So much of the American debate these days is over income distribution. The Census Bureau data states that the top quintile of earners (top 20%) earns 17 times more than the bottom 20%. A opinion piece in the Wall Street Journal today took a look at this. Now, the author, Phil Gramm, is a very respected Republican conservative. His co-author was a professional public servant. So that needs to be taken into account. However, data is data.
Their bottom line is that the disparity between the averages at the top 20% and the bottom 20% would look quite differently if you reduced from income the taxes paid by the top group and added to the bottom group income the cash transfers from the Federal Government, the States, municipalities, and private sources.
• The top 20% pay 2/3rds of all taxes. One-third of all household income averaged across all groups is paid in taxes: federal, State, and local.
• The Federal Government and the States make $1.9 trillion annually in cash transfers flowing from 95 Federal programs – 40% of Federal spending – and dozens of State and local programs, and private charities.
• These cash transfers provide 89% of the resources for the bottom 20%; and 50% for the second lowest 20%.
• Leaving out taxes and transfers overstates inequality by about 300%. The top two quintiles pay about 80% of all taxes; and the bottom two quintiles get about 70% of all cash transfers.
• Bottom 1/5 have income averaging $4908 per year. (For a family of four, income under $26,000 per year is classified as poverty.) However, this group receives on average $45,400 in government transfers and $3,300 in private transfers. They pay about $2709 in taxes. Their net is $50,900 of economic resources per year. They receive $17 in transfers for every $1 paid in taxes. The next lowest quintile gets about $4 in transfers for each $1 of taxes. The Middle income group, between the 40 to 60 percentile, receives about $17,850 in cash resources and pays about $17,737 in taxes, i.e., they break even. The fourth highest quintile gets $.29 dollars for each dollar of taxes paid and the top 20% about $.06 per dollar paid in taxes.
• The average taxes paid by the top 20% is $109,000 annually. In the end, the top 20% nets about 3.8 times as much as the bottom 20%, namely, $194,906 versus $50,900, a number which is close to the medium income in the United States.
They go on to discuss other issues, such as the difference in resources between the 21-40 percentile and the bottom 20% (9.4% better off) and the same for the middle group, 40-60 percentile (32% better off than the bottom). They also have some things to say about labor participation rates which are quite negative to the bottom quintile, which participates in the economy at about half the level of the past. But I think you get the point.
Now, what you might hope is that the Country could have a real discussion about data such as this. Averages don’t always tell the truth. For example, the weighted average income of the top 20% is no where near $300,000 per year. The top 1% truly distort this average. And, by the way, taxes paid by most of the top 20% are no where near $100,000 per year. Same problem. However, considering this, it only makes the argument worse for those who say the people at the top get all the money. In fact, take away the top 2 – 3 percentile, my guess is that the disparity between the 80-97 percentile versus the bottom 1/5 would be considerably less than 3.8 X.
Of course, the Progessives go after the top 2-3 percentile. The problem here is that some group needs to start the companies or manage them and invest the capital that creates all of those jobs out there. You destroy this group and you’ll just end up with a different 2-3 % who will control everything, but without having the skills to build anything. Think, Venezuela. (OK, longer discussion needed.)
I think the data pretty accurately documents where government transfers go, and note that it doesn’t record that it all goes to the lowest 20%. For a capitalistic democracy the Federal Government of the United States devotes 40% of its resources (expenditures) to redistributing cash among its citizens. This is a reasonably noble thing. I surely hope the young folks who decry the evils of capitalism take note of this before they push consideration of an alternative.
Wouldn’t it be wonderful if our politics focused on what we actually do, and then reflected on: how we could do it more efficiently; how we could make those resources more effective in helping folks move forward; how we could increase labor participation rates; how we could promote dignity for all five of our income quintiles; how we can just care for people who can’t do more than they do; how we could slow down and reverse the enormous concentration of wealth among the top .10% of our productive citizens without negatively affecting incentives and rewards for great economic accomplishments – I think Warren Buffett would agree with this goal; and how decent a people we are that we do as much as we do to level things out. You don’t hear the progressives bragging about our successes in these areas. Rather, the discourse seems to always be on how bad everything is. But neither do you hear conservatives explaining how much we do, and why this is a good thing, and also how we could do it better.
Maybe as citizens we could urge them to focus a little more honestly on this subject.
