March 9, 2011

Controversy Week: Income Disparity

10% of Americans control 70% of America's wealth, and by extension resources.
America was founded not only on the ideals of becoming a democracy, but a meritocracy as well. One of the big evolutions to come out of the American Revolution was that when the patriarch of a family died, his estate was not bequeathed to only the first-born male, but was divided evenly among the offspring. This meant that huge fortunes would be broken apart and we would avoid creating an American aristocracy that was so prevalent in the rest of the world at the time.

In America, possibly more than in any other country, we share the belief that a good idea and hard work can lead to success beyond anyone's dreams. We've seen it happen over and over again. Bill Gates is a wonderful and inspiring example. He took a good idea, ran with it, became filthy rich and changed the world for the better in the process. We all want the ability to do what he did. We all have the right to do what he did. The right to become successful might not be in the Bill of Rights but it might as well be.

We all know that not everyone will become wildly successful. Some will make it and some will fail, but we all firmly believe that we deserve a fair shake at the money tree. Unfortunately, over the last thirty years a corporate, de facto sort of aristocracy has developed that not only want to bring in insane salaries but believe they are entitled to them. We were all outraged at the CEO's pulling in ungodly sums of money despite the fact that their mismanagement brought America's economy to it's knees. Yet we did nothing about it.

There was a lot of bitching and whining about the problem but there was not any public outcry to actually do something about it. In fact, many even fought to ensure that income disparity grows this year by supporting the political party whose platform declared war on the middle class when it unleashed Reaganomics on the world. Somehow putting the interests of the rich ahead of the interests of everyone else became political priority number one in America. What is even more incredible is that so many people support it.

From 1945-1973, one of the greatest periods of economic growth by a country in world history, all income over $400,000 a year was taxed at a rate of between 70% and 91%. Reagan and George W. Bush dropped that rate down to it's current level of 35%. Why do people wonder why we have a huge deficit when taxes on the wealthy have been cut by more than half over the last thirty years? We don't need to slash government, we need to restore a sane tax policy.

We live in a time where the net worth of 400 Americans is equal to the net worth of half of all Americans. Bloody revolutions have been waged for numbers that weren't as bad as that. At a time when 99% of us have had to make sacrifices because of hard times why hasn't that top 1% been asked to make the same contribution?

People will write me off by arguing that I'm simply declaring class warfare. I've got news for you, class warfare was declared on us 30 years ago. It's about time we started fighting back.

UPDATE: Just to clarify, in America we use a marginal tax rate system. I won't go into exactly what that means because it's complicated and others could explain it better than I. What it means in practice is that the first $75,000 dollars everyone makes gets taxed at the same rate. You can make a million dollars or exactly $75,000 dollars and that first chunk of money will be taxed exactly the same. I think there are 5 different brackets right now and they all have their certain cut-off point.

In the example of the 1945 rate that person would not net only $120,000 dollars because that first $400,000 dollars would not be taxed at 70% but at the rate everyone else is taxed at up until that point. The benefit of having a higher bracket is that if you are pulling in a salary of over $400,000 dollars a year you are doing it on the backs of the people working for you and drives wages down in America as a whole. Yes, you could still make 30 million dollars a year if you really want to but you would be taxed hard on it. It's a way to bring the income gap to manageable levels and also encourages reinvestment in the company as opposed to going to the salary for the CEO.

Image taken from here:


  1. I was wondering when our generation - and I am including you in my group, I am a child of the eighties, - would really start to do something about this. Are we all lazy entitled slackers as older folks like to think?

  2. So if you make over $400,000 a year, you should be taxed at 70% to 90%?

    70% of $400,000 = $280,000

    $400,000 - $280,000 = $120,00

    So someone who works 80 hours a week and busts their ass to make $400,000 should be paid the same as someone who makes $120,000? Or are they taxed at such a rate that they will make significantly less than $120,000? Are they paying 50% in taxes and only bringing home $60,000? I mean, how do you decide who gets taxed what?

