In October last year, the Congressional Budget Office (CBO), a non-partisan arm of the Congress, came out with a study saying that in the decade beginning 1997, income grew by 18% for the bottom 20 percent of households, and 275% for the top 1 percent (those who earn more than $250,000). On an inflation-adjusted basis, income of the bottom 20% declined. CBO also said that the share of transfer payments (also called entitlements) to the lowest-income households declined. Not surprisingly, the overall average federal tax rate fell during this period. These are pretty damning statistics that exhibit the growing income inequality in the United States. This study, among other data-points, makes the ongoing debate about the need to increase taxes for households that make more than $250,000 seem almost an insult to arithmetic.
Yes, we need spending cuts from the government, but that cannot be the only solution to get America growing again. The current tax policy is unsustainable and if the representatives don’t address this yawning gap, sooner or later, the populace will ask harder questions from the gentry; Occupy movements are only the beginning. One would think that the leaders would be racing to address this severe fault line. Instead, we have prominent members of the Flat Earth Society coming out with proposals for a flat tax so that we can join exemplary economies such as Kazakhstan, Bosnia, Russia and Iraq—some of the odd 20 countries where presumably you can file taxes on the back on an envelope. But, I digress.
We hear some form of the following three objections to raising taxes on the top 1%. First, we hear that the higher taxes will dissuade job creation. Second, it’s said that the top-earners spend their money, which forces a trickle-down effect, in turn boosting the economy. And finally, there’s the made-for-cable “this is class warfare!” argument. Let us dismantle these in one fell swoop. It’s actually rather easy.
All of us can undoubtedly agree that the United States’ secular expansion that began in 1940s and continued through ‘80s was one of the best times for the country. The marginal tax rate for the top-earners today in 2010 was 35%. Want to venture a guess for the average tax rate of the top-earners from 1940 to 1980? 78%. Seventy-eight percent. Between 1951 and 1964, this rate stayed put at 91%. For these 40 years, no one stopped investing in America, no one needed the chimera of trickle-down economics, and jobs came by at a relative ease compared to the bleakness today’s graduates face. As for the class warfare argument, I think the CBO study says it all, if you really needed it.
Just for fun, want to guess what followed the last time this country lowered tax rates rapidly for the top-earners? It was the Great Depression (tax rate for the top-earners was lowered from 73% in 1921 to 25% in 1925). For the last three decades, we have seen a similar order of decline in the tax rate. The middle and low-income earners have survived due to increased use of credit and assistance from the Great Society programs, which were expanded by presidents Nixon and Ford. Now, as the citizens and the government begin to retire debt from these unsustainable levels, it is difficult to imagine continued economic growth without paring income inequality and return of taxation to the levels last seen during this country’s brightest days.
Continued spending cuts are proposed as the nirvana. I fully agree with the approach, but this is not enough to balance the budget and grow America sustainably. Your friends sit on boards of non-profits in the area as Johnson Board Fellows. They see first-hand what these cuts have meant to the community. More people with disabilities are denied service, victims of natural disasters such as the Owego flooding have less support to do repairs, and victims of assault find fewer doors to escape every-day brutality. The most vulnerable Americans have taken it on the chin. Do we want to double down on that? I’m certain that none of us want to be a part of a community that is unable to put resources behind its compassion.
Tax increases for the top-earners is a somewhat bitter but needed medicine.