This post began as a reply to a thread on Facebook. Some friends and I were debating the essence of what constitutes class warfare. At one point, one of them reiterated the ageless ism that “class warfare is painting poor people who are struggling as lazy, shiftless and hopeless.”
I do not consider people who do not have as much wealth as I as being lazy, hopeless or shiftless. Some are, but most are indeed, very hard-working individuals. Their great disadvantage is they lack certain talents that I do have. It might simply be that they lack the drive to succeed that I have – I know more than a few people who look at a “work week” as being 40 hours, maybe 50 – but the idea of working 24 hours a day, 7 days a week to make an enterprise successful isn’t what they want from life. And that’s fine, but they shouldn’t expect the same financial results as those of us who do put in that type of time and effort.
I can’t say their circumstances are a result of a lack of education. After all, I never finished grad school but have been more successful in my business career than many of my friends who have MBA’s. And people like Steve Jobs, Steve Wozniak, Bill Gates and other celebrated tech purveyors don’t even have undergrad degrees. This isn’ t to knock formal education. Certainly, for most people a great formal education is a key stepping-stone to career advancement. But given the choice between hiring a Harvard MBA and a kid with no more than a CTIA+ certification and a dream to be the next Woz, I’ll hire the kid. Every time – even though I know he won’t be around long; he’s going places I can’t take him.
I respect what those gentlemen (and hundreds of other entrepreneurs) have accomplished as a reflection of their particular talents, abilities and willingness to take risk. Being successful isn’t a matter of being “fortunate” so much as it is the residue of effort. I think most of us agree on that point (at least, I hope we do). A friend of mine recently launched a taxi company – and he has my ultimate respect. He saw a need, took a chance, made the investments in time, energy and capital and now have something he can call his own. And I’ve no doubt that if he wanted to grow further, expanding his market and footprint, those same qualities would guarantee his success.
Certainly, there are people of great wealth who arrived at their fortunes by dumb luck. Lottery winners, trust fund babies and the like. And if they don’t work hard at maintaining those fortunes, they generally wind up destitute – without any help from anyone. Just think of the stories you read about people blowing a $100 million lottery prize in a few years or the rich kid who partied his inheritance away. Life has an interesting way of dealing with the truly lazy in our society.
Class warfare has been a symptom of our political discourse far longer than the current administration, though this one has embraced it more fully than any since FDR. In fact, what started the entire discussion thread was when I posted this blog post from Ted Leonsis. Leonsis is one of the Obama administrations biggest supporters; he admits maxing his contributions to the Obama campaign. But even this stalwart has had enough with the administration’s bashing anyone with a dollar in their wallet. As Leonsis points out, “Why do we devalue success in the US when the rest of the world is trying to emulate what we have created as an economic system?”.
In the US, we’ve never fully accepted the idea that the general citizenry should pay for their government. Originally, the federal finances would funded by a mix of tariffs and fees, along with specific taxes placed on interstate commerce. By the dawn of the 20th Century, populists such as William Jennings Bryant and Theodore Roosevelt were agitating for a more expansive role for the federal government. Then, as now, there was a general hue and cry against men of wealth and the political ethos of the day demanded a “progressive” tax system. The original formulation was such a drastic change from the nation’s founding ideals that it required the 16th amendment to the Constitution. Prior to then, taxes levied directly on the citizenry had to be apportioned according to the most recent census. The charge among progressives was that the existing system was regressive – in that everyone had to pay the same share. They first attempted to circumvent this by passing a progressive income tax in 1894, the Supreme Court (in Pollock) ruled it unconstitutional in 1895.
There is a perception that those of us with means are opposed to paying taxes. We don’t enjoy paying them (nobody I’ve ever met actually does), but we understand that some government is a necessary evil. To that extent, we realize somebody has to pay for it and in a republic, it falls on the citizens to ensure the government is funded properly. If taxation were truly fair and equitable, there would undoubtedly be less grousing. However, there are two issues that have been brought to the fore with the recent debate (and devolution into class warfare) but not addressed:
First, those of us with means are not in the habit of tossing our money down the sewer in the vain hope that it eventually comes out the drain. We’re accustomed to being able to get a full accounting of where our money is, what it’s doing and when it’s doing it. (Well, most of us, anyway. There are always Bernie Madoff types). Our current budget morass lends itself to no such accounting. In fact, quite the opposite. As just the most recent example, consider the recent flap over FEMA funding. Once it became apparent that the government was about to shut down over the relatively small pittance, the administration suddenly “found” $780 million of funding that they had misplaced. The same thing happened over the summer, when the deficit mysteriously shrunk by $400 million. When you are a nation that is taking in 20-23% of national income as taxes, it is only fair to ask where the heck all of that money is going before asking anyone for more.
Secondly, we constantly hear the refrain that “the rich don’t pay their fair share.” I’m not quite sure what that refers to, but when nearly 1/2 of the nation doesn’t pay any income tax – and the bottom 1/5 receive more in federal benefits than they pay through any form of taxation – it seems that the rich are certainly paying at least their fair share. The greatest share of the tax burden is well-known by now, but in case you missed it – the top 10% of all earners (which begins with a family of 4 earning $114,000) pay 70% of all taxes. Not just income taxes, but all federal revenues. Those in the 11 – 50% bracket provide 22.3% of the nation’s revenue. So, once again, who isn’t paying their fair share?
