The Rich And Everyone Else

The debate over whether the rich are being plundered or pampered is a necessary one--even if it's hard to resolve. It's true that the wealthy would receive a huge part of President George W. Bush's proposed tax cut. The top 1 percent would get more than a quarter of the cuts. But it's also true that overtaxing the rich poses dangers. It encourages self-serving and cynical politics. Government is tempted to tax the few and distribute to the many without considering the long-term consequences.

Here are the facts of today's system:

(1) Federal taxes come increasingly from the rich and upper middle class. In 2001, the richest 1 percent of taxpayers (incomes starting at $373,000) paid 25 percent of all taxes, including income and payroll taxes, says the Center for Tax Justice, a liberal group. The share paid by the richest 20 percent (incomes starting at $72,000) was 68 percent. In 1979, these figures were 16 percent and 57 percent.

The concentration of taxes mainly reflects a concentration of income. In 2001, the richest 1 percent received 18 percent of income, up from 9 percent in 1979; the share of the richest fifth went from 46 percent to 58 percent. But tax cuts have also favored people in lower brackets. In 2001, the poorest 60 percent of Americans (incomes up to $44,000) paid 14 percent of taxes, down from 22 percent in 1979.

(2) Federal spending has shifted from defense to payments for individuals (Social Security, unemployment insurance, food stamps, Medicare). In 1955, military spending represented 62 percent of the federal budget. Payments for individuals were 21 percent. By 2001, the figures were reversed: defense, 17 percent; payments for individuals, 61 percent.

(3) Not surprisingly, these transfers go heavily to the bottom half of the income spectrum. In 2001, about 60 percent of federal cash payments (retirement, disability, unemployment benefits) went to the poorest 40 percent of Americans, reports the Census Bureau. Noncash programs (food stamps, Medicaid, Medicare, public housing) are similarly skewed.

Conventional wisdom holds that the wealthy rule politics through hefty campaign contributions. Not so. If the rich are so powerful, why are they taxed so heavily? Even after Bush's tax cuts, they would still pay most of the taxes. In our democracy, votes count for more--much more--than dollars. Rightly so.

This raises another question: if the rich are so outnumbered, why aren't they taxed even more? The common answer is that Americans don't loathe the rich. People want to become wealthy. They don't want success punished. Wealth is--if legally and ethically earned--seen as a reward for hard work, talent or risk-taking. True. But again, votes count. These values resonate politically because the rich and near-rich vote more than everyone else. In 2000, half of those with incomes under $35,000 voted compared with three quarters of those with incomes exceeding $75,000. The electorate has an upper-middle-class bias.

There is now a consensus that the rich should pay more than the poor and middle class--but not a consensus on how much more. In 1906, Teddy Roosevelt said: "The man of great wealth owes a peculiar obligation to the State, because he derives special advantage from the mere existence of government." This is the classic case for the progressive income tax--higher rates on higher incomes. Government promotes social stability and protects property; it enables the rich to get rich. Why should the rich get tax relief, ask Bush's critics, when their higher taxes mainly reflect higher incomes? Government should narrow the gap between rich and poor. (There's also an issue of timing. In the boom, some of the rich profited unethically.)

Here are competing ideals of tax justice. One says that taxes shouldn't penalize success; the other says people should pay their "fair" share. The argument is endless, because there is no obvious dividing line between a legitimate levy and confiscation.

If redistribution is the government's main purpose, then none of this is a problem. The rich should pay more; the poor should receive more; tax breaks--if affordable--should go to the middle of the middle class. But there is a problem if (as this writer worries) too much redistribution becomes politically corrupting and economically destructive. Under the guise of "meeting national needs," politics becomes an exercise in buying votes because burdens (mainly taxes) fall narrowly and benefits are spread widely. The economic danger is suffocation under an excess of taxes, government subsidies and welfare programs. It's insidious because it creeps up slowly over time. Think Europe.

The case for spreading the tax burden more evenly is not to reward or punish. It is to restore political discipline. Politicians and citizens ought to weigh the promised gains of government against the costs. They won't if the direct costs are borne only by a tiny minority. No one then needs to make hard choices. It becomes easy to forget that taxes are the price of government. If people want more (less) of one, they ought to want more (less) of the other. This is an exacting standard that politicians of both parties would gladly evade.