This essay is a philosophical one based on hard data concerning economic and social conditions in the USA. It contrasts the past and present and projects the near future path the country is on using current trends. While the trends are troubling, the situation is not completely hopeless. There are difficult choices that voters of this country will have to make in order to preserve and sustain the economic prosperity and freedom the vast majority has hitherto enjoyed.
The reader will discover this is not a partisan critique or screed. Fault, backed up by incontrovertible data, is shared by both Democrat and Republican politicos, remembering that in a democracy citizens are ultimately responsible for their own fate. This does not mean that Republicans and Democrats, liberals and conservatives, are equally to blame for our current and pending problems, just that all can be cited as not doing what is right and necessary for the good of the country.
I have used several sources for the data I am quoting to bolster my arguments with the latest being Arthur C. Brooks of the American Enterprise Institute.
In finally trying to address the problems of the current and future projected spiraling national debt and the stubbornly high unemployment and under employment rates, President Obama lectures incessantly about “fairness” in the current federal tax code. His solution is to raise federal income taxes on the “rich” as a basic matter of “fairness.” But just what is “fairness?”
There are basically two ways to define “fairness” in an economic sense where there is mal-distribution of income. One is “redistributive fairness” which President Obama and other liberals in and out of congress favor. The idea is through taxes or financial favoritism to take from wealthier Americans and give to less wealthy Americans and thereby to even out, to some degree, the income people have regardless of whether they have earned it.
The other definition is “meritocracy fairness” which holds that people should receive monetary compensation based on hard work, ingenuity, and innovation – i.e. the money that people make should come as a result of merit.
In his 2010 book The Battle: The Fight Between Free Enterprise and Big Government Will Shape America’s Future, Arthur Brooks states that inequality is “fair” if it is based on merit and equality would be “unfair” if what someone has earned on merit is redistributed to others who have not earned it. There should be penalties, not rewards, for corruption, stupidity, laziness, and incompetence. Where does the public come down in this? According to a comprehensive survey, 89% of Americans believe in “meritocracy fairness” and only 11% opt for “redistributive fairness.” People in the past, our ancestors, came to the United States for economic opportunity, not for redistribution of wealth.
What does a merit or opportunity society entail? It simply means the chance to move up the economic ladder. From the years 2001 to 2007 44% of the people in the bottom 20 percentile of the income spectrum moved up to a higher income group. However, this is, to use a cliché, a double-edged sword. In the true spirit of competition in this same time period 34% of the people in the top 20 percentile fell out of that group. C’est la vie.
Even considering the Obama, et al., redistributive philosophy what is the federal income tax breakdown per income group? The top 0.1% of income households pays 16½% of all federal income tax; the top 5% pays 59% (in 1980 they paid 35% - so much for the idea that the rich are paying less of the tax burden than formerly); the top 20% pays 89%. The next 20 percentile pays 15%; the following 20 percentile 4.0%; the one following that 20 percentile -4.3%; and the last 20 percentile pays -3.8%. On average the last combined 40 percentile groups receive more money from the IRS than they paid. Adding it up, the bottom 80 percentile income groups pays 11% of the tax burden which leaves the top 20% paying 89% of federal income taxes.
Between 47% and 51% (depending upon what year is being considered and who made the estimate) of families in this country paid no federal income tax. When questioned, 2/3 of these people say that everyone should pay something in income taxes. There is an estimated $1,000,000,000,000 per year in deductions, exceptions, and credits sheltered from federal income taxes that benefit people in all income levels.
Another way of stating the federal income tax burden is a breakdown of the amount of income levels: In 2009 1470 households with incomes of $1,000,000 or more paid no federal income taxes owing to tax deductions, shelters, and tax dodges. This represented 0.6% of all 237,000 households with incomes of $1,000,000 or more.
People with $1,000,000 or more of income paid 29% of the federal tax burden; those in the $50,000 - $75,000 income level paid 15% of federal income taxes; $40,000 - $50,000 paid 12½%; and $20,000 - $30,000 paid 5.7%.
