The Rich, Fairness and Politics

The vice of capitalism is the unequal distribution of its blessings. The virtue of socialism is the equal distribution of its miseries.
-Churchill

The Democrats are obsessed with "the rich". It dominates their thinking and distorts their policy priorities. John Edwards is currently the most honest about these feelings, so we will let him speak for his party:

I think the truth of the matter is that the tax policy in America has been established by big corporations and the wealthiest Americans. That's why we have tax breaks for the top 1 percent and 2 percent. It's why the profits of big corporations keep getting bigger and bigger, while most working middle-class families are struggling. So what we ought to be doing instead is getting rid of these tax breaks for big -- the wealthiest Americans -- big tax breaks for companies that are actually taking American jobs overseas. This is insanity, when we're losing American jobs at the rate we are today. And then, on top of that, we need to help middle-class families. January, 2007

So are the Democrats right with their class-warfare talk of "two Americas", one rich and one poor? Have we become a nation of haves and have-nots? As you would expect, The Democrats fail to define their terms, ask the wrong questions and come to the wrong answers. Let us begin the discussion by defining our terms.

Defining "The Rich"

How do we define rich versus middle-class? This is a key difference in politics because to help the "middle-class" is to firmly place oneself in the center, where the largest number of votes is to be found. As with poverty, these terms are slippery. First one must decide whether we define "rich" by income, the amount of money you make each year, or by wealth, the value of everything you own, including your house and pension plan. If you decide income, then do you include only cash, or do you include noncash benefits, such as health insurance and retirement benefits? Do we define income by individual or by family unit?

Census Data, Adjusted

Take, for example, the Census Bureau’s ranking of income by quintiles. In 2002, the Census used tax return data to show that the top 20% of households had 49.7% of income, compared top the bottom fifth’s 3.5%. This would mean that the top 20% of received $14.20 of income for every $1.00 at the bottom. That sounds like a high degree of inequity until one understands the nature of the Census data.

• In the first place, they measure gross income, meaning that taxes have not been deducted.
• Nor do they include the social safety net.
  • In 2002, the government spent $500 billion on means-tested welfare (including cash, food, housing and medical insurance) for the poor and another
  • $250 billion dollars subsidizing medical care for the elderly through Medicare.

When taxes and benefits are counted, the gap between top and bottom shrinks to $8.60 to $1.00 for the top fifth versus the bottom fifth.

The next problem is that the Census counts income by households, which do not contain equal numbers of persons. The top households have more people, and not surprisingly, more of them work. If one adjusts for the fact that the poorest households have 14% of the population compared to the top households having 25% of the population, then the top group receives $4.20 of income for each $1.00 a the bottom.

Inequality in income is also to a great degree related to the how much work each group actually performs. The top quintile performs over one-third of all paid labor, while the bottom third performs only 4.3%. This is not only due to the fact that there are fewer working adults in lower income families (think single mothers) but also that they work one-half as many hours as their higher income counterparts.

After adjusting for this, the top quintile earns $2.91 for every $1.00 earned at the bottom. Is this an acceptable degree of inequality? Discuss.

The Middle Class?

Using the Census Bureau’s definition of the rich as the top 20% of income earners, who then is the middle-class ($35,000-$55,000 per year in 2005)? Not your average working family, as you might think.

• Over two-thirds of married couples are found in the top two quintiles.

If a young skilled worker, say a nurse, makes $25 per hour- $50,000 per year - she would fall in the middle quintile. But if she marries a fellow co-worker, their combined income places them in the top quintile, the statistically rich. As we will discuss in more detail later, married couples in this quintile account for 17% of tax returns, but they pay 72% of all income taxes (2002). Perhaps middle-class is a value system, not a point on the income scale.

