September 2016

Envy Economics

By Amy K. Frantz

For every big-spending politician these days, the answer to the question: “How will we fund this and that new government program?” is “Let’s just tax the rich!” Can we actually make everyone equal in this country by taking more away from those with higher incomes and giving it to those with less?  The failure of Socialism in the Soviet Union, Venezuela, and other countries would suggest that we cannot, but that doesn’t stop politicians from using the idea as a political tool, if nothing else.

Professor Ernie Goss, the Jack MacAllister Chair in Regional Economics at Creighton University, writes a regular blog entitled, Economic Trends.  In a recent posting, he addresses the issue of using tax increases to reduce income inequality:

”[B]etween 1980 and 2013 when income inequality, as measured by the Gini Coefficient expanded by 22.2%, the share of federal income taxes paid by the highest one-fifth of earners rose from 64.7% to 88.0% while the share paid by the lowest one-fifth declined from +0.1% to -4.0% (i.e. tax rebates greater than tax payments). Even the middle income’s share dropped from 10.7% to 3.9% over the 33 years.”

This concept was confirmed by a National Taxpayers Union Foundation (NTUF) study, the topic of the Tax Education Foundation Brief in January of this year, illustrating Who Pays Income Taxes?  The NTUF report concludes:

“[T]he top 10 percent of earners, those earning $127,695 or more annually, pay 70 percent of the total federal personal income taxes.  On the other hand, the bottom half of earners, those earning less than $36,841 annually, paid only 3 percent of the total federal personal income taxes.”

Professor Goss highlights in his blog the “reasons that taxing high income individuals more heavily does not reduce income inequality are that excessively high tax rates on high income:

1) discourage individuals from pursing higher education and training to increase income; 2) encourage individuals to reduce work efforts and to increase leisure activity; 3) restrain small business formation and risk taking by entrepreneurs seeking greater financial returns; 4) incentivize individuals to spend excessively on goods and services that are deductible from taxes and; 5) encourage high income individuals to move to lower tax nations.”

The reason politicians continue to espouse this policy, in spite of evidence that it does not work, is that, as Professor Goss states in his blog, “envy economics….remains a viable political tool by generating votes and self-righteous smugness from its devotees.”

Amy K. Frantz is Vice President of Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.