WHY TRICKLE DOWN DOESN'T WORK

Filed in Gather Money Essential by on November 11, 2007 0 Comments

  

President John. F. Kennedy is credited with the following quote:  “A rising tide lifts all boats.”  This quote is often used to justify the reduction of income tax rates for the already wealthy, because of the belief that the wealthy will invest their additional funds in job creating activities, increasing the number of the employed and their incomes.

 

In reality, a rising tide will lift all boats in a harbor an equal distance, but it will not increase the size and power of any of the smaller boats.  A twelve-foot sailboat will be lifted the same distance as a forty-foot yacht, but it will not transformed into a forty-foot yacht.

 

There has been a great deal of interest in the growing income and wealth inequality both in the US and in the rapidly growing economies of Asia.  The effects of globalization on this issue are also being examined.  Much of the increase in wealth has not only resulted from the substantial increase in executive salaries, but also from wealth generated by capital gains, dividends, new publicly traded firms, technology development  (Google, for example) and appreciation in real estate and other similar assets. Both Alan Greenspan and Ben Bernanke, the former and current chairman of the Federal Reserve Bank, have warned about the destabilizing effects of too much concentration of wealth and income on our economy and the related social consequences. Simply put, trickle down economics doesn’t work, but trickle up economics is alive and well.

 

Major cuts in personal income tax rates begin with the election of Ronald Regan in 1980 and were continued by the current President George Bush.  For the twenty-five year period from 1980 to 2005, the average income tax rate for the highest 1% of earners in the US have declined from 34.47% in 1980 to 23.13% in 2005, a 33% decrease. For the same period, the average tax rate for the bottom 50% of US tax filers declined from 6.10% in 1980 to 2,98% in 2004, a 51% decrease. For the same period, the actual annual average dollar income of the top 1% earners increased from $147,651 in 1980 to $1,200,280 in 2005, an increase of 812%.  For the bottom 50% of earners, their actual annual average dollar income increased from $6.169 in 1980 to $14,526 in 2005, an increase of 235%.  Inflation for the same period was about 250%.

 

 All tax data in this article is based on an analysis of US personal income tax returns as complied and published by the Tax Foundation (tax foundation.org), and includes all tax returns that had a positive adjusted gross income.

 

An analysis of the percent of all US personal income from 1980 to 2005 for the top 1%, the top 10% and the bottom 50% is presented in chart form at the end of this article.  Each column represents the percent of all personal income earned by the income category for the years from 1980 to 2005.  It is clear that as the percent of total US personal incomes increase in the top 1% and top 10% category the percent earned my the bottom decreases.  After tax income for the top 1% increased by 954% from 1980 to 2005, while the it only increased by 243% for the bottom 50% during the same period, a period when inflation was slightly over 250%.  In other words, the bottom 50% of tax filers had no real income gains in twenty-five years, a statistic that is supported by other similar family income metrics.

 

The distribution of income in any country has social, political and psychological, as well as economic, consequences.  Economic stress on individual and families, combined with poor personal choices and poor education, increases levels of family conflict, divorce, child neglect and abuse and little or no health care for kids. The other, unintended, consequence of these conditions is to increase the demand for government services such as food stamps, welfare and Medicare, increasing the cost of government. This is another example of how we pretend that we are not paying for social services when, in fact, they are hidden in other taxes and costs.

 

Since mandating that employers pay all of their employers a “living wage” would be politically impossible and very difficult to implement in a fair and equitable manner, we need to expand the supplemental payments to workers who’s earned wages fail to reach a specified level based on the family size and location.  This concept has already been implemented through the Earned Income Credit (EIC) and Child Tax credit credit.  Both of these programs provide billions of additional income to the lowest earning families every year.  We need to target this concept at those working poor that are receiving any form of government assistance so we can offset some of the cost by decreasing governmental expenditures for low-income working individuals and families, placing the responsibility for managing their own financial lives.

 

In addition to the working poor, we need to address the issue of how we treat the non-working poor; adults who are unable to work due to age and physical or mental disability. There are currently over six million persons receiving Social Security disability payments (SSI) and another 750,000 persons who have applied for SSI.  These applicants currently have to wait from one to three years for a hearing.  The average SSI payment for even a totally disabled person is less than $1,000 per month.  There are an estimated ten million seriously mentally ill persons in the US and about one-fourth of the homeless are veterans.

 

Twenty-five years of US personal tax returns document that increasing concentration of wealth in out country, a trend that is also occurring in other world nations.  The growing disparity of income and wealth is a threat to the social fabric of many countries and needs to be addressed before the tipping point is reached.

       

       

SHARE OF ALL US PERSONAL INCOME 

  TOP TOP BOTTOM
  1% 10% 50%
  OF INC OF INC OF INC
1980 8.46% 32.13% 17.68%
1981 8.30% 31.98% 17.75%
1982 8.91% 32.26% 17.71%
1983 9.29% 32.78% 17.48%
1984 9.66% 33.25% 17.44%
1985 10.03% 33.77% 17.26%
1986 11.30% 35.12% 16.66%
1987 12.32% 36.90% 15.63%
1988 15.16% 39.45% 14.93%
1989 14.19% 39.27% 14.96%
1990 14.00% 38.77% 15.03%
1991 12.99% 38.20% 15.13%
1992 14.23% 39.23% 14.92%
1993 13.79% 39.05% 14.92%
1994 13.80% 39.19% 14.89%
1995 14.60% 40.16% 14.54%
1996 16.04% 41.59% 14.08%
1997 17.38% 42.83% 13.84%
1998 18.47% 43.77% 13.67%
1999 19.51% 44.89% 13.25%
2000 20.81% 46.01% 12.99%
2001 17.58% 43.11% 13.81%
2002 16.12% 41.77% 14.23%
2003 16.77% 42.36% 13.99%
2004 19.00% 44.35% 13.42%
2005 21.20% 46.44% 12.83%
AVG 15.90% 40.97% 14.50%
% CHGE +251% +145% -28%

 

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