OpinionJournal
Incomes and Politics
[FONT=Verdana, Times]Comparing the current decade to the sainted 1990s.[/FONT]
[FONT=Verdana, Times]Saturday, September 2, 2006 12:01 a.m.[/FONT]
[FONT=Verdana, Times]One sure sign that the economy is doing well is when the left revives that old political warhorse, inequality. With GDP growth of nearly 4% for three years running and a jobless rate of 4.7%, it's their last economic resort in an election year. But when you look at the actual evidence, the inequality campaign also proves to be trumped up. [/FONT]
[FONT=Verdana, Times]
The Treasury Department will soon release the latest IRS data on who paid how much in taxes in America through 2004. We've had an early look at the numbers, and anyone who reads the front pages of our leading dailies may be surprised to learn that the Bush years compare very well by tax and income equality to the sainted Clinton era.
First, the new data show that the bottom 50% of Americans in income--U.S. households with an income below the median of $44,389--paid a smaller share of total income taxes in 2004 (3.3%) than in Bill Clinton's last year in office (3.9%). That 3.3% is the lowest share of total income taxes paid by the bottom half of earners in at least 30 years, and probably ever. The majority of American families with an income below $40,000 pay no income tax at all today, and many of them also get a welfare subsidy from the Earned Income Tax Credit that effectively offsets much of what they pay in payroll taxes.
By contrast, Americans with an income in the top 1% paid 36.9% of all federal income taxes in 2004, down slightly from 37.4% at what was the height of the dot-com boom in 2000. But the top 5% and 10% of earners saw an increase in their tax share over that same period, with the top 5%'s share rising to 57.1% in 2004 from 56.5% in 2000. If this isn't the definition of a highly "progressive," a k a redistributionist, tax code, we don't know what is.
Especially instructive is what has happened to tax shares since the tax rate on capital gains and dividends was cut to 15% in 2003. These investment tax cuts have corresponded with a huge spike in tax payments by the affluent. Between 2002 and 2004, the income tax share of the top 0.1% of earners rose to 17.4% from 15.4%. A reasonable conclusion is that much of this increase reflects tax payments on capital gains and dividends--which have soared by an astounding 79% and 35%, respectively, since the rate cuts.
Democrats and their media pals dismiss all this by saying that the richest are paying more taxes because they're making out like bandits in the Bush years. Former Clinton economic adviser Gene Sperling grouses that the 1990s were "an era of shared prosperity," but that the Bush policies have produced "a disappointing decade on inequality."
The new IRS report contradicts that fairy tale too. Let's use the left's own definition of fairness and examine the actual new IRS evidence (see chart). During the Clinton Presidency, the share of total income earned by the richest 1% increased to a post-World War II high of 20.8% in 2000, from 13.8% in 1993. By contrast, in the first four years of the Bush Presidency, the income share of the top 1% fell slightly, to 19.0% from 20.8%.
The decline in the share of total income earned was even more pronounced when we look at the income shares of the top 0.1%; they earned a greater share (18.9%) of total income by the end of the Clinton era than they did in 2004 (17.4%). Some of this can be explained by the 2001 recession and subsequent strong economic expansion. The rich got socked hardest when the stock market plunged, though the dramatic income and wealth gains in the last three years are again raising income shares of the middle and upper income groups. The income share earned by the rich was still lower in 2004 than during Mr. Sperling's decade of allegedly "shared prosperity."
Some of our readers may not recall all of the front-page articles and editorials assailing the inequality in the 1990s. That's because there weren't many in contrast to the current spate, as the Media Research Center has documented. The inequality theme somehow only emerges when Republicans are in power, and this or that statistic can be trotted out to play to the stereotype that the GOP cares only about the rich, or Halliburton.
The truth is that there has been a modest widening of the income gap in recent decades, regardless of which party is in power. That gap seems due largely to growing returns on education and skills in the global economy. Americans without a high-school diploma are losing ground against those who have college degrees. But this argues not for higher taxes on the rich, who already pay the vast bulk of U.S. taxes. It argues for reforming K-12 education so even the weakest and poorest students can compete against the world.
