Income Inequality For Dummies

You can’t make the poor rich by making the rich poor.

You hear the Democrats cry a lot these days about Income Inequality. Well inequality in general is part of life. We, Homo Sapiens, do not have the same IQ, the same DNA, the same drive, the same proclivity for the same things, the same emotional makeup, the same physical abilities, the same appearance. We are all unique, one of a kind.

There are two things that the Democrat Left is not telling you about Income Inequality.

Firstly, whatever someone earns by hard work, by luck, by inheritance, whatever, is not gained by taking away what someone else has. If you were to go out and invent something new and market it and gain tremendous riches from it – think Bill Gates here – you didn’t steal it from others. You created new wealth and added to the aggregate wealth of the nation. You didn’t steal anything from anybody.

This raises the standard of living for everyone. But it can only be accomplished in free market Capitalism not under Socialism.

That aggregate wealth of the nation is called its GDP, Gross Domestic Product. And the very important thing to remember about it is that it is not a fixed amount but fluctuates and in the case of the United States has a history of growing larger and larger.

If our GDP, our economic pie, was a fixed amount then you could make a good case for the government deciding how to divide up the pie. But again, it isn’t.

Arbitrarily punishing success by confiscating a portion of a successful entrepreneur disincentivizes him to produce and be all he can be. I mean, think how he feels working hard so someone else can enjoy the fruits of his labor.

There is an old saying: when you tax something you get less of it and when you subsidize it you get more of it. So, if you overtax the wealthy you are going to get less productivity and consequently less tax revenue from them. Nobody likes to be a Serf. The Kennedy-Reagan-Trump tax cuts all produced an increase in tax revenue.

A Serf in the Middle Ages was defined as a worker who had to give up 50% of his crop to his Lord…in exchange for land to work and protection from predators. If you are paying 50% or more in taxes to all forms of government, than you have become a modern-day Serf. Add them up – federal income tax, Investment and capital gain taxes, the payroll tax, state income tax, state and local sales tax, excise taxes and property taxes and I will theorize that the wealthy pay more than 50% of their income from all sources. All these taxes hit the Middle Class the hardest. One of the states who has the highest taxation is California, which is why it has no Middle Class anymore. In California you have the rich and the poor and darn few in between. Most of the Middle Class has fled the state for mere survival.

Getting back to the matters at hand today, one trillionth slice of a three trillion economy is not as much as one trillionth slice of a five trillion economy. So, what in the long run raises the standard of living of the lower often unskilled workforce then is not INCOME REDISTRIBUTION but ECONOMIC GROWTH. You don’t grow the economy by over taxing and overregulating it. You stifle or strangle it. The economic pie must become larger and larger. Then each piece of pie is larger.

Secondly – I told you there were two things the Democrat Left was not telling you about Income Inequality – all parties are better off.

I like the explanation in the video with the balloon but here is a more formal one.

William L. Andersons writing for the Mises Institute explains it:

Before going farther, we must define income inequality. Statisticians like to divide people in this country into five categories, or quintiles, according to income. They take the average and median incomes from each quintile and then compare them with each other.

For example, the average income of the people in the bottom fifth might be $12,000, and the average income of those in the next quintile $20,000. The $8,000 is the income gap. Demographers claim that during the last 10 years, the average incomes of those in the top quintile have grown more than the incomes of those in the lowest group. So even though absolute incomes have grown in both groups, the fact that the income spread between them has become greater becomes the cause for alarm.

The issue behind this differential is explained in this simple example. Jones makes $10,000 a year, while Smith earns $20,000. Assuming no inflation, a year later Jones is earning $15,000 and Smith makes $30,000.

It is clear that both Jones and Smith are better off than they had been before, although in absolute terms Smith has earned a greater increase in income than has Jones. According to the “inequality” economists, only Smith is better off. In fact, according to their logic, Jones is actually worse off after he has increased his income because the income spread between Smith and him has grown. No matter that both men are better off. Economists have declared, instead, that inequality has become greater.

This may seem impressive to statisticians and welfare-minded politicians, but, in truth, economists do not own the analytical tools that allow them to declare the change in the “inequality gap” has made Jones relatively worse off. To do so would involve what economists call interpersonal utility comparisons. Economic analysis simply does not permit one to perform such analysis, as Murray Rothbard pointed out in Man, Economy, and State. Therefore, even in its inception, this fetish regarding income differences is bogus.

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Notice that both Jones and Smith earned a 50% increase yet the disparity between the two increased. Again, I have to make the point that it is not what the other fellow does you should be concerned with. He is not stealing anything from you. It is your circumstances you should evaluate. Are you doing better? What you don’t want to do is:……….my neighbor has a BMW and I only have a Honda Civic. So what? Don’t tell me that’s not fair.

 Let’s turn our attention to taxes now.

