The economic transformation of modern-day America
The folks at Mother Jones have put together what they call “Eleven charts that explain everything that’s wrong with America.” As you might imagine, given the source, the charts tell a story with a particular point of view. But they are also based on hard, unassailable data.
I’ve borrowed two of the 11 to make a couple of points.
I’m not sure that most people understand where their household happens to fall in the income distribution, so I’ll post the breakdown here. As in the chart above, all numbers are in 2007 dollars, taken from statistics compiled by the Congressional Budget Office.
Bottom quintile, or fifth: Below $20,500
Second quintile: $20,500-$34,299
Third quintile: $34,300-$49,999
Fourth quintile: $50,000-$74,699
Fifth quintile: $74,700 and above
Top 10 percent: $102,900 and above
Top 5 percent: $141,900
Top 1 percent: $352,900.
The chart doesn’t mean that the richest 1 percent of Americans are bad people. It doesn’t make them liars or cheats or unpatriotic. On the other hand, their great success over the past 30 years also doesn’t mean that they have somehow gotten twice as smart or work twice as hard as earlier generations of wealthy Americans, and thus deserve twice as much of the national income. The great shift in earning power simply means that the global economy has changed — in part because of conscious decisions in Washington to foster free trade, in part because of technology — in ways that have advantaged those with access to capital and disadvantaged those who work for a living.
The issue being fought out in places such as Wisconsin and Washington, DC is how to respond to that profound economic transformation. Wisconsin Gov. Scott Walker and his party believe that we should make changes in the law — lowering taxes for business, for example — that will further advantage those already benefiting from the economic transformation. To finance that shift, Walker also believes it is necessary to further weaken the bargaining power of those who have used unions to try to fend off their decline in economic clout.
Here in Georgia, the same basic issue is playing out another way, through the proposed revamping of the state tax code. The proposal now before the state Legislature calls for lowering the state income tax and corporate income tax — both of which tend to affect those in the upper quintile — while broadening the state sales tax to cover services such as haircuts and car repair, which would hit those in the lower quintiles disproportionately hard.
The bill has been described by its defenders as being pro-business, but a more accurate description would be pro-Big Business. As AJC reporter Chris Joyner points out, the proposed change would put a new tax-collection and paperwork burden on tens of thousands of small businesses in Georgia who for the first time would have to charge their customers a sales tax. And again, they are being forced to bear that additional burden in order to finance tax cuts to benefit their larger corporate brethren.
The second chart documents the shifting sources of tax revenues that are used to run the federal government. Among other things, it offers a dramatic rebuttal to those on the right who like to claim that almost 50 percent of Americans pay no income tax, and thus aren’t shouldering their fair share of the burden.
That’s a misleading statistic in its own right, because it labels high-school and college kids working part-time jobs who make only a few thousand dollars a year, as well as senior citizens on limited Social Security, as leeches on society because they make too little to pay income taxes. The number of Americans not paying income taxes has also been temporarily inflated by a deep recession in which millions of people have lost their jobs and thus the incomes on which they once paid taxes.
But the chart below offers the most telling indictment of that statistic. As you see, payroll taxes now generate almost as much revenue for the federal government as personal income taxes. To simply pretend that those taxes and the people who pay them don’t exist is outright fraud, and insulting to a lot of hard-working Americans.
A couple of other points about payroll taxes.
First, they are painfully regressive. According to CBO numbers, households in the bottom four quintiles pay more than 9 percent of their income in such taxes. Those in the top 5 percent pay 3.3 percent of their income in such taxes; those in the top 1 percent pay just 1.6 percent.
Second, take a look at what happens in the chart around 1982. See the sharp upward jump in the share of federal revenue generated by payroll taxes? That’s the point in which a commission led by Alan Greenspan proposed a significant increase in payroll taxes, allegedly to build a surplus in the Social Security Trust Fund to prepare for the retirement costs of the Baby Boom generation.
At the urging of President Reagan, Congress went along with that idea. But in practice, it hasn’t worked. Year after year, that surplus has been siphoned off to run the general government and to offset tax cuts that were skewed to help the richest of Americans. Theoretically, the approach was supposed to create a rising economic tide that would lift all boats, and if it had worked, it might have been acceptable.
But as the first chart demonstrates, that theory has been thoroughly tested by time and has been proved a failure. It’s time to try something else.
– Jay Bookman
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634 comments Add your comment
Observer
March 1st, 2011
9:21 am
Charts yay!!!
Observer
March 1st, 2011
9:21 am
First!!