    The reason I ask is because I watch my husband who has a very stressful job, who works a lot of hours, who works from home, who doesn't get enough sleep, who travels and misses his family .... why would he bust his ass anymore if the government were going to take 70% to 90% of it? I mean, at that point, he'd chose another field. Something less stressful that allowed him to spend more time with his family.

    I make significantly less than he does, but my job is less stressful and I have less responsibility than he does. I make more money than I used to make as a teacher, but I have a more stressful job and have to work more hours than I did when I was teaching. It's a choice I made.

    Don't get me wrong, I'm liberal and we're happy to pay the taxes we do to support social welfare programs, but at what point would overly taxing the highest earners drive people away from doing the most difficult and stressful jobs out there?

    It's sounds tricky to me.

  3. I have to side with Mandy on this. 91% tax is insane! Why work for that? I don't consider myself a lazy person, but I would work just to the limit and stop before I passed the margin. Because it wouldn't be worth my time.

    Personally, I think that Warren Buffet had the right idea when he convinced several of the other wealthiest people in the world to donate a significant portion of their wealth to charity. I think real change will come by people choosing to change. Not being forced into it.

  4. Amen! I guess this goes against everything The American Dream is based on. People forget that that dream is dependent on the very socio-economic culture of our time -- climbing the ladder means stepping on others' backs.

    In most western countries we now have top down governments that represent corporate interests over the interests of their citizens, and you're right; WE allowed it to happen. Apathy is easier than action. Because of our collective apathy, we now have soaring poverty rates and a burgeoning middle class poor.

    We should remember that most people in the highest income bracket receive tax breaks and incentives. They can afford to make investments and the like. By the time they're done with the their credits, they're at the same tax rate as Joe the Plumber ;)

    Perhaps I should mention that I'm from Canada, so you can just write this off as more socialist-commie-pinko rhetoric :)

  5. Thinking about this makes me want to bang my head on the wall. The truth is, a lot of people don't understand what taxes pay for and why they're important.

    "People will write me off by arguing that I'm simply declaring class warfare. I've got news for you, class warfare was declared on us 30 years ago. It's about time we started fighting back." So true.

  6. this is why i like working for tips.

  7. And so called social welfare programs aren't the problem. Do you want to pay for your roads to be kept up? Would you pay a toll on all US roads if they were unfunded by the government?

    You should also ask yourself - do I expect Social Security to be there when I retire? If you are 30 and under, it won't be so start saving and investing now. Or like me, I will probably be working til I drop.

    Look at all the people laid off in the recession that are over 50, do you see their jobs suddenly opening up for young people to take over? No. Because the truth about corporations, and you learn this in any business class, is they are not out to "create jobs" they are out to make profits that benefit their shareholders. In the end, layoffs are great for a company, you do more with less people, meaning less people to pay and less benefits to have to pay. I'm not anti-American Dream at all, I have worked for many corporations and would love to run one. But if you think that corporate America wants to help slash the unemployment rate, you are wrong. You are better off as a stockholder and not as a working plebe.

  8. I learned in economics 101 (Sophomore year of High School) that Economics is the study of how goods and services are produced and HOW they are distributed. If the 400 wealthiest people in America have a combined net worth greater than 50% of the country (150 million people), then it seems like something might be wrong with the system... If that makes me a communist, I'll go put on my red cap, comrade...

  9. hmm, i'm really starting to like you.

  10. We're developing a similar problem down here. John Key, our incumbent PM, has been cutting the top tax rates and greasing the ways for foreign business to open up shop here. While doing this he has declared an effective tax INCREASE for the lower income brackets, cut early childhood education and University funding, slashed job numbers and told people on benefits (Sickness, Dependent Persons, etc) to find work since their benefits will be taken from them in a set timeframe whether they find work or not.

    Suffice to say, New Zealand's long-run economic progress and the quality of life for anyone not earning shitloads has been hamstrung. I'm gonna follow the rest of the graduates and skip the country.

