Blogs » Democratic Economic Talking Points » Income Redistribution - Fact or Just a Bad Idea


The truth about Income Distribution

Following are the major points from the link provided below about income redistribution:

" Family structure. Over time, the two-parent, one-earner family was increasingly replaced by low-income single-parent families and higher-income two-parent, two-earner families. A part of the top quintile’s increased share of income reflects the fact that the average family or household in the top quintile contains almost three times as many workers as the average family or household in the bottom quintile.

Trade and technology. Trade and technology increasingly shifted demand away from less-educated and less-skilled workers toward workers with higher education or particular skills. The result was a growing earnings gap between more- and less-educated/skilled workers.

Expanded markets. With improved communications and transportation, people increasingly functioned in national, rather than local, markets. In these broader markets, persons with unique talents could command particularly high salaries.

Immigration. In 2002, immigrants who had entered the country since 1980 constituted nearly 11 percent of the labor force (see immigration). A relatively high proportion of these immigrants had low levels of education and increased the number of workers competing for low-paid work.

These factors, however, can explain only part of the increase in inequality. One other factor that explains the particularly high incomes of the highest-paid people is that between 1982 and 2004, the ratio of pay of chief executive officers to the average worker rose from 42:1 to 301:1, and pay of other high-level managers, lawyers, and people in other fields rose substantially also. (Good ole boy networks?)

Over multiple years, family income fluctuates, and so the distribution of multiyear income is moderately more equal than the distribution of single-year income."

I was surprised that our high school dropout rate was not listed as a contributing factor. The Department of Education estimates the dropout rate averaged about 8.1% in 2009. The dropout rate for the various races:





But besides the dropout rate many high school graduates are so poorly educated they can hardly read or write. Most alarming a study found that a third of college graduates could not compute the cost per ounce for a can of beans or whatever.

Another factor that is not discussed by the media or Obuma is mobility. Everyone starts out with a low income and over some years they earn more as they become more experience, better trained and more productive and harder to replace. So there is mobility both up and down the distribution of incomes. The various percentiles are not stagnant in fact today they are quite mobile but in the wrong direction.

So even if we really wanted to redistribute income how can it be done?

We can raise taxes on the rich. In 1924 Andrew Mellon, Harding’s treasury secretary testified before Congress about the then current tax rates. He called the 73% rate on top incomes “fantastic and impossible of payment……the high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax exempt securities………capital is being diverted that yield neither revenue to the government nor profit to the people. What Mellon said then was true and he had the data to back up his claim. It was true then and it is true today.

Recessions and stagnant economies are also a great re-distributor. The largest gains in income for the top 1% occur when the economy is booming as it was in Reagan’s and Clinton’s administration. On the other hand under Obuma’s policies income for the top 1% declined 22% in 2009 - overall it declined about 6%.

Socialism is also a great leveler except of course for the politically connected. Socialism makes everyone equally poor and pretty much stuck and with little hope of improvement even if they wanted to improve.

Now we are involved in a great political debate about how and why income should be redistributed. Obuma proposes to raise taxes on the on the top 1% the so-called millionaires and the billionaires. Raising their taxes 3 to 4% sounds like so little, but the truth is it is enough to change how they save and invest. Federal taxes are not the only taxes investors pay.

Assume a "millionaire" invests in a corporation. They will pay 35% on the corporate earnings and then another 15% on any dividends or capital gains. In most states they will also pay corporate franchise and income taxes amounting to an additional 10%. After throwing in corporate payroll and property taxes the final tax bill is around 60 to 70% of corporate earnings not to mention the costs of regulations – so it’s a wonder anyone would invest in a corporation or a business.

It makes no sense to increase taxes when we need jobs. We need to CUT not increase spending to allow the private sector to grow. A tax of 3.5% would raise about 46 billion per year while a cut of 2% in the payroll tax would reduce taxes by 160 billion for one year.

This is the camel's nose under the tent flap. Everyone knows that spending will not be reduced very much and that taxes will have to go up and go up a lot for everyone. And the thing taxes do very well is decrease investment, job creation and upward mobility - who the H3ll wants that!