Income by Percentile

American Gross Income Percentiles

Percentile	Income
Bottom 20%	< $18.5 K
Middle 20% (40%-60%)	$35 to $55 K
Top 20%	> $92 K
Top 5%	> $167 K
Top 1%	> $350 K

Democratic Viewpoint

Still, in their hearts, the Democrats are sure they can come to a working definition of the rich. The traditional line of $100,000 year is not longer useful as over 33% of married couples earn over this limit. It would be reasonable to take the top 5%, say two engineers, or the top 1%, say two doctors. You can choose either way, but the absolute income of doctors doesn’t quite raise the emotions high enough to justify class warfare. This is why Democrats usually refer to income in relative terms. Here is a illustrative quote from Lawrence Mishel, president of the left-leaning Economic Policy Institute, in 2006:

It’s a distraction from the (actual situation of the middle-class) to debate whether we have a higher standard of living now (compared to 1979) or not. We probably do. But so what? Middle-class Americans are not getting their fair share.

In other words, the absolute well-being of most Americans matters less to democrats than their relative position.

Understanding the Democrat

This puts Democrats in the awkward position of hiding their true motive: envy. They mask their real feelings behind a wonderfully attractive concept: justice.

Debating the Democrat

One must credit their marketing genius. Who could possible be against justice? It’s one of the four Cardinal virtues and it leads directly into another unassailable word: fairness.

In any discussion of economics with a Democrat, you can be sure that the words "justice" and "fairness" are sure to make an appearance. They have to. The absolute prosperity of even the poorest Americans is beyond dispute and one is hardly going to admit that she is envious.It is critical that you look for this and have your response prepared. Here is mine, and you are welcome to use it.

I think you are confusing unequal with unfair. You would not suggest, I’m sure (pause here and make eye contact as if to suggest "you’re not going to make it that easy are you?"), that it is unfair that 90% of the players in the NBA are blacks. I think that we need to discuss the meaning of the word justice.

Justice: Rawls' Veil of Ignorance

Now you are in a position for honest debate. In the American context, here is a definition of justice, based loosely on John Rawls’ concept of the "veil of ignorance". If you have a socioeconomic system in which at birth, you did not know where you would be placed (i.e. no advantage at the start and no fore knowledge of your finishing place), would you accept your final status as "fair", even if you ended up at the bottom.

For example, no one would want to be born into a country that puts 10% of its people into lifetime slavery, while giving 90% complete mastery over them, unless you knew ahead of time that you would not be a slave. But how about a country where your final socioeconomic status was determined only by your talent and effort?

Conservative Viewpoint

Conservatives believe that that just about describes America. The upward mobility of our poor and the absolute high standard of living for everyone is irrefutable. We are as "just" a society as exists. This places the burden of proof on the liberal to show that her desire to "redistribute" income is due to more than envy.

Economic Inequality

Having failed to make the case that taking money from the rich to give to the poor is "fair", liberals have shifted the argument to the problem of rising economic inequality. The past 50 years have seen a reduction in size and frequency in economic depressions and the long-run growth in productivity has lifted everyone’s standard of living.

Volatility and Politics

Many Americans, however, are worried that they and their children will experience a diminished quality of life in the future. There is a reason for this. Much of our economic gains have gone to just a small segment at the top. As well, the there has been increased turbulence in family incomes associated with job losses and restructuring. The average family has the seen the probability of a >50% drop in income go from 7% in 1970, to 16% in 2002.

Trend, By Percentile

As we see in Fig. 1, real hourly wages for those in the 90th percentile, the college educated, rose by 30% or more. Amongst this top 10%, most of the income growth was concentrated in the top 1%. These include America’s very highest salaries, the superstars: sports and entertainment stars, investment bankers and venture capitalists, corporate and tort lawyers and CEO’s. For those below the 50th percentile, real wages rose only 5 to 10 %.

• Note that this graph does not include total re-imbursement such as health insurance and pension plans. A graph of total compensation would show a better growth, but would not change the overall result.

While there are a variety of ways to explain the trends in wage inequality, perhaps differences by education are the most revealing.