Kamchak
March 1st, 2011
9:23 am
WEALTH ENVY!
scott
March 1st, 2011
9:23 am
TAX CODE EXPLAINED
Suppose that every evening, 10 men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The 10 men drank in the bar every evening and were quite happy with the arrangement, until one day, the owner said “Since you are all such good customers, I’m going to reduce the cost of your daily beer by $20.” Drinks for the 10 men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected, they would still drink for free, but what about the other six men, the paying customers? How could they divide the $20 windfall so that everyone would get his fair share? They realized that $20 divided by six is $3.33, but if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, using the principle of our tax system, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage based on how poor he was, and he proceeded to suggest the amounts that each should now pay.
Therefore, the fifth man, like the first four, now paid nothing.
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).
Each of the six was better off than before, and now half of the men continued to drink for free. But, once outside the bar, the men began to compare their savings.
“I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man, “But he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a buck too. It’s unfair, he got 10 times more benefit than me!”
“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy always win!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists, labor unions and government officials, is how the tax system works. The people who pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.
jm
March 1st, 2011
9:26 am
“free trade, in part because of technology”
I think this is fairly accurate. How much of it is globalization, and how much of it is technology, is up for debate. Either way, in my book, the solution is better education. There’s no denying the fact that we have been dropping like a rock down the math and science tests score rankings, and that, ALSO, is directly correlated with the winnowing of the middle class and the loss of earning power among the lower class.
Education, education, education.
They Both suck
March 1st, 2011
9:27 am
JB
I think many on the right call it ‘trickle down’
Have a great day
jm
March 1st, 2011
9:28 am
“to further weaken the bargaining power of those who have used unions to try to fend off their decline in economic clout”
Jay, no dam can stop the global tsunami. If you try to stop it, it just makes the flood that much worse when the dam breaks. The solution is education, not trade barriers or rigid employment laws.
jm
March 1st, 2011
9:30 am
“The proposal now before the state Legislature calls for lowering the state income tax and corporate income tax — both of which tend to affect those in the upper quintile — while broadening the state sales tax”
America has the lowest sales taxes among industrialized nations. Income and corporate taxes are subject to evasion. Sales taxes are far more difficult to evade. Sales taxes broaden the tax base, lower the marginal rate, reduce tax evasion, and encourage saving instead of consumption (something our nation is in desperate need of).
Southern Comfort (aka The Man)
March 1st, 2011
9:30 am
Scott
You could have just referenced the tax chain email instead of cutting and pasting the whole damned thing.
Kamchak
I second the motion!!!!!!!
That’s ok, I guess once the top earners have all the money, the game is over. That is how monopoly is played, right?
USinUK
March 1st, 2011
9:30 am
I second Observer … charts – YAY!!!
Ragnar Danneskjöld
March 1st, 2011
9:31 am
Dear Jay, good morning, with all due respect you fail to support a critical argument: “The great shift in earning power simply means that the global economy has changed — in part because of conscious decisions in Washington to foster free trade, in part because of technology — in ways that have advantaged those with access to capital and disadvantaged those who work for a living.”
We would agree that trade became somewhat freer in 1994, and sporadically otherwise. On the other hand, regulation of industry has increased exponentially since 1970. Why do you blame freedom for the non-problem, rather than “gaming the system?” I think overlord management of legislation and the related expansion of regulation – the modern “mercantilism” – is a more likely cause of the widening incomes-disparity.
jm
March 1st, 2011
9:32 am
“it offers a dramatic rebuttal to those on the right who like to claim that almost 50 percent of Americans pay no income tax”
the chart does not do this. The number of people paying income tax is at an all time low. However, those (fewer people) still paying income tax are paying a larger and larger share, which the chart does show.
Jay
March 1st, 2011
9:32 am
jm, sales tax evasion is a MAJOR problem.
USinUK
March 1st, 2011
9:32 am
“I think many on the right call it ‘trickle down’”
trickle-down … stomped-on … tomayto … tomahto …
USinUK
March 1st, 2011
9:33 am
scott – are you the chairman of the department of redundancy department.
Capitol Avenue Cal
March 1st, 2011
9:33 am
Don’t corporations employ most people (like you and me)? If we take more from coprs, don’t we lose jobs? And by the way, there is no such thing as “unassailable date.”
jm
March 1st, 2011
9:34 am
“payroll taxes now generate almost as much revenue for the federal government as personal income taxes”
…. to fund the liberal project called social security. Without it, social security goes bust. So for every dime going in from payroll taxes, a dime (actually more) goes out to those same people who worked.
