Many falsely contrived stories have appeared in recent weeks about huge gains in the proportion of national income taken by the top 1 percent of income earners (those earning about $328,000 or more per year). The truth is rather different, as Alan Reynolds has pointed out in a recent analysis for the Washington Times. The government keeps records only of pretax income. It doesn’t record income after taxes. For the government, pretax income remains the same, whatever the different tax rates imposed upon it. That is the first bit of dishonesty in the usual run of talk about income: Government figures get used that do not include taxes paid. Cuts in tax rates are castigated—without also noting that these lower rates bring in higher amounts of taxes.
The second common slipperiness ignores the fact that tax cuts influence incentives and behavior. Depending on which category gets better treatment in the tax code, alert people tend to shift their income from category to category. When, a few years back, taxes on personal income were higher than taxes on corporate income, many writers, doctors, dentists, lawyers, athletes, and artists incorporated themselves and counted a large part of their income as corporate income—a simple move that lowered the taxes they had to pay.
One advantage of the recent tax cuts is that tax rates on personal income fell to levels equal to or below corporate income. Thus, many alert taxpayers shifted their tax strategy. They moved out of their self-employing corporations and now take their income as direct personal income.
This shift significantly raised the total personal income that the highest 1 percent now report. On this greater base of income, they have now been paying more actual tax dollars than they have ever paid before. They also began to pay a larger proportion of the personal income taxes paid by all taxpayers put together. In other words, the shift in tax strategies creates an illusion of the top 1 percent having gained more income than they actually have. It is an illusion generated by an accounting device—and, in any case, the wealthiest 1 percent are now paying higher personal income taxes than ever before. And taxes paid by corporations are also higher.
These taxes are higher, naturally, because both the highest earners and the corporations are gaining higher income than before. From this higher income, they are helping to create new industries and new jobs. At 146 million today, the number of employed have jumped by twenty million since 1992. The explanation Reynolds gives (with greater detail and accuracy than this poor theologian is able to imitate) sheds clear light on three important outcomes that have been officially reported. First, the raw income reported as personal income by the top 1 percent has, in fact, taken a significant jump. Second, the proportion of all the personal income paid in taxes by the highest taxpayers has jumped from about 13 percent in 1988 to about 17 percent in 2005. Third, the proportion of all personal income taxes paid by the top 1 percent has jumped even higher. They used to pay 18 percent in 1979. They now pay 37 percent.
For my part, I prefer to see the wealthiest 1 percent reporting all their personal income as personal income. In this way, they greatly increase the base number on which tax rates are imposed. In addition, I prefer to see them pay the IRS a larger sum of dollars than ever before. I like it, too, when they send in a larger proportion of all the income taxes paid by all the rest of us. Finally, I prefer the top 1 percent to spend their gains for new research and new development. I prefer them to launch many new sorts of businesses and many whole new industries never seen before. From about 1980 on, these new investments have brought us new industries in personal computers, cell phones, faxes, iPods, high-definition television, cures for heretofore incurable genetic diseases, and the like. That is the way that employment grows—by creating new industries never before seen.
Without such sources of new wealth, there would be many fewer successful charities and philanthropies in the United States—and many fewer new buildings on our campuses, and many fewer new technologies in our hospitals and clinics. There would be fewer endowed chairs and fewer privately funded fellowships and scholarships. There would also be a great many fewer jobs, and a static or declining economy from which everyone would suffer.
Still, seeing rich people get richer makes some of my center-left friends really sad. My father taught us never to envy the rich but to feel sorry for them and to pray for them—because, he said, too many of them lead artificial and unhappy lives. It is better, he thought, not to have too much money. It is better to need to work hard for what one has.
Maybe he was just reconciling himself to his lot. But experience has proved to me that his words contain an important bit of wisdom.
Published in First Things June 13, 2007