Impact of the Information Age and Globalization

Educational attainment alone does not fully explain the inequality however, because even within groups with the same education level the gap between high and low earners has widened. Further explanation has focused on technology. Technological advancements in the digital age have fundamentally changed the nature of work and what workers need to know to do it. Between two liberal arts college graduates, the one who can use computer power to collect, analyze and synthesize data will have a significant advantage over the other who cannot. Similarly, a machinist who can use computers effectively will earn more than a comparable technophobe. While these differences are obvious in the marketplace, they are invisible to economic researchers. A related factor is the increasing globalization of labor markets. In the 1980’s, the loss of good paying manufacturing jobs was apparent to America’s high school graduates, in the 1990‘s, to its white collar workers. This cannot be the whole story however, because increased trade has created many new high skill jobs that now represent 20% of all present employment.

It is the nature of skill-based technological change that has had such an important impact: increased rewards at the top, with loss in the middle of all those repetitive jobs that could be replaced by technology or outsourced.

There remain low-wage jobs at the bottom involving manual or service work that cannot be easily automated, like care of people, or outsourced due to geography, like food and hotel industries.

Wages for these, however, have been undercut by 12 million illegal immigrants. By comparison, for the superstars, technology and globalization have increased the size of their markets. They can have a world-wide market at very little extra cost, and this is reflected in their huge incomes.

For the first time in generations, the instability of these changes has hit across the entire workforce, including the professional classes as well as blue-collar workers. The loss of income has been compounded by the loss of health insurance, which is linked to employment. This has led to heart-wrenching individual stories; fertile ground for politicians. Discussions of overall economic growth do little to reassure a worried middle-class.

Government Role

Is there a role for government initiatives? Are we, as a country, going to embrace the promise of the Information Age, knowing that its disruptive technologies will lead to obsolescence of entire industries? Are we going to embrace the opportunities of global trade, knowing that while its benefits are shared generally, its pain is felt narrowly?

If we are, then first we will have to deal with the fact that the two great pillars of economic security--the family and the workplace--guarantee far less financial stability than they once did.

As we shift from getting our health care, our income security, and our retirement pensions from our jobs, is there a role for government? It is one thing to have federal policies that foster private health, unemployment and disability insurance plans; it is quite another for the government to be the national health, unemployment and disability insurance company.

Education and re-training seem to be tools that would provide workers opportunity to recover from the buffeting of these powerful forces. Having schools run by unions as a government monopoly has proved a poor way to do it. The development of a social safety net better suited to the Digital Age is an important discussion and cannot be left to the Democrats, who see the issue as an opportunity to increase central government power and further tax the "rich".

The Rich

Let us end with that discussion. What do the top wage earners owe to the common weal by way of taxes? What have they paid in the past and what do they pay now? Here is the data for the last 15 years.

From the Wall Street Journal

So we see that the share of national income for the top 1% has gone from 14% to 21%, while their share of the income tax burden has gone form 25% to 39%. By comparison, the bottom 50% paid 3% of all income taxes. The Bush tax cuts have resulted in higher government revenues and a greater proportion of the tax burden falling on the rich. A rational person would conclude that if we need more money to build a better safety net for these times, we best soak the rich by keeping tax rates where they are, or better, decrease tax rates even more. That the Democrats want to raise taxes can only mean that their purpose is not to raise government revenue, but to take money away from a class of people they envy. In one sense, however, John Edwards is right, there are two Americas: one that works a lot and pays most of the taxes, and one that works less and pays little of the taxes. It is just that the reality is the opposite of what he suggests.

Questions

1. What is a "fair" ratio of incomes between the top 20% and the bottom 20% ?
2. Why don’t we use wealth to define the rich, instead of annual income?
3. Is middle-class a state of mind or an income class?
4. What would be the elements of a national safety-net?
5. Why are the liberals filled with envy?
6. How do you plan to get rich?
7. How do we need to change our education system for the information age?