This article first appeared in the St. Louis Beacon, Sept. 29, 2011 - The effective investigator learns to distrust coincidence. It's not that coincidence doesn't happen -- given the volume of events taking place at any given moment, it most assuredly does -- but the concept lends itself to facile explanation and thus leads to sloppy habits of thought. A car belonging to somebody named David Berkowitz was parked illegally near the site of a Son of Sam killing? Probably just a coincidence.
President Obama recently revived his call to raise taxes on our wealthiest citizens. Commenting on the proposal, he assured his audience that it was prompted not by class warfare but by simple math. The rich, by definition, have money and can thereby afford to pay more to support the system that sustains them in comfort.
The president's remarks about class warfare and math rang familiar. A quick search of the Beacon's archives indicated why. In my June 2 column, I argued that coping with the ominous budget deficit would necessitate both reduced spending and increased revenue. Regarding the latter, I noted, "...given the sorry state of the economy, the only people who can afford to pay more are the rich. That observation has nothing to do with class warfare and everything to do with arithmetic."
The same justification for the same plan -- perhaps I've acquired a fan at 1600 Pennsylvania Avenue... Coincidence or not, the question remains as to whether the rich are shouldering their fair share of the public burden. To answer that inquiry, we must first distinguish between wealth and income.
Wealth is an accumulation of assets; income is usually defined as money earned within a given year. Not surprisingly, economic analysis reveals huge disparities in both measures.
The top 20 percent of Americans own a whopping 85 percent of the nation's wealth while the bottom 40 percent own just 0.3 percent. That means that approximately 60 million citizens control all but 15 percent of the collective wealth of a nation of over 300 million. Meanwhile, about 120 million souls share just under one-third of 1 percent of the pie.
Viewed from that perspective, it's tempting to argue that the top quintile should pay 85 percent of the taxes. But we don't tax wealth, we tax income. A hypothetical example should serve to illustrate the justification for that arrangement.
Two taxpayers each earn $100,000 annually for 10 years and pay the identical amount of tax on their income. The first guy lives within his means and manages to save $5,000 a year. The second blows every dime he can muster and actually outspends his income by running up an extra $5,000 annually in consumer debt and credit card charges on which he makes only the minimum monthly payment.
At the end of the period, the prudent taxpayer has accumulated $50,000 in wealth, while the profligate has a negative net worth due to his $50,000 debt. It would hardly be fair to further tax the first guy's savings while exempting the latter from additional obligation. Sound public policy does not punish frugality and reward irresponsibility.
Since we tax income rather than assets, the relevant question is whether upper income earners are paying a proportionate share of taxes. Whether the extreme wage disparity is just or desirable, or the matter of corporate loopholes, are separate issues -- the present concern is one of proportional taxation for individual taxpayers. The statistics here may surprise you.
The top 20 percent of earners make a hefty 59.1 percent of total income but they pay an even heftier 64.3 percent of all income taxes. And the higher we progress up the pyramid, the greater the disparity between income and taxes paid.
The top 5 percent account for 37.4 percent of all wages but contribute 60.1 percent of the tax collected. The top 1 percent earns 22.8 percent of income while paying 40.4 percent of the total taxes.
Conversely, the bottom 50 percent of workers combine for a meager 2.9 percent of taxes, with about 48 percent of households having no income tax liability whatsoever. Of course, all workers are on the hook for payroll taxes but those go to Social Security and Medicare exclusively. All other federal operations are primarily funded through income taxation, supplemented with borrowing. Given the above analysis, it's difficult to argue that affluent workers aren't paying their fair share.
The problem here may be one of definition. So long as we define income as "money earned" we exempt people who obtain that desired commodity by other means. Should we redefine taxable income as "money acquired," federal straits may not be quite so dire. At present, people who make their living by gambling on the stock market are taxed at reduced capital gains rate of 15 percent. That's why Warren Buffett's secretary pays a higher percentage of her income to Uncle Sam than does her billionaire boss.
Similarly, people whose living is financed by inheritance are exempted from taxation for up to $5 million of windfall. If capital gains and inheritance were taxed as ordinary income, revenues would inflate without further burdening individuals who actually work.
Of course, most of those who benefit from the status quo would likely resist such egalitarian reform. A study by Washington think tank Public Citizen, for instance, found that only 1.6 percent of Americans inherit $100,000 or more while 91.9 percent inherit virtually nothing. Yet, the dreaded "death tax" is a hot-button issue among voters who will never have to pay it.
Interestingly, the same study found that the majority of funding for the nationwide campaign against the inheritance tax was contributed by "18 super-rich families." That's probably not a coincidence.
M.W. Guzy is a retired St. Louis cop who currently works for the city Sheriff's Department. His column appears weekly in the Beacon.