    (Oh yeah, if you have large monetary debts you CANNOT leave the country. They tried to include Student Loans in this condition to stop graduates moving overseas. Naturally, that didn't fly)

    No you CANNOT borrow my motorbike! Get your own! They're far cheaper to fill than a car XD

  11. The problem you run into, is that people have been brainwashed into believing in "the american dream". Because people still believe that one day, THEY will be rich, they protect all the Tax cuts for the wealthy. The people who blindly support "trickle down" economics are convinced that one day THEY will be at the top trickling down. Unfortunately if you're not already in the club, you ain't getting in.

    BTW I'm all ABOUT class warfare!! Bring it!

  12. Such a difficult topic.
    I know how hard it is to get taken of taxes to an extent where your family can't live anymore unless you make huge sacrfices, but I also know how much better off someone with that kind of job is than a family struggling to get food.

    I think some jobs make people richer and if they earned that job and their work, they should be granted a bigger share. On the contrary, I think it's good to tax people differently, the higher the salary the more tax etc. A good balance is the key, but it's very objective and hard to find a truly fair way.
    Nahno ∗ McLein

  13. It's a really tricky situation, because everyone wants their cut. We want to help the underprivileged, but we also want to reward those who have worked really hard. I have to say if I'm going to be taxed at a ridiculous rate the more money I make, enough that having that extra money will make it so that I sort of don't, then my incentive to work hard to gain that extra money will wither. I think we have to be really careful in this sort of thing or we risk punishing those "with" for the sake of those "without." But we also don't want to overlook the underprivileged. The question isn't even "have those 'with' earned it?" It doesn't really matter, I don't think. Because, really, who gets to judge? The question is more "what can we do for those without?" versus "what are we WILLING to do for those without?" And thus we swing back full circle--everyone wants what they feel they deserve. The thing is (and don't shoot me yet) someone who is making 30 million dollars, at exactly the same tax rate as someone who is making 30 thousand dollars, is still contributing significantly more. You'll likely find it difficult to convince them to contribute even more (especially if they started out with nothing and worked their way through the trenches to get to where they are). But for someone surviving on 30 thousand (or less), it's hard not to look up and say, what's a few million more to you? You have a personal chef and a nanny that holds a kleenex to your nose when you sneeze.

    So, what's fair? I don't know, to be honest. But I hate that it's politicians making the decisions. Because they really suck at it.

    But yeah, there's one thing that makes me crazy and that's when I see a company going down, people losing their jobs left and right, thrown out onto the street, but the fat cats at the top of that company walk away with full pensions and retirement and millions of dollars in severance. Especially when it was likely their decisions that screwed the company in the first place.

  14. Skeptical Czarina: I think it'll happen we realize we have to support all of the people who dumped their debt on us so a few could live it up. That time will come sooner than people think.

    Mandy: That's not how the tax rate works. I added an update above that sort of explains how it works better. The biggest stumbling block is that people thinks is that this argument is in the support of welfare. It's in support of fiscal solvency. If we don't do something really fast then we are going to have to make a choice between doing away with medicare and social security, getting rid of the military or having America declare bankruptcy. Meanwhile, the people that got us into this mess will retire to a villa in the south of France. This isn't about taking from the rich to give to the poor, it's about making sure one generation doesn't dump it's mess on another.

    Janet: That's not really how tax rates work. I added the bit below about how they actually work. The problem is charity isn't going to pay down our deficit or make social security solvent. The generation before ours hasn't paid for anything so we don't really have many options. This isn't about welfare, it's about paying bills. If we don't take this option than the other options are getting rid of social security and medicare, reducing the size of the military by about 80% or having America declare bankruptcy. I don't really see many options if we want America as we know it to continue to function. Coincidentally, both Bill Gates and Warren Buffet have come out in favor on raising taxes on the rich and they have the most to lose.

  15. ab: In a way because most of us has the money to get fat while watching TV we think we're a part of that dream but we're really just distracted. Loopholes are another huge issue that are really the difficult part to fix. You're pinko rhetoric is welcome here anytime.

