In America, there's remarkably little resentment of the rich. Most of us would like to be rich, but few of us view it as life's main goal. A recent Gallup poll asked whether people envied the rich. An astonishing 82 percent said no. The same poll queried whether the rich are happier, and only 11 percent said yes. The political appeal of soaking the rich -- now brandished by Democrats as "tax fairness" -- lies elsewhere.
It's the lure of the free lunch. Americans want more government, but they don't want to pay higher taxes. The contradiction lies at the core of our politics. Just about the loudest message from this year's election was that governors (Republicans and Democrats) who supported higher taxes suffered politically. Soaking the rich is seen as a way to conquer the contradiction. We'll just make the wicked wealthy pay.
Everyone imagines a swarm of filthy rich shrewdly avoiding taxes. It's a mirage. There are many tax evaders, but most of the rich pay. On average the wealthiest one percent of Americans pay 27 percent of their income as federal taxes -- and probably about half that in state and local taxes. You can argue about whether this is enough. But increasing their taxes sharply wouldn't provide money to meet all the demands for more health care, better schools, rebuilt highways and more social services.
If Americans want more government, people who consider themselves middle class will have to pay. Even people near the top of the income pyramid see themselves as merely comfortable, not fabulously wealthy. The richest 2 percent to 4 percent of families have average pre-tax income of $126,000; after federal taxes, that's $93,000. The wealthiest 5 percent to 10 percent of families have pre-tax income of $82,000 and after-tax income of $61,000. And finally, the richest 11 to 20 percent of families average $64,000 (pre-tax) and $48,000 (after-tax). (All these estimates exclude state and local taxes, which probably take another 9 percent to 13 percent of income.)
Let's now soak the super-rich and see what it would buy. In 1990, the richest one percent have average pre-tax incomes of $550,000, reports the Congressional Budget Office. (All the figures above also come from CBO.) Their collective income amounts to $550 billion, or about 13 percent of families' total income ($4.25 trillion). They will pay about $150 billion in federal taxes. That's about 15 percent of total taxes.
Okay, we'll increase their taxes 30 percent. They'll pay 35 percent of their income -- instead of today's 27 percent -- to Uncle Sam. This is well beyond any recent proposals. In the budget battle, Democrats urged a 10 percent income tax surcharge on millionaires. A 30 percent tax increase might raise $45 billion. But now consider the demands for new spending:
The Pepper Commission on health care has proposed insuring the 32 million uninsured Americans under 65 and providing long-term care for the elderly. The annual cost is variously estimated between $55 billion and $67 billion.
We spend 7 percent of gross national product on education. To raise that to 8 percent (a 14 percent increase) would cost about $55 billion annually.
We spend 2.5 percent of GNP on highways, bridges, airports, mass transit, sewage and water systems. Raising that 0.25 percent of GNP (a 10 percent increase) would cost $14 billion.
Spending all the $45 billion on the poorest fifth of Americans would allow us to raise their incomes nearly 30 percent (to almost $10,000) or provide an equivalent increase in government services (job training, housing, etc.).
The list is hardly exhaustive. It excludes many areas where higher spending is routinely advocated: child care, police and the environment. And enacting a $45 billion tax increase on the super-rich might be politically impossible. There'd be ferocious objections that hitting them so hard would hurt private investment and charities. Finally, a big tax increase might raise less than expected, because the super-rich are getting poorer.
Forbes magazine annually lists the richest 400 Americans. In 1990 the wealth required to make the list declined for the first time (from $275 million to $260 million). Donald Trump dropped off the list entirely. The number of billionaires (66) was five fewer than in 1989. The super-rich get half their income from investments and capital gains (the profits on the sale of stocks, bonds and other property). Collapsing real estate values and the dropping stock market have taken their toll.
But forget these problems. Suppose we get another $45 billion from the super-rich. Even this princely sum wouldn't end our political stalemate. At most, it would provide scatter-shot spending increases for many programs or a big infusion for one. Today's stalemate is that most Americans think government asks too much and provides too little. Disenchanted, they won't surrender any programs (which are already inadequate) or pay more taxes (which might be wasted).
No one wants to ask basic questions. Is government really performing badly? Or are peoples' expectations unrealistic? Are there radical ways to improve government's performance -- to get more bang for our buck? If government should do more of some things, should it do less of others? Should we redefine individuals' responsibilities and society's (assumed by government)? Democrats and Republicans sidestep these issues.
Each party strives to convince the public that it stands for something that it doesn't. Republicans pretend they want to cut taxes without saying which programs would be cut. Democrats preach social justice and "investing in the future" without advocating the taxes necessary to pay for their favored programs. And naturally, each party works hard to disguise its dishonesty.
Soaking the rich -- a k a "tax fairness" -- is the Democrats' latest diversion. It implies (falsely) that we can have bigger government without steeper taxes. The rich will pay. Indeed, their taxes will probably rise. But they will never pay enough to cure today's discontent with government. There's no free lunch.