Are the Wealthy Over Taxed? A Basic Illustration- Part One

My buddy Carter, a thoughtful bastard if ever there was one, suggested that if I have a long entry I should break it up into small chunks. I didn’t get where I am today without taking good advice from thoughtful bastards so here’s part one. If you don’t want to wait for the rest you can go to the following link and see the who thing in it’s entirety:

http://pudstrand.fatcow.com/Documents/Why%20we%20tax%20the%20way%20we%20do.htm

So without further adieu:

One of the most contentious issues in American politics is tax policy. Invariably economic and political arguments end up focusing on what if anything to do with tax rates. For thirty years Republicans, and to a lesser extent Democrats, have pursued a “small government” ideology that dictates less tax revenue regardless of expenditures. One of the Republican candidates in the 1980 presidential contest (George Bush Senior) referred to this as “voodoo economics”. I call it Magic Plan economics; the plan- cut taxes and wait for the magic to happen. I have to admit Bush’s phrase has a better ring to it.

Small government and reduced tax revenue have never yielded the promised results. After 30 years of tax cuts we find ourselves in the worst recession/depression since the 1930s. Despite massive cuts in government services and extensive privatization the federal government and most state governments have been running deficits and experiencing budget shortfalls for almost a decade now. Predictably, Republicans now advocate even more tax cuts while others are finally considering tax hikes.

I’ve watched this catastrophe unfold for 30 years and the question I’m left with is why did so many people buy into voodoo economics in the first place? How did this ridiculously simplistic notion gain so much currency?

I’ve decided that one factor that’s contributed to this fiasco is basic civic ignorance. I’m not trying insult anyone I just can’t think of any other way to describe it. Simplistic tax arguments can only win the day if a significant percentage of the population forget or never understand in the first place how and why we collect taxes, and why we do it the way we do.

Republicans like to point to tax incidence studies and other sources that reveal that the wealthiest Americans put the biggest chunk of dollars into the tax coffers. The top deciles contribute 40% – 60% of all the dollars collected in taxes. The suggestion is that the wealthy are paying a disproportionate number of dollars for a government they don’t use. This argument is then used to cut taxes for the wealthy under the theory that it’s unfair to make them pay so much for government they don’t use. There’s also the trickle down component that claims wealth concentration generates economic growth.

Are these Republican arguments viable? Does the amount of money the wealthy pay in taxes indicate they’re being unfairly taxed? To answer this question let’s imagine a small town; we’ll call it Carville (for reasons know only to myself and those who know something about Hansen’s disease). Carville is very simple place to live. There are ten people in Carville. In Carville no one is retired, and no one is unemployed, and no one lives in poverty. Furthermore, no one in Carville pays any taxes other than those that the town of Carville collects.

Economists break populations down into deciles in order evaluate tax and economic disparity. A decile is the product of dividing a given population by ten. In Carville, each person is a decile, in Minnesota each decile is about 245,000 people.

The people of Carville do not earn the same income. The poorest person in Carville makes $10 a year, and the wealthiest $100 a year. It costs around $5 a year to live in Carville, to cover the basic food, clothes, and shelter requirements. The Gross Domestic Product of Carville adding up all the personal income in town is $550. You can see is illustrated below.

Deciles   Annual Income
1             $10.00
2            $20.00
3             $30.00
1-3 total                                         $60.00
4             $40.00
5             $50.00
6             $60.00
7             $70.00
4-7 total                                        $220.00
8           $80.00
9           $90.00
10           $100.00
8-9 total                                       $270.00
Total Annual Income GDP        $550.00

Finally, Carville has a government and that government costs $55 a year to run. The people of Carville by the way are living in a small government heaven. Government spending in Carville comprises 10% of the GDP. In the real world government spending comprises 45% or more of GDP. The people of Carville are not footing the bill for a “big government” by any stretch of the imagination.

Tomorrow or maybe the next day I’ll compare Carville to Minnesota and we’ll see how things stack up.

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