    Tsarista: Well, sadly I think they'll get a wake up call pretty soon. Services haven't been being cut bad enough yet for people to really notice. When everyone's kid is taking kindergarten in a lecture hall I think people might take a bit more notice.

    Kage: And I'm sure you do quite well.

    Skeptical Czarina (Part II): Yes, yes, yes, yes, yes, YES!!! to everything you said.

  16. I guess I still don't understand.

    Why, if you're pulling in over $400,000, you are necessarily doing it on the "backs of people working for you?" What if you work for yourself, and you bring in that revenue yourself? What if you make money based on how much money you're bringing in to a company? You have to do the work yourself. I'm not getting how an individual who works his ass off is contributing to the income gap? I can accept that high income earners are taxed at a higher rate, but if we get taxed at 70% to 90%, many of us will quit what we're doing. And there goes all that money we were paying in taxes.

  17. Austin: It really is rather obvious what the problem is when you look at it from an economic modeling sort of perspective. Unfortunately we probably won't even have the money to pay for high school economics classes pretty soon so I get the feeling it might not get better anytime soon.

    id: Why thank you!

    Peridot: It's a problem much of the world is facing right now because the economic downturn that affected much of the world only makes the problems stand out more.

    And come on! I'll bring it right back.

    Rafa: It really amazes me how people can so consistently vote against their own economic interests. It completely baffles me.

  18. Nahno: When discussing fairness with tax rates something a lot of people forget is that while people who make more get taxed at a lower rate, overall a higher percentage of their income ends up going towards paying taxes. The less money you make they less money you have to save. If you spend all of your money you're paying a greater share in sales tax then someone who saves the majority of their money.

    Carolina: To me this isn't about supporting the underprivileged it is about making sure America is financially solvent. I'm not arguing that we need to give all this money to the poor, we need to pay our bills. If we don't raise taxes in this way we will have to come up with the money somehow. We could either get rid of social security and medicare, completely gut the military or have America declare bankruptcy. For the last 30 years one generation has drastically cut taxes and just decided that they didn't need to pay for anything, but pretty soon they'll all get to retire and we will have to pay for it. If we talk about fairness, I think it's completely unfair for us to have to pay for the previous generation's retirement.

    Laoch: Thanks.

    Mandy: Someone who is working for themselves is generally not going to pay themselves a salary, they keep their money invested in the company. Someone that is pulling in a huge salary, especially for a public corporation, is taking an unfair share of the salary pool. If your CEO is making 30 million dollars that is money that isn't being reinvested in the company, it is leaving the door. Half of that could be put into salaries. When layoffs come you rarely ever hear of the people on top taking a paycut as well. It just doesn't happen because there is no motivation when you can cut the pay of the workers.

    Raising the taxes on the highest earners would provide an incentive to reinvest in companies instead of just ruthlessly worrying about profits to the instead of creating a healthy and sustainable company.

  19. im just so glad to see how many doors my bachelors degree has opened for me...also...why aren't we facebook friends christof?

  20. I hate to say this, but I am not totally clear on the tax situation. I'll have to read over your explanation a couple more times. And I know I am guilty of believing that something is wrong with the system but not doing much more about it than crticizing it.

  21. There is little room for fairness in USA. The reason USA is this rich is not because it's been "fair" throughout its history. Don't let all the talk make your vision hazy.

  22. christopher, I love where your mind goes.

  23. The more I think about this, the more I wonder why the top income is "$400,000" or the $250,000 the current administration wants to make it?

    I mean, why not have more divisions? Why not tax people who make a million a year more than people who make $400,000 a year? And then why not tax people who make 30 million more than the folks who make a million, etc. I'm just wondering why either $400,000 or $250,000 means you've somehow "arrived" and should therefore pay the same in taxes as a billionaire. It's all sort of madness, isn't it?

    This is why I'm not in economics. It seems like witchcraft.


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