Five misconceptions about economic fairness

  • Article by: DAVID MORRIS
  • Updated: January 21, 2012 - 3:44 PM
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Recent remarks by Mitt Romney, the probable Republican nominee for president, all but guarantee that the inequality issue will remain front and center this election year.

When asked whether people who question the current distribution of wealth and power are motivated by "jealousy or fairness," Romney insisted, "I think it's about envy. I think it's about class warfare."

And in this election year he advised that if we do discuss inequality, we do so "in quiet rooms," not in public debates. But a public debate, of course, is inevitable. And welcomed.

To help that debate along, I'll address the five major statements that comprise the Republican argument on inequality.

1. Income is not all that unequal.

Actually, it is. Since 1980, the top 1 percent have increased their share of the national income by an astounding $1.1 trillion. Today 300,000 very rich Americans enjoy almost as much income as 150 million of their fellow citizens.

Since 1980, the average annual income of the bottom 90 percent of Americans has increased a meager $303, or 1 percent. The top 1 percent's income has more than doubled, increasing by about $500,000.

And the really, really rich, the top 10th of 1 percent, made out, dare I say, like bandits, quadrupling their average income to $22 million.

Meanwhile, a full-time worker's wage was 11 percent lower in 2004 than in 1973, adjusted for inflation, even though productivity increased by 78 percent.

2. Inequality doesn't matter. In America ambition and hard work can make a pauper a millionaire.

This is folklore. A worker's initial position in the income distribution is highly predictive of how much he or she earns later on.

As the Brookings Institution reports, "there is growing evidence of less intergenerational economic mobility in the United States than in many other rich industrialized countries."

The bitter fact is that it is harder for a poor person in America to become rich than in virtually any other industrialized country.

3. Income inequality is not a result of tax policy.

Nonsense. A painstaking analysis by economists Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva found "a strong correlation between the reductions in top tax rates and the increases in top 1 percent pre-tax income shares from 1975-79 to 2004-08."

For example, the United States slashed the top income tax rate by 35 percent and witnessed a 10 percent increase in its top 1 percent's pretax income share.

"By contrast, France or Germany saw very little change in their top tax rates and their top 1 percent income shares during the same period."

4. Taxing the rich will slow economic growth.

An examination of 18 countries in the Organization for Economic Cooperation and Development found "little empirical support for the claim that reducing the progressivity of the tax code has spurred economic growth, business formation or job growth."

Indeed, the rigorous analysis by Piketty, Saez and Stantcheva came to the opposite conclusion. Our economy may be growing more slowly because we are taxing the rich too little, not too much.

They estimated that the optimal top tax rate -- that is, the tax rate that would maximize revenue without slowing economic growth -- could be as high as 83 percent.

Redistributing income stimulates economies in part because when the 1 percent make more, they save, whereas when the 99 percent make more, they spend.

As a result, according to Mark Zandi, chief economist for Moody's, a dollar in tax cuts on capital gains adds 38 cents of economic growth, while a dollar in unemployment benefits gives the economy a boost of $1.63 and a dollar of food stamps adds $1.73.

5. Taxing the rich would not raise much money

Of course it would. If only the richest 400 families, whose average income in 2008 was an astounding $270 million, actually paid the statutory rate of 39 percent (to be revived as of next Jan. 1), an additional $500 billion would be raised over 10 years, putting a substantial dent in the projected deficit.

In 2010, hedge fund manager John Paulson made $5 billion. That year, according to Pulitzer Prize winner David Cay Johnston, Paulson paid no income taxes.

Am I envious, Mr. Romney? You bet I am.

But I'm also angry at the stark injustice of it all. And terrified of the power such wealth can wield in a country that allows billionaires to spend unlimited sums influencing legislation and elections.

A recent survey by the Pew Research Center found that two-thirds of Americans now believe the conflict between rich and poor is our greatest source of tension. It is a conflict that deserves to be aired fully -- and in public.

* * *

David Morris, Minneapolis, is the vice president of the Institute for Local Self-Reliance.

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