What about business and capital gain taxes? The business tax in the USA is 35%, which is the highest in the industrialized world and puts this country at a competitive disadvantage. The president and congress need to get off their collective duffs and lighten this unnecessary weight to our global competitiveness. And the capital gains tax? In the USA it is 15% (on a capital asset held for at least one year). For other countries it is all over the place: Japan 20%; UK 18%; Switzerland 0%; Brazil 15%; Denmark & Finland 28%; Egypt 0%; France 20%; Germany 25% (before 2001 it was 0%); Israel 20%; Italy 12 1/5%; and Netherlands 0%. In many other countries these capital gain taxes are either comingled with other taxes or are dependent upon the capital gains amount. Should our capital gain tax be lower, higher, or the same? As far as I can tell economists are divided on that question. It might help our current economic recession if the rate were at least temporarily lowered a bit.
How about payroll taxes you ask? It is true that Social Security and Medicare taxes are regressive, however these are not the same as federal income taxes. Despite their financial problems one has an expectation of receiving benefits when one retires based on what one pays into these programs. There is no expectation of anyone receiving benefits from federal income taxes commensurate with what one pays.
How has the size of government varied over the years in the United States? In 1913 federal, state, and local government expenditures comprised 8% of our Gross Domestic Product (GDP); in1940 even after the massive New Deal federal spending of the FDR administration it was 15%; in 1980 at the start of the Ronald Reagan administration it was 30%; in 1988 at the end of his presidential term it was 32%; in 2008 at the end of the Geo. W. Bush administration it was 33% and in 2011 it is 36%. At this rate of growth the current administration estimates that by 2038 it will be 50%. In the interval from 1913 to 2011 there have been various periods where Republicans or Democrats have controlled either one or both houses of congress. And during this time there have been eight Democrat presidents and 9 Republican presidents.
An argument might be made that government was too small 100, 80, or even 60 years ago to supply essential services to its citizens which are properly the purvey of the federal government and to be vigilant and protective of people’s rights against business interests, big and small. If that were ever true it certainly is not now. The question today and in the future is who is going to protect the public and preserve basic freedoms from what has become a too big, too intrusive, and overweening federal government?
In 1970 our national debt was 40% of GDP; in 2011 it is 100%; and the Congressional Budget Office (CBO) estimates that by 2030 it will be 200%. These trends are clearly unsustainable – we are on what Friedrich A. Hayek titled his 1944 economics book, The Road to Serfdom.
Don’t despair too much because there are some rational reasons for hope. As quoted by Arthur Brooks, the Virginia Declaration of Rights was written by Founding Father, George Mason, 30 days before the U.S. Declaration of Independence and contained the phrase, “Unalienable Rights of Life, Liberty, and the Means of Acquiring and Possessing Property.” The writers of our Declaration of Independence copied that phrase, but changed it to “…they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness…” because they believed there should be a moral rather than a material emphasis to the Declaration of Independence.
According to the Pew Research Center 76% of Americans favor free enterprise versus a more socialistic state and 69% want lower taxes and less government even if it means fewer services for themselves.
The Tea Party movement came into existence because Republican conservatives, independents, and moderate Democrats became alarmed that the country was on a road to an unsustainable and crippling national debt and a too big, too expense, and overly intrusive national government. The midterm 2010 elections marked these concerns with unmistaken finality. In the U.S. House of Representatives 63 seats changed from Democrat to Republican; in the state legislatures 680 seats changed from Democrat to Republican; and the governorships went from 23 being Republican to 29. Only an imaginary guru can know what will happen in 2012, however the signs are that Republicans will make additional gains at the expense of Democrats. If that eventuates does this means that the country will be out of the ditch and on the proper road as the image that politicians are so wont to put forth? Judging by the historical record, only if Republicans have at long last learned what the majority of rational voters have been demanding in the past couple of years. If not, then those miscreant politicos will be thrown out of office in turn.
Is wealth really what makes people happy? The correct answer is a resounding no. Really? Yes. Consider people who win a substantial lottery. They all put up their money in the hope (probabilistically insane) of winning the jackpot. Yet survey after survey finds that these same people by large majorities are less happy after they won than before for a variety of reasons. Again surveys reveal that people in relative wealthy countries are not happier than people in poorer countries so long as they are not starving and get a reasonable amount of healthcare. In 1972 31% of Americans said they were happy. Today still 31% of Americans say they are happy despite having, on average, 150% more purchasing power.
What then makes people happy? It is earned success. The money made from earned success is enjoyed, but it is the knowledge that one’s success was earned on merit that brings satisfaction and happiness to people. This should be a cautionary tale for those who want to take from those who produce and give to those who have not earned it.
I will close with the following comment: Societies that don’t believe in meritocracy and individual opportunity are motivated by envy and spite – this is characteristic of the hard left in America and elsewhere around the world.
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