Income Inequality – Part Two: Consumer Demand

Eric Andersen Eric Andersen 6 Comments

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In Part One I agreed with Sen. Bernie Sanders (D-VA). We have an income inequality problem. Where we disagree is I differentiate inequality created by consumer demand and individual decision (moral) from inequality created by government regulation in violation of rule of law (immoral).

SwiftSen. Sanders and Keeley Mullen, National Director of the Million Student March don’t believe that recording artist Taylor Swift with $80,000,000 income and $200,000,000 of wealth pays her fair share of tax. We won’t ask either to share the ethic used to arrive at their definition of “fair” nor will we ask them to reconcile their belief with the fact that the top 20% of income earners pay 84% of the taxes — or if a 100% tax for that matter could produce enough revenue to address the issue. Petty details.

Donald Boudreaux, an economist at George Mason University reminds us differences in wealth don’t necessarily translate into differences in living standards. One thing we do know despite Ms. Swift earning an income three hundred times greater than mine is that she does not enjoy three hundred times the government services, consume three hundred times the calories, enjoy meals three hundred times better than what is on my table nor is she likely to live three hundred times longer.

“Win-Win” not “Zero Sum”

Miss Swift’s income is a direct result of folks like you and I freely choosing to exchange our money for her music because in our pursuit of happiness we value her music more than having those dollars in our wallet. We call this a “win-win,” not a “win-lose.” Both Taylor and I are better off after the purchase. In a true free market one does not win at the expense of his neighbor. Both are winners.

The truth is everyone of us is culpable for the income inequality that exists. When we choose to purchase Swift’s “Shake It Off” instead of Jimmy Buffet’s “Wasted Away in Margaritaville” we create inequality between the two musicians. That’s right, the guilty one is looking at you in the mirror. Every purchase we make creates “winners” and “losers” as we send messages to the marketplace about the products and services we value most and direct the market how to best allocate scarce resources.

Some of the smartest people in America confuse concerns about the poor with concerns about the assets the wealthy control. I think it’s rooted in outdated zero-sum thinking—the idea that if a poor guy doesn’t have it, it’s because the wealthy guy does. One person is only better off at the expense of another under crony capitalism, not under conditions of honest entrepreneurship and free exchange. Miss Swift did not increase her wealth at the expense of millions of teenage girls. On the contrary, millions find themselves happier because of the purchase of her music.

Though Taylor Swift and I are equals under the law we are not equal in talent (add Phillip Rivers for that matter). To deprive Taylor Swift of her income would deprive millions of the happiness they derive from owning her music.

I am going to wager that Taylor doesn’t keep her millions under her mattress, but deposits her income in a local bank and invests in the market. Her savings become loans to the nurse in Clairemont struggling to purchase her first home and to the young man in Kensington starting his small business.

Depriving Taylor Swift of her income not only short circuits her incentive to create and bring happiness to others but it undermines the most effective economic engine the world has seen for creating economic opportunity for the poor. To deprive Ms. Swift of her income is to deprive her of the means to hire more workers as well as to deprive the market of the labor demand her purchases create.

Next is Part Three – Income Inequality Created by Individual Choice

Eric Andersen is a member of the Central Committee of the San Diego County Republican Party and is the Co-Founder of the Republican Liberty Caucus of San Diego County and im2moro.com. He is a former Rock Church Citizen of the Year.

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Comments 6

  1. “the top 20% of income earners pay 84% of the taxes…”

    I assume this statistic only refers to income tax and excludes payroll tax and sales tax, each of which would bring that number down.

    Putting that aside for a minute, how much of the country’s income is earned by the top 20% and how much of the country’s wealth is held by the top 20%? Without knowing the answers to those two questions, the statistic quoted above is meaningless.

  2. “Every purchase we make creates “winners” and “losers” as we send messages to the marketplace about the products and services we value most and direct the market how to best allocate scarce resources.”

    Bravo.

    Interfering with the trillions of daily decisions, made by hundreds of millions of Americans, distorts the information being provided and uses political decisions, to turn losers into winners and winners into losers

  3. We have an income inequality problem. We can agree there. However, that is probably where it stops based on these articles.

    For some perspective, in this article the author says that Taylor Swift makes $80,000,000 per year which is an income 300 times greater than his. Taking him at his word, that would mean that his income is about $266,000 per year. This is more than 98% of the population putting him in the top 2% of all earners.

    The article says that because Taylor Swift is talented and people choose to pay her for her music or endorsements (the article only mentions music but I would speculate that the bulk of her income is from endorsements, concerts, and other products, not direct music sales) and the people paying get a benefit from that, we create our own inequality and it is a win-win. That is a straw man argument.

    The article glances over tax policy while at the same time making the point that the wealthy pay 84% of taxes.

