Last night (January 20), President Obama used his State of the Union speech to officially propose a new tax plan. Though the White House has yet to release all of the specifics, the plan would basically increase taxes on the wealthy in order to reduce the financial burden on America’s struggling middle class.
By most accounts, the American economy has been making a healthy recovery since Obama took office in the wake of the 2008 financial crisis. Job growth has been steady, the stock market has performed remarkably well, and increased U.S. oil production has driven the price of gas down to 10-year lows.
The President’s approval rating has been rising along with consumer confidence in recent months, and is at its highest point (48%) since May 2013. “We must be doing something right,” Obama told UK Prime Minister David Cameron in a meeting last week.
But there’s still one major economic issue that Obama’s administration has yet to solve: the fact that the recovery has yet to really extend to middle America. As BBC Washington correspondent Naomi Grimley puts it,
“…for many middle class Americans wages still feel stagnant. A growing theme in US politics is the need to make sure the economic recovery extends to all and that there’s social mobility for those with aspirations.”
Obama’s new tax plan is an attempt to address that issue. According to the BBC, it would raise $320 billion over 10 years by doing three things:
- Closing a “trust-fund loophole” that allows wealthy individuals to pass on hundreds of billions of dollars tax-free,
- Increasing the capital gains tax on top earners (couples with $500,000+ in combined annual income) from 23.8% to 28%, and
- Levying a new fee on large banks – those with more than $50 billion in assets.
Under Obama’s plan, the $320 billion raised from these changes would be used to fund tax breaks for middle-income earners. These breaks would include increased childcare and education tax credits, a $500 tax credit for families in which both spouses are employed, and added incentives to encourage people to save more for retirement.
The White House has not been shy about admitting that America’s richest citizens will be footing almost all of the bill. According to Grimley,
“The White House is stressing 99% of these increases will fall on the richest 1%.”
When you consider that last statement, it’s hard to argue that the proposal isn’t a form of wealth redistribution; the White House is being pretty transparent about the fact that they’re trying to put more money in the pockets of the middle-class by taxing the richest 1% of Americans.
But that being said, I think it’s also worth taking a minute to examine the concept of wealth redistribution in a little more depth.
Though it’s been used as a political trigger term lately (often in tandem with the word “socialism”), wealth redistribution is actually much more common than most people realize.
Our American tax system is divided into six different brackets based off of annual income – the more you make, the higher percentage you pay in taxes. This system, known as a progressive tax, is one of the most common forms of wealth redistribution.
The majority of modernized countries around the world today use some sort of progressive tax system. In the US, tax brackets range from 10% to 35%, but many countries utilize progressive tax systems to an even greater extent. From WiseGeek.com:
“In China, the tax brackets under the progressive tax system range from 5% for the poorest citizens to 45% for the country’s elite. In Japan, progressive taxes range from 5% to 40%. In Australia, tax brackets range from 0% to 45%.”
Subsidy and voucher programs (like food stamps) are also examples of wealth redistribution, as are earned income tax credits and programs like Social Security and Medicare, which redistribute wealth from the young to the elderly.
But just because these programs exist doesn’t mean everyone is in favor of them. Many Americans are opposed to the progressive tax code and any other form of governmental wealth redistribution, arguing that these policies essentially penalize wealthy people for being prosperous.
As a young entrepreneur and aspiring businessman myself, I certainly understand this argument and can relate to those who think this way.
But blindly vilifying wealth redistribution often means ignoring the fact that America is facing levels of economic inequality that we haven’t seen since the years leading up to the Great Depression.
This past October, economists Emmanuel Saez (from UC-Berkeley) and Gabriel Zucman (from the London School of Economics) published one of the most up-to-date studies on America’s wealth inequality available today.
In a blog post on the LSE’s website, Saez and Zucman write,
“Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years. From the Great Depression in the 1930s through the late 1970s there was a substantial democratization of wealth. The trend then inverted, with the share of total household wealth owned by the top 0.1 percent increasing to 22 percent in 2012 from 7 percent in the late 1970s.”
Saez and Zucman’s research indicated that in 2012, this top 0.1% (which is made up of about 160,000 families) had as much combined wealth as America’s 145 million poorest families.
According to Fortune.com, Saez and Zucman argue that,
“…the drastic rise in wealth inequality has occurred for the same reasons as income inequality; namely, the trend of making taxes less progressive since the 1970s, and a changing job market that has forced many blue collar workers to compete with cheaper labor abroad.”
A separate study, published in 2013, concluded that the United States had the worst income inequality in the developed world.
But how does that inequality actually affect modern societies? A book entitled “The Spirit Level”, authored by social scientists Richard Wilkinson and Kate Pickett, set out to answer that very question.
The book – which The Guardian describes as, “a mix of ‘eureka!’ insights and statistical analysis” – caused major waves when it was fist published in 2009 by arguing that income inequality is actually detrimental to all levels of society.
Examining statistics from 23 developed countries and the 50 US states, Wilkinson and Pickett found a correlation between income inequality and higher rates of health and social problems, such as obesity, mental illness, homicides, teenage births, incarceration rates and drug use.
The two social scientists also discovered that states and countries with higher levels of income inequality tended to have lower performance on positive societal measures – things like life expectancy, education, trust amongst strangers, social mobility and even the numbers of patents issued per capita.
Low inequality also seems to produce long-term economic health. A 2011 report from the International Monetary Fund found a strong association between lower levels of inequality and sustained periods of economic growth.
While developing countries with high levels of inequality (such as Brazil, Cameroon, and Jordan), “…succeeded in initiating growth at high rates for a few years,” the IMF report stressed that, “…longer growth spells are robustly associated with more equality in the income distribution.”
Even many of the world’s richest individuals have recognized the perils of wealth inequality and are fighting to reduce it.
In fact, more than 100 of the world’s billionaires have already agreed to give away half of their net worth as part of The Giving Pledge, a campaign started by the wealthy philanthropic trio of Bill and Melinda Gates and Warren Buffett.
Like almost every major societal issue today, conversations about wealth inequality in America tend to be highly politicized. But when you examine the data, you quickly see that inequality has been rising pretty consistently since the 1970s, regardless of the political affiliations of Congress or the President.
This indicates that this rising wealth inequality is not a result of bad policies by one party or the other, but rather a much more systemic problem that is exposing inherent flaws in our economic system.
The data is indisputable: America is experiencing historic levels of inequality, and studies have shown that this inequality is detrimental to both the social and economic health of a society.
By no means is Obama’s new tax plan perfect. I’m certainly open to other ideas for increasing wealth equality, and would personally like to see more wealth redistributed into our education systems, rather than just using it to fund middle-class tax breaks.
But despite its flaws, Obama’s plan is an attempt to start addressing a problem that could prove to be one of America’s biggest challenges in the not-so-far-off future. And, at least in this case, doing something is definitely better than doing nothing.
So before we dismiss the plan as “more Obama socialism”, let’s take the time to seriously consider the economic problems we face as a nation. Maybe then we can use our critiques to improve upon the proposal, rather than to tear it down.