"Income inequality" has emerged as the issue du jour in national politics, threatening to displace the unpopular health-care law and the slow-growing economy this election year. Speeches and columns now routinely attack the banks or "the undeserving rich" and call on Washington to do something to redistribute income from the "super rich" to the poor and middle class. Democrats from President Obama to the new mayor of New York City are leading the charge on behalf of the "99%."
This crusade is based on three questionable claims. One is that the wealthy are mostly Wall Street bankers benefitting from rising stock and real estate prices, or executives who pay themselves extravagant salaries. Another claim is that such people unfairly benefit from a system that taxes capital gains at half the highest marginal rate paid by those who earn salaries and wages. Then there is the assertion that the "super rich" have abundant funds that can be taxed to improve the living standards of everyone else.
All of these claims are false. By promoting them, the president and his supporters may hope to distract attention from ObamaCare and the economy. Yet they are igniting hopes they can't possibly fulfill.
In 2010, the latest year for which we have complete data, roughly 119 million households filed tax returns with the IRS, leaving about 1.1 million households in the top 1% of the income distribution. According to this data compiled by the Congressional Budget Office, the top 1% received 15% of the national household income (before taxes) in 2010, up from 9% in 1980. A taxpayer needed a taxable income of $307,000 to enter the top 1%, a figure that hardly qualifies as "rich" today, especially in cities like New York, Chicago, Los Angeles or San Francisco.
According to research on individual tax returns in 2004 and 2005 by Jon Bakija of Williams College, Adam Cole of the Treasury Department and Bradley T. Heim of Indiana University, the top 1% consists primarily of salaried executives at nonfinancial businesses (30%) and secondarily of doctors (14%), people working in finance (13%) and lawyers (8%). Among the "super rich" in the top 0.1% (about 110,000 households), the distribution still favors business executives (41%) over people in finance (18%).
Given these percentages, there were approximately 330,000 salaried non-financial executives in the top 1% and some 45,000 in the top 0.1%. These are numbers far too large to be accounted for by senior executives in the Fortune 500. The vast majority must have earned their salaries in small- and medium-size businesses—not in the largest firms and definitely not in finance.
The top 1%, and especially the top 0.1%, also includes a growing number of professional athletes who have joined a long list of actors and artistic performers such as Tiger Woods, Peyton Manning, LeBron James, Matt Damon, Julia Roberts, Taylor Swift, Bruce Springsteen and Beyoncé. All of them (according to Forbes magazine) earn in excess of $10 million a year, and often much more.
Scores of college football or basketball coaches, like Nick Saban and Mike Krzyzewski, earn annual salaries in excess of $2 million. According to Forbes, the average salary for players in the National Basketball Association is more than $5 million, in Major League Baseball more than $3 million, and in the National Football League more than $2 million. The minimum salary in all three leagues is sufficient to place every player in the top 1%.
All of these performers earn their incomes in highly competitive environments and through the voluntary patronage of consumers. Where does their money come from?
The top earners depend heavily on salaries. In 2010 the top 1% earned 36% of their incomes from salaries and wages (what the CBO calls labor income), 22% from businesses, farms and partnerships, and just 19% from capital gains. The majority of their income would thus be taxed today either at the corporate or the highest marginal rate rather than at the lower capital-gains rate of 23.8%.
Emanuel Saez of the University of California ( Berkeley ) has shown in a series of papers that, as he writes, "The top income earners today are not 'rentiers' deriving their incomes from past wealth but rather are the 'working rich,' highly paid employees or new entrepreneurs who have not yet accumulated fortunes comparable to those accumulated during the Gilded Age."
The typical "rich" person today is someone who works for a salary and accumulates stocks and bonds through savings, retirement plans and (for business executives) stock options.
From 1980 to 2010, as the top 1% increased their share of total before-tax income to 15% from 9%, their share of the individual income tax soared to 39% of the total paid, up from 17%. Most were paying federal taxes at the highest marginal rate: In 1980 that rate was 70% and in 2010 it was 35.5%—but it has now climbed back to 39.6%. The share of federal taxes paid climbed dramatically in those 30 years even as marginal rates were cut almost in half.
According to the White House budget office, in 2010 the federal government raised approximately $900 billion from the individual income tax, of which about $350 billion (39%) was paid by the top 1% of income earners. The remainder of total federal tax collections (nearly $2.2 trillion in total) was paid through corporate, payroll, estate and excise taxes.
Those who want to "tax the rich" to redistribute income to the poor and middle class usually propose to raise the marginal rates on incomes or the capital-gains rate, or both. Yet as Scott Hodge recently documented in these pages, it will not be easy to raise vast sums this way.
The individual income tax accounts for slightly less than half of federal revenue and the top 1% already pays a substantial share of that total. Most of the wealth owned by the top 1%, and especially by the "super rich" in the top 0.1%, is also held in stocks, bonds and real estate that are not subject to income taxes until sold. It is a fool's errand to try to raise the living standards of the bottom 60% through higher income taxes on the top 1% or 0.1%.
The shift in incomes in favor of the wealthy has been due to several large forces, including a world-wide boom in asset prices, the rise of global markets, and technological innovation that has increased the earning power of the well educated. These have been positive—not negative—forces that have elevated living standards around the globe.
At a time of slow economic growth, mounting government debt, a stalemated politics and the impending retirement of the "baby boomers," the attacks on the "one percent" look more and more like a diversion from the nation's real problems.
Original Source: http://online.wsj.com/news/articles/SB10001424052702303519404579352551767664072