    We can look at state and local taxes where a study, from the Institute on Taxation and Economic Policy, found that virtually every state’s tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families. The study concludes that state and local tax systems are indirectly contributing to growing income inequality by taxing low- and middle-income households at significantly higher rates than wealthy taxpayers.

    Overall, the poorest 20% of Americans paid an average of 10.9% of their income in state and local taxes and the middle 20% of Americans paid 9.4%. The top 1%, meanwhile, pay only 5.4% of their income to state and local taxes.

    California is the most progressive state, with the poorest residents paying 10.5% and the top 1% paying 8.7%.

    Of course as stated in the article the richest people pay most of the federal income taxes; however, the article leaves out the fact that the rich have made almost all the new income over the past 30 years. According to Tax Foundation figures, the richest 1% has tripled their share of America’s income since 1980, after taxes.

    Additionally, federal income tax is only a small part of the burden on the middle class. Based on data from the Institute on Taxation and Economic Policy, the total of all state and local taxes, social security taxes, and excise taxes (gasoline, alcohol, tobacco) consumes 21% of the annual incomes of the poorest half of America. For the richest 1% of Americans, the same taxes consume only 7% of their incomes.

    We should also look at capital gains taxes. Why should financial earnings be taxed less than wage earnings from actual work? The richest 10% of Americans own over 80% of the stocks, the gains from which are taxed at a rate lower than most wage earners.

    The article also claims that the straw man, Taylor Swift, doesn’t consume 300 times more government services. However, the argument can be made that the very rich have benefited the most from government services.

    CEOs rely on roads, seaports, and airports to ship their products, the FAA, TSA, Coast Guard, and Department of Transportation to safeguard them, a nationwide energy grid to power their factories, and communications towers and satellites to conduct online business.

    Private jets use 16% of air traffic control resources while paying only 3% of the bill.

    Taxpayer-funded research at the Defense Advanced Research Projects Agency (the Internet) and the National Science Foundation (the Digital Library Initiative) has laid a half-century foundation for technological product development. Well into the 1980s, as companies like Apple, Google, Microsoft, Oracle, and Cisco profited from the fastest-growing product revolution in American history, the U.S. Government was still providing half the research funds. Even today 60% of university research is government-supported.

    Most of the annual $1.3 trillion in “tax expenditures” (tax subsidies from special deductions, exemptions, exclusions, credits, and loopholes) goes to the top quintile of taxpayers. One estimate is $250 billion a year just to the richest 1%.

    The mortgage interest and rental expense deductions alone return almost $100 billion a year to millionaires.

    At the same time the most profitable corporations get the biggest subsidies. The Federal Reserve provides more than $16 trillion in financial assistance to financial institutions and corporations. According to Citizens for Tax Justice, 280 profitable Fortune 500 companies, which together paid only half of the maximum 35 percent corporate tax rate, receive $223 billion in tax subsidies.
    Even the conservative Cato Institute admitted that the U.S. federal government spent $92 billion on corporate welfare during fiscal year 2006. Recipients included Boeing, Xerox, IBM, Motorola, Dow Chemical, and General Electric.

    In agriculture, most of the funding for commodity programs goes to large agribusiness corporations such as Archer Daniels Midland. For the oil industry, estimates of subsidy payments range from $10 to $50 billion per year.

    As a moral argument we can debate how much one person needs and if one person deserves to live in complete excess while other people, due to circumstances and systematic failures, deserve to live in poverty or starve.

    But the final argument that our straw man Taylor Swift, if deprived of her income would be deprived of the means to hire more workers is not based on fact. Taylor Swift is not going to hire more workers just because she has more money. She will only hire more workers if she needs more workers to meet demand. This requires her consumers to have the money to spend to increase demand. That lack of disposable income (and savings), and the affect it has on our economy and people’s lives, is one of the major problems of income inequality.

  4. Hypocrisy, agree with you that it is meaningless and misleading to say that “the top 20% of income earners pay 84% of the taxes…”

    Chris Shilling, where do you get these numbers? What about sales tax?

    “Overall, the poorest 20% of Americans paid an average of 10.9% of their income in state and local taxes and the middle 20% of Americans paid 9.4%. The top 1%, meanwhile, pay only 5.4% of their income to state and local taxes.”

    That is probably because capital gains are taxed at much lower rate than income. Top 1% get a large share of their income from investment, while the bottom ones do not have any extra to invest.

  5. Thanks Chris Shilling. It is not really a surprise to me, considering that wages are probably taxed at the highest rate, while long-term capital gains are taxed at the lowest rate. Still, nice to get solid data-based numbers.

    Inequality is an inevitable consequence of capitalism. Unfortunately, despite its appeal, complete equality will not work at all simply because the vast majority will lose their incentive to work. Other countries have done the experiment of socialism in the past century. The results are pretty bad unanimously.

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