Social security is a mess, although Medicaid and Medicare are far worse….
TaxPayer
March 1st, 2011
9:34 am
Hey, as long as you’re in the top one percent, who cares!
Ragnar Danneskjöld
March 1st, 2011
9:34 am
One of the despised Koch brothers has an excellent article in the WSJ today, explaining how overlords on both sides of the aisle are endeavoring to favor corporate friends and punish corporate enemies. I don’t know if the article is available to non-subscribers, but here is the link:
online.wsj.com/article/SB10001424052748704288304576170974226083178.html?mod=WSJ_Opinion_LEADTop
jm
March 1st, 2011
9:35 am
“It’s time to try something else.”
Well, let’s end payroll taxes, since they’re so regressive. Of course, we have to end Social Security also….
Southern Comfort (aka The Man)
March 1st, 2011
9:36 am
DAMN scott…. We got it the first time.
jm
I’d tend to think that trying to use sales taxes as a revenue base would hurt us more than our current system. Sales taxes go down as saving increases. Also, sales taxes are adversely affected in market downturns and/or recessions.
The number of people paying income tax is at an all time low.
Blame Bush and all of you who wanted those damned cuts extended.
scott
March 1st, 2011
9:37 am
usinuk…..No…I think Jay takes that role. He is the one that constantly puts out the same old graphs every other day. BTW….I love how it ticked you off. Call it “schadenfreude” if you will.
Jay
March 1st, 2011
9:39 am
jm, you cannot honestly make both those arguments.
If payroll taxes are collected for Social Security and thus don’t count as general revenue, as you claim, then the Social Security Trust Fund is actually in very good shape.
But if the Trust Fund is just a fiction, then payroll taxes MUST be included as general revenue. You can’t have it both ways.
USinUK
March 1st, 2011
9:39 am
“BTW….I love how it ticked you off. Call it “schadenfreude” if you will.”
tick me off? ah. no. but thanks for your concern.
just didn’t know if you realized you repeated yourself
Midori
March 1st, 2011
9:39 am
good thing my scrolling button is in top torm today
jm
March 1st, 2011
9:39 am
Jay 9:32 – sales tax evasion is a major problem. I have mixed feelings about a VAT, but a VAT (instead of a sales tax) provides an audit trail that makes it possible to eliminate evasion.
Then again, there is something very American about tax avoidance, and possibly even evasion….
The solution to all these problems are not higher taxes on anyone. It is a lower rate, broader base, and a focus on investing in education instead of the immense amount of wasted healthcare that occurs in Medicaid and Medicare.
Its time to invest in our future, and waste less. If that means paying teachers $80k with a $50k bonus if they do well, so be it. As long as they don’t get union protection (which corrupts the system). Of course, I think the funds are there for already to pay teachers that amount
The sad reality, is economics (aka the invisible hand) is working its normal magic. Uneducated people not doing value added work aren’t seeing their pay go up. That is as it should be.
Hopefully people are waking up to the siren call that they need to make a living, which requires a better education. Not a degree in theater, feminist studies, but one in math, science, engineering, or technology.
Got milk?
Doggone/GA
March 1st, 2011
9:42 am
“Don’t corporations employ most people (like you and me)?”
No, all businesses are just the middleman. It is their CUSTOMERS who employ you. The business just pays you.
“If we take more from coprs, don’t we lose jobs?”
We are taking LESS from them now than at any time since WW2 – and UNemployment is high.
As Jay says, time to try something else
USinUK
March 1st, 2011
9:42 am
meanwhile … in WI … let’s not address what the governor said on last week’s call … let’s prohibit prank calls, instead!
http://badgerherald.com/news/2011/02/28/bill_circulating_in_.php
oy, the stoopid is strong with these people …
jm
March 1st, 2011
9:42 am
Jay 9:39 – it is fair to say that Social Security going forward is cash flow negative. Yes, the previous SS “positive cash flows” were blown. However, the solution is not to raise taxes (give the gov’t more money to pee away). The only way to prevent the government from “robbing” the system is to put it in individual hands (individual accounts), with serious and strong guard rails to prevent people from doing stupid things.
Said investment options need to include the option to invest internationally as well….. time and technology has changed. It is possible to manage individual accounts, at low cost. Time to make the leap…. if not, we are going to fall in the abyss.
