before I was challenged to do some research).

They “get” it even though they misunderstand the extent of the problem. Below is a quote from an exceptional report which I used for most of my data:

“A remarkable study (Norton & Ariely, 2010) reveals that Americans have no idea that the wealth distribution (defined for them in terms of "net worth") is as concentrated as it is. When shown three pie charts representing possible wealth distributions, 90% or more of the 5,522 respondents -- whatever their gender, age, income level, or party affiliation -- thought that the American wealth distribution most resembled one in which the top 20% has about 60% of the wealth. In fact, of course, the top 20% control about 85% of the wealth.

Even more striking, they did not come close on the amount of wealth held by the bottom 40% of the population. It's a number I haven't even mentioned so far, and it's shocking: the lowest two quintiles hold just 0.3% of the wealth in the United States. Most people in the survey guessed the figure to be between 8% and 10%, and two dozen academic economists got it wrong too, by guessing about 2% -- seven times too high. Those surveyed did have it about right for what the 20% in the middle have; it's at the top and the bottom that they don't have any idea of what's going on.

Americans from all walks of life were also united in their vision of what the "ideal" wealth distribution would be, which may come as an even bigger surprise than their shared misinformation on the actual wealth distribution. They said that the ideal wealth distribution would be one in which the top 20% owned between 30 and 40 percent of the privately held wealth, which is a far cry from the 85 percent that the top 20% actually own. They also said that the bottom 40% -- that's 120 million Americans -- should have between 25% and 30%, not the mere 8% to 10% they thought this group had, and far above the 0.3% they actually had.”

Another misconception that most people have is that “the very wealthy are already paying their fair share because our tax system is very progressive”. In fact our tax system has become much less progressive over the past few decades, and in fact the top 1% actually pays less in total taxes than the next lower grouping.

Source: Citizens for Tax Justice (2010a).
Left-Click to Enlarge

An argument that conservatives make that has some validity is that “raising income taxes on the job creators is self-defeating since they will be less motivated to invest and work to create more jobs”.

My response to this is threefold:

1. Federal income tax rates have decreased in recent years and are much less punitive of success than they once were.

2. I was a successful small businessman for many years. NOT ONCE DID I CONSIDER TAXES WHEN DECIDING ON NEW EQUIPMENT OR ON EXPANDING. THE EXISTENCE OF A MARKET AND THE OPPORTUNITY FOR PROFITS WERE WHAT MOTIVATED ME.

3. When I worked for a large corporation and analyzed investment opportunities, only when competing projects outnumbered available funds were income taxes considered in a present-value analysis of projects.  That was when corporate tax was 50%.

When income taxes became prohibitive, it is true that when they were lowered, an increase in economic activity and jobs immediately followed. This happened under Kennedy, Reagan and Bush 43. I can’t ever remember when the opposite was true; that is, when raising taxes reduced economic growth. That certainly didn’t happen during Clinton’s presidency, although other factors were also at work then. No-one wants to see a huge increase in income tax rates, but some upward adjustments are absolutely necessary.

I believe that most liberals believe what they do basically from guilt (if they are wealthy) or from hatred caused by envy of success (today’s Democrats are much different than the Truman-Kennedy school). However, once in a while they are right about something, and they tend to be more creative than we conservatives. Social Security was a liberal idea. Without it most of our seniors would be living in abject poverty. The right to bargain collectively was a liberal idea. Without it there would be no middle class. Don’t reject the idea of trying to even out the extremes of capitalism just because it is a liberal concept.