Class Warfare Rhetoric vs Math

Chances are you’ve heard, in the last few days, the accusations against hard working Americans from Elizabeth Warren (senate candidate and special advisor to the Treasury). Her point was, essentially, how dare we resent having government confiscate our taxes, when it was government who granted us the ability to earn money in the first place!  

I understand a similar concept related to tithing. It is all God’s—everything. He grants us life and breath, and energy and ability, and the world in which we live. And in our case the best country on earth to live in. If we gave Him everything we have, we would still be in His debt. But He asks only that we voluntarily give a tithe—a tenth—of our earnings to Him, which He then uses for our good.  

I’m not resentful about that tithe; I’m grateful. But I have very different feelings about government. Take a look at what Warren actually said: 

I hear all this, you know, “well, this is class warfare, this is whatever. No! There is nobody in this country who got rich on his own—nobody. 

You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory—and hire someone to protect against this—because of the work the rest of us did. 

No look, you built a factory and it turned into something terrific, or a great idea. God bless—keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along. 

There’s something interesting here. What is the proper role of government? Protection of life, liberty and property. And you can argue for infrastructure. You can even argue for public education (although you can also argue against it, since public education provides an educated populace so much poorer than the private sector would and should do). So she lists just about only the things we already agreed, pretty much since our founding, were worth having government for. That’s why we granted those enumerated powers.  

She fails to list the innumerable extras we didn’t grant to government: welfare, social security, medicare, housing subsidies, government regulatory bodies, government science grants, foreign aid (particularly foreign aid to our enemies), and other obscene spending foolishness.  

And did we mention that the factory builder already paid his share of taxes while gathering enough capital wealth to build the factory? He wasn’t freeloading on the rest of us, as she seems to assume. 

If we were talking only about what she has listed, there’d be a lot less complaining about paying a fair share, or even what is a progressive tax already much higher on the wealthy.  

I happened to listen to another clip yesterday, posted in August, from the Mark Levin radio show. A caller named Paul Jackson from Michigan called in, having done the math. Here’s what he had gathered:  

Listen, the reason I’m calling is, I did a little analysis of the budget. The deficit for 2011, as you know, is projected to $1,650 Billion. If you add in the 1% cuts that the politicians just passed, that’s $38 B. If you say, OK, well the reason we have such a big deficit is because the evil George Bush made those tax cuts, if you dial up the tax rates for those making over $250,000 to 39.6% where it was under Bush, you… subtract an additional $65 B. If you say, well, it’s because the evil George Bush got us into these wars, if you back up the costs of, the projected costs of 2011 of Iraq, Afghanistan, the VA costs and everything, that’s an additional $171 B.  

Now we’re left with a budget deficit of $1,376 B. OK, then you can say, well it’s those evil, greedy companies that are doing this, like Exxon and Wal-Mart. As a matter of fact, let’s tax the Fortune 500 companies, the top 500 companies in this country, at 100%; let’s just take all their profits. If we do that, we’ll take an additional $232 B. Now we’ve got a deficit of $1,143 B. 

Now, as you know, Barack Obama’s gonna go around saying, Well, the reason is is the rich need to pay their fair share, and that’s the reason why, that’s where we need to get the money. OK, those making an income above $250,000, the income they made over $250,000 was probably by cheating some poor working person. So let’s just tax them at 100%. Let’s take all their money that they earn above $250,000 and confiscate all of it. Now we collect another $853 B. Now, after we’ve done that, after we’ve taxed all income above $250,000 at 100%, we’ve confiscated all the profits of the Fortune 500 at 100%, we assume we never went to war in Iraq and Afghanistan and we recover all that money, we still have a deficit, Mark, of $290 B. That’s nearly twice the deficit that we had in 2007 under the evil George Bush and those evil Republicans. 

He’s just talking about the deficit for this year, not accumulated deficits. He added his sources:  

One was Iowa Hawk, a terrific website…. And the other is IRS Data. And another one was, it was a government website on the cost of the war. The total cost of the Iran/Iraq War, from 2001 to 2011, and this is a government study, is $1.291 Trillion, and the projected cost for 2011 is $171 B. So you can confiscate all the money, and there’s still not enough.  

