True or False: There is greater income inequality now, under Republican policies implemented under the Bush administration, than we experienced in those halcyon days of the Clinton administration.
If you answered True, you are probably listening to modern pundits, who would like you to believe that growing inequality is a product of Republican policies. However, the data suggests otherwise. An op/ed piece in the online version of the Wall Street Journal, posted last Saturday (9/2/06), provides some analysis of new figures coming out on the tax and income distribution in the United States through 2004. The story can be found here:
Significantly, the share of income of the top 1% of earners is down to 19.0 percent, down slightly from 20.8% in 2000, the last year of the Clinton administration. Those top earners paid more taxes in 2004, but the total percentage of taxes was about the same: 36.9% vs. 37.4 % in 2000. Apparently, lower capital gain and dividend rates were helping this group, while those in the next tier – the top 5 to 10 % of earners, most of whom are earning wage income – paid a slightly higher percent of taxes. The bottom 50% -- earning less than $44,389 – paid 3.3% of taxes in 2004, below the 3.9% they paid in 2000.
Despite tax cuts, the system is still highly progressive. And the system is still raking in record tax receipts. FY 2005 brought in $2.153 trillion, and through ten months of FY 2006 (through July – August figures won’t be released until the end of this week) we have collected nearly $1.97 trillion. If August and September match last year’s receipts of roughly $400 billion, the total for FY 2006 will be nearly $2.4 trillion. (Unfortunately, we are still spending more – though the gap is narrowing.)
Focusing on individual income tax collection, collections through July are over $866 billion, up some 14% from the $758 billion in the prior fiscal period. Corporate income taxes through July are at $261 billion, up some 27% from the prior fiscal period. (See http://www.fms.treas.gov/mts/mts0706.pdf for all the above data.) These figures indicate solid earnings and profits, which are reliable indicators of prosperity. You don’t fudge the numbers up (a la Enron) when you have to pay your government partner on the outcome.
Despite the success of the current system in collecting more and more taxes, some still wring their hands over income inequality. And you would be right in suggesting it has nevertheless grown over the past fifteen years or so. During the beginning of the Clinton Administration, those top 1% of earners had only about 13 percent of total income. What is happening may have more to do with technology changes than tax policy. The problem is coming up with a solution that is not worse than the condition. Raising taxes on high-income (and productive) people kills innovation. Growing government programs to redistribute wealth also creates inequality – as witnessed from the fact that some states with low populations, like Alaska, reap huge per capita benefits from discretionary government spending.
We must understand that technology has given huge benefits to all people in terms of the goods and services they can enjoy. However, in terms of reaping profits from those innovations, the results are not so uniformly generous. Some are well placed and can benefit from the change; others do not. That is hard to change, and it is part of a dynamic economy.
Over time, markets have a way of providing new winners and losers. Witness the spectacle of the current struggles of Ford Motor Company. Once the leader in manufacturing, the founding family’s fortunes have waned in comparison to those in other leading industries, where new wealth has been created.
However, there is one aspect of this problem that is within the control of individuals. They can work to ensure that they, and their children after them, get an education and develop malleable skill sets that can adapt to changing market demands. It is not hard to see how the lesser skilled workers, and those who don’t pursue educational opportunities to provide an edge in the market place, will be left behind when the marketplace ratchets up demands for new skills and rewards them appropriately.
Differential rewards are needed to justify the new investment in human capital. That means inequality - and perhaps more of it, to the extent that more and more investment is required in knowledge and experience to exploit the opportunities presented. Policies to incentivize those investments make much more sense than policies based on creating disincentives for production through higher tax rates.