What class warfare of this type does is inflame passions. The only reason the “progressive” wing of American politics uses it is for one reason: to shake us down, so that they can grow government even further. If you don’t think so, then consider this. In 1937, at the height of FDR’s New Deal, the federal government consumed 16% of total GDP. In 1970, as LBJ’s “Great Society” took hold, that increased to 31%. Last year, it rose to the highest peacetime level ever at 39.55%. Now ask yourselves: Is the government really doing anything in 2011 that it didn’t do in 1937? And then ask yourselves why.
When you arrive at the answer, you’ll understand why the Obama Administration is resorting to class warfare and striving to divide us as a nation.
A positive development in our politics is that attention is finally turning to the debt and the annual deficit. In case you aren’t aware of the raw numbers, the deficit for the past two years has ballooned to more than an aggregated $3 trillion. That has raised the national debt to more than $14 trillion – or, about $123,000 for every household in the United States. I give President Obama credit for finally listening to the nation and recognizing the seriousness of the problem. It marks a dramatic turn for him, seeing as how he spent more in his first two years in office than his predecessor did in eight.
In his speech last week, the President didn’t mince words: he expects the “wealthy” to pay substantially more than they currently do while he continues to spend like a drunken sailor on things only a drunken politician would consider necessary. Lo, the blogosphere and networks have focused on the President’s new Medicare proposal (more on that tomorrow) and how yes, the “rich” should pay more. After all, the argument goes, the middle class is paying higher rates than the wealthy and that is just unfair. It certainly seems a winning political argument; after all, who isn’t for soaking the rich?
This makes for good sound bites and good politics, but bad policy. I realize that in some regions the Democrats definition of “wealthy” (a family earning $250,000/year) might make sense. But in others, $250,000 per year is simply middle class. Upper middle class, to be sure, but hardly wealthy. In the New York metro area, a family easily achieves a combined $250,000 in income with two public sector workers. It is even easier to reach if one person sells cars and the other works in the local bodega. The same holds true for San Francisco, Los Angeles and other major metro areas around the country. This is really a call to arms in class warfare, the destructive political game played by Andrew Jackson and Teddy Roosevelt, with disastrous effects for the nation – though those effects weren’t felt until decades later. Even liberal icon FDR understood the dangers of the game and generally shied away from playing it.
Fortunately, the IRS keeps records on the truly wealthy and the rest of us. The latest data they have is from 2007; but since the one tax policy liberals love to hate – the “Bush Tax Cuts” were already in effect – it makes a good statistical reference point. You can find it here. In it, the IRS keeps tabs on the 400 wealthiest taxpayers in the country and compares their rates to the rest of the taxpaying public. They began tracking the data in 1992, so we have a 15 year window in the way tax policy evolved through both the Bush and Clinton eras.
At first blush, it seems as though liberals may be on to something. The IRS calculated the effective tax rate on the top 400 earners as 26.38% in 1992, rising to a high of 29.93% by 1995, and then steadily dropping to 16.62% by 2007. But statistics are wonderful things; anyone can quote a number out of context to prove an argument and this is exactly what the liberal media is doing.
First, I give credit to the IRS for doing what nobody to the left of center has bothered doing in their arguments. Their numbers reflect 1990 dollars ,thereby accounting for inflation (in mathematical terms, they normalized values). So, if the truly wealthy were paying lower effective rates, then the government should have been taking in less money from them, right? Not so fast: in 1992, the IRS collected about $4.5 trillion; by 2007 that figure rose to $14.5 trillion. Why? Well, in 1992 not a single one of those 400 returns reflected an effective tax rate over 31%. By 2007, even with the hated “Bush Tax Cuts”, 55% of the top 400 had an effective tax rate of at least 35%. The lower overall tax rate for these taxpayers is reflected in the fact that 35 of them paid no tax – an effective rate of 0%.
Overall, the truly wealthy combined to pay 2.05% of the taxes in 2007, nearly double the 1.04% they contributed in 1992. In actual dollars, they contributed nearly $23 billion of the government’s total tax take of $1.1 trillion. Those who make up this class are certainly already paying their share and the administrations attempts to paint them as sore winners can only result in flat out class warfare.
We do have a revenue problem, since we’re spending more than 4 times what the government is taking in. A better focus would be on the 45% of Americans who currently do not pay any income tax. Certainly, if you’re gross income is below the poverty line for your region, you shouldn’t be expected to pay, but I doubt 45% of Americans are living in poverty. That certainly seems much fairer and also guarantees that those currently benefiting from living here also gain equity in the system.
However, I doubt we’re going to find $1.6 trillion in revenue by asking everyone to pay their taxes. We still need deep spending cuts just to get the 2012 budget balanced. Tune in as I tackle those issues throughout the week.