Ragnar Danneskjöld
March 1st, 2011
9:42 am
As to the second chart, data without context is nearly meaningless. From our leftist friends, I am led to believe that those programs funded by payroll taxes – social security and medicare – are the primary cause of the accursed “budget deficits.” Is it not therefore appropriate that payroll taxes rise to meet those exploding expenses? A more meaningful graph would track the relationship of payroll taxes to payroll-tax-related programs.
USinUK
March 1st, 2011
9:43 am
jm – “I have mixed feelings about a VAT, but a VAT (instead of a sales tax) provides an audit trail that makes it possible to eliminate evasion.”
not really. VAT evasion happens here and throughout Europe, too.
md
March 1st, 2011
9:43 am
Two points:
Looks like a compounding interest chart……….which is basically how it works…..money begets money.
Second, don’t assume one stays on the same line throughout life……………
Doggone/GA
March 1st, 2011
9:43 am
“Also, sales taxes are adversely affected in market downturns and/or recessions”
And so are income taxes…witness NOW
Bosch
March 1st, 2011
9:43 am
Midori
March 1st, 2011
9:39 am
good thing my scrolling button is in top torm today
Hi Midori — LOL! I thought the same thing.
Ragnar Danneskjöld
March 1st, 2011
9:44 am
Dear jm @ 9:39, a marvelous argument, well-done.
jm
March 1st, 2011
9:45 am
Frankly, Medicare, Medicaid, and Social Security (as innovations) are waaaaaaaay outdated. They are obsolete technology.
Instead, we should have moderate deductible subsidized health plans for Seniors, block grants with complete flexibility for Medicaid, and Social Security should transition (gradually) to private accounts instead of government (mis) management.
USinUK
March 1st, 2011
9:45 am
one more totally off-topic …
http://www.bbc.co.uk/news/world-africa-12604760
is it me, or is Gadaffi starting to look a lot like Mickey Rourke???
Dave R.
March 1st, 2011
9:46 am
Charts, wealth envy and statistics all in the same, lame post.
Add in Mother Jones (God, is that rag still in publication?) and you the mother of all wastes of 1’s and 0’s!
At some point, Jay might actually realize the dichotomy between assailing corporations for being the greedy, profit hogging mastodons they are, and their premise that they actually take money out of their profits in which to pay corporate taxes.
They can’t be or do both, Jay. The RATE corporations are charged for taxes is not the amount they pay out of profits. They set the price of their products with the tax rate in mind, so ultimately the consumer pays the corporate taxes. Raising corporate taxes will just raise the price of goods to consumers.
Bad corporation for making all that money! Good corporation for paying your taxes out of what’s left over!
Sheesh!
USinUK
March 1st, 2011
9:46 am
Bosch and Midori – see? now, you’ve gone and done it … now scott will get his schadenfreude (oops, sorry, “schadenfreude”) on and think you’re totally mad at him …
Midori
March 1st, 2011
9:46 am
bosch,
scott and jm are making my eyeballs bleed
Midori
March 1st, 2011
9:49 am
US – I think Quadaffi has that Don Johnson thing going (from his Miami Vice days)
Bosch
March 1st, 2011
9:49 am
Midori,
They are giving my scroll finger the arthritis.
jm
March 1st, 2011
9:50 am
Rich people are not the problem….. yes, the return on capital is going up and the return on labor is going down.
It is an incentive to go entrepreneurial. A drowning person pulling more people into a raging river to try to save themselves is not a solution. Instead, people need to learn to surf the waves and ride the river.
Education. And savings….
jm
March 1st, 2011
9:51 am
Midori, truth hurts doesn’t it.
USinUK
March 1st, 2011
9:51 am
midori – what – the 15-year-old-guy-trying-to-grow-a-beard look?
Bosch
March 1st, 2011
9:51 am
USinUK (or anybody else) –
Did you get a load of Charlie Sheen on one of the 100 or so interviews he gave yesterday? I saw him on Piers Morgan — yeah, don’t comment on that, but good LORD!!
Bosch
March 1st, 2011
9:52 am
“the 15-year-old-guy-trying-to-grow-a-beard look?”
Oh sh*t – I just sucked a piece of grapefruit down my throat the wrong way.
George W
March 1st, 2011
9:52 am
Sheen wont make it 12 more months.
Bosch
March 1st, 2011
9:53 am
George W,
After last night I was thinking 12 more days!
Bosch
March 1st, 2011
9:54 am
Sorry Jay, got off on a tangent — this column is what I’ve thought all along — it’s about the income disparity and income stagnation, stupid!!