About that 46%...

One of the points I was trying to make in my last piece is that we have two different kinds of income-related taxes in this country: the one we call “income tax” and the one we call “payroll tax.” The former is putatively progressive, although it is demonstrably not necessarily so. The latter is unquestionably regressive, since it applies only to the first $106,800 of earned income per wage-earner: not only do people making a million dollars a year pay a far lower rate than ordinary folks do, but the kinds of income that tend to be reserved, at least at significant levels, for the wealthiest among us (capital gains, dividends, interest, rent) aren’t taxed at all.

But just as those on the left too frequently conflate Exxon’s or GE’s failure to pay federal income tax with not paying taxes at all, those on the right—Rick Perry being the latest, particularly stupid and/or disingenuous, example of this phenomenon—holler about the 46% of Americans who don’t pay income tax. It’s true, of course, and also a completely conscious fabrication: a family of four making $26,000 in 2010 would indeed pay no income tax. ($26K = 4 exemptions @ $3650, plus the standard deduction of $11,400.) That family would pay $1092 in payroll taxes, however, even at the reduced rate used in 2011. This figure doesn’t count the additional $1612 paid by their employers, which, as Syracuse University professor Len Burman points out in an article on the website of that leftist rag, Forbes, “economists believe is ultimately paid by the employee in the form of lower wages.”

But the fact that virtually any GOP politician you can name is completely and utterly mendacious on this point isn’t news. What I’d like to discuss instead is the underlying truth that goes too often unspoken: the problem with the country isn’t that nearly half the people don’t pay income tax, it’s that nearly half the people don’t make enough money to be taxed. I’m not the first to talk about this, but certainly there are far too few politicians or commentators, even on the left, who make this observation.

Here’s the reality: study after study shows that economic disparity in this country is bad and getting worse. Just a few examples: a study by sociologist G. William Domhoff of the University of California at Santa Cruz shows that nearly 43% of the financial wealth (net worth minus home value) in the country is controlled by just 1% of the population. The top quintile controls 91.3%, the bottom two quintiles combined, 40% of the population, own only 0.3% of the wealth. These figures are very much tied to race, as well; whereas whites (in 2006) had household incomes about 67% higher than African-Americans and 43% higher than Hispanics, their net worth exceeded African-Americans’ by a ratio of over 15.4:1 and Hispanics’ by more than that. But if you take homes out of the picture, the ratios become 87:1 and 109:1, respectively.

Still, while race clearly plays a part in this scenario, the division between rich and poor—or, more accurately, between the ultra-rich and everybody else—is what really matters. The richer you are, the less of your net worth is tied up in your home: an article by Dave Gilson and Carolyn Perot in Mother Jones this spring points out that “The 2007 data (the most current) doesn't reflect the impact of the housing market crash. In 2007, the bottom 60% of Americans had 65% of their net worth tied up in their homes. The top 1%, in contrast, had just 10%. The housing crisis has no doubt further swelled the share of total net worth held by the superrich.”

Particularly interesting in the Mother Jones piece is a chart based on the work of Jacob Hacker of Yale University and Paul Pierson of UC-Berkeley. These two political scientists charted what actually occurred in the generation from 1979-2005 compared with what would have been projected based on the data of the previous few decades. You will not be surprised, Gentle Reader, to learn that the richest 1% fared quite well over that period, raking in some $673 billion (nearly $600,000 per family) per year more than would have been predicted. The hardest hit in percentage terms, of course, were those at the bottom, but the biggest losses in dollar terms came from those at the very center: families in the third quintile made over $10,000 a year less than would have been predicted.

Finally, let’s look at how America compares to other countries in terms of wealth equity. Hint: it ain’t pretty. There’s some complicated mathematics that goes into figuring the Gini index—I won’t attempt to explain it here, but basically there are two things you should know: it’s an objective number rather than an analysis of any kind, and the lower the number, the more equitably a nation’s wealth is distributed among the population. According to the CIA, the most recent number for Sweden is 23; Hungary, 24.7; Slovakia, 26; Canada, 32.1; the United Kingdom, 34. The United States: 45 in 2007, up from 40.8 a decade earlier. True, that’s not as bad as Swaziland (50.4), Honduras (53.8), or Namibia (70.7), but are those really the economies we want to be comparing ourselves to? We’re behind the likes of Albania (26.7), Bangladesh (33.2), and Yemen (37.7). The European Union as a whole: 30.4. China: 41.5. India: 36.8.

Another metric would be the ratio of the average income of the top 10% to the average income of the bottom 10%. Using this statistic, Japan has the most equitable economy at a ratio of 4.5:1; Bolivia is the worst of those surveyed, at nearly 94:1. The United States, at 15.9:1, is behind every other first-world country, not to mention the likes of Bosnia and Herzogovenia, Tanzania, and Liberia.

Of course, having a high degree of income disparity is neither the full measure of an economy nor an inherently bad thing: I’d rather have our economy that Greece’s or Ethiopia’s, even though they both beat us in both the metrics listed above. That said, however, Domhoff’s statistics are revealing:

Americans from all walks of life were also united in their vision of what the "ideal" wealth distribution would be…. 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. In fact, there's no country in the world that has a wealth distribution close to what Americans think is ideal when it comes to fairness.

There’s an outstanding graph that originally accompanied an excellent article by James Fallows in The Atlantic last fall about a study similar to Domhoff’s, this one by Michael Norton of Harvard Business School and Daniel Ariely of Duke. The chart, which I put on the Curmudgeon Central Facebook page last September, shows that whereas there are perhaps predictable variances between people who voted for Bush as opposed to Kerry, or who make more than $100K a year as opposed to less than $50K, literally every demographic both underestimated the existing disparity and believed that there should be more equity. Those making over $100,000 a year, for example, predictably showed the highest “ideal” percentage of wealth to be controlled by the top 20%. But their ideal would be 40%. They thought the reality was 62%. The actual reality: 84%.

So there seems to be some interest in a more balanced economy in which the gaps between the top and the bottom are less pronounced. This is true in theory, anyway—whether there’s actually as much egalitarian spirit as the subjects surveyed in either of these two studies seem to pretend is another matter. But the studies do highlight both the central flaw in the right-wing rhetoric in logical and ethical terms, and indeed the reason this spurious argumentation is effective. If, as the populace believes, those not paying income tax account for even the 15% of so of the nation’s wealth, that’s a fair amount of money not to be drawing any tax revenue at all. Trouble is, that bottom 46% make less than 3% of the income and have well under 1% of the wealth.

And so we’re back to where we started: if the right wants to make a big deal out of “nearly half” of the population not paying taxes (there were also a few thousand millionaires who didn’t, either, but that doesn’t bother them so much), then the appropriate response is not merely to point out that virtually everyone with a job of any kind pays payroll tax. It’s also to ask what the GOP is going to do to raise people up economically to the point where they’re going to be called upon to pay taxes. How do you do that, Governor Perry? I’ll give you a hint: it’s not by leading the nation in minimum-wage (and sub-minimum-wage) jobs.