$1650 B -                   38 B  recent tax cuts -                   65 B  Bush tax cuts -                171B  war spending 2011 -                232 B  all Fortune 500 profits -                853 B all income over $250K $290 B

So, is it true people are complaining about the class warfare rhetoric? Yes, with good reason. The wealthy are already taxed way beyond what the Constitution allows the government to take for the enumerated purposes. Already the wealthy pay at higher percentages on each and every dollar they earn. Already the wealthy pay way beyond the total revenue of the middle class and poor (49% of the poor pay essentially no income tax, only FICA and state and local taxes). So it’s a little jarring to have someone come at hard working Americans and accuse us of being ungrateful for not enslaving ourselves to the whims of a greedy government.

Elizabeth Warren was an advisor to the President—and hadn’t done the math! Or else, she had done the math but ignored it for the sake of class warfare. Is there some other way to assess what she meant by her little rant? Oh, yeah, there is: a rather frightening belief that Obama and his government are indeed the new god and tithing—and tithing now means several times more than ten percent.

Number Crunching

A couple of days ago I accidentally listened to part of the president’s speech (while trying to listen to something else), and I heard him say some things that were remarkably vague but clearly untrue. One was that, even though our nation’s credit rating has been downgraded below triple-A, he (who has been around the world apologizing for this terrible country that embarrasses him) insists that we always have been and always will be a triple-A country. That sounds like a disappointed parent of a youth sports team who tells the kids, “Even though they got more runs that you did, even though they performed better on the field, and even though we lost the game by all the usual measures, you’re still a winning team to me.” Right. Any kid hearing that would know what it really meant—they lost the game by not performing well enough. 

The other thing Obama said was that any solutions to our economic woes must include making the rich pay their fair share. I’m pretty sure I know what he means by that—more from me. But when listeners hear him say it and go, “Yeah, make those rich guys pay their fair share,” what do they have in mind?  

I asked my son Political Sphere if he knew, and he said he’d heard there was a study asking that question, and most people said they thought it would be about 25% of income. He said the whole percentage of the total tax burden that they pay isn’t what the envious poor are looking at; the pound of flesh they require is a quarter taken out of every dollar earned by those rich people (but not from themselves). 

I did some research; I didn’t find that particular study. But let’s go with that assumption and do some number crunching, first with percentage of total tax burden, and then also with that magical 25% number. 

The numbers we’ll use are from the IRS 2010 report (even though I’ll be using 2011 budget numbers, so the best we can do is estimate). Warning: math ahead, but nothing we can’t handle. The numbers are big, but the functions are pretty simple. 

Percentages of Taxes Paid

There were 139,960,580 tax returns (including only those with positive adjusted gross income—people who earned money). These earners reported an adjusted gross income totaling $8,426,625,000,000 ($8.5 Trillion). On that income they paid a total of $1,031,512,000,000 (a Trillion and some change). That’s only a quarter of the annual budget, so it’s good that income isn’t the only measure of GDP, and income tax isn’t the only source of revenue. 

The top 1% includes millionaires and billionaires, but also anyone making $380,354 a year or more; average in this group was $1.2 Million—wealthy, but not filthy rich. This percentile earned a total of $1,685,472,000,000 ($1.6 Trillion) and paid $392,149,000,000 (nearly $400 Billion). [Save these numbers; we’ll come back to them.] They earned 20% of total income and paid 38% of total income taxes. 

The top 5% needed to earn $159,619 to merit the honor of this category. (Note: all the US legislative branch and the president are at least in this category.) They earn 34.73% of income and pay 58.72% of income tax. Fair?  

The coveted top 10% earn at least $113,799. They earn 45.77% of income and pay 69.94% (round to 70%) of taxes. This is the category our household has inched its way into, following college degrees, graduate school, student loan payments, and nearly three decades of hard work and experience.  

Now for a paradigm shift. Average per capita income in the US is $47,500, in the top 10 nations worldwide. That means that an “average” household—married couple with two kids—would need to earn $190,000 to meet the average. They would need to be well into the top 5% of earners as a household. Our household (temporarily) has nine. To meet the average, we would need income of $427,500, far into the top 1% range. Instead, we earn about $30,000 less per capita than the average, explaining why we live in one just-below-median-cost home instead of several separate residences (just for this year, or part of this year, so don’t start up a donation fund or anything).[*] 

The point is, there is good reason we don’t feel rich. But we are considered a target by those who think we’re not paying our fair share. 

Just for completion, the top 25% earn $67,280 or more a year. They earn 67.38% of income and pay 86.34% (sometimes rounded to 90%) of taxes. 

The top 50% earn 87.25% (again close to 90%) of income, and pay 97.30%. So that resentful bottom half earns 12.75% of income and is paying only 2.7% of taxes. Fair?

