Everyone knows the solution to inequality in America is a simple one: seize the wealth of the rich and lavish it on the poor. Hold a giant ceremony, hosted by Sen. Elizabeth Warren, Sen. Bernie Sanders, and David Brock, where the evil billionaires are divested of their wealth and then invited to step into a frothy vat of tar. (The tar, of course, would be environmentally friendly, and would be derived from industrial hemp.)
Or, as Robert Solow, who for some reason is a Nobel Laureate in Economics, has written, fixing inequality is as simple as “taking a dollar from a random rich person and giving it to a random poor person.”
But as James Piereson notes in this hard-hitting piece in Commentary, there’s just one problem: America currently already has a very progressive income tax system, which does little if anything to redistribute wealth.
Piereson is a Manhattan Institute fellow and president of the William E. Simon Foundation. (I once received a small grant from the Simon Foundation to write an op-ed.) As he persuasively argues, “federal tax and spending policies had little effect on the overall distribution of income.”
He looks at Congressional Budget Office data comparing the shares of national income held by rich and poor Americans between 1980 and 2011. During this period, the top income tax rate started off at 70 percent, fell to 28 percent by the end of the George H.W. Bush Administration, rose to 39.6 percent in the Clinton years, fell again to 35 percent in the George W. Bush Administration, and is now back up to 39.6 percent under Obama.
Whether the tax rates were high or low, taxes reduce the rich’s share of national wealth by between 1-2 percent. In 1980, when the top income tax rate was 70 percent, the richest one percent of Americans had 9 percent of before-tax income and eight percent of after-tax income. In 2010, when the top income tax rate was 39.6 percent, these super-rich had 15 percent of before-tax income and 13 percent of after-tax income.
What about the poor? In 2011, the bottom 20 percent of Americans had five percent of the national income before taxes—and six percent of after-tax income. Most of the income of the poor does not come from government paychecks.
Suppose the top income tax rate was raised from 39.6 percent to 50 percent. In 2010, this would have resulted in the federal government getting $300 billion, assuming that the rich didn’t institute any tax-avoidance strategies. But that is only three percent of the federal budget, and not very much to redistribute to the poor.
The federal government gets only 42 percent of its money from income taxes. Forty percent comes from payroll taxes, and poor people pay proportionally more of their income in payroll taxes than income taxes. Remember that 40 percent of Americans don’t pay any income taxes, but everyone with income pays into Social Security. Social Security also is capped by income, so millionaires and billionaires don’t pay any more payroll taxes than those whose income is only in six figures. Thus in 2010 the top one percent of income earners paid 39 percent of income taxes, but only four percent of payroll taxes.
Moreover, the redistributive effects of Social Security are murky. It may well be that Social Security in some ways transfers income from the poor to the rich, since wealthier people live longer than the less well-off and rich people are more likely to have non-working spouses who qualify for Social Security than poor people are. It is plausible that the redistributive effects of payroll taxes and income taxes cancel each other out.
Julia Lynn Coronado, Don Fullerton, and Thomas Glass studied the redistributive effects of Social Security in a paper for the National Bureau of Economic Research. Their conclusions are stark. “Social Security does not redistribute from people who are rich over their lifetime to people who are poor. In fact, it may even be slightly regressive.”
Piereson also reminds us that most of the people who come to Washington are not idealists who want to improve the lives of the poor, but people who work for “countless trade associations, companies seeking government contracts, hospital and medical associations lobbying for Medicare and Medicaid expenditures, agricultural groups, college and university lobbyists, and advocacy organizations for the environment, the elderly, and the poor.” All of these well-paid workers are fully employed in maximally increasing government subsidies to their organizations.
“The federal government is an effective engine for dispensing patronage, encouraging rent-seeking, and circulating money to important voting blocs and well-connected constituencies,” he concludes. “It is not an effective engine for the redistribution of income.”