Democrats tell us that in order to right the wrong of income inequality we need to increase taxes on the rich. So, a top rate of 70% is in order. And the Corporate rate must go back to 28%, 35% would be even better.

The bottom 47% of wage earners in this country pay no federal income taxes. And the deductions have just been doubled under the Trump tax cuts. The top 20% of wage earners pay 86% of all federal income taxes. The top 1% of wage earners pay 20% of all federal income taxes.

So, the rich already pay their fair share (the statistics here are from different years and vary slightly).

Rich people pay nearly 87% of all federal individual income tax in America

Income levelShare of total federal 
individual income tax paid
Average income tax bill 
per person
Lowest 20%-2.2%-$643
Second lowest 20%-1.7%-$621
Middle income4.2%$1,743
Second richest 20%12.9%$6,285
Richest 20%86.8%$50,176

Increasing the progressive rate of federal income taxes any more will decrease tax revenues. This has been demonstrated over and over again by the Laffer Curve. The shape of the curve implies that as tax rates rise, tax revenues will also increase. However, these increased tax revenues will only increase till a peak, and after which, the tax revenues begin to decline. This means that after a point it is counter-intuitive to keep increasing tax rates.

Under the Kennedy – Reagan – Trump tax cuts the federal government’s tax revenue actually increased.

And the super high rates of taxation recommended by the Left will stifle and strangle the economy. Productivity will decrease when confiscation is ridiculous.

The best thing you can do for workers is to see to it that there are a plentiful supply of good, high paying jobs. JOBS! To do this the government has to pursue the policies of economic growth no wealth confiscation.

When you tell a Democrat that his super high increase in taxes will bring in less tax revenue, he says he doesn’t care, he wants to do it anyway. The reason? He wants to punish the rich. He wants to punish success. And when you have that mindset, you are glued to an ideology that ignores the practical and what will work. You don’t care what will work, you want to see the rich demoralized. Shame on you!

And for the Democrat Left to say that lowering corporate taxes are taxes for the rich, they are just plain wrong. Corporations are not owned by one rich person. Corporations are owned by their stockholders which include a lot of Blue Collar workers who are invested in Mutual Funds and/or 401Ks. Our reduction in the corporate tax rate brings us in line with the rest of the world and is one of the reasons that Manufacturing is returning to the USA. And that means more good paying jobs!

The United States has the highest standard of living in the world. Why is that? Why doesn’t Mexico have the same standard of living as the United States? Why are people pouring across our Southern border to get here?When pro-growth policies are adopted, good paying jobs are more plentiful and wages go up. Obama was the only President in history to never attain a GDP growth of 3% in a year. Since Trump became President and passed his tax cuts and tax reform, we have seen a complete turnaround. And some of that is due to a reduction of the corporate tax and a lessening of burdensome regulations.

FTE informs us: 

GROWTH

Investment in factories, machinery, new technology, and in the health, education, and training of people can raise future standards of living.

Economic growth is a sustained rise in a nation’s production of goods and services. It results from investments in human and physical capital, research and development, technological change, and improved institutional arrangements and incentives.

Historically, economic growth has been the primary vehicle for alleviating poverty and raising standards of living around the world.

Differences in economic growth are explained by differences in institutional arrangements, incentives to invest and the openness of markets to trade.

The institutions that foster growth and economic development include:

  • Open Markets – “Trade creates wealth.”
  • Property Rights – “Rights of ownership facilitate exchange.”
  • Rule of Law – “Consistent legal arrangements applied uniformly encourage long-term investment.”
  • Entrepreneurship and Innovation – “Increasing the gains from creative endeavors adds to economic activity.”

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And we will add lower taxes. I hope that you realize by now that we do tax the rich and that the rich pay more. But confiscating ¾ of their income and wealth is counterproductive.

There is a basic difference in economic philosophy here.

The Democrat Left wants to bring everybody down to the lowest common denominator. Then they are all equal – equally miserable. A Socialist Utopia where there are no rich is their goal. Think Cuba. My thought is that I never got a job from a poor man.

The Republican Right wants to lift everybody up to a higher level of achievement.

One way discourages entrepreneur ownership and getting ahead, the other encourages upward mobility.

Once Again William L. Anderson at the Mises Institute:

If there are dark economic clouds on the horizon, they have been placed there by the state. Violent government intervention into peaceful exchange and production can never result in production of more wealth. Instead, government creates winners and losers and changes the system of incentives. Where once people had to be inventive and creative in order to create products that others wished to purchase, now they must pay off their respective politician who will then attempt to change the structure of property rights in order to transfer wealth from productive to non-productive people.

                             

                             

It is time for those who believe in free market Capitalism to stand up and be counted and to do battle with this loud screaming from the Left about America’s unfairness.

Frederic L. Milliken

The Lexington Libertarian

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