In any event, it's a mistake to put much stock in these class-envy statistics on income shares, gini quotients, and wealth gaps that Washington and the media like to stress. There's nothing that policy makers can do about them in the short run, and a preoccupation with inequality will do actual harm if it leads to policies such as higher tax rates that reduce economic growth. We'd suggest readers ignore the inequality fad that is intended for election-year consumption and keep their eyes on what really matters--the policies that promote growth and prosperity for all Americans. [/FONT]
Incomes and Politics
[FONT=Verdana, Times]Comparing the current decade to the sainted 1990s.[/FONT]
[FONT=Verdana, Times]Saturday, September 2, 2006 12:01 a.m.[/FONT]
[FONT=Verdana, Times]One sure sign that the economy is doing well is when the left revives that old political warhorse, inequality. With GDP growth of nearly 4% for three years running and a jobless rate of 4.7%, it's their last economic resort in an election year. But when you look at the actual evidence, the inequality campaign also proves to be trumped up. [/FONT]
[FONT=Verdana, Times]
The Treasury Department will soon release the latest IRS data on who paid how much in taxes in America through 2004. We've had an early look at the numbers, and anyone who reads the front pages of our leading dailies may be surprised to learn that the Bush years compare very well by tax and income equality to the sainted Clinton era.
First, the new data show that the bottom 50% of Americans in income--U.S. households with an income below the median of $44,389--paid a smaller share of total income taxes in 2004 (3.3%) than in Bill Clinton's last year in office (3.9%). That 3.3% is the lowest share of total income taxes paid by the bottom half of earners in at least 30 years, and probably ever. The majority of American families with an income below $40,000 pay no income tax at all today, and many of them also get a welfare subsidy from the Earned Income Tax Credit that effectively offsets much of what they pay in payroll taxes.
By contrast, Americans with an income in the top 1% paid 36.9% of all federal income taxes in 2004, down slightly from 37.4% at what was the height of the dot-com boom in 2000. But the top 5% and 10% of earners saw an increase in their tax share over that same period, with the top 5%'s share rising to 57.1% in 2004 from 56.5% in 2000. If this isn't the definition of a highly "progressive," a k a redistributionist, tax code, we don't know what is.
Especially instructive is what has happened to tax shares since the tax rate on capital gains and dividends was cut to 15% in 2003. These investment tax cuts have corresponded with a huge spike in tax payments by the affluent. Between 2002 and 2004, the income tax share of the top 0.1% of earners rose to 17.4% from 15.4%. A reasonable conclusion is that much of this increase reflects tax payments on capital gains and dividends--which have soared by an astounding 79% and 35%, respectively, since the rate cuts.
Democrats and their media pals dismiss all this by saying that the richest are paying more taxes because they're making out like bandits in the Bush years. Former Clinton economic adviser Gene Sperling grouses that the 1990s were "an era of shared prosperity," but that the Bush policies have produced "a disappointing decade on inequality."
The decline in the share of total income earned was even more pronounced when we look at the income shares of the top 0.1%; they earned a greater share (18.9%) of total income by the end of the Clinton era than they did in 2004 (17.4%). Some of this can be explained by the 2001 recession and subsequent strong economic expansion. The rich got socked hardest when the stock market plunged, though the dramatic income and wealth gains in the last three years are again raising income shares of the middle and upper income groups. The income share earned by the rich was still lower in 2004 than during Mr. Sperling's decade of allegedly "shared prosperity."
Some of our readers may not recall all of the front-page articles and editorials assailing the inequality in the 1990s. That's because there weren't many in contrast to the current spate, as the Media Research Center has documented. The inequality theme somehow only emerges when Republicans are in power, and this or that statistic can be trotted out to play to the stereotype that the GOP cares only about the rich, or Halliburton.
The truth is that there has been a modest widening of the income gap in recent decades, regardless of which party is in power. That gap seems due largely to growing returns on education and skills in the global economy. Americans without a high-school diploma are losing ground against those who have college degrees. But this argues not for higher taxes on the rich, who already pay the vast bulk of U.S. taxes. It argues for reforming K-12 education so even the weakest and poorest students can compete against the world.
In any event, it's a mistake to put much stock in these class-envy statistics on income shares, gini quotients, and wealth gaps that Washington and the media like to stress. There's nothing that policy makers can do about them in the short run, and a preoccupation with inequality will do actual harm if it leads to policies such as higher tax rates that reduce economic growth. We'd suggest readers ignore the inequality fad that is intended for election-year consumption and keep their eyes on what really matters--the policies that promote growth and prosperity for all Americans. [/FONT]
Copyright © 2006 Dow Jones & Company, Inc.