Percentage Per Dollar Earned

OK, now for the all-important part about percentage per dollar earned. Those bottom 50% who want the rich to pay their fair share must define fair as “almost 10 times more per dollar earned than I pay,” because that bottom 50% is paying an average effective tax rate of just 2.59%. And, to be honest, only the top earners of the bottom 50% are paying that; the rest are paying nothing. Or less than nothing—receiving earned income tax credit, or possibly getting government handouts in the form of student grants, food stamps, or subsidized housing. 

But we want those top earners to be paying 25%; that’s what’s important, right? And they’re only paying an average effective tax rate of 23.27%. What’s with that? What it is is only part of the story.  

The top tax tier, you may know, is about 36%--that is, 36 cents out of every dollar earned above a certain income level. It will go up if Obama raises that upper rate to what it was before across-the-board Bush tax cuts nearly a decade ago. So their “richest” dollars are taxed well beyond the 25-cent fair level. That rate has been at times 78% (Reagan dropped it drastically, thus increasing revenue) and even 90% back during the Depression.  

But not all of their income is taxed that way. That’s right—because we have a progressive tax and not a flat tax.  

Also, some income of higher earners (and also some lower earners) comes in forms other than wages. They earn capital gains, for example, which are taxed at 15-25%. There’s a reason for the lower rate—to encourage capital investment, which equates to economic growth and jobs. And you have to remember that, when a person (you, even) invests capital, you’re taking a risk. The government doesn’t come in and give you a refund on your losses. Sunk costs are sunk. So, if an investor is expected to risk his capital, he needs to be able to accumulate enough growth that it doesn’t disappear into tax payments the moment he cashes it out; that would prevent him from reinvesting that money in another capital project. So raising that rate might look “fair,” but it would result in a worse economy and higher unemployment—also defined as a 100% tax on laid-off workers’ income.

The Answer You’re Looking For

For the sake of argument, what if we did “fairly” tax the top 1% of income earners at a flat 25%, just them? Their total income (you kept this number in mind from above, right?) is $1,685,472,000,000. So at 25% the tax revenue would be $421,368,000,000; that is $29,219,000,000 ($29.2 Billion) more—assuming all of it would be collected, meaning that the top 1% would behave no differently, make no attempt to put their income into other investments, or out of the country, or that they would refuse to bother earning the additional income.  

In the world of Washington spending, $29 Billion is a rounding error. Payroll for some random department.  

What if we included ALL the rich, those like us who make at least $113,799 a year? The total income of the top 10% (that includes, of course the top 5% and top 1%, by definition) is a little over $3.8 Trillion. Let’s say we raise the rate from 18.71% to 25% to be “fair.” Assuming no changes in behavior [which is impossible; read about the Laffer Curve], you could ideally increase revenue by $243 Billion (rounded up).  

Spending for 2011 is estimated to be $3.8 Trillion, with a deficit (less revenue than spending) of $1.27 Trillion. This hypothetical additional revenue would reduce this single year deficit to $1.03 Trillion. Not much of a dent. 

If we stopped fussing about who makes how much and just across the board taxed everybody 25 cents of every dollar earned (not including state and local, FICA, etc., that are not in this set of numbers at all), then we’d be bringing in not a mere $1.032 Trillion (total tax from all filers), but $2.11 Trillion. We’d reduce the deficit by $1.075 Trillion, still in the hole (with a painful chunk taken out of everyone’s paycheck).

How Much Is Enough?

What tax rate would we need to pay to meet this year’s expenditures? A little over 45%. From every income earner, rich to poverty-stricken.  

That’s just for this year. Obama insists that just about everything that can be cut has been cut, so you would need to expect another 45% to be taken out next year too. And that wouldn’t be to pay off the national debt. No, that would be just to keep our heads above water and not have to raise the debt ceiling yet again. 

Or, we can disregard everything this president says and do what it takes to cut spending to the specific lawful expenditures enumerated in the Constitution.

---

[*] My son Economic Sphere read this and wondered about the high per capita income number, so I tracked it down. It is most likely per capita GDP, which is higher (like revenue without subtracting expenses in a business). One stat I located put 2009 per capita income at $27,000 or so, which may be closer to accurate. If you want to redo the math for this paragraph, it would mean a family of four would earn $108,000, still nearly in the top 10% category. Our huge household would need $243,000 to be average—so the point that we would need to be rich to feel average still holds. I got the original stat, and the chart of IRS stats I used, from here: http://www.financialsamurai.com/2011/04/12/how-much-money-do-the-top-income-earners-make-percent/